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 September 30, 2012

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: 2-88927

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, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2

of the Exchange Act.	Large accelerated filer	¨	Accelerated filer	x
	Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨    No x

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, 5,469,962 shares as of November 4, 2012.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)	September 30,			December 31,
	2012			2011
	(Unaudited)
ASSETS
Cash and due from banks	$	6,677		$	8,403
Interest-bearing deposits in other banks		4,040			1,776
Total cash and cash equivalents		10,717			10,179
Investment securities available-for-sale		303,244			328,824
Investment securities held-to-maturity (estimated fair value of $2,632 in 2012 and $2,666 in 2011)		2,585			2,605
Restricted securities at cost - available-for-sale		4,427			5,189
Loans, net of unearned income		430,977			415,995
Allowance for loan losses		(5,905	)		(5,929	)
Net loans		425,072			410,066
Premises and equipment, net		18,027			12,725
Accrued interest receivable		4,219			4,375
Cash surrender value of bank owned life insurance		19,691			19,145
Investment in real estate ventures		1,346			1,484
Goodwill		19,133			19,133
Core deposit intangible		739			951
Prepaid FDIC insurance		1,102			1,427
Foreclosed assets held for resale		534			780
Deferred income taxes		8			30
Other assets		1,984			1,633
TOTAL ASSETS	$	812,828		$	818,546
LIABILITIES
Deposits:
Non-interest bearing	$	86,025		$	75,489
Interest bearing		544,207			548,860
Total Deposits		630,232			624,349
Short-term borrowings		16,764			30,882
Long-term borrowings		50,540			64,339
Accrued interest and other expenses		2,988			2,857
Deferred income taxes		4,346			2,350
Other liabilities		5,697			677
TOTAL LIABILITIES	$	710,567		$	725,454
STOCKHOLDERS' EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares in 2012; issued 0 in 2012	$	0		$	0
Common stock, par value $2.00 per share; authorized 20,000,000 shares in 2012 and 10,000,000 shares in 2011; issued 5,707,395 in 2012 and 5,687,767 in 2011		11,415			11,375
Surplus		30,526			30,157
Retained earnings		53,782			49,872
Accumulated other comprehensive income		12,472			7,757
Treasury stock, at cost, 238,489 shares in 2012 and 242,517 shares in 2011		(5,934	)		(6,069	)
TOTAL STOCKHOLDERS' EQUITY		102,261			93,092
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	812,828		$	818,546

See accompanying notes to consolidated financial statements.

1

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

(Amounts in thousands, except per share data)

	2012		2011
INTEREST INCOME
Interest and fees on loans	$	5,534	$	5,848
Interest and dividend income on investment securities		2,987		3,388
Interest on deposits in banks		1		0
Interest on federal funds sold		0		1
Total interest income	$	8,522	$	9,237
INTEREST EXPENSE
Interest on deposits	$	1,065	$	1,657
Interest on short-term borrowings		29		36
Interest on long-term borrowings		382		647
Total interest expense	$	1,476	$	2,340
Net interest income	$	7,046	$	6,897
Provision for loan losses		400		500
Net interest income after provision for loan losses	$	6,646	$	6,397
NON-INTEREST INCOME
Trust department	$	193	$	153
Service charges and fees		313		335
Bank owned life insurance income		179		187
ATM fees and debit card income		239		238
Gains on sale of mortgage loans		332		117
Investment securities gains (losses) - net		477		218
Other		153		95
Total non-interest income	$	1,886	$	1,343
NON-INTEREST EXPENSE
Salaries and employee benefits	$	2,602	$	2,394
Occupancy, net		398		335
Furniture and equipment		202		122
Computer expense		277		266
Professional services		174		197
State shares tax		193		227
FDIC insurance		120		127
ATM and debit card fees		121		98
Other		1,089		665
Total non-interest expense	$	5,176	$	4,431
Income before income tax expense	$	3,356	$	3,309
Income tax expense		592		632
NET INCOME	$	2,764	$	2,677
PER SHARE DATA
Net Income Per Share:
Basic	$	.51	$	.49
Diluted		.51		.49
Cash dividends per share		.25		.24

See accompanying notes to consolidated financial statements.

2

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

(Amounts in thousands, except per share data)

	2012		2011
INTEREST INCOME
Interest and fees on loans	$	16,833	$	17,572
Interest and dividend income on investment securities		9,456		10,338
Interest on deposits in banks		1		3
Interest on federal funds sold		0		1
Total interest income	$	26,290	$	27,914
INTEREST EXPENSE
Interest on deposits	$	3,528	$	5,263
Interest on short-term borrowings		88		129
Interest on long-term borrowings		1,482		1,927
Total interest expense	$	5,098	$	7,319
Net interest income	$	21,192	$	20,595
Provision for loan losses		1,200		1,100
Net interest income after provision for loan losses	$	19,992	$	19,495
NON-INTEREST INCOME
Trust department	$	561	$	440
Service charges and fees		885		983
Bank owned life insurance income		546		569
ATM fees and debit card income		730		678
Gains on sale of mortgage loans		738		211
Investment securities gains (losses) - net		1,484		143
Other		339		341
Total non-interest income	$	5,283	$	3,365
NON-INTEREST EXPENSE
Salaries and employee benefits	$	7,794	$	7,027
Occupancy, net		1,072		1,015
Furniture and equipment		445		330
Computer expense		800		743
Professional services		514		523
State shares tax		564		548
FDIC insurance		375		564
ATM and debit card fees		348		279
FHLB prepayment penalties		811		0
Other		2,845		2,178
Total non-interest expense	$	15,568	$	13,207
Income before income tax expense	$	9,707	$	9,653
Income tax expense		1,709		1,937
NET INCOME	$	7,998	$	7,716
PER SHARE DATA
Net Income Per Share:
Basic	$	1.47	$	1.42
Diluted		1.47		1.42
Cash dividends per share		.75		.72

See accompanying notes to consolidated financial statements.

3

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Amounts in thousands, except shares)

													Accumulated
								Compre-					Other
	Common Stock							hensive		Retained			Comprehensive			Treasury
	Shares		Amount		Surplus			Income		Earnings			Income (Loss)			Stock				Total
Balance at December 31, 2011		5,687,767	$	11,375	$	30,157				$	49,872		$	7,757		$	(6,069	)	$	93,092
Comprehensive Income:
Net Income								$	7,998		7,998									7,998
Change in net unrealized gains (losses) on investment securities available-for- sale, net of reclassification adjustment and tax effects									4,715					4,715						4,715
Total comprehensive income								$	12,713
Issuance of 19,628 shares of common stock for stock dividends and stock purchase plan		19,628		40		439														479
Issuance of 4,028 shares of treasury stock upon exercise of employee stock options						(70	)										135			65
Cash dividends - $.75 per share											(4,088	)								(4,088)
Balance at September 30, 2012		5,707,395	$	11,415	$	30,526				$	53,782		$	12,472		$	(5,934	)	$	102,261
Balance at December 31, 2010		5,687,767	$	11,375	$	30,175				$	45,246		$	(1,633	)	$	(6,103	)	$	79,060
Comprehensive Income:
Net Income								$	7,716		7,716									7,716
Change in unrealized gains (losses) on investment securities available-for sale, net of reclassification adjustment and tax effects									9,126					9,126						9,126
Total comprehensive income								$	16,842
Issuance of 815 shares of treasury stock upon exercise of employee stock options						(14	)										28			14
Cash dividends - $.72 per share											(3,920	)								(3,920)
Balance at September 30, 2011		5,687,767	$	11,375	$	30,161				$	49,042		$	7,493		$	(6,075	)	$	91,996

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Amounts in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net Income	$	2,764		$	2,677		$	7,998		$	7,716
Other comprehensive income:
Unrealized holding gains on available-for-sale investment securities arising during the period		3,088			9,712			8,651			13,948
Less reclassification adjustment for net gains realized in income		477			218			1,484			143
Change in unrealized gains before tax effect		2,611			9,494			7,167			13,805
Tax effects		(897	)		(3,216	)		(2,452	)		(4,679	)
Net change in unrealized gains		1,714			6,278			4,715			9,126
Comprehensive Income	$	4,478		$	8,955		$	12,713		$	16,842

See accompanying notes to consolidated financial statements.

4

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTMBER 30, 2012 AND 2011

(Unaudited)

(Amounts in thousands)	2012			2011
OPERATING ACTIVITIES
Net income	$	7,998			7,716
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,200			1,100
Depreciation and amortization		837			721
Premium amortization on investment securities		913			760
Discount accretion on investment securities		(676	)		(860	)
Core deposit discount amortization net of accretion		212			217
Deferred (benefit) income tax provision		(434	)		141
(Gain) loss on sale of mortgage loans originated for resale		(738	)		(211	)
Proceeds from sale of mortgage loans originated for resale		23,301			14,270
Originations of mortgage loans originated for resale		(24,499	)		(12,756	)
(Gain) loss on sales of investment securities		(1,484	)		(143	)
Loss (gain) on sale of foreclosed assets held for resale		195			137
Decrease (increase) in accrued interest receivable		156			315
(Increase) decrease in cash surrender value of bank owned life insurance		(546	)		(569	)
(Increase) decrease in other assets - net		(327	)		(218	)
Decrease (increase) in prepaid FDIC insurance		325			520
Increase (decrease) in accrued interest and other expenses		131			(32	)
(Decrease) increase in other liabilities		(408	)		(260	)
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	6,156		$	10,848
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale	$	36,737		$	53,564
Proceeds from maturities and redemptions of investment securities available-for-sale		27,894			26,229
Purchases of investment securities available-for-sale		(25,473	)		(87,501	)
Proceeds from maturities and redemption of investment securities held-to-maturity		14			2,048
Proceeds from the redemption of restricted securities		968			903
Purchases of restricted securities		(206	)		0
Net (increase) decrease in loans		(15,007	)		(3,632	)
Purchases of premises and equipment		(5,795	)		(1,047	)
Proceeds from sale of foreclosed assets held for resale		852			348
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	$	19,984		$	(9,088	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits	$	5,883		$	6,912
Net (decrease) increase in short-term borrowings		(14,118	)		1,372
Proceeds from long-term borrowings		10,000			5,000
Repayment of long-term borrowings		(23,799	)		(2,045	)
Proceeds from issuance of common stock		65			0
Proceeds from issuance of treasury stock		246			14
Cash dividends paid		(3,879	)		(3,920	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	$	(25,602	)	$	7,333
INCREASE IN CASH AND CASH EQUIVALENTS	$	538		$	9,093
CASH AND CASH EQUIVALENTS, BEGINNING		10,179			11,905
CASH AND CASH EQUIVALENTS, ENDING	$	10,717		$	20,998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for:
Cash paid during period for interest	$	5,355		$	7,484
Cash paid for income taxes		1,726			1,572

See accompanying notes to consolidated financial statements.

5

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of First Keystone Corporation and Subsidiary (the “Corporation”) are in accordance with accounting principles generally accepted in the United States of America and conform to common practices within the banking industry. The more significant accounting policies follow:

Principles of Consolidation

The consolidated financial statements include the accounts of First Keystone Corporation and its wholly-owned subsidiary, First Keystone Community Bank (the “Bank”). All significant inter-company balances and transactions have been eliminated in consolidation.

Nature of Operations

The Corporation, headquartered in Berwick, Pennsylvania, provides a full range of banking, trust and related services through its wholly-owned Bank subsidiary and is subject to competition from other financial institutions in connection with these services. The Bank serves a customer base which includes individuals, businesses, government, and public and institutional customers primarily located in the Northeast Region of Pennsylvania. The Bank has 16 full service offices and 17 Automated Teller Machines (“ATM”) located in Columbia, Luzerne, Montour and Monroe counties. The Corporation and its subsidiary must also adhere to certain federal and state banking laws and regulations and are subject to periodic examinations made by various federal agencies.

Segment Reporting

The Corporation’s subsidiary acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business, government, and public and institutional customers. Through its branch and ATM network, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. The Bank also performs personal, corporate, pension and fiduciary services through its Trust Department.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and mortgage banking operations of the Corporation. Currently, management measures the performance and allocates the resources of the Corporation as a single segment.

Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could significantly differ from those estimates.

Material estimates that are particularly susceptible to significant changes include the assessment for impairment of certain investment securities, the allowance for loan losses, deferred tax assets and liabilities, impairment of goodwill and other intangible assets and foreclosed assets held for resale. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstance indicate that the previous assumptions and factors have changed. The result of the analysis could result in adjustments to the estimates.

6

Investment Securities

The Corporation classifies its investment securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. Investment 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. Investment 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 and equity securities 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) in the Consolidated Statements of Changes in Stockholders’ Equity and in the Consolidated Statements of Comprehensive Income. 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.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums 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 investment securities gains and losses. The cost of investment securities sold, redeemed or matured is based on the specific identification method.

Restricted Securities

Restricted equity securities consist of stock in Federal Home Loan Bank of Pittsburgh (“FHLB-Pittsburgh”) and Atlantic Central Bankers Bank (“ACBB”). These securities do not have a readily determinable fair value because their ownership is restricted and they can be sold back only to the FHLB-Pittsburgh, ACBB or to another member institution. Therefore, these securities are classified as restricted equity investment securities, carried at cost, and evaluated for impairment. At September 30, 2012, the Corporation held $4,392,000 in stock of FHLB-Pittsburgh and $35,000 in stock of ACBB. At December 31, 2011, the Corporation held $5,154,000 in stock of the FHLB-Pittsburgh and $35,000 in stock of ACBB.

The Corporation evaluated its holding of restricted stock for impairment and deemed the stock to not be impaired due to the expected recoverability of cost, which equals the value reflected within the Corporation’s consolidated financial statements. The decision was based on several items ranging from the estimated true economic losses embedded within FHLB’s mortgage portfolio to the FHLB’s liquidity position and credit rating. The Corporation utilizes the impairment framework outlined in GAAP to evaluate stock for impairment. The following factors were evaluated to determine the ultimate recoverability of the cost of the Corporation’s restricted stock holdings; (i) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v) whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institution’s operational needs for the foreseeable future allow management to dispose of the stock. Based on the analysis of these factors, the Corporation determined that its holdings of restricted stock were not impaired at September 30, 2012 and December 31, 2011.

Loans

Loans are stated at their outstanding unpaid principal balances, net of deferred fees or 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 resale 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 to the Corporation.

Past-Due Loans — Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 15 days or more. Delinquent notices are generated automatically when a loan is 15 days past-due. Collection efforts continue on past-due loans that have not been satisfied, 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.

7

Non-Accrual Loans — 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 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 as to collectability of principal.

Impaired Loans — 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 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 or the fair value of the collateral for certain collateral dependent loans. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above.

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.

In addition, 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.

In addition, an allowance is provided for possible credit losses on off-balance sheet credit exposures. This allowance is estimated by management and if deemed necessary, the allowance would be classified in other liabilities on the consolidated balance sheets. As of September 30, 2012 and December 31, 2011, an allowance for possible credit losses on off-balance sheet credit exposures was not recorded.

The allowance consists of specific and general 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. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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 is 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 trouble debt restructuring is considered to be a collateral dependent loan, the loan is 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.

8

The general component covers all other loans not identified as impaired and is based on historical losses adjusted for current factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding two years. In calculating the historical component of our allowance, we aggregate loans into one of four portfolio segments: Commercial, Commercial Real Estate, Consumer and Residential. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result of continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. Actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: the concentration of special mention, substandard and doubtful loans as a percentage of total loans, levels of loan concentration within the portfolio segment or division of a portfolio segment, broad economic conditions, delinquency trends, volume trends and terms, and policy and management changes.

Premises and Equipment

Premises, improvements, and equipment are stated at cost less accumulated depreciation computed principally utilizing the straight-line method over the estimated useful lives of the assets. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value may not be recovered. Maintenance and minor repairs are charged to operations as incurred. The cost and accumulated depreciation of the premises and equipment retired or sold are eliminated from the property accounts at the time of retirement or sale, and the resulting gain or loss is reflected in current operations.

Mortgage Servicing Rights

The Corporation originates and sells real estate loans to investors in the secondary mortgage market. After the sale, the Corporation may retain the right to service these loans. When originated mortgage loans are sold and servicing is retained, a servicing asset is capitalized based on relative fair value at the date of sale. Servicing assets are amortized as an offset to other fees in proportion to, and over the period of, estimated net servicing income. The unamortized cost is included in other assets in the consolidated balance sheets. The servicing rights are periodically evaluated for impairment based on their relative fair value.

Foreclosed Assets Held for Resale

Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value on the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and if fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. The real estate is carried at the lower of carrying amount or fair value less cost to sell and is included in other assets on the consolidated balance sheets. Revenues derived from and costs to maintain the assets and subsequent gains and losses on sales are included in non-interest income and expense on the consolidated statements of income. The total of foreclosed real estate properties amounted to $534,000 at September 30, 2012 and $780,000 at December 31, 2011.

Bank Owned Life Insurance

The Corporation invests in Bank Owned Life Insurance (“BOLI”) with split dollar life provisions. Purchase of BOLI provides life insurance coverage on certain employees with the Corporation being owner and beneficiary of the policies.

Investments in Real Estate Ventures

The Bank is a limited partner in real estate ventures that own and operate affordable residential low-income housing apartment buildings for elderly and mentally challenged adult residents. The investments are accounted for under the effective yield method. Under the effective yield method, the Bank recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that the tax credits are allocated to the Bank. Under this method, the tax credits allocated, net of any amortization of the investment in the limited partnerships, are recognized in the consolidated statements of income as a component of income tax expense. The amount of tax credits allocated to the Bank were $277,000 in 2012 and $160,000 in 2011, and the amortization of the investments in the limited partnerships were $138,000 for the nine months ended September 30, 2012 and $88,000 for the nine months ended September 30, 2011.

9

Income Taxes

The provision for income taxes is based on the results of operations, adjusted primarily for tax-exempt income. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement and income tax bases of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period.

In assessing the ultimate realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Corporation and the Bank are subject to U.S. federal income tax and Commonwealth of Pennsylvania tax. The Corporation is no longer subject to examination by Federal or State taxing authorities for the years before 2008. At September 30, 2012 and December 31, 2011, the Corporation did not have any unrecognized tax benefits. The Corporation does not expect the amount of any unrecognized tax benefits to significantly increase in the next twelve months. The Corporation recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as non-interest expense. At September 30, 2012 and December 31, 2011, the Corporation does not have any amounts accrued for interest and/or penalties.

Goodwill, Other Intangible Assets, and Premium Discount

Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004. Such goodwill represents the excess cost of the acquired assets relative to the assets fair value at the dates of acquisition. During the first quarter of 2008, $152,000 of liabilities related to the Pocono acquisition were recorded as a purchase accounting adjustment resulting in an increase in the excess purchase price. The amount was comprised of the finalization of severance agreements and contract terminations related to the acquisition. In accordance with current accounting standards, goodwill is not amortized. Management performs an annual evaluation for impairment. Any impairment of goodwill results in a charge to income. The Corporation periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired. Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Corporation has tested the goodwill included in its consolidated balance sheet at December 31, 2011, and has determined there was no impairment as of that date or as of September 30, 2012. No assurance can be given that future impairment tests will not result in a charge to earnings.

Intangible assets are comprised of core deposit intangibles and premium discount (negative premium) on certificates of deposit acquired. The core deposit intangible is being amortized over the average life of the deposits acquired as determined by an independent third party. Premium discount (negative premium) on acquired certificates of deposit resulted from the valuation of certificate of deposit accounts by an independent third party. The book value of certificates of deposit acquired was greater than their fair value at the date of acquisition which resulted in a negative premium due to higher cost of the certificates of deposit compared to the cost of similar term financing. The Corporation has tested the core deposit intangible included in its consolidated balance sheet at December 31, 2011 and has determined there was no impairment as of that date or as of September 30, 2012. No assurance can be given that future impairment tests will not result in a charge to earnings.

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Stock Based Compensation

The Corporation adopted a stock option incentive plan in 1998. Compensation cost is recognized for stock options to employees based on the fair value of these awards at the date of grant. A Black-Scholes Option Pricing Model is utilized to estimate the fair value of stock options. Compensation expense is recognized over the requisite service period. The Plan expired in 2008, and therefore, no stock options are available for issuance. After adjustments for the effects of stock dividends, options exercised and options forfeited, there remains 13,603 exercisable options issued and outstanding as of September 30, 2012.

Per Share Data

FASB ASC 260-10, Earnings Per Share, requires dual presentation of basic and fully diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding at the end of each period. Diluted earnings per share is calculated by increasing the denominator for the assumed conversion of all potentially dilutive securities. The Corporation’s dilutive securities are limited to stock options. The most recent options issued were in December 2007.

Cash Flow Information

For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and due from banks, interest-bearing deposits in other banks, and federal funds sold. The Corporation considers cash classified as interest-bearing deposits with other banks as a cash equivalent since they are represented by cash accounts essentially on a demand basis.

Treasury Stock

The purchase of the Corporation’s common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a first-in-first-out basis.

Trust Assets and Income

Property held by the Corporation in a fiduciary or agency capacity for its customers is not included in the accompanying consolidated financial statements since such items are not assets of the Corporation. Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis.

Accumulated Other Comprehensive Income (Loss)

The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income (loss) is comprised of net unrealized holding gains (losses) on the available-for-sale investment securities portfolio. The Corporation has elected to report these effects on the Consolidated Statements of Comprehensive Income.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The primary purpose of the ASU is to improve the comparability between U.S. GAAP fair value accounting and reporting requirements and International Financial Reporting Standards (“IFRS”) fair value and reporting requirements. The ASU also requires additional disclosures about transfers between level 1 and 2 of the fair value hierarchy, quantitative information for level 3 inputs, and the level of the fair value measurement hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. The ASU was effective for the interim and annual periods beginning after December 15, 2011. The adoption of the standard did not have a material impact on the Corporation’s consolidated financial statements. See Note 8 for further information.

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In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income. The ASU requires presentation of the components of other comprehensive income (“OCI”) in either a continuous statement of comprehensive income or two separate but consecutive statements. The update does not change the items presented in OCI and does not affect the calculation or reporting of earnings per share (“EPS”). In December 2011, the FASB issued ASU 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in Accounting Standards update No. 2011-05, which deferred the effective date for the amendments to the reclassification of items out of accumulated other comprehensive income (“AOCI”). The guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2011, and must be applied retrospectively for all periods presented. Total other comprehensive income and the components of other comprehensive income are presented in the Consolidated Statements of Comprehensive Income.

In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other: Testing Goodwill for Impairment, to simplify the current two-step goodwill impairment test in FASB ASC Topic 350-20, Intangibles – Goodwill and Other: Goodwill. The update permits entities to first perform a qualitative assessment to determine whether or not it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would then perform the first step of the goodwill impairment test; otherwise, no further impairment test would be required. The guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Corporation adopted the standard as of January 1, 2012 and will apply the new guidance to future goodwill impairment testing. The adoption of the standard did not have a material impact on the Corporation’s consolidated financial statements or its goodwill impairment evaluation.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet: Disclosures about Offsetting Assets and Liabilities, to increase the disclosure requirements surrounding derivative instruments that are offset within the balance sheet pursuant to the provisions of current U.S. GAAP. The objective of the update is to provide greater comparability between issuers reporting under U.S. GAAP versus IFRS and provide users the ability to evaluate the effect of netting arrangements on a company’s financial statements. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective disclosure for all comparative periods presented. The Corporation is evaluating the impact of the ASU; however, the Corporation does not anticipate this update will have a material impact on its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles – Goodwill and Other (Topic 350). The primary purpose of the ASU is to simplify the impairment test for indefinite-lived intangible assets other than goodwill. The new guidance gives the Corporation the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Corporation will adopt this standard in the fourth quarter of 2012, and does not anticipate that this standard will have a material impact on its consolidated financial statements.

Advertising Costs

It is the Corporation’s policy to expense advertising costs in the period in which they are incurred. Advertising expense for the nine months ended September 30, 2012 and 2011, was approximately $216,000 and $201,000, respectively.

Reclassifications

The Corporation reclassified certain immaterial amounts in the Consolidated Statements of Income. Such reclassifications have no effect on the Corporation’s consolidated financial condition or net income.

12

NOTE 2 — INVESTMENT SECURITIES

The amortized cost, related estimated fair value, and unrealized gains and losses for investment securities classified as “Available-For-Sale” or “Held-to-Maturity” were as follows at September 30, 2012 and December 31, 2011:

	Available-for-Sale Securities
(Amounts in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
September 30, 2012:	Cost		Gains		Losses			Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	45,928	$	2,484	$	(58	)	$	48,354
Other		17,720		164		0			17,884
Obligations of state and political subdivisions		171,305		16,220		(670	)		186,855
Corporate securities		47,736		704		(301	)		48,139
Marketable equity securities		1,619		447		(54	)		2,012
Restricted equity securities		4,427		0		0			4,427
Total	$	288,735	$	20,019	$	(1,083	)	$	307,671

	Held-to-Maturity Securities
(Amounts in thousands)			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2012:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	110	$	5	$	0	$	115
Other		2,008		30		0		2,038
Obligations of state and political subdivisions		467		12		0		479
Total	$	2,585	$	47	$	0	$	2,632

	Available-for-Sale Securities
(Amounts in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
December 31, 2011:	Cost		Gains		Losses			Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	64,892	$	2,930	$	(41	)	$	67,781
Other		13,187		94		(6	)		13,275
Obligations of state and political subdivisions		177,139		11,846		(2,200	)		186,785
Corporate securities		60,263		373		(1,394	)		59,242
Marketable equity securities		1,574		292		(125	)		1,741
Restricted equity securities		5,189		0		0			5,189
Total	$	322,244	$	15,535	$	(3,766	)	$	334,013

	Held-to-Maturity Securities
(Amounts in thousands)			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2011:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	124	$	4	$	0	$	128
Other		2,014		46		0		2,060
Obligations of state and political subdivisions		467		11		0		478
Total	$	2,605	$	61	$	0	$	2,666

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Securities Available-for-Sale with an aggregate fair value of $180,422,000 at September 30, 2012 and $182,478,000 at December 31, 2011; and securities Held-to-Maturity with an aggregate book value of $1,118,000 at September 30, 2012 and $2,138,000 at December 31, 2011, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase, FHLB advances and other balances of $99,800,000 at September 30, 2012 and $106,647,000 at December 31, 2011.

The amortized cost, estimated fair value and weighted average yield of debt securities, by contractual maturity, are shown below at September 30, 2012 and December 31, 2011. 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.

(Amounts in thousands)

	September 30, 2012
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Available-For-Sale:
Within 1 Year:
Amortized cost	$	1,001		$	0		$	0		$	0		$	12,282
Estimated fair value		1,002			0			0			0			12,412
Weighted average yield		1.35	%		0	%		0	%		0	%		3.78	%
1 - 5 Years:
Amortized cost		12,134			3,430			0			0			30,993
Estimated fair value		12,264			3,626			0			0			31,357
Weighted average yield		1.03	%		4.77	%		0	%		0	%		2.29	%
5 - 10 Years:
Amortized cost		9,116			10,946			0			0			4,461
Estimated fair value		9,436			12,350			0			0			4,370
Weighted average yield		4.62	%		5.52	%		0	%		0	%		3.30	%
After 10
Amortized cost		41,397			156,929			1,619			4,427			0
Estimated fair value		43,536			170,879			2,012			4,427			0
Weighted average yield		3.23	%		6.30	%		3.63	%		0.09	%		0	%
Total:
Amortized cost	$	63,648		$	171,305		$	1,619		$	4,427		$	47,736
Estimated fair value		66,238			186,855			2,012			4,427			48,139
Weighted average yield		2.98	%		6.22	%		3.63	%		0.09	%		2.78	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

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(Amounts in thousands)

	September 30, 2012
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Held-To-Maturity:
Within 1 Year:
Amortized cost	$	0		$	0		$	0		$	0		$	0
Estimated fair value		0			0			0			0			0
Weighted average yield		0	%		0	%		0	%		0	%		0	%
1 - 5 Years:
Amortized cost		1,008			0			0			0			0
Estimated fair value		1,023			0			0			0			0
Weighted average yield		1.78	%		0	%		0	%		0	%		0	%
5 - 10 Years:
Amortized cost		1,110			0			0			0			0
Estimated fair value		1,130			0			0			0			0
Weighted average yield		1.07	%		0	%		0	%		0	%		0	%
After 10 Years:
Amortized cost		0			467			0			0			0
Estimated fair value		0			479			0			0			0
Weighted average yield		0	%		7.14	%		0	%		0	%		0	%
Total:
Amortized cost	$	2,118		$	467		$	0		$	0		$	0
Estimated fair value		2,153			479			0			0			0
Weighted average yield		1.41	%		7.14	%		0	%		0	%		0	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

15

(Amounts in thousands)

	December 31, 2011
	U.S. Government			Obligations
	Agency &			of State			Marketable			Restricted
	Corporation			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Available-For-Sale:
Within 1 Year:
Amortized cost	$	2,016		$	0		$	0		$	0		$	10,757
Estimated fair value		2,030			0			0			0			10,928
Weighted average yield		1.20	%		0	%		0	%		0	%		4.70	%
1 - 5 Years:
Amortized cost		11,175			3,411			0			0			48,506
Estimated fair value		11,250			3,614			0			0			47,444
Weighted average yield		1.17	%		4.77	%		0	%		0	%		2.59	%
5 - 10 Years:
Amortized cost		6,905			11,475			0			0			1,000
Estimated fair value		7,285			12,826			0			0			870
Weighted average yield		4.04	%		5.33	%		0	%		0	%		3.10	%
After 10 Years:
Amortized cost		57,983			162,253			1,574			5,189			0
Estimated fair value		60,491			170,345			1,741			5,189			0
Weighted average yield		3.66	%		6.30	%		3.37	%		0.01	%		0	%
Total:
Amortized cost	$	78,079		$	177,139		$	1,574		$	5,189		$	60,263
Estimated fair value		81,056			186,785			1,741			5,189			59,242
Weighted average yield		3.27	%		6.21	%		3.37	%		0.01	%		2.98	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

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(Amounts in thousands)

	December 31, 2011
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Held-to-Maturity:
Within 1 Year:
Amortized cost	$	0		$	0		$	0		$	0		$	0
Estimated fair value		0			0			0			0			0
Weighted average yield		0	%		0	%		0	%		0	%		0	%
1 - 5 Years:
Amortized cost		2,014			0			0			0			0
Estimated fair value		2,060			0			0			0			0
Weighted average yield		1.41	%		0	%		0	%		0	%		0	%
5 - 10 Years:
Amortized cost		124			0			0			0			0
Estimated fair value		128			0			0			0			0
Weighted average yield		2.56	%		0	%		0	%		0	%		0	%
After 10 Years:
Amortized cost		0			467			0			0			0
Estimated fair value		0			478			0			0			0
Weighted average yield		0	%		7.14	%		0	%		0	%		0	%
Total:
Amortized cost	$	2,138		$	467		$	0		$	0		$	0
Estimated fair value		2,188			478			0			0			0
Weighted average yield		1.48	%		7.14	%		0	%		0	%		0	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

There were no aggregate investments with a single issuer (excluding the U.S. Government and its agencies) which exceeded ten percent of consolidated shareholders’ equity at September 30, 2012. 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. The state and political subdivision investments are actively traded in a liquid market.

Proceeds from sale of investments in Available-for-Sale debt and equity securities during the third quarter of 2012 and 2011 were $9,829,000 and $9,435,000, respectively. Gross gains realized on these sales were $477,000 and $407,000, respectively. Gross losses on these sales were $0 and $188,000, respectively. There were no impairment losses in 2012 and 2011.

There were no proceeds from sale of investments in Held-to-Maturity debt and equity securities during the third quarter of 2012 and 2011. 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. Investment 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.

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When other-than-temporary impairment occurs, the amount of the other-than-temporary impairment 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 other-than-temporary impairment 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 other-than-temporary impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings shall become the new amortized cost basis of the investment.

The fair market value of the equity securities tends to fluctuate with the overall equity markets as well as the trends specific to each institution. The equity securities portfolio is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value has been less than the carrying value and the financial sector outlook. The Corporation also reviews dividend payment activities, levels of non-performing assets and loan loss reserves. The starting point for the equity analysis is the length and severity of market value decline. 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 equity securities to be other-than-temporary impaired at September 30, 2012 and December 31, 2011.

In accordance with disclosures required by FASB ASC 320-10-50, Investments - Debt and Equity Securities, the summary below shows the gross unrealized losses and fair value of the Corporation’s investments, aggregated by investment category, that individual securities have been in a continuous unrealized loss position for less than 12 months or 12 months or more as of September 30, 2012 and December 31, 2011:

September 30, 2012
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Loss		Value		Loss		Value		Loss
Direct obligations of the
U.S. Government	$	0	$	0	$	0	$	0	$	0	$	0
Federal agency backed securities		5,656		58		0		0		5,656		58
Municipal bonds		578		9		7,085		661		7,663		670
Corporate securities		1,919		51		6,277		250		8,196		301
Marketable equity securities		134		9		297		45		431		54
	$	8,287	$	127	$	13,659	$	956	$	21,946	$	1,083

December 31, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Loss		Value		Loss		Value		Loss
Direct obligations of the
U.S. Government	$	6,118	$	6	$	0	$	0	$	6,118	$	6
Federal agency backed securities		7,806		41		0		0		7,806		41
Municipal bonds		2,455		11		10,518		2,189		12,973		2,200
Corporate securities		32,162		1,185		1,791		209		33,953		1,394
Marketable equity securities		82		20		754		105		836		125
	$	48,623	$	1,263	$	13,063	$	2,503	$	61,686	$	3,766

18

The Corporation invests in various forms of agency debt including mortgage backed securities and callable debt. The mortgage backed securities are issued by FHLMC (“Federal Home Loan Mortgage Corporation”) or FNMA (“Federal National Mortgage Association”). The municipal securities consist of general obligations and revenue bonds. The marketable equity securities consist of stocks in other bank holding companies. 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 26 securities in an unrealized loss position as of September 30, 2012 represents an other-than-temporary impairment. The Corporation has the ability to hold the remaining securities contained in the above table for a time necessary to recover the cost.

Securities with an unrealized loss that are determined to be other-than-temporary are written down to fair value, with the write-down recorded as a realized loss included in investment securities gains (losses) expense-net on the consolidated statements of income.

NOTE 3 — LOANS

Major classifications of loans at September 30, 2012 and December 31, 2011 consisted of:

(Amounts in thousands)

	September 30,			December 31,
	2012			2011
Commercial, Financial and Agricultural	$	23,730		$	21,448
Tax-exempt - Real Estate and Other		31,601			19,779
Real estate mortgages - Held-for-sale		1,904			1,356
Real estate mortgages - Consumer		141,868			129,362
Real estate mortgages - Commercial		225,100			236,645
Consumer		6,651			7,429
Gross loans		430,854			416,019
Add (deduct): Unearned discount and		(202	)		(331	)
Net deferred loan fees and costs		325			307
Total loans, net of unearned income	$	430,977		$	415,995

Activity in the allowance for loan losses for the nine months ended September 30, 2012 and the year ended December 31, 2011:

(Amounts in thousands)

	September 30,			December 31,
	2012			2011
Balance at beginning of period	$	5,929		$	5,701
Provision charged to operations		1,200			1,900
Loans charged off		(1,291	)		(1,769	)
Recoveries		67			97
Balance at end of period	$	5,905		$	5,929

Loan risk grading is a management tool designed to identify and measure risk in the Bank’s loan portfolio. Its purpose is to provide a uniform framework and common language to assess and monitor risk, primarily in the Bank’s commercial loan/commercial real estate loan portfolios.

The 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 will be on the 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.

19

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $420,949,000 or 97.7% of gross loans are graded Pass; $3,372,000 or 0.8% are graded Special Mention; $6,533,000 or 1.5% are graded Substandard; and $0 are graded Doubtful.

Commercial & Industrial non-pass grades decreased to $1,198,000 as of September 30, 2012, as compared to $1,436,000 as of December 31, 2011. Commercial Real Estate non-pass grades decreased to $7,203,000 as of September 30, 2012, as compared to $10,375,000 as of December 31, 2011. The $3,172,000 decrease in Commercial Real Estate was the result of $1,172,000 in loans upgraded, $771,000 in loans charged-down, and $381,000 in loans transferred into foreclosed assets held for resale, with the balance attributed to borrower repayments. The Residential Real Estate and Consumer Loans non-pass grades increased to $1,504,000 as of September 30, 2012, compared to $1,115,000 as of December 31, 2011. The increase was due to the net of down-grading several residential assets and the transfer of one large residential property to foreclosed assets held for resale.

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 retail, commercial and commercial real estate borrowing relationships. An asset quality rating is assigned using the guidance provided in the Bank’s loan policy, which was revised in the second quarter of 2012. Primary responsibility for assigning the asset quality rating rests with the lender. The asset quality rating is validated periodically by both an internal and external loan review process. The rating will always 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 our Bank, credit history and lender knowledge of the borrower. 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 and 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 or assets 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 currently protected but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Bank’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. There is a distinct possibility that the Bank will sustain some loss.

20

They are characterized by the distinct possibility that the Bank will sustain some loss if in the aggregate amount of substandard assets, is not fully covered by the liquidation of the collateral used as security. Substandard loans are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral, and have a high probability of payment default, or they have other well-defined weaknesses. Such assets require more intensive supervision by Bank 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 where the basis of current information, conditions, and values, collection or liquidation in full is 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 procedures, capital injection, perfection of liens on additional collateral and/or refinancing plans are completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The credit quality indicators by loan segment are summarized below at September 30, 2012 and December 31, 2011:

	Commercial &				Commercial Real Estate
	Industrial				Construction
	September 30,		December 31,		September 30,			December 31,
	2012		2011		2012			2011
Grade:
1-6 Pass	$	51,341	$	38,250	$	5,470		$	3,781
7    Special Mention		642		556		0			0
8    Substandard		556		880		0			0
9    Doubtful		0		0		0			0
Add (deduct): Unearned discount		0		0		0			0
Net deferred loan fees & costs		119		100		(2	)		(8	)
Loans, net of unearned income	$	52,658	$	39,786	$	5,468		$	3,773

	Commercial Real Estate					Residential Real Estate
	Other					Including		Home Equity
	September 30,			December 31,		September 30,		December 31,
	2012			2011		2012		2011
Grade:
1-6 Pass	$	215,218		$	224,030	$	142,285	$	129,627
7    Special Mention		2,590			3,269		137		0
8    Substandard		4,613			7,106		1,350		1,091
9    Doubtful		0			0		0		0
Add (deduct): Unearned discount		0			0		0		0
Net deferred loan fees & costs		(26	)		3		156		133
Loans, net of unearned income	$	222,395		$	234,408	$	143,928	$	130,851

							Loans,
	Consumer Loans						Net of Unearned Income
	September 30,			December 31,			September 30,			December 31,
	2012			2011			2012			2011
Grade:
1-6 Pass	$	6,635		$	7,405		$	420,949		$	403,093
7    Special Mention		3			0			3,372			3,825
8    Substandard		14			24			6,533			9,101
9    Doubtful		0			0			0			0
Add (deduct): Unearned discount		(202	)		(331	)		(202	)		(331	)
Net deferred loan fees & costs		78			79			325			307
Loans, net of unearned income	$	6,528		$	7,177		$	430,977		$	415,995

21

Commercial C & I and Commercial Real Estate Other include loans categorized as tax free loans.

The activity in the allowance for loan losses, by loan segment, is summarized below for the years indicated.

(Amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
Nine months ended September 30, 2012:
Allowance for Loan Losses:
Beginning balance	$	489		$	3,507		$	137		$	1,228		$	568	$	5,929
Charge-offs		(264	)		(708	)		(54	)		(265	)		0		(1,291	)
Recoveries		23			21			22			1			0		67
Provision		308			164			(24	)		557			195		1,200
Ending Balance		556			2,984			81			1,521			763		5,905
Ending balance: individually
evaluated for impairment		0			390			0			158			0		548
Ending balance: collectively
evaluated for impairment	$	556		$	2,594		$	81		$	1,363		$	763	$	5,357
Financing Receivables:
Ending Balance	$	52,658		$	227,863		$	6,528		$	143,928		$	0	$	430,977
Ending balance: individually
evaluated for impairment		502			1,894			0			951			0		3,347
Ending balance: collectively
evaluated for impairment	$	52,156		$	225,969		$	6,528		$	142,977		$	0	$	427,630

(Amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated			Total
December 31, 2011:
Allowance for Loan Losses:
Beginning balance	$	565		$	2,769		$	123		$	1,501		$	743		$	5,701
Charge-offs		(485	)		(968	)		(98	)		(218	)		0			(1,769	)
Recoveries		28			51			16			2			0			97
Provision		381			1,655			96			(57	)		(175	)		1,900
Ending Balance		489			3,507			137			1,228			568			5,929
Ending balance: individually
evaluated for impairment		80			756			0			111			0			947
Ending balance: collectively
evaluated for impairment	$	409		$	2,751		$	137		$	1,117		$	568		$	4,982
Financing Receivables:
Ending Balance	$	39,786		$	238,181		$	7,177		$	130,851		$	0		$	415,995
Ending balance: individually
evaluated for impairment		122			3,211			0			855			0			4,188
Ending balance: collectively
evaluated for impairment	$	39,664		$	234,970		$	7,177		$	129,996		$	0		$	411,807

22

Impaired loans at September 30, 2012 and December 31, 2011 were $3,347,000 and $4,188,000, respectively. The gross interest that would have been recorded if these loans had been current in accordance with their original terms and the amounts actually recorded in income were as follows:

(Amounts in thousands)
	September 30,			December 31,
	2012			2011
Gross interest due under terms year-to-date	$	201		$	342
Amount included in income year-to-date		(20	)		(54	)
Interest income not recognized year-to-date	$	181		$	288

The Corporation’s impaired loans are summarized below for the periods ended September 30, 2012 and December 31, 2011.

(Amounts in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
September 30, 2012:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	502	$	801	$	0	$	811	$	3
Commercial real estate		865		1,326		0		1,364		0
Residential		108		173		0		177		0
With an allowance recorded:
Commercial		0		0		0		0		0
Commercial real estate		1,029		1,298		390		1,302		7
Residential		843		926		158		940		10
Total	$	3,347	$	4,524	$	548	$	4,594	$	20
Total consists of:
Commercial	$	502	$	801	$	0	$	811	$	3
Commercial real estate	$	1,894	$	2,624	$	390	$	2,666	$	7
Residential	$	951	$	1,099	$	158	$	1,117	$	10

(Amounts in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	43	$	188	$	0	$	239	$	0
Commercial real estate		1,319		1,505		0		1,554		12
Residential		270		280		0		286		1
With an allowance recorded:
Commercial		80		80		80		89		3
Commercial real estate		1,891		2,932		756		2,947		34
Residential		585		733		111		736		4
Total	$	4,188	$	5,718	$	947	$	5,851	$	54
Total consists of:
Commercial	$	123	$	268	$	80	$	328	$	3
Commercial real estate	$	3,210	$	4,437	$	756	$	4,501	$	46
Residential	$	855	$	1,013	$	111	$	1,022	$	5

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 is calculated on the daily loan balance during the period of impairment.

23

Financing receivables on non-accrual status and foreclosed assets as of September 30, 2012 and December 31, 2011 were as follows:

(Amounts in thousands)
	September 30,		December 31,
	2012		2011
Commercial - real estate	$	1,894	$	3,210
Commercial - other		502		123
Residential		951		855
Consumer		0		0
Total non-accruing loans		3,347		4,188
Restructured loans		0		0
Total impaired loans		3,347		4,188
Loans past-due 90 days or more and still accruing		2,016		0
Foreclosed assets		534		780
Total non-performing assets	$	5,897	$	4,968

At September 30, 2012 and December 31, 2011, the recorded investment in impaired loans as defined by FASB ASC 310-10-35, Receivables Subsequent Measurements, was $3,347,000 and $4,188,000, and the impaired loans allowances were $548,000 and $947,000, respectively at September 30, 2012 and December 31, 2011. The average year-to-date recorded balance in impaired loans during the period ended September 30, 2012 and December 31, 2011 was approximately $4,594,000 and $5,851,000, respectively.

The following tables present the aging of past-due loans by class of loans at September 30, 2012 and December 31, 2011:

(Amounts in thousands)					90 Days				Non-				Total
	30-59 Days		60-89 Days		or Greater		Total		Performing				Financing
	Past Due		Past Due		Past Due		Past Due		Assets		Current		Receivables
September 30, 2012:
Commercial	$	81	$	0	$	0	$	81	$	502	$	52,075	$	52,658
Commercial real estate		2,027		437		1,544		4,008		1,894		221,961		227,863
Consumer		63		15		0		78		0		6,450		6,528
Residential		1,126		91		472		1,689		951		141,288		143,928
Total	$	3,297	$	543	$	2,016	$	5,856	$	3,347	$	421,774	$	430,977

(Amounts in thousands)					90 Days				Non-				Total
	30-59 Days		60-89 Days		or Greater		Total		Performing				Financing
	Past Due		Past Due		Past Due		Past Due		Assets		Current		Receivables
December 31, 2011:
Commercial	$	166	$	21	$	0	$	187	$	123	$	39,476	$	39,786
Commercial real estate		1,427		785		0		2,212		3,210		232,759		238,181
Consumer		64		62		0		126		0		7,051		7,177
Residential		1,473		353		0		1,826		855		128,170		130,851
Total	$	3,130	$	1,221	$	0	$	4,351	$	4,188	$	407,456	$	415,995

Loans past-due 90 days or more and still accruing interest were $2,016,000 and $0 at September 30, 2012 and December 31, 2011, respectively. Loans 90 days or greater past-due remained on accrual status as these assets were deemed to be in the process of collection, guaranteed, or well secured. The loans consist of a participation loan with a balance of approximately $1,000,000 that is a well secured property with a loan-to-value of 25%; approximately $500,000 in commercial retail properties that are in the process of collection and deemed to be well secured; and two residential mortgages with a balance of $500,000, both of which are in the process of collection with the borrowers making payments.

At September 30, 2012, there were no commitments to lend additional funds with respect to non-accrual and restructured loans.

24

From time to time, the Bank may agree to modify the contractual terms of a borrower’s loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. Loans modified in a troubled debt restructuring are placed on non-accrual status until the Bank determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of six months. At September 30, 2012, there were no loans classified as troubled debt restructurings.

NOTE 4 — SHORT-TERM BORROWINGS

Federal funds purchased, securities sold under agreements to repurchase, Federal Discount Window, and Federal Home Loan Bank advances generally represent overnight or less than 30-day borrowings. U.S. Treasury tax and loan notes for collections made by the Bank are payable on demand.

NOTE 5 — LONG-TERM BORROWINGS

Long-term borrowings are comprised of advances from the Federal Home Loan Bank (“FHLB”) and a capital lease assumed as a result of the acquisition of Pocono Community Bank in the amount of $811,000 on November 1, 2007. Under terms of a blanket agreement, collateral for the loans are secured by certain qualifying assets of the Corporation’s banking subsidiary with FHLB, which consist principally of real estate mortgages and certain investment securities.

NOTE 6 — COMMITTMENTS AND CONTINGENCIES

In February 2012, the Bank acquired three parcels of vacant land in the amount of $504,000 in Kingston, Pennsylvania. This location opened on August 20, 2012 with a new branch building at a cost of $1.3 million.

In 2011, the Bank began work to expand its main headquarters in Berwick, Pennsylvania. As of September 30, 2012, the Bank has committed to spend $5.3 million on this facility, of which $4.3 million has been spent.

In February 2012, the Bank entered into an agreement with a seller to acquire property consisting of a parcel of land and a building in the amount of $400,000 in Shickshinny, Pennsylvania. This property was acquired on July 26, 2012, and is expected to open in the second quarter of 2013.

In September 2012, the Bank entered into an agreement with a seller to acquire property consisting of a parcel of land and a building in the amount of $311,000 in Dallas, Pennsylvania. The property is to be acquired by the end of the fourth quarter of 2012, and is expected to be open by the end of the first quarter of 2013.

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 of the Corporation.

NOTE 7 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS

      OF CREDIT 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 nonperformance 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 September 30, 2012 and December 31, 2011, were as follows:

(Amounts in thousands)

	September 30, 2012		December 31, 2011
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	58,631	$	62,459
Financial standby letters of credit	$	724	$	789
Performance standby letters of credit	$	3,783	$	4,370

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 to support standby letters of credit for which collateral is deemed necessary.

The Corporation grants commercial, agricultural, real estate mortgage and consumer loans to customers primarily in the counties of Columbia, Luzerne, Montour and Monroe, Pennsylvania. It is management’s opinion that the loan portfolio was well balanced and diversified at September 30, 2012, to the extent necessary to avoid any significant concentration of credit risk. However, its debtor’s ability to honor their contracts may be influenced by the region’s economy.

NOTE 8 — FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer (exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

A. Level 1: Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical, unrestrictive assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

B. Level 2: Fair value is based on significant other observable inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices that are not active for identical or similar assets and other observable inputs.

C. Level 3: Fair value is based on significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers of financial instruments between levels within the fair value hierarchy are recognized on the date management determines that the underlying circumstances or assumptions have changed.

26

Financial Assets Measured at Fair Value on a Recurring Basis

At September 30, 2012 and December 31, 2011, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

September 30, 2012

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed	$	0	$	48,354	$	0	$	48,354
Other		0		17,884		0		17,884
Obligations of state and political subdivisions		0		186,855		0		186,855
Corporate securities		0		48,139		0		48,139
Marketable equity securities		2,012		0		0		2,012
Restricted equity securities		0		4,427		0		4,427
Total	$	2,012	$	305,659	$	0	$	307,671

December 31, 2011

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed	$	0	$	67,781	$	0	$	67,781
Other		0		13,275		0		13,275
Obligations of state and political subdivisions		0		186,785		0		186,785
Corporate securities		0		59,242		0		59,242
Marketable equity securities		1,741		0		0		1,741
Restricted equity securities		0		5,189		0		5,189
Total	$	1,741	$	332,272	$	0	$	334,013

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 investments. There were no transfers between Level 1 and Level 2 during 2012 and 2011.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2012 and December 31, 2011, impaired loans measured at fair value on a non-recurring basis and the valuation methods used are as follows:

	Level 1		Level 2		Level 3		Total
Assets at September 30, 2012
Impaired loans:
Commercial, Financial and Agricultural	$	0	$	0	$	502	$	502
Commercial real estate mortgages		0		0		1,894		1,894
Residential real estate mortgages		0		0		951		951
Total impaired loans	$	0	$	0	$	3,347	$	3,347

27

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2011
Impaired loans:
Commercial, Financial and Agricultural	$	0	$	0	$	123	$	123
Commercial real estate mortgages		0		0		3,210		3,210
Residential real estate mortgages		0		0		855		855
Total impaired loans	$	0	$	0	$	4,188	$	4,188

The Bank’s impaired 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 impaired loans less than $250,000 upon classification and annually at year end, the Bank completes a Certificate of Inspection, which includes an onsite inspection, insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations. 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 2012 and 2011.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2012 and December 31, 2011, foreclosed assets held for resale measured at fair value on a non-recurring basis and the valuation methods used are as follows:

	Level 1		Level 2		Level 3		Total
Assets at September 30, 2012
Other foreclosed assets held for resale:
Residential real estate mortgages	$	0	$	0	$	474	$	474
Commercial real estate mortgages		0		0		60		60
Total foreclosed assets held for resale	$	0	$	0	$	534	$	534

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2011
Other foreclosed assets held for resale:
Commercial real estate mortgages	$	0	$	0	$	780	$	780
Total foreclosed assets held for resale	$	0	$	0	$	780	$	780

The Bank’s foreclosed asset valuation procedure requires an appraisal to be completed periodically with the exception of those cases which the Bank has obtained a sales agreement. 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 2012 and 2011.

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate		Valuation Technique	Unobservable Input	Range
Assets at September 30, 2012
Impaired loans	$	3,347	Appraisal of collateral1,3	Appraisal adjustments2		10% - 35%
Foreclosed assets held for sale		534	Appraisal of collateral1,3	Appraisal adjustments2		10% - 35%

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

²Appraisals may be adjusted 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.

28

Fair Value of Financial Instruments

(Amounts in thousands)

	Carrying		Fair Value Measurements at September 30, 2012
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	6,677	$	6,677	$	0	$	0	$	6,677
Short-term investments		4,040		4,040		0		0		4,040
Investment securities – available-for-sale		307,671		2,012		305,659		0		307,671
Investment securities – held-to-maturity		2,585		0		2,632		0		2,632
Net loans		425,072		0		0		425,579		425,579
Mortgage servicing rights		459		0		0		459		459
Accrued interest receivable		4,219		4,219		0		0		4,219
Cash surrender value of bank owned life insurance		19,691		19,691		0		0		19,691
FINANCIAL LIABILITIES:
Deposits		630,232		381,925		0		251,663		633,588
Short-term borrowings		16,764		16,764		0		0		16,764
Long-term borrowings		50,540		0		0		54,083		54,083
Accrued interest payable		529		529		0		0		529
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit										58,631
Financial standby letters of credit										724
Performance standby letters of credit										3,783

(Amounts in thousands)

	Carrying		Fair Value Measurements at December 31, 2011
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,403	$	8,403	$	0	$	0	$	8,403
Short-term investments		1,776		1,776		0		0		1,776
Investment securities – available-for-sale		334,013		1,741		332,272		0		334,013
Investment securities – held-to-maturity		2,605		0		2,666		0		2,666
Net loans		410,066		0		0		410,033		410,033
Mortgage servicing rights		421		0		0		421		421
Accrued interest receivable		4,375		4,375		0		0		4,375
Cash surrender value of bank owned life insurance		19,145		19,145		0		0		19,145
FINANCIAL LIABILITIES:
Deposits		624,349		368,831		0		255,962		624,793
Short-term borrowings		30,882		30,882		0		0		30,882
Long-term borrowings		64,339		0		0		69,055		69,055
Accrued interest payable		785		785		0		0		785
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit										62,459
Financial standby letters of credit										789
Performance standby letters of credit										4,370

29

FASB ASC 825-10-50, Financial Instruments - Overall - Disclosure, requires disclosure of fair value information about financial instruments, whether or not required to be recognized in the consolidated balance sheets, for which it is practicable to estimate such fair value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Fair value estimates derived through these techniques cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FASB ASC 825-10-50 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and Due From Banks, Short-Term Investments, Accrued Interest Receivable and Accrued Interest Payable

The fair values are equal to the current carrying values.

Investment Securities

Fair values have been individually determined based on currently quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

Fair values are estimated for categories of loans with similar financial characteristics. Loans were segregated by type such as commercial, tax-exempt, real estate mortgages and consumer. For estimation purposes, each loan category was further segmented into fixed and adjustable rate interest terms and also into performing and non-performing classifications.

The fair value of each category of performing loans is calculated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Fair value for non-performing loans is based on management’s estimate of future cash flows discounted using a rate commensurate with the risk associated with the estimated future cash flows. The assumptions used by management are judgmentally determined using specific borrower information.

Cash Surrender Value of Bank Owned Life Insurance

Fair value is equal to the cash surrender value of life insurance policies.

Deposits

Under FASB ASC 825-10-50, the fair value of deposits with no stated maturity, such as demand deposits, savings accounts and money market accounts, is equal to the amount payable on demand at September 30, 2012 and December 31, 2011.

Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar term borrowings, to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term and Long-Term Borrowings

The fair values of short-term borrowings are equal to the current carrying values, and long-term borrowings are estimated using discounted cash flow analyses based on the Corporation’s incremental borrowing rate for similar instruments.

Commitments to Extend Credit and Standby Letters of Credit

Management estimates that there are no material differences between the notional amount and the estimated fair value of those off-balance sheet items since they are primarily composed of unfunded loan commitments which are generally priced at market at the time of approval.

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NOTE 9 — MANAGEMENT’S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED

WITH FORM 10-Q FILING

In management’s opinion, the consolidated interim financial statements reflect fair presentation of the consolidated financial position of First Keystone Corporation and Subsidiary, and the results of their operations and their cash flows for the interim periods presented. Further, the consolidated interim financial statements are unaudited; however they reflect all adjustments, which are in the opinion of management, necessary to present fairly the consolidated financial condition and consolidated results of operations and cash flows for the interim periods presented and that all such adjustments to the consolidated financial statements are of a normal recurring nature. The independent registered public accounting firm, J. H. Williams & Co., LLP, reviewed these consolidated financial statements as stated in their accompanying review report.

The results of operations for the nine-month period ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year.

These consolidated interim financial statements have been prepared in accordance with requirements of Form 10-Q and therefore do not include all disclosures normally required by accounting principles generally accepted in the United States of America applicable to financial institutions as included with consolidated financial statements included in the Corporation’s Annual Report on Form 10-K filing. The reader of these consolidated interim financial statements may wish to refer to the Corporation’s Annual Report on Form 10-K for the period ended December 31, 2011, filed with the Securities and Exchange Commission.

31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of First Keystone Corporation:

We have reviewed the consolidated balance sheet of First Keystone Corporation and Subsidiary as of September 30, 2012 and the related consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2012 and 2011 and changes in stockholders’ equity and cash flows for the nine month periods ended September 30, 2012 and 2011. These consolidated interim financial statements are the responsibility of the management of First Keystone Corporation and Subsidiary.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Standards Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of First Keystone Corporation as of December 31, 2011, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 15, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ J. H. Williams & Co., LLP

J. H. Williams & Co., LLP

Kingston, Pennsylvania

November 8, 2012

32

Item 2. First Keystone Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operation as of September 30, 2012

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.

RESULTS OF OPERATIONS

First Keystone Corporation realized earnings for the third quarter of 2012 of $2,764,000, an increase of $87,000, or 3.3% from the third quarter of 2011. The increase in net income for the third quarter of 2012 was due to several factors, including an increase in net interest income, an increase in gains on sale of mortgage loans and an increase in gains on the sale of investment securities. On a per share basis, net income per share was $1.47 for the first nine months of 2012, up from $1.42 for the first nine months of 2011, an increase of 3.5%. Cash dividends increased to $.75 per share up from $.72 in the first nine months of 2011, an increase of 4.2%.

Year-to-date net income annualized as of September 30, 2012, amounted to a return on average common equity of 10.83%, a return on tangible equity of 15.47% and a return on assets of 1.30%. For the nine months ended September 30, 2011, these measures were 12.38%, 16.07%, and 1.26%, respectively, on an annualized basis.

In July 2012, the Corporation completed transactions designed to improve net interest income. Investment securities with a market value of $15,941,000 and having a yield of 2.95% were sold for a gain of $946,000. In addition, term borrowings with the Federal Home Loan Bank of Pittsburgh in the amount of $13,750,000 with a weighted average cost of 4.29% were prepaid, resulting in a prepayment penalty of $811,000. The impact of these transactions was an annualized increase in net interest income of $150,000. The deleveraging of the balance sheet also improved Tier 1 leverage and improved sensitivity to rising interest rates.

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 third quarter of 2012, interest income amounted to $8,522,000, a decrease of $715,000 or 7.7% from the third quarter of 2011, while interest expense amounted to $1,476,000 in the third quarter of 2012, a decrease of $864,000, or 36.9% from the third quarter of 2011. As a result, net interest income increased $149,000 or 2.2% in the third quarter of 2012 to $7,046,000 from $6,897,000 in third quarter of 2011. Net interest income increased $597,000 or 2.9% for the nine months ended September 30, 2012 to $21,192,000 from $20,595,000 for the same period in 2011.

Our net interest margin for the nine months ended September 30, 2012 was 4.12% compared to 3.97% for the nine months ended September 30, 2011.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the quarter ended September 30, 2012, was $400,000, compared to $500,000 for the quarter ended September 30, 2011. The year-to-date provision for loan losses amounted to $1,200,000 as of September 30, 2012, as compared to $1,100,000 as of September 30, 2011. The increase in the provision for loan losses resulted from the Bank’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, and other relevant factors. Net charge-offs for the nine month period ended September 30, 2012 was $1,224,000, compared to $1,327,000 for the nine month period ended September 30, 2011. The allowance for loan losses as a percentage of average loans outstanding, net of unearned interest, was 1.40% for the nine months ended September 30, 2012, as compared to 1.33% for the nine months ended September 30, 2011, and 1.44% for the year ended December 31, 2011. See Allowance for Loan Losses on Page 36 for further discussion.

33

NON-INTEREST INCOME

Total non-interest income was $1,886,000 for the quarter ended September 30, 2012, as compared to $1,343,000 for the quarter ended September 30, 2011, an increase of $543,000, or 40.4%. Excluding investment securities gains and losses, non-interest income was $1,409,000 for the third quarter of 2012, an increase of $284,000, or 25.2% from the third quarter of 2011. The increase in non-interest income was driven by an increase in net gains on the sale of investment securities of $259,000, an increase in gains on sale of residential mortgage loans of $215,000 and an increase in Trust Department income of $40,000 as compared to the third quarter of 2011.

NON-INTEREST EXPENSE

Total non-interest expense was $5,176,000 for the quarter ended September 30, 2012, as compared to $4,431,000 for the quarter ended September 30, 2011. Non-interest expense was up $745,000, or 16.8%. Salaries and employee benefits rose by $208,000, or 8.7%. These increases reflect additional employee and benefit costs associated with staffing additions in the accounting and information security areas. Also, medical insurance costs have risen for the period. Further, non-interest expense was impacted by increased costs related to collections and other real estate owned.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $7,794,000, or 50.1% of total non-interest expense for the nine months ended September 30, 2012, as compared to 53.2% for the nine months of 2011. Net occupancy, furniture and equipment, and computer expense amounted to $2,317,000 for the nine months ended September 30, 2012, an increase of $229,000, or 11.0%. Other non-interest expense, including the FHLB prepayment penalty, FDIC insurance, professional services and state shares tax amounted to $5,457,000 for the nine months ended September 30, 2012, an increase of $1,365,000, or 33.4% from the first nine months of 2011. Non-interest expense in the first nine months of 2012 is approximately 2.6% of average assets on an annualized basis, which places us among the leaders of our peer financial institutions at controlling total non-interest expense.

INCOME TAXES

Effective tax planning has helped produce favorable net income. Income tax expense amounted to $1,709,000 for the nine months ended September 30, 2012, as compared to $1,937,000 for the nine months ended September 30, 2011, a decrease of $228,000. The effective total income tax rate was 17.6% for the third quarter of 2012 as compared to 19.1% for the third quarter of 2011. The effective total income tax rate was 17.6% for the first nine months of 2012 as compared to 20.1% for the first nine months of 2011. The decrease in the effective tax rate was due to additional tax exempt income received and an additional low-income housing tax credit recognized during the period.

ANALYSIS OF FINANCIAL CONDITION

ASSETS

Total assets decreased to $812,828,000 as of September 30, 2012, a decrease of $5,718,000 from year-end 2011. Net loans increased by $15,006,000 or 3.7%, reflecting a slight pickup in activity. Cash balances decreased compared to year-end.

During the first nine months of 2012, the Corporation decreased short-term borrowings to $16,764,000 as of September 30, 2012, as compared to $30,882,000 as of December 31, 2011. Long-term borrowings decreased to $50,540,000 as of September 30, 2012, down from the $64,339,000 as of December 31, 2011.

The decreases in total assets and long-term borrowings were attributable to a program in which investments were sold to pay-off several long-term borrowings to further improve net interest margin.

34

EARNING ASSETS

Our primary earning asset, loans, net of unearned income, increased to $430,977,000 as of September 30, 2012, up $14,982,000, or 3.6% since year-end 2011. The loan portfolio continues to be diversified. Overall asset quality has remained consistent with non-performing assets increasing since year-end 2011. Total non-performing assets were $5,897,000 as of September 30, 2012, an increase of $929,000, or 18.7% from the $4,968,000 reported in non-performing assets as of December 31, 2011. Total allowance for loan losses to total non-performing assets was 100.1% as of September 30, 2012 and 119.3% at December 31, 2011.

In addition to loans, another primary earning asset is our overall investment portfolio, which decreased in size from December 31, 2011, to September 30, 2012. Held-to-maturity securities amounted to $2,585,000 as of September 30, 2012, a decrease of $20,000 from December 31, 2011. Available-for-sale securities amounted to $307,671,000 as of September 30, 2012, a decrease of $26,342,000 from year-end 2011. Interest-bearing deposits in other banks increased as of September 30, 2012, to $4,040,000 from $1,776,000 at year-end 2011.

LOANS

Total loans, net of unearned income, increased to $430,977,000 as of September 30, 2012, as compared to a balance of $415,995,000 as of December 31, 2011. The table on page 19 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated. Total loans, net of unearned income, increased $14,982,000, or 3.6% in the first nine months of 2012.

The economy and the resultant decline in loan demand accounted for slow growth in the loan portfolio in the first nine months of 2012. The Residential Real Estate loan portfolio increased $13,054,000 to $143,772,000 as of September 30, 2012, as compared to $130,718,000 as of December 31, 2011. The majority of the increase was the result of new originations and, to a lesser extent, refinances held in the Bank’s portfolio. The Commercial Secured by Real Estate loan portfolio decreased $11,545,000 to $225,100,000 as of September 30, 2012, as compared to $236,645,000 as of December 31, 2011. The decrease was the result of weak new loan originations; a $6,405,000 pay-off of one large commercial mortgage; pay-offs of four commercial mortgages with balances of $450,000 or more (all of which were income-producing properties); and typical portfolio run-off.

The loan portfolio is well diversified. The total commercial portfolio was $280,431,000 at September 30, 2012 and $277,872,000 at December 31, 2011, of which $227,891,000 or 52.9% of gross loans were secured by commercial real estate at September 30, 2012, and $238,186,000 or 57.3% at December 31, 2011.

The largest relationship is an $8,387,000 tax-free loan to a municipality founded in 1816 consisting of 35 square miles, which is located in the eastern region of our market area. According to township officials, the township experienced 17% growth in population from 2001 through 2010 and future job growth is projected to be 29% over the next 10 years. The township is currently involved in a $70,000,000 sewer expansion project. The Bank’s loan is secured by project receivables and the full faith, credit and taxing power of the township.

The second largest relationship consisted of the net balance of $8,256,000 after participation shares sold of $3,166,000. This relationship is comprised of several first lien mortgages relating to office and professional rental properties and a $5,000,000 line of credit to a planned residential community in the Corporation’s eastern market area. The principal and related companies have been involved in real estate development since 1974, and have successfully developed residential communities, medical office facilities, and professional office facilities. The entire relationship is secured by a combination of real estate and marketable securities.

The third largest relationship is a real estate development company and its related entities, specializing in the design, construction and management of student housing units. The company was established in the late 1980s and its primary market is our immediate central market. The relationship had outstanding loan balances of $7,518,000 at September 30, 2012, and is secured primarily by income producing real estate.

The fourth largest relationship of $7,261,000 is comprised of loans to individuals and their related companies involved in the ownership and operation of gas stations, convenience stores, and truck stops located in northern, central and eastern Pennsylvania. The borrowers are well experienced in the industry and have been operating various locations since 1988. The loans are secured by commercial real estate, and perfected security interest in all business assets.

35

The fifth largest relationship is a real estate holding LLC established in 2006 along with its related medical service companies. The LLC was formed to construct and provide medical office space for a group of closely related medical entities and outside services and is located in the Corporation’s immediate central market area. The relationship had outstanding loan balances of $6,993,000 at September 30, 2012, secured primarily by commercial real estate and perfected security interest in all business assets of the various related entities.

Each of the aforementioned loans are paying as agreed and none of the loans are considered criticized or classified. The property securing each of the loans was appraised at the time the loan was originated. Appraisals are ordered independently of the loan approval process from appraisers on an approved list. All appraisals are reviewed internally for conformity with accepted standards of the Bank.

All loan relationships in excess of $1,500,000 are reviewed internally and through an external loan review process on an annual basis. Such review is based upon analysis of current financial statements of the borrower, co-borrowers/guarantors, payment history, and economic conditions.

Increases in the portfolio in the first nine months of 2012 were primarily in residential mortgage real estate loans. There was an increase in commercial loans – other; these are loans to corporations and businesses not secured by real estate. The Corporation continued 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 to internally underwrite each of its loans to comply with prescribed policies and approval levels established by its Board of Directors.

Loans Outstanding, Net of Unearned Income

(Amounts in thousands)	September 30, 2012			December 31, 2011
Commercial, financial and agricultural:
Commercial secured by real estate	$	225,100		$	236,645
Commercial - other		23,730			21,448
Tax exempt - real estate and other		31,601			19,779
Real estate (primarily residential mortgage loans)		143,772			130,718
Consumer loans		6,651			7,429
Total Gross Loans		430,854			416,019
Add (deduct):   Unearned discount and		(202	)		(331	)
Net deferred loan fees and costs		325			307
Total Loans, net of unearned income	$	430,977		$	415,995

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of September 30, 2012, the allowance for loan loss was $5,905,000 as compared to $5,929,000 as of December 31, 2011. 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 the 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.

36

The Analysis of Allowance for Loan Losses table contains an analysis of our Allowance for Loan Losses indicating charge-offs and recoveries for the nine month period and the year and additional provisions charged to operations. In the first nine months of 2012, net charge-offs as a percentage of average loans were 0.29%, as compared to net charge-offs as a percentage of average loans of 0.41% during the twelve months of 2011, and 0.32% for the first nine months of 2011. Net charge-offs amounted to $1,224,000 for the first nine months of 2012 as compared to $1,672,000 for the twelve months ended December 31, 2011, and $1,327,000 for the first nine months of 2011. The decrease in net charge-offs in the first nine months of 2012 as compared to the first nine months of 2011 relates primarily to one commercial real estate relationship that was charged down $400,000 or 32.7% of net charge-offs; one Commercial/Financial relationship that was written down $153,000 or 12.5% of net charge-offs; and two Residential Mortgages that were charged down $169,000 or 13.8% of net charge-offs. The remaining balance of net charge-offs was comprised of small commercial relationships and small consumer loans.

For the first nine months of 2012, the provision for loan losses was $1,200,000 as compared to $1,100,000 for the first nine months of 2011. The provision, net of charge-offs and recoveries, increased the quarter end Allowance for Loan Losses to $5,905,000 of which $556,000 or 9.4% is attributed to Commercial, financial and agriculture loans; $4,505,000 or 76.3% is attributed to Real Estate loans; $81,000 or 1.4% is attributed to Consumer loans; and $763,000 or 12.9% being the unallocated component (refer to the activity in the allowance for loan losses by loan segment table in Note 3 — Loans on page 19). The Allowance for Loan Losses decreased to $5,905,000 as of September 30, 2012, as compared to $5,929,000 as of December 31, 2011. 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 probable losses inherent in the loan portfolio as of September 30, 2012.

Analysis of Allowance for Loan Losses

(Amounts in thousands)

	September 30, 2012			December 31, 2011			September 30, 2011
Balance at beginning of period	$	5,929		$	5,701		$	5,701
Charge-offs:
Commercial, financial and agricultural		264			485			483
Real estate		973			1,186			838
Consumer		54			98			71
		1,291			1,769			1,392
Recoveries
Commercial, financial and agricultural		23			28			23
Real estate		22			53			32
Consumer		22			16			10
		67			97			65
Net charge-offs		1,224			1,672			1,327
Additions charged to operations		1,200			1,900			1,100
Balance at end of period	$	5,905		$	5,929		$	5,474
Ratio of net charge-offs during the period to average loans outstanding during the period		0.29	%		0.41	%		0.32	%
Allowance for loan losses to average loans outstanding during the period		1.40	%		1.44	%		1.33	%

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.

37

With our manageable level of net charge-offs and the additions to the reserve from our provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.40% at September 30, 2012, 1.44% at December 31, 2011 and 1.33% at September 30, 2011.

The following table sets forth the allocation of the Bank’s allowance for loan losses by loan category and the percentage of loans in each category to total loans receivable at the dates indicated. The portion of the allowance for loan losses allocated to each loan category does not represent the total available for future losses that may occur within the loan category, since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.

Allocation of Allowance for Loan Losses

(Amounts in thousands)	September 30, 2012				December 31, 2011
Commercial, financial and agricultural	$	556	10.8	%*	$	489	9.1	%*
Real estate - mortgage		4,505	87.6	%*		4,735	88.3	%*
Consumer and other loans		81	1.6	%*		137	2.6	%*
Unallocated		763	N/A	*		568	N/A	*
	$	5,905	100.0	%*	$	5,929	100.0	%*

 *Percentage of allocation in each category to total in the Allowance for Loan Loss Analysis, excluding unallocated.

NON-PERFORMING ASSETS

The “Non-Performing Assets” table on page 40 details the Corporation’s non-performing assets 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 income. Restructured loans are loans where the borrower has been granted a concession in the interest rate or payment amount because of financial problems. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets increased $929,000 to $5,897,000 as of September 30, 2012 as compared to $4,968,000 as of December 31, 2011. The economy, in particular, high unemployment, weak job markets, unsettled fuel prices, rising energy costs, and the continued slowness in the housing industry had a direct effect of increasing the Corporation’s non-performing assets. The Corporation is closely monitoring its commercial real estate portfolio because of the current economic environment. In particular, vacancy rates are rising and rents and property values in some markets have fallen. Losses on commercial real estate, which increased in 2011, are projected to continue at higher than average levels through 2012 and into early 2013. Impaired loans decreased to $3,347,000 as of September 30, 2012, as compared to $4,188,000 as of December 31, 2011. Foreclosed assets held for resale decreased to $534,000 as of September 30, 2012 as compared to $780,000 as of December 31, 2011. Loans past-due 90 days or more and still accruing interest increased to $2,016,000 as of September 30, 2012, as compared to $0 as of December 31, 2011. These loans are deemed to be well secured and in the process of collection. They consist of a participation loan with a balance of approximately $1,000,000 that is a well secured property with a loan-to-value of 25%; approximately $500,000 in commercial retail properties that are in the process of collection and deemed to be well secured; and two residential mortgages with a balance of approximately $500,000, both of which are in the process of collection with the borrowers making payments. Non-performing assets to period end loans and foreclosed assets was 1.4% as of September 30, 2012 and 1.2% as of December 31, 2011. Total non-performing assets to total assets was 0.7% as of September 30, 2012 and 0.6% as of December 31, 2011. Our allowance for loan losses to total non-performing assets was 100.1% as of September 30, 2012 and 119.3% as of December 31, 2011. Additional detail can be found on page 40, “Non-Performing Assets Table” and page 24 in the “Financing Receivables on Non-Accrual Status 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 specialist to manage collection and liquidation efforts.

38

Impaired loans decreased to $3,347,000 at September 30, 2012 from $4,188,000 at December 31, 2011. Two relationships carried aggregate balances of $250,000 or greater. The largest relationship is represented by five loans carrying a balance of $1,135,000 secured by rental residential real estate. The September 30, 2012 valuation carried a net realizable value of $1,008,000, after an estimated $130,000 cost to sell, resulting in a specific allocation of $138,000. The second largest relationship is represented by one loan carrying a balance of $285,000 secured by residential property. The September 30, 2012 valuation carried a net realizable value of $226,000, after an estimated $25,000 cost to sell, resulting in a specific allocation of $59,000. Of the $3,347,000 in impaired loans, one is located outside of our primary market area carrying a balance of $186,000. None of the impaired loans are participated facilities.

The Corporation’s impaired 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 impaired loans less than $250,000 upon classification and annually 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, and we actively work with borrowers to resolve credit problems and will continue our close monitoring efforts in 2012. As of September 30, 2012, the Corporation did not have any troubled debt restructurings in its loan portfolio. Excluding the assets disclosed in the Non-Performing Assets Table, 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.

Should the economic climate no longer continue to be stable or deteriorate further, borrowers may experience difficulty, and the level of non-performing loans and 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 and lease losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination.

Interest income received and accrued on non-performing loans in the first nine months of 2012 and for the year ended December 31, 2011 was $20,000 and $54,000, respectively. Interest income, which would have been recorded on these loans under the original terms as of September 30, 2012 and December 31, 2011, was $201,000 and $342,000, respectively. At September 30, 2012 and December 31, 2011, the Corporation had no outstanding commitments to advance additional funds with respect to these non-performing loans.

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 September 30, 2012 and December 31, 2011, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

39

Non-performing Assets

(Amounts in thousands)
	September 30, 2012			December 31, 2011
Non-performing assets
Impaired loans	$	3,347		$	4,188
Foreclosed assets held for resale		534			780
Loans past-due 90 days or more and still accruing interest		2,016			0
Total non-performing assets	$	5,897		$	4,968
Impaired loans
Non-performing loans	$	3,347		$	4,188
Allocated allowance for loan losses		(548	)		(947	)
Net investment in impaired loans	$	2,799		$	3,241
Impaired loans with a valuation allowance	$	1,872		$	2,556
Impaired loans without a valuation allowance		1,475			1,632
Total impaired loans	$	3,347		$	4,188
Allocated valuation allowance related to impaired loans	$	548		$	947
Allocated valuation allowance as a percent of impaired loans		16.4	%		22.6	%
Impaired loans to loans net of unearned discount		0.8	%		1.0	%
Non-performing assets to period-end loans and foreclosed assets		1.4	%		1.2	%
Total non-performing assets to total assets		0.7	%		0.6	%
Allowance for loan losses to impaired loans		176.4	%		141.6	%
Allowance for loan losses to total non-performing assets		100.1	%		119.3	%

Real estate mortgages comprise 86.2% of the net loan portfolio as of September 30, 2012, as compared to 88.7% as of December 31, 2011. 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 fixed rate mortgages. The real estate loans are concentrated primarily in our market area and are subject to risks associated with the local economy. The commercial real estate loans typically re-price approximately each three to five years and are also concentrated in our market area. The Corporation’s loss exposure on its non-performing 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

Total deposits increased $5,883,000 to $630,232,000 as of September 30, 2012 as non-interest bearing deposits increased by $10,536,000 and interest bearing deposits decreased by $4,653,000 as of September 30, 2012, from year-end 2011. Total short-term and long-term borrowings decreased to $67,304,000 as of September 30, 2012, from $95,221,000 at year-end 2011, a decrease of $27,917,000, or 29.3%.

CAPITAL STRENGTH

Normal increases in capital are generated by net income, less cash dividends paid out. Also, accumulated other comprehensive income derived from unrealized gains on investment securities available-for-sale increased stockholders’ equity, or capital net of taxes, by $4,715,000 for the nine months ended September 30, 2012. The Corporation had 238,489 and 242,517 shares of common stock on September 30, 2012 and December 31, 2011, respectively, as treasury stock. This had an effect of reducing our total stockholders’ equity by $5,934,000 as of September 30, 2012, and $6,069,000 as of December 31, 2011.

40

Total stockholders’ equity was $102,261,000 as of September 30, 2012, and $93,092,000 as of December 31, 2011. Leverage ratio and risk based capital ratios remain very strong. As of September 30, 2012, our leverage ratio was 9.01% compared to 8.07% as of December 31, 2011. In addition, Tier I risk based capital and total risk based capital ratio as of September 30, 2012, were 13.24% and 14.38%, respectively. The same ratios as of December 31, 2011 were 11.99% and 13.09%, respectively.

At its Annual Shareholders’ Meeting on May 10, 2012, the Corporation’s Articles of Incorporation were amended to increase the number of authorized common shares with a par value of $2.00 from 10,000,000 to 20,000,000 shares. Additionally, the Corporation was authorized to issue up to 1,000,000 shares of preferred stock on terms to be determined by the Board of Directors.

LIQUIDITY

The liquidity position of the Corporation remains adequate to meet customer loan demand and deposit fluctuation. Managing liquidity remains an important segment of asset/liability management. Our overall liquidity position is maintained by an active asset/liability management committee.

Management feels its current liquidity position is satisfactory given the fact that the Corporation has a very stable core deposit base which has increased annually. Secondly, the Corporation’s loan payments and principal paydowns on its mortgage backed securities provide a steady source of funds. Also, short-term investments and maturing investments represent additional sources of liquidity.

The following table represents scheduled maturities of the Corporation’s contractual obligations by time remaining until maturity as of September 30, 2012 and December 31, 2011.

(Amounts in thousands)

Contractual Obligations September 30, 2012	Less than 1 Year		1 - 3 Years		3 - 5 Years		Over 5 Years		Total
Time deposits	$	137,960	$	80,378	$	29,970	$	0	$	248,308
Securities sold under agreement to repurchase		16,764		0		0		0		16,764
FHLB borrowings		6,000		19,000		5,000		20,000		50,000
Commitments to grant loans1		6,712		0		0		0		6,712
Commitments to fund loans for secondary market mortgages		2,016		0		0		0		2,016
Unfunded commitments on lines of credit1		49,903		0		0		0		49,903
Financial standby letters of credit1		724		0		0		0		724
Performance standby letters of credit1		3,783		0		0		0		3,783
Purchase and building commitments		1,400		0		0		0		1,400
Commitment for investment in real estate venture		180		0		0		0		180
Commitments to purchase investment securities		5,158		0		0		0		5,158
Operating lease obligations		155		255		194		2,360		2,964
Capital lease obligations		130		395		143		0		668
	$	230,885	$	100,028	$	35,307	$	22,360	$	388,580

¹The Corporation does not expect all of the commitments and letters of credit to be fully funded. The total commitments amount related to these contractual obligations does not necessarily represent future cash requirements.

41

(Amounts in thousands)

Contractual Obligations December 31, 2011	Less than 1 Year		1 - 3 Years		3 - 5 Years		Over 5 Years		Total
Time deposits	$	135,711	$	90,269	$	26,151	$	0	$	252,131
Securities sold under agreement to repurchase		18,132		0		0		0		18,132
FHLB borrowings		28,750		32,750		13,000		2,000		76,500
Commitments to grant loans1		5,703		0		0		0		5,703
Commitments to fund loans for secondary market mortgages		1,311		0		0		0		1,311
Unfunded commitments on lines of credit1		47,445		0		0		0		47,445
Purchase obligations of loan participations1		8,000		0		0		0		8,000
Financial standby letters of credit1		789		0		0		0		789
Performance standby letters of credit1		4,370		0		0		0		4,370
Purchase and building commitments		6,080		0		0		0		6,080
Commitment for investment in real estate venture		180		0		0		0		180
Operating lease obligations		187		305		189		2,394		3,075
Capital lease obligations		108		406		290		0		804
	$	256,766	$	123,730	$	39,630	$	4,394	$	424,520

¹The Corporation does not expect all of the commitments and letters of credit to be fully funded. The total commitments amount related to these contractual obligations does not necessarily represent future cash requirements.

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 2011 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, 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the Corporation’s quantitative and qualitative market risks since December 31, 2011. The composition of rate sensitive assets and rate sensitive liabilities as of September 30, 2012 is very similar to December 31, 2011. For more information, please refer to Part II - Item 7A of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011.

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 September 30, 2012.

b) Changes in internal control over financial reporting. There were no changes in the Corporation’s internal control over financial reporting during the fiscal quarter ended September 30, 2012, that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

42

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

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, 2011.

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
July 1 — July 31, 2012		—		—		—		120,000
August 1 — August 31, 2012		—		—		—		120,000
Sept. 1 — Sept. 30, 2012		—		—		—		120,000
Total		—		—		—		120,000

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

43

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 Registrant’s Report on Form 10-Q for the quarter ended June 30, 2012).
3ii		By-Laws, as amended and restated (Incorporated by reference to Exhibit 3(ii) to the Registrant’s Report on Form 8-K dated January 14, 2011).
10.1		Supplemental Employee Retirement Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2005).
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, 2010).
10.3		Profit Sharing Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2006).
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 14 to Registrant’s Report on Form 8-K dated January 9, 2007).
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.*

*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.

44

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
November 8, 2012	/s/ Matthew P. Prosseda
	Matthew P. Prosseda
	President and Chief Executive Officer
	(Principal Executive Officer)
November 8, 2012	/s/ Diane C.A. Rosler
	Diane C.A. Rosler
	Senior Vice President and Chief Financial Officer
	(Principal Accounting Officer)

45

INDEX TO EXHIBITS

Exhibit	Description
3i	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to Registrant’s Report on Form 10-Q for the quarter ended June 30, 2012).
3ii	By-Laws, as amended and restated (Incorporated by reference to Exhibit 3(ii) to the Registrant’s Report on Form 8-K dated January 14, 2011).
10.1	Supplemental Employee Retirement Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2005).
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, 2010).
10.3	Profit Sharing Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2006).
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 14 to Registrant’s Report on Form 8-K dated January 9, 2007).
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.*

*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.

46

EX-31.1

EXHIBIT 31.1

FIRST KEYSTONE CORPORATION

CERTIFICATION

I, Matthew P. Prosseda, certify that:

1.          I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2012, 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/ Matthew P. Prosseda

Matthew P. Prosseda

President and Chief Executive Officer

Date: November 8, 2012

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 September 30, 2012, 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: November 8, 2012

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 September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew P. Prosseda, 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/ Matthew P. Prosseda

Matthew P. Prosseda

President and Chief Executive Officer

November 8, 2012

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 September 30, 2012, 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

November 8, 2012

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

COMMITTMENTS AND CONTINGENCIES (Details) (USD $)	1 Months Ended		1 Months Ended
	Feb. 29, 2012 Property Acquired in Kingston, Pennsylvania [Member]	Dec. 31, 2011 Property Acquired in Kingston, Pennsylvania [Member]	Feb. 29, 2012 Property Acquired in Shickshinny, Pennsylvania [Member]	Sep. 30, 2012 Property Acquired in Dallas, Pennsylvania [Member]	Sep. 30, 2012 Capital Addition Purchase Commitments [Member]
Long-term Purchase Commitment [Line Items]
Number of properties acquired	3
Property acquired, acquisition cost	$ 504,000		$ 400,000	$ 311,000
Property acquired, acquisition date			Jul. 26, 2012
Committed amount to build facility					5,300,000
Construction cost to build facility		$ 1,300,000			$ 4,300,000

XML

LOANS (Schedule of Gross Interest That Would Have Been Recorded) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
LOANS [Abstract]
Gross interest due under terms year-to-date	$ 201	$ 342
Amount included in income year-to-date	(20)	(54)
Interest income not recognized year-to-date	$ 181	$ 288

XML

INVESTMENT SECURITIES (Narrative) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
INVESTMENT SECURITIES [Abstract]
Available-for-sale securities pledged as collateral	$ 180,422,000		$ 180,422,000		$ 182,478,000
Held-to-maturity securities pledged as collateral	1,118,000		1,118,000		2,138,000
Securities pledged as collateral, liabilities balance secured by the collateral	99,800,000		99,800,000		106,647,000
Proceeds from sales of investment securities available-for-sale	9,829,000	9,435,000	36,737,000	53,564,000
Sale of available-for-sale debt and equity securities, gross gains realized	477,000	407,000
Sale of available-for-sale debt and equity securities, gross losses realized	$ 0	$ 188,000
Number of securities in an unrealized position	26		26

XML

FAIR VALUES OF FINANCIAL INSTRUMENTS (Schedule of Assets Measured at Fair Value on Non-Recurring Basis) (Details) (Fair Value, Measurements, Nonrecurring [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 3,347	$ 4,188
Other foreclosed assets held for resale	534	780
Commercial [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	502	123
Commercial Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	1,894	3,210
Other foreclosed assets held for resale	60	780
Residential [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	951	855
Other foreclosed assets held for resale	474
Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0	0
Level 1 [Member] | Commercial [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Level 1 [Member] | Commercial Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0	0
Level 1 [Member] | Residential [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0
Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0	0
Level 2 [Member] | Commercial [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Level 2 [Member] | Commercial Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0	0
Level 2 [Member] | Residential [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0
Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	3,347	4,188
Other foreclosed assets held for resale	534	780
Level 3 [Member] | Commercial [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	502	123
Level 3 [Member] | Commercial Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	1,894	3,210
Other foreclosed assets held for resale	60	780
Level 3 [Member] | Residential [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	951	855
Other foreclosed assets held for resale	$ 474

XML

SHORT-TERM BORROWINGS (Details) (Maximum [Member])	9 Months Ended
	Sep. 30, 2012
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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of First Keystone Corporation and Subsidiary (the "Corporation") are in accordance with accounting principles generally accepted in the United States of America and conform to common practices within the banking industry. The more significant accounting policies follow:

Principles of Consolidation

The consolidated financial statements include the accounts of First Keystone Corporation and its wholly-owned subsidiary, First Keystone Community Bank (the "Bank"). All significant inter-company balances and transactions have been eliminated in consolidation.

Nature of Operations

The Corporation, headquartered in Berwick, Pennsylvania, provides a full range of banking, trust and related services through its wholly-owned Bank subsidiary and is subject to competition from other financial institutions in connection with these services. The Bank serves a customer base which includes individuals, businesses, government, and public and institutional customers primarily located in the Northeast Region of Pennsylvania. The Bank has 16 full service offices and 17 Automated Teller Machines ("ATM") located in Columbia, Luzerne, Montour and Monroe counties. The Corporation and its subsidiary must also adhere to certain federal and state banking laws and regulations and are subject to periodic examinations made by various federal agencies.

Segment Reporting

The Corporation's subsidiary acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business, government, and public and institutional customers. Through its branch and ATM network, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. The Bank also performs personal, corporate, pension and fiduciary services through its Trust Department.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and mortgage banking operations of the Corporation. Currently, management measures the performance and allocates the resources of the Corporation as a single segment.

Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could significantly differ from those estimates.

Material estimates that are particularly susceptible to significant changes include the assessment for impairment of certain investment securities, the allowance for loan losses, deferred tax assets and liabilities, impairment of goodwill and other intangible assets and foreclosed assets held for resale. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstance indicate that the previous assumptions and factors have changed. The result of the analysis could result in adjustments to the estimates.

Investment Securities

The Corporation classifies its investment securities as either "Held-to-Maturity" or "Available-for-Sale" at the time of purchase. Investment 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. Investment 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 and equity securities 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) in the Consolidated Statements of Changes in Stockholders' Equity and in the Consolidated Statements of Comprehensive Income. 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.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums 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 investment securities gains and losses. The cost of investment securities sold, redeemed or matured is based on the specific identification method.

Restricted Securities

Restricted equity securities consist of stock in Federal Home Loan Bank of Pittsburgh ("FHLB-Pittsburgh") and Atlantic Central Bankers Bank ("ACBB"). These securities do not have a readily determinable fair value because their ownership is restricted and they can be sold back only to the FHLB-Pittsburgh, ACBB or to another member institution. Therefore, these securities are classified as restricted equity investment securities, carried at cost, and evaluated for impairment. At September 30, 2012, the Corporation held $4,392,000 in stock of FHLB-Pittsburgh and $35,000 in stock of ACBB. At December 31, 2011, the Corporation held $5,154,000 in stock of the FHLB-Pittsburgh and $35,000 in stock of ACBB.

The Corporation evaluated its holding of restricted stock for impairment and deemed the stock to not be impaired due to the expected recoverability of cost, which equals the value reflected within the Corporation's consolidated financial statements. The decision was based on several items ranging from the estimated true economic losses embedded within FHLB's mortgage portfolio to the FHLB's liquidity position and credit rating. The Corporation utilizes the impairment framework outlined in GAAP to evaluate stock for impairment. The following factors were evaluated to determine the ultimate recoverability of the cost of the Corporation's restricted stock holdings; (i) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v) whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institution's operational needs for the foreseeable future allow management to dispose of the stock. Based on the analysis of these factors, the Corporation determined that its holdings of restricted stock were not impaired at September 30, 2012 and December 31, 2011.

Loans

Loans are stated at their outstanding unpaid principal balances, net of deferred fees or 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 resale 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 to the Corporation.

Past-Due Loans - Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 15 days or more. Delinquent notices are generated automatically when a loan is 15 days past-due. Collection efforts continue on past-due loans that have not been satisfied, 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.

Non-Accrual Loans - 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 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 as to collectability of principal.

Impaired Loans - 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 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 or the fair value of the collateral for certain collateral dependent loans. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above.

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.

In addition, 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.

In addition, an allowance is provided for possible credit losses on off-balance sheet credit exposures. This allowance is estimated by management and if deemed necessary, the allowance would be classified in other liabilities on the consolidated balance sheets. As of September 30, 2012 and December 31, 2011, an allowance for possible credit losses on off-balance sheet credit exposures was not recorded.

The allowance consists of specific and general 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. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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 is 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 trouble debt restructuring is considered to be a collateral dependent loan, the loan is 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 and is based on historical losses adjusted for current factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding two years. In calculating the historical component of our allowance, we aggregate loans into one of four portfolio segments: Commercial, Commercial Real Estate, Consumer and Residential. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result of continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. Actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: the concentration of special mention, substandard and doubtful loans as a percentage of total loans, levels of loan concentration within the portfolio segment or division of a portfolio segment, broad economic conditions, delinquency trends, volume trends and terms, and policy and management changes.

Premises and Equipment

Premises, improvements, and equipment are stated at cost less accumulated depreciation computed principally utilizing the straight-line method over the estimated useful lives of the assets. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value may not be recovered. Maintenance and minor repairs are charged to operations as incurred. The cost and accumulated depreciation of the premises and equipment retired or sold are eliminated from the property accounts at the time of retirement or sale, and the resulting gain or loss is reflected in current operations.

Mortgage Servicing Rights

The Corporation originates and sells real estate loans to investors in the secondary mortgage market. After the sale, the Corporation may retain the right to service these loans. When originated mortgage loans are sold and servicing is retained, a servicing asset is capitalized based on relative fair value at the date of sale. Servicing assets are amortized as an offset to other fees in proportion to, and over the period of, estimated net servicing income. The unamortized cost is included in other assets in the consolidated balance sheets. The servicing rights are periodically evaluated for impairment based on their relative fair value.

Foreclosed Assets Held for Resale

Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value on the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and if fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. The real estate is carried at the lower of carrying amount or fair value less cost to sell and is included in other assets on the consolidated balance sheets. Revenues derived from and costs to maintain the assets and subsequent gains and losses on sales are included in non-interest income and expense on the consolidated statements of income. The total of foreclosed real estate properties amounted to $534,000 at September 30, 2012 and $780,000 at December 31, 2011.

Bank Owned Life Insurance

The Corporation invests in Bank Owned Life Insurance ("BOLI") with split dollar life provisions. Purchase of BOLI provides life insurance coverage on certain employees with the Corporation being owner and beneficiary of the policies.

Investments in Real Estate Ventures

The Bank is a limited partner in real estate ventures that own and operate affordable residential low-income housing apartment buildings for elderly and mentally challenged adult residents. The investments are accounted for under the effective yield method. Under the effective yield method, the Bank recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that the tax credits are allocated to the Bank. Under this method, the tax credits allocated, net of any amortization of the investment in the limited partnerships, are recognized in the consolidated statements of income as a component of income tax expense. The amount of tax credits allocated to the Bank were $277,000 in 2012 and $160,000 in 2011, and the amortization of the investments in the limited partnerships were $138,000 for the nine months ended September 30, 2012 and $88,000 for the nine months ended September 30, 2011.

Income Taxes

The provision for income taxes is based on the results of operations, adjusted primarily for tax-exempt income. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement and income tax bases of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period.

In assessing the ultimate realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.

The Corporation and the Bank are subject to U.S. federal income tax and Commonwealth of Pennsylvania tax. The Corporation is no longer subject to examination by Federal or State taxing authorities for the years before 2008. At September 30, 2012 and December 31, 2011, the Corporation did not have any unrecognized tax benefits. The Corporation does not expect the amount of any unrecognized tax benefits to significantly increase in the next twelve months. The Corporation recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as non-interest expense. At September 30, 2012 and December 31, 2011, the Corporation does not have any amounts accrued for interest and/or penalties.

Goodwill, Other Intangible Assets, and Premium Discount

Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004. Such goodwill represents the excess cost of the acquired assets relative to the assets fair value at the dates of acquisition. During the first quarter of 2008, $152,000 of liabilities related to the Pocono acquisition were recorded as a purchase accounting adjustment resulting in an increase in the excess purchase price. The amount was comprised of the finalization of severance agreements and contract terminations related to the acquisition. In accordance with current accounting standards, goodwill is not amortized. Management performs an annual evaluation for impairment. Any impairment of goodwill results in a charge to income. The Corporation periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired. Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Corporation has tested the goodwill included in its consolidated balance sheet at December 31, 2011, and has determined there was no impairment as of that date or as of September 30, 2012. No assurance can be given that future impairment tests will not result in a charge to earnings.

Intangible assets are comprised of core deposit intangibles and premium discount (negative premium) on certificates of deposit acquired. The core deposit intangible is being amortized over the average life of the deposits acquired as determined by an independent third party. Premium discount (negative premium) on acquired certificates of deposit resulted from the valuation of certificate of deposit accounts by an independent third party. The book value of certificates of deposit acquired was greater than their fair value at the date of acquisition which resulted in a negative premium due to higher cost of the certificates of deposit compared to the cost of similar term financing. The Corporation has tested the core deposit intangible included in its consolidated balance sheet at December 31, 2011 and has determined there was no impairment as of that date or as of September 30, 2012. No assurance can be given that future impairment tests will not result in a charge to earnings.

Stock Based Compensation

The Corporation adopted a stock option incentive plan in 1998. Compensation cost is recognized for stock options to employees based on the fair value of these awards at the date of grant. A Black-Scholes Option Pricing Model is utilized to estimate the fair value of stock options. Compensation expense is recognized over the requisite service period. The Plan expired in 2008, and therefore, no stock options are available for issuance. After adjustments for the effects of stock dividends, options exercised and options forfeited, there remains 13,603 exercisable options issued and outstanding as of September 30, 2012.

Per Share Data

FASB ASC 260-10, Earnings Per Share, requires dual presentation of basic and fully diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding at the end of each period. Diluted earnings per share is calculated by increasing the denominator for the assumed conversion of all potentially dilutive securities. The Corporation's dilutive securities are limited to stock options. The most recent options issued were in December 2007.

Cash Flow Information

For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and due from banks, interest-bearing deposits in other banks, and federal funds sold. The Corporation considers cash classified as interest-bearing deposits with other banks as a cash equivalent since they are represented by cash accounts essentially on a demand basis.

Treasury Stock

The purchase of the Corporation's common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a first-in-first-out basis.

Trust Assets and Income

Property held by the Corporation in a fiduciary or agency capacity for its customers is not included in the accompanying consolidated financial statements since such items are not assets of the Corporation. Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis.

Accumulated Other Comprehensive Income (Loss)

The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income (loss) is comprised of net unrealized holding gains (losses) on the available-for-sale investment securities portfolio. The Corporation has elected to report these effects on the Consolidated Statements of Comprehensive Income.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The primary purpose of the ASU is to improve the comparability between U.S. GAAP fair value accounting and reporting requirements and International Financial Reporting Standards ("IFRS") fair value and reporting requirements. The ASU also requires additional disclosures about transfers between level 1 and 2 of the fair value hierarchy, quantitative information for level 3 inputs, and the level of the fair value measurement hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. The ASU was effective for the interim and annual periods beginning after December 15, 2011. The adoption of the standard did not have a material impact on the Corporation's consolidated financial statements. See Note 8 for further information.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income. The ASU requires presentation of the components of other comprehensive income ("OCI") in either a continuous statement of comprehensive income or two separate but consecutive statements. The update does not change the items presented in OCI and does not affect the calculation or reporting of earnings per share ("EPS"). In December 2011, the FASB issued ASU 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in Accounting Standards update No. 2011-05, which deferred the effective date for the amendments to the reclassification of items out of accumulated other comprehensive income ("AOCI"). The guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2011, and must be applied retrospectively for all periods presented. Total other comprehensive income and the components of other comprehensive income are presented in the Consolidated Statements of Comprehensive Income.

In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other: Testing Goodwill for Impairment, to simplify the current two-step goodwill impairment test in FASB ASC Topic 350-20, Intangibles - Goodwill and Other: Goodwill. The update permits entities to first perform a qualitative assessment to determine whether or not it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would then perform the first step of the goodwill impairment test; otherwise, no further impairment test would be required. The guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Corporation adopted the standard as of January 1, 2012 and will apply the new guidance to future goodwill impairment testing. The adoption of the standard did not have a material impact on the Corporation's consolidated financial statements or its goodwill impairment evaluation.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet: Disclosures about Offsetting Assets and Liabilities, to increase the disclosure requirements surrounding derivative instruments that are offset within the balance sheet pursuant to the provisions of current U.S. GAAP. The objective of the update is to provide greater comparability between issuers reporting under U.S. GAAP versus IFRS and provide users the ability to evaluate the effect of netting arrangements on a company's financial statements. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective disclosure for all comparative periods presented. The Corporation is evaluating the impact of the ASU; however, the Corporation does not anticipate this update will have a material impact on its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350). The primary purpose of the ASU is to simplify the impairment test for indefinite-lived intangible assets other than goodwill. The new guidance gives the Corporation the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Corporation will adopt this standard in the fourth quarter of 2012, and does not anticipate that this standard will have a material impact on its consolidated financial statements.

Advertising Costs

It is the Corporation's policy to expense advertising costs in the period in which they are incurred. Advertising expense for the nine months ended September 30, 2012 and 2011, was approximately $216,000 and $201,000, respectively.

Reclassifications

The Corporation reclassified certain immaterial amounts in the Consolidated Statements of Income. Such reclassifications have no effect on the Corporation's consolidated financial condition or net income.

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FAIR VALUES OF FINANCIAL INSTRUMENTS (Schedule of Additional Quantitative Information) (Details) (Appraisal of Collateral [Member], USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012
Impaired Loans Receivable [Member] | Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate	3,347
Impaired Loans Receivable [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Appraisal adjustment	10.00%
Impaired Loans Receivable [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Appraisal adjustment	35.00%
Foreclosed Assets Held for Sale [Member] | Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate	534
Foreclosed Assets Held for Sale [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Appraisal adjustment	10.00%
Foreclosed Assets Held for Sale [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Appraisal adjustment	35.00%

XML

LOANS (Schedule of Allowance for Loan Losses) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
LOANS [Abstract]
Balance at beginning of period	$ 5,929	$ 5,701
Provision charged to operations	1,200	1,900
Loans charged off	(1,291)	(1,769)
Recoveries	67	97
Balance at end of period	$ 5,905	$ 5,929

XML

LOANS (Schedule of Major Classifications of Loans) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
LOANS [Abstract]
Commercial, Financial and Agricultural	$ 23,730	$ 21,448
Tax-exempt - Real Estate and Other	31,601	19,779
Real estate mortgages - Held-for-sale	1,904	1,356
Real estate mortgages - Consumer	141,868	129,362
Real estate mortgages - Commercial	225,100	236,645
Consumer	6,651	7,429
Gross loans	430,854	416,019
Add (deduct): Unearned discount and	(202)	(331)
Net deferred loan fees and costs	325	307
Total loans, net of unearned income	$ 430,977	$ 415,995

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FAIR VALUES OF FINANCIAL INSTRUMENTS (Narrative) (Details) (USD $)	Sep. 30, 2012
Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Minimum impaired loan balance that requires an appraisal to be obtained and reviewed annually for impaired loan valuation procedure	$ 250,000
Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Maximum impaired loan balance for which the bank completes a Certificate of Inspection	$ 250,000

XML

LOANS (Narrative) (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	$ 430,854,000	$ 416,019,000
Impaired loans	3,347,000	4,188,000
With an allowance recorded	548,000	947,000
Impaired loans, average recorded balance	4,594,000	5,851,000
Loans past-due 90 days or more and still accruing	2,016,000	0
Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired loans	502,000	123,000
With an allowance recorded	0	80,000
Impaired loans, average recorded balance	811,000	328,000
Loans past-due 90 days or more and still accruing	0	0
Residential Real Estate and Consumer Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Number of large residential property transferred into foreclosed assets held for resale	1
Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	420,949,000	403,093,000
Percentage of total gross loans	97.70%
Pass [Member] | Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	51,341,000	38,250,000
Special Mention [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	3,372,000	3,825,000
Percentage of total gross loans	0.80%
Special Mention [Member] | Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	642,000	556,000
Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	6,533,000	9,101,000
Percentage of total gross loans	1.50%
Substandard [Member] | Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	556,000	880,000
Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	0	0
Doubtful [Member] | Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	0	0
Non-Pass Grades [Member] | Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	1,198,000	1,436,000
Non-Pass Grades [Member] | Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	7,203,000	10,375,000
Decrease in gross loans	(3,172,000)
Loans transferred into foreclosed assets held for resale	381,000
Non-Pass Grades [Member] | Residential Real Estate and Consumer Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Gross loans	1,504,000	1,115,000
Non-Pass Grades [Member] | Upgraded Loans [Member] | Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Decrease in gross loans	(1,172,000)
Non-Pass Grades [Member] | Charged Down Loans [Member] | Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Decrease in gross loans	(771,000)
Well Secured Participation Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans past-due 90 days or more and still accruing	1,000,000
Loan-to-value percentage	25.00%
Well Secured and in Process of Collection [Member] | Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans past-due 90 days or more and still accruing	500,000
Well Secured and in Process of Collection [Member] | Residential Real Estate and Consumer Loans [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans past-due 90 days or more and still accruing	$ 500,000

XML

LOANS (Schedule of Credit Quality Indicators by Loan Segment) (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment [Line Items]
Gross loans	$ 430,854,000	$ 416,019,000
Add (deduct): Unearned discount and	(202,000)	(331,000)
Net deferred loan fees and costs	325,000	307,000
Total loans, net of unearned income	430,977,000	415,995,000
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	420,949,000	403,093,000
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	3,372,000	3,825,000
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	6,533,000	9,101,000
Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	0	0
Commercial and Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	0	0
Net deferred loan fees and costs	119,000	100,000
Total loans, net of unearned income	52,658,000	39,786,000
Commercial and Industrial [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	51,341,000	38,250,000
Commercial and Industrial [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	642,000	556,000
Commercial and Industrial [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	556,000	880,000
Commercial and Industrial [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	0	0
Commercial Real Estate Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	0	0
Net deferred loan fees and costs	(2,000)	(8,000)
Total loans, net of unearned income	5,468,000	3,773,000
Commercial Real Estate Construction [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	5,470,000	3,781,000
Commercial Real Estate Construction [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	0	0
Commercial Real Estate Construction [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	0	0
Commercial Real Estate Construction [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	0	0
Commercial Real Estate Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	0	0
Net deferred loan fees and costs	(26,000)	3,000
Total loans, net of unearned income	222,395,000	234,408,000
Commercial Real Estate Other [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	215,218,000	224,030,000
Commercial Real Estate Other [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	2,590,000	3,269,000
Commercial Real Estate Other [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	4,613,000	7,106,000
Commercial Real Estate Other [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	0	0
Residential Real Estate Including Home Equity [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	0	0
Net deferred loan fees and costs	156,000	133,000
Total loans, net of unearned income	143,928,000	130,851,000
Residential Real Estate Including Home Equity [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	142,285,000	129,627,000
Residential Real Estate Including Home Equity [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	137,000	0
Residential Real Estate Including Home Equity [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	1,350,000	1,091,000
Residential Real Estate Including Home Equity [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	0	0
Consumer Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	(202,000)	(331,000)
Net deferred loan fees and costs	78,000	79,000
Total loans, net of unearned income	6,528,000	7,177,000
Consumer Loans [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	6,635,000	7,405,000
Consumer Loans [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	3,000	0
Consumer Loans [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	14,000	24,000
Consumer Loans [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Gross loans	$ 0	$ 0

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
OPERATING ACTIVITIES
Net Income	$ 7,998,000	$ 7,716,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,200,000	1,100,000
Depreciation and amortization	837,000	721,000
Premium amortization on investment securities	913,000	760,000
Discount accretion on investment securities	(676,000)	(860,000)
Core deposit discount amortization net of accretion	212,000	217,000
Deferred (benefit) income tax provision	(434,000)	141,000
(Gain) loss on sale of mortgage loans originated for resale	(738,000)	(211,000)
Proceeds from sale of mortgage loans originated for resale	23,301,000	14,270,000
Originations of mortgage loans originated for resale	(24,499,000)	(12,756,000)
(Gain) loss on sales of investment securities	(1,484,000)	(143,000)
Loss (gain) on sale of foreclosed assets held for resale	195,000	137,000
Decrease (increase) in accrued interest receivable	156,000	315,000
(Increase) decrease in cash surrender value of bank owned life insurance	(546,000)	(569,000)
(Increase) decrease in other assets - net	(327,000)	(218,000)
Decrease (increase) in prepaid FDIC insurance	325,000	520,000
Increase (decrease) in accrued interest and other expenses	131,000	(32,000)
(Decrease) increase in other liabilities	(408,000)	(260,000)
NET CASH PROVIDED BY OPERATING ACTIVITIES	6,156,000	10,848,000
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale	36,737,000	53,564,000
Proceeds from maturities and redemptions of investment securities available-for-sale	27,894,000	26,229,000
Purchases of investment securities available-for-sale	(25,473,000)	(87,501,000)
Proceeds from maturities and redemption of investment securities held-to-maturity	14,000	2,048,000
Proceeds from the redemption of restricted securities	968,000	903,000
Purchases of restricted securities	(206,000)	0
Net (increase) decrease in loans	(15,007,000)	(3,632,000)
Purchases of premises and equipment	(5,795,000)	(1,047,000)
Proceeds from sale of foreclosed assets held for resale	852,000	348,000
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	19,984,000	(9,088,000)
FINANCING ACTIVITIES
Net increase (decrease) in deposits	5,883,000	6,912,000
Net (decrease) increase in short-term borrowings	(14,118,000)	1,372,000
Proceeds from long-term borrowings	10,000,000	5,000,000
Repayment of long-term borrowings	(23,799,000)	(2,045,000)
Proceeds from issuance of common stock	65,000	0
Proceeds from issuance of treasury stock	246,000	14,000
Cash dividends paid	(3,879,000)	(3,920,000)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(25,602,000)	7,333,000
INCREASE IN CASH AND CASH EQUIVALENTS	538,000	9,093,000
CASH AND CASH EQUIVALENTS, BEGINNING	10,179,000	11,905,000
CASH AND CASH EQUIVALENTS, ENDING	10,717,000	20,998,000
Cash paid during period for:
Cash paid during period for interest	5,355,000	7,484,000
Cash paid for income taxes	$ 1,726,000	$ 1,572,000

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LOANS (Schedule of Allowance for Loan Losses by Loan Segment) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Allowance for Loan Losses:
Balance at beginning of period	$ 5,929	$ 5,701
Loans charged off	(1,291)	(1,769)
Recoveries	67	97
Provision charged to operations	1,200	1,900
Balance at end of period	5,905	5,929
Ending balance: individually evaluated for impairment	548	947
Ending balance: collectively evaluated for impairment	5,357	4,982
Total allowance	5,905	5,929
Financing Receivables:
Ending Balance	430,977	415,995
Ending balance: individually evaluated for impairment	3,347	4,188
Ending balance: collectively evaluated for impairment	427,630	411,807
Commercial [Member]
Allowance for Loan Losses:
Balance at beginning of period	489	565
Loans charged off	(264)	(485)
Recoveries	23	28
Provision charged to operations	308	381
Balance at end of period	556	489
Ending balance: individually evaluated for impairment	0	80
Ending balance: collectively evaluated for impairment	556	409
Total allowance	556	489
Financing Receivables:
Ending Balance	52,658	39,786
Ending balance: individually evaluated for impairment	502	122
Ending balance: collectively evaluated for impairment	52,156	39,664
Commercial Real Estate [Member]
Allowance for Loan Losses:
Balance at beginning of period	3,507	2,769
Loans charged off	(708)	(968)
Recoveries	21	51
Provision charged to operations	164	1,655
Balance at end of period	2,984	3,507
Ending balance: individually evaluated for impairment	390	756
Ending balance: collectively evaluated for impairment	2,594	2,751
Total allowance	2,984	3,507
Financing Receivables:
Ending Balance	227,863	238,181
Ending balance: individually evaluated for impairment	1,894	3,211
Ending balance: collectively evaluated for impairment	225,969	234,970
Consumer [Member]
Allowance for Loan Losses:
Balance at beginning of period	137	123
Loans charged off	(54)	(98)
Recoveries	22	16
Provision charged to operations	(24)	96
Balance at end of period	81	137
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	81	137
Total allowance	81	137
Financing Receivables:
Ending Balance	6,528	7,177
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	6,528	7,177
Residential [Member]
Allowance for Loan Losses:
Balance at beginning of period	1,228	1,501
Loans charged off	(265)	(218)
Recoveries	1	2
Provision charged to operations	557	(57)
Balance at end of period	1,521	1,228
Ending balance: individually evaluated for impairment	158	111
Ending balance: collectively evaluated for impairment	1,363	1,117
Total allowance	1,521	1,228
Financing Receivables:
Ending Balance	143,928	130,851
Ending balance: individually evaluated for impairment	951	855
Ending balance: collectively evaluated for impairment	142,977	129,996
Unallocated [Member]
Allowance for Loan Losses:
Balance at beginning of period	568	743
Loans charged off	0	0
Recoveries	0	0
Provision charged to operations	195	(175)
Balance at end of period	763	568
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	763	568
Total allowance	763	568
Financing Receivables:
Ending Balance	0	0
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	$ 0	$ 0

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Commitments to Extend Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial Instruments with off-balance sheet credit risk, contract or notional amounts	$ 58,631	$ 62,459
Financial Standby Letters of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial Instruments with off-balance sheet credit risk, contract or notional amounts	724	789
Performance Standby Letters of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial Instruments with off-balance sheet credit risk, contract or notional amounts	$ 3,783	$ 4,370

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
ASSETS
Cash and due from banks	$ 6,677	$ 8,403
Interest-bearing deposits in other banks	4,040	1,776
Total cash and cash equivalents	10,717	10,179
Investment securities available-for-sale	303,244	328,824
Investment securities held-to-maturity (estimated fair value of $2,632 in 2012 and $2,666 in 2011)	2,585	2,605
Restricted securities at cost - available-for-sale	4,427	5,189
Loans, net of unearned income	430,977	415,995
Allowance for loan losses	(5,905)	(5,929)
Net loans	425,072	410,066
Premises and equipment, net	18,027	12,725
Accrued interest receivable	4,219	4,375
Cash surrender value of bank owned life insurance	19,691	19,145
Investment in real estate ventures	1,346	1,484
Goodwill	19,133	19,133
Core deposit intangible	739	951
Prepaid FDIC insurance	1,102	1,427
Foreclosed assets held for resale	534	780
Deferred income taxes	8	30
Other assets	1,984	1,633
TOTAL ASSETS	812,828	818,546
Deposits:
Non-interest bearing	86,025	75,489
Interest-bearing Deposit Liabilities	544,207	548,860
Total Deposits	630,232	624,349
Short-term borrowings	16,764	30,882
Long-term borrowings	50,540	64,339
Accrued interest and other expenses	2,988	2,857
Deferred income taxes	4,346	2,350
Other liabilities	5,697	677
TOTAL LIABILITIES	710,567	725,454
STOCKHOLDERS' EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares in 2012; issued 0 in 2012	0	0
Common stock, par value $2.00 per share; authorized 20,000,000 shares in 2012 and 10,000,000 shares in 2011; issued 5,707,395 in 2012 and 5,687,767 in 2011	11,415	11,375
Surplus	30,526	30,157
Retained earnings	53,782	49,872
Accumulated other comprehensive income	12,472	7,757
Treasury stock, at cost, 238,489 shares in 2012 and 242,517 shares in 2011	(5,934)	(6,069)
TOTAL STOCKHOLDERS' EQUITY	102,261	93,092
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 812,828	$ 818,546

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FAIR VALUES OF FINANCIAL INSTRUMENTS (Schedule of Carrying Values and Estimated Fair Values of Financial Instruments) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
FINANCIAL ASSETS:
Cash and due from banks	$ 6,677	$ 8,403
Short-term investments	4,040	1,776
Investment securities - available-for-sale	307,671	334,013
Investment securities - held-to-maturity	2,632	2,666
Net loans	425,579	410,033
Mortgage servicing rights	459	421
Accrued interest receivable	4,219	4,375
Cash surrender value of bank owned life insurance	19,691	19,145
FINANCIAL LIABILITIES:
Deposits	633,588	624,793
Short-term borrowings	16,764	30,882
Long-term borrowings	54,083	69,055
Accrued interest payable	529	785
Carrying Amount [Member]
FINANCIAL ASSETS:
Cash and due from banks	6,677	8,403
Short-term investments	4,040	1,776
Investment securities - available-for-sale	307,671	334,013
Investment securities - held-to-maturity	2,585	2,605
Net loans	425,072	410,066
Mortgage servicing rights	459	421
Accrued interest receivable	4,219	4,375
Cash surrender value of bank owned life insurance	19,691	19,145
FINANCIAL LIABILITIES:
Deposits	630,232	624,349
Short-term borrowings	16,764	30,882
Long-term borrowings	50,540	64,339
Accrued interest payable	529	785
Level 1 [Member]
FINANCIAL ASSETS:
Cash and due from banks	6,677	8,403
Short-term investments	4,040	1,776
Investment securities - available-for-sale	2,012	1,741
Investment securities - held-to-maturity	0	0
Net loans	0	0
Mortgage servicing rights	0	0
Accrued interest receivable	4,219	4,375
Cash surrender value of bank owned life insurance	19,691	19,145
FINANCIAL LIABILITIES:
Deposits	381,925	368,831
Short-term borrowings	16,764	30,882
Long-term borrowings	0	0
Accrued interest payable	529	785
Level 2 [Member]
FINANCIAL ASSETS:
Cash and due from banks	0	0
Short-term investments	0	0
Investment securities - available-for-sale	305,659	332,272
Investment securities - held-to-maturity	2,632	2,666
Net loans	0	0
Mortgage servicing rights	0	0
Accrued interest receivable	0	0
Cash surrender value of bank owned life insurance	0	0
FINANCIAL LIABILITIES:
Deposits	0	0
Short-term borrowings	0	0
Long-term borrowings	0	0
Accrued interest payable	0	0
Level 3 [Member]
FINANCIAL ASSETS:
Cash and due from banks	0	0
Short-term investments	0	0
Investment securities - available-for-sale	0	0
Investment securities - held-to-maturity	0	0
Net loans	425,579	410,033
Mortgage servicing rights	459	421
Accrued interest receivable	0	0
Cash surrender value of bank owned life insurance	0	0
FINANCIAL LIABILITIES:
Deposits	251,663	255,962
Short-term borrowings	0	0
Long-term borrowings	54,083	69,055
Accrued interest payable	$ 0	$ 0

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Parenthetical) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY [Abstract]
Issuance of common stock for stock dividends and stock purchase plan, shares	19,628
Issuance of treasury stock upon exercise of employee stock options, shares	4,028	815
Cash dividends, per share	$ 0.75	$ 0.72

XML

LOANS (Schedule of Financing Receivables on Non-Accrual Status and Foreclosed Assets) (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
Impaired loans	$ 3,347,000	$ 4,188,000
Restructured loans	0	0
Total impaired loans	3,347,000	4,188,000
Loans past-due 90 days or more and still accruing	2,016,000	0
Foreclosed assets	534,000	780,000
Total non-performing assets	5,897,000	4,968,000
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Impaired loans	1,894,000	3,210,000
Loans past-due 90 days or more and still accruing	1,544,000	0
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Impaired loans	502,000	123,000
Loans past-due 90 days or more and still accruing	0	0
Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Impaired loans	951,000	855,000
Loans past-due 90 days or more and still accruing	472,000	0
Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Impaired loans	0	0
Loans past-due 90 days or more and still accruing	$ 0	$ 0

XML

FAIR VALUES OF FINANCIAL INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Inputs, Assets, Quantitative Information [Line Items]

Schedule of Investments Measured at Fair Value on Recurring Basis

September 30, 2012

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed	$	0	$	48,354	$	0	$	48,354
Other		0		17,884		0		17,884
Obligations of state and political subdivisions		0		186,855		0		186,855
Corporate securities		0		48,139		0		48,139
Marketable equity securities		2,012		0		0		2,012
Restricted equity securities		0		4,427		0		4,427
Total	$	2,012	$	305,659	$	0	$	307,671

December 31, 2011

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed	$	0	$	67,781	$	0	$	67,781
Other		0		13,275		0		13,275
Obligations of state and political subdivisions		0		186,785		0		186,785
Corporate securities		0		59,242		0		59,242
Marketable equity securities		1,741		0		0		1,741
Restricted equity securities		0		5,189		0		5,189
Total	$	1,741	$	332,272	$	0	$	334,013

Schedule of Additional Quantitative Information

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate		Valuation Technique	Unobservable Input	Range
Assets at September 30, 2012
Impaired loans	$	3,347	Appraisal of collateral1,3	Appraisal adjustments2		10% - 35%
Foreclosed assets held for sale		534	Appraisal of collateral1,3	Appraisal adjustments2		10% - 35%

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

²Appraisals may be adjusted 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.

Schedule of Carrying Values and Estimated Fair Values of Financial Instruments

(Amounts in thousands)

	Carrying		Fair Value Measurements at September 30, 2012
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	6,677	$	6,677	$	0	$	0	$	6,677
Short-term investments		4,040		4,040		0		0		4,040
Investment securities - available-for-sale		307,671		2,012		305,659		0		307,671
Investment securities - held-to-maturity		2,585		0		2,632		0		2,632
Net loans		425,072		0		0		425,579		425,579
Mortgage servicing rights		459		0		0		459		459
Accrued interest receivable		4,219		4,219		0		0		4,219
Cash surrender value of bank owned life insurance		19,691		19,691		0		0		19,691
FINANCIAL LIABILITIES:
Deposits		630,232		381,925		0		251,663		633,588
Short-term borrowings		16,764		16,764		0		0		16,764
Long-term borrowings		50,540		0		0		54,083		54,083
Accrued interest payable		529		529		0		0		529
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit										58,631
Financial standby letters of credit										724
Performance standby letters of credit										3,783

(Amounts in thousands)

	Carrying		Fair Value Measurements at December 31, 2011
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,403	$	8,403	$	0	$	0	$	8,403
Short-term investments		1,776		1,776		0		0		1,776
Investment securities - available-for-sale		334,013		1,741		332,272		0		334,013
Investment securities - held-to-maturity		2,605		0		2,666		0		2,666
Net loans		410,066		0		0		410,033		410,033
Mortgage servicing rights		421		0		0		421		421
Accrued interest receivable		4,375		4,375		0		0		4,375
Cash surrender value of bank owned life insurance		19,145		19,145		0		0		19,145
FINANCIAL LIABILITIES:
Deposits		624,349		368,831		0		255,962		624,793
Short-term borrowings		30,882		30,882		0		0		30,882
Long-term borrowings		64,339		0		0		69,055		69,055
Accrued interest payable		785		785		0		0		785
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit										62,459
Financial standby letters of credit										789
Performance standby letters of credit										4,370

Impaired Loans [Member]

Fair Value Inputs, Assets, Quantitative Information [Line Items]

Schedule of Assets Measured at Fair Value on Non-Recurring Basis

	Level 1		Level 2		Level 3		Total
Assets at September 30, 2012
Impaired loans:
Commercial, Financial and Agricultural	$	0	$	0	$	502	$	502
Commercial real estate mortgages		0		0		1,894		1,894
Residential real estate mortgages		0		0		951		951
Total impaired loans	$	0	$	0	$	3,347	$	3,347

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2011
Impaired loans:
Commercial, Financial and Agricultural	$	0	$	0	$	123	$	123
Commercial real estate mortgages		0		0		3,210		3,210
Residential real estate mortgages		0		0		855		855
Total impaired loans	$	0	$	0	$	4,188	$	4,188

Foreclosed Assets Held for Resale [Member]

Fair Value Inputs, Assets, Quantitative Information [Line Items]

Schedule of Assets Measured at Fair Value on Non-Recurring Basis

	Level 1		Level 2		Level 3		Total
Assets at September 30, 2012
Other foreclosed assets held for resale:
Residential real estate mortgages	$	0	$	0	$	474	$	474
Commercial real estate mortgages		0		0		60		60
Total foreclosed assets held for resale	$	0	$	0	$	534	$	534

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2011
Other foreclosed assets held for resale:
Commercial real estate mortgages	$	0	$	0	$	780	$	780
Total foreclosed assets held for resale	$	0	$	0	$	780	$	780

XML

LOANS (Schedule of Aging of Past Due Loans by Class of Loans) (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	$ 3,297,000	$ 3,130,000
60-89 Days Past Due	543,000	1,221,000
Greater Than 90 Days	2,016,000	0
Total Past Due	5,856,000	4,351,000
Non- Performing Assets	3,347,000	4,188,000
Current	421,774,000	407,456,000
Total loans, net of unearned income	430,977,000	415,995,000
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	81,000	166,000
60-89 Days Past Due	0	21,000
Greater Than 90 Days	0	0
Total Past Due	81,000	187,000
Non- Performing Assets	502,000	123,000
Current	52,075,000	39,476,000
Total loans, net of unearned income	52,658,000	39,786,000
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	2,027,000	1,427,000
60-89 Days Past Due	437,000	785,000
Greater Than 90 Days	1,544,000	0
Total Past Due	4,008,000	2,212,000
Non- Performing Assets	1,894,000	3,210,000
Current	221,961,000	232,759,000
Total loans, net of unearned income	227,863,000	238,181,000
Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	63,000	64,000
60-89 Days Past Due	15,000	62,000
Greater Than 90 Days	0	0
Total Past Due	78,000	126,000
Non- Performing Assets	0	0
Current	6,450,000	7,051,000
Total loans, net of unearned income	6,528,000	7,177,000
Residential [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
30-59 Days Past Due	1,126,000	1,473,000
60-89 Days Past Due	91,000	353,000
Greater Than 90 Days	472,000	0
Total Past Due	1,689,000	1,826,000
Non- Performing Assets	951,000	855,000
Current	141,288,000	128,170,000
Total loans, net of unearned income	$ 143,928,000	$ 130,851,000

XML

INVESTMENT SECURITIES (Schedule of Amortized Cost, Related Estimated Fair Value and Unrealized Gains and Losses for Investment Securities) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Available-for-Sale Securities
Amortized Cost	$ 288,735	$ 322,244
Gross Unrealized Gains	20,019	15,535
Gross Unrealized Losses	(1,083)	(3,766)
Estimated Fair Value	307,671	334,013
Held-to-Maturity Securities
Amortized Cost	2,585	2,605
Gross Unrealized Gains	47	61
Gross Unrealized Losses	0	0
Estimated Fair Value	2,632	2,666
Obligations of U.S. Government Corporations and Agencies: Mortgage-backed [Member]
Available-for-Sale Securities
Amortized Cost	45,928	64,892
Gross Unrealized Gains	2,484	2,930
Gross Unrealized Losses	(58)	(41)
Estimated Fair Value	48,354	67,781
Held-to-Maturity Securities
Amortized Cost	110	124
Gross Unrealized Gains	5	4
Gross Unrealized Losses	0	0
Estimated Fair Value	115	128
Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities
Amortized Cost	17,720	13,187
Gross Unrealized Gains	164	94
Gross Unrealized Losses	0	(6)
Estimated Fair Value	17,884	13,275
Held-to-Maturity Securities
Amortized Cost	2,008	2,014
Gross Unrealized Gains	30	46
Gross Unrealized Losses	0	0
Estimated Fair Value	2,038	2,060
Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities
Amortized Cost	171,305	177,139
Gross Unrealized Gains	16,220	11,846
Gross Unrealized Losses	(670)	(2,200)
Estimated Fair Value	186,855	186,785
Held-to-Maturity Securities
Amortized Cost	467	467
Gross Unrealized Gains	12	11
Gross Unrealized Losses	0	0
Estimated Fair Value	479	478
Corporate Securities [Member]
Available-for-Sale Securities
Amortized Cost	47,736	60,263
Gross Unrealized Gains	704	373
Gross Unrealized Losses	(301)	(1,394)
Estimated Fair Value	48,139	59,242
Marketable Equity Securities [Member]
Available-for-Sale Securities
Amortized Cost	1,619	1,574
Gross Unrealized Gains	447	292
Gross Unrealized Losses	(54)	(125)
Estimated Fair Value	2,012	1,741
Restricted Equity Securities [Member]
Available-for-Sale Securities
Amortized Cost	4,427	5,189
Gross Unrealized Gains	0	0
Gross Unrealized Losses	0	0
Estimated Fair Value	$ 4,427	$ 5,189

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME [Abstract]
Net Income	$ 2,764	$ 2,677	$ 7,998	$ 7,716
Other comprehensive income:
Unrealized holding gains on available-for-sale investment securities arising during the period	3,088	9,712	8,651	13,948
Less reclassification adjustment for net gains realized in income	477	218	1,484	143
Change in unrealized gains before tax effect	2,611	9,494	7,167	13,805
Tax effects	(897)	(3,216)	(2,452)	(4,679)
Net change in unrealized gains	1,714	6,278	4,715	9,126
Comprehensive Income	$ 4,478	$ 8,955	$ 12,713	$ 16,842

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
CONSOLIDATED BALANCE SHEETS [Abstract]
Investment securities held-to-maturity, estimated fair value	$ 2,632	$ 2,666
Preferred stock, par or stated value per share	$ 2.0	$ 2.0
Preferred stock, shares authorized	1,000,000
Preferred stock, shares issued	0
Common stock, par value per share	$ 2.0	$ 2.0
Common stock, shares authorized	20,000,000	10,000,000
Common stock, shares issued	5,707,395	5,687,767
Treasury stock, shares	238,489	242,517

XML

MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED WITH FORM 10-Q FILING

9 Months Ended

Sep. 30, 2012

MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED WITH FORM 10-Q FILING [Abstract]

MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED WITH FORM 10-Q FILING

NOTE 9 - MANAGEMENT'S ASSERTIONS AND COMMENTS REQUIRED TO BE PROVIDED

WITH FORM 10-Q FILING

In management's opinion, the consolidated interim financial statements reflect fair presentation of the consolidated financial position of First Keystone Corporation and Subsidiary, and the results of their operations and their cash flows for the interim periods presented. Further, the consolidated interim financial statements are unaudited; however they reflect all adjustments, which are in the opinion of management, necessary to present fairly the consolidated financial condition and consolidated results of operations and cash flows for the interim periods presented and that all such adjustments to the consolidated financial statements are of a normal recurring nature. The independent registered public accounting firm, J. H. Williams & Co., LLP, reviewed these consolidated financial statements as stated in their accompanying review report.

The results of operations for the nine-month period ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year.

These consolidated interim financial statements have been prepared in accordance with requirements of Form 10-Q and therefore do not include all disclosures normally required by accounting principles generally accepted in the United States of America applicable to financial institutions as included with consolidated financial statements included in the Corporation's Annual Report on Form 10-K filing. The reader of these consolidated interim financial statements may wish to refer to the Corporation's Annual Report on Form 10-K for the period ended December 31, 2011, filed with the Securities and Exchange Commission.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 04, 2012
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012
Entity Registrant Name	FIRST KEYSTONE CORP
Entity Central Index Key	0000737875
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		5,469,962

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of First Keystone Corporation and its wholly-owned subsidiary, First Keystone Community Bank (the "Bank"). All significant inter-company balances and transactions have been eliminated in consolidation.

Nature of Operations

Nature of Operations

The Corporation, headquartered in Berwick, Pennsylvania, provides a full range of banking, trust and related services through its wholly-owned Bank subsidiary and is subject to competition from other financial institutions in connection with these services. The Bank serves a customer base which includes individuals, businesses, government, and public and institutional customers primarily located in the Northeast Region of Pennsylvania. The Bank has 16 full service offices and 17 Automated Teller Machines ("ATM") located in Columbia, Luzerne, Montour and Monroe counties. The Corporation and its subsidiary must also adhere to certain federal and state banking laws and regulations and are subject to periodic examinations made by various federal agencies.

Segment Reporting

Segment Reporting

The Corporation's subsidiary acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business, government, and public and institutional customers. Through its branch and ATM network, the Bank offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. The Bank also performs personal, corporate, pension and fiduciary services through its Trust Department.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and mortgage banking operations of the Corporation. Currently, management measures the performance and allocates the resources of the Corporation as a single segment.

Use of Estimates

Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could significantly differ from those estimates.

Material estimates that are particularly susceptible to significant changes include the assessment for impairment of certain investment securities, the allowance for loan losses, deferred tax assets and liabilities, impairment of goodwill and other intangible assets and foreclosed assets held for resale. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstance indicate that the previous assumptions and factors have changed. The result of the analysis could result in adjustments to the estimates.

Investment Securities

Investment Securities

The Corporation classifies its investment securities as either "Held-to-Maturity" or "Available-for-Sale" at the time of purchase. Investment 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. Investment 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 and equity securities 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) in the Consolidated Statements of Changes in Stockholders' Equity and in the Consolidated Statements of Comprehensive Income. 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.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums 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 investment securities gains and losses. The cost of investment securities sold, redeemed or matured is based on the specific identification method.

Restricted Securities

Restricted Securities

Restricted equity securities consist of stock in Federal Home Loan Bank of Pittsburgh ("FHLB-Pittsburgh") and Atlantic Central Bankers Bank ("ACBB"). These securities do not have a readily determinable fair value because their ownership is restricted and they can be sold back only to the FHLB-Pittsburgh, ACBB or to another member institution. Therefore, these securities are classified as restricted equity investment securities, carried at cost, and evaluated for impairment. At September 30, 2012, the Corporation held $4,392,000 in stock of FHLB-Pittsburgh and $35,000 in stock of ACBB. At December 31, 2011, the Corporation held $5,154,000 in stock of the FHLB-Pittsburgh and $35,000 in stock of ACBB.

The Corporation evaluated its holding of restricted stock for impairment and deemed the stock to not be impaired due to the expected recoverability of cost, which equals the value reflected within the Corporation's consolidated financial statements. The decision was based on several items ranging from the estimated true economic losses embedded within FHLB's mortgage portfolio to the FHLB's liquidity position and credit rating. The Corporation utilizes the impairment framework outlined in GAAP to evaluate stock for impairment. The following factors were evaluated to determine the ultimate recoverability of the cost of the Corporation's restricted stock holdings; (i) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v) whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institution's operational needs for the foreseeable future allow management to dispose of the stock. Based on the analysis of these factors, the Corporation determined that its holdings of restricted stock were not impaired at September 30, 2012 and December 31, 2011.

Loans

Loans

Loans are stated at their outstanding unpaid principal balances, net of deferred fees or 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 resale 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 to the Corporation.

Past-Due Loans - Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 15 days or more. Delinquent notices are generated automatically when a loan is 15 days past-due. Collection efforts continue on past-due loans that have not been satisfied, 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.

Non-Accrual Loans - 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 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 as to collectability of principal.

Impaired Loans - 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 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 or the fair value of the collateral for certain collateral dependent loans. The recognition of interest income on impaired loans is the same as for non-accrual loans discussed above.

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.

In addition, 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.

In addition, an allowance is provided for possible credit losses on off-balance sheet credit exposures. This allowance is estimated by management and if deemed necessary, the allowance would be classified in other liabilities on the consolidated balance sheets. As of September 30, 2012 and December 31, 2011, an allowance for possible credit losses on off-balance sheet credit exposures was not recorded.

The allowance consists of specific and general 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. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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 is 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 trouble debt restructuring is considered to be a collateral dependent loan, the loan is 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 and is based on historical losses adjusted for current factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over the preceding two years. In calculating the historical component of our allowance, we aggregate loans into one of four portfolio segments: Commercial, Commercial Real Estate, Consumer and Residential. Risk factors impacting loans in each of the portfolio segments include broad deterioration of property values, reduced consumer and business spending as a result of continued high unemployment and reduced credit availability and lack of confidence in a sustainable recovery. Actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: the concentration of special mention, substandard and doubtful loans as a percentage of total loans, levels of loan concentration within the portfolio segment or division of a portfolio segment, broad economic conditions, delinquency trends, volume trends and terms, and policy and management changes.

Premises and Equipment

Premises and Equipment

Premises, improvements, and equipment are stated at cost less accumulated depreciation computed principally utilizing the straight-line method over the estimated useful lives of the assets. Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying value may not be recovered. Maintenance and minor repairs are charged to operations as incurred. The cost and accumulated depreciation of the premises and equipment retired or sold are eliminated from the property accounts at the time of retirement or sale, and the resulting gain or loss is reflected in current operations.

Mortgage Servicing Rights

Mortgage Servicing Rights

The Corporation originates and sells real estate loans to investors in the secondary mortgage market. After the sale, the Corporation may retain the right to service these loans. When originated mortgage loans are sold and servicing is retained, a servicing asset is capitalized based on relative fair value at the date of sale. Servicing assets are amortized as an offset to other fees in proportion to, and over the period of, estimated net servicing income. The unamortized cost is included in other assets in the consolidated balance sheets. The servicing rights are periodically evaluated for impairment based on their relative fair value.

Foreclosed Assets Held for Resale

Foreclosed Assets Held for Resale

Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value on the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and if fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. The real estate is carried at the lower of carrying amount or fair value less cost to sell and is included in other assets on the consolidated balance sheets. Revenues derived from and costs to maintain the assets and subsequent gains and losses on sales are included in non-interest income and expense on the consolidated statements of income. The total of foreclosed real estate properties amounted to $534,000 at September 30, 2012 and $780,000 at December 31, 2011.

Bank Owned Life Insurance

Bank Owned Life Insurance

The Corporation invests in Bank Owned Life Insurance ("BOLI") with split dollar life provisions. Purchase of BOLI provides life insurance coverage on certain employees with the Corporation being owner and beneficiary of the policies.

Investments in Real Estate Ventures

Investments in Real Estate Ventures

The Bank is a limited partner in real estate ventures that own and operate affordable residential low-income housing apartment buildings for elderly and mentally challenged adult residents. The investments are accounted for under the effective yield method. Under the effective yield method, the Bank recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that the tax credits are allocated to the Bank. Under this method, the tax credits allocated, net of any amortization of the investment in the limited partnerships, are recognized in the consolidated statements of income as a component of income tax expense. The amount of tax credits allocated to the Bank were $277,000 in 2012 and $160,000 in 2011, and the amortization of the investments in the limited partnerships were $138,000 for the nine months ended September 30, 2012 and $88,000 for the nine months ended September 30, 2011.

Income Taxes

Income Taxes

The provision for income taxes is based on the results of operations, adjusted primarily for tax-exempt income. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the consolidated financial statement and income tax bases of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period.

In assessing the ultimate realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.

The Corporation and the Bank are subject to U.S. federal income tax and Commonwealth of Pennsylvania tax. The Corporation is no longer subject to examination by Federal or State taxing authorities for the years before 2008. At September 30, 2012 and December 31, 2011, the Corporation did not have any unrecognized tax benefits. The Corporation does not expect the amount of any unrecognized tax benefits to significantly increase in the next twelve months. The Corporation recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as non-interest expense. At September 30, 2012 and December 31, 2011, the Corporation does not have any amounts accrued for interest and/or penalties.

Goodwill, Other Intangible Assets, and Premium Discount

Goodwill, Other Intangible Assets, and Premium Discount

Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004. Such goodwill represents the excess cost of the acquired assets relative to the assets fair value at the dates of acquisition. During the first quarter of 2008, $152,000 of liabilities related to the Pocono acquisition were recorded as a purchase accounting adjustment resulting in an increase in the excess purchase price. The amount was comprised of the finalization of severance agreements and contract terminations related to the acquisition. In accordance with current accounting standards, goodwill is not amortized. Management performs an annual evaluation for impairment. Any impairment of goodwill results in a charge to income. The Corporation periodically assesses whether events or changes in circumstances indicate that the carrying amounts of goodwill and other intangible assets may be impaired. Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Corporation has tested the goodwill included in its consolidated balance sheet at December 31, 2011, and has determined there was no impairment as of that date or as of September 30, 2012. No assurance can be given that future impairment tests will not result in a charge to earnings.

Intangible assets are comprised of core deposit intangibles and premium discount (negative premium) on certificates of deposit acquired. The core deposit intangible is being amortized over the average life of the deposits acquired as determined by an independent third party. Premium discount (negative premium) on acquired certificates of deposit resulted from the valuation of certificate of deposit accounts by an independent third party. The book value of certificates of deposit acquired was greater than their fair value at the date of acquisition which resulted in a negative premium due to higher cost of the certificates of deposit compared to the cost of similar term financing. The Corporation has tested the core deposit intangible included in its consolidated balance sheet at December 31, 2011 and has determined there was no impairment as of that date or as of September 30, 2012. No assurance can be given that future impairment tests will not result in a charge to earnings.

Stock Based Compensation

Stock Based Compensation

The Corporation adopted a stock option incentive plan in 1998. Compensation cost is recognized for stock options to employees based on the fair value of these awards at the date of grant. A Black-Scholes Option Pricing Model is utilized to estimate the fair value of stock options. Compensation expense is recognized over the requisite service period. The Plan expired in 2008, and therefore, no stock options are available for issuance. After adjustments for the effects of stock dividends, options exercised and options forfeited, there remains 13,603 exercisable options issued and outstanding as of September 30, 2012.

Per Share Data

Per Share Data

FASB ASC 260-10, Earnings Per Share, requires dual presentation of basic and fully diluted earnings per share. Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding at the end of each period. Diluted earnings per share is calculated by increasing the denominator for the assumed conversion of all potentially dilutive securities. The Corporation's dilutive securities are limited to stock options. The most recent options issued were in December 2007.

Cash Flow Information

Cash Flow Information

For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and due from banks, interest-bearing deposits in other banks, and federal funds sold. The Corporation considers cash classified as interest-bearing deposits with other banks as a cash equivalent since they are represented by cash accounts essentially on a demand basis.

Treasury Stock

Treasury Stock

The purchase of the Corporation's common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a first-in-first-out basis.

Trust Assets and Income

Trust Assets and Income

Property held by the Corporation in a fiduciary or agency capacity for its customers is not included in the accompanying consolidated financial statements since such items are not assets of the Corporation. Trust Department income is generally recognized on a cash basis and is not materially different than if it were reported on an accrual basis.

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)

The Corporation is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income (loss) is comprised of net unrealized holding gains (losses) on the available-for-sale investment securities portfolio. The Corporation has elected to report these effects on the Consolidated Statements of Comprehensive Income.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The primary purpose of the ASU is to improve the comparability between U.S. GAAP fair value accounting and reporting requirements and International Financial Reporting Standards ("IFRS") fair value and reporting requirements. The ASU also requires additional disclosures about transfers between level 1 and 2 of the fair value hierarchy, quantitative information for level 3 inputs, and the level of the fair value measurement hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. The ASU was effective for the interim and annual periods beginning after December 15, 2011. The adoption of the standard did not have a material impact on the Corporation's consolidated financial statements. See Note 8 for further information.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income. The ASU requires presentation of the components of other comprehensive income ("OCI") in either a continuous statement of comprehensive income or two separate but consecutive statements. The update does not change the items presented in OCI and does not affect the calculation or reporting of earnings per share ("EPS"). In December 2011, the FASB issued ASU 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in Accounting Standards update No. 2011-05, which deferred the effective date for the amendments to the reclassification of items out of accumulated other comprehensive income ("AOCI"). The guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2011, and must be applied retrospectively for all periods presented. Total other comprehensive income and the components of other comprehensive income are presented in the Consolidated Statements of Comprehensive Income.

In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other: Testing Goodwill for Impairment, to simplify the current two-step goodwill impairment test in FASB ASC Topic 350-20, Intangibles - Goodwill and Other: Goodwill. The update permits entities to first perform a qualitative assessment to determine whether or not it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would then perform the first step of the goodwill impairment test; otherwise, no further impairment test would be required. The guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Corporation adopted the standard as of January 1, 2012 and will apply the new guidance to future goodwill impairment testing. The adoption of the standard did not have a material impact on the Corporation's consolidated financial statements or its goodwill impairment evaluation.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet: Disclosures about Offsetting Assets and Liabilities, to increase the disclosure requirements surrounding derivative instruments that are offset within the balance sheet pursuant to the provisions of current U.S. GAAP. The objective of the update is to provide greater comparability between issuers reporting under U.S. GAAP versus IFRS and provide users the ability to evaluate the effect of netting arrangements on a company's financial statements. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective disclosure for all comparative periods presented. The Corporation is evaluating the impact of the ASU; however, the Corporation does not anticipate this update will have a material impact on its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles - Goodwill and Other (Topic 350). The primary purpose of the ASU is to simplify the impairment test for indefinite-lived intangible assets other than goodwill. The new guidance gives the Corporation the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Corporation will adopt this standard in the fourth quarter of 2012, and does not anticipate that this standard will have a material impact on its consolidated financial statements.

Advertising Costs

Advertising Costs

It is the Corporation's policy to expense advertising costs in the period in which they are incurred. Advertising expense for the nine months ended September 30, 2012 and 2011, was approximately $216,000 and $201,000, respectively.

Reclassifications

Reclassifications

The Corporation reclassified certain immaterial amounts in the Consolidated Statements of Income. Such reclassifications have no effect on the Corporation's consolidated financial condition or net income.

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CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
INTEREST INCOME
Interest and fees on loans	$ 5,534	$ 5,848	$ 16,833	$ 17,572
Interest and dividend income on investment securities	2,987	3,388	9,456	10,338
Interest on deposits in banks	1	0	1	3
Interest on federal funds sold	0	1	0	1
Total interest income	8,522	9,237	26,290	27,914
INTEREST EXPENSE
Interest on deposits	1,065	1,657	3,528	5,263
Interest on short-term borrowings	29	36	88	129
Interest on long-term borrowings	382	647	1,482	1,927
Total interest expense	1,476	2,340	5,098	7,319
Net interest income	7,046	6,897	21,192	20,595
Provision for loan losses	400	500	1,200	1,100
Net interest income after provision for loan losses	6,646	6,397	19,992	19,495
NON-INTEREST INCOME
Trust department	193	153	561	440
Service charges and fees	313	335	885	983
Bank owned life insurance income	179	187	546	569
ATM fees and debit card income	239	238	730	678
Gains on sale of mortgage loans	332	117	738	211
Investment securities gains (losses) - net	477	218	1,484	143
Other	153	95	339	341
Total non-interest income	1,886	1,343	5,283	3,365
NON-INTEREST EXPENSE
Salaries and employee benefits	2,602	2,394	7,794	7,027
Occupancy, net	398	335	1,072	1,015
Furniture and equipment	202	122	445	330
Computer expense	277	266	800	743
Professional services	174	197	514	523
State shares tax	193	227	564	548
FDIC insurance	120	127	375	564
ATM and debit card fees	121	98	348	279
FHLB prepayment penalties			811	0
Other	1,089	665	2,845	2,178
Total non-interest expense	5,176	4,431	15,568	13,207
Income before income tax expense	3,356	3,309	9,707	9,653
Income tax expense	592	632	1,709	1,937
NET INCOME	$ 2,764	$ 2,677	$ 7,998	$ 7,716
Net Income Per Share:
Basic	$ 0.51	$ 0.49	$ 1.47	$ 1.42
Diluted	$ 0.51	$ 0.49	$ 1.47	$ 1.42
Cash dividends per share	$ 0.25	$ 0.24	$ 0.75	$ 0.72

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SHORT-TERM BORROWINGS

9 Months Ended

Sep. 30, 2012

SHORT-TERM BORROWINGS [Abstract]

SHORT-TERM BORROWINGS

NOTE 4 - SHORT-TERM BORROWINGS

Federal funds purchased, securities sold under agreements to repurchase, Federal Discount Window, and Federal Home Loan Bank advances generally represent overnight or less than 30-day borrowings. U.S. Treasury tax and loan notes for collections made by the Bank are payable on demand.

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LOANS

9 Months Ended

Sep. 30, 2012

LOANS [Abstract]

LOANS

NOTE 3 - LOANS

Major classifications of loans at September 30, 2012 and December 31, 2011 consisted of:

(Amounts in thousands)

	September 30,			December 31,
	2012			2011
Commercial, Financial and Agricultural	$	23,730		$	21,448
Tax-exempt - Real Estate and Other		31,601			19,779
Real estate mortgages - Held-for-sale		1,904			1,356
Real estate mortgages - Consumer		141,868			129,362
Real estate mortgages - Commercial		225,100			236,645
Consumer		6,651			7,429
Gross loans		430,854			416,019
Add (deduct): Unearned discount and		(202	)		(331	)
Net deferred loan fees and costs		325			307
Total loans, net of unearned income	$	430,977		$	415,995

Activity in the allowance for loan losses for the nine months ended September 30, 2012 and the year ended December 31, 2011:

(Amounts in thousands)

	September 30,			December 31,
	2012			2011
Balance at beginning of period	$	5,929		$	5,701
Provision charged to operations		1,200			1,900
Loans charged off		(1,291	)		(1,769	)
Recoveries		67			97
Balance at end of period	$	5,905		$	5,929

Loan risk grading is a management tool designed to identify and measure risk in the Bank's loan portfolio. Its purpose is to provide a uniform framework and common language to assess and monitor risk, primarily in the Bank's commercial loan/commercial real estate loan portfolios.

The 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 will be on the 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.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $420,949,000 or 97.7% of gross loans are graded Pass; $3,372,000 or 0.8% are graded Special Mention; $6,533,000 or 1.5% are graded Substandard; and $0 are graded Doubtful.

Commercial & Industrial non-pass grades decreased to $1,198,000 as of September 30, 2012, as compared to $1,436,000 as of December 31, 2011. Commercial Real Estate non-pass grades decreased to $7,203,000 as of September 30, 2012, as compared to $10,375,000 as of December 31, 2011. The $3,172,000 decrease in Commercial Real Estate was the result of $1,172,000 in loans upgraded, $771,000 in loans charged-down, and $381,000 in loans transferred into foreclosed assets held for resale, with the balance attributed to borrower repayments. The Residential Real Estate and Consumer Loans non-pass grades increased to $1,504,000 as of September 30, 2012, compared to $1,115,000 as of December 31, 2011. The increase was due to the net of down-grading several residential assets and the transfer of one large residential property to foreclosed assets held for resale.

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 retail, commercial and commercial real estate borrowing relationships. An asset quality rating is assigned using the guidance provided in the Bank's loan policy, which was revised in the second quarter of 2012. Primary responsibility for assigning the asset quality rating rests with the lender. The asset quality rating is validated periodically by both an internal and external loan review process. The rating will always 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 our Bank, credit history and lender knowledge of the borrower. 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 and 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 or assets 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 currently protected but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Bank'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. There is a distinct possibility that the Bank will sustain some loss.

They are characterized by the distinct possibility that the Bank will sustain some loss if in the aggregate amount of substandard assets, is not fully covered by the liquidation of the collateral used as security. Substandard loans are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral, and have a high probability of payment default, or they have other well-defined weaknesses. Such assets require more intensive supervision by Bank 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 where the basis of current information, conditions, and values, collection or liquidation in full is 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 procedures, capital injection, perfection of liens on additional collateral and/or refinancing plans are completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The credit quality indicators by loan segment are summarized below at September 30, 2012 and December 31, 2011:

	Commercial &				Commercial Real Estate
	Industrial				Construction
	September 30,		December 31,		September 30,			December 31,
	2012		2011		2012			2011
Grade:
1-6 Pass	$	51,341	$	38,250	$	5,470		$	3,781
7 Special Mention		642		556		0			0
8 Substandard		556		880		0			0
9 Doubtful		0		0		0			0
Add (deduct): Unearned discount		0		0		0			0
Net deferred loan fees & costs		119		100		(2	)		(8	)
Loans, net of unearned income	$	52,658	$	39,786	$	5,468		$	3,773

	Commercial Real Estate					Residential Real Estate
	Other					Including		Home Equity
	September 30,			December 31,		September 30,		December 31,
	2012			2011		2012		2011
Grade:
1-6 Pass	$	215,218		$	224,030	$	142,285	$	129,627
7 Special Mention		2,590			3,269		137		0
8 Substandard		4,613			7,106		1,350		1,091
9 Doubtful		0			0		0		0
Add (deduct): Unearned discount		0			0		0		0
Net deferred loan fees & costs		(26	)		3		156		133
Loans, net of unearned income	$	222,395		$	234,408	$	143,928	$	130,851

							Loans,
	Consumer Loans						Net of Unearned Income
	September 30,			December 31,			September 30,			December 31,
	2012			2011			2012			2011
Grade:
1-6 Pass	$	6,635		$	7,405		$	420,949		$	403,093
7 Special Mention		3			0			3,372			3,825
8 Substandard		14			24			6,533			9,101
9 Doubtful		0			0			0			0
Add (deduct): Unearned discount		(202	)		(331	)		(202	)		(331	)
Net deferred loan fees & costs		78			79			325			307
Loans, net of unearned income	$	6,528		$	7,177		$	430,977		$	415,995

Commercial C & I and Commercial Real Estate Other include loans categorized as tax free loans.

The activity in the allowance for loan losses, by loan segment, is summarized below for the years indicated.

(Amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
Nine months ended September 30, 2012:
Allowance for Loan Losses:
Beginning balance	$	489		$	3,507		$	137		$	1,228		$	568	$	5,929
Charge-offs		(264	)		(708	)		(54	)		(265	)		0		(1,291	)
Recoveries		23			21			22			1			0		67
Provision		308			164			(24	)		557			195		1,200
Ending Balance		556			2,984			81			1,521			763		5,905
Ending balance: individually
evaluated for impairment		0			390			0			158			0		548
Ending balance: collectively
evaluated for impairment	$	556		$	2,594		$	81		$	1,363		$	763	$	5,357
Financing Receivables:
Ending Balance	$	52,658		$	227,863		$	6,528		$	143,928		$	0	$	430,977
Ending balance: individually
evaluated for impairment		502			1,894			0			951			0		3,347
Ending balance: collectively
evaluated for impairment	$	52,156		$	225,969		$	6,528		$	142,977		$	0	$	427,630

(Amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated			Total
December 31, 2011:
Allowance for Loan Losses:
Beginning balance	$	565		$	2,769		$	123		$	1,501		$	743		$	5,701
Charge-offs		(485	)		(968	)		(98	)		(218	)		0			(1,769	)
Recoveries		28			51			16			2			0			97
Provision		381			1,655			96			(57	)		(175	)		1,900
Ending Balance		489			3,507			137			1,228			568			5,929
Ending balance: individually
evaluated for impairment		80			756			0			111			0			947
Ending balance: collectively
evaluated for impairment	$	409		$	2,751		$	137		$	1,117		$	568		$	4,982
Financing Receivables:
Ending Balance	$	39,786		$	238,181		$	7,177		$	130,851		$	0		$	415,995
Ending balance: individually
evaluated for impairment		122			3,211			0			855			0			4,188
Ending balance: collectively
evaluated for impairment	$	39,664		$	234,970		$	7,177		$	129,996		$	0		$	411,807

Impaired loans at September 30, 2012 and December 31, 2011 were $3,347,000 and $4,188,000, respectively. The gross interest that would have been recorded if these loans had been current in accordance with their original terms and the amounts actually recorded in income were as follows:

(Amounts in thousands)
	September 30,			December 31,
	2012			2011
Gross interest due under terms year-to-date	$	201		$	342
Amount included in income year-to-date		(20	)		(54	)
Interest income not recognized year-to-date	$	181		$	288

The Corporation's impaired loans are summarized below for the periods ended September 30, 2012 and December 31, 2011.

(Amounts in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
September 30, 2012:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	502	$	801	$	0	$	811	$	3
Commercial real estate		865		1,326		0		1,364		0
Residential		108		173		0		177		0
With an allowance recorded:
Commercial		0		0		0		0		0
Commercial real estate		1,029		1,298		390		1,302		7
Residential		843		926		158		940		10
Total	$	3,347	$	4,524	$	548	$	4,594	$	20
Total consists of:
Commercial	$	502	$	801	$	0	$	811	$	3
Commercial real estate	$	1,894	$	2,624	$	390	$	2,666	$	7
Residential	$	951	$	1,099	$	158	$	1,117	$	10

(Amounts in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	43	$	188	$	0	$	239	$	0
Commercial real estate		1,319		1,505		0		1,554		12
Residential		270		280		0		286		1
With an allowance recorded:
Commercial		80		80		80		89		3
Commercial real estate		1,891		2,932		756		2,947		34
Residential		585		733		111		736		4
Total	$	4,188	$	5,718	$	947	$	5,851	$	54
Total consists of:
Commercial	$	123	$	268	$	80	$	328	$	3
Commercial real estate	$	3,210	$	4,437	$	756	$	4,501	$	46
Residential	$	855	$	1,013	$	111	$	1,022	$	5

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 is calculated on the daily loan balance during the period of impairment.

Financing receivables on non-accrual status and foreclosed assets as of September 30, 2012 and December 31, 2011 were as follows:

(Amounts in thousands)
	September 30,		December 31,
	2012		2011
Commercial - real estate	$	1,894	$	3,210
Commercial - other		502		123
Residential		951		855
Consumer		0		0
Total non-accruing loans		3,347		4,188
Restructured loans		0		0
Total impaired loans		3,347		4,188
Loans past-due 90 days or more and still accruing		2,016		0
Foreclosed assets		534		780
Total non-performing assets	$	5,897	$	4,968

At September 30, 2012 and December 31, 2011, the recorded investment in impaired loans as defined by FASB ASC 310-10-35, Receivables Subsequent Measurements, was $3,347,000 and $4,188,000, and the impaired loans allowances were $548,000 and $947,000, respectively at September 30, 2012 and December 31, 2011. The average year-to-date recorded balance in impaired loans during the period ended September 30, 2012 and December 31, 2011 was approximately $4,594,000 and $5,851,000, respectively.

The following tables present the aging of past-due loans by class of loans at September 30, 2012 and December 31, 2011:

(Amounts in thousands)					90 Days				Non-				Total
	30-59 Days		60-89 Days		or Greater		Total		Performing				Financing
	Past Due		Past Due		Past Due		Past Due		Assets		Current		Receivables
September 30, 2012:
Commercial	$	81	$	0	$	0	$	81	$	502	$	52,075	$	52,658
Commercial real estate		2,027		437		1,544		4,008		1,894		221,961		227,863
Consumer		63		15		0		78		0		6,450		6,528
Residential		1,126		91		472		1,689		951		141,288		143,928
Total	$	3,297	$	543	$	2,016	$	5,856	$	3,347	$	421,774	$	430,977

(Amounts in thousands)					90 Days				Non-				Total
	30-59 Days		60-89 Days		or Greater		Total		Performing				Financing
	Past Due		Past Due		Past Due		Past Due		Assets		Current		Receivables
December 31, 2011:
Commercial	$	166	$	21	$	0	$	187	$	123	$	39,476	$	39,786
Commercial real estate		1,427		785		0		2,212		3,210		232,759		238,181
Consumer		64		62		0		126		0		7,051		7,177
Residential		1,473		353		0		1,826		855		128,170		130,851
Total	$	3,130	$	1,221	$	0	$	4,351	$	4,188	$	407,456	$	415,995

Loans past-due 90 days or more and still accruing interest were $2,016,000 and $0 at September 30, 2012 and December 31, 2011, respectively. Loans 90 days or greater past-due remained on accrual status as these assets were deemed to be in the process of collection, guaranteed, or well secured. The loans consist of a participation loan with a balance of approximately $1,000,000 that is a well secured property with a loan-to-value of 25%; approximately $500,000 in commercial retail properties that are in the process of collection and deemed to be well secured; and two residential mortgages with a balance of $500,000, both of which are in the process of collection with the borrowers making payments.

At September 30, 2012, there were no commitments to lend additional funds with respect to non-accrual and restructured loans.

From time to time, the Bank may agree to modify the contractual terms of a borrower's loan. In cases where such modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. Loans modified in a troubled debt restructuring are placed on non-accrual status until the Bank determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of six months. At September 30, 2012, there were no loans classified as troubled debt restructurings.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	9 Months Ended			3 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Mar. 31, 2008 Pocono Community Bank [Member]	Sep. 30, 2012 Federal Home Loan Bank of Pittsburgh [Member]	Dec. 31, 2011 Federal Home Loan Bank of Pittsburgh [Member]	Sep. 30, 2012 Atlantic Central Bankers Bank [Member]	Dec. 31, 2011 Atlantic Central Bankers Bank [Member]	Sep. 30, 2012 Full Service Offices [Member]	Sep. 30, 2012 Automated Teller Machines [Member]
Significant Accounting Policies [Line Items]
Number of stores									16	17
Restricted securities at cost - available-for-sale	$ 4,427,000		$ 5,189,000		$ 4,392,000	$ 5,154,000	$ 35,000	$ 35,000
Periods loan payments should be in arrears before loans are considered past-due	15 days
Periods loan payments should be in arrears before loans are considered past-due	90 days
Foreclosed assets held for resale	534,000		780,000
Investments in real estate ventures, allocated tax credits	277,000	160,000
Investments in real estate ventures, amortization of the investments	138,000	88,000
Liabilities recorded as a purchase accounting adjustment				152,000
Number of outstanding options	13,603
Advertising expense	$ 216,000	$ 201,000

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INVESTMENT SECURITIES (Tables)

9 Months Ended

Sep. 30, 2012

INVESTMENT SECURITIES [Abstract]

Schedule of Amortized Cost, Related Estimated Fair Value, and Unrealized Gains and Losses for Investment Securities

	Available-for-Sale Securities
(Amounts in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
September 30, 2012:	Cost		Gains		Losses			Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	45,928	$	2,484	$	(58	)	$	48,354
Other		17,720		164		0			17,884
Obligations of state and political subdivisions		171,305		16,220		(670	)		186,855
Corporate securities		47,736		704		(301	)		48,139
Marketable equity securities		1,619		447		(54	)		2,012
Restricted equity securities		4,427		0		0			4,427
Total	$	288,735	$	20,019	$	(1,083	)	$	307,671

	Held-to-Maturity Securities
(Amounts in thousands)			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2012:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	110	$	5	$	0	$	115
Other		2,008		30		0		2,038
Obligations of state and political subdivisions		467		12		0		479
Total	$	2,585	$	47	$	0	$	2,632

	Available-for-Sale Securities
(Amounts in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
December 31, 2011:	Cost		Gains		Losses			Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	64,892	$	2,930	$	(41	)	$	67,781
Other		13,187		94		(6	)		13,275
Obligations of state and political subdivisions		177,139		11,846		(2,200	)		186,785
Corporate securities		60,263		373		(1,394	)		59,242
Marketable equity securities		1,574		292		(125	)		1,741
Restricted equity securities		5,189		0		0			5,189
Total	$	322,244	$	15,535	$	(3,766	)	$	334,013

	Held-to-Maturity Securities
(Amounts in thousands)			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2011:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	124	$	4	$	0	$	128
Other		2,014		46		0		2,060
Obligations of state and political subdivisions		467		11		0		478
Total	$	2,605	$	61	$	0	$	2,666

Schedule of Amortized Cost, Estimated Fair Value and Weighted Average Yield of Debt Securities, by Contractual Maturity

(Amounts in thousands)

	September 30, 2012
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Available-For-Sale:
Within 1 Year:
Amortized cost	$	1,001		$	0		$	0		$	0		$	12,282
Estimated fair value		1,002			0			0			0			12,412
Weighted average yield		1.35	%		0	%		0	%		0	%		3.78	%
1 - 5 Years:
Amortized cost		12,134			3,430			0			0			30,993
Estimated fair value		12,264			3,626			0			0			31,357
Weighted average yield		1.03	%		4.77	%		0	%		0	%		2.29	%
5 - 10 Years:
Amortized cost		9,116			10,946			0			0			4,461
Estimated fair value		9,436			12,350			0			0			4,370
Weighted average yield		4.62	%		5.52	%		0	%		0	%		3.30	%
After 10
Amortized cost		41,397			156,929			1,619			4,427			0
Estimated fair value		43,536			170,879			2,012			4,427			0
Weighted average yield		3.23	%		6.30	%		3.63	%		0.09	%		0	%
Total:
Amortized cost	$	63,648		$	171,305		$	1,619		$	4,427		$	47,736
Estimated fair value		66,238			186,855			2,012			4,427			48,139
Weighted average yield		2.98	%		6.22	%		3.63	%		0.09	%		2.78	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

(Amounts in thousands)

	September 30, 2012
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Held-To-Maturity:
Within 1 Year:
Amortized cost	$	0		$	0		$	0		$	0		$	0
Estimated fair value		0			0			0			0			0
Weighted average yield		0	%		0	%		0	%		0	%		0	%
1 - 5 Years:
Amortized cost		1,008			0			0			0			0
Estimated fair value		1,023			0			0			0			0
Weighted average yield		1.78	%		0	%		0	%		0	%		0	%
5 - 10 Years:
Amortized cost		1,110			0			0			0			0
Estimated fair value		1,130			0			0			0			0
Weighted average yield		1.07	%		0	%		0	%		0	%		0	%
After 10 Years:
Amortized cost		0			467			0			0			0
Estimated fair value		0			479			0			0			0
Weighted average yield		0	%		7.14	%		0	%		0	%		0	%
Total:
Amortized cost	$	2,118		$	467		$	0		$	0		$	0
Estimated fair value		2,153			479			0			0			0
Weighted average yield		1.41	%		7.14	%		0	%		0	%		0	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

(Amounts in thousands)

	December 31, 2011
	U.S. Government			Obligations
	Agency &			of State			Marketable			Restricted
	Corporation			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Available-For-Sale:
Within 1 Year:
Amortized cost	$	2,016		$	0		$	0		$	0		$	10,757
Estimated fair value		2,030			0			0			0			10,928
Weighted average yield		1.20	%		0	%		0	%		0	%		4.70	%
1 - 5 Years:
Amortized cost		11,175			3,411			0			0			48,506
Estimated fair value		11,250			3,614			0			0			47,444
Weighted average yield		1.17	%		4.77	%		0	%		0	%		2.59	%
5 - 10 Years:
Amortized cost		6,905			11,475			0			0			1,000
Estimated fair value		7,285			12,826			0			0			870
Weighted average yield		4.04	%		5.33	%		0	%		0	%		3.10	%
After 10 Years:
Amortized cost		57,983			162,253			1,574			5,189			0
Estimated fair value		60,491			170,345			1,741			5,189			0
Weighted average yield		3.66	%		6.30	%		3.37	%		0.01	%		0	%
Total:
Amortized cost	$	78,079		$	177,139		$	1,574		$	5,189		$	60,263
Estimated fair value		81,056			186,785			1,741			5,189			59,242
Weighted average yield		3.27	%		6.21	%		3.37	%		0.01	%		2.98	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

(Amounts in thousands)

	December 31, 2011
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Held-to-Maturity:
Within 1 Year:
Amortized cost	$	0		$	0		$	0		$	0		$	0
Estimated fair value		0			0			0			0			0
Weighted average yield		0	%		0	%		0	%		0	%		0	%
1 - 5 Years:
Amortized cost		2,014			0			0			0			0
Estimated fair value		2,060			0			0			0			0
Weighted average yield		1.41	%		0	%		0	%		0	%		0	%
5 - 10 Years:
Amortized cost		124			0			0			0			0
Estimated fair value		128			0			0			0			0
Weighted average yield		2.56	%		0	%		0	%		0	%		0	%
After 10 Years:
Amortized cost		0			467			0			0			0
Estimated fair value		0			478			0			0			0
Weighted average yield		0	%		7.14	%		0	%		0	%		0	%
Total:
Amortized cost	$	2,138		$	467		$	0		$	0		$	0
Estimated fair value		2,188			478			0			0			0
Weighted average yield		1.48	%		7.14	%		0	%		0	%		0	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

Schedule of Investment Securities That Have Been in Continuous Unrealized Loss Position for Less Than 12 Months or More Than 12 Months

September 30, 2012
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Loss		Value		Loss		Value		Loss
Direct obligations of the
U.S. Government	$	0	$	0	$	0	$	0	$	0	$	0
Federal agency backed securities		5,656		58		0		0		5,656		58
Municipal bonds		578		9		7,085		661		7,663		670
Corporate securities		1,919		51		6,277		250		8,196		301
Marketable equity securities		134		9		297		45		431		54
	$	8,287	$	127	$	13,659	$	956	$	21,946	$	1,083

December 31, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Loss		Value		Loss		Value		Loss
Direct obligations of the
U.S. Government	$	6,118	$	6	$	0	$	0	$	6,118	$	6
Federal agency backed securities		7,806		41		0		0		7,806		41
Municipal bonds		2,455		11		10,518		2,189		12,973		2,200
Corporate securities		32,162		1,185		1,791		209		33,953		1,394
Marketable equity securities		82		20		754		105		836		125
	$	48,623	$	1,263	$	13,063	$	2,503	$	61,686	$	3,766

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

9 Months Ended

Sep. 30, 2012

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

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

NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS

OF CREDIT 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 nonperformance 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 September 30, 2012 and December 31, 2011, were as follows:

(Amounts in thousands)

	September 30, 2012		December 31, 2011
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	58,631	$	62,459
Financial standby letters of credit	$	724	$	789
Performance standby letters of credit	$	3,783	$	4,370

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 to support standby letters of credit for which collateral is deemed necessary.

The Corporation grants commercial, agricultural, real estate mortgage and consumer loans to customers primarily in the counties of Columbia, Luzerne, Montour and Monroe, Pennsylvania. It is management's opinion that the loan portfolio was well balanced and diversified at September 30, 2012, to the extent necessary to avoid any significant concentration of credit risk. However, its debtor's ability to honor their contracts may be influenced by the region's economy.

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LONG-TERM BORROWINGS

9 Months Ended

Sep. 30, 2012

LONG-TERM BORROWINGS [Abstract]

LONG-TERM BORROWINGS

NOTE 5 - LONG-TERM BORROWINGS

Long-term borrowings are comprised of advances from the Federal Home Loan Bank ("FHLB") and a capital lease assumed as a result of the acquisition of Pocono Community Bank in the amount of $811,000 on November 1, 2007. Under terms of a blanket agreement, collateral for the loans are secured by certain qualifying assets of the Corporation's banking subsidiary with FHLB, which consist principally of real estate mortgages and certain investment securities.

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COMMITTMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2012

COMMITTMENTS AND CONTINGENCIES [Abstract]

COMMITTMENTS AND CONTINGENCIES

NOTE 6 - COMMITTMENTS AND CONTINGENCIES

In February 2012, the Bank acquired three parcels of vacant land in the amount of $504,000 in Kingston, Pennsylvania. This location opened on August 20, 2012 with a new branch building at a cost of $1.3 million.

In 2011, the Bank began work to expand its main headquarters in Berwick, Pennsylvania. As of September 30, 2012, the Bank has committed to spend $5.3 million on this facility, of which $4.3 million has been spent.

In February 2012, the Bank entered into an agreement with a seller to acquire property consisting of a parcel of land and a building in the amount of $400,000 in Shickshinny, Pennsylvania. This property was acquired on July 26, 2012, and is expected to open in the second quarter of 2013.

In September 2012, the Bank entered into an agreement with a seller to acquire property consisting of a parcel of land and a building in the amount of $311,000 in Dallas, Pennsylvania. The property is to be acquired by the end of the fourth quarter of 2012, and is expected to be open by the end of the first quarter of 2013.

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 of the Corporation.

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FAIR VALUES OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2012

FAIR VALUES OF FINANCIAL INSTRUMENTS [Abstract]

FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 8 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer (exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

A. Level 1: Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical, unrestrictive assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

B. Level 2: Fair value is based on significant other observable inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices that are not active for identical or similar assets and other observable inputs.

C. Level 3: Fair value is based on significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers of financial instruments between levels within the fair value hierarchy are recognized on the date management determines that the underlying circumstances or assumptions have changed.

Financial Assets Measured at Fair Value on a Recurring Basis

At September 30, 2012 and December 31, 2011, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

September 30, 2012

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed	$	0	$	48,354	$	0	$	48,354
Other		0		17,884		0		17,884
Obligations of state and political subdivisions		0		186,855		0		186,855
Corporate securities		0		48,139		0		48,139
Marketable equity securities		2,012		0		0		2,012
Restricted equity securities		0		4,427		0		4,427
Total	$	2,012	$	305,659	$	0	$	307,671

December 31, 2011

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed	$	0	$	67,781	$	0	$	67,781
Other		0		13,275		0		13,275
Obligations of state and political subdivisions		0		186,785		0		186,785
Corporate securities		0		59,242		0		59,242
Marketable equity securities		1,741		0		0		1,741
Restricted equity securities		0		5,189		0		5,189
Total	$	1,741	$	332,272	$	0	$	334,013

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 investments. There were no transfers between Level 1 and Level 2 during 2012 and 2011.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2012 and December 31, 2011, impaired loans measured at fair value on a non-recurring basis and the valuation methods used are as follows:

	Level 1		Level 2		Level 3		Total
Assets at September 30, 2012
Impaired loans:
Commercial, Financial and Agricultural	$	0	$	0	$	502	$	502
Commercial real estate mortgages		0		0		1,894		1,894
Residential real estate mortgages		0		0		951		951
Total impaired loans	$	0	$	0	$	3,347	$	3,347

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2011
Impaired loans:
Commercial, Financial and Agricultural	$	0	$	0	$	123	$	123
Commercial real estate mortgages		0		0		3,210		3,210
Residential real estate mortgages		0		0		855		855
Total impaired loans	$	0	$	0	$	4,188	$	4,188

The Bank's impaired 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 impaired loans less than $250,000 upon classification and annually at year end, the Bank completes a Certificate of Inspection, which includes an onsite inspection, insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations. 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 2012 and 2011.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2012 and December 31, 2011, foreclosed assets held for resale measured at fair value on a non-recurring basis and the valuation methods used are as follows:

	Level 1		Level 2		Level 3		Total
Assets at September 30, 2012
Other foreclosed assets held for resale:
Residential real estate mortgages	$	0	$	0	$	474	$	474
Commercial real estate mortgages		0		0		60		60
Total foreclosed assets held for resale	$	0	$	0	$	534	$	534

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2011
Other foreclosed assets held for resale:
Commercial real estate mortgages	$	0	$	0	$	780	$	780
Total foreclosed assets held for resale	$	0	$	0	$	780	$	780

The Bank's foreclosed asset valuation procedure requires an appraisal to be completed periodically with the exception of those cases which the Bank has obtained a sales agreement. 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 2012 and 2011.

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate		Valuation Technique	Unobservable Input	Range
Assets at September 30, 2012
Impaired loans	$	3,347	Appraisal of collateral1,3	Appraisal adjustments2		10% - 35%
Foreclosed assets held for sale		534	Appraisal of collateral1,3	Appraisal adjustments2		10% - 35%

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

²Appraisals may be adjusted 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

(Amounts in thousands)

	Carrying		Fair Value Measurements at September 30, 2012
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	6,677	$	6,677	$	0	$	0	$	6,677
Short-term investments		4,040		4,040		0		0		4,040
Investment securities - available-for-sale		307,671		2,012		305,659		0		307,671
Investment securities - held-to-maturity		2,585		0		2,632		0		2,632
Net loans		425,072		0		0		425,579		425,579
Mortgage servicing rights		459		0		0		459		459
Accrued interest receivable		4,219		4,219		0		0		4,219
Cash surrender value of bank owned life insurance		19,691		19,691		0		0		19,691
FINANCIAL LIABILITIES:
Deposits		630,232		381,925		0		251,663		633,588
Short-term borrowings		16,764		16,764		0		0		16,764
Long-term borrowings		50,540		0		0		54,083		54,083
Accrued interest payable		529		529		0		0		529
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit										58,631
Financial standby letters of credit										724
Performance standby letters of credit										3,783

(Amounts in thousands)

	Carrying		Fair Value Measurements at December 31, 2011
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,403	$	8,403	$	0	$	0	$	8,403
Short-term investments		1,776		1,776		0		0		1,776
Investment securities - available-for-sale		334,013		1,741		332,272		0		334,013
Investment securities - held-to-maturity		2,605		0		2,666		0		2,666
Net loans		410,066		0		0		410,033		410,033
Mortgage servicing rights		421		0		0		421		421
Accrued interest receivable		4,375		4,375		0		0		4,375
Cash surrender value of bank owned life insurance		19,145		19,145		0		0		19,145
FINANCIAL LIABILITIES:
Deposits		624,349		368,831		0		255,962		624,793
Short-term borrowings		30,882		30,882		0		0		30,882
Long-term borrowings		64,339		0		0		69,055		69,055
Accrued interest payable		785		785		0		0		785
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit										62,459
Financial standby letters of credit										789
Performance standby letters of credit										4,370

FASB ASC 825-10-50, Financial Instruments - Overall - Disclosure, requires disclosure of fair value information about financial instruments, whether or not required to be recognized in the consolidated balance sheets, for which it is practicable to estimate such fair value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Fair value estimates derived through these techniques cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FASB ASC 825-10-50 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and Due From Banks, Short-Term Investments, Accrued Interest Receivable and Accrued Interest Payable

The fair values are equal to the current carrying values.

Investment Securities

Fair values have been individually determined based on currently quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans

Fair values are estimated for categories of loans with similar financial characteristics. Loans were segregated by type such as commercial, tax-exempt, real estate mortgages and consumer. For estimation purposes, each loan category was further segmented into fixed and adjustable rate interest terms and also into performing and non-performing classifications.

The fair value of each category of performing loans is calculated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Fair value for non-performing loans is based on management's estimate of future cash flows discounted using a rate commensurate with the risk associated with the estimated future cash flows. The assumptions used by management are judgmentally determined using specific borrower information.

Cash Surrender Value of Bank Owned Life Insurance

Fair value is equal to the cash surrender value of life insurance policies.

Deposits

Under FASB ASC 825-10-50, the fair value of deposits with no stated maturity, such as demand deposits, savings accounts and money market accounts, is equal to the amount payable on demand at September 30, 2012 and December 31, 2011.

Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar term borrowings, to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term and Long-Term Borrowings

The fair values of short-term borrowings are equal to the current carrying values, and long-term borrowings are estimated using discounted cash flow analyses based on the Corporation's incremental borrowing rate for similar instruments.

Commitments to Extend Credit and Standby Letters of Credit

Management estimates that there are no material differences between the notional amount and the estimated fair value of those off-balance sheet items since they are primarily composed of unfunded loan commitments which are generally priced at market at the time of approval.

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LOANS (Schedule of Impaired Loans) (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Recorded Investment
Total	$ 3,347	$ 4,188
Unpaid Principal Balance
Total	4,524	5,718
Related Allowance
With an allowance recorded	548	947
Average Recorded Investment
Total	4,594	5,851
Interest Income Recognized
Total	20	54
Commercial [Member]
Recorded Investment
With no related allowance recorded	502	43
With an allowance recorded	0	80
Total	502	123
Unpaid Principal Balance
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	801	188
With an allowance recorded	0	80
Total	801	268
Related Allowance
With no related allowance recorded	0	0
With an allowance recorded	0	80
Average Recorded Investment
With no related allowance recorded	811	239
With an allowance recorded	0	89
Total	811	328
Interest Income Recognized
With no related allowance recorded	3	0
With an allowance recorded	0	3
Total	3	3
Commercial Real Estate [Member]
Recorded Investment
With no related allowance recorded	865	1,319
With an allowance recorded	1,029	1,891
Total	1,894	3,210
Unpaid Principal Balance
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	1,326	1,505
With an allowance recorded	1,298	2,932
Total	2,624	4,437
Related Allowance
With no related allowance recorded	0	0
With an allowance recorded	390	756
Average Recorded Investment
With no related allowance recorded	1,364	1,554
With an allowance recorded	1,302	2,947
Total	2,666	4,501
Interest Income Recognized
With no related allowance recorded	0	12
With an allowance recorded	7	34
Total	7	46
Residential [Member]
Recorded Investment
With no related allowance recorded	108	270
With an allowance recorded	843	585
Total	951	855
Unpaid Principal Balance
Impaired Financing Receivable, with No Related Allowance, Unpaid Principal Balance	173	280
With an allowance recorded	926	733
Total	1,099	1,013
Related Allowance
With no related allowance recorded	0	0
With an allowance recorded	158	111
Average Recorded Investment
With no related allowance recorded	177	286
With an allowance recorded	940	736
Total	1,117	1,022
Interest Income Recognized
With no related allowance recorded	0	1
With an allowance recorded	10	4
Total	$ 10	$ 5

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

9 Months Ended

Sep. 30, 2012

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

Schedule of Contract or Notional Amounts of Financial Instruments with Off-balance Sheet Credit Risk

(Amounts in thousands)

	September 30, 2012		December 31, 2011
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	58,631	$	62,459
Financial standby letters of credit	$	724	$	789
Performance standby letters of credit	$	3,783	$	4,370

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INVESTMENT SECURITIES (Schedule of Amortized Cost, Related Estimated Fair Value and Weighted Average Yield of Debt Securities, by Contractual Maturity) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012		Dec. 31, 2011
U.S. Government Agency & Corporation Obligations [Member]
Available-For-Sale:
Amortized cost	$ 1,001	[1]	$ 2,016	[1]
Estimated fair value	1,002	[1]	2,030	[1]
Weighted average yield	1.35%	[1]	1.20%	[1]
Amortized cost	12,134	[1]	11,175	[1]
Estimated fair value	12,264	[1]	11,250	[1]
Weighted average yield	1.03%	[1]	1.17%	[1]
Amortized cost	9,116	[1]	6,905	[1]
Estimated fair value	9,436	[1]	7,285	[1]
Weighted average yield	4.62%	[1]	4.04%	[1]
Amortized cost	41,397	[1]	57,983	[1]
Estimated fair value	43,536	[1]	60,491	[1]
Weighted average yield	3.23%	[1]	3.66%	[1]
Amortized cost	63,648	[1]	78,079	[1]
Estimated fair value	66,238	[1]	81,056	[1]
Weighted average yield	2.98%	[1]	3.27%	[1]
Held-To-Maturity:
Amortized cost	0	[1]	0	[1]
Estimated fair value	0	[1]	0	[1]
Weighted average yield	0.00%	[1]	0.00%	[1]
Amortized cost	1,008	[1]	2,014	[1]
Estimated fair value	1,023	[1]	2,060	[1]
Weighted average yield	1.78%	[1]	1.41%	[1]
Amortized cost	1,110	[1]	124	[1]
Estimated fair value	1,130	[1]	128	[1]
Weighted average yield	1.07%	[1]	2.56%	[1]
Amortized cost	0	[1]	0	[1]
Estimated fair value	0	[1]	0	[1]
Weighted average yield	0.00%	[1]	0.00%	[1]
Amortized cost	2,118	[1]	2,138	[1]
Estimated fair value	2,153	[1]	2,188	[1]
Weighted average yield	1.41%	[1]	1.48%	[1]
Obligations of State and Political Subdivisions [Member]
Schedule of Available for Sale and Held to Maturity Securities [Line Items]
Average yield calculation, tax-equivalent basis	34.00%		34.00%
Available-For-Sale:
Amortized cost	0	[2]	0	[2]
Estimated fair value	0	[2]	0	[2]
Weighted average yield	0.00%	[2]	0.00%	[2]
Amortized cost	3,430	[2]	3,411	[2]
Estimated fair value	3,626	[2]	3,614	[2]
Weighted average yield	4.77%	[2]	4.77%	[2]
Amortized cost	10,946	[2]	11,475	[2]
Estimated fair value	12,350	[2]	12,826	[2]
Weighted average yield	5.52%	[2]	5.33%	[2]
Amortized cost	156,929	[2]	162,253	[2]
Estimated fair value	170,879	[2]	170,345	[2]
Weighted average yield	6.30%	[2]	6.30%	[2]
Amortized cost	171,305	[2]	177,139	[2]
Estimated fair value	186,855	[2]	186,785	[2]
Weighted average yield	6.22%	[2]	6.21%	[2]
Held-To-Maturity:
Amortized cost	0	[2]	0	[2]
Estimated fair value	0	[2]	0	[2]
Weighted average yield	0.00%	[2]	0.00%	[2]
Amortized cost	0	[2]	0	[2]
Estimated fair value	0	[2]	0	[2]
Weighted average yield	0.00%	[2]	0.00%	[2]
Amortized cost	0	[2]	0	[2]
Estimated fair value	0	[2]	0	[2]
Weighted average yield	0.00%	[2]	0.00%	[2]
Amortized cost	467	[2]	467	[2]
Estimated fair value	479	[2]	478	[2]
Weighted average yield	7.14%	[2]	7.14%	[2]
Amortized cost	467	[2]	467	[2]
Estimated fair value	479	[2]	478	[2]
Weighted average yield	7.14%	[2]	7.14%	[2]
Marketable Equity Securities [Member]
Available-For-Sale:
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	1,619	[3]	1,574	[3]
Estimated fair value	2,012	[3]	1,741	[3]
Weighted average yield	3.63%	[3]	3.37%	[3]
Amortized cost	1,619	[3]	1,574	[3]
Estimated fair value	2,012	[3]	1,741	[3]
Weighted average yield	3.63%	[3]	3.37%	[3]
Held-To-Maturity:
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Restricted Equity Securities [Member]
Available-For-Sale:
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	4,427	[3]	5,189	[3]
Estimated fair value	4,427	[3]	5,189	[3]
Weighted average yield	0.09%	[3]	0.01%	[3]
Amortized cost	4,427	[3]	5,189	[3]
Estimated fair value	4,427	[3]	5,189	[3]
Weighted average yield	0.09%	[3]	0.01%	[3]
Held-To-Maturity:
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Amortized cost	0	[3]	0	[3]
Estimated fair value	0	[3]	0	[3]
Weighted average yield	0.00%	[3]	0.00%	[3]
Corporate Securities [Member]
Available-For-Sale:
Amortized cost	12,282		10,757
Estimated fair value	12,412		10,928
Weighted average yield	3.78%		4.70%
Amortized cost	30,993		48,506
Estimated fair value	31,357		47,444
Weighted average yield	2.29%		2.59%
Amortized cost	4,461		1,000
Estimated fair value	4,370		870
Weighted average yield	3.30%		3.10%
Amortized cost	0		0
Estimated fair value	0		0
Weighted average yield	0.00%		0.00%
Amortized cost	47,736		60,263
Estimated fair value	48,139		59,242
Weighted average yield	2.78%		2.98%
Held-To-Maturity:
Amortized cost	0		0
Estimated fair value	0		0
Weighted average yield	0.00%		0.00%
Amortized cost	0		0
Estimated fair value	0		0
Weighted average yield	0.00%		0.00%
Amortized cost	0		0
Estimated fair value	0		0
Weighted average yield	0.00%		0.00%
Amortized cost	0		0
Estimated fair value	0		0
Weighted average yield	0.00%		0.00%
Amortized cost	0		0
Estimated fair value	$ 0		$ 0
Weighted average yield	0.00%		0.00%

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

[2] Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

[3] Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

XML

FAIR VALUES OF FINANCIAL INSTRUMENTS (Schedule of Investments Measured at Fair Value on Recurring Basis) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Available-for-Sale Securities:
Available-for-sale securities	$ 307,671	$ 334,013
Obligations of U.S. Government Corporations and Agencies: Mortgage-backed [Member]
Available-for-Sale Securities:
Available-for-sale securities	48,354	67,781
Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities:
Available-for-sale securities	17,884	13,275
Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities:
Available-for-sale securities	186,855	186,785
Corporate Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	48,139	59,242
Marketable Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	2,012	1,741
Restricted Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	4,427	5,189
Level 1 [Member]
Available-for-Sale Securities:
Available-for-sale securities	2,012	1,741
Level 2 [Member]
Available-for-Sale Securities:
Available-for-sale securities	305,659	332,272
Level 3 [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Obligations of U.S. Government Corporations and Agencies: Mortgage-backed [Member]
Available-for-Sale Securities:
Available-for-sale securities	48,354	67,781
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities:
Available-for-sale securities	17,884	13,275
Fair Value, Measurements, Recurring [Member] | Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities:
Available-for-sale securities	186,855	186,785
Fair Value, Measurements, Recurring [Member] | Corporate Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	48,139	59,242
Fair Value, Measurements, Recurring [Member] | Marketable Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	2,012	1,741
Fair Value, Measurements, Recurring [Member] | Restricted Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	4,427	5,189
Fair Value, Measurements, Recurring [Member] | Level 1 [Member]
Available-for-Sale Securities:
Available-for-sale securities	2,012	1,741
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Obligations of U.S. Government Corporations and Agencies: Mortgage-backed [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Corporate Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Marketable Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	2,012	1,741
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Restricted Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 2 [Member]
Available-for-Sale Securities:
Available-for-sale securities	305,659	332,272
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Obligations of U.S. Government Corporations and Agencies: Mortgage-backed [Member]
Available-for-Sale Securities:
Available-for-sale securities	48,354	67,781
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities:
Available-for-sale securities	17,884	13,275
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities:
Available-for-sale securities	186,855	186,785
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Corporate Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	48,139	59,242
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Marketable Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Restricted Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	4,427	5,189
Fair Value, Measurements, Recurring [Member] | Level 3 [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Obligations of U.S. Government Corporations and Agencies: Mortgage-backed [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Corporate Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Marketable Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Restricted Equity Securities [Member]
Available-for-Sale Securities:
Available-for-sale securities	$ 0	$ 0

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock [Member]	Surplus [Member]	Comprehensive Income [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Treasury Stock [Member]
Balance at Dec. 31, 2010	$ 79,060	$ 11,375	$ 30,175		$ 45,246	$ (1,633)	$ (6,103)
Balance, shares at Dec. 31, 2010		5,687,767
Comprehensive Income:
Net Income	7,716			7,716	7,716
Change in net unrealized gains (losses) on investment securities available-for- sale, net of reclassification adjustment and tax effects	9,126			9,126		9,126
Comprehensive Income	16,842			16,842
Issuance of 4,028 and 815 shares of treasury stock upon exercise of employee stock options	14		(14)				28
Cash dividends - $.75 and $.72 per share	3,920				3,920
Balance at Sep. 30, 2011	91,996	11,375	30,161		49,042	7,493	(6,075)
Balance, shares at Sep. 30, 2011		5,687,767
Balance at Dec. 31, 2011	93,092	11,375	30,157		49,872	7,757	(6,069)
Balance, shares at Dec. 31, 2011		5,687,767
Comprehensive Income:
Net Income	7,998			7,998	7,998
Change in net unrealized gains (losses) on investment securities available-for- sale, net of reclassification adjustment and tax effects	4,715			4,715		4,715
Comprehensive Income	12,713			12,713
Issuance of 19,628 shares of common stock for stock dividends and stock purchase plan	479	40	439
Issuance of 19,628 shares of common stock for stock dividends and stock purchase plan, shares	19,628	19,628
Issuance of 4,028 and 815 shares of treasury stock upon exercise of employee stock options	65		(70)				135
Cash dividends - $.75 and $.72 per share	4,088				4,088
Balance at Sep. 30, 2012	$ 102,261	$ 11,415	$ 30,526		$ 53,782	$ 12,472	$ (5,934)
Balance, shares at Sep. 30, 2012		5,707,395

XML

INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2012

INVESTMENT SECURITIES [Abstract]

INVESTMENT SECURITIES

NOTE 2 - INVESTMENT SECURITIES

The amortized cost, related estimated fair value, and unrealized gains and losses for investment securities classified as "Available-For-Sale" or "Held-to-Maturity" were as follows at September 30, 2012 and December 31, 2011:

	Available-for-Sale Securities
(Amounts in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
September 30, 2012:	Cost		Gains		Losses			Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	45,928	$	2,484	$	(58	)	$	48,354
Other		17,720		164		0			17,884
Obligations of state and political subdivisions		171,305		16,220		(670	)		186,855
Corporate securities		47,736		704		(301	)		48,139
Marketable equity securities		1,619		447		(54	)		2,012
Restricted equity securities		4,427		0		0			4,427
Total	$	288,735	$	20,019	$	(1,083	)	$	307,671

	Held-to-Maturity Securities
(Amounts in thousands)			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
September 30, 2012:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	110	$	5	$	0	$	115
Other		2,008		30		0		2,038
Obligations of state and political subdivisions		467		12		0		479
Total	$	2,585	$	47	$	0	$	2,632

	Available-for-Sale Securities
(Amounts in thousands)			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
December 31, 2011:	Cost		Gains		Losses			Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	64,892	$	2,930	$	(41	)	$	67,781
Other		13,187		94		(6	)		13,275
Obligations of state and political subdivisions		177,139		11,846		(2,200	)		186,785
Corporate securities		60,263		373		(1,394	)		59,242
Marketable equity securities		1,574		292		(125	)		1,741
Restricted equity securities		5,189		0		0			5,189
Total	$	322,244	$	15,535	$	(3,766	)	$	334,013

	Held-to-Maturity Securities
(Amounts in thousands)			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2011:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	124	$	4	$	0	$	128
Other		2,014		46		0		2,060
Obligations of state and political subdivisions		467		11		0		478
Total	$	2,605	$	61	$	0	$	2,666

Securities Available-for-Sale with an aggregate fair value of $180,422,000 at September 30, 2012 and $182,478,000 at December 31, 2011; and securities Held-to-Maturity with an aggregate book value of $1,118,000 at September 30, 2012 and $2,138,000 at December 31, 2011, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase, FHLB advances and other balances of $99,800,000 at September 30, 2012 and $106,647,000 at December 31, 2011.

The amortized cost, estimated fair value and weighted average yield of debt securities, by contractual maturity, are shown below at September 30, 2012 and December 31, 2011. 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.

(Amounts in thousands)

	September 30, 2012
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Available-For-Sale:
Within 1 Year:
Amortized cost	$	1,001		$	0		$	0		$	0		$	12,282
Estimated fair value		1,002			0			0			0			12,412
Weighted average yield		1.35	%		0	%		0	%		0	%		3.78	%
1 - 5 Years:
Amortized cost		12,134			3,430			0			0			30,993
Estimated fair value		12,264			3,626			0			0			31,357
Weighted average yield		1.03	%		4.77	%		0	%		0	%		2.29	%
5 - 10 Years:
Amortized cost		9,116			10,946			0			0			4,461
Estimated fair value		9,436			12,350			0			0			4,370
Weighted average yield		4.62	%		5.52	%		0	%		0	%		3.30	%
After 10
Amortized cost		41,397			156,929			1,619			4,427			0
Estimated fair value		43,536			170,879			2,012			4,427			0
Weighted average yield		3.23	%		6.30	%		3.63	%		0.09	%		0	%
Total:
Amortized cost	$	63,648		$	171,305		$	1,619		$	4,427		$	47,736
Estimated fair value		66,238			186,855			2,012			4,427			48,139
Weighted average yield		2.98	%		6.22	%		3.63	%		0.09	%		2.78	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

(Amounts in thousands)

	September 30, 2012
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Held-To-Maturity:
Within 1 Year:
Amortized cost	$	0		$	0		$	0		$	0		$	0
Estimated fair value		0			0			0			0			0
Weighted average yield		0	%		0	%		0	%		0	%		0	%
1 - 5 Years:
Amortized cost		1,008			0			0			0			0
Estimated fair value		1,023			0			0			0			0
Weighted average yield		1.78	%		0	%		0	%		0	%		0	%
5 - 10 Years:
Amortized cost		1,110			0			0			0			0
Estimated fair value		1,130			0			0			0			0
Weighted average yield		1.07	%		0	%		0	%		0	%		0	%
After 10 Years:
Amortized cost		0			467			0			0			0
Estimated fair value		0			479			0			0			0
Weighted average yield		0	%		7.14	%		0	%		0	%		0	%
Total:
Amortized cost	$	2,118		$	467		$	0		$	0		$	0
Estimated fair value		2,153			479			0			0			0
Weighted average yield		1.41	%		7.14	%		0	%		0	%		0	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

(Amounts in thousands)

	December 31, 2011
	U.S. Government			Obligations
	Agency &			of State			Marketable			Restricted
	Corporation			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Available-For-Sale:
Within 1 Year:
Amortized cost	$	2,016		$	0		$	0		$	0		$	10,757
Estimated fair value		2,030			0			0			0			10,928
Weighted average yield		1.20	%		0	%		0	%		0	%		4.70	%
1 - 5 Years:
Amortized cost		11,175			3,411			0			0			48,506
Estimated fair value		11,250			3,614			0			0			47,444
Weighted average yield		1.17	%		4.77	%		0	%		0	%		2.59	%
5 - 10 Years:
Amortized cost		6,905			11,475			0			0			1,000
Estimated fair value		7,285			12,826			0			0			870
Weighted average yield		4.04	%		5.33	%		0	%		0	%		3.10	%
After 10 Years:
Amortized cost		57,983			162,253			1,574			5,189			0
Estimated fair value		60,491			170,345			1,741			5,189			0
Weighted average yield		3.66	%		6.30	%		3.37	%		0.01	%		0	%
Total:
Amortized cost	$	78,079		$	177,139		$	1,574		$	5,189		$	60,263
Estimated fair value		81,056			186,785			1,741			5,189			59,242
Weighted average yield		3.27	%		6.21	%		3.37	%		0.01	%		2.98	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

(Amounts in thousands)

	December 31, 2011
	U.S. Government			Obligations
	Corporations &			of State			Marketable			Restricted
	Agencies			& Political			Equity			Equity			Corporate
	Obligations1			Subdivisions2			Securities3			Securities3			Securities
Held-to-Maturity:
Within 1 Year:
Amortized cost	$	0		$	0		$	0		$	0		$	0
Estimated fair value		0			0			0			0			0
Weighted average yield		0	%		0	%		0	%		0	%		0	%
1 - 5 Years:
Amortized cost		2,014			0			0			0			0
Estimated fair value		2,060			0			0			0			0
Weighted average yield		1.41	%		0	%		0	%		0	%		0	%
5 - 10 Years:
Amortized cost		124			0			0			0			0
Estimated fair value		128			0			0			0			0
Weighted average yield		2.56	%		0	%		0	%		0	%		0	%
After 10 Years:
Amortized cost		0			467			0			0			0
Estimated fair value		0			478			0			0			0
Weighted average yield		0	%		7.14	%		0	%		0	%		0	%
Total:
Amortized cost	$	2,138		$	467		$	0		$	0		$	0
Estimated fair value		2,188			478			0			0			0
Weighted average yield		1.48	%		7.14	%		0	%		0	%		0	%

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

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities and restricted equity securities are not considered to have defined maturities and are included in the after ten year category.

There were no aggregate investments with a single issuer (excluding the U.S. Government and its agencies) which exceeded ten percent of consolidated shareholders' equity at September 30, 2012. 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. The state and political subdivision investments are actively traded in a liquid market.

Proceeds from sale of investments in Available-for-Sale debt and equity securities during the third quarter of 2012 and 2011 were $9,829,000 and $9,435,000, respectively. Gross gains realized on these sales were $477,000 and $407,000, respectively. Gross losses on these sales were $0 and $188,000, respectively. There were no impairment losses in 2012 and 2011.

There were no proceeds from sale of investments in Held-to-Maturity debt and equity securities during the third quarter of 2012 and 2011. 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. Investment 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 other-than-temporary impairment occurs, the amount of the other-than-temporary impairment 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 other-than-temporary impairment 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 other-than-temporary impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings shall become the new amortized cost basis of the investment.

The fair market value of the equity securities tends to fluctuate with the overall equity markets as well as the trends specific to each institution. The equity securities portfolio is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value has been less than the carrying value and the financial sector outlook. The Corporation also reviews dividend payment activities, levels of non-performing assets and loan loss reserves. The starting point for the equity analysis is the length and severity of market value decline. 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 equity securities to be other-than-temporary impaired at September 30, 2012 and December 31, 2011.

In accordance with disclosures required by FASB ASC 320-10-50, Investments - Debt and Equity Securities, the summary below shows the gross unrealized losses and fair value of the Corporation's investments, aggregated by investment category, that individual securities have been in a continuous unrealized loss position for less than 12 months or 12 months or more as of September 30, 2012 and December 31, 2011:

September 30, 2012
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Loss		Value		Loss		Value		Loss
Direct obligations of the
U.S. Government	$	0	$	0	$	0	$	0	$	0	$	0
Federal agency backed securities		5,656		58		0		0		5,656		58
Municipal bonds		578		9		7,085		661		7,663		670
Corporate securities		1,919		51		6,277		250		8,196		301
Marketable equity securities		134		9		297		45		431		54
	$	8,287	$	127	$	13,659	$	956	$	21,946	$	1,083

December 31, 2011
	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Amounts in thousands)	Value		Loss		Value		Loss		Value		Loss
Direct obligations of the
U.S. Government	$	6,118	$	6	$	0	$	0	$	6,118	$	6
Federal agency backed securities		7,806		41		0		0		7,806		41
Municipal bonds		2,455		11		10,518		2,189		12,973		2,200
Corporate securities		32,162		1,185		1,791		209		33,953		1,394
Marketable equity securities		82		20		754		105		836		125
	$	48,623	$	1,263	$	13,063	$	2,503	$	61,686	$	3,766

The Corporation invests in various forms of agency debt including mortgage backed securities and callable debt. The mortgage backed securities are issued by FHLMC ("Federal Home Loan Mortgage Corporation") or FNMA ("Federal National Mortgage Association"). The municipal securities consist of general obligations and revenue bonds. The marketable equity securities consist of stocks in other bank holding companies. 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 26 securities in an unrealized loss position as of September 30, 2012 represents an other-than-temporary impairment. The Corporation has the ability to hold the remaining securities contained in the above table for a time necessary to recover the cost.

Securities with an unrealized loss that are determined to be other-than-temporary are written down to fair value, with the write-down recorded as a realized loss included in investment securities gains (losses) expense-net on the consolidated statements of income.

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INVESTMENT SECURITIES (Schedule of Investment Securities Which Have Been in Continuous Unrealized Loss Position for Less Than 12 Months or More Than 12 Months) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Less Than 12 Months
Fair Value	$ 8,287	$ 48,623
Unrealized Loss	127	1,263
12 Months or More
Fair Value	13,659	13,063
Unrealized Loss	956	2,503
Total
Fair Value	21,946	61,686
Unrealized Loss	1,083	3,766
Obligations of U.S. Government Corporations and Agencies: Mortgage-backed [Member]
Less Than 12 Months
Fair Value	0	6,118
Unrealized Loss	0	6
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	0	6,118
Unrealized Loss	0	6
U.S. Government Agency & Corporation Obligations [Member]
Less Than 12 Months
Fair Value	5,656	7,806
Unrealized Loss	58	41
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	5,656	7,806
Unrealized Loss	58	41
Municipal Bonds [Member]
Less Than 12 Months
Fair Value	578	2,455
Unrealized Loss	9	11
12 Months or More
Fair Value	7,085	10,518
Unrealized Loss	661	2,189
Total
Fair Value	7,663	12,973
Unrealized Loss	670	2,200
Corporate Securities [Member]
Less Than 12 Months
Fair Value	1,919	32,162
Unrealized Loss	51	1,185
12 Months or More
Fair Value	6,277	1,791
Unrealized Loss	250	209
Total
Fair Value	8,196	33,953
Unrealized Loss	301	1,394
Marketable Equity Securities [Member]
Less Than 12 Months
Fair Value	134	82
Unrealized Loss	9	20
12 Months or More
Fair Value	297	754
Unrealized Loss	45	105
Total
Fair Value	431	836
Unrealized Loss	$ 54	$ 125

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LONG-TERM BORROWINGS (Details) (Pocono Community Bank [Member], USD $)	Sep. 30, 2012
Pocono Community Bank [Member]
Debt Instrument [Line Items]
Federal Home Loan Bank ("FHLB") and a capital lease assumed	$ 811,000

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LOANS (Tables)

9 Months Ended

Sep. 30, 2012

LOANS [Abstract]

Schedule of Major Classifications of Loans

	September 30,			December 31,
	2012			2011
Commercial, Financial and Agricultural	$	23,730		$	21,448
Tax-exempt - Real Estate and Other		31,601			19,779
Real estate mortgages - Held-for-sale		1,904			1,356
Real estate mortgages - Consumer		141,868			129,362
Real estate mortgages - Commercial		225,100			236,645
Consumer		6,651			7,429
Gross loans		430,854			416,019
Add (deduct): Unearned discount and		(202	)		(331	)
Net deferred loan fees and costs		325			307
Total loans, net of unearned income	$	430,977		$	415,995

Schedule of Allowance for Loan Losses

(Amounts in thousands)

	September 30,			December 31,
	2012			2011
Balance at beginning of period	$	5,929		$	5,701
Provision charged to operations		1,200			1,900
Loans charged off		(1,291	)		(1,769	)
Recoveries		67			97
Balance at end of period	$	5,905		$	5,929

Schedule of Credit Quality Indicators by Loan Segment

	Commercial &				Commercial Real Estate
	Industrial				Construction
	September 30,		December 31,		September 30,			December 31,
	2012		2011		2012			2011
Grade:
1-6 Pass	$	51,341	$	38,250	$	5,470		$	3,781
7 Special Mention		642		556		0			0
8 Substandard		556		880		0			0
9 Doubtful		0		0		0			0
Add (deduct): Unearned discount		0		0		0			0
Net deferred loan fees & costs		119		100		(2	)		(8	)
Loans, net of unearned income	$	52,658	$	39,786	$	5,468		$	3,773

	Commercial Real Estate					Residential Real Estate
	Other					Including		Home Equity
	September 30,			December 31,		September 30,		December 31,
	2012			2011		2012		2011
Grade:
1-6 Pass	$	215,218		$	224,030	$	142,285	$	129,627
7 Special Mention		2,590			3,269		137		0
8 Substandard		4,613			7,106		1,350		1,091
9 Doubtful		0			0		0		0
Add (deduct): Unearned discount		0			0		0		0
Net deferred loan fees & costs		(26	)		3		156		133
Loans, net of unearned income	$	222,395		$	234,408	$	143,928	$	130,851

							Loans,
	Consumer Loans						Net of Unearned Income
	September 30,			December 31,			September 30,			December 31,
	2012			2011			2012			2011
Grade:
1-6 Pass	$	6,635		$	7,405		$	420,949		$	403,093
7 Special Mention		3			0			3,372			3,825
8 Substandard		14			24			6,533			9,101
9 Doubtful		0			0			0			0
Add (deduct): Unearned discount		(202	)		(331	)		(202	)		(331	)
Net deferred loan fees & costs		78			79			325			307
Loans, net of unearned income	$	6,528		$	7,177		$	430,977		$	415,995

Schedule of Allowance For Loan Losses, by Loan Segment

(Amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
Nine months ended September 30, 2012:
Allowance for Loan Losses:
Beginning balance	$	489		$	3,507		$	137		$	1,228		$	568	$	5,929
Charge-offs		(264	)		(708	)		(54	)		(265	)		0		(1,291	)
Recoveries		23			21			22			1			0		67
Provision		308			164			(24	)		557			195		1,200
Ending Balance		556			2,984			81			1,521			763		5,905
Ending balance: individually
evaluated for impairment		0			390			0			158			0		548
Ending balance: collectively
evaluated for impairment	$	556		$	2,594		$	81		$	1,363		$	763	$	5,357
Financing Receivables:
Ending Balance	$	52,658		$	227,863		$	6,528		$	143,928		$	0	$	430,977
Ending balance: individually
evaluated for impairment		502			1,894			0			951			0		3,347
Ending balance: collectively
evaluated for impairment	$	52,156		$	225,969		$	6,528		$	142,977		$	0	$	427,630

(Amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated			Total
December 31, 2011:
Allowance for Loan Losses:
Beginning balance	$	565		$	2,769		$	123		$	1,501		$	743		$	5,701
Charge-offs		(485	)		(968	)		(98	)		(218	)		0			(1,769	)
Recoveries		28			51			16			2			0			97
Provision		381			1,655			96			(57	)		(175	)		1,900
Ending Balance		489			3,507			137			1,228			568			5,929
Ending balance: individually
evaluated for impairment		80			756			0			111			0			947
Ending balance: collectively
evaluated for impairment	$	409		$	2,751		$	137		$	1,117		$	568		$	4,982
Financing Receivables:
Ending Balance	$	39,786		$	238,181		$	7,177		$	130,851		$	0		$	415,995
Ending balance: individually
evaluated for impairment		122			3,211			0			855			0			4,188
Ending balance: collectively
evaluated for impairment	$	39,664		$	234,970		$	7,177		$	129,996		$	0		$	411,807

Schedule of Gross Interest that Would Have Been Recorded

(Amounts in thousands)
	September 30,			December 31,
	2012			2011
Gross interest due under terms year-to-date	$	201		$	342
Amount included in income year-to-date		(20	)		(54	)
Interest income not recognized year-to-date	$	181		$	288

Schedule of Impaired Loans

(Amounts in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
September 30, 2012:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	502	$	801	$	0	$	811	$	3
Commercial real estate		865		1,326		0		1,364		0
Residential		108		173		0		177		0
With an allowance recorded:
Commercial		0		0		0		0		0
Commercial real estate		1,029		1,298		390		1,302		7
Residential		843		926		158		940		10
Total	$	3,347	$	4,524	$	548	$	4,594	$	20
Total consists of:
Commercial	$	502	$	801	$	0	$	811	$	3
Commercial real estate	$	1,894	$	2,624	$	390	$	2,666	$	7
Residential	$	951	$	1,099	$	158	$	1,117	$	10

(Amounts in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2011:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	43	$	188	$	0	$	239	$	0
Commercial real estate		1,319		1,505		0		1,554		12
Residential		270		280		0		286		1
With an allowance recorded:
Commercial		80		80		80		89		3
Commercial real estate		1,891		2,932		756		2,947		34
Residential		585		733		111		736		4
Total	$	4,188	$	5,718	$	947	$	5,851	$	54
Total consists of:
Commercial	$	123	$	268	$	80	$	328	$	3
Commercial real estate	$	3,210	$	4,437	$	756	$	4,501	$	46
Residential	$	855	$	1,013	$	111	$	1,022	$	5

Schedule of Financing Receivables on Non-Accrual Status and Foreclosed Assets

(Amounts in thousands)
	September 30,		December 31,
	2012		2011
Commercial - real estate	$	1,894	$	3,210
Commercial - other		502		123
Residential		951		855
Consumer		0		0
Total non-accruing loans		3,347		4,188
Restructured loans		0		0
Total impaired loans		3,347		4,188
Loans past-due 90 days or more and still accruing		2,016		0
Foreclosed assets		534		780
Total non-performing assets	$	5,897	$	4,968

Schedule of Aging of Past-due Loans by Class of Loans

(Amounts in thousands)					90 Days				Non-				Total
	30-59 Days		60-89 Days		or Greater		Total		Performing				Financing
	Past Due		Past Due		Past Due		Past Due		Assets		Current		Receivables
September 30, 2012:
Commercial	$	81	$	0	$	0	$	81	$	502	$	52,075	$	52,658
Commercial real estate		2,027		437		1,544		4,008		1,894		221,961		227,863
Consumer		63		15		0		78		0		6,450		6,528
Residential		1,126		91		472		1,689		951		141,288		143,928
Total	$	3,297	$	543	$	2,016	$	5,856	$	3,347	$	421,774	$	430,977

(Amounts in thousands)					90 Days				Non-				Total
	30-59 Days		60-89 Days		or Greater		Total		Performing				Financing
	Past Due		Past Due		Past Due		Past Due		Assets		Current		Receivables
December 31, 2011:
Commercial	$	166	$	21	$	0	$	187	$	123	$	39,476	$	39,786
Commercial real estate		1,427		785		0		2,212		3,210		232,759		238,181
Consumer		64		62		0		126		0		7,051		7,177
Residential		1,473		353		0		1,826		855		128,170		130,851
Total	$	3,130	$	1,221	$	0	$	4,351	$	4,188	$	407,456	$	415,995