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, 2015

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, 5,606,938 shares as of November 4, 2015

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share data)	September 30,			December 31,
	2015			2014
ASSETS
Cash and due from banks	$	9,512		$	7,543
Interest-bearing deposits in other banks		488			424
Total cash and cash equivalents		10,000			7,967
Time deposits with other banks		1,482			1,482
Investment securities available-for-sale		370,293			347,666
Investment securities held-to-maturity (fair value 2015- $31 2014 - $1,060)		30			1,056
Restricted investment in bank stocks		6,795			5,308
Loans		519,909			487,461
Allowance for loan losses		(7,234	)		(6,390	)
Net loans		512,675			481,071
Premises and equipment, net		20,130			20,871
Accrued interest receivable		3,990			3,313
Cash surrender value of bank owned life insurance		21,734			21,236
Investments in low-income housing partnerships		1,595			1,130
Goodwill		19,133			19,133
Core deposit intangible, net		―			122
Foreclosed assets held for resale		256			55
Other assets		3,429			1,943
TOTAL ASSETS	$	971,542		$	912,353
LIABILITIES
Deposits:
Non-interest bearing	$	107,540		$	96,530
Interest bearing		613,997			565,032
Total deposits		721,537			661,562
Short-term borrowings		65,482			73,123
Long-term borrowings		70,259			65,339
Accrued interest payable		434			399
Deferred income taxes		215			211
Other liabilities		4,553			5,448
TOTAL LIABILITIES		862,480			806,082
STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares in 2015 and 2014; issued 0 in 2015 and 2014		―			―
Common stock, par value $2.00 per share; authorized 20,000,000 shares in 2015 and 2014; issued 5,840,050 in 2015 and 5,802,521 in 2014; outstanding 5,606,938 in 2015 and 5,567,372 in 2014		11,680			11,605
Surplus		33,522			32,674
Retained earnings		66,327			63,485
Accumulated other comprehensive income		3,289			4,330
Treasury stock, at cost, 233,112 shares in 2015 and 235,149 in 2014		(5,756	)		(5,823	)
TOTAL STOCKHOLDERS’ EQUITY		109,062			106,271
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	971,542		$	912,353

See accompanying notes to consolidated financial statements.

2

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Unaudited)

(Dollars in thousands, except per share data)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015			2014
INTEREST INCOME
Interest and fees on loans	$	5,398	$	5,258	$	16,090		$	15,284
Interest and dividend income on investment securities:
Taxable		1,579		1,912		4,927			5,920
Tax-exempt		808		560		2,212			1,800
Dividends		15		18		45			50
Dividend income on restricted investment in bank stocks		77		67		353			169
Interest on interest-bearing deposits in other banks		8		―		24			1
Total interest income		7,885		7,815		23,651			23,224
INTEREST EXPENSE
Interest on deposits		779		684		2,307			2,241
Interest on short-term borrowings		85		71		215			159
Interest on long-term borrowings		390		325		1,153			913
Total interest expense		1,254		1,080		3,675			3,313
Net interest income		6,631		6,735		19,976			19,911
Provision for loan losses		753		100		1,178			433
Net interest income after provision for loan losses		5,878		6,635		18,798			19,478
NON-INTEREST INCOME
Trust department		216		216		670			711
Service charges and fees		469		460		1,291			1,171
Bank owned life insurance income		169		165		498			514
ATM fees and debit card income		310		284		903			833
Gains on sales of mortgage loans		111		68		425			148
Net investment securities gains		1,036		163		2,131			1,963
Impairment charges on equity securities		―		―		(14	)		―
Other		121		146		378			395
Total non-interest income		2,432		1,502		6,282			5,735
NON-INTEREST EXPENSE
Salaries and employee benefits		2,741		2,927		8,432			8,569
Occupancy, net		386		384		1,260			1,279
Furniture and equipment		158		130		449			437
Computer expense		217		273		600			816
Professional services		139		147		451			444
Pennsylvania shares tax		190		159		556			476
FDIC insurance		137		142		390			379
ATM and debit card fees		164		155		461			446
Data processing fees		111		102		452			298
Foreclosed assets held for resale expense		9		4		58			126
Advertising		147		139		327			447
Other		833		700		2,475			2,236
Total non-interest expense		5,232		5,262		15,911			15,953
Income before income tax expense		3,078		2,875		9,169			9,260
Income tax expense		593		492		1,805			1,823
NET INCOME	$	2,485	$	2,383	$	7,364		$	7,437
PER SHARE DATA
Net income per share:
Basic	$	0.44	$	0.43	$	1.32		$	1.34
Diluted		0.44		0.43		1.32			1.34
Dividends per share		0.27		0.26		0.81			0.78

See accompanying notes to consolidated financial statements.

3

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)	Three Months Ended
	September 30,
	2015			2014
Net Income	$	2,485		$	2,383
Other comprehensive income (loss):
Unrealized net holding gains (losses) on available-for-sale investment securities arising during the period, net of income taxes of $1,181 and $(100), respectively		2,285			(174	)
Less reclassification adjustment for net gains included in net income, net of income taxes of $(353) and $(55), respectively (a) (b)		(683	)		(108	)
Total other comprehensive income (loss)		1,602			(282	)
Total Comprehensive Income	$	4,087		$	2,101

_______________________

(a) Gross amounts are included in net investment securities gains on the Consolidated Statements of Income in non-interest income.

(b) Income tax amounts are included in income tax expense on the Consolidated Statements of Income.

(Dollars in thousands)	Nine Months Ended
	September 30,
	2015			2014
Net Income	$	7,364		$	7,437
Other comprehensive (loss) income:
Unrealized net holding gains on available-for-sale investment securities arising during the period, net of income taxes of $176 and $2,538, respectively		356			4,951
Less reclassification adjustment for net gains included in net income, net of income taxes of $(725) and $(667), respectively (a) (c)		(1,406	)		(1,296	)
Less reclassification adjustment for impairment charges on equity securities included in net income, net of income taxes of $5 and $0, respectively (b) (c)		9			―
Total other comprehensive (loss) income		(1,041	)		3,655
Total Comprehensive Income	$	6,323		$	11,092

_______________________

(a) Gross amounts are included in net investment securities gains on the Consolidated Statements of Income in non-interest income.

(b) Gross amounts are included in impairment charges on equity securities on the Consolidated Statements of Income in non-interest income.

(c) Income tax amounts are included in income tax expense on the Consolidated Statements of Income.

See accompanying notes to consolidated financial statements.

4

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Unaudited)

(Dollars in thousands, except per share data)
										Accumulated
										Other						Total
	Common Stock						Retained			Comprehensive			Treasury			Stockholders’
	Shares		Amount		Surplus		Earnings			Income (Loss)			Stock			Equity
Balance at January 1, 2015		5,802,521	$	11,605	$	32,674	$	63,485		$	4,330		$	(5,823	)	$	106,271
Net Income								7,364									7,364
Other comprehensive loss, net of taxes											(1,041	)					(1,041	)
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options		37,529		75		848								67			990
Dividends - $0.81 per share								(4,522	)								(4,522	)
Balance at September 30, 2015		5,840,050	$	11,680	$	33,522	$	66,327		$	3,289		$	(5,756	)	$	109,062
Balance at January 1, 2014		5,756,474	$	11,513	$	31,626	$	59,089		$	(54	)	$	(5,823	)	$	96,351
Net Income								7,437									7,437
Other comprehensive income, net of taxes											3,655						3,655
Issuance of common stock under dividend reinvestment plan		33,993		68		778											846
Dividends - $0.78 per share								(4,315	)								(4,315	)
Balance at September 30, 2014		5,790,467	$	11,581	$	32,404	$	62,211		$	3,601		$	(5,823	)	$	103,974

See accompanying notes to consolidated financial statements.

5

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(Unaudited)

(Dollars in thousands)
	2015			2014
OPERATING ACTIVITIES
Net income	$	7,364		$	7,437
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,178			433
Depreciation and amortization		1,126			1,213
Net premium amortization on investment securities		2,103			1,207
Deferred income tax expense		549			155
Gains on sales of mortgage loans		(425	)		(148	)
Proceeds from sales of mortgage loans originated for resale		15,447			6,000
Originations of mortgage loans originated for resale		(13,961	)		(8,077	)
Gains on sales of investment securities		(2,131	)		(1,963	)
Impairment charges on equity securities		14			―
Losses on sales of foreclosed real estate held for resale, including write-downs		34			36
(Increase) decrease in accrued interest receivable		(677	)		211
Earnings on investment in bank owned life insurance		(498	)		(514	)
Losses on disposals of premises and equipment		30			―
Increase in other assets		(1,486	)		(300	)
Increase in accrued interest payable		35			9
Decrease in other liabilities		(1,958	)		(3,041	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		6,744			2,658
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale		111,799			138,218
Proceeds from maturities and redemptions of investment securities available-for-sale		17,006			31,087
Purchases of investment securities available-for-sale		(151,941	)		(150,390	)
Proceeds from maturities and redemptions of investment securities held-to-maturity		1,026			12
Net change in restricted investment in bank stocks		(1,487	)		(2,355	)
Net increase in loans		(34,035	)		(37,178	)
Purchases of premises and equipment		(232	)		(516	)
Purchases of investment in real estate venture		(590	)		—
Proceeds from sales of foreclosed assets held for resale		21			489
NET CASH USED IN INVESTING ACTIVITIES		(58,433	)		(20,633	)
FINANCING ACTIVITIES
Net increase (decrease) in deposits		59,975			(33,976	)
Net (decrease) increase in short-term borrowings		(7,641	)		8,617
Proceeds from long-term borrowings		5,000			30,000
Repayment of long-term borrowings		(80	)		(5,065	)
Common stock issued		953			826
Proceeds from issuance of treasury stock		37			―
Dividends paid		(4,522	)		(4,315	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		53,722			(3,913	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,033			(21,888	)
CASH AND CASH EQUIVALENTS, BEGINNING		7,967			30,623
CASH AND CASH EQUIVALENTS, ENDING	$	10,000		$	8,735
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	3,640		$	3,304
Income taxes paid		2,047			1,755
Purchased securities settling after quarter end		1,063			―
Loans transferred to foreclosed assets held for resale		256			262

See accompanying notes to consolidated financial statements.

6

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 ― BASIS OF PRESENTATION AND ACCOUNTING POLICIES

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2015, are not necessarily indicative of the results for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.

The Corporation has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2015 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

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

Except as disclosed below, there were no new accounting pronouncements affecting the Corporation during the three and nine months ended September 30, 2015 that were not already adopted by the Corporation.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue requirements in Revenue Recognition (Topic 605). This ASU requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The ASU is effective for annual reporting periods beginning after December 31, 2016, including interim periods within the reporting period. Early application is not permitted. In July 2015, the FASB approved a one-year delay of the effective date of this standard. The deferral would require public entities to apply the standard for annual reporting periods beginning after December 15, 2017. Public companies would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016. The Corporation is currently evaluating the impact of this ASU on its consolidated financial statements.

NOTE 3 — 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 Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

7

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.

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, 2015 and December 31, 2014:

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
September 30, 2015:	Cost		Gains		Losses			Value
U.S. Treasury securities	$	1,026	$	6	$	―		$	1,032
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		95,941		626		(299	)		96,268
Other		21,876		256		(46	)		22,086
Obligations of state and political subdivisions		195,845		5,048		(340	)		200,553
Corporate debt securities		49,350		31		(993	)		48,388
Marketable equity securities		1,194		772		―			1,966
Total	$	365,232	$	6,739	$	(1,678	)	$	370,293

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2015:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	30	$	1	$	―	$	31
Total	$	30	$	1	$	―	$	31

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2014:	Cost		Gains		Losses			Value
U.S. Treasury securities	$	11,356	$	24	$	(2	)	$	11,378
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		112,146		1,055		(487	)		112,714
Other		26,246		270		(6	)		26,510
Obligations of state and political subdivisions		151,565		6,127		(469	)		157,223
Corporate debt securities		38,499		112		(825	)		37,786
Marketable equity securities		1,208		867		(20	)		2,055
Total	$	341,020	$	8,455	$	(1,809	)	$	347,666

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2014:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	56	$	2	$	―	$	58
Other		1,000		2		―		1,002
Total	$	1,056	$	4	$	―	$	1,060

8

Securities Available-for-Sale with an aggregate fair value of $312,484,000 at September 30, 2015 and $222,847,000 at December 31, 2014, and securities Held-to-Maturity with an aggregate book value of $30,000 at September 30, 2015 and $1,056,000 at December 31, 2014, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase, FHLB advances and other balances of $236,806,000 at September 30, 2015 and $155,895,000 at December 31, 2014.

The amortized cost, estimated fair value and weighted average yield of debt and equity securities, by contractual maturity, are shown below at September 30, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)
	September 30, 2015
	Available-For-Sale															Held-To-Maturity
				U.S. Government			Obligations									U.S. Government
				Corporations &			of State			Corporate			Marketable			Corporations &
	U.S. Treasury			Agencies			& Political			Debt			Equity			Agencies
	Securities			Obligations1			Subdivisions2			Securities			Securities3			Obligations1
Within 1 Year:
Amortized cost	$	―		$	―		$	550		$	869		$	―		$	―
Fair value		―			―			565			885			―			―
Weighted average yield		―			―			6.45	%		3.15	%		―			―
1 - 5 Years:
Amortized cost		1,026			15,127			20,586			12,155			―			30
Fair value		1,032			15,271			21,077			12,031			―			31
Weighted average yield		0.96	%		1.83	%		3.01	%		2.30	%		―			2.55	%
5 - 10 Years:
Amortized cost		―			40,740			91,445			36,326			―			―
Fair value		―			41,077			92,800			35,472			―			―
Weighted average yield		―			2.18	%		3.13	%		2.69	%		―			―
After 10 Years:
Amortized cost		―			61,950			83,264			―			1,194			―
Fair value		―			62,006			86,111			―			1,966			―
Weighted average yield		―			1.65	%		4.93	%		―			4.95	%		―
Total:
Amortized cost	$	1,026		$	117,817		$	195,845		$	49,350		$	1,194		$	30
Fair value		1,032			118,354			200,553			48,388			1,966			31
Weighted average yield		0.96	%		1.86	%		3.89	%		2.60	%		4.95	%		2.55	%

_______________________

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 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 U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at September 30, 2015. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch. The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the three months ended September 30, 2015 and 2014 were $32,059,000 and $18,016,000, respectively. Gross gains realized on these sales were $1,036,000 and $235,000, respectively. Gross losses on these sales were $0 and $72,000, respectively. Impairment losses realized on Available-for-Sale equity securities for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively.

9

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the nine months ended September 30, 2015 and 2014 were $111,799,000 and $138,218,000, respectively. Gross gains realized on these sales were $2,186,000 and $2,557,000, respectively. Gross losses on these sales were $55,000 and $594,000, respectively. Impairment losses realized on Available-for-Sale equity securities for the nine months ended September 30, 2015 and 2014 were $14,000 and $0, respectively.

There were no proceeds from sales of investments in Held-to-Maturity debt and equity securities during the three or nine month periods ended September 30, 2015 or 2014. Therefore, there were no gains or losses realized during these periods.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. 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 on debt securities, 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 the realized loss is recognized as impairment charges on securities on the Consolidated Statements of Income. The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes 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 realized loss is recognized as impairment charges on securities on the Consolidated Statements of Income. The amount of the total other-than-temporary impairment is recognized in other comprehensive income (loss), net of applicable taxes. The previous cost basis less the other-than-temporary impairment recognized in earnings becomes the new cost basis of the investment.

The Corporation and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. As of June 30, 2015, we recognized other than temporary impairment on one equity security that was trading below cost basis. We have written down the value of the shares based upon market indications. In management’s opinion, the equity securities reflect a more accurate valuation of the shares after the impairment charge. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at September 30, 2015. Management did not consider any securities to be other-than-temporarily impaired at December 31, 2014.

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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, 2015 and December 31, 2014:

September 30, 2015
(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale:	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury securities	$	―	$	―		$	―	$	―		$	―	$	―
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		17,464		(199	)		11,801		(100	)		29,265		(299	)
Other		3,928		(46	)		―		―			3,928		(46	)
Obligations of state and political subdivisions		34,508		(213	)		8,133		(127	)		42,641		(340	)
Corporate debt securities		26,913		(365	)		19,080		(628	)		45,993		(993	)
Marketable equity securities		―		―			―		―			―		―
	$	82,813	$	(823	)	$	39,014	$	(855	)	$	121,827	$	(1,678	)

December 31, 2014
(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale:	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury securities	$	6,030	$	(2	)	$	―	$	―		$	6,030	$	(2	)
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		19,823		(230	)		17,099		(257	)		36,922		(487	)
Other		7,154		(6	)		―		―			7,154		(6	)
Obligations of state and political subdivisions		21,459		(94	)		18,273		(375	)		39,732		(469	)
Corporate debt securities		22,227		(542	)		12,066		(283	)		34,293		(825	)
Marketable equity securities		30		(20	)		―		―			30		(20	)
	$	76,723	$	(894	)	$	47,438	$	(915	)	$	124,161	$	(1,809	)

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”), FNMA (“Federal National Mortgage Association”) or GNMA (“Government 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 62 securities with a one year or less unrealized loss position or any of their 19 securities with a greater than one year unrealized loss position as of September 30, 2015, represent an other-than-temporary impairment, as these unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

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NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Net 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.

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

Commercial and Industrial Lending

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

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

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

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

Commercial Real Estate Lending

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

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

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

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Residential Real Estate Lending (Including Home Equity)

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

The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The Corporation offers fixed-rate mortgage loans with terms up to a maximum of twenty years for both permanent structures and those under construction. Generally, the majority of the Corporation’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ninety-five percent or less. Generally, home equity term loans are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of fifteen years. Generally, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

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

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

Consumer Lending

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

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

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

Delinquent Loans

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 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 brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Bank estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

13

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

Loans in which the borrower is in bankruptcy are considered on a case by case basis and are either charged off or reaffirmed by the borrower.

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

Allowance for Loan Losses

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

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

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

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

14

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

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the Consolidated Balance Sheet. As of September 30, 2015 and December 31, 2014, the amount of the reserve for unfunded lending commitments was $132,000 and $0.

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

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

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

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

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Bank determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months.

The Bank utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the Bank’s loan policy. 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 commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on 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.

The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio, as well as other variables such as current economic conditions, and individual strengths and weaknesses.

Risk grade characteristics are as follows:

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

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

15

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.

They are characterized by the distinct possibility that the Bank will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default; are inadequately protected by the current sound net worth, paying capacity of the borrower, or pledged collateral; and may 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 whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

16

The following table presents the classes of the loan portfolio summarized by risk rating as of September 30, 2015 and December 31, 2014:

	Commercial and
(Dollars in thousands)	Industrial				Commercial Real Estate
	September 30,		December 31,		September 30,		December 31,
	2015		2014		2015		2014
Grade:
1-6   Pass	$	88,125	$	64,459	$	239,816	$	237,404
7      Special Mention		159		47		3,900		11,008
8      Substandard		―		21		15,796		5,472
9      Doubtful		―		―		―		―
Add (deduct): Unearned discount and		―		―		―		―
Net deferred loan fees and costs		142		129		311		38
Total loans	$	88,426	$	64,656	$	259,823	$	253,922

	Residential Real Estate
	Including Home Equity					Consumer Loans
	September 30,			December 31,		September 30,			December 31,
	2015			2014		2015			2014
Grade:
1-6   Pass	$	162,943		$	161,122	$	5,761		$	5,248
7      Special Mention		1,115			520		28			21
8      Substandard		1,680			1,640		4			9
9      Doubtful		―			―		―			―
Add (deduct): Unearned discount and		(20	)		―		(1	)		(40	)
Net deferred loan fees and costs		56			271		94			92
Total loans	$	165,774		$	163,553	$	5,886		$	5,330

	Total Loans
	September 30,			December 31,
	2015			2014
Grade:
1-6   Pass	$	496,645		$	468,233
7      Special Mention		5,202			11,596
8      Substandard		17,480			7,142
9      Doubtful		―			―
Add (deduct):  Unearned discount and		(21	)		(40	)
Net deferred loan fees and costs		603			530
Total loans	$	519,909		$	487,461

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $50,248,000 and $3,034,000, respectively at September 30, 2015 and $30,334,000 and $3,235,000 at December 31, 2014. Loans held for sale amounted to $1,723,000 at September 30, 2015 and $2,201,000 at December 31, 2014.

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

(Dollars in thousands)	Commercial		Commercial			Residential
	and Industrial		Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the three month period ended September 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	706	$	3,139		$	1,867		$	89		$	799		$	6,600
Charge-offs		―		(95	)		(39	)		(8	)		―			(142	)
Recoveries		4		17			―			2			―			23
Provision		56		1,293			105			37			(738	)		753
Ending Balance	$	766	$	4,354		$	1,933		$	120		$	61		$	7,234

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the nine month period ended September 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	542		$	3,176		$	1,928		$	107		$	637		$	6,390
Charge-offs		(2	)		(232	)		(147	)		(23	)		―			(404	)
Recoveries		7			59			―			4			―			70
Provision		219			1,351			152			32			(576	)		1,178
Ending Balance	$	766		$	4,354		$	1,933		$	120		$	61		$	7,234
Ending balance: individually evaluated for impairment	$	―		$	1,243		$	36		$	―		$	―		$	1,279
Ending balance: collectively evaluated for impairment	$	766		$	3,111		$	1,897		$	120		$	61		$	5,955
Loan Receivables:
Ending Balance	$	88,426		$	259,823		$	165,774		$	5,886		$	―		$	519,909
Ending balance: individually evaluated for impairment	$	400		$	11,620		$	934		$	―		$	―		$	12,954
Ending balance: collectively evaluated for impairment	$	88,026		$	248,203		$	164,840		$	5,886		$	―		$	506,955

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the three month period ended September 30, 2014:
Beginning balance	$	743		$	3,450		$	1,619		$	51		$	614		$	6,477
Charge-offs		(100	)		―			(6	)		(21	)		―			(127	)
Recoveries		3			34			1			2			―			40
Provision		(123	)		(108	)		262			89			(20	)		100
Ending Balance	$	523		$	3,376		$	1,876		$	121		$	594		$	6,490

18

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the nine month period ended September 30, 2014:
Beginning balance	$	776		$	3,320		$	1,565		$	53		$	805		$	6,519
Charge-offs		(107	)		(237	)		(180	)		(36	)		―			(560	)
Recoveries		24			59			12			3			―			98
Provision		(170	)		234			479			101			(211	)		433
Ending Balance	$	523		$	3,376		$	1,876		$	121		$	594		$	6,490
Ending balance: individually evaluated for impairment	$	―		$	28		$	17		$	―		$	―		$	45
Ending balance: collectively evaluated for impairment	$	523		$	3,348		$	1,859		$	121		$	594		$	6,445
Loan Receivables:
Ending Balance	$	69,360		$	249,373		$	161,381		$	5,147		$	―		$	485,261
Ending balance: individually evaluated for impairment	$	340		$	5,573		$	1,173		$	6		$	―		$	7,092
Ending balance: collectively evaluated for impairment	$	69,020		$	243,800		$	160,208		$	5,141		$	―		$	478,169

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of December 31, 2014:
Allowance for Loan Losses:
Ending Balance	$	542	$	3,176	$	1,928	$	107	$	637	$	6,390
Ending balance: individually evaluated for impairment	$	―	$	38	$	81	$	―	$	―	$	119
Ending balance: collectively evaluated for impairment	$	542	$	3,138	$	1,847	$	107	$	637	$	6,271
Loan Receivables:
Ending Balance	$	64,656	$	253,922	$	163,553	$	5,330	$	―	$	487,461
Ending balance: individually evaluated for impairment	$	399	$	5,350	$	1,291	$	4	$	―	$	7,044
Ending balance: collectively evaluated for impairment	$	64,257	$	248,572	$	162,262	$	5,326	$	―	$	480,417

As of September 30, 2015, the $256,000 in foreclosed assets held for resale was secured entirely by residential real estate and was held as the result of obtaining physical possession. At December 31, 2014, the $55,000 in foreclosed assets held for resale was secured entirely by commercial real estate, and there were no residential real estate properties held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $215,000 at September 30, 2015 and $118,000 at December 31, 2014. These balances were not included in foreclosed assets held for resale at September 30, 2015 or December 31, 2014.

From time to time, the Bank may agree to modify the contractual terms of a borrower’s loan. In cases where the modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).

19

The outstanding balance of TDRs as of September 30, 2015 and December 31, 2014 was $8,851,000 and $4,708,000, respectively. The increase in TDRs was attributable to deterioration in the respective borrowers’ financial position, and in some cases a declining collateral value, along with the Bank’s proactive monitoring of the loan portfolio. There were $48,000 and $0 in unfunded commitments on TDRs at September 30, 2015 and December 31, 2014, respectively.

During the three months ended September 30, 2015, two loans with a combined post modification balance of $992,000 were classified as TDRs, as compared to the same period in 2014, when four loans with a combined post modification balance of $888,000 were classified as TDRs. The loan modifications for the three months ended September 30, 2015 consisted of one term modification and one payment modification. The loan modifications for the three months ended September 30, 2014 consisted of one term modification and three payment modifications.

During the nine months ended September 30, 2015, seven loans with a combined post modification balance of $5,550,000 were classified as TDRs, as compared to the same period in 2014, when thirteen loans with a combined post modification balance of $1,810,000 were classified as TDRs. The loan modifications for the nine months ended September 30, 2015 consisted of four term modifications and three payment modifications. The loan modifications for the nine months ended September 30, 2014 consisted of one interest rate modification, four term modifications, and eight payment modifications.

The following table presents the unpaid balance of TDRs at the dates indicated:

(Dollars in thousands)
	September 30,		December 31,
	2015		2014
Non-accrual TDRs	$	1,401	$	1,638
Accruing TDRs		7,450		3,070
Total	$	8,851	$	4,708

At September 30, 2015, five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $2,133,000 were not in compliance with the terms of their restructure, compared to September 30, 2014 when four Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,573,000 were not in compliance with the terms of their restructure.

During the three months ended September 30, 2015, two Commercial Real Estate loans totaling $178,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2014 when there were no payment defaults on loans that were modified as TDRs within the preceding twelve months. During the nine months ended September 30, 2015, three Commercial Real Estate loans totaling $4,404,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2014 when four Commercial Real Estate loans totaling $193,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults. The significant increase in defaulted TDRs at September 30, 2015 as compared to September 30, 2014 is largely due to one loan in the amount of $4,226,000 to a student housing holding company, which was modified as a TDR in the first quarter of 2015 and experienced its subsequent default during the second quarter of 2015.

The following table presents information regarding the loan modifications categorized as TDRs during the three and nine months ended September 30, 2015 and September 30, 2014:

(Dollars in thousands, except number of contracts)
	Three Months Ended September 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		―	$	―	$	―	$	―
Commercial Real Estate		2		815		992		1,001
Consumer		―		―		―		―
Total		2	$	815	$	992	$	1,001

(Dollars in thousands, except number of contracts)
	Three Months Ended September 30, 2014
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		―	$	―	$	―	$	―
Commercial Real Estate		4		801		888		887
Consumer		―		―		―		―
Total		4	$	801	$	888	$	887

20

(Dollars in thousands, except number of contracts)
	Nine Months Ended September 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	23	$	23	$	21
Commercial Real Estate		6		5,395		5,527		5,527
Consumer		―		―		―		―
Total		7	$	5,418	$	5,550	$	5,548

(Dollars in thousands, except number of contracts)
	Nine Months Ended September 30, 2014
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		2	$	327	$	327	$	326
Commercial Real Estate		10		1,389		1,476		1,080
Consumer		1		7		7		6
Total		13	$	1,723	$	1,810	$	1,412

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three and nine months ended September 30, 2015 and September 30, 2014 with the total number of each type of modification performed.

Three Months Ended September 30, 2015

Nine Months Ended September 30, 2015

Rate

Term

Payment

Number

Rate

Term

Payment

Number

Modification

Modification

Modification

Modified

Modification

Modification

Modification

Modified

Commercial  and Industrial

―

―

―

―

―

1

―

1

Commercial Real Estate

―

1

1

2

―

3

3

6

Consumer

―

―

―

―

―

―

―

―

Total

―

1

1

2

―

4

3

7

Three Months Ended September 30, 2014

Nine Months Ended September 30, 2014

Rate

Term

Payment

Number

Rate

Term

Payment

Number

Modification

Modification

Modification

Modified

Modification

Modification

Modification

Modified

Commercial and Industrial

―

―

―

―

―

―

2

2

Commercial Real Estate

―

1

3

4

1

4

5

10

Consumer

―

―

―

―

―

―

1

1

Total

―

1

3

4

1

4

8

13

21

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below for the periods ended September 30, 2015 and December 31, 2014.

(Dollars in thousands)	September 30, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	400	$	545	$	―	$	399	$	545	$	―
Commercial Real Estate		9,297		9,641		―		4,828		5,278		―
Residential Real Estate		493		612		―		727		892		―
Consumer		―		―		―		4		4		―
With an allowance recorded:
Commercial and Industrial		―		―		―		―		―		―
Commercial Real Estate		2,323		6,272		1,243		522		522		38
Residential Real Estate		441		441		36		564		569		81
Consumer		―		―		―		―		―		―
Total	$	12,954	$	17,511	$	1,279	$	7,044	$	7,810	$	119
Total consists of:
Commercial and Industrial	$	400	$	545	$	―	$	399	$	545	$	―
Commercial Real Estate	$	11,620	$	15,913	$	1,243	$	5,350	$	5,800	$	38
Residential Real Estate	$	934	$	1,053	$	36	$	1,291	$	1,461	$	81
Consumer	$	―	$	―	$	―	$	4	$	4	$	―

______________________

At September 30, 2015 and December 31, 2014, $8,851,000 and $4,708,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $0 and $27,000, respectively. The recorded investment represents the loan balance reflected on the Consolidated Balance Sheets net of any charge-offs. The unpaid principal balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the three and nine months ended September 30, 2015 and 2014.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	407	$	2	$	341	$	―
Commercial Real Estate		9,235		59		5,213		20
Residential Real Estate		499		―		1,123		―
Consumer		1		―		7		―
With an allowance recorded:
Commercial Real Estate		1,162		45		171		8
Residential Real Estate		441		―		33		2
Total	$	11,745	$	106	$	6,888	$	30
Total consists of:
Commercial and Industrial	$	407	$	2	$	341	$	―
Commercial Real Estate	$	10,397	$	104	$	5,384	$	28
Residential Real Estate	$	940	$	―	$	1,156	$	2
Consumer	$	1	$	―	$	7	$	―

_____________________

Of the $106,000 and $30,000 in interest income recognized on impaired loans for the three months ended September 30, 2015 and 2014, respectively, $60,000 and $9,000 in interest income was recognized in respect to non-accrual loans.

22

(Dollars in thousands)	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	407	$	12	$	184	$	13
Commercial Real Estate		8,218		305		5,037		86
Residential Real Estate		449		―		865		―
Consumer		2		―		5		―
With an allowance recorded:
Commercial Real Estate		581		45		101		8
Residential Real Estate		445		―		17		2
Total	$	10,102	$	362	$	6,209	$	109
Total consists of:
Commercial and Industrial	$	407	$	12	$	184	$	13
Commercial Real Estate	$	8,799	$	350	$	5,138	$	94
Residential Real Estate	$	894	$	―	$	882	$	2
Consumer	$	2	$	―	$	5	$	―

_____________________

Of the $362,000 and $109,000 in interest income recognized on impaired loans for the nine months ended September 30, 2015 and 2014, respectively, $60,000 and $10,000 in interest income was recognized in respect to non-accrual loans.

Loan receivables on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing, as of September 30, 2015 and December 31, 2014 were as follows:

(Dollars in thousands)
	September 30,		December 31,
	2015		2014
Commercial and Industrial	$	―	$	5
Commercial Real Estate		4,570		2,678
Residential Real Estate		934		1,291
Total non-accrual loans		5,504		3,974
Foreclosed assets held for resale		256		55
Loans past-due 90 days or more and still accruing		164		10
Total non-performing assets	$	5,924	$	4,039

The following tables present the classes of the loan portfolio summarized by the past-due status at September 30, 2015 and December 31, 2014:

(Dollars in thousands)
													90 Days
													Or Greater
					90 Days								Past Due
	30-59 Days		60-89 Days		or Greater		Total				Total		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
September 30, 2015:
Commercial and Industrial	$	185	$	24	$	22	$	231	$	88,195	$	88,426	$	22
Commercial Real Estate		561		403		4,520		5,484		254,339		259,823		―
Residential Real Estate		1,381		216		1,045		2,642		163,132		165,774		142
Consumer		17		13		―		30		5,856		5,886		―
Total	$	2,144	$	656	$	5,587	$	8,387	$	511,522	$	519,909	$	164

23

(Dollars in thousands)
													90 Days
													Or Greater
					90 Days								Past Due
	30-59 Days		60-89 Days		or Greater		Total				Total		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
December 31, 2014:
Commercial and Industrial	$	72	$	28	$	5	$	105	$	64,551	$	64,656	$	―
Commercial Real Estate		1,657		613		2,375		4,645		249,277		253,922		―
Residential Real Estate		1,998		224		1,220		3,442		160,111		163,553		10
Consumer		27		8		―		35		5,295		5,330		―
Total	$	3,754	$	873	$	3,600	$	8,227	$	479,234	$	487,461	$	10

At September 30, 2015 and December 31, 2014, there were no commitments to lend additional funds with respect to impaired loans.

NOTE 5 — BORROWINGS

Short-Term Borrowings

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, Federal Discount Window, and Federal Home Loan Bank (“FHLB”) advances, which generally represent overnight or less than 30-day borrowings.

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

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

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

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

24

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of September 30, 2015 and December 31, 2014.

(Dollars in thousands)

Gross

Net Amounts

Amounts

of Liabilities

Offset

Presented

Gross

in the

in the

Amounts of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance

Financial

Collateral

Net

Liabilities

Sheet

Sheet

Instruments

Pledge

Amount

September 30, 2015

Repurchase agreements (a)

$

22,882

$

―

$

22,882

$

(22,882

)

$

―

$

―

December 31, 2014

Repurchase agreements (a)

$

16,730

$

―

$

16,730

$

(16,730

)

$

―

$

―

______________________

(a) As of September 30, 2015 and December 31, 2014, the fair value of securities pledged in connection with repurchase agreements was $28,837,000 and $26,094,000, respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of September 30, 2015.

(Dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total
September 30, 2015:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and /or agency securities	$	22,882	$	―	$	―	$	―	$	22,882
Total	$	22,882	$	―	$	―	$	―	$	22,882

Long-Term Borrowings

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

NOTE 6 — COMMITMENTS AND CONTINGENCIES

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

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, 2015 and December 31, 2014, were as follows:

(Dollars in thousands)
	September 30, 2015		December 31, 2014
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	83,658	$	84,983
Financial standby letters of credit	$	475	$	471
Performance standby letters of credit	$	5,102	$	5,851

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.

NOTE 8 — FAIR VALUE MEASUREMENTS

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

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

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

26

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

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

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

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

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

Financial Assets Measured at Fair Value on a Recurring Basis

At September 30, 2015 and December 31, 2014, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
September 30, 2015
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	―	$	1,032	$	―	$	1,032
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		―		96,268		―		96,268
Other		―		22,086		―		22,086
Obligations of state and political subdivisions		―		200,553		―		200,553
Corporate debt securities		―		48,388		―		48,388
Marketable equity securities		1,966		―		―		1,966
Total	$	1,966	$	368,327	$	―	$	370,293

(Dollars in thousands)
December 31, 2014
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	―	$	11,378	$	―	$	11,378
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		―		112,714		―		112,714
Other		―		26,510		―		26,510
Obligations of state and political subdivisions		―		157,223		―		157,223
Corporate debt securities		―		37,786		―		37,786
Marketable equity securities		2,055		―		―		2,055
Total	$	2,055	$	345,611	$	―	$	347,666

27

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 2015 or 2014.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2015 and December 31, 2014, impaired loans measured at fair value on a non-recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at September 30, 2015
Impaired loans:
Commercial and Industrial	$	―	$	―	$	―	$	―
Commercial Real Estate		―		―		2,573		2,573
Residential Real Estate		―		―		599		599
Total impaired loans	$	―	$	―	$	3,172	$	3,172

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2014
Impaired loans:
Commercial and Industrial	$	―	$	―	$	3	$	3
Commercial Real Estate		―		―		2,073		2,073
Residential Real Estate		―		―		856		856
Total impaired loans	$	―	$	―	$	2,932	$	2,932

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. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2015 and 2014.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2015 and December 31, 2014 foreclosed assets held for resale measured at fair value on a non-recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at September 30, 2015
Other foreclosed assets held for resale:
Commercial Real Estate	$	―	$	―	$	―	$	―
Total foreclosed assets held for resale	$	―	$	―	$	―	$	―

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(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2014
Other foreclosed assets held for resale:
Commercial Real Estate	$	―	$	―	$	55	$	55
Total foreclosed assets held for resale	$	―	$	―	$	55	$	55

The Bank’s foreclosed asset valuation procedure requires an appraisal, which considers the sales prices of similar properties in the proximate vicinity, 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 2015 and 2014.

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:

(Dollars in thousands)
	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
	Estimate		Valuation Technique	Unobservable Input	Range	Average
September 30, 2015
Impaired loans	$	3,172	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (63%)		(33	)%
Foreclosed assets held for resale	$	―	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (0%)		(0	)%
December 31, 2014
Impaired loans	$	2,932	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (63%)		(37	)%
Foreclosed assets held for resale	$	55	Appraisal of collateral1,3	Appraisal adjustments2	(33%) – (46%)		(37	)%

______________________

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

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

³Includes qualitative adjustments by management and estimated liquidation expenses.

Fair Value of Financial Instruments

(Dollars in thousands)
	Carrying		Fair Value Measurements at September 30, 2015
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,512	$	9,512	$	―	$	―	$	9,512
Interest-bearing deposits in other banks		488		―		488		―		488
Time deposits with other banks		1,482		―		1,482		―		1,482
Investment securities available-for-sale		370,293		1,966		368,327		―		370,293
Investment securities held-to-maturity		30		―		31		―		31
Restricted investment in bank stocks		6,795		―		6,795		―		6,795
Net loans		512,675		―		―		519,951		519,951
Mortgage servicing rights		494		―		―		494		494
Accrued interest receivable		3,990		―		3,990		―		3,990
FINANCIAL LIABILITIES:
Deposits		721,537		―		722,521		―		722,521
Short-term borrowings		65,482		―		65,482		―		65,482
Long-term borrowings		70,259		―		72,301		―		72,301
Accrued interest payable		434		―		434		―		434
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		―		―		―		―		―

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(Dollars in thousands)
	Carrying		Fair Value Measurements at December 31, 2014
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,543	$	7,543	$	―	$	―	$	7,543
Interest-bearing deposits in other banks		424		―		424		―		424
Time deposits with other banks		1,482		―		1,482		―		1,482
Investment securities available-for-sale		347,666		2,055		345,611		―		347,666
Investment securities held-to-maturity		1,056		―		1,060		―		1,060
Restricted investment in bank stocks		5,308		―		5,308		―		5,308
Net loans		481,071		―		―		485,468		485,468
Mortgage servicing rights		481		―		―		481		481
Accrued interest receivable		3,313		―		3,313		―		3,313
FINANCIAL LIABILITIES:
Deposits		661,562		―		661,819		―		661,819
Short-term borrowings		73,123		―		73,123		―		73,123
Long-term borrowings		65,339		―		66,739		―		66,739
Accrued interest payable		399		―		399		―		399
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		―		―		―		―		―

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at September 30, 2015 and December 31, 2014:

Cash and Due From Banks, Interest-Bearing Deposits in Other Banks, Time Deposits with Other Banks, Restricted Investment in Bank Stocks, Accrued Interest Receivable and Accrued Interest Payable

The fair values are equal to the current carrying values.

Investment Securities

The fair value of investment securities are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying on the securities’ relationship to other benchmark quoted prices.

Loans

Fair values are estimated for categories of loans with similar financial characteristics. Loans were segregated by type such as Commercial and Industrial, Commercial and Residential Real Estate mortgages and Consumer. For estimation purposes, each loan category was further segmented into fixed and adjustable rate interest terms.

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 impaired 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 or based on the value of the collateral if repayment is expected solely from collateral. The assumptions used by management are judgmentally determined using information regarding each specific borrower.

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Mortgage Servicing Rights

The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date.

Deposits

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, 2015 and December 31, 2014.

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.

Off-Balance Sheet Financial Instruments

The fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

NOTE 9 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Corporation. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share.

(In thousands, except earnings per share)	Three Months Ended
	September 30,
	2015		2014
Net income	$	2,485	$	2,383
Weighted-average common shares outstanding		5,594		5,544
Basic earnings per share	$	0.44	$	0.43
Weighted-average common shares outstanding		5,594		5,544
Common stock equivalents due to effect of stock options		2		5
Total weighted-average common shares and equivalents		5,596		5,549
Diluted earnings per share	$	0.44	$	0.43

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(In thousands, except earnings per share)	Nine Months Ended
	September 30,
	2015		2014
Net income	$	7,364	$	7,437
Weighted-average common shares outstanding		5,581		5,553
Basic earnings per share	$	1.32	$	1.34
Weighted-average common shares outstanding		5,581		5,553
Common stock equivalents due to effect of stock options		2		5
Total weighted-average common shares and equivalents		5,583		5,538
Diluted earnings per share	$	1.32	$	1.34

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

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

CRITICAL ACCOUNTING ESTIMATES

The Corporation has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Corporation applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the consolidated financial statements included in the 2014 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, 2014.

RESULTS OF OPERATIONS

Quarter ended September 30, 2015 compared to quarter ended September 30, 2014

First Keystone Corporation realized earnings for the three months ended September 30, 2015 of $2,485,000, an increase of $102,000, or 4.3% from the third quarter of 2014. The increase in net income for the three months ended September 30, 2015 was primarily due to an increase in net investment securities gains.

On a per share basis, for the three months ended September 30, 2015, net income was $0.44 versus $0.43 in the three months ended September 30, 2014. Cash dividends amounted to $0.27 per share up from $0.26 in the three months ended September 30, 2014, an increase of 3.8%.

NET INTEREST INCOME

The major source of operating income for the Corporation is net interest income, defined as interest income less interest expense. For the three months ended September 30, 2015, interest income amounted to $7,885,000, an increase of $70,000 or 0.9% from the three months ended September 30, 2014, while interest expense amounted to $1,254,000 for the three months ended September 30, 2015, an increase of $174,000, or 16.1% from the three months ended September 30, 2014. As a result, net interest income decreased $104,000 or 1.5% to $6,631,000 from $6,735,000 for the same period in 2014.

The Corporation’s net interest margin for the three months ended September 30, 2015 was 3.24% compared to 3.45% for the same period in 2014. The decrease in net interest margin was a result of the unprecedented continuing low interest rate environment.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the three months ended September 30, 2015 and September 30, 2014 was $753,000 and $100,000, respectively. 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. One of the factors contributing to the increase in the provision for loan losses is a significant specific allocation on a non-performing originated participation loan assigned during the third quarter of 2015, included in the discussion of the Corporation’s largest impaired loan relationships in the Non-Performing Assets section on page 40. Net charge-offs for the three months ended September 30, 2015 and 2014 were $119,000 and $87,000, respectively. See Allowance for Loan Losses on page 38 for further discussion.

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NON-INTEREST INCOME

Total non-interest income was $2,432,000 for the three months ended September 30, 2015, as compared to $1,502,000 for the same period in 2014, an increase of $930,000, or 61.9%. Service charges and fee income increased by $9,000 or 2.0%. Gains on sales of mortgage loans increased $43,000 or 63.2% due to a favorable and stable rate environment for the Bank’s customers.

Net gains on sales of investment securities increased $873,000 to $1,036,000 for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. The Bank has taken gains and losses in the portfolio to reduce market risk and protect from further changes in value in the face of increases in long-term interest rates.

Excluding net investment securities gains, non-interest income was $1,396,000 for the three months ended September 30, 2015, an increase of $57,000 or 4.3% from the three months ended September 30, 2014.

NON-INTEREST EXPENSE

Total non-interest expense was $5,232,000 for the three months ended September 30, 2015, as compared to $5,262,000 for the three months ended September 30, 2014. Non-interest expense decreased $30,000 or 0.6%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $2,741,000 or 52.4% of total non-interest expense for the three months ended September 30, 2015, as compared to 55.6% for the three months ended September 30, 2014. Net occupancy, furniture and equipment, and computer expense amounted to $761,000 for the three months ended September 30, 2015, a decrease of $26,000 or 3.3%. The decrease was due to lower software maintenance costs as a result of the outsourcing of the Bank’s core processing system. Pennsylvania shares tax expense increased $31,000 or 19.5% as a result of an increase in total assets and total equity. Data processing expenses increased $9,000 or 8.8% to $111,000 for the three months ended September 30, 2015 as a result of the planned outsourcing of the Bank’s core processing system in 2014 for data security, disaster recovery and system efficiency goals. Foreclosed assets held for resale expense increased $5,000 or 125.0% due to the write down of three foreclosed properties in 2015. Advertising expense increased $8,000 or 5.8% as compared to the three months ended September 30, 2014, due to increased digital media advertising expenses. Other non-interest expense amounted to $833,000 for the three months ended September 30, 2015, an increase of $133,000 or 19.0% as compared to the three months ended September 30, 2014. The increase was due to higher fees for an enhanced internet and mobile banking platform, Kasasa rewards and success fees, and an increase in charitable donations.

INCOME TAXES

Effective tax planning has helped produce favorable net income. Income tax expense amounted to $593,000 for the three months ended September 30, 2015, as compared to $492,000 for the three months ended September 30, 2014, an increase of $101,000. The effective total income tax rate was 19.3% for the third quarter of 2015 as compared to 17.1% for the third quarter of 2014. The increase in the effective tax rate was due to an increase in net gains on sales of investment securities.

Nine months ended September 30, 2015 compared to nine months ended September 30, 2014

First Keystone Corporation realized earnings for the nine months ended September 30, 2015 of $7,364,000, a decrease of $73,000, or 1.0% from the nine months ended September 30, 2014. The decrease in net income for the nine months ended September 30, 2015 was primarily due to an increase in the provision for loan losses.

On a per share basis, for the nine months ended September 30, 2015, net income was $1.32 versus $1.34 in the nine months ended September 30, 2014. Cash dividends increased to $0.81 per share up from $0.78 in the first nine months ended September 30, 2014, an increase of 3.8%.

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NET INTEREST INCOME

The major source of operating income for the Corporation is net interest income, defined as interest income less interest expense. For the first nine months of 2015, interest income amounted to $23,651,000, an increase of $427,000 or 1.8% from the first nine months of 2014, while interest expense amounted to $3,675,000 for the nine months ended September 30, 2015, an increase of $362,000, or 10.9% from the nine months ended September 30, 2014. As a result, net interest income increased $65,000 or 0.3% to $19,976,000 from $19,911,000 for the same period in 2014.

The Corporation’s net interest margin for the nine months ended September 30, 2015 was 3.27% compared to 3.45% for the same period in 2014. The decrease in net interest margin was a result of the unprecedented continuing low interest rate environment and the Bank’s reliance on short-term and long-term borrowings to support loan growth.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the nine months ended September 30, 2015 and September 30, 2014 was $1,178,000 and $433,000, respectively. 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. One of the factors contributing to the increase in the provision for loan losses is a significant specific allocation on a non-performing originated participation loan assigned during the third quarter of 2015, included in the discussion of the Corporation’s largest impaired loan relationships in the Non-Performing Assets section on page 40. Net charge-offs for the nine months ended September 30, 2015 and 2014 were $334,000 and $462,000, respectively. See Allowance for Loan Losses on page 38 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $6,282,000 for the nine months ended September 30, 2015, as compared to $5,735,000 for the same period in 2014, an increase of $547,000, or 9.5%. Service charges and fee income increased by $120,000 or 10.2%. This increase was primarily the result of an increase in the Bank’s per item overdraft fee and certain other deposit account fees implemented during the second and third quarters of 2014. Gains on sales of mortgage loans increased $277,000 or 187.2% due to a favorable and stable rate environment for the Bank’s customers.

Net gains on sales of investment securities increased $168,000 to $2,131,000 for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. The Bank has taken gains and losses in the portfolio to reduce market risk and protect from further changes in value in the face of increases in long-term interest rates.

Excluding net investment securities gains, non-interest income was $4,151,000 for the nine months ended September 30, 2015, an increase of $379,000 or 10.0% from the nine months ended September 30, 2014.

NON-INTEREST EXPENSE

Total non-interest expense was $15,911,000 for the nine months ended September 30, 2015, as compared to $15,953,000 for the nine months ended September 30, 2014. Non-interest expense decreased $42,000 or 0.3%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $8,432,000 or 53.0% of total non-interest expense for the nine months ended September 30, 2015, as compared to 53.7% for the nine months ended September 30, 2014. Net occupancy, furniture and equipment, and computer expense amounted to $2,309,000 for the nine months ended September 30, 2015, a decrease of $223,000 or 8.8%. The decrease was due to lower software maintenance costs as a result of the outsourcing of the Bank’s core processing system. Pennsylvania shares tax expense increased $80,000 or 16.8% as a result of an increase in total assets and total equity. Data processing expenses increased $154,000 or 51.7% to $452,000 for the nine months ended September 30, 2015 as a result of the planned outsourcing of the Bank’s core processing system in 2014 for data security, disaster recovery and system efficiency goals. Foreclosed assets held for resale expense decreased $68,000 or 54.0% due to the sales of several foreclosed properties in 2014. Advertising expense decreased $120,000 or 26.8% as compared to the third quarter of 2014 as a result of the rollout of the Bank’s new suite of rewards checking products called Kasasa in February 2014.

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INCOME TAXES

Effective tax planning has helped produce favorable net income. Income tax expense amounted to $1,805,000 for the nine months ended September 30, 2015, as compared to $1,823,000 for the nine months ended September 30, 2014, a decrease of $18,000. The effective total income tax rate was 19.7% for the nine months ended September 30, 2015 and 2014.

FINANCIAL CONDITION

SUMMARY

Total assets increased to $971,542,000 as of September 30, 2015, an increase of $59,189,000, or 6.5% from year-end 2014. Total assets as of December 31, 2014 amounted to $912,353,000.

Total loans increased $32,448,000 or 6.7%. Loan demand grew in the nine months ended September 30, 2015 as the Bank has seen an increase in loan originations, primarily in the commercial and industrial portfolio.

Total deposits increased $59,975,000 or 9.1% to $721,537,000 as of September 30, 2015.

The Corporation continues to maintain and manage its asset growth. The Corporation’s strong equity capital position provides an opportunity to further leverage its asset growth. Total borrowings decreased in the first nine months of 2015 by $2,721,000 to $135,741,000 from $138,462,000 as of December 31, 2014. Borrowings decreased due to increased deposit balances.

Total stockholders’ equity increased to $109,062,000 at September 30, 2015, an increase of $2,791,000 or 2.6% from December 31, 2014.

SEGMENT REPORTING

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

EARNING ASSETS

Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Corporation maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled 92.3% at September 30, 2015, compared to 91.8% at September 30, 2014. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and investment securities.

Our primary earning asset, total loans, increased to $519,909,000 as of September 30, 2015, up $32,448,000, or 6.7% since year-end 2014. The loan portfolio continues to be well diversified. Non-performing assets increased since year-end 2014, but overall asset quality has remained consistent. Total non-performing assets were $5,924,000 as of September 30, 2015, an increase of $1,885,000, or 46.7% from $4,039,000 reported in non-performing assets as of December 31, 2014. Total allowance for loan losses to total non-performing assets was 122.1% as of September 30, 2015 and 158.2% at December 31, 2014.

In addition to loans, another primary earning asset is our overall investment portfolio, which increased in size from December 31, 2014, to September 30, 2015. Available-for-sale securities amounted to $370,293,000 as of September 30, 2015, an increase of $22,627,000 from year-end 2014.

Interest-bearing deposits in other banks increased as of September 30, 2015, to $488,000 from $424,000 at year-end 2014. Time deposits with other banks were $1,482,000 at September 30, 2015 and December 31, 2014.

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LOANS

Total loans increased to $519,909,000 as of September 30, 2015 as compared to $487,461,000 as of December 31, 2014. The table on page 17 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated. Total loans increased by $32,448,000 or 6.7%.

Increasing demand for borrowing by businesses accounted for the 6.7% increase in the loan portfolio from December 31, 2014 to September 30, 2015. The Commercial and Industrial portfolio increased $23,770,000 to $88,426,000 as of September 30, 2015 as compared to $64,656,000 as of December 31, 2014. The increase in the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) was attributed to new loan originations totaling $32,491,000, which were offset by loan payoffs of $5,369,000, as well as regular principal payments. The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $5,901,000 to $259,823,000 as of September 30, 2015, as compared to $253,922,000 at December 31, 2014. The increase was mainly attributed to new loan originations totaling $30,294,000, which were offset by loan payoffs of $11,717,000, combined with regular principal payments and typical amortizations in the loan portfolio. The Residential Real Estate portfolio increased $2,221,000 to $165,774,000 as of September 30, 2015, as compared to $163,553,000 at December 31, 2014. The increase was the result of new loan originations totaling $22,048,000 offset against payoffs of $11,837,000 and net loans sold of $4,146,000 combined with regular principal payments. Net loans sold in the Residential Real Estate portfolio for the nine months ended September 30, 2015 consisted of total loans sold during the nine months ended September 30, 2015 of $15,022,000 offset with loans opened and sold in the same quarter during any quarter of 2015 which amounted to $10,876,000. 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 its efforts to lend to creditworthy borrowers despite the continued slow economic conditions.

Management believes that the loan portfolio is well diversified. The total commercial portfolio was $348,249,000. Of the total commercial portfolio, $259,823,000 or 50.0% of total loans is secured by commercial real estate.

The largest relationship is comprised of various real estate entities with a mutual owner who began real estate investment and development activities in 1989. The relationship had outstanding loan balances and unused commitments of $11,125,000 at September 30, 2015. The individual owns a diverse mix of real estate entities which specialize in construction/development projects, leasing of commercial office space, and rental of multi-tenant residential units. This relationship is comprised of $10,025,000 in long term debt and two lines of credit totaling $1,100,000. The relationship is well secured by first lien mortgages on income producing commercial and residential real estate, plus assignment of governmental leases and collateral pledge of cash accounts and marketable securities.

The second largest relationship consists of a hotel management company that has been in operation since 1987 and successfully owns and operates seven hotels. At September 30, 2015, the relationship consisted of outstanding loan balances and unused commitments totaling $8,668,000. The debt is comprised of $6,858,000 in long term debt and $1,810,000 in available credit on two real estate term loans. The relationship is secured by commercial real estate and business assets, as well as the assignment of leases and a life insurance policy.

The third largest relationship consists of a real estate development/holding company that was established in 2006 to construct a multi-tenant medical complex, as well as the medical-related entities that operate out of the complex. The relationship had outstanding loan balances and unused commitments of $8,634,000 at September 30, 2015. The debt is comprised of $7,917,000 in term debt, $450,000 in lines of credit, and $267,000 in available credit on a real estate term loan. The relationship is secured by commercial real estate and business assets, as well as the assignment of leases and a life insurance policy.

The fourth largest relationship consists of a municipality founded in 1816 consisting of 35 square miles. The township completed a major expansion of its central sewage system in late 2012 due to increasing population growth among residential users and the addition of a large volume of business users, including pharmaceutical companies and recreational waterparks. The expansion was funded by grants, bond issues, and bank debt. At September 30, 2015, the relationship had outstanding balances and unused commitments of $8,521,000, which consisted entirely of term debt. The loans are secured by project receivables and the full faith, credit, and taxing power of the township.

The fifth largest relationship is comprised of multiple first and second lien mortgages relating to the purchase and improvements of several existing hotels. The principal and related owners/guarantors have extensive experience in the hotel industry, owning and operating hotels in various states for over twenty-five years. At September 30, 2015, the relationship had outstanding loan balances and unused commitments of $8,171,000. The debt is comprised of $8,116,000 in long term debt and two lines of credit totaling $55,000. The loans are secured by commercial real estate and business assets.

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Each of the relationships is located within the Corporation’s market area.

All of the loans are performing as agreed. 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.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $496,645,000 or 95.6% of total loans are graded Pass; $5,202,000 or 1.0% are graded Special Mention; $17,480,000 or 3.4% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 4 — Loans and Allowance for Loan Losses for risk grading tables.

Overall, non-pass grades increased to $22,682,000 at September 30, 2015, as compared to $18,738,000 at December 31, 2014. Commercial and Industrial non-pass grades increased to $159,000 as of September 30, 2015 as compared to $68,000 as of December 31, 2014. Commercial Real Estate non-pass grades increased to $19,696,000 as of September 30, 2015 as compared to $16,480,000 as of December 31, 2014. The Residential Real Estate and Consumer loan non-pass grades increased to $2,827,000 as of September 30, 2015 as compared to $2,190,000 as of December 31, 2014.

The increase in Commercial Real Estate non-pass grades was mainly the result of the downgrade of two loans totaling $3,446,000 (combined with typical payment amortization and other normal fluctuations in the Commercial Real Estate non-pass grade portfolio segment). One of the downgraded loans totaling $2,499,000 is with a corporation that operates a licensed nursing home/long-term care facility. A decline in nursing home residents has led to decreased revenues and increased operating losses. However, despite the circumstances, the borrower continues to perform. One of the downgraded loans in the amount of $947,000 is with a corporation that owns and operates a golf course and banquet facility. Despite low liquidity and a weak debt-service coverage ratio, the borrower continues to perform.

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

Total Loans

(Dollars in thousands)	September 30,		December 31,
	2015		2014
Commercial and Industrial	$	88,426	$	64,656
Commercial Real Estate		259,823		253,922
Residential Real Estate		165,774		163,553
Consumer		5,886		5,330
Total loans	$	519,909	$	487,461

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of September 30, 2015, the allowance for loan losses was $7,234,000 as compared to $6,390,000 as of December 31, 2014. 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.

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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.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the nine month periods ended September 30, 2015 and 2014. For the first nine months of 2015, net charge-offs as a percentage of average loans was 0.07% as compared to 0.10% for the nine month period ended September 30, 2014. Net charge-offs amounted to $334,000 for the first nine months of 2015 as compared to $462,000 for the nine months of 2014. The decrease in net charge-offs in the first nine months of 2015 as compared to the first nine months of 2014 related primarily to decreased charge-offs in Commercial and Industrial loans. During the first nine months of 2015, $2,000 in Commercial and Industrial loans were charged off as compared to $107,000 for the first nine months of 2014.

For the first nine months of 2015, the provision for loan losses was $1,178,000 as compared to $433,000 for the first nine months of 2014. The provision, net of charge-offs and recoveries, increased the quarter end Allowance for Loan Losses to $7,234,000 of which 10.6% was attributed to the Commercial and Industrial component; 60.2% attributed to the Commercial Real Estate component; 26.7% attributed to the Residential Real Estate component (primarily residential mortgages); 1.7% attributed to the Consumer component; and 0.8% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page 12). The Corporation determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of September 30, 2015.

Analysis of Allowance for Loan Losses

(Dollars in thousands)	September 30,			September 30,
	2015			2014
Balance at beginning of the nine month period	$	6,390		$	6,519
Charge-offs:
Commercial and Industrial		2			107
Commercial Real Estate		232			237
Residential Real Estate		147			180
Consumer		23			36
		404			560
Recoveries:
Commercial and Industrial		7			24
Commercial Real Estate		59			59
Residential Real Estate		―			12
Consumer		4			3
		70			98
Net charge-offs		334			462
Additions charged to operations		1,178			433
Balance at end of the nine month period	$	7,234		$	6,490
Ratio of net charge-offs during the period to average loans outstanding during the period		0.07	%		0.10	%
Allowance for loan losses to average loans outstanding during the period		1.43	%		1.40	%

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.

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

With the Bank’s manageable level of net charge-offs and the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.43% at September 30, 2015 and 1.40% at September 30, 2014.

NON-PERFORMING ASSETS

The table on page 42 details the Corporation’s non-performing assets and impaired loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan currently is performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income. A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession that the Corporation would not otherwise consider. Modifications to loans classified as TDRs generally include reductions in contractual interest rates, principal deferments and extensions of maturity dates at a stated interest rate lower than the current market for a new loan with similar risk characteristics. While unusual, there may be instances of loan principal forgiveness. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

Total non-performing assets amounted to $5,924,000 as of September 30, 2015 as compared to $4,039,000 as of December 31, 2014. The economy, in particular, high unemployment/labor underutilization rate, weak job markets, unsettled fuel prices and energy costs, and the continued slowness in the housing industry had a direct effect on the Corporation’s non-performing assets. The Corporation is closely monitoring its Commercial Real Estate portfolio because of the current economic environment. In particular, vacancy rates are rising and rents and property values in some markets have fallen. Non-accrual loans totaled $5,504,000 as of September 30, 2015 as compared to $3,974,000 as of December 31, 2014. The increase in non-accrual loans, which was also the primary driver of the overall increase in non-performing assets, at September 30, 2015 as compared to December 31, 2014 is largely due to the addition of one loan in the amount of $2,323,000 to non-accrual status during the third quarter of 2015, combined with typical payment amortization and other normal fluctuations in the non-accrual portfolio segment. Foreclosed assets held for resale amounted to $256,000 at September 30, 2015 as compared to $55,000 at December 31, 2014. Loans past-due 90 days or more and still accruing interest amounted to $164,000 as of September 30, 2015 as compared to $10,000 as of December 31, 2014. At September 30, 2015, loans past-due 90 days or more and still accruing interest consisted of two Commercial and Industrial loans and three Residential Real Estate loans, which are all deemed to be well secured by collateral and in the process of collection. Non-performing assets to total loans was 1.1% at September 30, 2015 as compared to 0.8% at December 31, 2014. Non-performing assets to total assets was 0.6% at September 30, 2015 as compared to 0.4% at December 31, 2014. The allowance for loan losses to total non-performing assets was 122.1% as of September 30, 2015 as compared to 158.2% as of December 31, 2014. Additional detail can be found on page 42 in the Non-Performing Assets and Impaired Loans table and page 23 in the Loan 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.

Potential problem loans are defined as performing substandard loans which are not deemed to be impaired. These loans have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future. Potential problem loans amounted to $6,571,000 at September 30, 2015, compared to $2,477,000 at December 31, 2014.

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Impaired loans were $12,954,000 at September 30, 2015 and $7,044,000 at December 31, 2014. The largest impaired loan relationship at September 30, 2015 consisted of one performing loan to a student-housing holding company in the amount of $4,226,000, which was secured by commercial real estate. The loan was downgraded to substandard status and modified as a TDR during the first quarter of 2015 due to economic hardships experienced by the borrower. The decline in occupancy rates was attributed to the overall economic decline in students’ disposable income and an increase in enrollment in online courses. The discounted cash flow evaluation at September 30, 2015 resulted in a specific allocation of $0. At September 30, 2015, the second largest impaired loan relationship consisted of a non-performing originated participation loan to a student-housing holding company which was secured by commercial real estate. The Corporation’s participation share of the loan was $2,323,000. The loan was downgraded to substandard and placed on non-accrual status during the third quarter of 2015 due to the borrower’s inability to reach a break-even rental income, related to a significant decline in occupancy rates. The collateral evaluation of the participation at September 30, 2015 carried a value of $2,917,000, after considering estimated appraisal adjustments and costs to sell of 17% and considering the total participation outstanding note balance, resulting in the Corporation’s specific allocation of $1,243,000. The third largest impaired loan relationship at September 30, 2015 consisted of a non-performing purchased participation loan to a retailer of motorcycles, ATVs, and other motorized recreational vehicles, which was secured by commercial real estate. The Corporation’s participation share of the loan was $1,277,000. The collateral evaluation of the participation at September 30, 2015 carried a value of $5,091,000, after considering estimated appraisal adjustments and costs to sell of 40% and considering the total participation outstanding note balance, resulting in the Corporation’s specific allocation of $0. The estimated appraisal adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the $12,954,000 in impaired loans at September 30, 2015, none were located outside the Corporation’s primary market area.

Loans categorized as TDRs carried an unpaid balance of $8,851,000 as of September 30, 2015 as compared to $4,708,000 as of December 31, 2014. The increase was attributable to deterioration in the respective borrowers’ financial position, and in some cases a declining collateral value, along with the Bank’s proactive monitoring of the loan portfolio resulting in the identification of additional loans classified as TDRs. Of the twenty-seven restructured loans at September 30, 2015, four loans are classified in the Commercial and Industrial portfolio, twenty-two loans are classified in the Commercial Real Estate portfolio, and one loan is classified in the Consumer portfolio. At September 30, 2015, five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $2,133,000 were not in compliance with the terms of their restructure, compared to September 30, 2014 when four Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,573,000 were not in compliance with the terms of their restructure. The troubled debt restructurings at September 30, 2015 consisted of ten term modifications beyond the original stated term, four interest rate modifications, and thirteen payment modifications. TDRs are separately identified for impairment disclosures, and if necessary, a specific allocation is established. As of September 30, 2015 and December 31, 2014, specific allocations of $0 and $27,000 were attributable to the TDRs.

During the three months ended September 30, 2015, two Commercial Real Estate loans totaling $178,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2014 when there were no payment defaults on loans that were modified as TDRs within the preceding twelve months. During the nine months ended September 30, 2015, three Commercial Real Estate loans totaling $4,404,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2014 when four Commercial Real Estate loans totaling $193,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults. The significant increase in defaulted TDRs at September 30, 2015 as compared to September 30, 2014 is largely due to one loan in the amount of $4,226,000 to a student housing holding company, which was modified as a TDR in the first quarter of 2015 and experienced its subsequent default during the second quarter of 2015.

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

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

Improving loan quality is a priority. The Corporation actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2015. Excluding the assets disclosed in the Non-Performing Assets and Impaired Loans tables below and the Troubled Debt Restructurings section in Note 4 — Loans and Allowance for Loan Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

Should the economic climate no longer continue to be stable or deteriorate further, borrowers may experience difficulty, and the level of impaired loans and non-performing assets, charge-offs and delinquencies could rise and possibly require additional increases in the Corporation’s allowance for loan losses.

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

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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, 2015 and December 31, 2014, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

(Dollars in thousands)	September 30,			December 31,
	2015			2014
Non-performing assets
Non-accrual loans	$	5,504		$	3,974
Foreclosed assets held for resale		256			55
Loans past-due 90 days or more and still accruing interest		164			10
Total non-performing assets	$	5,924		$	4,039
Impaired loans
Non-accrual loans	$	5,504		$	3,974
Accruing TDRs		7,450			3,070
Total impaired loans		12,954			7,044
Allocated allowance for loan losses		(1,279	)		(119	)
Net investment in impaired loans	$	11,675		$	6,925
Impaired loans with a valuation allowance	$	2,764		$	1,086
Impaired loans without a valuation allowance		10,190			5,958
Total impaired loans	$	12,954		$	7,044
Allocated valuation allowance as a percent of impaired loans		9.9	%		1.7	%
Impaired loans to total loans		2.5	%		1.4	%
Non-performing assets to total loans		1.1	%		0.8	%
Non-performing assets to total assets		0.6	%		0.4	%
Allowance for loan losses to impaired loans		55.8	%		90.7	%
Allowance for loan losses to total non-performing assets		122.1	%		158.2	%

Real estate mortgages comprise 81.9% of the loan portfolio as of September 30, 2015, as compared to 85.6% as of December 31, 2014. Real estate mortgages consist of both residential and commercial real estate loans. The real estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential real estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated primarily in the Corporation’s market area and are subject to risks associated with the local economy. The commercial real estate loans typically reprice approximately every three to five years and are also concentrated in the Corporation’s market area. The Corporation’s loss exposure on its impaired loans continues to be mitigated by collateral positions on these loans. The allocated allowance for loan losses associated with impaired loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.

DEPOSITS AND OTHER BORROWED FUNDS

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

Total deposits increased $59,975,000 to $721,537,000 as of September 30, 2015 as non-interest bearing deposits increased by $11,010,000 and interest bearing deposits increased by $48,965,000 from year-end 2014. Total deposits increased due to the deposit of funds by a municipal depositor through normal, seasonal generation of tax revenues. The shift to core deposits and away from time deposits continued in the nine months ended September 30, 2015. Demand deposits and savings accounts increased, while certificates of deposit fell. Total short-term and long-term borrowings decreased to $135,741,000 as of September 30, 2015, from $138,462,000 at year-end 2014, a decrease of $2,721,000, or 2.0%. Total borrowings decreased due to increased deposit balances.

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CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out. During the first nine months of the year, net income less dividends paid increased capital by $2,842,000. Accumulated other comprehensive income derived from net unrealized gains on investment securities available-for-sale also impacts capital. At December 31, 2014, accumulated other comprehensive income was $4,330,000. Accumulated other comprehensive income stood at $3,289,000 at September 30, 2015, a decrease of $1,041,000. Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s investment portfolio, as well as its decision to sell securities at a gain or loss. In order to protect the Bank from market risk in the event of further interest rate increases, the Bank chose to sell a portion of its securities during the first nine months of 2015 at an overall net gain of $2,131,000. These fluctuations from net unrealized gains on investment securities available-for-sale do not affect regulatory capital, as the Bank elected to opt-out of this item with the filing of the March 31, 2015 Call Report.

The Corporation held 233,112 and 235,149 shares of common stock as treasury stock at September 30, 2015 and December 31, 2014, respectively. This had an effect of reducing our total stockholders’ equity by $5,756,000 as of September 30, 2015 and $5,823,000 as of December 31, 2014.

Total stockholders’ equity was $109,062,000 as of September 30, 2015, and $106,271,000 as of December 31, 2014. Leverage ratio and risk based capital ratios remain very strong. As of September 30, 2015, the Bank’s Tier 1 leverage ratio was 8.61% compared to 8.63% as of December 31, 2014. Tier I risk based capital and total risk based capital ratios as of September 30, 2015, were 12.48% and 13.62%, respectively. The same ratios as of December 31, 2014 were 13.92% and 15.07%, respectively. In addition, the Bank’s Common Equity Tier 1 capital to risk-weighted assets ratio was 12.48% at September 30, 2015.

LIQUIDITY

The Corporation’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity provides resources for credit needs of borrowers, for depositor withdrawals and for funding corporate operations.

Sources of liquidity are as follows:

· Growth in the core deposit base;

· Proceeds from sales or maturities of investment securities;

· Payments received on loans and mortgage-backed securities;

· Overnight correspondent bank borrowings on various credit lines; and,

· Borrowing capacity available from the FHLB.

Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the Corporation is maintained by an active asset/liability management committee. The Corporation believes that its core deposits are stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the Corporation’s minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.

MARKET RISK

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

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

Asset/Liability Management

The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Corporation actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a given time period, referred to as a rate sensitivity gap. If more assets than liabilities mature or reprice within the time frame, the Corporation is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the Corporation is liability sensitive. This position would contribute positively to net interest income in a falling rate environment. The Corporation’s cumulative gap at one year indicates the Corporation is liability sensitive at September 30, 2015.

Earnings at Risk

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

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

Earnings Simulation Modeling

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

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

The table on the following page presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would decrease 5.8%, 12.0% and 18.8% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would decrease 3.0% and 9.9% in the 100 and 200 basis point decreasing rate scenarios presented. All of these forecasts are within the Corporation’s one year policy guidelines.

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The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current unprecedented low interest rate environment with federal funds trading in the 0 – 25 basis point range. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Corporation’s interest-bearing liabilities are at rates below 1% and therefore cannot decline 100 or more basis points. However, the Corporation’s interest-sensitive assets are able to decline by these amounts. For the nine months ended September 30, 2015, the cost of interest-bearing liabilities averaged 0.67%, and the yield on average interest-earning assets, on a fully taxable equivalent basis, averaged 3.84%.

Net Present Value Estimation

The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At September 30, 2015, the 100 and 200 basis point immediate decreases in rates are estimated to affect tax-adjusted net present value with decreases of 2.0% and 9.0%, respectively. Additionally, tax-adjusted net present value is projected to decrease 4.0%, 8.0% and 13.9% in the 100, 200 and 300 basis point immediate increase scenarios, respectively. All scenarios presented are within the Corporation’s policy limits.

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

Effect of Change in Interest Rates

	Projected Change
Effect on Net Interest Income
1-Year Net Income Simulation Projection
+300 bp Shock vs. Stable Rate	(18.8	)%
+200 bp Shock vs. Stable Rate	(12.0	)%
+100 bp Shock vs. Stable Rate	(5.8	)%
Flat rate	―
-100 bp Shock vs. Stable Rate	(3.0	)%
-200 bp Shock vs. Stable Rate	(9.9	)%
Effect on Net Present Value of Balance Sheet
Static Net Present Value Change
+300 bp Shock vs. Stable Rate	(13.9	)%
+200 bp Shock vs. Stable Rate	(8.0	)%
+100 bp Shock vs. Stable Rate	(4.0	)%
Flat rate	―
-100 bp Shock vs. Stable Rate	(2.0	)%
-200 bp Shock vs. Stable Rate	(9.0	)%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures. First Keystone Corporation maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) designed to ensure that information required to be disclosed in the reports that the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those disclosure controls and procedures performed as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer of the Corporation concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2015.

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, 2015, that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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, 2014.

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, 2015		―		―		―		120,000
August 1 — August 31, 2015		―		―		―		120,000
Sept. 1 — Sept. 30, 2015		―		―		―		120,000
Total		―		―		―		120,000

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

47

Item 6. Exhibits and Reports on Form 8-K

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

Exhibit Number	Description of Exhibit
3i	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Registrant’s Report on Form 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 February 14, 2013).
10.1(a)	Supplemental Employee Retirement Plan – J. Gerald Bazewicz (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.1(b)	Supplemental Employee Retirement Plan – David R. Saracino (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.1(c)	Supplemental Employee Retirement Plan – Matthew P. Prosseda (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.1(d)	Supplemental Employee Retirement Plan – Elaine Woodland (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.2	Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
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 August 27, 2013).
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.**
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.**
32.1	Section 1350 Certification of Chief Executive Officer.**
32.2	Section 1350 Certification of Chief Financial Officer.**
101.INS	XBRL Instance Document.**
101.SCH	XBRL Taxonomy Extension Schema Document.**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.**
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**

* Denotes a compensatory plan.

** Filed herewith.

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

48

FIRST KEYSTONE CORPORATION

SIGNATURES

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

	FIRST KEYSTONE CORPORATION
	Registrant
November 6, 2015	/s/ Matthew P. Prosseda
	Matthew P. Prosseda
	President and Chief Executive Officer
	(Principal Executive Officer)
November 6, 2015	/s/ Diane C.A. Rosler
	Diane C.A. Rosler
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

49

INDEX TO EXHIBITS

Exhibit	Description
3i	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Registrant’s Report on Form 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 February 14, 2013).
10.1(a)	Supplemental Employee Retirement Plan – J. Gerald Bazewicz (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.1(b)	Supplemental Employee Retirement Plan – David R. Saracino (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.1(c)	Supplemental Employee Retirement Plan – Matthew P. Prosseda (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.1(d)	Supplemental Employee Retirement Plan – Elaine Woodland (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
10.2	Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*
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 August 27, 2013).
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.**
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.**
32.1	Section 1350 Certification of Chief Executive Officer.**
32.2	Section 1350 Certification of Chief Financial Officer.**
101.INS	XBRL Instance Document.**
101.SCH	XBRL Taxonomy Extension Schema Document.**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.**
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**

* Denotes a compensatory plan.

** Filed herewith.

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

50

EX-31.1

EXHIBIT 31.1

FIRST KEYSTONE CORPORATION

CERTIFICATION

I, Matthew P. Prosseda, certify that:

1.    I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2015, 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 6, 2015

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, 2015, 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 6, 2015

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, 2015, 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 6, 2015

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, 2015, 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 6, 2015

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

BORROWINGS (Details 1) $ in Thousands	Sep. 30, 2015 USD ($)
Repurchase agreements
Remaining Contractual Maturity of the Agreements	$ 22,882
US Treasury Securities [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	22,882
Maturity Overnight [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	22,882
Maturity Overnight [Member] | US Treasury Securities [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	22,882
Maturity Less than 30 Days [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	0
Maturity Less than 30 Days [Member] | US Treasury Securities [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	0
Maturity 30 to 90 Days [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	0
Maturity 30 to 90 Days [Member] | US Treasury Securities [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	0
Maturity Greater than 90 Days [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	0
Maturity Greater than 90 Days [Member] | US Treasury Securities [Member]
Repurchase agreements
Remaining Contractual Maturity of the Agreements	$ 0

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 4) - Number	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Financing Receivable, Modifications, Number of Contracts	2	4	7	13
Rate Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	1
Term Modification [Member]
Financing Receivable, Modifications, Number of Contracts	1	1	4	4
Payment Modification [Member]
Financing Receivable, Modifications, Number of Contracts	1	3	3	8
Commercial and Industrial [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	1	2
Commercial and Industrial [Member] | Rate Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	0
Commercial and Industrial [Member] | Term Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	1	0
Commercial and Industrial [Member] | Payment Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	2
Commercial Real Estate [Member]
Financing Receivable, Modifications, Number of Contracts	2	4	6	10
Commercial Real Estate [Member] | Rate Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	1
Commercial Real Estate [Member] | Term Modification [Member]
Financing Receivable, Modifications, Number of Contracts	1	1	3	4
Commercial Real Estate [Member] | Payment Modification [Member]
Financing Receivable, Modifications, Number of Contracts	1	3	3	5
Consumer [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	1
Consumer [Member] | Rate Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	0
Consumer [Member] | Term Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	0
Consumer [Member] | Payment Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	1

XML

INVESTMENT SECURITIES (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Available-for-Sale Securities
Amortized Cost	$ 365,232	$ 341,020
Gross Unrealized Gains	6,739	8,455
Gross Unrealized Losses	(1,678)	(1,809)
Fair Value	370,293	347,666
Held-to-Maturity Securities
Amortized Cost	30	1,056
Gross Unrealized Gains	1	4
Gross Unrealized Losses	0	0
Investment Securities Held-to-Maturity, Estimated Fair Value	31	1,060
US Treasury securities [Member]
Available-for-Sale Securities
Amortized Cost	1,026	11,356
Gross Unrealized Gains	6	24
Gross Unrealized Losses	0	(2)
Fair Value	1,032	11,378
Obligations of U.S. Government Corporations and Agencies Mortgage-backed [Member]
Available-for-Sale Securities
Amortized Cost	95,941	112,146
Gross Unrealized Gains	626	1,055
Gross Unrealized Losses	(299)	(487)
Fair Value	96,268	112,714
Held-to-Maturity Securities
Amortized Cost	30	56
Gross Unrealized Gains	1	2
Gross Unrealized Losses	0	0
Investment Securities Held-to-Maturity, Estimated Fair Value	31	58
Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities
Amortized Cost	21,876	26,246
Gross Unrealized Gains	256	270
Gross Unrealized Losses	(46)	(6)
Fair Value	22,086	26,510
Held-to-Maturity Securities
Amortized Cost		1,000
Gross Unrealized Gains		2
Gross Unrealized Losses		0
Investment Securities Held-to-Maturity, Estimated Fair Value		1,002
Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities
Amortized Cost	195,845	151,565
Gross Unrealized Gains	5,048	6,127
Gross Unrealized Losses	(340)	(469)
Fair Value	200,553	157,223
Corporate debt securities [Member]
Available-for-Sale Securities
Amortized Cost	49,350	38,499
Gross Unrealized Gains	31	112
Gross Unrealized Losses	(993)	(825)
Fair Value	48,388	37,786
Marketable equity securities [Member]
Available-for-Sale Securities
Amortized Cost	1,194	1,208
Gross Unrealized Gains	772	867
Gross Unrealized Losses	0	(20)
Fair Value	$ 1,966	$ 2,055

XML

FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	$ 370,293	$ 347,666
Mortgaged-backed Obligations of U.S. Government Corporations and Agencies: [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	96,268	112,714
Other Obligations of U.S. Government Corporations and Agencies [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	22,086	26,510
Obligations of state and political subdivisions [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	200,553	157,223
Corporate debt securities [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	48,388	37,786
Marketable equity securities [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	1,966	2,055
US Treasury Securities [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	1,032	11,378
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	1,966	2,055
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	368,327	345,611
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Mortgaged-backed Obligations of U.S. Government Corporations and Agencies: [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Mortgaged-backed Obligations of U.S. Government Corporations and Agencies: [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	96,268	112,714
Fair Value, Measurements, Recurring [Member] | Mortgaged-backed Obligations of U.S. Government Corporations and Agencies: [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	22,086	26,510
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	200,553	157,223
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	48,388	37,786
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Marketable equity securities [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	1,966	2,055
Fair Value, Measurements, Recurring [Member] | Marketable equity securities [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Marketable equity securities [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | US Treasury Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | US Treasury Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	1,032	11,378
Fair Value, Measurements, Recurring [Member] | US Treasury Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	$ 0	$ 0

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details Textual) - USD ($)	3 Months Ended			9 Months Ended		12 Months Ended
	Sep. 30, 2015	Jun. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Restructured loans	$ 8,851,000			$ 8,851,000		$ 4,708,000
Financing Receivable, Modifications, Post-Modification Recorded Investment	992,000		$ 888,000	5,550,000	$ 1,810,000
Allowance for Credit Losses, Change in Method of Calculating Impairment	0			0		27,000
Loans Receivable Held-for-sale, Amount	1,723,000			1,723,000		2,201,000
Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure	256,000			256,000
Impaired Financing Receivable, Interest Income, Accrual Method, Total	106,000		30,000	362,000	109,000
Impaired Financing Receivable Interest Income Non-accrual Method	60,000		9,000	60,000	10,000
Reserve for Off-balance Sheet Activities [Member]
Valuation Allowances and Reserves, Balance	132,000			$ 132,000		0
Residential Mortgage Loans [Member]
Term of Loan Offering				20 years
Maximum Loan to Value Ratio				eighty percent
TDRs [Member]
Financing Receivable, Modifications, Subsequent Default, Recorded Investment				$ 48,000		0
Commercial and Industrial [Member]
Tax free loans	50,248,000			50,248,000		30,334,000
Financing Receivable, Modifications, Post-Modification Recorded Investment	0		0	23,000	327,000
Impaired Financing Receivable, Interest Income, Accrual Method, Total	2,000		0	12,000	13,000
Commercial Real Estate [Member]
Tax free loans	3,034,000			3,034,000		3,235,000
Financing Receivable, Modifications, Post-Modification Recorded Investment	992,000		888,000	5,527,000	1,476,000
Financing Receivable, Modifications, Subsequent Default, Recorded Investment	178,000	$ 4,226,000		$ 4,404,000	193,000
Term of Loan Offering				20 years
Maximum Loan to Value Ratio				eighty percent
Impaired Financing Receivable, Interest Income, Accrual Method, Total	104,000		28,000	$ 350,000	94,000
Commercial Real Estate [Member] | Six [Member]
Financing Receivable, Modifications, Subsequent Default, Recorded Investment				2,133,000	1,573,000
Residential Portfolio Segment [Member]
Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure	215,000			215,000		$ 118,000
Impaired Financing Receivable, Interest Income, Accrual Method, Total	$ 0		$ 2,000	$ 0	$ 2,000
Residential Portfolio Segment [Member] | Line of Credit [Member] | Maximum [Member]
Term of Loan Offering				20 years
Maximum Loan to Value Ratio				eighty percent
Residential Portfolio Segment [Member] | Home Equity Term Loans [Member]
Term of Loan Offering				15 years
Maximum Loan to Value Ratio				eighty percent

XML

EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Net income	$ 2,485	$ 2,383	$ 7,364	$ 7,437
Weighted-average common shares outstanding	5,594	5,544	5,581	5,553
Basic earnings per share	$ 0.44	$ 0.43	$ 1.32	$ 1.34
Weighted-average common shares outstanding	5,594	5,544	5,581	5,553
Common stock equivalents due to effect of stock options	2	5	2	5
Total weighted-average common shares and equivalents	5,596	5,549	5,583	5,538
Diluted earnings per share	$ 0.44	$ 0.43	$ 1.32	$ 1.34

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
OPERATING ACTIVITIES
Net income	$ 7,364	$ 7,437
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,178	433
Depreciation and amortization	1,126	1,213
Net premium amortization on investment securities	2,103	1,207
Deferred income tax expense	549	155
Gains on sales of mortgage loans	(425)	(148)
Proceeds from sales of mortgage loans originated for resale	15,447	6,000
Originations of mortgage loans originated for resale	(13,961)	(8,077)
Gains on sales of investment securities	(2,131)	(1,963)
Impairment charges on equity securities	14	0
Losses on sales of foreclosed real estate held for resale, including write-downs	34	36
(Increase) decrease in accrued interest receivable	(677)	211
Earnings on investment in bank owned life insurance	(498)	(514)
Losses on disposals of premises and equipment	30	0
Increase in other assets	(1,486)	(300)
Increase in accrued interest payable	35	9
Decrease in other liabilities	(1,958)	(3,041)
NET CASH PROVIDED BY OPERATING ACTIVITIES	6,744	2,658
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale	111,799	138,218
Proceeds from maturities and redemptions of investment securities available-for-sale	17,006	31,087
Purchases of investment securities available-for-sale	(151,941)	(150,390)
Proceeds from maturities and redemptions of investment securities held-to-maturity	1,026	12
Net change in restricted investment in bank stocks	(1,487)	(2,355)
Net increase in loans	(34,035)	(37,178)
Purchases of premises and equipment	(232)	(516)
Purchases of investment in real estate venture	(590)	0
Proceeds from sales of foreclosed assets held for resale	21	489
NET CASH USED IN INVESTING ACTIVITIES	(58,433)	(20,633)
FINANCING ACTIVITIES
Net increase (decrease) in deposits	59,975	(33,976)
Net (decrease) increase in short-term borrowings	(7,641)	8,617
Proceeds from long-term borrowings	5,000	30,000
Repayment of long-term borrowings	(80)	(5,065)
Common stock issued	953	826
Proceeds from issuance of treasury stock	37	0
Dividends paid	(4,522)	(4,315)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	53,722	(3,913)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	2,033	(21,888)
CASH AND CASH EQUIVALENTS, BEGINNING	7,967	30,623
CASH AND CASH EQUIVALENTS, ENDING	10,000	8,735
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	3,640	3,304
Income taxes paid	2,047	1,755
Purchased securities settling after quarter end	1,063	0
Loans transferred to foreclosed assets held for resale	$ 256	$ 262

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FAIR VALUE MEASUREMENTS (Details 1) - Fair Value, Measurements, Nonrecurring [Member] - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 3,172	$ 2,932
Other foreclosed assets held for resale	0	55
Fair Value, Inputs, 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
Fair Value, Inputs, 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
Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	3,172	2,932
Other foreclosed assets held for resale	0	55
Commercial Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	2,573	2,073
Other foreclosed assets held for resale	0	55
Commercial Real Estate [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Other foreclosed assets held for resale	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	2,573	2,073
Other foreclosed assets held for resale	0	55
Residential Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	599	856
Residential Real Estate [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Residential Real Estate [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Residential Real Estate [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	599	856
Commercial and Industrial [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	3
Commercial and Industrial [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Commercial and Industrial [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Commercial and Industrial [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 0	$ 3

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	$ (21)	$ (40)
Net deferred loan fees and costs	603	530
Total loans	519,909	487,461
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	496,645	468,233
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,202	11,596
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	17,480	7,142
Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Commercial and Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	0	0
Net deferred loan fees and costs	142	129
Total loans	88,426	64,656
Commercial and Industrial [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	88,125	64,459
Commercial and Industrial [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	159	47
Commercial and Industrial [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	21
Commercial and Industrial [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	0	0
Net deferred loan fees and costs	311	38
Total loans	259,823	253,922
Commercial Real Estate [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	239,816	237,404
Commercial Real Estate [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	3,900	11,008
Commercial Real Estate [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	15,796	5,472
Commercial Real Estate [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Residential Real Estate Including Home Equity [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	(20)	0
Net deferred loan fees and costs	56	271
Total loans	165,774	163,553
Residential Real Estate Including Home Equity [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	162,943	161,122
Residential Real Estate Including Home Equity [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,115	520
Residential Real Estate Including Home Equity [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,680	1,640
Residential Real Estate Including Home Equity [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Consumer Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	(1)	(40)
Net deferred loan fees and costs	94	92
Total loans	5,886	5,330
Consumer Loans [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,761	5,248
Consumer Loans [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	28	21
Consumer Loans [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	4	9
Consumer Loans [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 0	$ 0

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INVESTMENT SECURITIES (Details Textual)		3 Months Ended		9 Months Ended
		Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Available-for-sale Securities Pledged as Collateral		$ 312,484,000		$ 312,484,000		$ 222,847,000
Held-to-maturity Securities Pledged as Collateral		30,000		30,000		1,056,000
Security Owned and Pledged as Collateral, Associated Liabilities, Fair Value		236,806,000		236,806,000		$ 155,895,000
Proceeds from Sale of Available-for-sale Securities, Total		32,059,000	$ 18,016,000	111,799,000	$ 138,218,000
Available-for-sale Securities, Gross Realized Gains		1,036,000	235,000	2,186,000	2,557,000
Available-for-sale Securities, Gross Realized Losses		$ 0	72,000	$ 55,000	594,000
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions, Greater than or Equal to One Year		62		62
State And Political Subdivisions On Tax Equivalent Basis Ratio Percentage	[1]	34.00%		34.00%
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions, Less than One Year		19		19
Other than Temporary Impairment Losses, Investments, Available-for-sale Securities		$ 0	$ 0	$ 14,000	$ 0

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

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FAIR VALUE MEASUREMENTS (Details 2) - USD ($) $ in Thousands		9 Months Ended	12 Months Ended
		Sep. 30, 2015	Dec. 31, 2014
Impaired loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Valuation Technique	[1],[2]	Appraisal of collateral	Appraisal of collateral
Unobservable Input	[3]	Appraisal adjustments	Appraisal adjustments
Impaired loans [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate		$ 3,172	$ 2,932
Impaired loans [Member] | Maximum [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(63.00%)	(63.00%)
Impaired loans [Member] | Minimum [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		0.00%	0.00%
Impaired loans [Member] | Weighted Average [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(33.00%)	(37.00%)
Foreclosed assets held for resale [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Valuation Technique	[1],[2]	Appraisal of collateral	Appraisal of collateral
Unobservable Input	[3]	Appraisal adjustments	Appraisal adjustments
Foreclosed assets held for resale [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate		$ 0	$ 55
Foreclosed assets held for resale [Member] | Maximum [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		0.00%	(46.00%)
Foreclosed assets held for resale [Member] | Minimum [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		0.00%	(33.00%)
Foreclosed assets held for resale [Member] | Weighted Average [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		0.00%	(37.00%)

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

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

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

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 1) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Financing Receivable, Allowance for Credit Losses, Beginning Balance	$ 6,600	$ 6,477	$ 6,390	$ 6,519	$ 6,519
Charge-offs	(142)	(127)	(404)	(560)
Recoveries	23	40	70	98
Provision	753	100	1,178	433
Financing Receivable, Allowance for Credit Losses, Ending Balance	7,234	6,490	7,234	6,490	6,390
Ending balance: individually evaluated for impairment	1,279	45	1,279	45	119
Ending balance: collectively evaluated for impairment	5,955	6,445	5,955	6,445	6,271
Ending Balance	519,909	485,261	519,909	485,261	487,461
Ending balance: individually evaluated for impairment	12,954	7,092	12,954	7,092	7,044
Ending balance: collectively evaluated for impairment	506,955	478,169	506,955	478,169	480,417
Commercial and Industrial [Member]
Financing Receivable, Allowance for Credit Losses, Beginning Balance	706	743	542	776	$ 776
Charge-offs	0	(100)	(2)	(107)
Recoveries	4	3	7	24
Provision	56	(123)	219	(170)
Financing Receivable, Allowance for Credit Losses, Ending Balance	766	523	766	523	$ 542
Ending balance: individually evaluated for impairment	0	0	0	0	0
Ending balance: collectively evaluated for impairment	766	523	766	523	542
Ending Balance	88,426	69,360	88,426	69,360	64,656
Ending balance: individually evaluated for impairment	400	340	400	340	399
Ending balance: collectively evaluated for impairment	88,026	69,020	88,026	69,020	64,257
Commercial Real Estate [Member]
Financing Receivable, Allowance for Credit Losses, Beginning Balance	3,139	3,450	3,176	3,320	3,320
Charge-offs	(95)	0	(232)	(237)
Recoveries	17	34	59	59
Provision	1,293	(108)	1,351	234
Financing Receivable, Allowance for Credit Losses, Ending Balance	4,354	3,376	4,354	3,376	3,176
Ending balance: individually evaluated for impairment	1,243	28	1,243	28	38
Ending balance: collectively evaluated for impairment	3,111	3,348	3,111	3,348	3,138
Ending Balance	259,823	249,373	259,823	249,373	253,922
Ending balance: individually evaluated for impairment	11,620	5,573	11,620	5,573	5,350
Ending balance: collectively evaluated for impairment	248,203	243,800	248,203	243,800	248,572
Residential Real Estate [Member]
Financing Receivable, Allowance for Credit Losses, Beginning Balance	1,867	1,619	1,928	1,565	1,565
Charge-offs	(39)	(6)	(147)	(180)
Recoveries	0	1	0	12
Provision	105	262	152	479
Financing Receivable, Allowance for Credit Losses, Ending Balance	1,933	1,876	1,933	1,876	1,928
Ending balance: individually evaluated for impairment	36	17	36	17	81
Ending balance: collectively evaluated for impairment	1,897	1,859	1,897	1,859	1,847
Ending Balance	165,774	161,381	165,774	161,381	163,553
Ending balance: individually evaluated for impairment	934	1,173	934	1,173	1,291
Ending balance: collectively evaluated for impairment	164,840	160,208	164,840	160,208	162,262
Consumer [Member]
Financing Receivable, Allowance for Credit Losses, Beginning Balance	89	51	107	53	53
Charge-offs	(8)	(21)	(23)	(36)
Recoveries	2	2	4	3
Provision	37	89	32	101
Financing Receivable, Allowance for Credit Losses, Ending Balance	120	121	120	121	107
Ending balance: individually evaluated for impairment	0	0	0	0	0
Ending balance: collectively evaluated for impairment	120	121	120	121	107
Ending Balance	5,886	5,147	5,886	5,147	5,330
Ending balance: individually evaluated for impairment	0	6	0	6	4
Ending balance: collectively evaluated for impairment	5,886	5,141	5,886	5,141	5,326
Unallocated Financing Receivables [Member]
Financing Receivable, Allowance for Credit Losses, Beginning Balance	799	614	637	805	805
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	(738)	(20)	(576)	(211)
Financing Receivable, Allowance for Credit Losses, Ending Balance	61	594	61	594	637
Ending balance: individually evaluated for impairment	0	0	0	0	0
Ending balance: collectively evaluated for impairment	61	594	61	594	637
Ending Balance	0	0	0	0	0
Ending balance: individually evaluated for impairment	0	0	0	0	0
Ending balance: collectively evaluated for impairment	$ 0	$ 0	$ 0	$ 0	$ 0

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 2) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Financing Receivable, Modifications, Recorded Investment	$ 8,851	$ 4,708
Non-accrual TDRs [Member]
Financing Receivable, Modifications, Recorded Investment	1,401	1,638
Accruing TDRs [Member]
Financing Receivable, Modifications, Recorded Investment	$ 7,450	$ 3,070

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [Parenthetical] - $ / shares	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Cash dividends, per share	$ 0.81	$ 0.78

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 3) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) Number	Sep. 30, 2014 USD ($) Number	Sep. 30, 2015 USD ($) Number	Sep. 30, 2014 USD ($) Number
Financing Receivable, Modifications, Number of Contracts | Number	2	4	7	13
Financing Receivable, Modifications, Pre-Modification Outstanding Recorded Investment	$ 815	$ 801	$ 5,418	$ 1,723
Financing Receivable, Modifications, Post-Modification Outstanding Recorded Investment	992	888	5,550	1,810
Receivables, Change in Method of Calculating Impairment, Recorded Investment	$ 1,001	$ 887	$ 5,548	$ 1,412
Commercial and Industrial [Member]
Financing Receivable, Modifications, Number of Contracts | Number	0	0	1	2
Financing Receivable, Modifications, Pre-Modification Outstanding Recorded Investment	$ 0	$ 0	$ 23	$ 327
Financing Receivable, Modifications, Post-Modification Outstanding Recorded Investment	0	0	23	327
Receivables, Change in Method of Calculating Impairment, Recorded Investment	$ 0	$ 0	$ 21	$ 326
Commercial Real Estate [Member]
Financing Receivable, Modifications, Number of Contracts | Number	2	4	6	10
Financing Receivable, Modifications, Pre-Modification Outstanding Recorded Investment	$ 815	$ 801	$ 5,395	$ 1,389
Financing Receivable, Modifications, Post-Modification Outstanding Recorded Investment	992	888	5,527	1,476
Receivables, Change in Method of Calculating Impairment, Recorded Investment	$ 1,001	$ 887	$ 5,527	$ 1,080
Consumer [Member]
Financing Receivable, Modifications, Number of Contracts | Number	0	0	0	1
Financing Receivable, Modifications, Pre-Modification Outstanding Recorded Investment	$ 0	$ 0	$ 0	$ 7
Financing Receivable, Modifications, Post-Modification Outstanding Recorded Investment	0	0	0	7
Receivables, Change in Method of Calculating Impairment, Recorded Investment	$ 0	$ 0	$ 0	$ 6

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BORROWINGS (Details Textual) - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Short-term Debt [Line Items]
Fair value of securities pledged	$ 28,837,000	$ 26,094,000

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
ASSETS
Cash and due from banks	$ 9,512	$ 7,543
Interest-bearing deposits in other banks	488	424
Total cash and cash equivalents	10,000	7,967
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	370,293	347,666
Investment securities held-to-maturity (fair value 2015- $31 2014 - $1,060)	30	1,056
Restricted investment in bank stocks	6,795	5,308
Loans	519,909	487,461
Allowance for loan losses	(7,234)	(6,390)
Net loans	512,675	481,071
Premises and equipment, net	20,130	20,871
Accrued interest receivable	3,990	3,313
Cash surrender value of bank owned life insurance	21,734	21,236
Investments in low-income housing partnerships	1,595	1,130
Goodwill	19,133	19,133
Core deposit intangible, net	0	122
Foreclosed assets held for resale	256	55
Other assets	3,429	1,943
TOTAL ASSETS	971,542	912,353
Deposits:
Non-interest bearing	107,540	96,530
Interest bearing	613,997	565,032
Total deposits	721,537	661,562
Short-term borrowings	65,482	73,123
Long-term borrowings	70,259	65,339
Accrued interest payable	434	399
Deferred income taxes	215	211
Other liabilities	4,553	5,448
TOTAL LIABILITIES	862,480	806,082
STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares in 2015 and 2014; issued 0 in 2015 and 2014	0	0
Common stock, par value $2.00 per share; authorized 20,000,000 shares in 2015 and 2014; issued 5,840,050 in 2015 and 5,802,521 in 2014; outstanding 5,606,938 in 2015 and 5,567,372 in 2014	11,680	11,605
Surplus	33,522	32,674
Retained earnings	66,327	63,485
Accumulated other comprehensive income	3,289	4,330
Treasury stock, at cost, 233,112 shares in 2015 and 235,149 in 2014	(5,756)	(5,823)
TOTAL STOCKHOLDERS’ EQUITY	109,062	106,271
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 971,542	$ 912,353

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FAIR VALUE MEASUREMENTS (Details 3) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
FINANCIAL ASSETS: (Carrying Amount)
Cash and due from banks	$ 9,512	$ 7,543
Interest-bearing deposits in other banks	488	424
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	370,293	347,666
Investment securities held-to-maturity	30	1,056
Restricted investment in bank stocks	6,795	5,308
Net loans	512,675	481,071
Mortgage servicing rights	494	481
Accrued interest receivable	3,990	3,313
FINANCIAL LIABILITIES: (Carrying Amount)
Deposits	721,537	661,562
Short-term borrowings	65,482	73,123
Long-term borrowings	70,259	65,339
Accrued interest payable	434	399
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Carrying Amount)	0	0
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	9,512	7,543
Interest-bearing deposits in other banks	488	424
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	370,293	347,666
Investment securities held-to-maturity	31	1,060
Restricted investment in bank stocks	6,795	5,308
Net loans	519,951	485,468
Mortgage servicing rights	494	481
Accrued interest receivable	3,990	3,313
FINANCIAL LIABILITIES: (Fair Value)
Deposits	722,521	661,819
Short-term borrowings	65,482	73,123
Long-term borrowings	72,301	66,739
Accrued interest payable	434	399
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	0	0
Fair Value, Inputs, Level 1 [Member]
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	9,512	7,543
Interest-bearing deposits in other banks	0	0
Time deposits with other banks	0	0
Investment securities available-for-sale	1,966	2,055
Investment securities held-to-maturity	0	0
Restricted investment in bank stocks	0	0
Net loans	0	0
Mortgage servicing rights	0	0
Accrued interest receivable	0	0
FINANCIAL LIABILITIES: (Fair Value)
Deposits	0	0
Short-term borrowings	0	0
Long-term borrowings	0	0
Accrued interest payable	0	0
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	0	0
Fair Value, Inputs, Level 2 [Member]
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	0	0
Interest-bearing deposits in other banks	488	424
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	368,327	345,611
Investment securities held-to-maturity	31	1,060
Restricted investment in bank stocks	6,795	5,308
Net loans	0	0
Mortgage servicing rights	0	0
Accrued interest receivable	3,990	3,313
FINANCIAL LIABILITIES: (Fair Value)
Deposits	722,521	661,819
Short-term borrowings	65,482	73,123
Long-term borrowings	72,301	66,739
Accrued interest payable	434	399
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	0	0
Fair Value, Inputs, Level 3 [Member]
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	0	0
Interest-bearing deposits in other banks	0	0
Time deposits with other banks	0	0
Investment securities available-for-sale	0	0
Investment securities held-to-maturity	0	0
Restricted investment in bank stocks	0	0
Net loans	519,951	485,468
Mortgage servicing rights	494	481
Accrued interest receivable	0	0
FINANCIAL LIABILITIES: (Fair Value)
Deposits	0	0
Short-term borrowings	0	0
Long-term borrowings	0	0
Accrued interest payable	0	0
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	$ 0	$ 0

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME [Parenthetical] - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax	$ 1,181	$ (100)	$ 176	$ 2,538
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax	$ (353)	$ (55)	(725)	(667)
Other Comprehensive Income Loss, Reclassification Adjustment For Impairment Charge From AOCI for Sale of Securities, Tax			$ 5	$ 0

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 6) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Total non-accrual loans	$ 5,504	$ 3,974
Foreclosed assets held for resale	256	55
Loans past-due 90 days or more and still accruing	164	10
Total non-performing assets	5,924	4,039
Commercial and Industrial [Member]
Total non-accrual loans	0	5
Loans past-due 90 days or more and still accruing	22	0
Commercial real estate [Member]
Total non-accrual loans	4,570	2,678
Loans past-due 90 days or more and still accruing	0	0
Residential real estate [Member]
Total non-accrual loans	934	1,291
Loans past-due 90 days or more and still accruing	$ 142	$ 10

XML

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

9 Months Ended

Sep. 30, 2015

Risks and Uncertainties [Abstract]

Schedule Of Concentration Risk, Credit Risk, Financial Instruments, Off-Balance Sheet Risk [Table Text Block]

The contract or notional amounts at September 30, 2015 and December 31, 2014, were as follows:

(Dollars in thousands)
	September 30, 2015		December 31, 2014
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	83,658	$	84,983
Financial standby letters of credit	$	475	$	471
Performance standby letters of credit	$	5,102	$	5,851

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 7) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Total Past Due	$ 8,387	$ 8,227
Current	511,522	479,234
Total Loans	519,909	487,461
90 Days or Greater Past Due and Still Accruing	164	10
Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	2,144	3,754
Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	656	873
Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	5,587	3,600
Commercial and Industrial [Member]
Total Past Due	231	105
Current	88,195	64,551
Total Loans	88,426	64,656
90 Days or Greater Past Due and Still Accruing	22	0
Commercial and Industrial [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	185	72
Commercial and Industrial [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	24	28
Commercial and Industrial [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	22	5
Commercial Real Estate [Member]
Total Past Due	5,484	4,645
Current	254,339	249,277
Total Loans	259,823	253,922
90 Days or Greater Past Due and Still Accruing	0	0
Commercial Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	561	1,657
Commercial Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	403	613
Commercial Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	4,520	2,375
Residential Real Estate [Member]
Total Past Due	2,642	3,442
Current	163,132	160,111
Total Loans	165,774	163,553
90 Days or Greater Past Due and Still Accruing	142	10
Residential Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	1,381	1,998
Residential Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	216	224
Residential Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	1,045	1,220
Consumer [Member]
Total Past Due	30	35
Current	5,856	5,295
Total Loans	5,886	5,330
90 Days or Greater Past Due and Still Accruing	0	0
Consumer [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	17	27
Consumer [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	13	8
Consumer [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	$ 0	$ 0

XML

EARNINGS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2015

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

The following table sets forth the computation of basic and diluted earnings per share.

(In thousands, except earnings per share)	Three Months Ended
	September 30,
	2015		2014
Net income	$	2,485	$	2,383
Weighted-average common shares outstanding		5,594		5,544
Basic earnings per share	$	0.44	$	0.43
Weighted-average common shares outstanding		5,594		5,544
Common stock equivalents due to effect of stock options		2		5
Total weighted-average common shares and equivalents		5,596		5,549
Diluted earnings per share	$	0.44	$	0.43

(In thousands, except earnings per share)	Nine Months Ended
	September 30,
	2015		2014
Net income	$	7,364	$	7,437
Weighted-average common shares outstanding		5,581		5,553
Basic earnings per share	$	1.32	$	1.34
Weighted-average common shares outstanding		5,581		5,553
Common stock equivalents due to effect of stock options		2		5
Total weighted-average common shares and equivalents		5,583		5,538
Diluted earnings per share	$	1.32	$	1.34

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Total	Common Stock [Member]	Surplus [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Treasury Stock [Member]
Balance at Dec. 31, 2013	$ 96,351	$ 11,513	$ 31,626	$ 59,089	$ (54)	$ (5,823)
Balance (in shares) at Dec. 31, 2013		5,756,474
Net Income	7,437			7,437
Other comprehensive income (loss), net of taxes	3,655				3,655
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options	846	$ 68	778
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options (in shares)		33,993
Dividends	(4,315)			(4,315)
Balance at Sep. 30, 2014	103,974	$ 11,581	32,404	62,211	3,601	(5,823)
Balance (in shares) at Sep. 30, 2014		5,790,467
Balance at Dec. 31, 2014	106,271	$ 11,605	32,674	63,485	4,330	(5,823)
Balance (in shares) at Dec. 31, 2014		5,802,521
Net Income	7,364			7,364
Other comprehensive income (loss), net of taxes	(1,041)				(1,041)
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options	990	$ 75	848			67
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options (in shares)		37,529
Dividends	(4,522)			(4,522)
Balance at Sep. 30, 2015	$ 109,062	$ 11,680	$ 33,522	$ 66,327	$ 3,289	$ (5,756)
Balance (in shares) at Sep. 30, 2015		5,840,050

XML

CONSOLIDATED BALANCE SHEETS [Parenthetical] - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Investment securities held-to-maturity, estimated fair value	$ 31	$ 1,060
Preferred stock, par value (in dollars per share)	$ 2.00	$ 2.00
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Common stock, par value (in dollars per share)	$ 2.00	$ 2.00
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	5,840,050	5,802,521
Common stock, shares outstanding	5,606,938	5,567,372
Treasury stock, shares	233,112	235,149

XML

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 8 — FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

Financial Assets Measured at Fair Value on a Recurring Basis

At September 30, 2015 and December 31, 2014, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
September 30, 2015
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,032	$	—	$	1,032
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		96,268		—		96,268
Other		—		22,086		—		22,086
Obligations of state and political subdivisions		—		200,553		—		200,553
Corporate debt securities		—		48,388		—		48,388
Marketable equity securities		1,966		—		—		1,966
Total	$	1,966	$	368,327	$	—	$	370,293

(Dollars in thousands)
December 31, 2014
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	11,378	$	—	$	11,378
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		112,714		—		112,714
Other		—		26,510		—		26,510
Obligations of state and political subdivisions		—		157,223		—		157,223
Corporate debt securities		—		37,786		—		37,786
Marketable equity securities		2,055		—		—		2,055
Total	$	2,055	$	345,611	$	—	$	347,666

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 2015 or 2014.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2015 and December 31, 2014, impaired loans measured at fair value on a non-recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at September 30, 2015
Impaired loans:
Commercial and Industrial	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		2,573		2,573
Residential Real Estate		—		—		599		599
Total impaired loans	$	—	$	—	$	3,172	$	3,172

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2014
Impaired loans:
Commercial and Industrial	$	—	$	—	$	3	$	3
Commercial Real Estate		—		—		2,073		2,073
Residential Real Estate		—		—		856		856
Total impaired loans	$	—	$	—	$	2,932	$	2,932

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. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2015 and 2014.

 

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2015 and December 31, 2014 foreclosed assets held for resale measured at fair value on a non-recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at September 30, 2015
Other foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	—	$	—
Total foreclosed assets held for resale	$	—	$	—	$	—	$	—

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2014
Other foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	55	$	55
Total foreclosed assets held for resale	$	—	$	—	$	55	$	55

The Bank’s foreclosed asset valuation procedure requires an appraisal, which considers the sales prices of similar properties in the proximate vicinity, 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 2015 and 2014.

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:

(Dollars in thousands)
	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
	Estimate		Valuation Technique	Unobservable Input	Range	Average
September 30, 2015
Impaired loans	$	3,172	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (63%)		(33)	%
Foreclosed assets held for resale	$	—	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (0%)		(0)	%
December 31, 2014
Impaired loans	$	2,932	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (63%)		(37)	%
Foreclosed assets held for resale	$	55	Appraisal of collateral1,3	Appraisal adjustments2	(33%) – (46%)		(37)	%

______________________

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

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

³Includes qualitative adjustments by management and estimated liquidation expenses.

Fair Value of Financial Instruments

(Dollars in thousands)
	Carrying		Fair Value Measurements at September 30, 2015
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,512	$	9,512	$	—	$	—	$	9,512
Interest-bearing deposits in other banks		488		—		488		—		488
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		370,293		1,966		368,327		—		370,293
Investment securities held-to-maturity		30		—		31		—		31
Restricted investment in bank stocks		6,795		—		6,795		—		6,795
Net loans		512,675		—		—		519,951		519,951
Mortgage servicing rights		494		—		—		494		494
Accrued interest receivable		3,990		—		3,990		—		3,990
FINANCIAL LIABILITIES:
Deposits		721,537		—		722,521		—		722,521
Short-term borrowings		65,482		—		65,482		—		65,482
Long-term borrowings		70,259		—		72,301		—		72,301
Accrued interest payable		434		—		434		—		434
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

(Dollars in thousands)
	Carrying		Fair Value Measurements at December 31, 2014
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,543	$	7,543	$	—	$	—	$	7,543
Interest-bearing deposits in other banks		424		—		424		—		424
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		347,666		2,055		345,611		—		347,666
Investment securities held-to-maturity		1,056		—		1,060		—		1,060
Restricted investment in bank stocks		5,308		—		5,308		—		5,308
Net loans		481,071		—		—		485,468		485,468
Mortgage servicing rights		481		—		—		481		481
Accrued interest receivable		3,313		—		3,313		—		3,313
FINANCIAL LIABILITIES:
Deposits		661,562		—		661,819		—		661,819
Short-term borrowings		73,123		—		73,123		—		73,123
Long-term borrowings		65,339		—		66,739		—		66,739
Accrued interest payable		399		—		399		—		399
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at September 30, 2015 and December 31, 2014:

Cash and Due From Banks, Interest-Bearing Deposits in Other Banks, Time Deposits with Other Banks, Restricted Investment in Bank Stocks, Accrued Interest Receivable and Accrued Interest Payable

The fair values are equal to the current carrying values.

Investment Securities

The fair value of investment securities are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying on the securities’ relationship to other benchmark quoted prices.

Loans

Fair values are estimated for categories of loans with similar financial characteristics. Loans were segregated by type such as Commercial and Industrial, Commercial and Residential Real Estate mortgages and Consumer. For estimation purposes, each loan category was further segmented into fixed and adjustable rate interest terms.

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 impaired 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 or based on the value of the collateral if repayment is expected solely from collateral. The assumptions used by management are judgmentally determined using information regarding each specific borrower.

Mortgage Servicing Rights

The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date.

Deposits

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, 2015 and December 31, 2014.

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.

Off-Balance Sheet Financial Instruments

The fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Nov. 04, 2015
Document Information [Line Items]
Entity Registrant Name	FIRST KEYSTONE CORP
Entity Central Index Key	0000737875
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Trading Symbol	FKYS
Entity Common Stock, Shares Outstanding		5,606,938
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2015
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2015

XML

EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2015

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

NOTE 9 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Corporation. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share.

(In thousands, except earnings per share)	Three Months Ended
	September 30,
	2015		2014
Net income	$	2,485	$	2,383
Weighted-average common shares outstanding		5,594		5,544
Basic earnings per share	$	0.44	$	0.43
Weighted-average common shares outstanding		5,594		5,544
Common stock equivalents due to effect of stock options		2		5
Total weighted-average common shares and equivalents		5,596		5,549
Diluted earnings per share	$	0.44	$	0.43

(In thousands, except earnings per share)	Nine Months Ended
	September 30,
	2015		2014
Net income	$	7,364	$	7,437
Weighted-average common shares outstanding		5,581		5,553
Basic earnings per share	$	1.32	$	1.34
Weighted-average common shares outstanding		5,581		5,553
Common stock equivalents due to effect of stock options		2		5
Total weighted-average common shares and equivalents		5,583		5,538
Diluted earnings per share	$	1.32	$	1.34

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
INTEREST INCOME
Interest and fees on loans	$ 5,398	$ 5,258	$ 16,090	$ 15,284
Interest and dividend income on investment securities:
Taxable	1,579	1,912	4,927	5,920
Tax-exempt	808	560	2,212	1,800
Dividends	15	18	45	50
Dividend income on restricted investment in bank stocks	77	67	353	169
Interest on interest-bearing deposits in other banks	8	0	24	1
Total interest income	7,885	7,815	23,651	23,224
INTEREST EXPENSE
Interest on deposits	779	684	2,307	2,241
Interest on short-term borrowings	85	71	215	159
Interest on long-term borrowings	390	325	1,153	913
Total interest expense	1,254	1,080	3,675	3,313
Net interest income	6,631	6,735	19,976	19,911
Provision for loan losses	753	100	1,178	433
Net interest income after provision for loan losses	5,878	6,635	18,798	19,478
NON-INTEREST INCOME
Trust department	216	216	670	711
Service charges and fees	469	460	1,291	1,171
Bank owned life insurance income	169	165	498	514
ATM fees and debit card income	310	284	903	833
Gains on sales of mortgage loans	111	68	425	148
Net investment securities gains	1,036	163	2,131	1,963
Impairment charges on equity securities	0	0	(14)	0
Other	121	146	378	395
Total non-interest income	2,432	1,502	6,282	5,735
NON-INTEREST EXPENSE
Salaries and employee benefits	2,741	2,927	8,432	8,569
Occupancy, net	386	384	1,260	1,279
Furniture and equipment	158	130	449	437
Computer expense	217	273	600	816
Professional services	139	147	451	444
Pennsylvania shares tax	190	159	556	476
FDIC insurance	137	142	390	379
ATM and debit card fees	164	155	461	446
Data processing fees	111	102	452	298
Foreclosed assets held for resale expense	9	4	58	126
Advertising	147	139	327	447
Other	833	700	2,475	2,236
Total non-interest expense	5,232	5,262	15,911	15,953
Income before income tax expense	3,078	2,875	9,169	9,260
Income tax expense	593	492	1,805	1,823
NET INCOME	$ 2,485	$ 2,383	$ 7,364	$ 7,437
Net income per share:
Basic (in dollars per share)	$ 0.44	$ 0.43	$ 1.32	$ 1.34
Diluted (in dollars per share)	0.44	0.43	1.32	1.34
Dividends per share (in dollars per share)	$ 0.27	$ 0.26	$ 0.81	$ 0.78

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INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2015

Investments, Debt and Equity Securities [Abstract]

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

NOTE 3 — 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 Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

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.

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, 2015 and December 31, 2014:

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2015:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,026	$	6	$	—	$	1,032
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		95,941		626		(299)		96,268
Other		21,876		256		(46)		22,086
Obligations of state and political subdivisions		195,845		5,048		(340)		200,553
Corporate debt securities		49,350		31		(993)		48,388
Marketable equity securities		1,194		772		—		1,966
Total	$	365,232	$	6,739	$	(1,678)	$	370,293

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2015:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	30	$	1	$	—	$	31
Total	$	30	$	1	$	—	$	31

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2014:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	11,356	$	24	$	(2)	$	11,378
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		112,146		1,055		(487)		112,714
Other		26,246		270		(6)		26,510
Obligations of state and political subdivisions		151,565		6,127		(469)		157,223
Corporate debt securities		38,499		112		(825)		37,786
Marketable equity securities		1,208		867		(20)		2,055
Total	$	341,020	$	8,455	$	(1,809)	$	347,666

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2014:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	56	$	2	$	—	$	58
Other		1,000		2		—		1,002
Total	$	1,056	$	4	$	—	$	1,060

Securities Available-for-Sale with an aggregate fair value of $312,484,000 at September 30, 2015 and $222,847,000 at December 31, 2014, and securities Held-to-Maturity with an aggregate book value of $30,000 at September 30, 2015 and $1,056,000 at December 31, 2014, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase, FHLB advances and other balances of $236,806,000 at September 30, 2015 and $155,895,000 at December 31, 2014.

 

The amortized cost, estimated fair value and weighted average yield of debt and equity securities, by contractual maturity, are shown below at September 30, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)
	September 30, 2015
	Available-For-Sale															Held-To-Maturity
				U.S. Government			Obligations									U.S. Government
				Corporations &			of State			Corporate			Marketable			Corporations &
	U.S. Treasury			Agencies			& Political			Debt			Equity			Agencies
	Securities			Obligations1			Subdivisions2			Securities			Securities3			Obligations1
Within 1 Year:
Amortized cost	$	—		$	—		$	550		$	869		$	—		$	—
Fair value		—			—			565			885			—			—
Weighted average yield		—			—			6.45	%		3.15	%		—			—
1 - 5 Years:
Amortized cost		1,026			15,127			20,586			12,155			—			30
Fair value		1,032			15,271			21,077			12,031			—			31
Weighted average yield		0.96	%		1.83	%		3.01	%		2.30	%		—			2.55	%
5 - 10 Years:
Amortized cost		—			40,740			91,445			36,326			—			—
Fair value		—			41,077			92,800			35,472			—			—
Weighted average yield		—			2.18	%		3.13	%		2.69	%		—			—
After 10 Years:
Amortized cost		—			61,950			83,264			—			1,194			—
Fair value		—			62,006			86,111			—			1,966			—
Weighted average yield		—			1.65	%		4.93	%		—			4.95	%		—
Total:
Amortized cost	$	1,026		$	117,817		$	195,845		$	49,350		$	1,194		$	30
Fair value		1,032			118,354			200,553			48,388			1,966			31
Weighted average yield		0.96	%		1.86	%		3.89	%		2.60	%		4.95	%		2.55	%

_______________________

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 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 U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at September 30, 2015. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch. The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the three months ended September 30, 2015 and 2014 were $32,059,000 and $18,016,000, respectively. Gross gains realized on these sales were $1,036,000 and $235,000, respectively. Gross losses on these sales were $0 and $72,000, respectively. Impairment losses realized on Available-for-Sale equity securities for the three months ended September 30, 2015 and 2014 were $0 and $0, respectively.

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the nine months ended September 30, 2015 and 2014 were $111,799,000 and $138,218,000, respectively. Gross gains realized on these sales were $2,186,000 and $2,557,000, respectively. Gross losses on these sales were $55,000 and $594,000, respectively. Impairment losses realized on Available-for-Sale equity securities for the nine months ended September 30, 2015 and 2014 were $14,000 and $0, respectively.

There were no proceeds from sales of investments in Held-to-Maturity debt and equity securities during the three or nine month periods ended September 30, 2015 or 2014. Therefore, there were no gains or losses realized during these periods.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. 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 on debt securities, 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 the realized loss is recognized as impairment charges on securities on the Consolidated Statements of Income. The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes 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 realized loss is recognized as impairment charges on securities on the Consolidated Statements of Income. The amount of the total other-than-temporary impairment is recognized in other comprehensive income (loss), net of applicable taxes. The previous cost basis less the other-than-temporary impairment recognized in earnings becomes the new cost basis of the investment.

The Corporation and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. As of June 30, 2015, we recognized other than temporary impairment on one equity security that was trading below cost basis. We have written down the value of the shares based upon market indications. In management’s opinion, the equity securities reflect a more accurate valuation of the shares after the impairment charge. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at September 30, 2015. Management did not consider any securities to be other-than-temporarily impaired at December 31, 2014.

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, 2015 and December 31, 2014:

September 30, 2015
(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-Sale:	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		17,464		(199)		11,801		(100)		29,265		(299)
Other		3,928		(46)		—		—		3,928		(46)
Obligations of state and political subdivisions		34,508		(213)		8,133		(127)		42,641		(340)
Corporate debt securities		26,913		(365)		19,080		(628)		45,993		(993)
Marketable equity securities		—		—		—		—		—		—
	$	82,813	$	(823)	$	39,014	$	(855)	$	121,827	$	(1,678)

December 31, 2014
(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-Sale:	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities	$	6,030	$	(2)	$	—	$	—	$	6,030	$	(2)
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		19,823		(230)		17,099		(257)		36,922		(487)
Other		7,154		(6)		—		—		7,154		(6)
Obligations of state and political subdivisions		21,459		(94)		18,273		(375)		39,732		(469)
Corporate debt securities		22,227		(542)		12,066		(283)		34,293		(825)
Marketable equity securities		30		(20)		—		—		30		(20)
	$	76,723	$	(894)	$	47,438	$	(915)	$	124,161	$	(1,809)

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”), FNMA (“Federal National Mortgage Association”) or GNMA (“Government 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 62 securities with a one year or less unrealized loss position or any of their 19 securities with a greater than one year unrealized loss position as of September 30, 2015, represent an other-than-temporary impairment, as these unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

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RECENT ACCOUNTING STANDARDS UPDATES ("ASU")

9 Months Ended

Sep. 30, 2015

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

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

 

Except as disclosed below, there were no new accounting pronouncements affecting the Corporation during the three and nine months ended September 30, 2015 that were not already adopted by the Corporation.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue requirements in Revenue Recognition (Topic 605). This ASU requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The ASU is effective for annual reporting periods beginning after December 31, 2016, including interim periods within the reporting period. Early application is not permitted. In July 2015, the FASB approved a one-year delay of the effective date of this standard. The deferral would require public entities to apply the standard for annual reporting periods beginning after December 15, 2017. Public companies would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016. The Corporation is currently evaluating the impact of this ASU on its consolidated financial statements.

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FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

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

At September 30, 2015 and December 31, 2014, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
September 30, 2015
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,032	$	—	$	1,032
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		96,268		—		96,268
Other		—		22,086		—		22,086
Obligations of state and political subdivisions		—		200,553		—		200,553
Corporate debt securities		—		48,388		—		48,388
Marketable equity securities		1,966		—		—		1,966
Total	$	1,966	$	368,327	$	—	$	370,293

(Dollars in thousands)
December 31, 2014
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	11,378	$	—	$	11,378
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		112,714		—		112,714
Other		—		26,510		—		26,510
Obligations of state and political subdivisions		—		157,223		—		157,223
Corporate debt securities		—		37,786		—		37,786
Marketable equity securities		2,055		—		—		2,055
Total	$	2,055	$	345,611	$	—	$	347,666

Fair Value Measurements, Nonrecurring [Table Text Block]

At September 30, 2015 and December 31, 2014, impaired loans measured at fair value on a non-recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at September 30, 2015
Impaired loans:
Commercial and Industrial	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		2,573		2,573
Residential Real Estate		—		—		599		599
Total impaired loans	$	—	$	—	$	3,172	$	3,172

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2014
Impaired loans:
Commercial and Industrial	$	—	$	—	$	3	$	3
Commercial Real Estate		—		—		2,073		2,073
Residential Real Estate		—		—		856		856
Total impaired loans	$	—	$	—	$	2,932	$	2,932

At September 30, 2015 and December 31, 2014 foreclosed assets held for resale measured at fair value on a non-recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at September 30, 2015
Other foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	—	$	—
Total foreclosed assets held for resale	$	—	$	—	$	—	$	—

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2014
Other foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	55	$	55
Total foreclosed assets held for resale	$	—	$	—	$	55	$	55

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

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:

(Dollars in thousands)
	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
	Estimate		Valuation Technique	Unobservable Input	Range	Average
September 30, 2015
Impaired loans	$	3,172	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (63%)		(33)	%
Foreclosed assets held for resale	$	—	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (0%)		(0)	%
December 31, 2014
Impaired loans	$	2,932	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (63%)		(37)	%
Foreclosed assets held for resale	$	55	Appraisal of collateral1,3	Appraisal adjustments2	(33%) – (46%)		(37)	%

______________________

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

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

³Includes qualitative adjustments by management and estimated liquidation expenses.

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

Fair Value of Financial Instruments

(Dollars in thousands)
	Carrying		Fair Value Measurements at September 30, 2015
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,512	$	9,512	$	—	$	—	$	9,512
Interest-bearing deposits in other banks		488		—		488		—		488
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		370,293		1,966		368,327		—		370,293
Investment securities held-to-maturity		30		—		31		—		31
Restricted investment in bank stocks		6,795		—		6,795		—		6,795
Net loans		512,675		—		—		519,951		519,951
Mortgage servicing rights		494		—		—		494		494
Accrued interest receivable		3,990		—		3,990		—		3,990
FINANCIAL LIABILITIES:
Deposits		721,537		—		722,521		—		722,521
Short-term borrowings		65,482		—		65,482		—		65,482
Long-term borrowings		70,259		—		72,301		—		72,301
Accrued interest payable		434		—		434		—		434
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

(Dollars in thousands)
	Carrying		Fair Value Measurements at December 31, 2014
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,543	$	7,543	$	—	$	—	$	7,543
Interest-bearing deposits in other banks		424		—		424		—		424
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		347,666		2,055		345,611		—		347,666
Investment securities held-to-maturity		1,056		—		1,060		—		1,060
Restricted investment in bank stocks		5,308		—		5,308		—		5,308
Net loans		481,071		—		—		485,468		485,468
Mortgage servicing rights		481		—		—		481		481
Accrued interest receivable		3,313		—		3,313		—		3,313
FINANCIAL LIABILITIES:
Deposits		661,562		—		661,819		—		661,819
Short-term borrowings		73,123		—		73,123		—		73,123
Long-term borrowings		65,339		—		66,739		—		66,739
Accrued interest payable		399		—		399		—		399
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

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INVESTMENT SECURITIES (Tables)

9 Months Ended

Sep. 30, 2015

Investments, Debt and Equity Securities [Abstract]

Unrealized Gain (Loss) on Investments [Table Text Block]

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, 2015 and December 31, 2014:

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2015:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,026	$	6	$	—	$	1,032
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		95,941		626		(299)		96,268
Other		21,876		256		(46)		22,086
Obligations of state and political subdivisions		195,845		5,048		(340)		200,553
Corporate debt securities		49,350		31		(993)		48,388
Marketable equity securities		1,194		772		—		1,966
Total	$	365,232	$	6,739	$	(1,678)	$	370,293

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2015:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	30	$	1	$	—	$	31
Total	$	30	$	1	$	—	$	31

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2014:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	11,356	$	24	$	(2)	$	11,378
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		112,146		1,055		(487)		112,714
Other		26,246		270		(6)		26,510
Obligations of state and political subdivisions		151,565		6,127		(469)		157,223
Corporate debt securities		38,499		112		(825)		37,786
Marketable equity securities		1,208		867		(20)		2,055
Total	$	341,020	$	8,455	$	(1,809)	$	347,666

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2014:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	56	$	2	$	—	$	58
Other		1,000		2		—		1,002
Total	$	1,056	$	4	$	—	$	1,060

Investments Classified by Contractual Maturity Date [Table Text Block]

The amortized cost, estimated fair value and weighted average yield of debt and equity securities, by contractual maturity, are shown below at September 30, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)
	September 30, 2015
	Available-For-Sale															Held-To-Maturity
				U.S. Government			Obligations									U.S. Government
				Corporations &			of State			Corporate			Marketable			Corporations &
	U.S. Treasury			Agencies			& Political			Debt			Equity			Agencies
	Securities			Obligations1			Subdivisions2			Securities			Securities3			Obligations1
Within 1 Year:
Amortized cost	$	—		$	—		$	550		$	869		$	—		$	—
Fair value		—			—			565			885			—			—
Weighted average yield		—			—			6.45	%		3.15	%		—			—
1 - 5 Years:
Amortized cost		1,026			15,127			20,586			12,155			—			30
Fair value		1,032			15,271			21,077			12,031			—			31
Weighted average yield		0.96	%		1.83	%		3.01	%		2.30	%		—			2.55	%
5 - 10 Years:
Amortized cost		—			40,740			91,445			36,326			—			—
Fair value		—			41,077			92,800			35,472			—			—
Weighted average yield		—			2.18	%		3.13	%		2.69	%		—			—
After 10 Years:
Amortized cost		—			61,950			83,264			—			1,194			—
Fair value		—			62,006			86,111			—			1,966			—
Weighted average yield		—			1.65	%		4.93	%		—			4.95	%		—
Total:
Amortized cost	$	1,026		$	117,817		$	195,845		$	49,350		$	1,194		$	30
Fair value		1,032			118,354			200,553			48,388			1,966			31
Weighted average yield		0.96	%		1.86	%		3.89	%		2.60	%		4.95	%		2.55	%

_______________________

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 are not considered to have defined maturities and are included in the after ten year category.

Schedule of Unrealized Loss on Investments [Table Text Block]

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, 2015 and December 31, 2014:

September 30, 2015
(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-Sale:	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		17,464		(199)		11,801		(100)		29,265		(299)
Other		3,928		(46)		—		—		3,928		(46)
Obligations of state and political subdivisions		34,508		(213)		8,133		(127)		42,641		(340)
Corporate debt securities		26,913		(365)		19,080		(628)		45,993		(993)
Marketable equity securities		—		—		—		—		—		—
	$	82,813	$	(823)	$	39,014	$	(855)	$	121,827	$	(1,678)

December 31, 2014
(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available-for-Sale:	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury securities	$	6,030	$	(2)	$	—	$	—	$	6,030	$	(2)
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		19,823		(230)		17,099		(257)		36,922		(487)
Other		7,154		(6)		—		—		7,154		(6)
Obligations of state and political subdivisions		21,459		(94)		18,273		(375)		39,732		(469)
Corporate debt securities		22,227		(542)		12,066		(283)		34,293		(825)
Marketable equity securities		30		(20)		—		—		30		(20)
	$	76,723	$	(894)	$	47,438	$	(915)	$	124,161	$	(1,809)

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

NOTE 6 — COMMITMENTS AND CONTINGENCIES

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

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LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2015

Receivables [Abstract]

Financing Receivables [Text Block]

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Net 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.

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

Commercial and Industrial Lending

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

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

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

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

Commercial Real Estate Lending

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

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

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

Residential Real Estate Lending (Including Home Equity)

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

The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The Corporation offers fixed-rate mortgage loans with terms up to a maximum of twenty years for both permanent structures and those under construction. Generally, the majority of the Corporation’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ninety-five percent or less. Generally, home equity term loans are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of fifteen years. Generally, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

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

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

Consumer Lending

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

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

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

Delinquent Loans

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 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 brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Bank estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell.

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

Loans in which the borrower is in bankruptcy are considered on a case by case basis and are either charged off or reaffirmed by the borrower.

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

Allowance for Loan Losses

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

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

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

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

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

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the Consolidated Balance Sheet. As of September 30, 2015 and December 31, 2014, the amount of the reserve for unfunded lending commitments was $132,000 and $0.

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

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

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

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

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Bank determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months.

The Bank utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the Bank’s loan policy. 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 commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on 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.

The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio, as well as other variables such as current economic conditions, and individual strengths and weaknesses.

Risk grade characteristics are as follows:

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

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

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

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

Generally, these loans 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.

They are characterized by the distinct possibility that the Bank will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default; are inadequately protected by the current sound net worth, paying capacity of the borrower, or pledged collateral; and may 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 whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The following table presents the classes of the loan portfolio summarized by risk rating as of September 30, 2015 and December 31, 2014:

		Commercial and
(Dollars in thousands)		Industrial				Commercial Real Estate
		September 30,		December 31,		September 30,		December 31,
		2015		2014		2015		2014
Grade:
1-6	Pass	$	88,125	$	64,459	$	239,816	$	237,404
7	Special Mention		159		47		3,900		11,008
8	Substandard		—		21		15,796		5,472
9	Doubtful		—		—		—		—
Add (deduct): Unearned discount and			—		—		—		—
Net deferred loan fees and costs			142		129		311		38
Total loans		$	88,426	$	64,656	$	259,823	$	253,922

		Residential Real Estate
		Including Home Equity				Consumer Loans
		September 30,		December 31,		September 30,		December 31,
		2015		2014		2015		2014
Grade:
1-6	Pass	$	162,943	$	161,122	$	5,761	$	5,248
7	Special Mention		1,115		520		28		21
8	Substandard		1,680		1,640		4		9
9	Doubtful		—		—		—		—
Add (deduct): Unearned discount and			(20)		—		(1)		(40)
Net deferred loan fees and costs			56		271		94		92
Total loans		$	165,774	$	163,553	$	5,886	$	5,330

		Total Loans
		September 30,		December 31,
		2015		2014
Grade:
1-6	Pass	$	496,645	$	468,233
7	Special Mention		5,202		11,596
8	Substandard		17,480		7,142
9	Doubtful		—		—
Add (deduct): Unearned discount and			(21)		(40)
Net deferred loan fees and costs			603		530
Total loans		$	519,909	$	487,461

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $50,248,000 and $3,034,000, respectively at September 30, 2015 and $30,334,000 and $3,235,000 at December 31, 2014. Loans held for sale amounted to $1,723,000 at September 30, 2015 and $2,201,000 at December 31, 2014.

 

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

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended September 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	706	$	3,139	$	1,867	$	89	$	799	$	6,600
Charge-offs		—		(95)		(39)		(8)		—		(142)
Recoveries		4		17		—		2		—		23
Provision		56		1,293		105		37		(738)		753
Ending Balance	$	766	$	4,354	$	1,933	$	120	$	61	$	7,234

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the nine month period ended September 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	542	$	3,176	$	1,928	$	107	$	637	$	6,390
Charge-offs		(2)		(232)		(147)		(23)		—		(404)
Recoveries		7		59		—		4		—		70
Provision		219		1,351		152		32		(576)		1,178
Ending Balance	$	766	$	4,354	$	1,933	$	120	$	61	$	7,234
Ending balance: individually evaluated for impairment	$	—	$	1,243	$	36	$	—	$	—	$	1,279
Ending balance: collectively evaluated for impairment	$	766	$	3,111	$	1,897	$	120	$	61	$	5,955
Loan Receivables:
Ending Balance	$	88,426	$	259,823	$	165,774	$	5,886	$	—	$	519,909
Ending balance: individually evaluated for impairment	$	400	$	11,620	$	934	$	—	$	—	$	12,954
Ending balance: collectively evaluated for impairment	$	88,026	$	248,203	$	164,840	$	5,886	$	—	$	506,955

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended September 30, 2014:
Beginning balance	$	743	$	3,450	$	1,619	$	51	$	614	$	6,477
Charge-offs		(100)		—		(6)		(21)		—		(127)
Recoveries		3		34		1		2		—		40
Provision		(123)		(108)		262		89		(20)		100
Ending Balance	$	523	$	3,376	$	1,876	$	121	$	594	$	6,490

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the nine month period ended September 30, 2014:
Beginning balance	$	776	$	3,320	$	1,565	$	53	$	805	$	6,519
Charge-offs		(107)		(237)		(180)		(36)		—		(560)
Recoveries		24		59		12		3		—		98
Provision		(170)		234		479		101		(211)		433
Ending Balance	$	523	$	3,376	$	1,876	$	121	$	594	$	6,490
Ending balance: individually evaluated for impairment	$	—	$	28	$	17	$	—	$	—	$	45
Ending balance: collectively evaluated for impairment	$	523	$	3,348	$	1,859	$	121	$	594	$	6,445
Loan Receivables:
Ending Balance	$	69,360	$	249,373	$	161,381	$	5,147	$	—	$	485,261
Ending balance: individually evaluated for impairment	$	340	$	5,573	$	1,173	$	6	$	—	$	7,092
Ending balance: collectively evaluated for impairment	$	69,020	$	243,800	$	160,208	$	5,141	$	—	$	478,169

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of December 31, 2014:
Allowance for Loan Losses:
Ending Balance	$	542	$	3,176	$	1,928	$	107	$	637	$	6,390
Ending balance: individually evaluated for impairment	$	—	$	38	$	81	$	—	$	—	$	119
Ending balance: collectively evaluated for impairment	$	542	$	3,138	$	1,847	$	107	$	637	$	6,271
Loan Receivables:
Ending Balance	$	64,656	$	253,922	$	163,553	$	5,330	$	—	$	487,461
Ending balance: individually evaluated for impairment	$	399	$	5,350	$	1,291	$	4	$	—	$	7,044
Ending balance: collectively evaluated for impairment	$	64,257	$	248,572	$	162,262	$	5,326	$	—	$	480,417

As of September 30, 2015, the $256,000 in foreclosed assets held for resale was secured entirely by residential real estate and was held as the result of obtaining physical possession. At December 31, 2014, the $55,000 in foreclosed assets held for resale was secured entirely by commercial real estate, and there were no residential real estate properties held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $215,000 at September 30, 2015 and $118,000 at December 31, 2014. These balances were not included in foreclosed assets held for resale at September 30, 2015 or December 31, 2014.

 

From time to time, the Bank may agree to modify the contractual terms of a borrower’s loan. In cases where the modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).

The outstanding balance of TDRs as of September 30, 2015 and December 31, 2014 was $8,851,000 and $4,708,000, respectively. The increase in TDRs was attributable to deterioration in the respective borrowers’ financial position, and in some cases a declining collateral value, along with the Bank’s proactive monitoring of the loan portfolio. There were $48,000 and $0 in unfunded commitments on TDRs at September 30, 2015 and December 31, 2014, respectively.

During the three months ended September 30, 2015, two loans with a combined post modification balance of $992,000 were classified as TDRs, as compared to the same period in 2014, when four loans with a combined post modification balance of $888,000 were classified as TDRs. The loan modifications for the three months ended September 30, 2015 consisted of one term modification and one payment modification. The loan modifications for the three months ended September 30, 2014 consisted of one term modification and three payment modifications.

During the nine months ended September 30, 2015, seven loans with a combined post modification balance of $5,550,000 were classified as TDRs, as compared to the same period in 2014, when thirteen loans with a combined post modification balance of $1,810,000 were classified as TDRs. The loan modifications for the nine months ended September 30, 2015 consisted of four term modifications and three payment modifications. The loan modifications for the nine months ended September 30, 2014 consisted of one interest rate modification, four term modifications, and eight payment modifications.

The following table presents the unpaid balance of TDRs at the dates indicated:

(Dollars in thousands)
	September 30,		December 31,
	2015		2014
Non-accrual TDRs	$	1,401	$	1,638
Accruing TDRs		7,450		3,070
Total	$	8,851	$	4,708

At September 30, 2015, five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $2,133,000 were not in compliance with the terms of their restructure, compared to September 30, 2014 when four Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,573,000 were not in compliance with the terms of their restructure.

During the three months ended September 30, 2015, two Commercial Real Estate loans totaling $178,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2014 when there were no payment defaults on loans that were modified as TDRs within the preceding twelve months. During the nine months ended September 30, 2015, three Commercial Real Estate loans totaling $4,404,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2014 when four Commercial Real Estate loans totaling $193,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults. The significant increase in defaulted TDRs at September 30, 2015 as compared to September 30, 2014 is largely due to one loan in the amount of $4,226,000 to a student housing holding company, which was modified as a TDR in the first quarter of 2015 and experienced its subsequent default during the second quarter of 2015.

The following table presents information regarding the loan modifications categorized as TDRs during the three and nine months ended September 30, 2015 and September 30, 2014:

(Dollars in thousands, except number of contracts)
	Three Months Ended September 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		—	$	—	$	—	$	—
Commercial Real Estate		2		815		992		1,001
Consumer		—		—		—		—
Total		2	$	815	$	992	$	1,001

(Dollars in thousands, except number of contracts)
	Three Months Ended September 30, 2014
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		—	$	—	$	—	$	—
Commercial Real Estate		4		801		888		887
Consumer		—		—		—		—
Total		4	$	801	$	888	$	887

(Dollars in thousands, except number of contracts)
	Nine Months Ended September 30, 2015
		Pre-Modification		Post-Modification
	Number	Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts	Investment		Investment		Investment
Commercial and Industrial	1	$	23	$	23	$	21
Commercial Real Estate	6		5,395		5,527		5,527
Consumer	—		—		—		—
Total	7	$	5,418	$	5,550	$	5,548

(Dollars in thousands, except number of contracts)
	Nine Months Ended September 30, 2014
		Pre-Modification		Post-Modification
	Number	Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts	Investment		Investment		Investment
Commercial and Industrial	2	$	327	$	327	$	326
Commercial Real Estate	10		1,389		1,476		1,080
Consumer	1		7		7		6
Total	13	$	1,723	$	1,810	$	1,412

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three and nine months ended September 30, 2015 and September 30, 2014 with the total number of each type of modification performed.

	Three Months Ended September 30, 2015								Nine Months Ended September 30, 2015
	Rate		Term		Payment		Number		Rate		Term		Payment		Number
	Modification		Modification		Modification		Modified		Modification		Modification		Modification		Modified
Commercial and Industrial		—		—		—		—		—		1		—		1
Commercial Real Estate		—		1		1		2		—		3		3		6
Consumer		—		—		—		—		—		—		—		—
Total		—		1		1		2		—		4		3		7

	Three Months Ended September 30, 2014								Nine Months Ended September 30, 2014
	Rate		Term		Payment		Number		Rate		Term		Payment		Number
	Modification		Modification		Modification		Modified		Modification		Modification		Modification		Modified
Commercial and Industrial		—		—		—		—		—		—		2		2
Commercial Real Estate		—		1		3		4		1		4		5		10
Consumer		—		—		—		—		—		—		1		1
Total		—		1		3		4		1		4		8		13

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below for the periods ended September 30, 2015 and December 31, 2014.

(Dollars in thousands)	September 30, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	400	$	545	$	—	$	399	$	545	$	—
Commercial Real Estate		9,297		9,641		—		4,828		5,278		—
Residential Real Estate		493		612		—		727		892		—
Consumer		—		—		—		4		4		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Commercial Real Estate		2,323		6,272		1,243		522		522		38
Residential Real Estate		441		441		36		564		569		81
Consumer		—		—		—		—		—		—
Total	$	12,954	$	17,511	$	1,279	$	7,044	$	7,810	$	119
Total consists of:
Commercial and Industrial	$	400	$	545	$	—	$	399	$	545	$	—
Commercial Real Estate	$	11,620	$	15,913	$	1,243	$	5,350	$	5,800	$	38
Residential Real Estate	$	934	$	1,053	$	36	$	1,291	$	1,461	$	81
Consumer	$	—	$	—	$	—	$	4	$	4	$	—

______________________

At September 30, 2015 and December 31, 2014, $8,851,000 and $4,708,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $0 and $27,000, respectively. The recorded investment represents the loan balance reflected on the Consolidated Balance Sheets net of any charge-offs. The unpaid principal balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the three and nine months ended September 30, 2015 and 2014.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	407	$	2	$	341	$	—
Commercial Real Estate		9,235		59		5,213		20
Residential Real Estate		499		—		1,123		—
Consumer		1		—		7		—
With an allowance recorded:
Commercial Real Estate		1,162		45		171		8
Residential Real Estate		441		—		33		2
Total	$	11,745	$	106	$	6,888	$	30
Total consists of:
Commercial and Industrial	$	407	$	2	$	341	$	—
Commercial Real Estate	$	10,397	$	104	$	5,384	$	28
Residential Real Estate	$	940	$	—	$	1,156	$	2
Consumer	$	1	$	—	$	7	$	—

_____________________

Of the $106,000 and $30,000 in interest income recognized on impaired loans for the three months ended September 30, 2015 and 2014, respectively, $60,000 and $9,000 in interest income was recognized in respect to non-accrual loans.

(Dollars in thousands)	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	407	$	12	$	184	$	13
Commercial Real Estate		8,218		305		5,037		86
Residential Real Estate		449		—		865		—
Consumer		2		—		5		—
With an allowance recorded:
Commercial Real Estate		581		45		101		8
Residential Real Estate		445		—		17		2
Total	$	10,102	$	362	$	6,209	$	109
Total consists of:
Commercial and Industrial	$	407	$	12	$	184	$	13
Commercial Real Estate	$	8,799	$	350	$	5,138	$	94
Residential Real Estate	$	894	$	—	$	882	$	2
Consumer	$	2	$	—	$	5	$	—

_____________________

Of the $362,000 and $109,000 in interest income recognized on impaired loans for the nine months ended September 30, 2015 and 2014, respectively, $60,000 and $10,000 in interest income was recognized in respect to non-accrual loans.

Loan receivables on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing, as of September 30, 2015 and December 31, 2014 were as follows:

(Dollars in thousands)
	September 30,		December 31,
	2015		2014
Commercial and Industrial	$	—	$	5
Commercial Real Estate		4,570		2,678
Residential Real Estate		934		1,291
Total non-accrual loans		5,504		3,974
Foreclosed assets held for resale		256		55
Loans past-due 90 days or more and still accruing		164		10
Total non-performing assets	$	5,924	$	4,039

The following tables present the classes of the loan portfolio summarized by the past-due status at September 30, 2015 and December 31, 2014:

(Dollars in thousands)
													90 Days
													Or Greater
					90 Days								Past Due
	30-59 Days		60-89 Days		or Greater		Total				Total		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
September 30, 2015:
Commercial and Industrial	$	185	$	24	$	22	$	231	$	88,195	$	88,426	$	22
Commercial Real Estate		561		403		4,520		5,484		254,339		259,823		—
Residential Real Estate		1,381		216		1,045		2,642		163,132		165,774		142
Consumer		17		13		—		30		5,856		5,886		—
Total	$	2,144	$	656	$	5,587	$	8,387	$	511,522	$	519,909	$	164

(Dollars in thousands)
													90 Days
													Or Greater
					90 Days								Past Due
	30-59 Days		60-89 Days		or Greater		Total				Total		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
December 31, 2014:
Commercial and Industrial	$	72	$	28	$	5	$	105	$	64,551	$	64,656	$	—
Commercial Real Estate		1,657		613		2,375		4,645		249,277		253,922		—
Residential Real Estate		1,998		224		1,220		3,442		160,111		163,553		10
Consumer		27		8		—		35		5,295		5,330		—
Total	$	3,754	$	873	$	3,600	$	8,227	$	479,234	$	487,461	$	10

At September 30, 2015 and December 31, 2014, there were no commitments to lend additional funds with respect to impaired loans.

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BORROWINGS

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

Subordinated Borrowings Disclosure [Text Block]

NOTE 5 — BORROWINGS

Short-Term Borrowings

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, Federal Discount Window, and Federal Home Loan Bank (“FHLB”) advances, which generally represent overnight or less than 30-day borrowings.

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

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

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

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

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of September 30, 2015 and December 31, 2014.

(Dollars in thousands)			Gross		Net Amounts
			Amounts		of Liabilities
			Offset		Presented
	Gross		in the		in the
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral		Net
	Liabilities		Sheet		Sheet		Instruments		Pledge		Amount
September 30, 2015
Repurchase agreements (a)	$	22,882	$	—	$	22,882	$	(22,882)	$	—	$	—
December 31, 2014
Repurchase agreements (a)	$	16,730	$	—	$	16,730	$	(16,730)	$	—	$	—

______________________

(a) As of September 30, 2015 and December 31, 2014, the fair value of securities pledged in connection with repurchase agreements was $28,837,000 and $26,094,000, respectively.

 

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of September 30, 2015.

(Dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total
September 30, 2015:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and /or agency securities	$	22,882	$	—	$	—	$	—	$	22,882
Total	$	22,882	$	—	$	—	$	—	$	22,882

Long-Term Borrowings

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

XML

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

9 Months Ended

Sep. 30, 2015

Risks and Uncertainties [Abstract]

Schedule Off Balance Sheet Credit Risks [Text Block]

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, 2015 and December 31, 2014, were as follows:

(Dollars in thousands)
	September 30, 2015		December 31, 2014
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	83,658	$	84,983
Financial standby letters of credit	$	475	$	471
Performance standby letters of credit	$	5,102	$	5,851

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.

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 5) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Recorded Investment
Total	$ 12,954		$ 12,954		$ 7,044
Unpaid Principal Balance
Total	17,511		17,511		7,810
Related Allowance
Total	1,279		1,279		119
Average Recorded Investment
Total	11,745	$ 6,888	10,102	$ 6,209
Interest Income Recognized
Total	106	30	362	109
Commercial and Industrial [Member]
Recorded Investment
With no related allowance recorded	400		400		399
With an allowance recorded	0		0		0
Total	400		400		399
Unpaid Principal Balance
With no related allowance recorded	545		545		545
With an allowance recorded	0		0		0
Total	545		545		545
Related Allowance
With no related allowance recorded	0		0		0
With an allowance recorded	0		0		0
Total	0		0		0
Average Recorded Investment
With no related allowance recorded	407	341	407	184
Total	407	341	407	184
Interest Income Recognized
With no related allowance recorded	2	0	12	13
Total	2	0	12	13
Commercial Real Estate [Member]
Recorded Investment
With no related allowance recorded	9,297		9,297		4,828
With an allowance recorded	2,323		2,323		522
Total	11,620		11,620		5,350
Unpaid Principal Balance
With no related allowance recorded	9,641		9,641		5,278
With an allowance recorded	6,272		6,272		522
Total	15,913		15,913		5,800
Related Allowance
With no related allowance recorded	0		0		0
With an allowance recorded	1,243		1,243		38
Total	1,243		1,243		38
Average Recorded Investment
With no related allowance recorded	9,235	5,213	8,218	5,037
With an allowance recorded	1,162	171	581	101
Total	10,397	5,384	8,799	5,138
Interest Income Recognized
With no related allowance recorded	59	20	305	86
With an allowance recorded	45	8	45	8
Total	104	28	350	94
Residential Real Estate [Member]
Recorded Investment
With no related allowance recorded	493		493		727
With an allowance recorded	441		441		564
Total	934		934		1,291
Unpaid Principal Balance
With no related allowance recorded	612		612		892
With an allowance recorded	441		441		569
Total	1,053		1,053		1,461
Related Allowance
With no related allowance recorded	0		0		0
With an allowance recorded	36		36		81
Total	36		36		81
Average Recorded Investment
With no related allowance recorded	499	1,123	449	865
With an allowance recorded	441	33	445	17
Total	940	1,156	894	882
Interest Income Recognized
With no related allowance recorded	0	0	0	0
With an allowance recorded	0	2	0	2
Total	0	2	0	2
Consumer [Member]
Recorded Investment
With no related allowance recorded	0		0		4
With an allowance recorded	0		0		0
Total	0		0		4
Unpaid Principal Balance
With no related allowance recorded	0		0		4
With an allowance recorded	0		0		0
Total	0		0		4
Related Allowance
With no related allowance recorded	0		0		0
With an allowance recorded	0		0		0
Total	0		0		$ 0
Average Recorded Investment
With no related allowance recorded	1	7	2	5
Total	1	7	2	5
Interest Income Recognized
With no related allowance recorded	0	0	0	0
Total	$ 0	$ 0	$ 0	$ 0

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BORROWINGS (Tables)

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

Schedule of Repurchase Agreements [Table Text Block]

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of September 30, 2015 and December 31, 2014.

(Dollars in thousands)			Gross		Net Amounts
			Amounts		of Liabilities
			Offset		Presented
	Gross		in the		in the
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral		Net
	Liabilities		Sheet		Sheet		Instruments		Pledge		Amount
September 30, 2015
Repurchase agreements (a)	$	22,882	$	—	$	22,882	$	(22,882)	$	—	$	—
December 31, 2014
Repurchase agreements (a)	$	16,730	$	—	$	16,730	$	(16,730)	$	—	$	—

______________________

(a) As of September 30, 2015 and December 31, 2014, the fair value of securities pledged in connection with repurchase agreements was $28,837,000 and $26,094,000, respectively.

Schedule Of Remaining Contractual Maturity Of Repurchase Agreements [Table Text Block]

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of September 30, 2015.

(Dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total
September 30, 2015:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and /or agency securities	$	22,882	$	—	$	—	$	—	$	22,882
Total	$	22,882	$	—	$	—	$	—	$	22,882

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INVESTMENT SECURITIES (Details 1) - USD ($) $ in Thousands		Sep. 30, 2015	Dec. 31, 2014
Held-to-Maturity - Amortized cost
Total		$ 30	$ 1,056
Held-to-Maturity - Estimated fair value
Total		31	$ 1,060
US Treasury Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year		0
1 - 5 Years		1,026
5 - 10 Years		0
After 10 Years		0
Total		1,026
Available-For-Sale - Estimated fair value
Within 1 Year		0
1 - 5 Years		1,032
5 - 10 Years		0
After 10 Years		0
Total		$ 1,032
Available-For-Sale - Weighted average yield
Within 1 Year		0.00%
1 - 5 Years		0.96%
5 - 10 Years		0.00%
After 10 Years		0.00%
Total		0.96%
US Government-sponsored Enterprises Debt Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year	[1]	$ 0
1 - 5 Years	[1]	15,127
5 - 10 Years	[1]	40,740
After 10 Years	[1]	61,950
Total	[1]	117,817
Available-For-Sale - Estimated fair value
Within 1 Year	[1]	0
1 - 5 Years	[1]	15,271
5 - 10 Years	[1]	41,077
After 10 Years	[1]	62,006
Total	[1]	$ 118,354
Available-For-Sale - Weighted average yield
Within 1 Year	[1]	0.00%
1 - 5 Years	[1]	1.83%
5 - 10 Years	[1]	2.18%
After 10 Years	[1]	1.65%
Total	[1]	1.86%
Held-to-Maturity - Amortized cost
Within 1 Year	[1]	$ 0
1 - 5 Years	[1]	30
5 - 10 Years	[1]	0
After 10 Years	[1]	0
Total	[1]	30
Held-to-Maturity - Estimated fair value
Within 1 Year	[1]	0
1 - 5 Years	[1]	31
5 - 10 Years	[1]	0
After 10 Years	[1]	0
Total	[1]	$ 31
Held-to-Maturity - Weighted average yield
Within 1 Year	[1]	0.00%
1 - 5 Years	[1]	2.55%
5 - 10 Years	[1]	0.00%
After 10 Years	[1]	0.00%
Total	[1]	2.55%
Obligations of State and Political Subdivisions [Member]
Available-For-Sale - Amortized cost
Within 1 Year	[2]	$ 550
1 - 5 Years	[2]	20,586
5 - 10 Years	[2]	91,445
After 10 Years	[2]	83,264
Total	[2]	195,845
Available-For-Sale - Estimated fair value
Within 1 Year	[2]	565
1 - 5 Years	[2]	21,077
5 - 10 Years	[2]	92,800
After 10 Years	[2]	86,111
Total	[2]	$ 200,553
Available-For-Sale - Weighted average yield
Within 1 Year	[2]	6.45%
1 - 5 Years	[2]	3.01%
5 - 10 Years	[2]	3.13%
After 10 Years	[2]	4.93%
Total	[2]	3.89%
Corporate Debt Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year		$ 869
1 - 5 Years		12,155
5 - 10 Years		36,326
After 10 Years		0
Total		49,350
Available-For-Sale - Estimated fair value
Within 1 Year		885
1 - 5 Years		12,031
5 - 10 Years		35,472
After 10 Years		0
Total		$ 48,388
Available-For-Sale - Weighted average yield
Within 1 Year		3.15%
1 - 5 Years		2.30%
5 - 10 Years		2.69%
After 10 Years		0.00%
Total		2.60%
Equity Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year	[3]	$ 0
1 - 5 Years	[3]	0
5 - 10 Years	[3]	0
After 10 Years	[3]	1,194
Total	[3]	1,194
Available-For-Sale - Estimated fair value
Within 1 Year	[3]	0
1 - 5 Years	[3]	0
5 - 10 Years	[3]	0
After 10 Years	[3]	1,966
Total	[3]	$ 1,966
Available-For-Sale - Weighted average yield
Within 1 Year	[3]	0.00%
1 - 5 Years	[3]	0.00%
5 - 10 Years	[3]	0.00%
After 10 Years	[3]	4.95%
Total	[3]	4.95%

[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 are not considered to have defined maturities and are included in the after ten year category.

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Commitments to extend credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Concentration Risk, Credit Risk, Financial Instrument, Off-Balance Sheet Risk	$ 83,658	$ 84,983
Financial standby letters of credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Concentration Risk, Credit Risk, Financial Instrument, Off-Balance Sheet Risk	475	471
Performance standby letters of credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Concentration Risk, Credit Risk, Financial Instrument, Off-Balance Sheet Risk	$ 5,102	$ 5,851

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
		Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Net Income		$ 2,485	$ 2,383	$ 7,364	$ 7,437
Other comprehensive (loss) income:
Unrealized net holding gains (losses) on available-for-sale investment securities arising during the period, net of income taxes		2,285	(174)	356	4,951
Less reclassification adjustment for net gains included in net income, net of income taxes	[1],[2]	(683)	(108)	(1,406)	(1,296)
Less reclassification adjustment for impairment charge on equity securities included in net income, net of income taxes	[2],[3]			9	0
Total other comprehensive (loss) income		1,602	(282)	(1,041)	3,655
Total Comprehensive Income		$ 4,087	$ 2,101	$ 6,323	$ 11,092

[1] Gross amounts are included in net investment securities gains on the Consolidated Statements of Income in non-interest income.

[2] Income tax amounts are included in income tax expense on the Consolidated Statements of Income.

[3] Gross amounts are included in impairment charges on equity securities on the Consolidated Statements of Income in non-interest income.

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BASIS OF PRESENTATION AND ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2015

Accounting Policies [Abstract]

Basis of Presentation and Significant Accounting Policies [Text Block]

NOTE 1 — BASIS OF PRESENTATION AND ACCOUNTING POLICIES

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2015, are not necessarily indicative of the results for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.

The Corporation has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2015 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

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INVESTMENT SECURITIES (Details 2) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Less Than 12 Months
Fair Value	$ 82,813	$ 76,723
Unrealized Loss	(823)	(894)
12 Months or More
Fair Value	39,014	47,438
Unrealized Loss	(855)	(915)
Total
Fair Value	121,827	124,161
Unrealized Loss	(1,678)	(1,809)
US Treasury Securities [Member]
Less Than 12 Months
Fair Value	0	6,030
Unrealized Loss	0	(2)
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	0	6,030
Unrealized Loss	0	(2)
Obligations of U.S. Government Corporations and Agencies Mortgage-backed [Member]
Less Than 12 Months
Fair Value	17,464	19,823
Unrealized Loss	(199)	(230)
12 Months or More
Fair Value	11,801	17,099
Unrealized Loss	(100)	(257)
Total
Fair Value	29,265	36,922
Unrealized Loss	(299)	(487)
Other Obligations of U.S. Government Corporations and Agencies [Member]
Less Than 12 Months
Fair Value	3,928	7,154
Unrealized Loss	(46)	(6)
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	3,928	7,154
Unrealized Loss	(46)	(6)
Obligations of State and Political Subdivisions [Member]
Less Than 12 Months
Fair Value	34,508	21,459
Unrealized Loss	(213)	(94)
12 Months or More
Fair Value	8,133	18,273
Unrealized Loss	(127)	(375)
Total
Fair Value	42,641	39,732
Unrealized Loss	(340)	(469)
Corporate debt securities [Member]
Less Than 12 Months
Fair Value	26,913	22,227
Unrealized Loss	(365)	(542)
12 Months or More
Fair Value	19,080	12,066
Unrealized Loss	(628)	(283)
Total
Fair Value	45,993	34,293
Unrealized Loss	(993)	(825)
Marketable equity securities [Member]
Less Than 12 Months
Fair Value	0	30
Unrealized Loss	0	(20)
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	0	30
Unrealized Loss	$ 0	$ (20)

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BORROWINGS (Details) - USD ($) $ in Thousands		Sep. 30, 2015	Dec. 31, 2014
Repurchase agreements
Gross Amounts of Recognized Liabilities	[1]	$ 22,882	$ 16,730
Gross Amounts Offset in the Consolidated Balance Sheet	[1]	0	0
Net Amounts of Liabilities Presented in the Consolidated Balance Sheet	[1]	22,882	16,730
Financial Instruments	[1]	(22,882)	(16,730)
Cash Collateral Pledge	[1]	0	0
Net Amount	[1]	$ 0	$ 0

[1] As of September 30, 2015 and December 31, 2014, the fair value of securities pledged in connection with repurchase agreements was $28,837,000 and $26,094,000, respectively.

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

9 Months Ended

Sep. 30, 2015

Receivables [Abstract]

Financing Receivable Credit Quality Indicators [Table Text Block]

The following table presents the classes of the loan portfolio summarized by risk rating as of September 30, 2015 and December 31, 2014:

		Commercial and
(Dollars in thousands)		Industrial				Commercial Real Estate
		September 30,		December 31,		September 30,		December 31,
		2015		2014		2015		2014
Grade:
1-6	Pass	$	88,125	$	64,459	$	239,816	$	237,404
7	Special Mention		159		47		3,900		11,008
8	Substandard		—		21		15,796		5,472
9	Doubtful		—		—		—		—
Add (deduct): Unearned discount and			—		—		—		—
Net deferred loan fees and costs			142		129		311		38
Total loans		$	88,426	$	64,656	$	259,823	$	253,922

		Residential Real Estate
		Including Home Equity				Consumer Loans
		September 30,		December 31,		September 30,		December 31,
		2015		2014		2015		2014
Grade:
1-6	Pass	$	162,943	$	161,122	$	5,761	$	5,248
7	Special Mention		1,115		520		28		21
8	Substandard		1,680		1,640		4		9
9	Doubtful		—		—		—		—
Add (deduct): Unearned discount and			(20)		—		(1)		(40)
Net deferred loan fees and costs			56		271		94		92
Total loans		$	165,774	$	163,553	$	5,886	$	5,330

		Total Loans
		September 30,		December 31,
		2015		2014
Grade:
1-6	Pass	$	496,645	$	468,233
7	Special Mention		5,202		11,596
8	Substandard		17,480		7,142
9	Doubtful		—		—
Add (deduct): Unearned discount and			(21)		(40)
Net deferred loan fees and costs			603		530
Total loans		$	519,909	$	487,461

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

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

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended September 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	706	$	3,139	$	1,867	$	89	$	799	$	6,600
Charge-offs		—		(95)		(39)		(8)		—		(142)
Recoveries		4		17		—		2		—		23
Provision		56		1,293		105		37		(738)		753
Ending Balance	$	766	$	4,354	$	1,933	$	120	$	61	$	7,234

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the nine month period ended September 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	542	$	3,176	$	1,928	$	107	$	637	$	6,390
Charge-offs		(2)		(232)		(147)		(23)		—		(404)
Recoveries		7		59		—		4		—		70
Provision		219		1,351		152		32		(576)		1,178
Ending Balance	$	766	$	4,354	$	1,933	$	120	$	61	$	7,234
Ending balance: individually evaluated for impairment	$	—	$	1,243	$	36	$	—	$	—	$	1,279
Ending balance: collectively evaluated for impairment	$	766	$	3,111	$	1,897	$	120	$	61	$	5,955
Loan Receivables:
Ending Balance	$	88,426	$	259,823	$	165,774	$	5,886	$	—	$	519,909
Ending balance: individually evaluated for impairment	$	400	$	11,620	$	934	$	—	$	—	$	12,954
Ending balance: collectively evaluated for impairment	$	88,026	$	248,203	$	164,840	$	5,886	$	—	$	506,955

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended September 30, 2014:
Beginning balance	$	743	$	3,450	$	1,619	$	51	$	614	$	6,477
Charge-offs		(100)		—		(6)		(21)		—		(127)
Recoveries		3		34		1		2		—		40
Provision		(123)		(108)		262		89		(20)		100
Ending Balance	$	523	$	3,376	$	1,876	$	121	$	594	$	6,490

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the nine month period ended September 30, 2014:
Beginning balance	$	776	$	3,320	$	1,565	$	53	$	805	$	6,519
Charge-offs		(107)		(237)		(180)		(36)		—		(560)
Recoveries		24		59		12		3		—		98
Provision		(170)		234		479		101		(211)		433
Ending Balance	$	523	$	3,376	$	1,876	$	121	$	594	$	6,490
Ending balance: individually evaluated for impairment	$	—	$	28	$	17	$	—	$	—	$	45
Ending balance: collectively evaluated for impairment	$	523	$	3,348	$	1,859	$	121	$	594	$	6,445
Loan Receivables:
Ending Balance	$	69,360	$	249,373	$	161,381	$	5,147	$	—	$	485,261
Ending balance: individually evaluated for impairment	$	340	$	5,573	$	1,173	$	6	$	—	$	7,092
Ending balance: collectively evaluated for impairment	$	69,020	$	243,800	$	160,208	$	5,141	$	—	$	478,169

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of December 31, 2014:
Allowance for Loan Losses:
Ending Balance	$	542	$	3,176	$	1,928	$	107	$	637	$	6,390
Ending balance: individually evaluated for impairment	$	—	$	38	$	81	$	—	$	—	$	119
Ending balance: collectively evaluated for impairment	$	542	$	3,138	$	1,847	$	107	$	637	$	6,271
Loan Receivables:
Ending Balance	$	64,656	$	253,922	$	163,553	$	5,330	$	—	$	487,461
Ending balance: individually evaluated for impairment	$	399	$	5,350	$	1,291	$	4	$	—	$	7,044
Ending balance: collectively evaluated for impairment	$	64,257	$	248,572	$	162,262	$	5,326	$	—	$	480,417

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

The following table presents the unpaid balance of TDRs at the dates indicated:

(Dollars in thousands)
	September 30,		December 31,
	2015		2014
Non-accrual TDRs	$	1,401	$	1,638
Accruing TDRs		7,450		3,070
Total	$	8,851	$	4,708

Troubled Debt Restructurings On Financing Receivables By Type [Table Text Block]

The following table presents information regarding the loan modifications categorized as TDRs during the three and nine months ended September 30, 2015 and September 30, 2014:

(Dollars in thousands, except number of contracts)
	Three Months Ended September 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		—	$	—	$	—	$	—
Commercial Real Estate		2		815		992		1,001
Consumer		—		—		—		—
Total		2	$	815	$	992	$	1,001

(Dollars in thousands, except number of contracts)
	Three Months Ended September 30, 2014
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		—	$	—	$	—	$	—
Commercial Real Estate		4		801		888		887
Consumer		—		—		—		—
Total		4	$	801	$	888	$	887

(Dollars in thousands, except number of contracts)
	Nine Months Ended September 30, 2015
		Pre-Modification		Post-Modification
	Number	Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts	Investment		Investment		Investment
Commercial and Industrial	1	$	23	$	23	$	21
Commercial Real Estate	6		5,395		5,527		5,527
Consumer	—		—		—		—
Total	7	$	5,418	$	5,550	$	5,548

(Dollars in thousands, except number of contracts)
	Nine Months Ended September 30, 2014
		Pre-Modification		Post-Modification
	Number	Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts	Investment		Investment		Investment
Commercial and Industrial	2	$	327	$	327	$	326
Commercial Real Estate	10		1,389		1,476		1,080
Consumer	1		7		7		6
Total	13	$	1,723	$	1,810	$	1,412

Loan Modifications By Type [Table Text Block]

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three and nine months ended September 30, 2015 and September 30, 2014 with the total number of each type of modification performed.

	Three Months Ended September 30, 2015								Nine Months Ended September 30, 2015
	Rate		Term		Payment		Number		Rate		Term		Payment		Number
	Modification		Modification		Modification		Modified		Modification		Modification		Modification		Modified
Commercial and Industrial		—		—		—		—		—		1		—		1
Commercial Real Estate		—		1		1		2		—		3		3		6
Consumer		—		—		—		—		—		—		—		—
Total		—		1		1		2		—		4		3		7

	Three Months Ended September 30, 2014								Nine Months Ended September 30, 2014
	Rate		Term		Payment		Number		Rate		Term		Payment		Number
	Modification		Modification		Modification		Modified		Modification		Modification		Modification		Modified
Commercial and Industrial		—		—		—		—		—		—		2		2
Commercial Real Estate		—		1		3		4		1		4		5		10
Consumer		—		—		—		—		—		—		1		1
Total		—		1		3		4		1		4		8		13

Impaired Financing Receivables [Table Text Block]

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below for the periods ended September 30, 2015 and December 31, 2014.

(Dollars in thousands)	September 30, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	400	$	545	$	—	$	399	$	545	$	—
Commercial Real Estate		9,297		9,641		—		4,828		5,278		—
Residential Real Estate		493		612		—		727		892		—
Consumer		—		—		—		4		4		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Commercial Real Estate		2,323		6,272		1,243		522		522		38
Residential Real Estate		441		441		36		564		569		81
Consumer		—		—		—		—		—		—
Total	$	12,954	$	17,511	$	1,279	$	7,044	$	7,810	$	119
Total consists of:
Commercial and Industrial	$	400	$	545	$	—	$	399	$	545	$	—
Commercial Real Estate	$	11,620	$	15,913	$	1,243	$	5,350	$	5,800	$	38
Residential Real Estate	$	934	$	1,053	$	36	$	1,291	$	1,461	$	81
Consumer	$	—	$	—	$	—	$	4	$	4	$	—

______________________

At September 30, 2015 and December 31, 2014, $8,851,000 and $4,708,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $0 and $27,000, respectively. The recorded investment represents the loan balance reflected on the Consolidated Balance Sheets net of any charge-offs. The unpaid principal balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the three and nine months ended September 30, 2015 and 2014.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	407	$	2	$	341	$	—
Commercial Real Estate		9,235		59		5,213		20
Residential Real Estate		499		—		1,123		—
Consumer		1		—		7		—
With an allowance recorded:
Commercial Real Estate		1,162		45		171		8
Residential Real Estate		441		—		33		2
Total	$	11,745	$	106	$	6,888	$	30
Total consists of:
Commercial and Industrial	$	407	$	2	$	341	$	—
Commercial Real Estate	$	10,397	$	104	$	5,384	$	28
Residential Real Estate	$	940	$	—	$	1,156	$	2
Consumer	$	1	$	—	$	7	$	—

_____________________

Of the $106,000 and $30,000 in interest income recognized on impaired loans for the three months ended September 30, 2015 and 2014, respectively, $60,000 and $9,000 in interest income was recognized in respect to non-accrual loans.

(Dollars in thousands)	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2015				September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	407	$	12	$	184	$	13
Commercial Real Estate		8,218		305		5,037		86
Residential Real Estate		449		—		865		—
Consumer		2		—		5		—
With an allowance recorded:
Commercial Real Estate		581		45		101		8
Residential Real Estate		445		—		17		2
Total	$	10,102	$	362	$	6,209	$	109
Total consists of:
Commercial and Industrial	$	407	$	12	$	184	$	13
Commercial Real Estate	$	8,799	$	350	$	5,138	$	94
Residential Real Estate	$	894	$	—	$	882	$	2
Consumer	$	2	$	—	$	5	$	—

_____________________

Of the $362,000 and $109,000 in interest income recognized on impaired loans for the nine months ended September 30, 2015 and 2014, respectively, $60,000 and $10,000 in interest income was recognized in respect to non-accrual loans.

Schedule of Non-Performing Assets [Table Text Block]

Loan receivables on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing, as of September 30, 2015 and December 31, 2014 were as follows:

(Dollars in thousands)
	September 30,		December 31,
	2015		2014
Commercial and Industrial	$	—	$	5
Commercial Real Estate		4,570		2,678
Residential Real Estate		934		1,291
Total non-accrual loans		5,504		3,974
Foreclosed assets held for resale		256		55
Loans past-due 90 days or more and still accruing		164		10
Total non-performing assets	$	5,924	$	4,039

Past Due Financing Receivables [Table Text Block]

The following tables present the classes of the loan portfolio summarized by the past-due status at September 30, 2015 and December 31, 2014:

(Dollars in thousands)
													90 Days
													Or Greater
					90 Days								Past Due
	30-59 Days		60-89 Days		or Greater		Total				Total		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
September 30, 2015:
Commercial and Industrial	$	185	$	24	$	22	$	231	$	88,195	$	88,426	$	22
Commercial Real Estate		561		403		4,520		5,484		254,339		259,823		—
Residential Real Estate		1,381		216		1,045		2,642		163,132		165,774		142
Consumer		17		13		—		30		5,856		5,886		—
Total	$	2,144	$	656	$	5,587	$	8,387	$	511,522	$	519,909	$	164

(Dollars in thousands)
													90 Days
													Or Greater
					90 Days								Past Due
	30-59 Days		60-89 Days		or Greater		Total				Total		and Still
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
December 31, 2014:
Commercial and Industrial	$	72	$	28	$	5	$	105	$	64,551	$	64,656	$	—
Commercial Real Estate		1,657		613		2,375		4,645		249,277		253,922		—
Residential Real Estate		1,998		224		1,220		3,442		160,111		163,553		10
Consumer		27		8		—		35		5,295		5,330		—
Total	$	3,754	$	873	$	3,600	$	8,227	$	479,234	$	487,461	$	10