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 June 30, 2016

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, 5,645,997 shares as of August 3, 2016

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share data)	June 30,			December 31,
	2016			2015
ASSETS
Cash and due from banks	$	8,586		$	7,474
Interest-bearing deposits in other banks		672			1,534
Total cash and cash equivalents		9,258			9,008
Time deposits with other banks		1,482			1,482
Investment securities available-for-sale		385,089			385,241
Investment securities held-to-maturity (fair value 2016- $21; 2015 - $27)		20			26
Restricted investment in bank stocks		6,622			5,742
Loans		516,998			516,610
Allowance for loan losses		(7,219	)		(6,739	)
Net loans		509,779			509,871
Premises and equipment, net		19,697			20,113
Accrued interest receivable		3,932			4,086
Cash surrender value of bank owned life insurance		22,229			21,900
Investments in low-income housing partnerships		1,465			1,553
Goodwill		19,133			19,133
Foreclosed assets held for resale		1,280			1,472
Deferred income taxes		―			692
Other assets		3,330			3,170
TOTAL ASSETS	$	983,316		$	983,489
LIABILITIES
Deposits:
Non-interest bearing	$	109,113		$	107,391
Interest bearing		575,358			613,207
Total deposits		684,471			720,598
Short-term borrowings		99,638			80,539
Long-term borrowings		75,175			70,232
Accrued interest payable		441			382
Deferred income taxes		2,709			―
Other liabilities		3,546			3,300
TOTAL LIABILITIES		865,980			875,051
STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares in 2016 and 2015; issued 0 in 2016 and 2015		―			―
Common stock, par value $2.00 per share; authorized 20,000,000 shares in 2016 and 2015; issued 5,879,109 in 2016 and 5,853,317 in 2015; outstanding 5,645,997 in 2016 and 5,620,205 in 2015		11,758			11,707
Surplus		34,450			33,830
Retained earnings		68,251			66,622
Accumulated other comprehensive income		8,633			2,035
Treasury stock, at cost, 233,112 shares in 2016 and 2015		(5,756	)		(5,756	)
TOTAL STOCKHOLDERS’ EQUITY		117,336			108,438
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	983,316		$	983,489

See accompanying notes to consolidated financial statements.

2

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Unaudited)

(Dollars in thousands, except per share data)	Three Months Ended					Six Months Ended
	June 30,					June 30,
INTEREST INCOME	2016		2015			2016		2015
Interest and fees on loans	$	5,468	$	5,372		$	10,924	$	10,692
Interest and dividend income on investment securities:
Taxable		1,436		1,657			2,944		3,348
Tax-exempt		940		733			1,862		1,404
Dividends		16		15			31		30
Dividend income on restricted investment in bank stocks		64		72			124		276
Interest on interest-bearing deposits in other banks		8		8			16		16
Total interest income		7,932		7,857			15,901		15,766
INTEREST EXPENSE
Interest on deposits		825		776			1,679		1,528
Interest on short-term borrowings		90		66			161		130
Interest on long-term borrowings		370		387			755		763
Total interest expense		1,285		1,229			2,595		2,421
Net interest income		6,647		6,628			13,306		13,345
Provision for loan losses		284		213			567		425
Net interest income after provision for loan losses		6,363		6,415			12,739		12,920
NON-INTEREST INCOME
Trust department		230		240			430		454
Service charges and fees		446		423			861		822
Bank owned life insurance income		165		165			329		329
ATM fees and debit card income		331		310			643		593
Gains on sales of mortgage loans		55		133			157		314
Net investment securities gains		380		603			394		1,095
Impairment charges on equity securities		―		(14	)		―		(14	)
Other		59		133			152		257
Total non-interest income		1,666		1,993			2,966		3,850
NON-INTEREST EXPENSE
Salaries and employee benefits		2,587		2,847			5,373		5,691
Occupancy, net		379		406			789		874
Furniture and equipment		128		144			264		291
Computer expense		235		149			461		383
Professional services		149		158			302		312
Pennsylvania shares tax		188		190			377		366
FDIC insurance		163		129			317		253
ATM and debit card fees		167		172			306		297
Data processing fees		135		180			268		341
Foreclosed assets held for resale expense		61		42			112		49
Advertising		96		107			163		180
Other		726		872			1,422		1,642
Total non-interest expense		5,014		5,396			10,154		10,679
Income before income tax expense		3,015		3,012			5,551		6,091
Income tax expense		524		582			884		1,212
NET INCOME	$	2,491	$	2,430		$	4,667	$	4,879
PER SHARE DATA
Net income per share:
Basic	$	0.44	$	0.44		$	0.83	$	0.88
Diluted		0.44		0.44			0.83		0.88
Dividends per share		0.27		0.27			0.54		0.54

See accompanying notes to consolidated financial statements.

3

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)	Three Months Ended
	June 30,
	2016			2015
Net Income	$	2,491		$	2,430
Other comprehensive income (loss):
Unrealized net holding gains (losses) on available-for-sale investment securities arising during the period, net of income taxes of $1,391 and $(1,721), respectively		2,687			(3,331	)
Less reclassification adjustment for net gains included in net income, net of income taxes of $(129) and $(205), respectively (a) (c)		(251	)		(398	)
Less reclassification adjustment for impairment charge on equity securities included in net income, net of income taxes of $0 and $5, respectively (b) (c)		—			9
Total other comprehensive income (loss)		2,436			(3,720	)
Total Comprehensive Income (Loss)	$	4,927		$	(1,290	)

_______________________

(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.

(Dollars in thousands)	Six Months Ended
	June 30,
	2016			2015
Net Income	$	4,667		$	4,879
Other comprehensive income (loss):
Unrealized net holding gains (losses) on available-for-sale investment securities arising during the period, net of income taxes of $3,536 and $(1,005), respectively		6,858			(1,929	)
Less reclassification adjustment for net gains included in net income, net of income taxes of $(134) and $(372), respectively (a) (c)		(260	)		(723	)
Less reclassification adjustment for impairment charge on equity securities included in net income, net of income taxes of $0 and $5, respectively (b) (c)		—			9
Total other comprehensive income (loss)		6,598			(2,643	)
Total Comprehensive Income	$	11,265		$	2,236

_______________________

(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

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(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, 2016		5,853,317	$	11,707	$	33,830	$	66,622		$	2,035		$	(5,756	)	$	108,438
Net Income								4,667									4,667
Other comprehensive income, net of taxes											6,598						6,598
Issuance of common stock under dividend reinvestment plan		25,792		51		620											671
Dividends - $0.54 per share								(3,038	)								(3,038	)
Balance at June 30, 2016		5,879,109	$	11,758	$	34,450	$	68,251		$	8,633		$	(5,756	)	$	117,336
Balance at January 1, 2015		5,802,521	$	11,605	$	32,674	$	63,485		$	4,330		$	(5,823	)	$	106,271
Net Income								4,879									4,879
Other comprehensive loss, net of taxes											(2,643	)					(2,643	)
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options		24,391		49		551								58			658
Dividends - $0.54 per share								(3,011	)								(3,011	)
Balance at June 30, 2015		5,826,912	$	11,654	$	33,225	$	65,353		$	1,687		$	(5,765	)	$	106,154

See accompanying notes to consolidated financial statements.

5

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Unaudited)

(Dollars in thousands)

	2016			2015
OPERATING ACTIVITIES
Net income	$	4,667		$	4,879
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		567			425
Depreciation and amortization		677			784
Net premium amortization on investment securities		1,900			1,324
Deferred income tax expense		―			113
Gains on sales of mortgage loans		(157	)		(297	)
Gains on sales of mortgage loans held for investment transferred to held for sale		―			(17	)
Proceeds from sales of mortgage loans originated for resale		4,621			11,079
Originations of mortgage loans originated for resale		(6,483	)		(8,853	)
Gains on sales of investment securities		(394	)		(1,095	)
Impairment charges on equity securities		―			14
Net losses on sales of foreclosed real estate held for resale, including write-downs		37			33
Decrease (increase) in accrued interest receivable		154			(692	)
Earnings on investment in bank owned life insurance		(329	)		(329	)
Losses on disposals of premises and equipment		―			30
Increase in other assets		(118	)		(1,201	)
Increase in accrued interest payable		59			31
Increase (decrease) in other liabilities		238			(2,135	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,439			4,093
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale		27,408			79,740
Proceeds from maturities and redemptions of investment securities available-for-sale		6,808			12,727
Purchases of investment securities available-for-sale		(25,571	)		(102,185	)
Proceeds from maturities and redemptions of investment securities held-to-maturity		6			1,023
Net change in restricted investment in bank stocks		(880	)		(937	)
Net decrease (increase) in loans		1,512			(17,512	)
Proceeds from sales of mortgage loans held for investment transferred to held for sale		―			491
Purchases of premises and equipment		(208	)		(122	)
Proceeds from sales of foreclosed assets held for resale		230			―
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		9,305			(26,775	)
FINANCING ACTIVITIES
Net (decrease) increase in deposits		(36,127	)		4,539
Net increase in short-term borrowings		19,099			15,339
Proceeds from long-term borrowings		10,000			5,000
Repayment of long-term borrowings		(5,057	)		(53	)
Common stock issued		629			589
Proceeds from issuance of treasury stock		―			32
Dividends paid		(3,038	)		(3,011	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(14,494	)		22,435
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		250			(247	)
CASH AND CASH EQUIVALENTS, BEGINNING		9,008			7,967
CASH AND CASH EQUIVALENTS, ENDING	$	9,258		$	7,720
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	$	2,536		$	2,390
Income taxes paid		1,730			1,330
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Purchased securities settling after quarter end		―			1,920
Loans transferred to foreclosed assets held for resale		75			226
Loans transferred (from) to held for sale portfolio		(171	)		491
Common stock subscription receivable		42			37

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 six month periods ended June 30, 2016, are not necessarily indicative of the results for the year ending December 31, 2016. 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, 2015.

The Corporation has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of June 30, 2016 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. In July 2016, the Corporation anticipates approximately $449,000 in tax-free claims income from life insurance proceeds as the result of the death benefit which will be paid on a life insurance policy covering one of our former employees that remained an insured person by our bank-owned life insurance program following her separation of employment.

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

Except as disclosed below, there were no new accounting pronouncements affecting the Corporation during the six months ended June 30, 2016 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 August 2015, the FASB issued an update ASU 2015-14 which 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. In March 2016, the FASB issued an update ASU 2016-08 which updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. In April 2016, the FASB issued an update ASU 2016-10. The ASU updates the standard by identifying performance obligations and licenses of intellectual property, which clarifies the guidance surrounding licensing arrangements and the identification of performance obligations. In May 2016, the FASB issued an update ASU 2016-12 which articulates narrow-scope improvements and practical expedients. The Corporation is currently evaluating the impact of these ASUs on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the guidance revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with fair value of financial instruments. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this update is not expected to have a material impact on the Corporation’s consolidated financial position or results of operations.

7

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Corporation is in the process of evaluating the impact of this guidance and anticipates an impact to the consolidated financial statements with regard to the Corporation’s operating lease agreements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. This is in contrast to existing guidance whereby credit losses generally are not recognized until they are incurred. For public companies, this update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Corporation is currently assessing the impact that this guidance will have 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.

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.

8

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 June 30, 2016 and December 31, 2015:

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2016:	Cost		Gains		Losses			Value
U.S. Treasury securities	$	1,015	$	5	$	―		$	1,020
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		112,802		1,596		(194	)		114,204
Other		11,541		74		(24	)		11,591
Obligations of state and political subdivisions		201,749		10,828		―			212,577
Corporate debt securities		43,623		388		(342	)		43,669
Marketable equity securities		1,194		834		―			2,028
Total	$	371,924	$	13,725	$	(560	)	$	385,089

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2016:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	20	$	1	$	―	$	21
Total	$	20	$	1	$	―	$	21

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2015:	Cost		Gains		Losses			Value
U.S. Treasury securities	$	1,022	$	―	$	(1	)	$	1,021
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		113,847		37		(1,410	)		112,474
Other		21,554		117		(79	)		21,592
Obligations of state and political subdivisions		195,297		5,425		(408	)		200,314
Corporate debt securities		49,162		10		(1,339	)		47,833
Marketable equity securities		1,194		813		―			2,007
Total	$	382,076	$	6,402	$	(3,237	)	$	385,241

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	26	$	1	$	―	$	27
Total	$	26	$	1	$	―	$	27

Securities Available-for-Sale with an aggregate fair value of $255,220,000 at June 30, 2016 and $326,872,000 at December 31, 2015, and securities Held-to-Maturity with an aggregate book value of $20,000 at June 30, 2016 and $26,000 at December 31, 2015, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase, FHLB advances and other balances of $191,148,000 at June 30, 2016 and $219,576,000 at December 31, 2015.

9

The amortized cost, estimated fair value and weighted average yield of debt and equity securities, by contractual maturity, are shown below at June 30, 2016. 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)

	June 30, 2016
	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	$	―		$	―		$	902		$	―		$	―		$	―
Fair value		―			―			908			―			―			―
Weighted average yield		―			―			6.29	%		―			―			―
1 - 5 Years:
Amortized cost		1,015			30,977			42,696			12,639			―			20
Fair value		1,020			31,593			44,250			12,722			―			21
Weighted average yield		0.96	%		2.06	%		2.80	%		2.38	%		―			2.55	%
5 - 10 Years:
Amortized cost		―			16,821			72,677			30,984			―			―
Fair value		―			17,166			76,116			30,947			―			―
Weighted average yield		―			2.06	%		3.29	%		2.76	%		―			―
After 10 Years:
Amortized cost		―			76,545			85,474			―			1,194			―
Fair value		―			77,036			91,303			―			2,028			―
Weighted average yield		―			1.67	%		4.58	%		―			5.16	%		―
Total:
Amortized cost	$	1,015		$	124,343		$	201,749		$	43,623		$	1,194		$	20
Fair value		1,020			125,795			212,577			43,669			2,028			21
Weighted average yield		0.96	%		1.82	%		3.75	%		2.65	%		5.16	%		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 June 30, 2016. 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 June 30, 2016 and 2015 were $20,374,000 and $31,966,000, respectively. Gross gains realized on these sales were $380,000 and $603,000, respectively. There were no losses realized on these sales for the three months ended June 30, 2016 and 2015. Impairment losses realized on Available-for-Sale equity securities for the three months ended June 30, 2016 and 2015 were $0 and $14,000, respectively.

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the six months ended June 30, 2016 and 2015 were $27,408,000 and $79,740,000, respectively. Gross gains realized on these sales were $435,000 and $1,151,000, respectively. Gross losses on these sales were $41,000 and $56,000, respectively. Impairment losses realized on Available-for-Sale equity securities for the six months ended June 30, 2016 and 2015 were $0 and $14,000, respectively.

There were no proceeds from sales of investments in Held-to-Maturity debt equity securities during the three or six month periods ended June 30, 2016 or 2015. Therefore, there were no gains or losses realized during these periods.

10

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 June 30, 2016 or December 31, 2015.

11

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 June 30, 2016 and December 31, 2015:

June 30, 2016

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	―	$	―		$	―	$	―		$	―	$	―
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		11,375		(78	)		7,751		(116	)		19,126		(194	)
Other		3,676		(24	)		―		―			3,676		(24	)
Obligations of state and political subdivisions		―		―			―		―			―		―
Corporate debt securities		4,467		(30	)		13,464		(312	)		17,931		(342	)
Marketable equity securities		―		―			―		―			―		―
	$	19,518	$	(132	)	$	21,215	$	(428	)	$	40,733	$	(560	)

December 31, 2015

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	1,021	$	(1	)	$	―	$	―		$	1,021	$	(1	)
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		86,618		(1,177	)		11,234		(233	)		97,852		(1,410	)
Other		12,962		(79	)		―		―			12,962		(79	)
Obligations of state and political subdivisions		26,163		(258	)		8,105		(150	)		34,268		(408	)
Corporate debt securities		27,527		(531	)		19,433		(808	)		46,960		(1,339	)
Marketable equity securities		―		―			―		―			―		―
	$	154,291	$	(2,046	)	$	38,772	$	(1,191	)	$	193,063	$	(3,237	)

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 8 securities with a one year or less unrealized loss position or any of their 10 securities with a greater than one year unrealized loss position as of June 30, 2016, 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.

12

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

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

Residential mortgage loans held for 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 thirty 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. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability and willingness to repay is 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 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 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

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

14

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.

15

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

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the Consolidated Balance Sheets. As of June 30, 2016 and December 31, 2015, the amount of the reserve for unfunded lending commitments was $192,000 and $184,000, respectively.

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

A loan is considered impaired when, based on current information and events, it is probable that the 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 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.

16

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 and 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.

17

The following table presents the classes of the loan portfolio summarized by risk rating as of June 30, 2016 and December 31, 2015:

		Commercial and
(Dollars in thousands)		Industrial				Commercial Real Estate
		June 30,		December 31,		June 30,		December 31,
		2016		2015		2016		2015
Grade:
1-6  Pass		$	74,932	$	80,730	$	243,888	$	242,546
7     Special Mention			4,331		4,194		9,216		3,890
8     Substandard			―		―		10,031		12,238
9     Doubtful			―		―		―		―
Add (deduct):	Unearned discount and		―		―		―		―
	Net deferred loan fees and costs		136		150		389		344
Total loans		$	79,399	$	85,074	$	263,524	$	259,018

		Residential Real Estate
		Including Home Equity						Consumer Loans
		June 30,			December 31,			June 30,		December 31,
		2016			2015			2016		2015
Grade:
1-6  Pass		$	165,568		$	163,690		$	6,198	$	5,764
7     Special Mention			1,063			1,667			17		26
8     Substandard			1,119			1,245			5		4
9     Doubtful			―			―			―		―
Add (deduct):	Unearned discount and		(10	)		(15	)		―		―
	Net deferred loan fees and costs		15			41			100		96
Total loans		$	167,755		$	166,628		$	6,320	$	5,890

		Total Loans
		June 30,			December 31,
		2016			2015
Grade:
1-6  Pass		$	490,586		$	492,730
7     Special Mention			14,627			9,777
8     Substandard			11,155			13,487
9     Doubtful			―			―
Add (deduct):	Unearned discount and		(10	)		(15	)
	Net deferred loan fees and costs		640			631
Total loans		$	516,998		$	516,610

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $40,186,000 and $2,877,000 at June 30, 2016 and $43,817,000 and $2,992,000 at December 31, 2015. Loans held for sale amounted to $3,755,000 at June 30, 2016 and $1,929,000 at December 31, 2015.

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

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer		Unallocated		Total
As of and for the three month period ended June 30, 2016:
Allowance for Loan Losses:
Beginning balance	$	731		$	3,983		$	1,749		$	101	$	448	$	7,012
Charge-offs		(2	)		(57	)		(25	)		―		―		(84	)
Recoveries		4			―			―			3		―		7
Provision		(31	)		88			(27	)		2		252		284
Ending Balance	$	702		$	4,014		$	1,697		$	106	$	700	$	7,219

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated		Total
As of and for the six month period ended June 30, 2016:
Allowance for Loan Losses:
Beginning balance	$	725		$	3,983		$	1,777		$	96		$	158	$	6,739
Charge-offs		(2	)		(57	)		(25	)		(23	)		―		(107	)
Recoveries		4			―			12			4			―		20
Provision		(25	)		88			(67	)		29			542		567
Ending Balance	$	702		$	4,014		$	1,697		$	106		$	700	$	7,219
Ending balance: individually evaluated for impairment	$	―		$	393		$	19		$	―		$	―	$	412
Ending balance: collectively evaluated for impairment	$	702		$	3,621		$	1,678		$	106		$	700	$	6,807
Loans Receivable:
Ending Balance	$	79,399		$	263,524		$	167,755		$	6,320		$	―	$	516,998
Ending balance: individually evaluated for impairment	$	478		$	11,993		$	858		$	―		$	―	$	13,329
Ending balance: collectively evaluated for impairment	$	78,921		$	251,531		$	166,897		$	6,320		$	―	$	503,669

(Dollars in thousands)	Commercial		Commercial			Residential
	and Industrial		Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the three month period ended June 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	687	$	3,019		$	1,852		$	90		$	837		$	6,485
Charge-offs		―		(94	)		(49	)		(1	)		―			(144	)
Recoveries		3		42			―			1			―			46
Provision		16		172			64			(1	)		(38	)		213
Ending Balance	$	706	$	3,139		$	1,867		$	89		$	799		$	6,600

19

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated		Total
As of and for the six month period ended June 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	542		$	3,176		$	1,928		$	107		$	637	$	6,390
Charge-offs		(2	)		(137	)		(108	)		(15	)		―		(262	)
Recoveries		3			42			―			2			―		47
Provision		163			58			47			(5	)		162		425
Ending Balance	$	706		$	3,139		$	1,867		$	89		$	799	$	6,600
Ending balance: individually evaluated for impairment	$	―		$	24		$	66		$	―		$	―	$	90
Ending balance: collectively evaluated for impairment	$	706		$	3,115		$	1,801		$	89		$	799	$	6,510
Loans Receivable:
Ending Balance	$	78,077		$	256,184		$	162,463		$	5,448		$	―	$	502,172
Ending balance: individually evaluated for impairment	$	414		$	9,174		$	1,029		$	2		$	―	$	10,619
Ending balance: collectively evaluated for impairment	$	77,663		$	247,010		$	161,434		$	5,446		$	―	$	491,553

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the twelve months ended December 31, 2015:
Allowance for Loan Losses:
Beginning balance	$	542		$	3,176		$	1,928		$	107		$	637		$	6,390
Charge-offs		(2	)		(1,759	)		(210	)		(45	)		―			(2,016	)
Recoveries		22			59			1			6			―			88
Provision		163			2,507			58			28			(479	)		2,277
Ending Balance	$	725		$	3,983		$	1,777		$	96		$	158		$	6,739
Ending balance: individually evaluated for impairment	$	―		$	309		$	31		$	―		$	―		$	340
Ending balance: collectively evaluated for impairment	$	725		$	3,674		$	1,746		$	96		$	158		$	6,399
Loans Receivable:
Ending Balance	$	85,074		$	259,018		$	166,628		$	5,890		$	―		$	516,610
Ending balance: individually evaluated for impairment	$	399		$	12,057		$	911		$	―		$	―		$	13,367
Ending balance: collectively evaluated for impairment	$	84,675		$	246,961		$	165,717		$	5,890		$	―		$	503,243

Of the $1,280,000 in foreclosed assets held for resale at June 30, 2016, $105,000 was secured by residential real estate, $50,000 was secured by land, and $1,125,000 was secured by commercial real estate. Of the $1,472,000 in foreclosed assets held for resale at December 31, 2015, $256,000 was secured by residential real estate, $50,000 was secured by land, and $1,166,000 was secured by commercial real estate. At June 30, 2016 and December 31, 2015, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $266,000 at June 30, 2016 and $221,000 at December 31, 2015. These balances were not included in foreclosed assets held for resale at June 30, 2016 or December 31, 2015.

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”).

20

The outstanding balance of TDRs as of June 30, 2016 and December 31, 2015 was $11,091,000 and $11,096,000, respectively. The small decrease in TDRs at June 30, 2016 as compared to December 31, 2015 is attributable to large principal payments and paydowns made on existing TDRs net against smaller loans modified as TDRs during the six months ended June 30, 2016. There were $18,000 and $31,000 in unfunded commitments on TDRs at June 30, 2016 and December 31, 2015, respectively.

During the three months ended June 30, 2016, three loans with a combined post modification balance of $114,000 were classified as TDRs, as compared to the same period in 2015, when three loans with a combined post modification balance of $308,000 were classified as TDRs. The loan modifications for the three months ended June 30, 2016 consisted of two term modifications and one payment modification. The loan modifications for the three months ended June 30, 2015 consisted of two term modifications and one payment modification.

During the six months ended June 30, 2016, seven loans with a combined post modification balance of $542,000 were classified as TDRs, as compared to the same period in 2015, when five loans with a combined post modification balance of $4,558,000 were classified as TDRs. The loan modifications for the six months ended June 30, 2016 consisted of five term modifications and two payment modifications. The loan modifications for the six months ended June 30, 2015 consisted of three term modifications and two payment modifications.

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

(Dollars in thousands)

	June 30,		December 31,
	2016		2015
Non-accrual TDRs	$	300	$	477
Accruing TDRs		10,791		10,619
Total	$	11,091	$	11,096

At June 30, 2016, five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $748,000 were not in compliance with the terms of their restructure, compared to June 30, 2015 when five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $6,393,000 were not in compliance with the terms of their restructure. The significant decrease in TDRs not in compliance with the terms of their restructure at June 30, 2016 as compared to June 30, 2015 is largely due to the proper measures being taken to bring two loans totaling $5,639,000 into compliance with the terms of their restructure. One loan to a student housing holding company in the amount of $4,226,000 was not in compliance with the terms of its restructure at June 30, 2015, but proper measures were taken to bring the loan into compliance with restructure terms by June 30, 2016. A purchased participation loan in the amount of $1,413,000 to a distributor of recreational vehicles was not in compliance with the terms of its restructure at June 30, 2015. A piece of property related to this loan, valued at $925,000, was moved to foreclosed assets held for resale at December 31, 2015, and proper measures were taken to bring the remainder of the loan into compliance with restructure terms by June 30, 2016.

During the three months ended June 30, 2016, no loans that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2015 when one Commercial Real Estate loan totaling $4,226,000 that was modified as a TDR within the preceding twelve months had experienced a payment default. During the six months ended June 30, 2016, no loans that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2015 when two Commercial Real Estate loans totaling $4,446,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults. The significant decrease in defaulted TDRs at June 30, 2016 as compared to June 30, 2015 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 payment default during the second quarter of 2015.

21

The following table presents information regarding the loan modifications categorized as TDRs during the three and six months ended June 30, 2016 and June 30, 2015:

(Dollars in thousands)	Three Months Ended June 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	18	$	18	$	18
Commercial Real Estate		2		96		96		95
Total		3	$	114	$	114	$	113

(Dollars in thousands)	Three Months Ended June 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		―	$	―	$	―	$	―
Commercial Real Estate		3		354		308		308
Total		3	$	354	$	308	$	308

(Dollars in thousands)	Six Months Ended June 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		4	$	86	$	86	$	81
Commercial Real Estate		3		456		456		209
Total		7	$	542	$	542	$	290

(Dollars in thousands)	Six Months Ended June 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	23	$	23	$	22
Commercial Real Estate		4		4,580		4,535		4,533
Total		5	$	4,603	$	4,558	$	4,555

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three and six months ended June 30, 2016 and June 30, 2015 with the total number of each type of modification performed.

Three Months Ended June 30, 2016

Six Months Ended June 30, 2016

Rate

Term

Payment

Number

Rate

Term

Payment

Number

Modification

Modification

Modification

Modified

Modification

Modification

Modification

Modified

Commercial and Industrial

―

1

―

1

―

3

1

4

Commercial Real Estate

―

1

1

2

―

2

1

3

Total

―

2

1

3

―

5

2

7

Three Months Ended June 30, 2015

Six Months Ended June 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

―

2

1

3

―

2

2

4

Total

―

2

1

3

―

3

2

5

22

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below for the periods ended June 30, 2016 and December 31, 2015.

(Dollars in thousands)	June 30, 2016						December 31, 2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	478	$	478	$	―	$	399	$	399	$	―
Commercial Real Estate		6,781		8,020		―		7,853		9,524		―
Residential Real Estate		434		603		―		475		657		―
With an allowance recorded:
Commercial Real Estate		5,212		6,567		393		4,204		4,204		309
Residential Real Estate		424		424		19		436		436		31
Total	$	13,329	$	16,092	$	412	$	13,367	$	15,220	$	340
Total consists of:
Commercial and Industrial	$	478	$	478	$	―	$	399	$	399	$	―
Commercial Real Estate	$	11,993	$	14,587	$	393	$	12,057	$	13,728	$	309
Residential Real Estate	$	858	$	1,027	$	19	$	911	$	1,093	$	31

______________________

At June 30, 2016 and December 31, 2015, $11,091,000 and $11,096,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $256,000 and $309,000, 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 six months ended June 30, 2016 and 2015.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	472	$	5	$	416	$	5
Commercial Real Estate		6,913		83		8,943		141
Residential Real Estate		423		―		441		―
Consumer		―		―		3		―
With an allowance recorded:
Commercial Real Estate		5,179		37		257		―
Residential Real Estate		424		―		547		―
Total	$	13,411	$	125	$	10,607	$	146
Total consists of:
Commercial and Industrial	$	472	$	5	$	416	$	5
Commercial Real Estate	$	12,092	$	120	$	9,200	$	141
Residential Real Estate	$	847	$	―	$	988	$	―
Consumer	$	―	$	―	$	3	$	―

 _____________________

Of the $125,000 and $146,000 in interest income recognized on impaired loans for the three months ended June 30, 2016 and 2015, respectively, no interest income was recognized with respect to non-accrual loans.

23

(Dollars in thousands)	For the Six Months Ended				For the Six Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	447	$	10	$	410	$	9
Commercial Real Estate		6,904		171		7,599		247
Residential Real Estate		422		―		414		―
Consumer		―		―		3		―
With an allowance recorded:
Commercial Real Estate		5,176		74		259		―
Residential Real Estate		428		―		553		―
Total	$	13,377	$	255	$	9,238	$	256
Total consists of:
Commercial and Industrial	$	447	$	10	$	410	$	9
Commercial Real Estate	$	12,080	$	245	$	7,858	$	247
Residential Real Estate	$	850	$	―	$	967	$	―
Consumer	$	―	$	―	$	3	$	―

_____________________

Of the $255,000 and $256,000 in interest income recognized on impaired loans for the six months ended June 30, 2016 and 2015, respectively, no interest income was recognized with respect to non-accrual loans.

Loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing, as of June 30, 2016 and December 31, 2015 were as follows:

(Dollars in thousands)
	June 30,		December 31,
	2016		2015
Commercial Real Estate	$	1,680	$	1,837
Residential Real Estate		858		911
Total non-accrual loans		2,538		2,748
Foreclosed assets held for resale		1,280		1,472
Loans past-due 90 days or more and still accruing		431		166
Total non-performing assets	$	4,249	$	4,386

The following tables present the classes of the loan portfolio summarized by the past-due status at June 30, 2016 and December 31, 2015:

(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
June 30, 2016:
Commercial and Industrial	$	638	$	63	$	―	$	701	$	78,698	$	79,399	$	―
Commercial Real Estate		1,357		627		1,901		3,885		259,639		263,524		398
Residential Real Estate		974		26		848		1,848		165,907		167,755		33
Consumer		11		―		―		11		6,309		6,320		―
Total	$	2,980	$	716	$	2,749	$	6,445	$	510,553	$	516,998	$	431

24

(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, 2015:
Commercial and Industrial	$	34	$	―	$	―	$	34	$	85,040	$	85,074	$	―
Commercial Real Estate		316		3		1,484		1,803		257,215		259,018		―
Residential Real Estate		1,288		491		1,049		2,828		163,800		166,628		166
Consumer		20		―		―		20		5,870		5,890		―
Total	$	1,658	$	494	$	2,533	$	4,685	$	511,925	$	516,610	$	166

At June 30, 2016, commitments to lend additional funds with respect to impaired loans consisted of three irrevocable letters of credit totaling $2,204,000. One irrevocable letter of credit in the amount of $2,185,000 was associated with a loan to a developer of a residential sub-division. Two irrevocable letters of credit totaling $19,000 were associated with a loan to a community recreation facility. At December 31, 2015, the only commitment to lend additional funds with respect to impaired loans was an irrevocable letter of credit in the amount of $2,185,000 associated with a loan to a developer of a residential sub-division.

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.

25

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of June 30, 2016 and December 31, 2015.

(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

June 30, 2016

Repurchase agreements (a)

$

24,029

$

―

$

24,029

$

(24,029

)

$

―

$

―

December 31, 2015

Repurchase agreements (a)

$

20,779

$

―

$

20,779

$

(20,779

)

$

―

$

―

______________________

(a) As of June 30, 2016 and December 31, 2015, the fair value of securities pledged in connection with repurchase agreements was $27,713,000 and $27,510,000, respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of June 30, 2016:

(Dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total
June 30, 2016:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	24,029	$	―	$	―	$	―	$	24,029
Total	$	24,029	$	―	$	―	$	―	$	24,029

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.

26

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 June 30, 2016 and December 31, 2015, were as follows:

(Dollars in thousands)

	June 30, 2016		December 31, 2015
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	85,194	$	72,552
Financial standby letters of credit	$	452	$	475
Performance standby letters of credit	$	4,660	$	4,692

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.

27

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 June 30, 2016 and December 31, 2015, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)

June 30, 2016
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	―	$	1,020	$	―	$	1,020
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		―		114,204		―		114,204
Other		―		11,591		―		11,591
Obligations of state and political subdivisions		―		212,577		―		212,577
Corporate debt securities		―		43,669		―		43,669
Marketable equity securities		2,028		―		―		2,028
Total	$	2,028	$	383,061	$	―	$	385,089

(Dollars in thousands)

December 31, 2015

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	―	$	1,021	$	―	$	1,021
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		―		112,474		―		112,474
Other		―		21,592		―		21,592
Obligations of state and political subdivisions		―		200,314		―		200,314
Corporate debt securities		―		47,833		―		47,833
Marketable equity securities		2,007		―		―		2,007
Total	$	2,007	$	383,234	$	―	$	385,241

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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 2016 or 2015.

Financial Assets Measured at Fair Value on a Non-recurring Basis

At June 30, 2016 and December 31, 2015, impaired loans measured at fair value on a non-recurring basis that are collateral dependent and the valuation methods used are as follows:

(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
Assets at June 30, 2016
Impaired loans:
Commercial Real Estate	$	―	$	―	$	5,289	$	5,289
Residential Real Estate		―		―		549		549
Total impaired loans	$	―	$	―	$	5,838	$	5,838

(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2015
Impaired loans:
Commercial Real Estate	$	―	$	―	$	1,665	$	1,665
Residential Real Estate		―		―		631		631
Total impaired loans	$	―	$	―	$	2,296	$	2,296

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 2016 and 2015.

Nonfinancial Assets Measured at Fair Value on a Non-recurring Basis

At June 30, 2016, 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 June 30, 2016
Foreclosed assets held for resale:
Commercial Real Estate	$	―	$	―	$	200	$	200
Total foreclosed assets held for resale	$	―	$	―	$	200	$	200

At December 31, 2015, there were no nonfinancial assets measured at fair value on a non-recurring basis.

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 2016 and 2015.

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The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis that are collateral dependent 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
June 30, 2016
Impaired loans	$	5,838	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (63%)		(19	%)
Foreclosed assets held for resale	$	200	Appraisal of collateral1,3	Appraisal adjustments2	(17%) – (17%)		(17	%)
December 31, 2015
Impaired loans	$	2,296	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (63%)		(29	%)
Foreclosed assets held for resale	$	―	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (0%)		(0	%)

______________________

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 June 30, 2016
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,586	$	8,586	$	―	$	―	$	8,586
Interest-bearing deposits in other banks		672		―		672		―		672
Time deposits with other banks		1,482		―		1,482		―		1,482
Investment securities available-for-sale		385,089		2,028		383,061		―		385,089
Investment securities held-to-maturity		20		―		21		―		21
Restricted investment in bank stocks		6,622		―		6,622		―		6,622
Net loans		509,779		―		―		508,581		508,581
Mortgage servicing rights		461		―		―		461		461
Accrued interest receivable		3,932		―		3,932		―		3,932
FINANCIAL LIABILITIES:
Deposits		684,471		―		686,178		―		686,178
Short-term borrowings		99,638		―		99,638		―		99,638
Long-term borrowings		75,175		―		77,279		―		77,279
Accrued interest payable		441		―		441		―		441
OFF-BALANCE SHEET FINANCIAL  INSTRUMENTS		―		―		―		―		―

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(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2015
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,474	$	7,474	$	―	$	―	$	7,474
Interest-bearing deposits in other banks		1,534		―		1,534		―		1,534
Time deposits with other banks		1,482		―		1,482		―		1,482
Investment securities available-for-sale		385,241		2,007		383,234		―		385,241
Investment securities held-to-maturity		26		―		27		―		27
Restricted investment in bank stocks		5,742		―		5,742		―		5,742
Net loans		509,871		―		―		498,671		498,671
Mortgage servicing rights		493		―		―		493		493
Accrued interest receivable		4,086		―		4,086		―		4,086
FINANCIAL LIABILITIES:
Deposits		720,598		―		720,341		―		720,341
Short-term borrowings		80,539		―		80,539		―		80,539
Long-term borrowings		70,232		―		71,302		―		71,302
Accrued interest payable		382		―		382		―		382
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 June 30, 2016 and December 31, 2015:

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 values 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

Servicing rights are carried at cost. The carrying amount approximates fair value.

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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 June 30, 2016 and December 31, 2015.

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
	June 30,
	2016		2015
Net income	$	2,491	$	2,430
Weighted-average common shares outstanding		5,633		5,581
Basic earnings per share	$	0.44	$	0.44
Weighted-average common shares outstanding		5,633		5,581
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,635		5,583
Diluted earnings per share	$	0.44	$	0.44

(In thousands, except earnings per share)	Six Months Ended
	June 30,
	2016		2015
Net income	$	4,667	$	4,879
Weighted-average common shares outstanding		5,627		5,574
Basic earnings per share	$	0.83	$	0.88
Weighted-average common shares outstanding		5,627		5,574
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,629		5,576
Diluted earnings per share	$	0.83	$	0.88

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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 2015 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, 2015.

RESULTS OF OPERATIONS

Quarter ended June 30, 2016 compared to quarter ended June 30, 2015

First Keystone Corporation realized earnings for the three months ended June 30, 2016 of $2,491,000, an increase of $61,000, or 2.5% from the second quarter of 2015. The increase in net income for the three months ended June 30, 2016 was primarily due to a decrease in non-interest expense.

On a per share basis, net income was $0.44 for the three months ended June 30, 2016 and 2015. Cash dividends amounted to $0.27 per share for the three months ended June 30, 2016 and 2015.

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 June 30, 2016, interest income amounted to $7,932,000, an increase of $75,000 or 1.0% from the three months ended June 30, 2015, while interest expense amounted to $1,285,000 for the three months ended June 30, 2016, an increase of $56,000, or 4.6% from the three months ended June 30, 2015. As a result, net interest income increased $19,000 or 0.3% to $6,647,000 from $6,628,000 for the same period in 2015.

The Corporation’s net interest margin for the three months ended June 30, 2016 was 3.18% compared to 3.25% for the same period in 2015. 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 June 30, 2016 and June 30, 2015 was $284,000 and $213,000, respectively. The increase in the provision for loan losses resulted from the Corporation’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, and other relevant factors. Net charge-offs for the three months ended June 30, 2016 and 2015 were $77,000 and $98,000, respectively. See Allowance for Loan Losses on page 38 for further discussion.

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NON-INTEREST INCOME

Total non-interest income was $1,666,000 for the three months ended June 30, 2016, as compared to $1,993,000 for the same period in 2015, a decrease of $327,000, or 16.4%. ATM fees and debit card income increased $21,000 or 6.8% to $331,000 for the three months ended June 30, 2016. Gains on sales of mortgage loans decreased $78,000 or 58.6% due to a decrease in loans originated with the intent to sell and volume of loans sold.

Net gains on sales of investment securities decreased $223,000 to $380,000 for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. 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 and gains on sales of mortgage loans, non-interest income was $1,231,000 for the three months ended June 30, 2016, a decrease of $26,000 from the three months ended June 30, 2015.

NON-INTEREST EXPENSE

Total non-interest expense was $5,014,000 for the three months ended June 30, 2016, as compared to $5,396,000 for the three months ended June 30, 2015. Non-interest expense decreased $382,000 or 7.1%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $2,587,000 or 51.6% of total non-interest expense for the three months ended June 30, 2016, as compared to 52.8% for the three months ended June 30, 2015. Significant reductions in salaries and employee benefits expenses were achieved through changes implemented in staffing levels throughout the organization. Net occupancy, furniture and equipment, and computer expense amounted to $742,000 for the three months ended June 30, 2016, an increase of $43,000 or 6.2%. The increase was due to higher software maintenance costs. FDIC insurance expense increased $34,000 or 26.4% as compared to the three months ended June 30, 2015. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates. Data processing expenses decreased $45,000 or 25.0% to $135,000 for the three months ended June 30, 2016. In 2015, the Bank realized expenses related to the conversion to an outsourced data processing system for item processing and check image solutions, plus normal outsourcing fees for the Bank’s core processing system. Foreclosed assets held for resale expense increased $19,000 due to costs associated with the maintenance and sales of nine properties in 2016 versus four properties in 2015. Other non-interest expense amounted to $726,000 for the three months ended June 30, 2016, a decrease of $146,000 or 16.7% as compared to the three months ended June 30, 2015. The decrease was due to fewer charitable donations and the completion of amortization of the core deposit intangible associated with the acquisition of Pocono Community Bank in November 2007. The core deposit intangible was fully amortized effective June 2015.

INCOME TAXES

Income tax expense amounted to $524,000 for the three months ended June 30, 2016, as compared to $582,000 for the three months ended June 30, 2015, a decrease of $58,000. The effective total income tax rate was 17.4% for the second quarter of 2016 as compared to 19.3% for the second quarter of 2015. The decrease in the effective tax rate was due to a net increase in tax-exempt interest earned from investments in and loans to state and local units of government, and a decrease in net gains on sales of investment securities.

Six months ended June 30, 2016 compared to six months ended June 30, 2015

First Keystone Corporation realized earnings for the six months ended June 30, 2016 of $4,667,000, a decrease of $212,000, or 4.3% from the same period in 2015. The decrease in net income for the six months ended June 30, 2016 was primarily due to a decrease in net investment securities gains.

On a per share basis, for the six months ended June 30, 2016, net income was $0.83 versus $0.88 for the six months ended June 30, 2015. Cash dividends amounted to $0.54 per share for the six months ended June 30, 2016 and 2015.

34

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 six months ended June 30, 2016, interest income amounted to $15,901,000, an increase of $135,000 or 0.9% from the first six months of 2015, while interest expense amounted to $2,595,000 for the six months ended June 30, 2016, an increase of $174,000, or 7.2% from the six months ended June 30, 2015. As a result, net interest income decreased $39,000 or 0.3% to $13,306,000 from $13,345,000 for the same period in 2015.

The Corporation’s net interest margin for the six months ended June 30, 2016 was 3.18% compared to 3.29% for the same period in 2015. 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 six months ended June 30, 2016 and June 30, 2015 was $567,000 and $425,000, respectively. The increase in the provision for loan losses resulted from the Corporation’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, and other relevant factors. Net charge-offs for the six months ended June 30, 2016 and 2015 were $87,000 and $215,000, respectively. See Allowance for Loan Losses on page 38 for further discussion.

NON-INTEREST INCOME

Total non-interest income was $2,966,000 for the six months ended June 30, 2016, as compared to $3,850,000 for the same period in 2015, a decrease of $884,000, or 23.0%. ATM fees and debit card income increased by $50,000 or 8.4% to $643,000 for the six months ended June 30, 2016. Gains on sales of mortgage loans decreased $157,000 or 50.0% due to a decrease in loans originated with the intent to sell and the volume of loans sold.

Net gains on sales of investment securities decreased $701,000 to $394,000 for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. 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 and gains on sales of mortgage loans, non-interest income was $2,415,000 for the six months ended June 30, 2016, a decrease of $26,000 from the six months ended June 30, 2015.

NON-INTEREST EXPENSE

Total non-interest expense was $10,154,000 for the six months ended June 30, 2016, as compared to $10,679,000 for the six months ended June 30, 2015. Non-interest expense decreased $525,000 or 4.9%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $5,373,000 or 52.9% of total non-interest expense for the six months ended June 30, 2016, as compared to 53.3% for the six months ended June 30, 2015. Significant reductions in salaries and employee benefits expenses were achieved through changes implemented in staffing levels throughout the organization. Net occupancy, furniture and equipment, and computer expense amounted to $1,514,000 for the six months ended June 30, 2016, a decrease of $34,000 or 2.2%. The decrease was due to lower maintenance and utilities costs. FDIC insurance expense increased $64,000 or 25.3% as compared to the six months ended June 30, 2015. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates. Data processing expenses decreased $73,000 or 21.4% to $268,000 for the six months ended June 30, 2016. In 2015, the Bank, realized expenses related to the conversion to an outsourced data processing system for item processing and check image solutions, plus normal outsourcing fees for the Bank’s core processing system. Foreclosed assets held for resale expense increased $63,000 due to costs associated with the maintenance and sales of nine properties in 2016 versus four properties in 2015. Other non-interest expense amounted to $1,422,000 for the six months ended June 30, 2016, a decrease of $220,000 or 13.4% as compared to the six months ended June 30, 2015. The decrease was due to fewer charitable donations, lower data communications expenses and the completion of amortization of the core deposit intangible associated with the acquisition of Pocono Community Bank in November 2007. The core deposit intangible was fully amortized effective June 2015.

35

INCOME TAXES

Income tax expense amounted to $884,000 for the six months ended June 30, 2016, as compared to $1,212,000 for the six months ended June 30, 2015, a decrease of $328,000. The effective total income tax rate was 15.9% for the six months ended June 30, 2016 as compared to 19.9% for the six months ended June 30, 2015. The decrease in the effective tax rate was due to a net increase in tax-exempt interest earned from investments in and loans to state and local units of government, and a decrease in net gains on sales of investment securities.

FINANCIAL CONDITION

SUMMARY

Total assets decreased to $983,316,000 as of June 30, 2016, a decrease of $173,000 from year-end 2015. Total assets as of December 31, 2015 amounted to $983,489,000.

Total loans increased $388,000 or 0.1%. Loan demand remained steady in the six months ended June 30, 2016 as the Bank has seen an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits decreased $36,127,000 or 5.0% to $684,471,000 as of June 30, 2016.

The Corporation continues to maintain and manage its asset growth. The Corporation’s strong equity capital position provides an opportunity to further leverage its asset growth. Total borrowings increased in the first six months of 2016 by $24,042,000 to $174,813,000 from $150,771,000 as of December 31, 2015. Borrowings increased due to decreased deposit balances.

Total stockholders’ equity increased to $117,336,000 at June 30, 2016, an increase of $8,898,000 or 8.2% from December 31, 2015.

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 92.5% at June 30, 2016, compared to 92.2% at June 30, 2015. 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 $516,998,000 as of June 30, 2016, up $388,000, or 0.1% since year-end 2015. The loan portfolio continues to be well diversified. Non-performing assets decreased since year-end 2015, and overall asset quality has remained consistent. Total non-performing assets were $4,249,000 as of June 30, 2016, a decrease of $137,000, or 3.1% from $4,386,000 reported in non-performing assets as of December 31, 2015. Total allowance for loan losses to total non-performing assets was 169.9% as of June 30, 2016 and 153.6% at December 31, 2015.

In addition to loans, another primary earning asset is our overall investment portfolio, which decreased in size from December 31, 2015, to June 30, 2016. Available-for-sale securities amounted to $385,089,000 as of June 30, 2016, a decrease of $152,000 from year-end 2015.

Interest-bearing deposits in other banks decreased as of June 30, 2016, to $672,000 from $1,534,000 at year-end 2015. Time deposits with other banks were $1,482,000 at June 30, 2016 and December 31, 2015.

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LOANS

Total loans increased to $516,998,000 as of June 30, 2016 as compared to $516,610,000 as of December 31, 2015. The table on page 18 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated. Total loans increased by $388,000 or 0.1%.

Steady demand for borrowing by both individuals and businesses accounted for the 0.1% increase in the loan portfolio from December 31, 2015 to June 30, 2016. The Commercial and Industrial portfolio decreased $5,675,000 to $79,399,000 as of June 30, 2016, as compared to $85,074,000 at December 31, 2015. The decrease in the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) was attributed to new loan originations totaling $6,851,000 offset by loan payoffs of $7,515,000, as well as regular principal payments. The significant decrease in the Commercial and Industrial portfolio is primarily due to the payoff of two large tax-free Commercial and Industrial loans during the six months ended June 30, 2016, totaling approximately $5,742,000 combined with normal portfolio fluctuations. The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $4,506,000 to $263,524,000 at June 30, 2016, as compared to $259,018,000 at December 31, 2015. The increase was mainly the result of $13,122,000 in new loan originations, offset by $2,898,000 in loan payoffs in addition to regular principal payments and other typical amortizations in the Commercial Real Estate portfolio. The significant increase in the Commercial Real Estate portfolio is primarily due to the issuance of two Commercial Real Estate term loans during the six months ended June 30, 2016, totaling approximately $4,042,000 combined with typical portfolio fluctuations. Residential Real Estate loans increased $1,127,000 to $167,755,000 at June 30, 2016, as compared to $166,628,000 at December 31, 2015. The increase was the result of $13,523,000 in new loan originations offset by loan payoffs of $5,417,000, net loans sold of $1,260,000, and regular principal payments. Net loans sold in the Residential Real Estate portfolio for the six months ended June 30, 2016 consisted of total loans sold during the six months ended June 30, 2016 of $4,464,000, offset with loans opened and sold in the same quarter during any quarter of 2016 which amounted to $3,204,000. The Corporation continues to originate and sell certain long-term fixed rate residential mortgage loans which conform to secondary market requirements. The Corporation derives ongoing income from the servicing of mortgages sold in the secondary market. The Corporation continues its efforts to lend to creditworthy borrowers despite the continued slow economic conditions.

Management believes that the loan portfolio is well diversified. The total commercial portfolio was $342,923,000 at June 30, 2016. Of total loans, $263,524,000 or 51.0% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings. The Corporation continues to monitor these portfolios.

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 $10,618,000 at June 30, 2016. 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 $9,518,000 in 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 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 June 30, 2016, the relationship had outstanding loan balances and unused commitments of $9,984,000. The debt is comprised of $9,929,000 in term debt and two lines of credit totaling $55,000. The loans are secured by commercial real estate and business assets.

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 $8,492,000 at June 30, 2016. The debt is comprised of $7,775,000 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 June 30, 2016, the relationship had outstanding balances of $8,474,000, which consisted entirely of term debt. The loans are secured by project receivables and the full faith, credit, and taxing power of the township.

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The fifth largest relationship consists of a hotel management company that has been in operation since 1987 and successfully owns and operates seven hotels. At June 30, 2016, the relationship had outstanding balances totaling $8,420,000, which consisted entirely of term debt. The relationship is secured by commercial real estate and business assets, as well as the assignment of leases and a life insurance policy.

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

All of the above mentioned loans are performing as agreed and all are graded pass. 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.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $490,586,000 or 95.0% of gross loans are graded Pass; $14,627,000 or 2.8% are graded Special Mention; $11,155,000 or 2.2% 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 $25,782,000 at June 30, 2016, as compared to $23,264,000 at December 31, 2015. Commercial and Industrial non-pass grades increased to $4,331,000 as of June 30, 2016 as compared to $4,194,000 as of December 31, 2015. Commercial Real Estate non-pass grades increased to $19,247,000 as of June 30, 2016 as compared to $16,128,000 as of December 31, 2015. The Residential Real Estate and Consumer loan non-pass grades decreased to $2,204,000 as of June 30, 2016 as compared to $2,942,000 as of December 31, 2015.

The increase in Commercial Real Estate non-pass grades was mainly the result of the downgrade of one loan totaling $3,630,000 (combined with typical payment amortization and other normal fluctuations in the Commercial Real Estate non-pass grade portfolio segment). The loan is a purchased participation to the owner of a recreation facility. The loan was downgraded to Special Mention during the first quarter of 2016 due to the borrower’s decreased revenues which resulted from reduced snowfall totals and higher than average temperatures during the 2016 winter season.

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)	June 30,		December 31,
	2016		2015
Commercial and Industrial	$	79,399	$	85,074
Commercial Real Estate		263,524		259,018
Residential Real Estate		167,755		166,628
Consumer		6,320		5,890
Total loans	$	516,998	$	516,610

 ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of June 30, 2016, the allowance for loan losses was $7,219,000 as compared to $6,739,000 as of December 31, 2015. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

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

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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 six month periods ended June 30, 2016 and 2015. For the first six months of 2016, net charge-offs as a percentage of average loans was 0.02% as compared to 0.04% for the six month period ended June 30, 2015. Net charge-offs amounted to $87,000 for the first six months of 2016 as compared to $215,000 for the first six months of 2015. The decrease in net charge-offs in the first six months of 2016 as compared to the first six months of 2015 related primarily to decreased charge-offs in Commercial and Residential Real Estate loans. During the first six months of 2016, $82,000 in Commercial and Residential Real Estate loans were charged off as compared to the first six months of 2015 when $245,000 in Commercial and Residential Real Estate loans were charged off.

For the first six months of 2016, the provision for loan losses was $567,000 as compared to $425,000 for the first six months of 2015. The provision, net of charge-offs and recoveries, increased the quarter end Allowance for Loan Losses to $7,219,000 of which 9.7% was attributed to the Commercial and Industrial component; 55.6% attributed to the Commercial Real Estate component; 23.5% attributed to the Residential Real Estate component (primarily residential mortgages); 1.5% attributed to the Consumer component; and 9.7% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page 13). The Corporation determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of June 30, 2016.

Analysis of Allowance for Loan Losses

(Dollars in thousands)	June 30,			June 30,
	2016			2015
Balance at beginning of the six month period	$	6,739		$	6,390
Charge-offs:
Commercial and Industrial		2			2
Commercial Real Estate		57			137
Residential Real Estate		25			108
Consumer		23			15
		107			262
Recoveries:
Commercial and Industrial		4			3
Commercial Real Estate		―			42
Residential Real Estate		12			―
Consumer		4			2
		20			47
Net charge-offs		87			215
Additions charged to operations		567			425
Balance at end of the six month period	$	7,219		$	6,600
Ratio of net charge-offs during the period to average loans outstanding during the period		0.02	%		0.04	%
Allowance for loan losses to average loans outstanding during the period		1.39	%		1.31	%

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

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

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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 1.39% at June 30, 2016 and 1.31% at June 30, 2015.

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 $4,249,000 as of June 30, 2016 as compared to $4,386,000 as of December 31, 2015. 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, while property values in some markets have fallen. Non-accrual loans totaled $2,538,000 as of June 30, 2016 as compared to $2,748,000 as of December 31, 2015. Foreclosed assets held for resale amounted to $1,280,000 at June 30, 2016 as compared to $1,472,000 at December 31, 2015. Loans past-due 90 days or more and still accruing interest amounted to $431,000 as of June 30, 2016 as compared to $166,000 as of December 31, 2015. At June 30, 2016, loans past-due 90 days and still accruing interest consisted of one Commercial Real Estate loan and one Residential Real Estate loan. A sale is pending on part of the collateral securing the Commercial Real Estate loan, and a substantial paydown will be made on the loan when the sale is finalized; at that time, the loan will be brought to paid-current status. The borrower of the Residential Real Estate loan has filed bankruptcy, and loan payments are currently being held by a trustee until the bankruptcy plan has been finalized; upon finalization, the payments will be forwarded to the Bank, and the loan will be brought to paid-current status.

Non-performing assets to total loans was 0.8% at June 30, 2016 and December 31, 2015. Non-performing assets to total assets was 0.4% at June 30, 2016 and December 31, 2015. The allowance for loan losses to total non-performing assets was 169.9% as of June 30, 2016 as compared to 153.6% as of December 31, 2015. Additional detail can be found on page 42 in the Non-Performing Assets and Impaired Loans table and page 24 in the Loans Receivable 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 $860,000 at June 30, 2016, compared to $2,280,000 at December 31, 2015.

Impaired loans were $13,329,000 at June 30, 2016 and $13,367,000 at December 31, 2015. The largest impaired loan relationship at June 30, 2016 consisted of one performing loan to a student housing holding company in the amount of $4,151,000, 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 the borrower’s failure to achieve stabilization and meet projected occupancy rates that was attributed to the overall economic decline in students’ disposable income and an increase in enrollment in online courses. The collateral evaluation at June 30, 2016 carried a value of $3,896,000, after considering appraisal adjustments and costs to sell of 10% and considering the outstanding note balance, resulting in a specific allocation of $256,000. At June 30, 2016, the second largest impaired loan relationship consisted of a performing loan to a developer of a residential sub-division in the amount of $3,207,000, which was secured by commercial real estate. The contract was extended and the loan was modified as a TDR during the fourth quarter of 2015 because the weak real estate market has hindered the process of the development plans and expected sales of building lots have not materialized. The discounted cash flow evaluation at June 30, 2016 resulted in a specific allocation of $0. The third largest impaired loan relationship at June 30, 2016 consisted of a non-performing participation loan to a student housing holding company which was secured by commercial real estate. The Corporation’s participation share of the loan was $968,000. 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 the borrower’s failure to meet projected occupancy rates. The collateral evaluation of the total participation at June 30, 2016 carried a value of $2,456,000, after considering estimated appraisal adjustments and costs to sell of 25% and considering the total participation outstanding note balance, resulting in a specific allocation of $93,000. The estimated appraisal adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the $13,329,000 in impaired loans at June 30, 2016, none were located outside of the Corporation’s primary market area.

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Loans categorized as TDRs carried an unpaid balance of $11,091,000 as of June 30, 2016 as compared to $11,096,000 as of December 31, 2015. The small decrease in TDRs at June 30, 2016 as compared to December 31, 2015 is attributable to large principal payments and paydowns made on existing TDRs net against smaller loans modified as TDRs during the six months ended June 30, 2016. Of the twenty-nine restructured loans at June 30, 2016, seven loans are classified in the Commercial and Industrial portfolio and twenty-two loans are classified in the Commercial Real Estate portfolio. The troubled debt restructurings at June 30, 2016 consisted of sixteen term modifications beyond the original stated term, four interest rate modifications, and nine payment modifications. TDRs are separately identified for impairment disclosures, and if necessary, a specific allocation is established. As of June 30, 2016 and December 31, 2015, specific allocations of $256,000 and $309,000 were attributable to the TDRs. There were $18,000 and $31,000 in unused commitments attributable to TDRs at June 30, 2016 and December 31, 2015, respectively.

At June 30, 2016, five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $748,000 were not in compliance with the terms of their restructure, compared to June 30, 2015 when five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $6,393,000 were not in compliance with the terms of their restructure. The significant decrease in TDRs not in compliance with the terms of their restructure at June 30, 2016 as compared to June 30, 2015 is largely due to the proper measures being taken to bring two loans totaling $5,639,000 into compliance with the terms of their restructure. One loan to a student housing holding company in the amount of $4,226,000 was not in compliance with the terms of its restructure at June 30, 2015, but proper measures were taken to bring the loan into compliance with restructure terms by June 30, 2016. A purchased participation loan in the amount of $1,413,000 to a distributor of recreational vehicles was not in compliance with the terms of its restructure at June 30, 2015. A piece of property related to this loan, valued at $925,000, was moved to foreclosed assets held for resale at December 31, 2015, and proper measures were taken to bring the remainder of the loan into compliance with restructure terms by June 30, 2016.

During the three months ended June 30, 2016, no loans that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2015 when one Commercial Real Estate loan totaling $4,226,000 that was modified as a TDR within the preceding twelve months had experienced a payment default. During the six months ended June 30, 2016, no loans that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2015 when two Commercial Real Estate loans totaling $4,446,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults. The significant decrease in defaulted TDRs at June 30, 2016 as compared to June 30, 2015 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 payment 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 2016. 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.

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

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of June 30, 2016 and December 31, 2015, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

(Dollars in thousands)	June 30,			December 31,
	2016			2015
Non-performing assets
Non-accrual loans	$	2,538		$	2,748
Foreclosed assets held for resale		1,280			1,472
Loans past-due 90 days or more and still accruing interest		431			166
Total non-performing assets	$	4,249		$	4,386
Impaired loans
Non-accrual loans	$	2,538		$	2,748
Accruing TDRs		10,791			10,619
Total impaired loans		13,329			13,367
Allocated allowance for loan losses		(412	)		(340	)
Net investment in impaired loans	$	12,917		$	13,027
Impaired loans with a valuation allowance	$	5,636		$	4,640
Impaired loans without a valuation allowance		7,693			8,727
Total impaired loans	$	13,329		$	13,367
Allocated valuation allowance as a percent of impaired loans		3.1	%		2.5	%
Impaired loans to total loans		2.6	%		2.6	%
Non-performing assets to total loans		0.8	%		0.8	%
Non-performing assets to total assets		0.4	%		0.4	%
Allowance for loan losses to impaired loans		54.2	%		50.4	%
Allowance for loan losses to total non-performing assets		169.9	%		153.6	%

Real estate mortgages comprise 83.4% of the loan portfolio as of June 30, 2016, as compared to 82.4% as of December 31, 2015. 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 decreased $36,127,000 to $684,471,000 as of June 30, 2016 as non-interest bearing deposits increased by $1,722,000 and interest bearing deposits decreased by $37,849,000 from year-end 2015. Total deposits decreased due to the withdrawal of funds by a municipal depositor through normal, seasonal use of funds. The shift to core deposits and away from time deposits continued in the six months ended June 30, 2016. Demand deposits and savings accounts increased, while certificates of deposit fell. Total short-term and long-term borrowings increased to $174,813,000 as of June 30, 2016, from $150,771,000 at year-end 2015, an increase of $24,042,000, or 15.9%. Total borrowings increased due to decreased deposit balances.

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CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out. During the first six months of the year, net income less dividends paid increased capital by $1,629,000. Accumulated other comprehensive income derived from net unrealized gains on investment securities available-for-sale also impacts capital. At December 31, 2015, accumulated other comprehensive income was $2,035,000. Accumulated other comprehensive income stood at $8,633,000 at June 30, 2016, an increase of $6,598,000. 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 six months of 2016 at an overall net gain of $394,000. 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 shares of common stock as treasury stock at June 30, 2016 and December 31, 2015. This had an effect of reducing our total stockholders’ equity by $5,756,000 as of June 30, 2016 and December 31, 2015.

Total stockholders’ equity was $117,336,000 as of June 30, 2016, and $108,438,000 as of December 31, 2015. Leverage ratio and risk based capital ratios remain very strong. As of June 30, 2016, the Bank’s Tier 1 leverage ratio was 8.56% compared to 8.46% as of December 31, 2015. Tier I risk based capital and total risk based capital ratios as of June 30, 2016, were 12.80% and 13.95%, respectively. The same ratios as of December 31, 2015 were 12.67% and 13.76%, respectively. In addition, the Bank’s Common Equity Tier 1 capital to risk-weighted assets ratio was 12.80% at June 30, 2016 and 12.67% at December 31, 2015.

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019. Management believes that, as of June 30, 2016, the Corporation would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.

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 correspondent banks: FHLB, Atlantic Community Bankers Bank and Federal Reserve Bank.

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.

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MARKET RISK

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

Increases in the level of interest rates also may adversely affect the fair value of the Corporation’s securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Corporation’s interest-earning assets, which could adversely affect the Corporation’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Corporation’s stockholders’ equity, if retained. Under FASB ASC 320-10, 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 June 30, 2016.

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.

44

The table on the bottom of this 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 4.0%, 8.5% and 13.6% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would decrease 1.7% and 7.3% in the 100 and 200 basis point decreasing rate scenarios presented. All of these forecasts are within the Corporation’s one year policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current unprecedented low interest rate environment with federal funds trading in the 25 – 50 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 six months ended June 30, 2016, the cost of interest-bearing liabilities averaged 0.69%, and the yield on average interest-earning assets, on a fully taxable equivalent basis, averaged 3.75%.

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 June 30, 2016, the 100 and 200 basis point immediate decreases in rates are estimated to affect tax-adjusted net present value with decreases of 6.0% and 15.0%, respectively. Additionally, tax-adjusted net present value is projected to decrease 0.0%, 2.0% and 6.1% 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		(13.6	)%
+200 bp Shock vs. Stable Rate		(8.5	)%
+100 bp Shock vs. Stable Rate		(4.0	)%
Flat rate
-100 bp Shock vs. Stable Rate		(1.7	)%
-200 bp Shock vs. Stable Rate		(7.3	)%
Effect on Net Present Value of Balance Sheet
Static Net Present Value Change
+300 bp Shock vs. Stable Rate		(6.1	)%
+200 bp Shock vs. Stable Rate		(2.0	)%
+100 bp Shock vs. Stable Rate		―
Flat rate
-100 bp Shock vs. Stable Rate		(6.0	)%
-200 bp Shock vs. Stable Rate		(15.0	)%

45

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 June 30, 2016.

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 June 30, 2016, that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

46

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, 2015.

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
April 1 — April 30, 2016		―		―		―		120,000
May 1 — May 31, 2016		―		―		―		120,000
June 1 — June 30, 2016		―		―		―		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
August 8, 2016	/s/ Matthew P. Prosseda
	Matthew P. Prosseda
	President and Chief Executive Officer
	(Principal Executive Officer)
August 8, 2016	/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 June 30, 2016, 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: August 8, 2016

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 June 30, 2016, 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: August 8, 2016

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 June 30, 2016, 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

August 8, 2016

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 June 30, 2016, 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

August 8, 2016

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

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2016	Aug. 03, 2016
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q2
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		5,645,997

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
ASSETS
Cash and due from banks	$ 8,586	$ 7,474
Interest-bearing deposits in other banks	672	1,534
Total cash and cash equivalents	9,258	9,008
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	385,089	385,241
Investment securities held-to-maturity (fair value 2016- $21; 2015 - $27)	20	26
Restricted investment in bank stocks	6,622	5,742
Loans	516,998	516,610
Allowance for loan losses	(7,219)	(6,739)
Net loans	509,779	509,871
Premises and equipment, net	19,697	20,113
Accrued interest receivable	3,932	4,086
Cash surrender value of bank owned life insurance	22,229	21,900
Investments in low-income housing partnerships	1,465	1,553
Goodwill	19,133	19,133
Foreclosed assets held for resale	1,280	1,472
Deferred income taxes	0	692
Other assets	3,330	3,170
TOTAL ASSETS	983,316	983,489
Deposits:
Non-interest bearing	109,113	107,391
Interest bearing	575,358	613,207
Total deposits	684,471	720,598
Short-term borrowings	99,638	80,539
Long-term borrowings	75,175	70,232
Accrued interest payable	441	382
Deferred income taxes	2,709	0
Other liabilities	3,546	3,300
TOTAL LIABILITIES	865,980	875,051
STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares in 2016 and 2015; issued 0 in 2016 and 2015	0	0
Common stock, par value $2.00 per share; authorized 20,000,000 shares in 2016 and 2015; issued 5,879,109 in 2016 and 5,853,317 in 2015; outstanding 5,645,997 in 2016 and 5,620,205 in 2015	11,758	11,707
Surplus	34,450	33,830
Retained earnings	68,251	66,622
Accumulated other comprehensive income	8,633	2,035
Treasury stock, at cost, 233,112 shares in 2016 and 2015	(5,756)	(5,756)
TOTAL STOCKHOLDERS’ EQUITY	117,336	108,438
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$ 983,316	$ 983,489

XML

CONSOLIDATED BALANCE SHEETS [Parenthetical] - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
Investment securities held-to-maturity, estimated fair value	$ 21	$ 27
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	5,879,109	5,853,317
Common stock, shares outstanding	5,645,997	5,620,205
Treasury stock, shares	233,112	233,112

XML

CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
INTEREST INCOME
Interest and fees on loans	$ 5,468	$ 5,372	$ 10,924	$ 10,692
Interest and dividend income on investment securities:
Taxable	1,436	1,657	2,944	3,348
Tax-exempt	940	733	1,862	1,404
Dividends	16	15	31	30
Dividend income on restricted investment in bank stocks	64	72	124	276
Interest on interest-bearing deposits in other banks	8	8	16	16
Total interest income	7,932	7,857	15,901	15,766
INTEREST EXPENSE
Interest on deposits	825	776	1,679	1,528
Interest on short-term borrowings	90	66	161	130
Interest on long-term borrowings	370	387	755	763
Total interest expense	1,285	1,229	2,595	2,421
Net interest income	6,647	6,628	13,306	13,345
Provision for loan losses	284	213	567	425
Net interest income after provision for loan losses	6,363	6,415	12,739	12,920
NON-INTEREST INCOME
Trust department	230	240	430	454
Service charges and fees	446	423	861	822
Bank owned life insurance income	165	165	329	329
ATM fees and debit card income	331	310	643	593
Gains on sales of mortgage loans	55	133	157	314
Net investment securities gains	380	603	394	1,095
Impairment charges on equity securities	0	(14)	0	(14)
Other	59	133	152	257
Total non-interest income	1,666	1,993	2,966	3,850
NON-INTEREST EXPENSE
Salaries and employee benefits	2,587	2,847	5,373	5,691
Occupancy, net	379	406	789	874
Furniture and equipment	128	144	264	291
Computer expense	235	149	461	383
Professional services	149	158	302	312
Pennsylvania shares tax	188	190	377	366
FDIC insurance	163	129	317	253
ATM and debit card fees	167	172	306	297
Data processing fees	135	180	268	341
Foreclosed assets held for resale expense	61	42	112	49
Advertising	96	107	163	180
Other	726	872	1,422	1,642
Total non-interest expense	5,014	5,396	10,154	10,679
Income before income tax expense	3,015	3,012	5,551	6,091
Income tax expense	524	582	884	1,212
NET INCOME	$ 2,491	$ 2,430	$ 4,667	$ 4,879
Net income per share:
Basic	$ 0.44	$ 0.44	$ 0.83	$ 0.88
Diluted	0.44	0.44	0.83	0.88
Dividends per share	$ 0.27	$ 0.27	$ 0.54	$ 0.54

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
		Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Net Income		$ 2,491	$ 2,430	$ 4,667	$ 4,879
Other comprehensive income (loss):
Unrealized net holding gains (losses) on available-for-sale investment securities arising during the period, net of income taxes		2,687	(3,331)	6,858	(1,929)
Less reclassification adjustment for net gains included in net income, net of income taxes	[1],[2]	(251)	(398)	(260)	(723)
Less reclassification adjustment for impairment charge on equity securities included in net income, net of income taxes	[2],[3]	0	9	0	9
Total other comprehensive income (loss)		2,436	(3,720)	6,598	(2,643)
Total Comprehensive Income (Loss)		$ 4,927	$ (1,290)	$ 11,265	$ 2,236

[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.

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) [Parenthetical] - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax	$ 1,391	$ (1,721)	$ 3,536	$ (1,005)
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax	(129)	(205)	(134)	(372)
Other Comprehensive Income Loss, Reclassification Adjustment For Impairment Charge From AOCI for Sale of Securities, Tax	$ 0	$ 5	$ 0	$ 5

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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, 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	4,879			4,879
Other comprehensive income (loss), net of taxes	(2,643)				(2,643)
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options	658	$ 49	551			58
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options (in shares)		24,391
Dividends - $0.54 per share	(3,011)			(3,011)
Balance at Jun. 30, 2015	106,154	$ 11,654	33,225	65,353	1,687	(5,765)
Balance (in shares) at Jun. 30, 2015		5,826,912
Balance at Dec. 31, 2015	108,438	$ 11,707	33,830	66,622	2,035	(5,756)
Balance (in shares) at Dec. 31, 2015		5,853,317
Net Income	4,667			4,667
Other comprehensive income (loss), net of taxes	6,598				6,598
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options	671	$ 51	620
Issuance of common stock under dividend reinvestment plan and exercise of employee stock options (in shares)		25,792
Dividends - $0.54 per share	(3,038)			(3,038)
Balance at Jun. 30, 2016	$ 117,336	$ 11,758	$ 34,450	$ 68,251	$ 8,633	$ (5,756)
Balance (in shares) at Jun. 30, 2016		5,879,109

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [Parenthetical] - $ / shares	6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015
Cash dividends, per share	$ 0.54	$ 0.54

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015
OPERATING ACTIVITIES
Net income	$ 4,667	$ 4,879
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	567	425
Depreciation and amortization	677	784
Net premium amortization on investment securities	1,900	1,324
Deferred income tax expense	0	113
Gains on sales of mortgage loans	(157)	(297)
Gains on sales of mortgage loans held for investment transferred to held for sale	0	(17)
Proceeds from sales of mortgage loans originated for resale	4,621	11,079
Originations of mortgage loans originated for resale	(6,483)	(8,853)
Gains on sales of investment securities	(394)	(1,095)
Impairment charges on equity securities	0	14
Net losses on sales of foreclosed real estate held for resale, including write-downs	37	33
Decrease (increase) in accrued interest receivable	154	(692)
Earnings on investment in bank owned life insurance	(329)	(329)
Losses on disposals of premises and equipment	0	30
Increase in other assets	(118)	(1,201)
Increase in accrued interest payable	59	31
Increase (decrease) in other liabilities	238	(2,135)
NET CASH PROVIDED BY OPERATING ACTIVITIES	5,439	4,093
INVESTING ACTIVITIES
Proceeds from sales of investment securities available-for-sale	27,408	79,740
Proceeds from maturities and redemptions of investment securities available-for-sale	6,808	12,727
Purchases of investment securities available-for-sale	(25,571)	(102,185)
Proceeds from maturities and redemptions of investment securities held-to-maturity	6	1,023
Net change in restricted investment in bank stocks	(880)	(937)
Net decrease (increase) in loans	1,512	(17,512)
Proceeds from sales of mortgage loans held for investment transferred to held for sale	0	491
Purchases of premises and equipment	(208)	(122)
Proceeds from sales of foreclosed assets held for resale	230	0
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	9,305	(26,775)
FINANCING ACTIVITIES
Net (decrease) increase in deposits	(36,127)	4,539
Net increase in short-term borrowings	19,099	15,339
Proceeds from long-term borrowings	10,000	5,000
Repayment of long-term borrowings	(5,057)	(53)
Common stock issued	629	589
Proceeds from issuance of treasury stock	0	32
Dividends paid	(3,038)	(3,011)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(14,494)	22,435
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	250	(247)
CASH AND CASH EQUIVALENTS, BEGINNING	9,008	7,967
CASH AND CASH EQUIVALENTS, ENDING	9,258	7,720
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	2,536	2,390
Income taxes paid	1,730	1,330
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Purchased securities settling after quarter end	0	1,920
Loans transferred to foreclosed assets held for resale	75	226
Loans transferred (from) to held for sale portfolio	(171)	491
Common stock subscription receivable	$ 42	$ 37

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BASIS OF PRESENTATION AND ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2016

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 six month periods ended June 30, 2016, are not necessarily indicative of the results for the year ending December 31, 2016. 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, 2015.

The Corporation has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of June 30, 2016 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. In July 2016, the Corporation anticipates approximately $449,000 in tax-free claims income from life insurance proceeds as the result of the death benefit which will be paid on a life insurance policy covering one of our former employees that remained an insured person by our bank-owned life insurance program following her separation of employment.

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RECENT ACCOUNTING STANDARDS UPDATES ("ASU")

6 Months Ended

Jun. 30, 2016

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 six months ended June 30, 2016 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 August 2015, the FASB issued an update ASU 2015-14 which 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. In March 2016, the FASB issued an update ASU 2016-08 which updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. In April 2016, the FASB issued an update ASU 2016-10. The ASU updates the standard by identifying performance obligations and licenses of intellectual property, which clarifies the guidance surrounding licensing arrangements and the identification of performance obligations. In May 2016, the FASB issued an update ASU 2016-12 which articulates narrow-scope improvements and practical expedients. The Corporation is currently evaluating the impact of these ASUs on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. In particular, the guidance revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also amends certain disclosure requirements associated with fair value of financial instruments. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Entities should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this update is not expected to have a material impact on the Corporation’s consolidated financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Corporation is in the process of evaluating the impact of this guidance and anticipates an impact to the consolidated financial statements with regard to the Corporation’s operating lease agreements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. This is in contrast to existing guidance whereby credit losses generally are not recognized until they are incurred. For public companies, this update will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Corporation is currently assessing the impact that this guidance will have on its consolidated financial statements.

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INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015:

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2016:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,015	$	5	$	—	$	1,020
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		112,802		1,596		(194)		114,204
Other		11,541		74		(24)		11,591
Obligations of state and political subdivisions		201,749		10,828		—		212,577
Corporate debt securities		43,623		388		(342)		43,669
Marketable equity securities		1,194		834		—		2,028
Total	$	371,924	$	13,725	$	(560)	$	385,089

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2016:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	20	$	1	$	—	$	21
Total	$	20	$	1	$	—	$	21

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,022	$	—	$	(1)	$	1,021
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		113,847		37		(1,410)		112,474
Other		21,554		117		(79)		21,592
Obligations of state and political subdivisions		195,297		5,425		(408)		200,314
Corporate debt securities		49,162		10		(1,339)		47,833
Marketable equity securities		1,194		813		—		2,007
Total	$	382,076	$	6,402	$	(3,237)	$	385,241

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	26	$	1	$	—	$	27
Total	$	26	$	1	$	—	$	27

Securities Available-for-Sale with an aggregate fair value of $255,220,000 at June 30, 2016 and $326,872,000 at December 31, 2015, and securities Held-to-Maturity with an aggregate book value of $20,000 at June 30, 2016 and $26,000 at December 31, 2015, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase, FHLB advances and other balances of $191,148,000 at June 30, 2016 and $219,576,000 at December 31, 2015.

The amortized cost, estimated fair value and weighted average yield of debt and equity securities, by contractual maturity, are shown below at June 30, 2016. 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)

	June 30, 2016
	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	$	—		$	—		$	902		$	—		$	—		$	—
Fair value		—			—			908			—			—			—
Weighted average yield		—			—			6.29	%		—			—			—
1 - 5 Years:
Amortized cost		1,015			30,977			42,696			12,639			—			20
Fair value		1,020			31,593			44,250			12,722			—			21
Weighted average yield		0.96	%		2.06	%		2.80	%		2.38	%		—			2.55	%
5 - 10 Years:
Amortized cost		—			16,821			72,677			30,984			—			—
Fair value		—			17,166			76,116			30,947			—			—
Weighted average yield		—			2.06	%		3.29	%		2.76	%		—			—
After 10 Years:
Amortized cost		—			76,545			85,474			—			1,194			—
Fair value		—			77,036			91,303			—			2,028			—
Weighted average yield		—			1.67	%		4.58	%		—			5.16	%		—
Total:
Amortized cost	$	1,015		$	124,343		$	201,749		$	43,623		$	1,194		$	20
Fair value		1,020			125,795			212,577			43,669			2,028			21
Weighted average yield		0.96	%		1.82	%		3.75	%		2.65	%		5.16	%		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 June 30, 2016. 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 June 30, 2016 and 2015 were $20,374,000 and $31,966,000, respectively. Gross gains realized on these sales were $380,000 and $603,000, respectively. There were no losses realized on these sales for the three months ended June 30, 2016 and 2015. Impairment losses realized on Available-for-Sale equity securities for the three months ended June 30, 2016 and 2015 were $0 and $14,000, respectively.

 

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the six months ended June 30, 2016 and 2015 were $27,408,000 and $79,740,000, respectively. Gross gains realized on these sales were $435,000 and $1,151,000, respectively. Gross losses on these sales were $41,000 and $56,000, respectively. Impairment losses realized on Available-for-Sale equity securities for the six months ended June 30, 2016 and 2015 were $0 and $14,000, respectively.

 

There were no proceeds from sales of investments in Held-to-Maturity debt equity securities during the three or six month periods ended June 30, 2016 or 2015. 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 June 30, 2016 or December 31, 2015.

 

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 June 30, 2016 and December 31, 2015:

June 30, 2016

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		11,375		(78)		7,751		(116)		19,126		(194)
Other		3,676		(24)		—		—		3,676		(24)
Obligations of state and political subdivisions		—		—		—		—		—		—
Corporate debt securities		4,467		(30)		13,464		(312)		17,931		(342)
Marketable equity securities		—		—		—		—		—		—
	$	19,518	$	(132)	$	21,215	$	(428)	$	40,733	$	(560)

December 31, 2015

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	1,021	$	(1)	$	—	$	—	$	1,021	$	(1)
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		86,618		(1,177)		11,234		(233)		97,852		(1,410)
Other		12,962		(79)		—		—		12,962		(79)
Obligations of state and political subdivisions		26,163		(258)		8,105		(150)		34,268		(408)
Corporate debt securities		27,527		(531)		19,433		(808)		46,960		(1,339)
Marketable equity securities		—		—		—		—		—		—
	$	154,291	$	(2,046)	$	38,772	$	(1,191)	$	193,063	$	(3,237)

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 8 securities with a one year or less unrealized loss position or any of their 10 securities with a greater than one year unrealized loss position as of June 30, 2016, 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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LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2016

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

Residential mortgage loans held for 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 thirty 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. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability and willingness to repay is 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 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 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

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

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 Sheets. As of June 30, 2016 and December 31, 2015, the amount of the reserve for unfunded lending commitments was $192,000 and $184,000, respectively.

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

A loan is considered impaired when, based on current information and events, it is probable that the 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 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 and 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 June 30, 2016 and December 31, 2015:

		Commercial and
(Dollars in thousands)		Industrial				Commercial Real Estate
		June 30,		December 31,		June 30,		December 31,
		2016		2015		2016		2015
Grade:
1-6  Pass		$	74,932	$	80,730	$	243,888	$	242,546
7     Special Mention			4,331		4,194		9,216		3,890
8     Substandard					—		10,031		12,238
9     Doubtful			—		—		—		—
Add (deduct):	Unearned discount and		—		—		—		—
	Net deferred loan fees and costs		136		150		389		344
Total loans		$	79,399	$	85,074	$	263,524	$	259,018

		Residential Real Estate
		Including Home Equity						Consumer Loans
		June 30,			December 31,			June 30,		December 31,
		2016			2015			2016		2015
Grade:
1-6  Pass		$	165,568		$	163,690		$	6,198	$	5,764
7     Special Mention			1,063			1,667			17		26
8     Substandard			1,119			1,245			5		4
9     Doubtful			—			—			—		—
Add (deduct):	Unearned discount and		(10	)		(15	)		—		—
	Net deferred loan fees and costs		15			41			100		96
Total loans		$	167,755		$	166,628		$	6,320	$	5,890

		Total Loans
		June 30,			December 31,
		2016			2015
Grade:
1-6  Pass		$	490,586		$	492,730
7     Special Mention			14,627			9,777
8     Substandard			11,155			13,487
9     Doubtful			—			—
Add (deduct):	Unearned discount and		(10	)		(15	)
	Net deferred loan fees and costs		640			631
Total loans		$	516,998		$	516,610

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $40,186,000 and $2,877,000 at June 30, 2016 and $43,817,000 and $2,992,000 at December 31, 2015. Loans held for sale amounted to $3,755,000 at June 30, 2016 and $1,929,000 at December 31, 2015.

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

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer		Unallocated		Total
As of and for the three month period ended June 30, 2016:
Allowance for Loan Losses:
Beginning balance	$	731		$	3,983		$	1,749		$	101	$	448	$	7,012
Charge-offs		(2	)		(57	)		(25	)		—		—		(84	)
Recoveries		4			—			—			3		—		7
Provision		(31	)		88			(27	)		2		252		284
Ending Balance	$	702		$	4,014		$	1,697		$	106	$	700	$	7,219

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated		Total
As of and for the six month period ended June 30, 2016:
Allowance for Loan Losses:
Beginning balance	$	725		$	3,983		$	1,777		$	96		$	158	$	6,739
Charge-offs		(2	)		(57	)		(25	)		(23	)		—		(107	)
Recoveries		4			—			12			4			—		20
Provision		(25	)		88			(67	)		29			542		567
Ending Balance	$	702		$	4,014		$	1,697		$	106		$	700	$	7,219
Ending balance: individually evaluated for impairment	$	—		$	393		$	19		$	—		$	—	$	412
Ending balance: collectively evaluated for impairment	$	702		$	3,621		$	1,678		$	106		$	700	$	6,807
Loans Receivable:
Ending Balance	$	79,399		$	263,524		$	167,755		$	6,320		$	—	$	516,998
Ending balance: individually evaluated for impairment	$	478		$	11,993		$	858		$	—		$	—	$	13,329
Ending balance: collectively evaluated for impairment	$	78,921		$	251,531		$	166,897		$	6,320		$	—	$	503,669

(Dollars in thousands)	Commercial		Commercial			Residential
	and Industrial		Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the three month period ended June 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	687	$	3,019		$	1,852		$	90		$	837		$	6,485
Charge-offs		—		(94	)		(49	)		(1	)		—			(144	)
Recoveries		3		42			—			1			—			46
Provision		16		172			64			(1	)		(38	)		213
Ending Balance	$	706	$	3,139		$	1,867		$	89		$	799		$	6,600

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated		Total
As of and for the six month period ended June 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	542		$	3,176		$	1,928		$	107		$	637	$	6,390
Charge-offs		(2	)		(137	)		(108	)		(15	)		—		(262	)
Recoveries		3			42			—			2			—		47
Provision		163			58			47			(5	)		162		425
Ending Balance	$	706		$	3,139		$	1,867		$	89		$	799	$	6,600
Ending balance: individually evaluated for impairment	$	—		$	24		$	66		$	—		$	—	$	90
Ending balance: collectively evaluated for impairment	$	706		$	3,115		$	1,801		$	89		$	799	$	6,510
Loans Receivable:
Ending Balance	$	78,077		$	256,184		$	162,463		$	5,448		$	—	$	502,172
Ending balance: individually evaluated for impairment	$	414		$	9,174		$	1,029		$	2		$	—	$	10,619
Ending balance: collectively evaluated for impairment	$	77,663		$	247,010		$	161,434		$	5,446		$	—	$	491,553

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the twelve months ended December 31, 2015:
Allowance for Loan Losses:
Beginning balance	$	542		$	3,176		$	1,928		$	107		$	637		$	6,390
Charge-offs		(2	)		(1,759	)		(210	)		(45	)		—			(2,016	)
Recoveries		22			59			1			6			—			88
Provision		163			2,507			58			28			(479	)		2,277
Ending Balance	$	725		$	3,983		$	1,777		$	96		$	158		$	6,739
Ending balance: individually evaluated for impairment	$	—		$	309		$	31		$	—		$	—		$	340
Ending balance: collectively evaluated for impairment	$	725		$	3,674		$	1,746		$	96		$	158		$	6,399
Loans Receivable:
Ending Balance	$	85,074		$	259,018		$	166,628		$	5,890		$	—		$	516,610
Ending balance: individually evaluated for impairment	$	399		$	12,057		$	911		$	—		$	—		$	13,367
Ending balance: collectively evaluated for impairment	$	84,675		$	246,961		$	165,717		$	5,890		$	—		$	503,243

Of the $1,280,000 in foreclosed assets held for resale at June 30, 2016, $105,000 was secured by residential real estate, $50,000 was secured by land, and $1,125,000 was secured by commercial real estate. Of the $1,472,000 in foreclosed assets held for resale at December 31, 2015, $256,000 was secured by residential real estate, $50,000 was secured by land, and $1,166,000 was secured by commercial real estate. At June 30, 2016 and December 31, 2015, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $266,000 at June 30, 2016 and $221,000 at December 31, 2015. These balances were not included in foreclosed assets held for resale at June 30, 2016 or December 31, 2015.

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 June 30, 2016 and December 31, 2015 was $11,091,000 and $11,096,000, respectively. The small decrease in TDRs at June 30, 2016 as compared to December 31, 2015 is attributable to large principal payments and paydowns made on existing TDRs net against smaller loans modified as TDRs during the six months ended June 30, 2016. There were $18,000 and $31,000 in unfunded commitments on TDRs at June 30, 2016 and December 31, 2015, respectively.

During the three months ended June 30, 2016, three loans with a combined post modification balance of $114,000 were classified as TDRs, as compared to the same period in 2015, when three loans with a combined post modification balance of $308,000 were classified as TDRs. The loan modifications for the three months ended June 30, 2016 consisted of two term modifications and one payment modification. The loan modifications for the three months ended June 30, 2015 consisted of two term modifications and one payment modification.

During the six months ended June 30, 2016, seven loans with a combined post modification balance of $542,000 were classified as TDRs, as compared to the same period in 2015, when five loans with a combined post modification balance of $4,558,000 were classified as TDRs. The loan modifications for the six months ended June 30, 2016 consisted of five term modifications and two payment modifications. The loan modifications for the six months ended June 30, 2015 consisted of three term modifications and two payment modifications.

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

(Dollars in thousands)

	June 30,		December 31,
	2016		2015
Non-accrual TDRs	$	300	$	477
Accruing TDRs		10,791		10,619
Total	$	11,091	$	11,096

At June 30, 2016, five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $748,000 were not in compliance with the terms of their restructure, compared to June 30, 2015 when five Commercial Real Estate loans classified as TDRs with a combined recorded investment of $6,393,000 were not in compliance with the terms of their restructure. The significant decrease in TDRs not in compliance with the terms of their restructure at June 30, 2016 as compared to June 30, 2015 is largely due to the proper measures being taken to bring two loans totaling $5,639,000 into compliance with the terms of their restructure. One loan to a student housing holding company in the amount of $4,226,000 was not in compliance with the terms of its restructure at June 30, 2015, but proper measures were taken to bring the loan into compliance with restructure terms by June 30, 2016. A purchased participation loan in the amount of $1,413,000 to a distributor of recreational vehicles was not in compliance with the terms of its restructure at June 30, 2015. A piece of property related to this loan, valued at $925,000, was moved to foreclosed assets held for resale at December 31, 2015, and proper measures were taken to bring the remainder of the loan into compliance with restructure terms by June 30, 2016.

During the three months ended June 30, 2016, no loans that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2015 when one Commercial Real Estate loan totaling $4,226,000 that was modified as a TDR within the preceding twelve months had experienced a payment default. During the six months ended June 30, 2016, no loans that were modified as TDRs within the preceding twelve months had experienced payment defaults, as compared to the same period in 2015 when two Commercial Real Estate loans totaling $4,446,000 that were modified as TDRs within the preceding twelve months had experienced payment defaults. The significant decrease in defaulted TDRs at June 30, 2016 as compared to June 30, 2015 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 payment default during the second quarter of 2015.

The following table presents information regarding the loan modifications categorized as TDRs during the three and six months ended June 30, 2016 and June 30, 2015:

(Dollars in thousands)	Three Months Ended June 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	18	$	18	$	18
Commercial Real Estate		2		96		96		95
Total		3	$	114	$	114	$	113

(Dollars in thousands)	Three Months Ended June 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		—	$	—	$	—	$	—
Commercial Real Estate		3		354		308		308
Total		3	$	354	$	308	$	308

(Dollars in thousands)	Six Months Ended June 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		4	$	86	$	86	$	81
Commercial Real Estate		3		456		456		209
Total		7	$	542	$	542	$	290

(Dollars in thousands)	Six Months Ended June 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	23	$	23	$	22
Commercial Real Estate		4		4,580		4,535		4,533
Total		5	$	4,603	$	4,558	$	4,555

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three and six months ended June 30, 2016 and June 30, 2015 with the total number of each type of modification performed.

	Three Months Ended June 30, 2016								Six Months Ended June 30, 2016
	Rate		Term		Payment		Number		Rate		Term		Payment		Number
	Modification		Modification		Modification		Modified		Modification		Modification		Modification		Modified
Commercial and Industrial		—		1		—		1		—		3		1		4
Commercial Real Estate		—		1		1		2		—		2		1		3
Total		—		2		1		3		—		5		2		7

	Three Months Ended June 30, 2015								Six Months Ended June 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		—		2		1		3		—		2		2		4
Total		—		2		1		3		—		3		2		5

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below for the periods ended June 30, 2016 and December 31, 2015.

(Dollars in thousands)	June 30, 2016						December 31, 2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	478	$	478	$	—	$	399	$	399	$	—
Commercial Real Estate		6,781		8,020		—		7,853		9,524		—
Residential Real Estate		434		603		—		475		657		—
With an allowance recorded:
Commercial Real Estate		5,212		6,567		393		4,204		4,204		309
Residential Real Estate		424		424		19		436		436		31
Total	$	13,329	$	16,092	$	412	$	13,367	$	15,220	$	340
Total consists of:
Commercial and Industrial	$	478	$	478	$	—	$	399	$	399	$	—
Commercial Real Estate	$	11,993	$	14,587	$	393	$	12,057	$	13,728	$	309
Residential Real Estate	$	858	$	1,027	$	19	$	911	$	1,093	$	31

______________________

At June 30, 2016 and December 31, 2015, $11,091,000 and $11,096,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $256,000 and $309,000, 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 six months ended June 30, 2016 and 2015.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	472	$	5	$	416	$	5
Commercial Real Estate		6,913		83		8,943		141
Residential Real Estate		423		—		441		—
Consumer		—		—		3		—
With an allowance recorded:
Commercial Real Estate		5,179		37		257		—
Residential Real Estate		424		—		547		—
Total	$	13,411	$	125	$	10,607	$	146
Total consists of:
Commercial and Industrial	$	472	$	5	$	416	$	5
Commercial Real Estate	$	12,092	$	120	$	9,200	$	141
Residential Real Estate	$	847	$	—	$	988	$	—
Consumer	$	—	$	—	$	3	$	—

 _____________________

Of the $125,000 and $146,000 in interest income recognized on impaired loans for the three months ended June 30, 2016 and 2015, respectively, no interest income was recognized with respect to non-accrual loans.

(Dollars in thousands)	For the Six Months Ended				For the Six Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	447	$	10	$	410	$	9
Commercial Real Estate		6,904		171		7,599		247
Residential Real Estate		422		—		414		—
Consumer		—		—		3		—
With an allowance recorded:
Commercial Real Estate		5,176		74		259		—
Residential Real Estate		428		—		553		—
Total	$	13,377	$	255	$	9,238	$	256
Total consists of:
Commercial and Industrial	$	447	$	10	$	410	$	9
Commercial Real Estate	$	12,080	$	245	$	7,858	$	247
Residential Real Estate	$	850	$	—	$	967	$	—
Consumer	$	—	$	—	$	3	$	—

_____________________

Of the $255,000 and $256,000 in interest income recognized on impaired loans for the six months ended June 30, 2016 and 2015, respectively, no interest income was recognized with respect to non-accrual loans.

Loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing, as of June 30, 2016 and December 31, 2015 were as follows:

(Dollars in thousands)
	June 30,		December 31,
	2016		2015
Commercial Real Estate	$	1,680	$	1,837
Residential Real Estate		858		911
Total non-accrual loans		2,538		2,748
Foreclosed assets held for resale		1,280		1,472
Loans past-due 90 days or more and still accruing		431		166
Total non-performing assets	$	4,249	$	4,386

The following tables present the classes of the loan portfolio summarized by the past-due status at June 30, 2016 and December 31, 2015:

(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
June 30, 2016:
Commercial and Industrial	$	638	$	63	$	—	$	701	$	78,698	$	79,399	$	—
Commercial Real Estate		1,357		627		1,901		3,885		259,639		263,524		398
Residential Real Estate		974		26		848		1,848		165,907		167,755		33
Consumer		11		—		—		11		6,309		6,320		—
Total	$	2,980	$	716	$	2,749	$	6,445	$	510,553	$	516,998	$	431

(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, 2015:
Commercial and Industrial	$	34	$	—	$	—	$	34	$	85,040	$	85,074	$	—
Commercial Real Estate		316		3		1,484		1,803		257,215		259,018		—
Residential Real Estate		1,288		491		1,049		2,828		163,800		166,628		166
Consumer		20		—		—		20		5,870		5,890		—
Total	$	1,658	$	494	$	2,533	$	4,685	$	511,925	$	516,610	$	166

At June 30, 2016, commitments to lend additional funds with respect to impaired loans consisted of three irrevocable letters of credit totaling $2,204,000. One irrevocable letter of credit in the amount of $2,185,000 was associated with a loan to a developer of a residential sub-division. Two irrevocable letters of credit totaling $19,000 were associated with a loan to a community recreation facility. At December 31, 2015, the only commitment to lend additional funds with respect to impaired loans was an irrevocable letter of credit in the amount of $2,185,000 associated with a loan to a developer of a residential sub-division

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BORROWINGS

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015.

(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
June 30, 2016
Repurchase agreements (a)	$	24,029	$	—	$	24,029	$	(24,029)	$	—	$	—
December 31, 2015
Repurchase agreements (a)	$	20,779	$	—	$	20,779	$	(20,779)	$	—	$	—

______________________

(a) As of June 30, 2016 and December 31, 2015, the fair value of securities pledged in connection with repurchase agreements was $27,713,000 and $27,510,000, respectively.

 

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of June 30, 2016:

(Dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total
June 30, 2016:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	24,029	$	—	$	—	$	—	$	24,029
Total	$	24,029	$	—	$	—	$	—	$	24,029

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.

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COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2016

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

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015, were as follows:

(Dollars in thousands)

	June 30, 2016		December 31, 2015
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	85,194	$	72,552
Financial standby letters of credit	$	452	$	475
Performance standby letters of credit	$	4,660	$	4,692

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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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)

June 30, 2016
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,020	$	—	$	1,020
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		114,204		—		114,204
Other		—		11,591		—		11,591
Obligations of state and political subdivisions		—		212,577		—		212,577
Corporate debt securities		—		43,669		—		43,669
Marketable equity securities		2,028		—		—		2,028
Total	$	2,028	$	383,061	$	—	$	385,089

(Dollars in thousands)

December 31, 2015

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,021	$	—	$	1,021
Obligations of U.S. Government Corporations and Agencies:		—
Mortgaged-backed		—		112,474		—		112,474
Other		—		21,592		—		21,592
Obligations of state and political subdivisions		—		200,314		—		200,314
Corporate debt securities		—		47,833		—		47,833
Marketable equity securities		2,007		—		—		2,007
Total	$	2,007	$	383,234	$	—	$	385,241

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 2016 or 2015.

Financial Assets Measured at Fair Value on a Non-recurring Basis

At June 30, 2016 and December 31, 2015, impaired loans measured at fair value on a non-recurring basis that are collateral dependent and the valuation methods used are as follows:

(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
Assets at June 30, 2016
Impaired loans:
Commercial Real Estate	$	—	$	—	$	5,289	$	5,289
Residential Real Estate		—		—		549		549
Total impaired loans	$	—	$	—	$	5,838	$	5,838

(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2015
Impaired loans:
Commercial Real Estate	$	—	$	—	$	1,665	$	1,665
Residential Real Estate		—		—		631		631
Total impaired loans	$	—	$	—	$	2,296	$	2,296

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 2016 and 2015.

Nonfinancial Assets Measured at Fair Value on a Non-recurring Basis

At June 30, 2016, 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 June 30, 2016
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	200	$	200
Total foreclosed assets held for resale	$	—	$	—	$	200	$	200

At December 31, 2015, there were no nonfinancial assets measured at fair value on a non-recurring basis.

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 2016 and 2015.

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis that are collateral dependent 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
June 30, 2016
Impaired loans	$	5,838	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (63%)	(19	%)
Foreclosed assets held for resale	$	200	Appraisal of collateral1,3	Appraisal adjustments2	(17%) – (17%)	(17	%)
December 31, 2015
Impaired loans	$	2,296	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (63%)	(29	%)
Foreclosed assets held for resale	$	—	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (0%)	(0	%)

______________________

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 June 30, 2016
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,586	$	8,586	$	—	$	—	$	8,586
Interest-bearing deposits in other banks		672		—		672		—		672
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		385,089		2,028		383,061		—		385,089
Investment securities held-to-maturity		20		—		21		—		21
Restricted investment in bank stocks		6,622		—		6,622		—		6,622
Net loans		509,779		—		—		508,581		508,581
Mortgage servicing rights		461		—		—		461		461
Accrued interest receivable		3,932		—		3,932		—		3,932
FINANCIAL LIABILITIES:
Deposits		684,471		—		686,178		—		686,178
Short-term borrowings		99,638		—		99,638		—		99,638
Long-term borrowings		75,175		—		77,279		—		77,279
Accrued interest payable		441		—		441		—		441
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2015
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,474	$	7,474	$	—	$	—	$	7,474
Interest-bearing deposits in other banks		1,534		—		1,534		—		1,534
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		385,241		2,007		383,234		—		385,241
Investment securities held-to-maturity		26		—		27		—		27
Restricted investment in bank stocks		5,742		—		5,742		—		5,742
Net loans		509,871		—		—		498,671		498,671
Mortgage servicing rights		493		—		—		493		493
Accrued interest receivable		4,086		—		4,086		—		4,086
FINANCIAL LIABILITIES:
Deposits		720,598		—		720,341		—		720,341
Short-term borrowings		80,539		—		80,539		—		80,539
Long-term borrowings		70,232		—		71,302		—		71,302
Accrued interest payable		382		—		382		—		382
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 June 30, 2016 and December 31, 2015:

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 values 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

Servicing rights are carried at cost. The carrying amount approximates fair value.

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 June 30, 2016 and December 31, 2015.

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.

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EARNINGS PER SHARE

6 Months Ended

Jun. 30, 2016

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
	June 30,
	2016		2015
Net income	$	2,491	$	2,430
Weighted-average common shares outstanding		5,633		5,581
Basic earnings per share	$	0.44	$	0.44
Weighted-average common shares outstanding		5,633		5,581
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,635		5,583
Diluted earnings per share	$	0.44	$	0.44

(In thousands, except earnings per share)	Six Months Ended
	June 30,
	2016		2015
Net income	$	4,667	$	4,879
Weighted-average common shares outstanding		5,627		5,574
Basic earnings per share	$	0.83	$	0.88
Weighted-average common shares outstanding		5,627		5,574
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,629		5,576
Diluted earnings per share	$	0.83	$	0.88

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INVESTMENT SECURITIES (Tables)

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015:

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2016:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,015	$	5	$	—	$	1,020
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		112,802		1,596		(194)		114,204
Other		11,541		74		(24)		11,591
Obligations of state and political subdivisions		201,749		10,828		—		212,577
Corporate debt securities		43,623		388		(342)		43,669
Marketable equity securities		1,194		834		—		2,028
Total	$	371,924	$	13,725	$	(560)	$	385,089

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2016:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	20	$	1	$	—	$	21
Total	$	20	$	1	$	—	$	21

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,022	$	—	$	(1)	$	1,021
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		113,847		37		(1,410)		112,474
Other		21,554		117		(79)		21,592
Obligations of state and political subdivisions		195,297		5,425		(408)		200,314
Corporate debt securities		49,162		10		(1,339)		47,833
Marketable equity securities		1,194		813		—		2,007
Total	$	382,076	$	6,402	$	(3,237)	$	385,241

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	26	$	1	$	—	$	27
Total	$	26	$	1	$	—	$	27

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 June 30, 2016. 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)

	June 30, 2016
	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	$	—		$	—		$	902		$	—		$	—		$	—
Fair value		—			—			908			—			—			—
Weighted average yield		—			—			6.29	%		—			—			—
1 - 5 Years:
Amortized cost		1,015			30,977			42,696			12,639			—			20
Fair value		1,020			31,593			44,250			12,722			—			21
Weighted average yield		0.96	%		2.06	%		2.80	%		2.38	%		—			2.55	%
5 - 10 Years:
Amortized cost		—			16,821			72,677			30,984			—			—
Fair value		—			17,166			76,116			30,947			—			—
Weighted average yield		—			2.06	%		3.29	%		2.76	%		—			—
After 10 Years:
Amortized cost		—			76,545			85,474			—			1,194			—
Fair value		—			77,036			91,303			—			2,028			—
Weighted average yield		—			1.67	%		4.58	%		—			5.16	%		—
Total:
Amortized cost	$	1,015		$	124,343		$	201,749		$	43,623		$	1,194		$	20
Fair value		1,020			125,795			212,577			43,669			2,028			21
Weighted average yield		0.96	%		1.82	%		3.75	%		2.65	%		5.16	%		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 June 30, 2016 and December 31, 2015:

June 30, 2016

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		11,375		(78)		7,751		(116)		19,126		(194)
Other		3,676		(24)		—		—		3,676		(24)
Obligations of state and political subdivisions		—		—		—		—		—		—
Corporate debt securities		4,467		(30)		13,464		(312)		17,931		(342)
Marketable equity securities		—		—		—		—		—		—
	$	19,518	$	(132)	$	21,215	$	(428)	$	40,733	$	(560)

December 31, 2015

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	1,021	$	(1)	$	—	$	—	$	1,021	$	(1)
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		86,618		(1,177)		11,234		(233)		97,852		(1,410)
Other		12,962		(79)		—		—		12,962		(79)
Obligations of state and political subdivisions		26,163		(258)		8,105		(150)		34,268		(408)
Corporate debt securities		27,527		(531)		19,433		(808)		46,960		(1,339)
Marketable equity securities		—		—		—		—		—		—
	$	154,291	$	(2,046)	$	38,772	$	(1,191)	$	193,063	$	(3,237)

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015:

		Commercial and
(Dollars in thousands)		Industrial				Commercial Real Estate
		June 30,		December 31,		June 30,		December 31,
		2016		2015		2016		2015
Grade:
1-6 Pass		$	74,932	$	80,730	$	243,888	$	242,546
7 Special Mention			4,331		4,194		9,216		3,890
8 Substandard			—		—		10,031		12,238
9 Doubtful			—		—		—		—
Add (deduct):	Unearned discount and		—		—		—		—
	Net deferred loan fees and costs		136		150		389		344
Total loans		$	79,399	$	85,074	$	263,524	$	259,018

		Residential Real Estate
		Including Home Equity				Consumer Loans
		June 30,		December 31,		June 30,		December 31,
		2016		2015		2016		2015
Grade:
1-6 Pass		$	165,568	$	163,690	$	6,198	$	5,764
7 Special Mention			1,063		1,667		17		26
8 Substandard			1,119		1,245		5		4
9 Doubtful			—		—		—		—
Add (deduct):	Unearned discount and		(10)		(15)		—		—
	Net deferred loan fees and costs		15		41		100		96
Total loans		$	167,755	$	166,628	$	6,320	$	5,890

		Total Loans
		June 30,		December 31,
		2016		2015
Grade:
1-6 Pass		$	490,586	$	492,730
7 Special Mention			14,627		9,777
8 Substandard			11,155		13,487
9 Doubtful			—		—
Add (deduct):	Unearned discount and		(10)		(15)
	Net deferred loan fees and costs		640		631
Total loans		$	516,998	$	516,610

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

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

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended June 30, 2016:
Allowance for Loan Losses:
Beginning balance	$	731	$	3,983	$	1,749	$	101	$	448	$	7,012
Charge-offs		(2)		(57)		(25)		—		—		(84)
Recoveries		4		—		—		3		—		7
Provision		(31)		88		(27)		2		252		284
Ending Balance	$	702	$	4,014	$	1,697	$	106	$	700	$	7,219

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the six month period ended June 30, 2016:
Allowance for Loan Losses:
Beginning balance	$	725	$	3,983	$	1,777	$	96	$	158	$	6,739
Charge-offs		(2)		(57)		(25)		(23)		—		(107)
Recoveries		4		—		12		4		—		20
Provision		(25)		88		(67)		29		542		567
Ending Balance	$	702	$	4,014	$	1,697	$	106	$	700	$	7,219
Ending balance: individually evaluated for impairment	$	—	$	393	$	19	$	—	$	—	$	412
Ending balance: collectively evaluated for impairment	$	702	$	3,621	$	1,678	$	106	$	700	$	6,807
Loans Receivable:
Ending Balance	$	79,399	$	263,524	$	167,755	$	6,320	$	—	$	516,998
Ending balance: individually evaluated for impairment	$	478	$	11,993	$	858	$	—	$	—	$	13,329
Ending balance: collectively evaluated for impairment	$	78,921	$	251,531	$	166,897	$	6,320	$	—	$	503,669

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended June 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	687	$	3,019	$	1,852	$	90	$	837	$	6,485
Charge-offs		—		(94)		(49)		(1)		—		(144)
Recoveries		3		42		—		1		—		46
Provision		16		172		64		(1)		(38)		213
Ending Balance	$	706	$	3,139	$	1,867	$	89	$	799	$	6,600

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the six month period ended June 30, 2015:
Allowance for Loan Losses:
Beginning balance	$	542	$	3,176	$	1,928	$	107	$	637	$	6,390
Charge-offs		(2)		(137)		(108)		(15)		—		(262)
Recoveries		3		42		—		2		—		47
Provision		163		58		47		(5)		162		425
Ending Balance	$	706	$	3,139	$	1,867	$	89	$	799	$	6,600
Ending balance: individually evaluated for impairment	$	—	$	24	$	66	$	—	$	—	$	90
Ending balance: collectively evaluated for impairment	$	706	$	3,115	$	1,801	$	89	$	799	$	6,510
Loans Receivable:
Ending Balance	$	78,077	$	256,184	$	162,463	$	5,448	$	—	$	502,172
Ending balance: individually evaluated for impairment	$	414	$	9,174	$	1,029	$	2	$	—	$	10,619
Ending balance: collectively evaluated for impairment	$	77,663	$	247,010	$	161,434	$	5,446	$	—	$	491,553

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the twelve months ended December 31, 2015:
Allowance for Loan Losses:
Beginning balance	$	542	$	3,176	$	1,928	$	107	$	637	$	6,390
Charge-offs		(2)		(1,759)		(210)		(45)		—		(2,016)
Recoveries		22		59		1		6		—		88
Provision		163		2,507		58		28		(479)		2,277
Ending Balance	$	725	$	3,983	$	1,777	$	96	$	158	$	6,739
Ending balance: individually evaluated for impairment	$	—	$	309	$	31	$	—	$	—	$	340
Ending balance: collectively evaluated for impairment	$	725	$	3,674	$	1,746	$	96	$	158	$	6,399
Loans Receivable:
Ending Balance	$	85,074	$	259,018	$	166,628	$	5,890	$	—	$	516,610
Ending balance: individually evaluated for impairment	$	399	$	12,057	$	911	$	—	$	—	$	13,367
Ending balance: collectively evaluated for impairment	$	84,675	$	246,961	$	165,717	$	5,890	$	—	$	503,243

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)

	June 30,		December 31,
	2016		2015
Non-accrual TDRs	$	300	$	477
Accruing TDRs		10,791		10,619
Total	$	11,091	$	11,096

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 six months ended June 30, 2016 and June 30, 2015:

(Dollars in thousands)	Three Months Ended June 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	18	$	18	$	18
Commercial Real Estate		2		96		96		95
Total		3	$	114	$	114	$	113

(Dollars in thousands)	Three Months Ended June 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		—	$	—	$	—	$	—
Commercial Real Estate		3		354		308		308
Total		3	$	354	$	308	$	308

(Dollars in thousands)	Six Months Ended June 30, 2016
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		4	$	86	$	86	$	81
Commercial Real Estate		3		456		456		209
Total		7	$	542	$	542	$	290

(Dollars in thousands)	Six Months Ended June 30, 2015
			Pre-Modification		Post-Modification
	Number		Outstanding Recorded		Outstanding Recorded		Recorded
	of Contracts		Investment		Investment		Investment
Commercial and Industrial		1	$	23	$	23	$	22
Commercial Real Estate		4		4,580		4,535		4,533
Total		5	$	4,603	$	4,558	$	4,555

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 six months ended June 30, 2016 and June 30, 2015 with the total number of each type of modification performed.

	Three Months Ended June 30, 2016								Six Months Ended June 30, 2016
	Rate		Term		Payment		Number		Rate		Term		Payment		Number
	Modification		Modification		Modification		Modified		Modification		Modification		Modification		Modified
Commercial and Industrial		—		1		—		1		—		3		1		4
Commercial Real Estate		—		1		1		2		—		2		1		3
Total		—		2		1		3		—		5		2		7

	Three Months Ended June 30, 2015								Six Months Ended June 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		—		2		1		3		—		2		2		4
Total		—		2		1		3		—		3		2		5

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 June 30, 2016 and December 31, 2015.

(Dollars in thousands)	June 30, 2016						December 31, 2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	478	$	478	$	—	$	399	$	399	$	—
Commercial Real Estate		6,781		8,020		—		7,853		9,524		—
Residential Real Estate		434		603		—		475		657		—
With an allowance recorded:
Commercial Real Estate		5,212		6,567		393		4,204		4,204		309
Residential Real Estate		424		424		19		436		436		31
Total	$	13,329	$	16,092	$	412	$	13,367	$	15,220	$	340
Total consists of:
Commercial and Industrial	$	478	$	478	$	—	$	399	$	399	$	—
Commercial Real Estate	$	11,993	$	14,587	$	393	$	12,057	$	13,728	$	309
Residential Real Estate	$	858	$	1,027	$	19	$	911	$	1,093	$	31

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the three and six months ended June 30, 2016 and 2015.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	472	$	5	$	416	$	5
Commercial Real Estate		6,913		83		8,943		141
Residential Real Estate		423		—		441		—
Consumer		—		—		3		—
With an allowance recorded:
Commercial Real Estate		5,179		37		257		—
Residential Real Estate		424		—		547		—
Total	$	13,411	$	125	$	10,607	$	146
Total consists of:
Commercial and Industrial	$	472	$	5	$	416	$	5
Commercial Real Estate	$	12,092	$	120	$	9,200	$	141
Residential Real Estate	$	847	$	—	$	988	$	—
Consumer	$	—	$	—	$	3	$	—

(Dollars in thousands)	For the Six Months Ended				For the Six Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	447	$	10	$	410	$	9
Commercial Real Estate		6,904		171		7,599		247
Residential Real Estate		422		—		414		—
Consumer		—		—		3		—
With an allowance recorded:
Commercial Real Estate		5,176		74		259		—
Residential Real Estate		428		—		553		—
Total	$	13,377	$	255	$	9,238	$	256
Total consists of:
Commercial and Industrial	$	447	$	10	$	410	$	9
Commercial Real Estate	$	12,080	$	245	$	7,858	$	247
Residential Real Estate	$	850	$	—	$	967	$	—
Consumer	$	—	$	—	$	3	$	—

Schedule of Non-Performing Assets [Table Text Block]

Loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing, as of June 30, 2016 and December 31, 2015 were as follows:

(Dollars in thousands)
	June 30,		December 31,
	2016		2015
Commercial Real Estate	$	1,680	$	1,837
Residential Real Estate		858		911
Total non-accrual loans		2,538		2,748
Foreclosed assets held for resale		1,280		1,472
Loans past-due 90 days or more and still accruing		431		166
Total non-performing assets	$	4,249	$	4,386

Past Due Financing Receivables [Table Text Block]

The following tables present the classes of the loan portfolio summarized by the past-due status at June 30, 2016 and December 31, 2015:

(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
June 30, 2016:
Commercial and Industrial	$	638	$	63	$	—	$	701	$	78,698	$	79,399	$	—
Commercial Real Estate		1,357		627		1,901		3,885		259,639		263,524		398
Residential Real Estate		974		26		848		1,848		165,907		167,755		33
Consumer		11		—		—		11		6,309		6,320		—
Total	$	2,980	$	716	$	2,749	$	6,445	$	510,553	$	516,998	$	431

(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, 2015:
Commercial and Industrial	$	34	$	—	$	—	$	34	$	85,040	$	85,074	$	—
Commercial Real Estate		316		3		1,484		1,803		257,215		259,018		—
Residential Real Estate		1,288		491		1,049		2,828		163,800		166,628		166
Consumer		20		—		—		20		5,870		5,890		—
Total	$	1,658	$	494	$	2,533	$	4,685	$	511,925	$	516,610	$	166

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BORROWINGS (Tables)

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015.

(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
June 30, 2016
Repurchase agreements (a)	$	24,029	$	—	$	24,029	$	(24,029)	$	—	$	—
December 31, 2015
Repurchase agreements (a)	$	20,779	$	—	$	20,779	$	(20,779)	$	—	$	—

______________________

(a) As of June 30, 2016 and December 31, 2015, the fair value of securities pledged in connection with repurchase agreements was $27,713,000 and $27,510,000, 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 June 30, 2016:

(Dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
	Continuous		30 days		Days		90 Days		Total
June 30, 2016:
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	24,029	$	—	$	—	$	—	$	24,029
Total	$	24,029	$	—	$	—	$	—	$	24,029

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

6 Months Ended

Jun. 30, 2016

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 June 30, 2016 and December 31, 2015, were as follows:

(Dollars in thousands)

	June 30, 2016		December 31, 2015
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	85,194	$	72,552
Financial standby letters of credit	$	452	$	475
Performance standby letters of credit	$	4,660	$	4,692

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FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jun. 30, 2016

Fair Value Disclosures [Abstract]

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

At June 30, 2016 and December 31, 2015, investments measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)

June 30, 2016
	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,020	$	—	$	1,020
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		114,204		—		114,204
Other		—		11,591		—		11,591
Obligations of state and political subdivisions		—		212,577		—		212,577
Corporate debt securities		—		43,669		—		43,669
Marketable equity securities		2,028		—		—		2,028
Total	$	2,028	$	383,061	$	—	$	385,089

(Dollars in thousands)

December 31, 2015

	Level 1		Level 2		Level 3		Total
Available-for-Sale Securities:
U.S. Treasury securities	$	—	$	1,021	$	—	$	1,021
Obligations of U.S. Government Corporations and Agencies:		—
Mortgaged-backed		—		112,474		—		112,474
Other		—		21,592		—		21,592
Obligations of state and political subdivisions		—		200,314		—		200,314
Corporate debt securities		—		47,833		—		47,833
Marketable equity securities		2,007		—		—		2,007
Total	$	2,007	$	383,234	$	—	$	385,241

Fair Value Measurements, Nonrecurring [Table Text Block]

At June 30, 2016 and December 31, 2015, impaired loans measured at fair value on a non-recurring basis that are collateral dependent and the valuation methods used are as follows:

(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
Assets at June 30, 2016
Impaired loans:
Commercial Real Estate	$	—	$	—	$	5,289	$	5,289
Residential Real Estate		—		—		549		549
Total impaired loans	$	—	$	—	$	5,838	$	5,838

(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
Assets at December 31, 2015
Impaired loans:
Commercial Real Estate	$	—	$	—	$	1,665	$	1,665
Residential Real Estate		—		—		631		631
Total impaired loans	$	—	$	—	$	2,296	$	2,296

Fair Value Non Financial Assets Measured On Nonrecurring Basis [Table Text Block]

At June 30, 2016, 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 June 30, 2016
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	200	$	200
Total foreclosed assets held for resale	$	—	$	—	$	200	$	200

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

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis that are collateral dependent 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
June 30, 2016
Impaired loans	$	5,838	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (63%)	(19	%)
Foreclosed assets held for resale	$	200	Appraisal of collateral1,3	Appraisal adjustments2	(17%) – (17%)	(17	%)
December 31, 2015
Impaired loans	$	2,296	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (63%)	(29	%)
Foreclosed assets held for resale	$	—	Appraisal of collateral1,3	Appraisal adjustments2	(0%) – (0%)	(0	%)

______________________

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 June 30, 2016
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	8,586	$	8,586	$	—	$	—	$	8,586
Interest-bearing deposits in other banks		672		—		672		—		672
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		385,089		2,028		383,061		—		385,089
Investment securities held-to-maturity		20		—		21		—		21
Restricted investment in bank stocks		6,622		—		6,622		—		6,622
Net loans		509,779		—		—		508,581		508,581
Mortgage servicing rights		461		—		—		461		461
Accrued interest receivable		3,932		—		3,932		—		3,932
FINANCIAL LIABILITIES:
Deposits		684,471		—		686,178		—		686,178
Short-term borrowings		99,638		—		99,638		—		99,638
Long-term borrowings		75,175		—		77,279		—		77,279
Accrued interest payable		441		—		441		—		441
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2015
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,474	$	7,474	$	—	$	—	$	7,474
Interest-bearing deposits in other banks		1,534		—		1,534		—		1,534
Time deposits with other banks		1,482		—		1,482		—		1,482
Investment securities available-for-sale		385,241		2,007		383,234		—		385,241
Investment securities held-to-maturity		26		—		27		—		27
Restricted investment in bank stocks		5,742		—		5,742		—		5,742
Net loans		509,871		—		—		498,671		498,671
Mortgage servicing rights		493		—		—		493		493
Accrued interest receivable		4,086		—		4,086		—		4,086
FINANCIAL LIABILITIES:
Deposits		720,598		—		720,341		—		720,341
Short-term borrowings		80,539		—		80,539		—		80,539
Long-term borrowings		70,232		—		71,302		—		71,302
Accrued interest payable		382		—		382		—		382
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

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EARNINGS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2016

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
	June 30,
	2016		2015
Net income	$	2,491	$	2,430
Weighted-average common shares outstanding		5,633		5,581
Basic earnings per share	$	0.44	$	0.44
Weighted-average common shares outstanding		5,633		5,581
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,635		5,583
Diluted earnings per share	$	0.44	$	0.44

(In thousands, except earnings per share)	Six Months Ended
	June 30,
	2016		2015
Net income	$	4,667	$	4,879
Weighted-average common shares outstanding		5,627		5,574
Basic earnings per share	$	0.83	$	0.88
Weighted-average common shares outstanding		5,627		5,574
Common stock equivalents due to effect of stock options		2		2
Total weighted-average common shares and equivalents		5,629		5,576
Diluted earnings per share	$	0.83	$	0.88

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BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Details Textual)	1 Months Ended
	Jul. 31, 2016 USD ($)
Subsequent Event [Member]
Proceeds from Life Insurance Policies	$ 449,000

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INVESTMENT SECURITIES (Details) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
Available-for-Sale Securities
Amortized Cost	$ 371,924	$ 382,076
Gross Unrealized Gains	13,725	6,402
Gross Unrealized Losses	(560)	(3,237)
Fair Value	385,089	385,241
Held-to-Maturity Securities
Amortized Cost	20	26
Gross Unrealized Gains	1	1
Gross Unrealized Losses	0	0
Fair Value	21	27
US Treasury securities [Member]
Available-for-Sale Securities
Amortized Cost	1,015	1,022
Gross Unrealized Gains	5	0
Gross Unrealized Losses	0	(1)
Fair Value	1,020	1,021
Obligations of U.S. Government Corporations and Agencies Mortgage-backed [Member]
Available-for-Sale Securities
Amortized Cost	112,802	113,847
Gross Unrealized Gains	1,596	37
Gross Unrealized Losses	(194)	(1,410)
Fair Value	114,204	112,474
Held-to-Maturity Securities
Amortized Cost	20	26
Gross Unrealized Gains	1	1
Gross Unrealized Losses	0	0
Fair Value	21	27
Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities
Amortized Cost	11,541	21,554
Gross Unrealized Gains	74	117
Gross Unrealized Losses	(24)	(79)
Fair Value	11,591	21,592
Obligations of State and Political Subdivisions [Member]
Available-for-Sale Securities
Amortized Cost	201,749	195,297
Gross Unrealized Gains	10,828	5,425
Gross Unrealized Losses	0	(408)
Fair Value	212,577	200,314
Corporate debt securities [Member]
Available-for-Sale Securities
Amortized Cost	43,623	49,162
Gross Unrealized Gains	388	10
Gross Unrealized Losses	(342)	(1,339)
Fair Value	43,669	47,833
Marketable equity securities [Member]
Available-for-Sale Securities
Amortized Cost	1,194	1,194
Gross Unrealized Gains	834	813
Gross Unrealized Losses	0	0
Fair Value	$ 2,028	$ 2,007

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INVESTMENT SECURITIES (Details 1) - USD ($) $ in Thousands		Jun. 30, 2016	Dec. 31, 2015
Held-to-Maturity - Amortized cost
Total		$ 20	$ 26
Held-to-Maturity - Estimated fair value
Total		21	$ 27
US Treasury Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year		0
1 - 5 Years		1,015
5 - 10 Years		0
After 10 Years		0
Total		1,015
Available-For-Sale - Estimated fair value
Within 1 Year		0
1 - 5 Years		1,020
5 - 10 Years		0
After 10 Years		0
Total		$ 1,020
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]	30,977
5 - 10 Years	[1]	16,821
After 10 Years	[1]	76,545
Total	[1]	124,343
Available-For-Sale - Estimated fair value
Within 1 Year	[1]	0
1 - 5 Years	[1]	31,593
5 - 10 Years	[1]	17,166
After 10 Years	[1]	77,036
Total	[1]	$ 125,795
Available-For-Sale - Weighted average yield
Within 1 Year	[1]	0.00%
1 - 5 Years	[1]	2.06%
5 - 10 Years	[1]	2.06%
After 10 Years	[1]	1.67%
Total	[1]	1.82%
Held-to-Maturity - Amortized cost
Within 1 Year	[1]	$ 0
1 - 5 Years	[1]	20
5 - 10 Years	[1]	0
After 10 Years	[1]	0
Total	[1]	20
Held-to-Maturity - Estimated fair value
Within 1 Year	[1]	0
1 - 5 Years	[1]	21
5 - 10 Years	[1]	0
After 10 Years	[1]	0
Total	[1]	$ 21
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]	$ 902
1 - 5 Years	[2]	42,696
5 - 10 Years	[2]	72,677
After 10 Years	[2]	85,474
Total	[2]	201,749
Available-For-Sale - Estimated fair value
Within 1 Year	[2]	908
1 - 5 Years	[2]	44,250
5 - 10 Years	[2]	76,116
After 10 Years	[2]	91,303
Total	[2]	$ 212,577
Available-For-Sale - Weighted average yield
Within 1 Year	[2]	6.29%
1 - 5 Years	[2]	2.80%
5 - 10 Years	[2]	3.29%
After 10 Years	[2]	4.58%
Total	[2]	3.75%
Corporate Debt Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year		$ 0
1 - 5 Years		12,639
5 - 10 Years		30,984
After 10 Years		0
Total		43,623
Available-For-Sale - Estimated fair value
Within 1 Year		0
1 - 5 Years		12,722
5 - 10 Years		30,947
After 10 Years		0
Total		$ 43,669
Available-For-Sale - Weighted average yield
Within 1 Year		0.00%
1 - 5 Years		2.38%
5 - 10 Years		2.76%
After 10 Years		0.00%
Total		2.65%
Marketable 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]	2,028
Total	[3]	$ 2,028
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]	5.16%
Total	[3]	5.16%

[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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INVESTMENT SECURITIES (Details 2) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
Less Than 12 Months
Fair Value	$ 19,518	$ 154,291
Unrealized Loss	(132)	(2,046)
12 Months or More
Fair Value	21,215	38,772
Unrealized Loss	(428)	(1,191)
Total
Fair Value	40,733	193,063
Unrealized Loss	(560)	(3,237)
US Treasury Securities [Member]
Less Than 12 Months
Fair Value	0	1,021
Unrealized Loss	0	(1)
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	0	1,021
Unrealized Loss	0	(1)
Obligations of U.S. Government Corporations and Agencies Mortgage-backed [Member]
Less Than 12 Months
Fair Value	11,375	86,618
Unrealized Loss	(78)	(1,177)
12 Months or More
Fair Value	7,751	11,234
Unrealized Loss	(116)	(233)
Total
Fair Value	19,126	97,852
Unrealized Loss	(194)	(1,410)
Other Obligations of U.S. Government Corporations and Agencies [Member]
Less Than 12 Months
Fair Value	3,676	12,962
Unrealized Loss	(24)	(79)
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	3,676	12,962
Unrealized Loss	(24)	(79)
Obligations of State and Political Subdivisions [Member]
Less Than 12 Months
Fair Value	0	26,163
Unrealized Loss	0	(258)
12 Months or More
Fair Value	0	8,105
Unrealized Loss	0	(150)
Total
Fair Value	0	34,268
Unrealized Loss	0	(408)
Corporate debt securities [Member]
Less Than 12 Months
Fair Value	4,467	27,527
Unrealized Loss	(30)	(531)
12 Months or More
Fair Value	13,464	19,433
Unrealized Loss	(312)	(808)
Total
Fair Value	17,931	46,960
Unrealized Loss	(342)	(1,339)
Marketable equity securities [Member]
Less Than 12 Months
Fair Value	0	0
Unrealized Loss	0	0
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	0	0
Unrealized Loss	$ 0	$ 0

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INVESTMENT SECURITIES (Details Textual)	3 Months Ended		6 Months Ended
	Jun. 30, 2016 USD ($)	Jun. 30, 2015 USD ($)	Jun. 30, 2016 USD ($)	Jun. 30, 2015 USD ($)	Dec. 31, 2015 USD ($)
Available-for-sale Securities Pledged as Collateral	$ 255,220,000		$ 255,220,000		$ 326,872,000
Held-to-maturity Securities Pledged as Collateral	20,000		20,000		26,000
Carrying Value Of Public Funds, Trust Funds, Securities Sold Under Agreements To Repurchase, FHLB Advances, And Other Balances	191,148,000		191,148,000		$ 219,576,000
Proceeds from Sale of Available-for-sale Securities, Total	20,374,000	$ 31,966,000	27,408,000	$ 79,740,000
Available-for-sale Securities, Gross Realized Gains	$ 380,000	603,000	435,000	1,151,000
Available-for-sale Securities, Gross Realized Losses			$ 41,000	56,000
State And Political Subdivisions On Tax Equivalent Basis Ratio Percentage	34.00%		34.00%
Available For Sale Securities In Unrealized Loss Positions Qualitative Disclosure Number Of Positions Less Than Or Equal To One Year	8		8
Available For Sale Securities In Unrealized Loss Positions Qualitative Disclosure Number Of Positions Greater Than One Year	10		10
Other than Temporary Impairment Losses, Investments, Available-for-sale Securities	$ 0	$ 14,000	$ 0	$ 14,000

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015	Jun. 30, 2015
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount and	$ (10)	$ (15)
Net deferred loan fees and costs	640	631
Total loans	516,998	516,610	$ 502,172
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	490,586	492,730
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	14,627	9,777
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	11,155	13,487
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	136	150
Total loans	79,399	85,074	78,077
Commercial and Industrial [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	74,932	80,730
Commercial and Industrial [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	4,331	4,194
Commercial and Industrial [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
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	389	344
Total loans	263,524	259,018	256,184
Commercial Real Estate [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	243,888	242,546
Commercial Real Estate [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	9,216	3,890
Commercial Real Estate [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	10,031	12,238
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	(10)	(15)
Net deferred loan fees and costs	15	41
Total loans	167,755	166,628	162,463
Residential Real Estate Including Home Equity [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	165,568	163,690
Residential Real Estate Including Home Equity [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,063	1,667
Residential Real Estate Including Home Equity [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,119	1,245
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	0	0
Net deferred loan fees and costs	100	96
Total loans	6,320	5,890	$ 5,448
Consumer Loans [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	6,198	5,764
Consumer Loans [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	17	26
Consumer Loans [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5	4
Consumer Loans [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 0	$ 0

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 1) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015	Dec. 31, 2015
Beginning balance	$ 7,012	$ 6,485	$ 6,739	$ 6,390	$ 6,390
Charge-offs	(84)	(144)	(107)	(262)	(2,016)
Recoveries	7	46	20	47	88
Provision	284	213	567	425	2,277
Ending Balance	7,219	6,600	7,219	6,600	6,739
Ending balance: individually evaluated for impairment	412	90	412	90	340
Ending balance: collectively evaluated for impairment	6,807	6,510	6,807	6,510	6,399
Ending Balance	516,998	502,172	516,998	502,172	516,610
Ending balance: individually evaluated for impairment	13,329	10,619	13,329	10,619	13,367
Ending balance: collectively evaluated for impairment	503,669	491,553	503,669	491,553	503,243
Commercial and Industrial [Member]
Beginning balance	731	687	725	542	542
Charge-offs	(2)	0	(2)	(2)	(2)
Recoveries	4	3	4	3	22
Provision	(31)	16	(25)	163	163
Ending Balance	702	706	702	706	725
Ending balance: individually evaluated for impairment	0	0	0	0	0
Ending balance: collectively evaluated for impairment	702	706	702	706	725
Ending Balance	79,399	78,077	79,399	78,077	85,074
Ending balance: individually evaluated for impairment	478	414	478	414	399
Ending balance: collectively evaluated for impairment	78,921	77,663	78,921	77,663	84,675
Commercial Real Estate [Member]
Beginning balance	3,983	3,019	3,983	3,176	3,176
Charge-offs	(57)	(94)	(57)	(137)	(1,759)
Recoveries	0	42	0	42	59
Provision	88	172	88	58	2,507
Ending Balance	4,014	3,139	4,014	3,139	3,983
Ending balance: individually evaluated for impairment	393	24	393	24	309
Ending balance: collectively evaluated for impairment	3,621	3,115	3,621	3,115	3,674
Ending Balance	263,524	256,184	263,524	256,184	259,018
Ending balance: individually evaluated for impairment	11,993	9,174	11,993	9,174	12,057
Ending balance: collectively evaluated for impairment	251,531	247,010	251,531	247,010	246,961
Residential Real Estate [Member]
Beginning balance	1,749	1,852	1,777	1,928	1,928
Charge-offs	(25)	(49)	(25)	(108)	(210)
Recoveries	0	0	12	0	1
Provision	(27)	64	(67)	47	58
Ending Balance	1,697	1,867	1,697	1,867	1,777
Ending balance: individually evaluated for impairment	19	66	19	66	31
Ending balance: collectively evaluated for impairment	1,678	1,801	1,678	1,801	1,746
Ending Balance	167,755	162,463	167,755	162,463	166,628
Ending balance: individually evaluated for impairment	858	1,029	858	1,029	911
Ending balance: collectively evaluated for impairment	166,897	161,434	166,897	161,434	165,717
Consumer [Member]
Beginning balance	101	90	96	107	107
Charge-offs	0	(1)	(23)	(15)	(45)
Recoveries	3	1	4	2	6
Provision	2	(1)	29	(5)	28
Ending Balance	106	89	106	89	96
Ending balance: individually evaluated for impairment	0	0	0	0	0
Ending balance: collectively evaluated for impairment	106	89	106	89	96
Ending Balance	6,320	5,448	6,320	5,448	5,890
Ending balance: individually evaluated for impairment	0	2	0	2	0
Ending balance: collectively evaluated for impairment	6,320	5,446	6,320	5,446	5,890
Unallocated Financing Receivables [Member]
Beginning balance	448	837	158	637	637
Charge-offs	0	0	0	0	0
Recoveries	0	0	0	0	0
Provision	252	(38)	542	162	(479)
Ending Balance	700	799	700	799	158
Ending balance: individually evaluated for impairment	0	0	0	0	0
Ending balance: collectively evaluated for impairment	700	799	700	799	158
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	Jun. 30, 2016	Dec. 31, 2015
Financing Receivable, Modifications, Recorded Investment	$ 11,091	$ 11,096
Non-accrual TDRs [Member]
Financing Receivable, Modifications, Recorded Investment	300	477
Accruing TDRs [Member]
Financing Receivable, Modifications, Recorded Investment	$ 10,791	$ 10,619

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 3) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2016 USD ($) Number	Jun. 30, 2015 USD ($) Number	Jun. 30, 2016 USD ($) Number	Jun. 30, 2015 USD ($) Number
Financing Receivable, Modifications, Number of Contracts | Number	3	3	7	5
Financing Receivable, Modifications, Pre-Modification Outstanding Recorded Investment	$ 114	$ 354	$ 542	$ 4,603
Financing Receivable, Modifications, Post-Modification Outstanding Recorded Investment	114	308	542	4,558
Financing Receivable, Modifications, Recorded Investment	$ 113	$ 308	$ 290	$ 4,555
Commercial and Industrial [Member]
Financing Receivable, Modifications, Number of Contracts | Number	1	0	4	1
Financing Receivable, Modifications, Pre-Modification Outstanding Recorded Investment	$ 18	$ 0	$ 86	$ 23
Financing Receivable, Modifications, Post-Modification Outstanding Recorded Investment	18	0	86	23
Financing Receivable, Modifications, Recorded Investment	$ 18	$ 0	$ 81	$ 22
Commercial Real Estate [Member]
Financing Receivable, Modifications, Number of Contracts | Number	2	3	3	4
Financing Receivable, Modifications, Pre-Modification Outstanding Recorded Investment	$ 96	$ 354	$ 456	$ 4,580
Financing Receivable, Modifications, Post-Modification Outstanding Recorded Investment	96	308	456	4,535
Financing Receivable, Modifications, Recorded Investment	$ 95	$ 308	$ 209	$ 4,533

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 4) - Number	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Financing Receivable, Modifications, Number of Contracts	3	3	7	5
Rate Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	0
Term Modification [Member]
Financing Receivable, Modifications, Number of Contracts	2	2	5	3
Payment Modification [Member]
Financing Receivable, Modifications, Number of Contracts	1	1	2	2
Commercial and Industrial [Member]
Financing Receivable, Modifications, Number of Contracts	1	0	4	1
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	1	0	3	1
Commercial and Industrial [Member] | Payment Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	1	0
Commercial Real Estate [Member]
Financing Receivable, Modifications, Number of Contracts	2	3	3	4
Commercial Real Estate [Member] | Rate Modification [Member]
Financing Receivable, Modifications, Number of Contracts	0	0	0	0
Commercial Real Estate [Member] | Term Modification [Member]
Financing Receivable, Modifications, Number of Contracts	1	2	2	2
Commercial Real Estate [Member] | Payment Modification [Member]
Financing Receivable, Modifications, Number of Contracts	1	1	1	2

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 5) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015	Dec. 31, 2015
Recorded Investment
Total	$ 13,329		$ 13,329		$ 13,367
Unpaid Principal Balance
Total	16,092		16,092		15,220
Related Allowance
Total	412		412		340
Average Recorded Investment
Total	13,411	$ 10,607	13,377	$ 9,238
Interest Income Recognized
Total	125	146	255	256
Commercial and Industrial [Member]
Recorded Investment
With no related allowance recorded	478		478		399
Total	478		478		399
Unpaid Principal Balance
With no related allowance recorded	478		478		399
Total	478		478		399
Related Allowance
With no related allowance recorded	0		0		0
Total	0		0		0
Average Recorded Investment
With no related allowance recorded	472	416	447	410
Total	472	416	447	410
Interest Income Recognized
With no related allowance recorded	5	5	10	9
Total	5	5	10	9
Commercial Real Estate [Member]
Recorded Investment
With no related allowance recorded	6,781		6,781		7,853
With an allowance recorded	5,212		5,212		4,204
Total	11,993		11,993		12,057
Unpaid Principal Balance
With no related allowance recorded	8,020		8,020		9,524
With an allowance recorded	6,567		6,567		4,204
Total	14,587		14,587		13,728
Related Allowance
With no related allowance recorded	0		0		0
With an allowance recorded	393		393		309
Total	393		393		309
Average Recorded Investment
With no related allowance recorded	6,913	8,943	6,904	7,599
With an allowance recorded	5,179	257	5,176	259
Total	12,092	9,200	12,080	7,858
Interest Income Recognized
With no related allowance recorded	83	141	171	247
With an allowance recorded	37	0	74	0
Total	120	141	245	247
Residential Real Estate [Member]
Recorded Investment
With no related allowance recorded	434		434		475
With an allowance recorded	424		424		436
Total	858		858		911
Unpaid Principal Balance
With no related allowance recorded	603		603		657
With an allowance recorded	424		424		436
Total	1,027		1,027		1,093
Related Allowance
With no related allowance recorded	0		0		0
With an allowance recorded	19		19		31
Total	19		19		$ 31
Average Recorded Investment
With no related allowance recorded	423	441	422	414
With an allowance recorded	424	547	428	553
Total	847	988	850	967
Interest Income Recognized
With no related allowance recorded	0	0	0	0
With an allowance recorded	0	0	0	0
Total	0	0	0	0
Consumer [Member]
Average Recorded Investment
With no related allowance recorded	0	3	0	3
Total	0	3	0	3
Interest Income Recognized
With no related allowance recorded	0	0	0	0
Total	$ 0	$ 0	$ 0	$ 0

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 6) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
Total non-accrual loans	$ 2,538	$ 2,748
Foreclosed assets held for resale	1,280	1,472
Loans past-due 90 days or more and still accruing	431	166
Total non-performing assets	4,249	4,386
Commercial real estate [Member]
Total non-accrual loans	1,680	1,837
Loans past-due 90 days or more and still accruing	398	0
Residential real estate [Member]
Total non-accrual loans	858	911
Loans past-due 90 days or more and still accruing	$ 33	$ 166

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 7) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015	Jun. 30, 2015
Total Past Due	$ 6,445	$ 4,685
Current	510,553	511,925
Total Loans	516,998	516,610	$ 502,172
90 Days or Greater Past Due and Still Accruing	431	166
Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	2,980	1,658
Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	716	494
Financing Receivables, 90 Days or Greater Past Due [Member]
Total Past Due	2,749	2,533
Commercial and Industrial [Member]
Total Past Due	701	34
Current	78,698	85,040
Total Loans	79,399	85,074	78,077
90 Days or Greater Past Due and Still Accruing	0	0
Commercial and Industrial [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	638	34
Commercial and Industrial [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	63	0
Commercial and Industrial [Member] | Financing Receivables, 90 Days or Greater Past Due [Member]
Total Past Due	0	0
Commercial Real Estate [Member]
Total Past Due	3,885	1,803
Current	259,639	257,215
Total Loans	263,524	259,018	256,184
90 Days or Greater Past Due and Still Accruing	398	0
Commercial Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	1,357	316
Commercial Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	627	3
Commercial Real Estate [Member] | Financing Receivables, 90 Days or Greater Past Due [Member]
Total Past Due	1,901	1,484
Residential Real Estate [Member]
Total Past Due	1,848	2,828
Current	165,907	163,800
Total Loans	167,755	166,628	162,463
90 Days or Greater Past Due and Still Accruing	33	166
Residential Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	974	1,288
Residential Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	26	491
Residential Real Estate [Member] | Financing Receivables, 90 Days or Greater Past Due [Member]
Total Past Due	848	1,049
Consumer [Member]
Total Past Due	11	20
Current	6,309	5,870
Total Loans	6,320	5,890	$ 5,448
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	11	20
Consumer [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	0	0
Consumer [Member] | Financing Receivables, 90 Days or Greater Past Due [Member]
Total Past Due	$ 0	$ 0

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details Textual) - USD ($)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015	Dec. 31, 2015
Financing Receivable, Modifications, Post-Modification Recorded Investment	$ 114,000	$ 308,000	$ 542,000	$ 4,558,000
Allowance for Credit Losses, Change in Method of Calculating Impairment	256,000		256,000		$ 309,000
Loans Receivable Held-for-sale, Amount	3,755,000		3,755,000		1,929,000
Impaired Financing Receivable, Interest Income, Accrual Method, Total	125,000	146,000	255,000	256,000
Financing Receivable, Modifications, Recorded Investment	11,091,000		11,091,000		11,096,000
Foreclosed Assets Held For Resale	1,280,000		1,280,000		1,472,000
Foreclosed Assets Held For Resale Secured By Land	50,000		50,000		50,000
Foreclosed Assets Held For Resale Secured By Commercial Real Estate	1,125,000		1,125,000		1,166,000
Foreclosed Assets Held For Resale Secured By Residential Real Estate	105,000		105,000		256,000
Commercial Real Estate [Member]
Financing Receivable Modification Not In Compliance Of Terms			748,000	6,393,000
Reserve for Off-balance Sheet Activities [Member]
Valuation Allowances and Reserves, Balance	192,000		$ 192,000		184,000
Residential Mortgage Loans [Member]
Term of Loan Offering			30 years
Maximum Loan to Value Ratio			eighty percent
TDRs [Member]
Financing Receivable, Modifications, Recorded Investment	11,091,000		$ 11,091,000		11,096,000
Unfunded Lending Commitments			18,000		31,000
Two Loans [Member] | Significant Variance From Prior Period Loans Not In Compliance With Terms of Restructure [Member]
Financing Receivable, Modifications, Recorded Investment		5,639,000		5,639,000
Commercial and Industrial [Member]
Tax free loans	40,186,000		40,186,000		43,817,000
Financing Receivable, Modifications, Post-Modification Recorded Investment	18,000	0	86,000	23,000
Impaired Financing Receivable, Interest Income, Accrual Method, Total	5,000	5,000	10,000	9,000
Commercial Real Estate [Member]
Tax free loans	2,877,000		2,877,000		2,992,000
Financing Receivable, Modifications, Post-Modification Recorded Investment	96,000	308,000	$ 456,000	4,535,000
Term of Loan Offering			20 years
Maximum Loan to Value Ratio			eighty percent
Impaired Financing Receivable, Interest Income, Accrual Method, Total	120,000	141,000	$ 245,000	247,000
Residential Portfolio Segment [Member]
Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure	266,000		266,000		221,000
Impaired Financing Receivable, Interest Income, Accrual Method, Total	0	0	$ 0	0
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
Irrevocable Letter of credit [Member]
Loans and Leases Receivable, Impaired, Commitment to Lend	2,204,000		$ 2,204,000
Irrevocable Letter of credit [Member] | Developer of a residential sub-division [Member]
Loans and Leases Receivable, Impaired, Commitment to Lend	2,185,000		2,185,000		2,185,000
Irrevocable Letter of credit [Member] | Community recreation facility [Member]
Loans and Leases Receivable, Impaired, Commitment to Lend	$ 19,000		$ 19,000
Loan to Distributor of Recreational Vehicles [Member] | Significant Variance From Prior Period Loans Not In Compliance With Terms of Restructure [Member]
Financing Receivable, Modifications, Subsequent Default, Recorded Investment		1,413,000		1,413,000
Loan to Distributor of Recreational Vehicles [Member] | Portion Moved to Foreclosed Assets Held For Resale [Member] | Significant Variance From Prior Period Loans Not In Compliance With Terms of Restructure [Member]
Other Real Estate, Foreclosed Assets, and Repossessed Assets					$ 925,000
Loan to Student Housing Holding Company [Member] | Significant Variance From Prior Period Loans Not In Compliance With Terms of Restructure [Member]
Financing Receivable, Modifications, Subsequent Default, Recorded Investment		$ 4,226,000		$ 4,226,000

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BORROWINGS (Details) - USD ($) $ in Thousands		Jun. 30, 2016	Dec. 31, 2015
Repurchase agreements
Gross Amounts of Recognized Liabilities	[1]	$ 24,029	$ 20,779
Gross Amounts Offset in the Consolidated Balance Sheet	[1]	0	0
Net Amounts of Liabilities Presented in the Consolidated Balance Sheet	[1]	24,029	20,779
Financial Instruments	[1]	(24,029)	(20,779)
Cash Collateral Pledge	[1]	0	0
Net Amount	[1]	$ 0	$ 0

[1] As of June 30, 2016 and December 31, 2015, the fair value of securities pledged in connection with repurchase agreements was $27,713,000 and $27,510,000, respectively.

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BORROWINGS (Details 1) $ in Thousands	Jun. 30, 2016 USD ($)
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	$ 24,029
U.S. Treasury and/or agency securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	24,029
Overnight and Continuous [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	24,029
Overnight and Continuous [Member] | U.S. Treasury and/or agency securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	24,029
Up to 30 days [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
Up to 30 days [Member] | U.S. Treasury and/or agency securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
30 - 90 Days [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
30 - 90 Days [Member] | U.S. Treasury and/or agency securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
Greater than 90 Days [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
Greater than 90 Days [Member] | U.S. Treasury and/or agency securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	$ 0

XML

BORROWINGS (Details Textual) - USD ($)	6 Months Ended
	Jun. 30, 2016	Dec. 31, 2015
Short-term Debt [Line Items]
Fair value of securities pledged	$ 27,713,000	$ 27,510,000
Maximum [Member]
Short-term Debt [Line Items]
Federal funds purchased, securities sold under agreements to repurchase and Federal Home Loan Bank advances, maturity	30 days

XML

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (Details) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
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	$ 85,194	$ 72,552
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	452	475
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	$ 4,660	$ 4,692

XML

FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	$ 385,089	$ 385,241
U.S. Treasury securities [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	1,020	1,021
Mortgage Backed Obligations of US Government Corporations and Agencies [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	114,204	112,474
Other Obligations of US Government Corporations and Agencies [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	11,591	21,592
Obligations of state and political subdivisions [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	212,577	200,314
Corporate debt securities [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	43,669	47,833
Marketable equity securities [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	2,028	2,007
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	2,028	2,007
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	383,061	383,234
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] | U.S. 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] | U.S. Treasury securities [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	1,020	1,021
Fair Value, Measurements, Recurring [Member] | U.S. Treasury securities [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	0	0
Fair Value, Measurements, Recurring [Member] | Mortgage Backed Obligations of US 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] | Mortgage Backed Obligations of US Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	114,204	112,474
Fair Value, Measurements, Recurring [Member] | Mortgage Backed Obligations of US 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 US 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 US Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure [Abstract]
Available-for-Sale Securities:	11,591	21,592
Fair Value, Measurements, Recurring [Member] | Other Obligations of US 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:	212,577	200,314
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:	43,669	47,833
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:	2,028	2,007
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

XML

FAIR VALUE MEASUREMENTS (Details 1) - Fair Value, Measurements, Nonrecurring [Member] - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 5,838	$ 2,296
Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	5,838	2,296
Commercial Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	5,289	1,665
Commercial Real Estate [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	5,289	1,665
Residential Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	549	631
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	$ 549	$ 631

XML

FAIR VALUE MEASUREMENTS (Details 2) $ in Thousands	Jun. 30, 2016 USD ($)
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	$ 200
Fair Value, Inputs, Level 1 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0
Fair Value, Inputs, Level 2 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0
Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	200
Commercial Real Estate [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	200
Commercial Real Estate [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	$ 200

XML

FAIR VALUE MEASUREMENTS (Details 3) - USD ($) $ in Thousands		6 Months Ended	12 Months Ended
		Jun. 30, 2016	Dec. 31, 2015
Impaired loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate		$ 5,838	$ 2,296
Valuation Technique	[1],[2]	Appraisal of collateral	Appraisal of collateral
Unobservable Input	[3]	Appraisal adjustments	Appraisal adjustments
Impaired loans [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(10.00%)	(10.00%)
Impaired loans [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(63.00%)	(63.00%)
Impaired loans [Member] | Weighted Average [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(19.00%)	(29.00%)
Foreclosed assets held for resale [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate		$ 200	$ 0
Valuation Technique	[1],[2]	Appraisal of collateral	Appraisal of collateral
Unobservable Input	[3]	Appraisal adjustments	Appraisal adjustments
Foreclosed assets held for resale [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(17.00%)	(0.00%)
Foreclosed assets held for resale [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(17.00%)	(0.00%)
Foreclosed assets held for resale [Member] | Weighted Average [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(17.00%)	(0.00%)

[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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FAIR VALUE MEASUREMENTS (Details 4) - USD ($) $ in Thousands	Jun. 30, 2016	Dec. 31, 2015
FINANCIAL ASSETS: (Carrying Amount)
Cash and due from banks	$ 8,586	$ 7,474
Interest-bearing deposits in other banks	672	1,534
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	385,089	385,241
Investment securities held-to-maturity	20	26
Restricted investment in bank stocks	6,622	5,742
Net loans	509,779	509,871
Mortgage servicing rights	461	493
Accrued interest receivable	3,932	4,086
FINANCIAL LIABILITIES: (Carrying Amount)
Deposits	684,471	720,598
Short-term borrowings	99,638	80,539
Long-term borrowings	75,175	70,232
Accrued interest payable	441	382
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Carrying Amount)	0	0
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	8,586	7,474
Interest-bearing deposits in other banks	672	1,534
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	385,089	385,241
Investment securities held-to-maturity	21	27
Restricted investment in bank stocks	6,622	5,742
Net loans	508,581	498,671
Mortgage servicing rights	461	493
Accrued interest receivable	3,932	4,086
FINANCIAL LIABILITIES: (Fair Value)
Deposits	686,178	720,341
Short-term borrowings	99,638	80,539
Long-term borrowings	77,279	71,302
Accrued interest payable	441	382
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	0	0
Fair Value, Inputs, Level 1 [Member]
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	8,586	7,474
Interest-bearing deposits in other banks	0	0
Time deposits with other banks	0	0
Investment securities available-for-sale	2,028	2,007
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	672	1,534
Time deposits with other banks	1,482	1,482
Investment securities available-for-sale	383,061	383,234
Investment securities held-to-maturity	21	27
Restricted investment in bank stocks	6,622	5,742
Net loans	0	0
Mortgage servicing rights	0	0
Accrued interest receivable	3,932	4,086
FINANCIAL LIABILITIES: (Fair Value)
Deposits	686,178	720,341
Short-term borrowings	99,638	80,539
Long-term borrowings	77,279	71,302
Accrued interest payable	441	382
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	508,581	498,671
Mortgage servicing rights	461	493
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

FAIR VALUE MEASUREMENTS (Details Textual)	Jun. 30, 2016 USD ($)
Maximum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Minimum impaired loan balance that requires an appraisal to be obtained and reviewed annually for impaired loan valuation procedure	$ 250,000
Minimum [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Maximum impaired loan balance for which the bank completes a Certificate of Inspection	$ 250,000

XML

EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2016	Jun. 30, 2015
Earnings Per Share [Line Items]
Net income	$ 2,491	$ 2,430	$ 4,667	$ 4,879
Weighted-average common shares outstanding	5,633	5,581	5,627	5,574
Basic earnings per share	$ 0.44	$ 0.44	$ 0.83	$ 0.88
Weighted-average common shares outstanding	5,633	5,581	5,627	5,574
Common stock equivalents due to effect of stock options	2	2	2	2
Total weighted-average common shares and equivalents	5,635	5,583	5,629	5,576
Diluted earnings per share	$ 0.44	$ 0.44	$ 0.83	$ 0.88