10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 – Q

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

For the quarterly period ended March 31, 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: 001-34292

ORRSTOWN FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in its Charter)

Pennsylvania (State or Other Jurisdiction of Incorporation or Organization) 23-2530374 (I.R.S. Employer Identification No.)

77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania	17257
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (717) 532-6114

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 the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	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

Number of shares outstanding of the registrant’s Common Stock as of April 29, 2016: 8,283,144.

ORRSTOWN FINANCIAL SERVICES, INC.

INDEX

		Page
Part I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated balance sheets – March 31, 2016 and December 31, 2015	3
	Consolidated statements of income – Three months ended March 31, 2016 and 2015	4
	Consolidated statements of comprehensive income – Three months ended March 31, 2016 and 2015	5
	Consolidated statements of changes in shareholders’ equity – Three months ended March 31, 2016 and 2015	6
	Consolidated statements of cash flows – Three months ended March 31, 2016 and 2015	7
	Notes to consolidated financial statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	59
SIGNATURES		60
EXHIBIT INDEX		61

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

(Dollars in thousands, except per share data)	March 31, 2016			December 31, 2015
Assets
Cash and due from banks	$	12,281		$	11,412
Interest bearing deposits with banks	54,634			16,928
Cash and cash equivalents	66,915			28,340
Restricted investments in bank stocks	6,270			8,720
Securities available for sale	327,590			394,124
Loans held for sale	3,499			5,917
Loans	804,703			781,713
Less: Allowance for loan losses	(13,347		)	(13,568		)
Net loans	791,356			768,145
Premises and equipment, net	29,689			23,960
Cash surrender value of life insurance	31,438			31,224
Intangible assets	155			207
Accrued interest receivable	3,582			3,845
Other assets	26,785			28,334
Total assets	$	1,287,279		$	1,292,816
Liabilities
Deposits:
Non-interest bearing	$	146,094		$	131,390
Interest bearing	902,282			900,777
Total deposits	1,048,376			1,032,167
Short-term borrowings	62,693			89,156
Long-term debt	24,413			24,495
Accrued interest and other liabilities	13,550			13,937
Total liabilities	1,149,032			1,159,755
Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	0			0
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 8,348,441 and 8,320,479 shares issued; 8,288,793 and 8,272,591 shares outstanding	437			435
Additional paid - in capital	124,548			124,317
Retained earnings	9,855			7,939
Accumulated other comprehensive income	4,434			1,199
Treasury stock—common, 59,648 and 47,888 shares, at cost	(1,027		)	(829		)
Total shareholders’ equity	138,247			133,061
Total liabilities and shareholders’ equity	$	1,287,279		$	1,292,816

The Notes to Consolidated Financial Statements are an integral part of these statements.

3

Consolidated Statements of Income (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

	Three Months Ended
(Dollars in thousands, except per share data)	March 31, 2016		March 31, 2015
Interest and dividend income
Interest and fees on loans	$	7,991	$	7,327
Interest and dividends on investment securities
Taxable	1,464		1,820
Tax-exempt	441		55
Short-term investments	65		26
Total interest and dividend income	9,961		9,228
Interest expense
Interest on deposits	1,139		777
Interest on short-term borrowings	66		60
Interest on long-term debt	106		76
Total interest expense	1,311		913
Net interest income	8,650		8,315
Provision for loan losses	0		0
Net interest income after provision for loan losses	8,650		8,315
Noninterest income
Service charges on deposit accounts	1,303		1,193
Other service charges, commissions and fees	160		173
Trust department income	1,336		1,247
Brokerage income	449		437
Mortgage banking activities	642		520
Earnings on life insurance	268		229
Other income	87		40
Investment securities gains	1,420		1,529
Total noninterest income	5,665		5,368
Noninterest expenses
Salaries and employee benefits	6,183		5,900
Occupancy expense	526		624
Furniture and equipment	786		743
Data processing	635		511
Telephone and communication	176		190
Automated teller and interchange fees	161		206
Advertising and bank promotions	456		245
FDIC insurance	232		246
Legal	181		213
Other professional services	339		299
Directors compensation	231		157
Collection and problem loan	52		96
Real estate owned expenses	43		25
Taxes other than income	155		226
Intangible asset amortization	51		51
Other operating expenses	914		774
Total noninterest expenses	11,121		10,506
Income before income taxes	3,194		3,177
Income tax expense	614		715
Net income	$	2,580	$	2,462
Per share information:
Basic earnings per share	$	0.32	$	0.30
Diluted earnings per share	0.32		0.30
Dividends per share	0.08		0.00

The Notes to Consolidated Financial Statements are an integral part of these statements.

4

Consolidated Statements of Comprehensive Income (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

	Three Months Ended
(Dollars in thousands)	March 31, 2016			March 31, 2015
Net income	$	2,580		$	2,462
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale arising during the period	6,396			4,523
Reclassification adjustment for gains realized in net income	(1,420		)	(1,529		)
Net unrealized gains	4,976			2,994
Tax effect	(1,741		)	(1,048		)
Total other comprehensive income, net of tax and reclassification adjustments	3,235			1,946
Total comprehensive income	$	5,815		$	4,408

The Notes to Consolidated Financial Statements are an integral part of these statements.

5

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

	Three Months Ended March 31, 2016 and 2015
(Dollars in thousands, except per share data)	Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total Shareholders’ Equity
Balance, January 1, 2015	$	430	$	123,392		$	1,887		$	1,576	$	(20	)	$	127,265
Net income	0		0			2,462			0		0			2,462
Total other comprehensive income, net of taxes	0		0			0			1,946		0			1,946
Stock-based compensation plans:
Issuance of stock (31,358 shares), including compensation expense of $134	0		181			0			0		0			181
Issuance of stock through dividend reinvestment plan (10 shares)	0		0			0			0		0			0
Balance, March 31, 2015	$	430	$	123,573		$	4,349		$	3,522	$	(20	)	$	131,854
Balance, January 1, 2016	$	435	$	124,317		$	7,939		$	1,199	$	(829	)	$	133,061
Net income	0		0			2,580			0		0			2,580
Total other comprehensive income, net of taxes	0		0			0			3,235		0			3,235
Cash dividends ($0.08 per share)	0		0			(664		)	0		0			(664		)
Stock-based compensation plans:
Issuance of stock (27,962 shares), including compensation expense of $237	2		235			0			0		0			237
Issuance of treasury stock (2,461 shares), including compensation expense of $3	0		(4		)	0			0		47			43
Acquisition of treasury stock (14,221 shares)	0		0			0			0		(245		)	(245		)
Balance, March 31, 2016	$	437	$	124,548		$	9,855		$	4,434	$	(1,027	)	$	138,247

The Notes to Consolidated Financial Statements are an integral part of these statements.

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Consolidated Statements of Cash Flows (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY

	Three Months Ended
(Dollars in thousands)	March 31, 2016			March 31, 2015
Cash flows from operating activities
Net income	$	2,580		$	2,462
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums on securities available for sale	1,372			1,534
Depreciation and amortization	741			741
Provision for loan losses	0			0
Stock-based compensation	240			134
Gain on sales of loans originated for sale	(547		)	(415		)
Mortgage loans originated for sale	(18,041		)	(16,023		)
Proceeds from sales of loans originated for sale	20,839			14,420
Net gain on disposal of other real estate owned	(55		)	(7		)
Writedown of other real estate owned	51			0
Net loss on disposal of premises and equipment	25			0
Deferred income taxes	728			726
Investment securities gains	(1,420		)	(1,529		)
Earnings on cash surrender value of life insurance	(268		)	(229		)
Decrease in accrued interest receivable	263			48
Increase in accrued interest payable and other liabilities	(387		)	(116		)
Other, net	(1,037		)	(986		)
Net cash provided by operating activities	5,084			760
Cash flows from investing activities
Proceeds from sales of available for sale securities	64,743			41,382
Maturities, repayments and calls of available for sale securities	6,816			7,838
Purchases of available for sale securities	0			(19,859		)
Net redemptions of restricted investments in bank stocks	2,450			672
Net increase in loans	(23,262		)	(23,842		)
Purchases of bank premises and equipment	(6,321		)	(126		)
Improvements to other real estate owned	(35		)	0
Proceeds from disposal of other real estate owned	305			253
Net cash provided by investing activities	44,696			6,318
Cash flows from financing activities
Net increase (decrease) in deposits	16,209			(3,948		)
Net decrease in short term purchased funds	(26,463		)	(11,470		)
Proceeds from long-term debt	0			20,000
Payments on long-term debt	(82		)	(10,078		)
Dividends paid	(664		)	0
Net proceeds from issuance of common stock	0			47
Acquisition of treasury stock	(245		)	0
Issuance of treasury stock	40			0
Net cash (used in) financing activities	(11,205		)	(5,449		)
Net increase in cash and cash equivalents	38,575			1,629
Cash and cash equivalents at beginning of period	28,340			31,409
Cash and cash equivalents at end of period	$	66,915		$	33,038
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,301		$	923
Income taxes	0			0
Supplemental schedule of noncash investing activities:
Other real estate acquired in settlement of loans	$	51		$	745

The Notes to Consolidated Financial Statements are an integral part of these statements.

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Notes to Consolidated Financial Statements

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – Orrstown Financial Services, Inc. (the “Company”) is a bank holding company (that has elected status as a financial holding company with the Board of Governors of the Federal Reserve System (the “FRB”)) whose primary activity consists of supervising its wholly-owned subsidiary, Orrstown Bank (the “Bank”). The Company operates through its office in Shippensburg, Pennsylvania. The Bank provides services through its network of 21 offices in Cumberland, Franklin, Lancaster, and Perry Counties of Pennsylvania and in Washington County, Maryland. The Bank engages in lending services for commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending. Deposit services include checking, savings, time, and money market deposits. The Bank also provides investment and brokerage services through its Orrstown Financial Advisors division. The Company and the Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation – The unaudited condensed consolidated financial statements of the Company and its subsidiary are presented for the three months ended March 31, 2016 and 2015 and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. However, unaudited information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. Information presented at December 31, 2015 is condensed from audited year-end financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 2015. The consolidated financial statements include the accounts of the Company and the Bank. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. All significant intercompany transactions and accounts have been eliminated.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Subsequent Events – GAAP establishes standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The subsequent events principle sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and specifies the disclosures that should be made about events or transactions that occur after the balance sheet date.

Concentration of Credit Risk – The Company generally grants commercial, residential, construction, municipal, and various forms of consumer lending to customers in its market area. Although the Company maintains a diversified loan portfolio, a significant portion of its customers’ ability to honor their contracts is dependent upon economic sectors for commercial real estate, including office space, retail strip centers, multi-family and hospitality, residential building operators, sales finance, sub-dividers and developers. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if collateral is deemed necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but generally includes real estate and equipment.

The types of securities the Company invests in are included in Note 2, “Securities Available for Sale” and the type of lending the Company engages in are included in Note 3, “Loans Receivable and Allowance for Loan Losses.”

Cash and Cash Equivalents – For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks, federal funds sold and interest bearing deposits due on demand, all of which have original maturities of 90 days or less. Net cash flows are reported for customer loan and deposit transactions, loans held for sale and redemption (purchases) of restricted investments in bank stocks, and short-term borrowings.

Restricted Investments in Bank Stocks – Restricted investments in bank stocks, which represents required investments in the common stock of correspondent banks, is carried at cost as of March 31, 2016 and December 31, 2015, and consists of common stock of the Federal Reserve Bank of Philadelphia (“Federal Reserve Bank”), Atlantic Community Bankers Bank and the Federal Home Loan Bank of Pittsburgh (“FHLB”).

Management evaluates the restricted investment in bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or

8

Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted, (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank.

Management believes no impairment charge is necessary related to the restricted investments in bank stocks as of March 31, 2016. However, security impairment analysis is completed quarterly and the determination that no impairment had occurred as of March 31, 2016 is no assurance that impairment may not occur in the future.

Securities – Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. “Trading” securities are recorded at fair value with changes in fair value included in earnings. As of March 31, 2016 and December 31, 2015, the Company had no held to maturity or trading securities. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities and approximate the level yield method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

The Company had no debt securities it deemed to be other than temporarily impaired at March 31, 2016 or December 31, 2015.

The Company’s securities are exposed to various risks, such as interest rate risk, market risk, and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the consolidated financial statements.

Loans Held for Sale – Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value (LOCM). Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in non-interest income.

Loans – The Company grants commercial, residential, commercial mortgage, construction, municipal, mortgage and various forms of consumer loans to its customers located principally in south-central Pennsylvania and northern Maryland. The ability of the Company’s debtors to honor their contracts is dependent largely upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a yield adjustment over the respective term of the loan.

For all classes of loans, the accrual of interest income on loans, including impaired loans, generally ceases when principal or interest is past due 90 days or more or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is reversed and charged against current interest income, unless fully collateralized. Subsequent payments received are either applied to the

9

outstanding principal balance or recorded as interest income, depending upon management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contractual terms of the loan.

Loans, the terms of which are modified, are classified as troubled debt restructurings ("TDRs") if a concession was granted in connection with the modification, for legal or economic reasons, related to the debtor’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, a temporary reduction in interest rates, or granting of an interest rate below market rates given the risk of the transaction. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs may be restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs are evaluated individually for impairment on a quarterly basis including monitoring of performance according to their modified terms.

Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

See Note 3, “Loans Receivable and Allowance for Loan Losses,” for additional details.

Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Loans Serviced – The Bank administers secondary market mortgage programs available through the FHLB and the Federal National Mortgage Association and offers residential mortgage products and services to customers. The Bank originates single-family residential mortgage loans for immediate sale in the secondary market, and retains the servicing of those loans. At March 31, 2016 and December 31, 2015, the balance of loans serviced for others was $324,221,000 and $317,793,000.

Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Cash Surrender Value of Life Insurance – The Company has purchased life insurance policies on certain employees. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Premises and Equipment – Buildings, improvements, equipment, furniture and fixtures are carried at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization has been provided generally on the straight-line method and is computed over the estimated useful lives of the various assets as follows: buildings and improvements, including leasehold improvements – 10 to 40 years; and furniture and equipment – 3 to 15 years. Repairs and maintenance are charged to operations as incurred, while major additions and improvements are capitalized. Gain or loss on retirement or disposal of individual assets is recorded as income or expense in the period of retirement or disposal.

Intangible Assets – Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. The Company’s intangible assets have finite lives and are amortized, on a straight line basis, over their estimated lives, generally 10 years for deposit premiums and 15 years for customer lists.

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Mortgage Servicing Rights – The estimated fair value of mortgage servicing rights (MSRs) related to loans sold and serviced by the Company is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment, by comparing the carrying amount to estimated fair value. Fair value is determined periodically through a discounted cash flows valuation performed by a third party. Significant inputs to the valuation include expected servicing income, net of expense, the discount rate and the expected life of the underlying loans. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment through a charge against servicing income on the consolidated statement of income. If the Company determines, based on subsequent valuations, that impairment no longer exists or is reduced, the valuation allowance is reduced through a credit to earnings. The balance of mortgage servicing rights was $2,710,000 and $2,672,000 as of March 31, 2016 and December 31, 2015, and is included in other assets.

Foreclosed Real Estate – Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell the underlying collateral. Capitalized costs include any costs that significantly improve the value of the properties. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell. Foreclosed real estate totaled $495,000 and $710,000 as of March 31, 2016 and December 31, 2015 and is included in other assets.

Investments in Real Estate Partnerships – The Company currently has a 99% limited partner interest in several real estate partnerships in central Pennsylvania. These investments are affordable housing projects which entitle the Company to tax deductions and credits that expire through 2025. The Company accounts for its investments in affordable housing projects under the proportional amortization method when the criteria is met, which is limited to one investment entered into in 2015. Investments prior to 2015 did not meet the criteria, and are accounted for under the equity method of accounting. The recorded investment in these real estate partnerships, included in other assets in the balance sheet, totaled $5,328,000 and $5,450,000 as of March 31, 2016 and December 31, 2015, of which $2,150,000 and $2,205,000 will be accounted for under the proportional amortization method, respectively. Losses of $89,000 and $85,000 were recorded for the three months ended March 31, 2016 and 2015 and are included in other noninterest income. Losses on the investments accounted for under the proportional amortization method of $33,000, net of federal income tax benefit, is netted against income tax expense for the three months ended March 31, 2016. During the three months ended 2016 and 2015, the Company recognized federal tax credits from the projects totaling $184,000, and $119,000, which is included in income tax expense.

Advertising – The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expense was $151,000 and $112,000 for the three months ended March 31, 2016 and 2015.

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”) – The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities which are included in short-term borrowings. Under these Repurchase Agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these Repurchase Agreements are accounted for as collateralized financing arrangements (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 in the Company’s consolidated balance sheet, while the securities underlying the Repurchase Agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the Repurchase Agreement liabilities. In addition, as the Company 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 Company be in default (e.g., fails to make an interest payment to the counterparty). For the Repurchase Agreements, the collateral is held by the Company in a segregated custodial account under a third party agreement. Repurchase agreements are secured by U.S. Government Sponsored Enterprises mortgage-backed securities and mature overnight.

Stock Compensation Plans – The Company has stock compensation plans that cover employees and non-employee directors. Stock compensation accounting guidance (Financial Accounting Standards Board ("FASB") ASC 718, Compensation – Stock Compensation) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the grant date fair value of the stock award, including a Black-Scholes model for stock options. Compensation cost for all stock awards is calculated and recognized over the employees’ service period, generally defined as the vesting period.

Income Taxes – The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of

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the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.

Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Treasury Stock – Common stock shares repurchased are recorded as treasury stock at cost.

Earnings Per Share – Basic earnings per share represent net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Restricted stock awards are included in weighted average common shares outstanding as they are earned. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company related solely to outstanding stock options and restricted stock awards.

Treasury shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income – Comprehensive income consists of net income and other comprehensive income. Other comprehensive income is limited to unrealized gains on securities available for sale for all years presented. The component of accumulated other comprehensive income, net of taxes, at March 31, 2016 and December 31, 2015 consisted of unrealized gains on securities available for sale and totaled $4,434,000 and $1,199,000.

Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Segment Reporting – The Company only operates in one significant segment – Community Banking. The Company’s non-banking activities are insignificant to the consolidated financial statements.

Reclassification – Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation. Reclassifications had no effect on prior year net income or shareholders' equity.

Recent Accounting Pronouncements – In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606). ASU 2014-9, as amended, creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The Company is evaluating the impact of this standard on its financial position and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as subsequently amended by ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the

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carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. Further, the amendment indicates the SEC would not object to a ratable amortization of debt issuance costs on line-of-credit arrangements. These amendments were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company’s adoption of this standard on January 1, 2016 did not have a significant impact on the Company’s operating results or financial condition.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update provides updated accounting and reporting requirements for both public and non-public entities. The most significant provisions that will impact the Company is: 1) equity securities available for sale will be measured at fair value, with the changes in fair value recognized in the income statement; 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the balance sheet; 3) utilization of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) require separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The update will be effective for interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. Early adoption is not permitted. The Company is evaluating the impact of this standard on its financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update provides updated accounting and reporting requirements, which, among other things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) 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. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees 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 modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company anticipates that the impact on the balance sheet will result in an increase in assets and liabilities for its right of use assets and related lease liabilities for those leases that are outstanding at the date of adoption, however, it does not anticipate it will have a material impact on its results of operations. We are currently evaluating the other effects of adoption of this new standard on our financial position, including regulatory capital.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). The update will require recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled, eliminating the additional paid-in-capital pools. The guidance will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not anticipate this update will have a material impact on its financial position or results of operations.

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NOTE 2. SECURITIES AVAILABLE FOR SALE

At March 31, 2016 and December 31, 2015, the investment securities portfolio was comprised exclusively of securities classified as “available for sale,” resulting in investment securities being carried at fair value. The amortized cost and fair values of investment securities available for sale at March 31, 2016 and December 31, 2015 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2016
U.S. Government Agencies	$	45,072	$	188	$	121	$	45,139
States and political subdivisions	124,302		5,246		367		129,181
U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities	129,219		1,556		0		130,775
GSE residential collateralized mortgage obligations (CMOs)	14,040		384		20		14,404
Private label CMOs	8,086		0		68		8,018
Total debt securities	320,719		7,374		576		327,517
Equity securities	50		23		0		73
Totals	$	320,769	$	7,397	$	576	$	327,590
December 31, 2015
U.S. Government Agencies	$	47,209	$	200	$	182	$	47,227
States and political subdivisions	124,421		2,483		943		125,961
GSE residential mortgage-backed securities	132,389		229		269		132,349
GSE residential CMOs	15,668		215		40		15,843
GSE commercial CMOs	63,598		735		563		63,770
Private label CMOs	8,944		0		43		8,901
Total debt securities	392,229		3,862		2,040		394,051
Equity securities	50		23		0		73
Totals	$	392,279	$	3,885	$	2,040	$	394,124

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The following table shows gross unrealized losses and fair value of the Company’s available for sale securities that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015:

	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2016
U.S. Government Agencies	$	19,951	$	121	$	0	$	0	$	19,951	$	121
States and political subdivisions	1,205		2		5,313		365		6,518		367
GSE residential collateralized mortgage obligations (CMOs)	0		0		2,555		20		2,555		20
Private label CMOs	8,018		68		0		0		8,018		68
Total temporarily impaired securities	$	29,174	$	191	$	7,868	$	385	$	37,042	$	576
December 31, 2015
U.S. Government Agencies	$	27,640	$	182	$	0	$	0	$	27,640	$	182
States and political subdivisions	30,252		373		14,139		570		44,391		943
GSE residential mortgage-backed securities	82,911		269		0		0		82,911		269
GSE residential CMOs	0		0		4,237		40		4,237		40
GSE commercial CMOs	33,606		563		0		0		33,606		563
Private label CMOs	8,901		43		0		0		8,901		43
Total temporarily impaired securities	$	183,310	$	1,430	$	18,376	$	610	$	201,686	$	2,040

The Company had 11 securities and 53 securities at March 31, 2016 and December 31, 2015 in which the amortized cost exceed their values, as discussed below.

U.S. Agencies and Government Sponsored Enterprises (GSE).Six U.S. Agencies and GSE securities, including mortgage-backed securities and collateralized mortgage obligations, have amortized costs which exceed their fair values, four of which are in the less than 12 months, and two have amortized costs which exceed their fair value for more than 12 months at March 31, 2016. At December 31, 2015, the Company had 29 U.S. Government Agencies and GSE securities, including mortgage-backed and collateralized mortgage obligations with unrealized losses, 25 GSE securities have amortized costs which exceed their fair values for less than 12 months, and four have amortized costs which exceed their fair values for more than 12 months. These unrealized losses have been caused by a rise in interest rates or widening of spreads from the time the securities were purchased. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the par value basis of the investments. Because the Company did not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 or at December 31, 2015.

State and Political Subdivisions.Two state and political subdivision securities have amortized costs which exceeded their fair values, one in the less than 12 months, and one in the more than 12 months category at March 31, 2016. At December 31, 2015, 21 state and political subdivision securities have an amortized cost which exceeds their fair value, 16 of which are in the less than 12 months category, and five have amortized costs which exceed their fair value for more than 12 months. These unrealized losses have been caused by a rise in interest rates or a widening of spreads from the time the securities were purchased. Management considers the investment rating, the state of the issuer of the security and other credit support in determining whether the security is other-than-temporarily impaired. Because the Company did not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 or at December 31, 2015.

Private Label.Three private label collateralized mortgage obligations have unrealized losses, all of which were in the less than 12 months category at March 31, 2016. At December 31, 2015, three private label securities have an amortized cost which exceeds their fair value for less than 12 months. These unrealized losses have been caused by a rise in interest rates from the time the securities were purchased. Because the Company does not intend to sell the investments and it is not more likely than

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not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 or at December 31, 2015.

The amortized cost and fair values of securities available for sale at March 31, 2016 by contractual maturity are shown below. Contractual maturities will differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	365	$	366
Due after one year through five years	3,232		3,381
Due after five years through ten years	62,821		65,147
Due after ten years	102,956		105,426
Mortgage-backed securities and collateralized mortgage obligations	151,345		153,197
Total debt securities	320,719		327,517
Equity securities	50		73
	$	320,769	$	327,590

Gross gains on the sales of securities were $1,468,000 and $1,553,000 for the three months ended March 31, 2016 and 2015. Gross losses on securities available for sale were $48,000 and $24,000 for the three months ended March 31, 2016 and 2015.

Securities with a fair value of $254,252,000 and $250,397,000 at March 31, 2016 and December 31, 2015 were pledged to secure public funds and for other purposes as required or permitted by law.

NOTE 3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The Company’s loan portfolio is broken down into segments to an appropriate level of disaggregation to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the segments were further broken down into classes, to allow for differing risk characteristics within a segment.

The risks associated with lending activities differ among the various loan classes, and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact the borrower’s ability to repay its loans, and impact the associated collateral.

The Company has various types of commercial real estate loans which have differing levels of credit risk associated with them. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.

Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner-occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships as compared to owner-occupied loans mentioned above.

Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions which may change based on the supply of similar properties in the area. In the

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event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, including the guarantors of the project or other collateral securing the loan.

Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured for our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy, as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the credit worthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending.

Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its customers for a specific utility.

The Company originates loans to its retail customers, including fixed-rate and adjustable rate first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the credit worthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The credit worthiness of the borrower is considered including credit scores and debt-to-income ratios, which generally cannot exceed 43%.

Installment and other loans’ credit risk are mitigated through prudent underwriting standards, including the evaluation of the credit worthiness of the borrower through credit scores and debt-to-income ratios, and if secured, the collateral value of the assets. As these loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, they typically present a greater risk to the Company than 1-4 family residential loans.

The loan portfolio, excluding residential loans held for sale, broken out by class, as of March 31, 2016 and December 31, 2015 was as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial real estate:
Owner-occupied	$	106,464	$	103,578
Non-owner occupied	154,731		145,401
Multi-family	37,664		35,109
Non-owner occupied residential	54,834		54,175
Acquisition and development:
1-4 family residential construction	7,270		9,364
Commercial and land development	42,245		41,339
Commercial and industrial	77,277		73,625
Municipal	62,302		57,511
Residential mortgage:
First lien	125,706		126,022
Home equity - term	16,578		17,337
Home equity - lines of credit	111,770		110,731
Installment and other loans	7,862		7,521
	$	804,703	$	781,713

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In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including special mention, substandard, doubtful or loss. The “Special Mention” category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. “Substandard” loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. “Substandard” loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A “Doubtful” loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification of loss is deferred. “Loss” assets are considered uncollectible, as the underlying borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as “Loss,” there is little prospect of collecting the loan’s principal or interest and it is generally written off.

The Bank has a loan review policy and program which is designed to identify and manage risk in the lending function. The Enterprise Risk Management (“ERM”) Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Bank’s loan portfolio. This includes the monitoring of the lending activities of all Bank personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. The loan review program provides the Bank with an independent review of the Bank’s loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the “Pass” categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500,000, which includes confirmation of risk rating by the appropriate credit authority, including Credit Administration for loans in excess of $1,000,000. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the ERM Committee.

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The following summarizes the Bank’s ratings based on its internal risk rating system as of March 31, 2016 and December 31, 2015:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
March 31, 2016
Commercial real estate:
Owner-occupied	$	98,959	$	1,771	$	3,705	$	2,029	$	0	$	106,464
Non-owner occupied	134,518		12,419		108		7,686		0		154,731
Multi-family	34,863		1,763		813		225		0		37,664
Non-owner occupied residential	51,490		1,282		1,231		792		39		54,834
Acquisition and development:
1-4 family residential construction	7,270		0		0		0		0		7,270
Commercial and land development	41,105		215		922		3		0		42,245
Commercial and industrial	74,651		1,352		560		714		0		77,277
Municipal	62,302		0		0		0		0		62,302
Residential mortgage:
First lien	120,882		0		44		4,780		0		125,706
Home equity - term	16,478		0		1		99		0		16,578
Home equity - lines of credit	110,850		251		102		567		0		111,770
Installment and other loans	7,846		0		0		9		7		7,862
	$	761,214	$	19,053	$	7,486	$	16,904	$	46	$	804,703
December 31, 2015
Commercial real estate:
Owner-occupied	$	96,715	$	1,124	$	3,630	$	2,109	$	0	$	103,578
Non-owner occupied	125,043		12,394		108		7,856		0		145,401
Multi-family	31,957		1,779		1,140		233		0		35,109
Non-owner occupied residential	50,601		1,305		1,374		895		0		54,175
Acquisition and development:
1-4 family residential construction	9,364		0		0		0		0		9,364
Commercial and land development	40,181		219		934		5		0		41,339
Commercial and industrial	70,967		1,380		544		734		0		73,625
Municipal	57,511		0		0		0		0		57,511
Residential mortgage:
First lien	121,214		0		0		4,808		0		126,022
Home equity - term	17,234		0		0		103		0		17,337
Home equity - lines of credit	109,731		230		180		590		0		110,731
Installment and other loans	7,504		0		0		17		0		7,521
	$	738,022	$	18,431	$	7,910	$	17,350	$	0	$	781,713

Classified loans may also be evaluated for impairment. For commercial real estate, acquisition and development and commercial and industrial loans, a loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, 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. Generally, loans that are more than 90 days past due are deemed 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 to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and

19

commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. The updated fair values are incorporated into the impairment analysis as of the next reporting period.

Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value; the loan has been identified as uncollectible; and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.

As of March 31, 2016 and December 31, 2015, nearly all of the Company’s impaired loans’ extent of impairment were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All restructured loan impairments were determined based on discounted cash flows for those loans classified as TDRs and still accruing interest. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it would also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.

According to policy, updated appraisals are generally required every 18 months for classified loans in excess of $250,000. The “as is value” provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances dictate that another value provided by the appraiser is more appropriate.

Generally, impaired loans secured by real estate are measured at fair value using certified real estate appraisals that had been completed within the last year. Appraised values are further discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on one or a combination of the following approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted. The approaches are as follows:

• Original appraisal – if the original appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the original certified appraised value may be used. Discounts as deemed appropriate for selling costs are factored into the appraised value in arriving at fair value.

• Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.

Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable agings or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.

The Company distinguishes Substandard loans on both an impaired and non-impaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A “Substandard” classification does not automatically meet the definition of “impaired.” A "Substandard" loan is one that is inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Extensions of credit so classified have well-defined weaknesses which may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as "Substandard." As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development and commercial and industrial loans rated “Substandard” to be collectively evaluated for impairment as opposed to evaluating these loans individually for impairment. Although we believe these loans have well defined weaknesses and meet the definition of “Substandard,” they are generally performing and management has concluded

20

that it is likely it will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The following table summarizes impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as of March 31, 2016 and December 31, 2015. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and the partial charge-off will be recorded when final information is received.

	Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance
(Dollars in thousands)	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
March 31, 2016
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,029	$	3,301
Non-owner occupied	0		0		0		7,686		8,521
Multi-family	0		0		0		225		381
Non-owner occupied residential	39		39		39		792		1,080
Acquisition and development:
Commercial and land development	0		0		0		3		18
Commercial and industrial	0		0		0		714		768
Residential mortgage:
First lien	1,357		1,392		103		3,423		4,133
Home equity - term	0		0		0		99		106
Home equity - lines of credit	0		0		0		567		712
Installment and other loans	7		8		7		9		35
	$	1,403	$	1,439	$	149	$	15,547	$	19,055
December 31, 2015
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,109	$	3,344
Non-owner occupied	0		0		0		7,856		8,600
Multi-family	0		0		0		233		385
Non-owner occupied residential	0		0		0		895		1,211
Acquisition and development:
Commercial and land development	0		0		0		5		19
Commercial and industrial	0		0		0		734		780
Residential mortgage:
First lien	1,952		1,984		271		2,856		3,369
Home equity - term	0		0		0		103		110
Home equity - lines of credit	22		23		10		568		688
Installment and other loans	8		9		8		9		35
	$	1,982	$	2,016	$	289	$	15,368	$	18,541

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The following tables summarize the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired, generally on a cash basis, for the three months ended March 31, 2016 and 2015:

	2016				2015
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,069	$	0	$	3,159	$	0
Non-owner occupied	7,771		0		1,658		0
Multi-family	229		0		521		0
Non-owner occupied residential	875		0		1,303		0
Acquisition and development:
Commercial and land development	4		0		392		2
Commercial and industrial	724		0		2,346		0
Residential mortgage:
First lien	4,776		9		5,241		9
Home equity - term	101		0		93		0
Home equity - lines of credit	589		0		512		0
Installment and other loans	17		0		25		0
	$	17,155	$	9	$	15,250	$	11

The following table presents impaired loans that are TDRs, with the recorded investment as of March 31, 2016 and December 31, 2015.

	March 31, 2016			December 31, 2015
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Residential mortgage:
First lien	9	$	1,044	8	$	793
	9	1,044		8	793
Nonaccruing:
Residential mortgage:
First lien	12	1,128		12	1,153
Installment and other loans	1	9		1	10
	13	1,137		13	1,163
	22	$	2,181	21	$	1,956

The loans presented above were considered TDRs as the result of the Company agreeing to below market interest rates for the risk of the transaction, allowing the loan to remain on interest-only status, or a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For TDRs in default of their original terms, impairment is generally determined on a collateral-dependent approach, except for accruing residential mortgage TDRs, which are generally on the discounted cash flow approach.

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The following table presents the number of loans modified, and their pre-modification and post-modification investment balances for the three months ended March 31, 2016 and 2015:

	2016					2015
(Dollars in thousands)	Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment		Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment
Three Months Ended March 31,
Residential mortgage:
First lien	1	$	257	$	0	1	$	59	$	59
	1	$	257	$	0	1	$	59	$	59

Certain loans modified during a period may no longer be outstanding at the end of the period if the loan was paid off.

The following table presents restructured loans, included in nonaccrual loans, that were modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended March 31, 2016 and 2015:

	2016			2015
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Three Months Ended March 31,
Residential mortgage:
First lien	0	$	0	5	$	323
	0	$	0	5	$	323

No additional commitments have been made to borrowers whose loans are considered TDRs.

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Management further monitors the performance and credit quality of the loan portfolio by analyzing the average length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2016 and December 31, 2015:

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
March 31, 2016
Commercial real estate:
Owner-occupied	$	104,251	$	184	$	0	$	0	$	184	$	2,029	$	106,464
Non-owner occupied	146,986		59		0		0		59		7,686		154,731
Multi-family	37,439		0		0		0		0		225		37,664
Non-owner occupied residential	53,970		34		0		0		34		830		54,834
Acquisition and development:
1-4 family residential construction	7,270		0		0		0		0		0		7,270
Commercial and land development	42,241		1		0		0		1		3		42,245
Commercial and industrial	76,563		0		0		0		0		714		77,277
Municipal	62,302		0		0		0		0		0		62,302
Residential mortgage:
First lien	121,180		746		43		0		789		3,737		125,706
Home equity - term	16,478		0		0		1		1		99		16,578
Home equity - lines of credit	110,902		301		0		0		301		567		111,770
Installment and other loans	7,823		23		0		0		23		16		7,862
	$	787,405	$	1,348	$	43	$	1	$	1,392	$	15,906	$	804,703
December 31, 2015
Commercial real estate:
Owner-occupied	$	101,395	$	74	$	0	$	0	$	74	$	2,109	$	103,578
Non-owner occupied	137,545		0		0		0		0		7,856		145,401
Multi-family	34,876		0		0		0		0		233		35,109
Non-owner occupied residential	53,280		0		0		0		0		895		54,175
Acquisition and development:
1-4 family residential construction	9,364		0		0		0		0		0		9,364
Commercial and land development	41,236		0		98		0		98		5		41,339
Commercial and industrial	72,846		24		21		0		45		734		73,625
Municipal	57,511		0		0		0		0		0		57,511
Residential mortgage:
First lien	120,119		1,844		44		0		1,888		4,015		126,022
Home equity - term	17,200		34		0		0		34		103		17,337
Home equity - lines of credit	109,740		286		91		24		401		590		110,731
Installment and other loans	7,488		16		0		0		16		17		7,521
	$	762,600	$	2,278	$	254	$	24	$	2,556	$	16,557	$	781,713

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The Company maintains the allowance for loan losses at a level believed to be adequate by management for probable incurred credit losses. The allowance is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the allowance for loan losses utilizing a defined methodology, which considers specific credit evaluation of impaired loans as discussed above, past loan loss historical experience, and qualitative factors. Management believes the approach properly addresses the requirements of ASC Subtopic 310-10-35 for loans individually identified as impaired, and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance.

In connection with its quarterly evaluation of the adequacy of the allowance for loan losses, management continually reviews its methodology to determine if it continues to properly address the risk in the loan portfolio. For each loan class presented above, general allowances are provided for loans that are collectively evaluated for impairment, which is based on quantitative factors, principally historical loss trends for the respective loan class, adjusted for qualitative factors. In addition, an adjustment to the historical loss factors is made to account for delinquency and other potential risk not elsewhere defined within the Allowance for Loan and Lease Loss methodology.

Prior to December 31, 2015, the look back period for historical losses was 12 quarters, weighted one-half for the most recent four quarters, and one-quarter for each of the two previous four quarter periods in order to appropriately capture the loss history in the loan segment. Effective December 31, 2015, the Company extended the look back period to 16 quarters which will increase to 20 quarters through December 31, 2016. The extended period was on a prospective basis, more heavily weighted to the most recent four quarters. The look back period was extended as it was determined that a longer look back period is more consistent with the duration of an economic cycle. Management considers current economic, business, and real estate conditions, and the trends in historical charge-off percentages that resulted from applying partial charge-offs to impaired loans, and the impact of distressed loan sales during the year in determining the look back period.

In addition to the quantitative analysis, adjustments to the reserve requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors. As of March 31, 2016 and December 31, 2015, the qualitative factors used by management to adjust the historical loss percentage to the anticipated loss allocation, which may range from a minus 150 basis points to a positive 150 basis points per factor, include:

Nature and Volume of Loans – Loan growth in the current and subsequent quarters based on the Bank’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture, and the number of exceptions to loan policy, and supervisory loan to value exceptions, etc.

Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the composition of the Bank’s overall portfolio and management’s evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.

Underwriting Standards and Recovery Practices – Factors considered include changes to underwriting standards and perceived impact on anticipated losses, trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.

Delinquency Trends – Factors considered include the delinquency percentages noted in the portfolio relative to economic conditions, severity of the delinquencies, and whether the ratios are trending upwards or downwards.

Classified Loans Trends – Factors considered include the internal loan ratings of the portfolio, the severity of the ratings, and whether the loan segment’s ratings show a more favorable or less favorable trend, and underlying market conditions and their impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – Factors considered include the years of experience of senior and middle management and the lending staff and turnover of the staff, and instances of repeat criticisms of ratings.

Quality of Loan Review – Factors include the years of experience of the loan review staff, in-house versus outsourced provider of review, turnover of staff and the perceived quality of their work in relation to other external information.

National and Local Economic Conditions – Ratios and factors considered include trends in the consumer price index (CPI), unemployment rates, housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition

25

Activity in the allowance for loan losses for the three months ended March 31, 2016 and 2015 was as follows:

	Commercial															Consumer
(Dollars in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Municipal			Total			Residential Mortgage			Installment and Other			Total			Unallocated			Total
March 31, 2016
Balance, beginning of period	$	7,883		$	850		$	1,012		$	58		$	9,803		$	2,870		$	121		$	2,991		$	774		$	13,568
Provision for loan losses	33			(111		)	37			4			(37		)	45			102			147			(110		)	0
Charge-offs	0			0			(21		)	0			(21		)	(244		)	(64		)	(308		)	0			(329		)
Recoveries	80			0			2			0			82			6			20			26			0			108
Balance, end of period	$	7,996		$	739		$	1,030		$	62		$	9,827		$	2,677		$	179		$	2,856		$	664		$	13,347
March 31, 2015
Balance, beginning of period	$	9,462		$	697		$	806		$	183		$	11,148		$	2,262		$	119		$	2,381		$	1,218		$	14,747
Provision for loan losses	(63		)	(87		)	(137		)	(62		)	(349		)	494			15			509			(160		)	0
Charge-offs	(66		)	(22		)	(26		)	0			(114		)	(201		)	(20		)	(221		)	0			(335		)
Recoveries	13			0			22			0			35			12			2			14			0			49
Balance, end of period	$	9,346		$	588		$	665		$	121		$	10,720		$	2,567		$	116		$	2,683		$	1,058		$	14,461

The following table summarizes the ending loan balances individually evaluated for impairment based upon loan segment, as well as the related allowance for loan losses allocation for each at March 31, 2016 and December 31, 2015:

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
March 31, 2016
Loans allocated by:
Individually evaluated for impairment	$	10,771	$	3	$	714	$	0	$	11,488	$	5,446	$	16	$	5,462	$	0	$	16,950
Collectively evaluated for impairment	342,922		49,512		76,563		62,302		531,299		248,608		7,846		256,454		0		787,753
	$	353,693	$	49,515	$	77,277	$	62,302	$	542,787	$	254,054	$	7,862	$	261,916	$	0	$	804,703
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	39	$	0	$	0	$	0	$	39	$	103	$	7	$	110	$	0	$	149
Collectively evaluated for impairment	7,957		739		1,030		62		9,788		2,574		172		2,746		664		13,198
	$	7,996	$	739	$	1,030	$	62	$	9,827	$	2,677	$	179	$	2,856	$	664	$	13,347
December 31, 2015
Loans allocated by:
Individually evaluated for impairment	$	11,093	$	5	$	734	$	0	$	11,832	$	5,501	$	17	$	5,518	$	0	$	17,350
Collectively evaluated for impairment	327,170		50,698		72,891		57,511		508,270		248,589		7,504		256,093		0		764,363
	$	338,263	$	50,703	$	73,625	$	57,511	$	520,102	$	254,090	$	7,521	$	261,611	$	0	$	781,713
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	281	$	8	$	289	$	0	$	289
Collectively evaluated for impairment	7,883		850		1,012		58		9,803		2,589		113		2,702		774		13,279
	$	7,883	$	850	$	1,012	$	58	$	9,803	$	2,870	$	121	$	2,991	$	774	$	13,568

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NOTE 4. INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Pennsylvania. The Bank also files an income tax return in the State of Maryland. The Company is no longer subject to U.S. federal, state or local income tax examination by tax authorities for years before 2012.

The components of income tax expense for the three months ended March 31, 2016 and 2015 are summarized as follows:

	Three months ended March 31,
(Dollars in thousands)	2016			2015
Current year provision (benefit):
Federal	$	(112	)	$	(15	)
State	(2		)	4
	(114		)	(11		)
Deferred tax expense
Federal	722			720
State	6			6
	728			726
Net income tax expense	$	614		$	715

The provision for income taxes includes $497,000 and $535,000 of applicable income tax expense related to net securities gains for the three months ended March 31, 2016 and 2015.

The components of the net deferred tax asset, included in other assets, are as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	5,078	$	5,111
Deferred compensation	546		547
Retirement plans and salary continuation	1,865		1,824
Share-based compensation	417		343
Off balance sheet reserves	224		218
Nonaccrual loan interest	315		246
Goodwill	116		124
Bonus accrual	69		359
Low income housing credit carryforward	1,735		1,652
Alternative minimum tax credit carryforward	2,262		2,195
Charitable contribution carryforward	69		211
Net operating loss carryforward	3,798		4,431
Other	190		182
Total deferred tax assets	16,684		17,443
Deferred tax liabilities:
Depreciation	771		815
Net unrealized gains on securities available for sale	2,387		646
Mortgage servicing rights	699		669
Purchase accounting adjustments	336		352
Other	180		181
Total deferred tax liabilities	4,373		2,663
Net deferred tax asset	$	12,311	$	14,780

The provision for income taxes differs from that computed by applying statutory rates to income before income taxes primarily due to the effects of tax-exempt income, non-deductible expenses and tax credits.

27

As of March 31, 2016, the Company had charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2019, 2036 and 2032, respectively.

In assessing whether or not some or all of our deferred tax asset is more likely than not to be realized in the future, management considers all positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of deferred tax assets is dependent upon existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considered projected future taxable income, length of time needed for carryforwards to reverse, available tax planning strategies, and other factors in making its assessment that it was more likely than not the net deferred tax assets would be realized, and that no valuation allowance was required at March 31, 2016 or December 31, 2015.

NOTE 5. SHARE-BASED COMPENSATION PLANS

The Company maintains share-based compensation plans, the purpose of which are to provide officers, employees, and non-employee members of the Board of Directors of the Company and the Bank, with additional incentive to further the success of the Company. In May 2011, the shareholders of the Company approved the 2011 Orrstown Financial Services, Inc. Incentive Stock Plan (the “Plan”). Under the Plan, 381,920 shares of the common stock of the Company were reserved to be issued. As of March 31, 2016, 151,445 shares were available to be issued under the Plan.

Incentive awards under the Plan may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees of the Company and its present or future subsidiaries, and members of the Board of Directors of the Company or any subsidiary of the Company, are eligible to participate in the Plan. The Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting of awards and restrictions on shares. Generally, awards are nonqualified under the IRS code, unless the awards are deemed to be incentive awards to employees, at the Compensation Committee’s discretion.

A roll forward of the Company’s nonvested restricted shares for the three months ended March 31, 2016 is presented below:

	Shares		Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	197,381		$	16.17
Granted	29,045		17.69
Forfeited	(1,083	)	17.26
Vested	(2,500	)	10.43
Nonvested shares, at period end	222,843		$	16.43

For thethreemonths endedMarch 31, 2016and 2015,$237,000and$131,000was recognized as expense on the restricted stock awards, with tax benefits recorded of$83,000and$46,000for the respective periods.As of March 31, 2016 and December 31, 2015, the unrecognized compensation expense related to the stock awards were $2,495,000 and $2,293,000. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 3.0 years.

A roll forward of the Company’s outstanding stock options for the three months ended March 31, 2016 is presented below:

	Shares		Weighted Average Exercise Price
Outstanding at beginning of year	101,460		$	28.72
Forfeited	(2,050	)	26.54
Options outstanding and exercisable, at period end	99,410		$	28.76

28

The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. All options are fully vested upon issuance. Information pertaining to options outstanding and exercisable at March 31, 2016 is as follows:

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$21.14 - $24.99	35,674	4.15	$	21.47
$25.00 - $29.99	2,792	4.01	25.76
$30.00 - $34.99	38,640	1.53	31.28
$35.00 - $37.59	22,304	1.25	36.44
$21.14 - $37.59	99,410	2.48	$	28.76

The options outstanding and exercisable had no intrinsic value at March 31, 2016 and December 31, 2015 as each exercise price exceeded the market value.

The Company also maintains an employee stock purchase plan, in order to provide employees of the Company and its subsidiaries an opportunity to purchase stock of the Company. Under the employee stock purchase plan, eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary, up to the IRS limit, at the lower of 95% of the fair market value of the shares on the semi-annual offering date, or related purchase date. The Company reserved 350,000 shares of its common stock, after making adjustments for stock dividends and a stock split, to be issued under the employee stock purchase plan. As of March 31, 2016, 189,877 shares were available to be issued under the employee stock purchase plan. Employees purchased 2,461 and 2,964 shares at a weighted average price of $16.57 and $15.74 for the three months ended March 31, 2016 and 2015. Compensation expense recognized on the employee stock purchase plan totaled $3,000 and $3,000 for the three months ended March 31, 2016 and 2015.

The Company uses a combination of issuing new shares or treasury shares to meet stock compensation exercises depending on market conditions.

NOTE 6. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

On January 19, 2016, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (the "Commission") that provides for up to an aggregate of $100,000,000, through the sale of common stock, preferred stock, warrants, debt securities, and units. To date, the Company has not issued any securities under this shelf registration.

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Although applicable to the Bank, prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

Quantitative measures established by regulators to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (as set forth in the following table) of total and Tier 1 capital (as defined in regulations) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to risk weighted assets, and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2016 and December 31, 2015, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Effective January 1, 2015, the Company and Bank became subject to final rules establishing a new comprehensive capital framework for U.S. banking organizations, including community banks (the "Basel III Capital Rules"), which substantially

29

revised the risk-based capital requirements in comparison to the previously existing U.S. risk-based capital rules. The Basel III Capital Rules, among other things, (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) increased the minimum requirements for Tier 1 Capital ratio as well as the minimum levels to be considered well capitalized under prompt corrective action; (iii) and introduced the "capital conservation buffer”, designed to absorb losses during periods of economic stress. Institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer are subject to constraints on dividends, equity repurchases and discretionary bonuses to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

As of March 31, 2016, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The Company and the Bank’s actual capital ratios as of March 31, 2016 and December 31, 2015, are also presented in the table.

	Actual				Minimum Capital Requirement				Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2016
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	137,389	15.7	%	$	70,181	8.0	%	n/a		n/a
Orrstown Bank	121,703		13.9	%	70,133		8.0	%	$	87,666	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	52,636		6.0	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	52,599		6.0	%	70,133		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	39,477		4.5	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	39,450		4.5	%	56,983		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	126,352		9.8	%	51,579		4.0	%	n/a		n/a
Orrstown Bank	110,673		8.6	%	51,609		4.0	%	64,511		5.0	%
December 31, 2015
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	134,562	15.8	%	$	68,078	8.0	%	n/a		n/a
Orrstown Bank	118,671		14.0	%	68,027		8.0	%	$	85,034	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	51,058		6.0	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	51,021		6.0	%	68,027		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	38,294		4.5	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	38,265		4.5	%	55,272		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	123,825		9.8	%	50,684		4.0	%	n/a		n/a
Orrstown Bank	107,942		8.5	%	50,695		4.0	%	63,368		5.0	%

On September 14, 2015, the Board of Directors of the Company authorized a stock repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares,

30

in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. Purchases may be made from time to time on open market or privately negotiated transactions. The repurchase program may be suspended or discontinued at any time. As of March 31, 2016, 61,298 shares had been repurchased under the program at a total cost of $1,051,000, or $17.15 per share.

NOTE 7. EARNINGS PER SHARE

Earnings per share for the three months ended March 31, 2016 and 2015 were as follows:

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2016		2015
Net income	$	2,580	$	2,462
Weighted average shares outstanding (basic)	8,071		8,110
Impact of common stock equivalents	68		24
Weighted average shares outstanding (diluted)	8,139		8,134
Per share information:
Basic earnings per share	$	0.32	$	0.30
Diluted earnings per share	0.32		0.30

Stock options amounting to 99,000 and 130,000 shares of common stock were not considered in computing diluted earnings per share for the three months ended March 31, 2016 and 2015 as their exercise would have been antidilutive as the exercise price exceeded the average market value.

NOTE 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. 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 balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’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 and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

	Contract or Notional Amount
(Dollars in thousands)	March 31, 2016		December 31, 2015
Commitments to fund:
Revolving, open ended home equity loans	$	115,813	$	110,473
1-4 family residential construction loans	5,464		6,153
Commercial real estate, construction and land development loans	41,065		14,174
Commercial, industrial and other loans	87,971		84,480
Standby letters of credit	7,002		6,510

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 and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a

31

case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company holds collateral supporting those commitments when deemed necessary by management. The current amount of liability, as of March 31, 2016 and December 31, 2015, for guarantees under standby letters of credit issued was not material.

The Company currently maintains a reserve in other liabilities totaling $519,000 and $472,000 at March 31, 2016 and December 31, 2015 for off-balance sheet credit exposures that currently are not funded, based on historical loss experience of the related loan class. For the three months ended March 31, 2016 and 2015, the amount expensed (recovered) was $47,000 and $(68,000).

The Company has sold loans to the Federal Home Loan Bank of Chicago as part of its Mortgage Partnership Finance Program (“MPF Program”). Under the terms of the MPF Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan that is sold under the program is “credit enhanced” such that the individual loan’s rating is raised to “AA,” as determined by the Federal Home Loan Bank of Chicago. The sum of total loans sold under the MPF Program with limited recourse was $42,478,000 and $44,124,000 at March 31, 2016 and December 31, 2015, with limited recourse back to the Company on these loans of $8,199,000 and $8,230,000 at these dates. Many of the loans sold under the MPF Program have primary mortgage insurance, which reduces the Company’s overall exposure. The Company is in the process of foreclosing on loans sold under the MPF Program or recovering amounts previously charged off, with a resulting net charge (recovery) of $(52,000) and $40,000 for the three months ended March 31, 2016 and 2015. These amounts, charged to other expenses represent an estimate of the Company’s loss under its recourse exposure.

NOTE 9. FAIR VALUE DISCLOSURES

The Company meets the requirements for disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Fair value measurements under GAAP describes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that employ unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value.

The three levels are defined as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market for the asset or liability, for substantially the full term of the financial instrument. Level 3 – the valuation methodology is derived from model-based techniques in which at least one significant input is unobservable to the fair value measurement and based on the Company’s own assumptions about market participants’ assumptions.

Following is a description of the valuation methodologies used for instruments measured on a recurring basis at estimated fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

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Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. All of the Company’s securities are classified as available for sale.

The Company had no fair value liabilities measured on a recurring basis at March 31, 2016 and December 31, 2015. A summary of assets at March 31, 2016 and December 31, 2015, measured at estimated fair value on a recurring basis was as follows:

(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2016
Securities available for sale:
U.S. Government Agencies	$	0	$	45,139	$	0	$	45,139
States and political subdivisions	0		129,181		0		129,181
U.S. Government Sponsored enterprises (GSE) residential mortgage-backed securities	0		130,775		0		130,775
GSE residential collateralized mortgage obligations (CMOs)	0		14,404		0		14,404
Private label CMOs	0		8,018		0		8,018
Total debt securities	0		327,517		0		327,517
Equity securities - financial services	0		73		0		73
Total securities	$	0	$	327,590	$	0	$	327,590
December 31, 2015
Securities available for sale:
U.S. Government Agencies	$	0	$	47,227	$	0	$	47,227
States and political subdivisions	0		125,961		0		125,961
GSE residential mortgage-backed securities	0		132,349		0		132,349
GSE residential collateralized mortgage obligations (CMOs)	0		15,843		0		15,843
GSE commercial CMOs	0		63,770		0		63,770
Private label CMOs	0		8,901		0		8,901
Total debt securities	0		394,051		0		394,051
Equity securities - financial services	0		73		0		73
Total securities	$	0	$	394,124	$	0	$	394,124

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

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Impaired Loans

The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral, or discounted cash flows based on a market rate of interest for performing TDRs. For collateral dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). For discounted cash flow impairment measurement on residential mortgage loans, the Company discounts cash flows on a particular credit, utilizing a market rate of interest that adequately reflects the terms and conditions of the note, and the credit risk associated with it. Impaired loans with an allocation to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income. Specific allocations to the allowance for loan losses or partial charge-offs were $2,234,000 and $2,246,000 at March 31, 2016 and December 31, 2015. Changes in the fair value of impaired loans for those still held at March 31, considered in the determination as to the provision for loan losses, totaled $(5,000) and $862,000 for the three months ended March 31, 2016 and 2015.

Foreclosed Real Estate

Other real estate property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Specific charges to value the real estate owned at the lower of cost or fair value on properties held at March 31, 2016 and December 31, 2015 were $168,000 and $129,000. Changes in the fair value of foreclosed real estate for those still held at March 31, charged to real estate expenses, totaled $51,000 and $0 for the three months ended March 31, 2016 and 2015.

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

(Dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
March 31, 2016
Impaired loans	$	4,850	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0% - 60% discount
				Management adjustments for liquidation expenses	6% - 44% discount
Foreclosed real estate	265		Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	10% - 20% discount
				Management adjustments for liquidation expenses	5% - 6% discount
December 31, 2015
Impaired loans	$	4,757	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0% - 70% discount
				Management adjustments for liquidation expenses	6% - 44% discount
Foreclosed real estate	175		Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	10% - 20% discount
				Management adjustments for liquidation expenses	5% - 6% discount

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A summary of assets at March 31, 2016 and December 31, 2015, measured at estimated fair value on a nonrecurring basis was as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2016
Impaired Loans
Commercial real estate:
Owner-occupied	$	0	$	0	$	836	$	836
Non-owner occupied	0		0		736		736
Multi-family	0		0		225		225
Non-owner occupied residential	0		0		507		507
Acquisition and development:
Commercial and land development	0		0		3		3
Residential mortgage:
First lien	0		0		2,340		2,340
Home equity - lines of credit	0		0		194		194
Installment and other loans	0		0		9		9
Impaired loans, net	$	0	$	0	$	4,850	$	4,850
Foreclosed real estate
Residential	$	0	$	0	$	186	$	186
Commercial and land development	0		0		79		79
Total foreclosed real estate	$	0	$	0	$	265	$	265
December 31, 2015
Impaired Loans
Commercial real estate:
Owner-occupied	$	0	$	0	$	881	$	881
Non-owner occupied	0		0		736		736
Multi-family	0		0		233		233
Non-owner occupied residential	0		0		570		570
Acquisition and development:
Commercial and land development	0		0		5		5
Residential mortgage:
First lien	0		0		2,094		2,094
Home equity - lines of credit	0		0		229		229
Installment and other loans	0		0		9		9
Impaired loans, net	$	0	$	0	$	4,757	$	4,757
Foreclosed real estate
Residential	$	0	$	0	$	101	$	101
Commercial and land development	0		0		74		74
Total foreclosed real estate	$	0	$	0	$	175	$	175

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Fair values of financial instruments

In addition to those disclosed above, the following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and Due from Banks and Interest Bearing Deposits with Banks

The carrying amounts of cash and due from banks and interest bearing deposits with banks approximate their fair value.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. These loans typically consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.

Loans Receivable

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality.

Restricted Investment in Bank Stock

These investments are carried at cost. The Company is required to maintain minimum investment balances in these stocks, which are not actively traded and therefore have no readily determinable market value.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposits and IRAs are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market to a schedule of aggregated expected maturities on time deposits.

Short-Term Borrowings

The carrying amounts of federal funds purchased, borrowings under Repurchase Agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements.

Long-Term Debt

The fair value of the Company’s fixed rate long-term borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts of variable-rate long-term borrowings approximate their fair values at the reporting date.

Accrued Interest

The carrying amounts of accrued interest receivable and payable approximate their fair values.

Off-Balance-Sheet Instruments

The Company generally does not charge commitment fees. Fees for standby letters of credit and other off-balance-sheet instruments are not significant.

36

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2016 and December 31, 2015:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2016
Financial Assets
Cash and due from banks	$	12,281	$	12,281	$	12,281	$	0	$	0
Interest bearing deposits with banks	54,634		54,634		54,634		0		0
Restricted investments in bank stocks	6,270		n/a		n/a		n/a		n/a
Securities available for sale	327,590		327,590		0		327,590		0
Loans held for sale	3,499		3,595		0		3,595		0
Loans, net of allowance for loan losses	791,356		810,260		0		0		810,260
Accrued interest receivable	3,582		3,582		0		1,709		1,873
Financial Liabilities
Deposits	1,048,376		1,055,702		0		1,055,702		0
Short-term borrowings	62,693		62,693		0		62,693		0
Long-term debt	24,413		25,259		0		25,259		0
Accrued interest payable	376		376		0		376		0
Off-balance sheet instruments	0		0		0		0		0
December 31, 2015
Financial Assets
Cash and due from banks	$	11,412	$	11,412	$	11,412	$	0	$	0
Interest bearing deposits with banks	16,928		16,928		16,928		0		0
Restricted investments in bank stocks	8,720		n/a		n/a		n/a		n/a
Securities available for sale	394,124		394,124		0		394,124		0
Loans held for sale	5,917		6,045		0		6,045		0
Loans, net of allowance for loan losses	768,145		776,067		0		0		776,067
Accrued interest receivable	3,845		3,845		0		2,257		1,588
Financial Liabilities
Deposits	1,032,167		1,032,265		0		1,032,265		0
Short-term borrowings	89,156		89,156		0		89,156		0
Long-term debt	24,495		25,357		0		25,357		0
Accrued interest payable	366		366		0		366		0
Off-balance sheet instruments	0		0		0		0		0

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NOTE 10. CONTINGENCIES

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.

The Company, the Bank and certain current and former directors and executive officers (collectively, “Orrstown Defendants”) are defendants in a putative class action filed by Southeastern Pennsylvania Transportation Authority (“SEPTA”) on May 25, 2012, in the United States District Court for the Middle District of Pennsylvania. In a later amended complaint, the list of defendants was expanded to include the Company’s independent registered public accounting firm and the underwriters of the Company’s March 2010 public offering of common stock. The complaint, as amended, alleges among other things that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 15, 2010 through April 5, 2012, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief.

On June 22, 2015, the Court dismissed without prejudice SEPTA’s amended complaint against all defendants, finding that SEPTA failed to state a claim under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. The Court ordered that, within 30 days, SEPTA either seek leave to amend its amended complaint, accompanied by the proposed amendment, or file a notice of its intention to stand on the amended complaint.

On July 22, 2015, SEPTA filed a motion for leave to amend under Local Rule 15.1, as allowed by the Court’s ruling on June 22, 2015. Many of the allegations of the proposed second amended complaint are essentially the same or similar to the allegations of the dismissed amended complaint. The proposed second amended complaint also alleges that the Orrstown Defendants did not publicly disclose certain alleged failures of internal controls over loan underwriting, risk management, and financial reporting during the period 2009 to 2012, in violation of the federal securities laws. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend and SEPTA filed its second amended complaint that same day.

On February 25, 2016, the Court issued a scheduling Order directing: all defendants to file any motions to dismiss by March 18, 2016; SEPTA to file an omnibus opposition to defendants’ motions to dismiss by April 8, 2016; and all defendants to file reply briefs in support of their motions to dismiss by April 22, 2016. Defendants timely filed their motions to dismiss the second amended complaint and the parties filed their briefs in accordance with the Court-ordered schedule. The February 25, 2016 Order stays all discovery and other deadlines in the case (including the filing of SEPTA’s motion for class certification) pending the outcome of the motions to dismiss.

The Company believes that the allegations of SEPTA’s second amended complaint are without merit and intends to vigorously defend itself against those claims.

Given the litigation is still in the pleading stage, it is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company, headquartered in Shippensburg, Pennsylvania, is a one bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, Orrstown Bank. At March 31, 2016, the Company had total assets of $1,287,279,000, total liabilities of $1,149,032,000 and total shareholders’ equity of $138,247,000.

The U.S. economy is in its seventh year of recovery from one of its longest and most severe economic recessions in recent history. The strength of the recovery has been modest by historical standards, with GDP growth struggling to sustain momentum above 2.0%. Unemployment continues to decline, however it remains to be seen if this will continue. Corporate profitability for publicly traded companies has been declining for a few quarters and historically this has led to cutbacks in business investment and employment. In addition, most of the rest of the world's economies appear to be in a recession or experiencing decelerating growth which has resulted in volatile markets. Although the dollar strengthened significantly in 2014

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and 2015, the dollar weakened somewhat in the first quarter of 2016. This has led to a mild increase in commodity prices. The Federal Reserve paused their plans to tighten monetary policy due to the increased uncertainty.

Caution About Forward Looking Statements

Certain statements appearing herein which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, the Company may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements refer to a future period or periods, reflecting management’s current beliefs as to likely future developments, and use words like “may,” “will,” “expect,” “estimate,” “anticipate” or similar terms. Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about events or results or otherwise are not statements of historical facts, including, but not limited to, statements related to new business development, new loan opportunities, growth in the balance sheet and fee based revenue lines of business, reducing risk assets, and mitigating losses in the future. Actual results and trends could differ materially from those set forth in such statements and there can be no assurances that we will achieve the desired level of new business development and new loans, growth in the balance sheet and fee based revenue lines of business, continue to reduce risk assets or mitigate losses in the future. Factors that could cause actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: ineffectiveness of the Company’s business strategy due to changes in current or future market conditions; the effects of competition, including industry consolidation and development of competing financial products and services; changes in laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act; interest rate movements; changes in credit quality; inability to raise capital under favorable conditions, volatilities in the securities markets; deteriorating economic conditions; and other risks and uncertainties, including those detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and this Quarterly Report on Form 10-Q under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other filings made with the Commission. The statements are valid only as of the date hereof and the Company disclaims any obligation to update this information.

The following is a discussion of our consolidated financial condition at March 31, 2016 and results of operations for the three months ended March 31, 2016 and 2015. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated. The discussion and analysis should be read in conjunction with our Consolidated Financial Statements (Unaudited) and Notes thereto presented elsewhere in this report. Certain prior period amounts, presented in this discussion and analysis, have been reclassified to conform to current period classifications.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the financial services industry in which it operates. Management, in order to prepare the Company’s consolidated financial statements, is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date through the date the financial statements are filed with the Commission. As this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources.

The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, the Company has identified the adequacy of the allowance for loan losses and accounting for income taxes as critical accounting policies.

The allowance for loan losses represents management’s estimate of probable incurred credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on

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impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet.

The Company recognizes deferred tax assets and liabilities for the future effects of temporary differences and tax credits. Enacted tax rates are applied to cumulative temporary differences based on expected taxable income in the periods in which the deferred tax asset or liability is anticipated to be realized. Future tax rate changes could occur that would require the recognition of income or expense in the statement of operations in the period in which they are enacted. Deferred tax assets must be reduced by a valuation allowance if in management’s judgment it is “more likely than not” that some portion of the asset will not be realized. Management may need to modify its judgment in this regard, from one period to another, should a material change occur in the business environment, tax legislation, or in any other business factor that could impair the Company’s ability to benefit from the asset in the future. Management considered projected future taxable income, length of time needed for carryforwards to reverse, available tax planning strategies, and other factors in making its assessment that it was more likely than not the net deferred taxes would be realized.

Readers of the consolidated financial statements should be aware that the estimates and assumptions used in the Company’s current financial statements may need to be updated in future financial presentations for changes in circumstances, business or economic conditions in order to fairly represent the condition of the Company at that time.

RESULTS OF OPERATIONS

QUARTER ENDED MARCH 31, 2016 COMPARED TO QUARTER ENDED MARCH 31, 2015

Summary

The Company recorded net income of $2,580,000 for the three months ended March 31, 2016 compared to net income of $2,462,000 for the same period in 2015. Diluted EPS for the three months ended March 31, 2016 were $0.32, compared to $0.30 for the three months ended March 31, 2015. Net interest income of $8,650,000 was $335,000 higher for the three months ended March 31, 2016 than in the same period of 2015. This improvement occurred as average loans increased by $82,455,000 between the two periods with average loans outstanding totaling $795,785,000 for the three months ended March 31, 2016, an 11.6% increase as compared to the same period in 2015.

Net Interest Income

Net interest income, which is the difference between interest income and fees on interest-earning assets and interest expense on interest-bearing liabilities, is the primary component of the Company’s revenue. Interest-earning assets include loans, securities and federal funds sold. Interest bearing liabilities include deposits and borrowed funds. To compare the tax-exempt yields to taxable yields, amounts are adjusted to pretax equivalents based on a 35% federal corporate tax rate.

Net interest income is affected by changes in interest rates, volumes of interest-earning assets and interest-bearing liabilities and the composition of those assets and liabilities. The “net interest spread” and “net interest margin” are two common statistics related to changes in net interest income. The net interest spread represents the difference between the yields earned on interest-earning assets and the rates paid for interest-bearing liabilities. The net interest margin is defined as the ratio of net interest income to average earning assets. Through the use of non-interest bearing demand deposits and shareholders' equity, the net interest margin exceeds the net interest spread, as these funding sources are non-interest bearing.

For the three months ended March 31, 2016, net interest income measured on a fully tax equivalent basis increased$538,000 to $9,157,000 from $8,619,000 in the corresponding period in 2015. The primary reason for the increase in net interest income was a 9.4% increase in interest earning assets, offset partially by a higher average in interest bearing liabilities and higher cost of funds on them.

Interest income earned on loans increased$660,000 from $7,601,000 for the quarter ended March 31, 2015 to $8,261,000 for the same period in 2016. The primary reason for the increase was growth in the average loan balance from $713,330,000 for the three months ended March 31, 2015 to $795,785,000 for the same period in 2016, offset partially by a 14 basis point decrease in yield on the loans. Loan yields declined despite a 25 basis point increase in short-term rates in the fourth quarter of 2015 due to proceeds received from loan paydowns and payoffs being reinvested in lower interest rates due to competitive market conditions.

Securities interest income increased$237,000 to $2,142,000 for the three months ended March 31, 2016, from $1,905,000 for the same period in 2015. The average balance on securities has increased from $356,635,000 for the three months ended

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March 31, 2015 to $363,614,000 for the same period in 2016. The increase in interest income on securities was also positively affected by higher tax equivalent yields earned, which averaged 2.37% in 2016 compared to 2.17% for the same period in 2015. The increase in short-term interest rates in the fourth quarter of 2015 favorably impacted yields earned 2016.

Interest expense on deposits and borrowings for the three months ended March 31, 2016 was $1,311,000, an increase of $398,000, from $913,000 in the same period in 2015. Our ability to attract new deposits allowed for an increase in average deposits, and in particular, time deposits. The Company’s cost of funds on interest-bearing liabilities has increased to 0.52% for the three months ended March 31, 2016 from 0.40% for the same period in 2015. The higher rate paid was primarily for intermediate term brokered deposits that were acquired in the latter half of 2015 to protect the bank’s earnings from a rising rate environment.

The Company’s net interest spread of 2.98% decreased 14 basis points for the three months ended March 31, 2016 as compared to the same period in 2015. Net interest margin for the three months ended March 31, 2016 was 3.06%, a 12 basis point decrease from 3.18% for the three months ended March 31, 2015. Maturing loan proceeds were generally reinvested at lower rates due to competitive market conditions. Lowering rates on interest bearing liabilities was not feasible, as they are generally more influenced by changes in short term interest rates.

The table that follows shows average balances and interest yields on a fully taxable equivalent basis (FTE) for the three months ended March 31, 2016 and 2015:

	March 31, 2016							March 31, 2015
(Dollars in thousands)	Average Balance		Tax Equivalent Interest			Tax Equivalent Rate		Average Balance		Tax Equivalent Interest			Tax Equivalent Rate
Assets
Federal funds sold & interest bearing bank balances	$	43,242	$	65		0.60	%	$	29,569	$	26		0.36	%
Securities	363,614		2,142			2.37		356,635		1,905			2.17
Loans	795,785		8,261			4.18		713,330		7,601			4.32
Total interest-earning assets	1,202,641		10,468			3.50		1,099,534		9,532			3.52
Other assets	94,292							81,698
Total	$	1,296,933						$	1,181,232
Liabilities and Shareholders’ Equity
Interest bearing demand deposits	$	521,442	$	252		0.19		$	504,387	$	220		0.18
Savings deposits	87,702		35			0.16		87,665		34			0.16
Time deposits	304,800		852			1.12		235,049		523			0.90
Short term borrowings	76,342		66			0.35		78,370		60			0.31
Long term debt	24,459		106			1.74		16,112		76			1.91
Total interest bearing liabilities	1,014,745		1,311			0.52		921,583		913			0.40
Non-interest bearing demand deposits	133,214							118,866
Other	13,206							11,166
Total Liabilities	1,161,165							1,051,615
Shareholders’ Equity	135,768							129,617
Total	$	1,296,933						$	1,181,232
Net interest income (FTE)/net interest spread			9,157			2.98	%			8,619			3.12	%
Net interest margin						3.06	%						3.18	%
Tax-equivalent adjustment			(507		)					(304		)
Net interest income			$	8,650						$	8,315

NOTES: Yields and interest income on tax-exempt assets have been computed on a fully taxable equivalent basis assuming a 35% tax rate.

For yield calculation purposes, nonaccruing loans are included in the average loan balance.

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Provision for Loan Losses

The Company recorded no provision for loan losses for the three months ended March 31, 2016, and 2015. In determining the required provision for loan losses, both quantitative and qualitative factors are considered in the determination of the adequacy of the allowance for loan losses, as noted in the "Asset Quality" section. For both periods presented, favorable historical charge-off data combined with stable economic and market conditions has resulted in the determination that no additional provision for loan losses were required to offset net charge-offs. Further, no additional reserves were needed on impaired loans, or for loan growth experienced during the three months ended March 31, 2016 and 2015.

See further discussion in the “Allowance for Loan Losses” section.

Noninterest Income

Noninterest income, excluding securities gains, totaled $4,245,000 for the three months ended March 31, 2016, compared to $3,839,000 for the same period in 2015. Several factors contributed to the net change in noninterest income, excluding security gains, for the first three months of 2016 compared to the same period in 2015, as noted below.

• The Company experienced an increase in service charges on deposit accounts of $110,000 for the three months ended March 31, 2016 to $1,303,000 compared to the corresponding period in 2015, due principally to revenues generated from new product offerings and higher interchange fees associated with increased usage.

• Trust department and brokerage income was $1,785,000 for the three months ended March 31, 2016, an increase of $101,000, or 6.0% from the same period in 2015. Revenues were favorably impacted in 2016 by the recognition of several estate fees, which resulted in volatility between periods.

• Favorable real estate and interest rate market conditions led to the increases in mortgage banking revenues, which generated income of $642,000 for the three months ended March 31, 2016, compared to $520,000 for the corresponding period in 2015.

• Earnings on life insurance totaled $268,000 for the three months ended March 31, 2016, an increase of $39,000, or 17.0%, over the same period in 2015, due principally to additional life insurance purchased in 2015 to fund a new compensation arrangement.

Securities gains totaled $1,420,000 for the three months ended March 31, 2016 compared to $1,529,000 for the same period in 2015. For all periods, asset/liability management strategies and interest rate conditions resulted in gains on sales of securities, as market conditions presented opportunities to accelerate earnings on securities through gains, while also meeting the funding requirements of lending activity.

Noninterest Expenses

Noninterest expenses totaled $11,121,000 for the three months ended March 31, 2016, compared to $10,506,000 for the corresponding prior year period. The changes in certain components of noninterest expenses for the three months ended March 31, 2016 and 2015, are described below.

• Salaries and employee benefits increased $283,000 or 4.8%, from $5,900,000 for the three months ended March 31, 2015 to $6,183,000 for the same period in 2016. The higher expenses in 2016 were due to merit increases, additional employees, as well as higher costs associated with incentive based compensation as additional share-based awards were granted and the prior year's awards had a full quarters' worth of expense in 2016.

• Occupancy expense of $526,000 for the three months ended March 31, 2016 represented a decrease of $98,000 from the same period in 2015, due in part to more favorable weather conditions, and less snow removal services in 2016 compared to the prior year.

• Data processing costs of $635,000 for the three months ended March 31, 2016, increased $124,000 compared to $511,000 for the same period in 2015. The increase in costs is reflective of overall higher volumes and costs associated with new and more sophisticated product and service offerings.

• Advertising and bank promotion expense increased from $245,000 for the three months ended March 31, 2015 to $456,000 for corresponding period in 2016, due primarily to $100,000 of incremental educational improvement tax

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credit ("EITC") contributions that carried over to the first quarter of 2016, and increased advertising and promotion expenditures as we continue to promote the Orrstown brand in the markets we presently serve.

• Directors' compensation totaled $231,000 for the three months ended March 31, 2016, a 47.1% increase over $157,000 for the same period in 2015. The increase is principally due to an increase in directors' compensation that resulted from the issuance of restricted stock in May 2015 that had a full quarter of expense totaling $43,000 in 2016 with no corresponding expense in 2015. The remainder of the increase is attributable to two new directors added in 2016, and related compensation paid to them for their services.

• Taxes, other than income, decreased $71,000 from $226,000 for the three months ended March 31, 2015 to $155,000 for the three months ended March 31, 2016. As a result of the incremental EITC contributions made in the first quarter of 2016, a corresponding $90,000 credit was recognized on our Bank Shares Tax liability, and reduced the tax expense for the period.

• Other operating expenses of $914,000 for the three months ended March 31, 2016 represented a $140,000 increase over the $774,000 expensed in the corresponding period in 2015. Included in this category is an increase of $115,000 in the provision for off-balance sheet reserves on loans that have been committed to borrowers, but not funded. The growth in commitments to fund loans has been consistent with growth we have seen in our loan portfolio.

The Company’s efficiency ratio improved slightly for the three months ended March 31, 2016 to 82.6%, compared to 83.8% for the same period in 2015. The improvement in the ratio was primarily the result of the increase in net interest income and noninterest income exceeding the increase in noninterest expenses. The efficiency ratio expresses noninterest expense as a percentage of tax equivalent net interest income and noninterest income, excluding securities gains, intangible asset amortization and other real estate income and expenses.

Income Tax Expense

Income tax expense totaled $614,000, or an effective tax rate of 19.2% for the three months ended March 31, 2016, compared to $715,000, or 22.5% of pre-tax earnings, for the three months ended March 31, 2015. The Company’s effective tax rate is significantly less than the federal statutory rate of 35.0% principally due to tax-free income, including interest earned on tax-free loans and securities, and earnings on the cash surrender value of life insurance policies. The lower effective tax rate for the three months ended March 31, 2016 compared to the same period in 2015 is the result of a larger percentage of pre-tax income being tax-free, combined with additional federal income tax credits in the current year’s results.

FINANCIAL CONDITION

A substantial amount of time is devoted by management to overseeing the investment of funds in loans and securities and the formulation of policies directed toward the profitability and minimization of risk associated with such investments.

Securities Available for Sale

The Company utilizes securities available for sale as a tool for managing interest rate risk to enhance income through interest and dividend income, to provide liquidity and to provide collateral for certain deposits and borrowings. As of March 31, 2016, securities available for sale were $327,590,000, a decrease of $66,534,000, from December 31, 2015’s balance of $394,124,000. As a result of interest rate market conditions, the Company liquidated its government sponsored enterprise commercial mortgage obligations portfolio with an amortized cost of $63,598,000, and fair value of $63,770,000 at December 31, 2015, at a net gain of $1,420,000, and used the proceeds to fund loan demand, including liquidity for loans that will fund after the end of the quarter.

Loan Portfolio

The Company offers various products to meet the credit needs of our borrowers, principally consisting of commercial real estate loans, commercial and industrial loans, and retail loans consisting of loans secured by residential properties, and to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.

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The risks associated with lending activities differ among the various loan classes, and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact the borrower’s ability to repay its loans, and impact the associated collateral. See Note 3, “Loans Receivable and Allowance for Loan Losses,” in the Notes to the Consolidated Financial Statements for a detailed description of the Company’s loan classes and differing levels of credit risk associated with each class, which information is incorporated herein by reference.

The loan portfolio, excluding residential loans held for sale, broken out by classes as of March 31, 2016 and December 31, 2015 was as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial real estate:
Owner-occupied	$	106,464	$	103,578
Non-owner occupied	154,731		145,401
Multi-family	37,664		35,109
Non-owner occupied residential	54,834		54,175
Acquisition and development:
1-4 family residential construction	7,270		9,364
Commercial and land development	42,245		41,339
Commercial and industrial	77,277		73,625
Municipal	62,302		57,511
Residential mortgage:
First lien	125,706		126,022
Home equity - term	16,578		17,337
Home equity - lines of credit	111,770		110,731
Installment and other loans	7,862		7,521
	$	804,703	$	781,713

The loan portfolio at March 31, 2016 of $804,703,000 reflected an increase of $22,990,000, or 2.9%, from $781,713,000 at December 31, 2015. Growth was experienced in nearly all loan segments from December 31, 2015 to March 31, 2016, with the largest increase coming in the commercial real estate segment, which grew by $15,430,000, representing two-thirds of the total loan growth. The Company’s increased sales efforts and additional relationship managers have resulted in growth, as we capitalize on disruption in the market that has been caused by the acquisition of some of the competitors in the markets served by larger institutions.

Asset Quality

Risk Elements

The Company’s loan portfolios are subject to varying degrees of credit risk. Credit risk is mitigated through the Company’s underwriting standards, on-going credit review, and monitoring of asset quality measures. Additionally, loan portfolio diversification, limiting exposure to a single industry or borrower, and requiring collateral also mitigate the Company’s risk of credit loss.

The Company’s loan portfolio is principally to borrowers in south central Pennsylvania and Washington County, Maryland. As the majority of loans are concentrated in this geographic region, a substantial portion of the debtor’s ability to honor their obligations may be affected by the level of economic activity in the market area.

Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, restructured loans still accruing and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, generally the accrual of interest income ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed

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and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.

Loans, the terms of which are modified, are classified as TDRs if a concession was granted, for legal or economic reasons, related to a debtor’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, temporary reduction in interest rates, or below market rates. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs are restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs are evaluated individually for impairment if they have been restructured during the most recent calendar year, or if they are not performing according to their modified terms.

The following table presents the Company’s risk elements, including information concerning the aggregate balances of nonaccrual, restructured loans still accruing, loans past due 90 days or more, and foreclosed real estate as of March 31, 2016, December 31, 2015 and March 31, 2015. Relevant asset quality ratios are also presented.

(Dollars in thousands)	March 31, 2016			December 31, 2015			March 31, 2015
Nonaccrual loans (cash basis)	$	15,906		$	16,557		$	13,888
Other real estate (OREO)	495			710			1,431
Total nonperforming assets	16,401			17,267			15,319
Restructured loans still accruing	1,044			793			1,096
Loans past due 90 days or more and still accruing	1			24			0
Total risk assets	$	17,446		$	18,084		$	16,415
Loans 30-89 days past due	$	1,391		$	2,532		$	1,631
Asset quality ratios:
Nonaccrual loans to loans	1.98		%	2.12		%	1.91		%
Nonperforming assets to assets	1.27		%	1.34		%	1.29		%
Total nonperforming assets to total loans and OREO	2.04		%	2.21		%	2.10		%
Total risk assets to total loans and OREO	2.17		%	2.31		%	2.25		%
Total risk assets to total assets	1.36		%	1.40		%	1.38		%
Allowance for loan losses to total loans	1.66		%	1.74		%	1.99		%
Allowance for loan losses to nonaccrual loans	83.91		%	81.95		%	104.13		%
Allowance for loan losses to nonaccrual and restructured loans still accruing	78.74		%	78.20		%	96.51		%

Risk assets, defined as nonaccrual loans, restructured loans, loans past due 90 days or more and still accruing, and other real estate owned, totaled $17,446,000 at March 31, 2016, a decrease of $638,000, or 3.5%, from the balance at December 31, 2015 of $18,084,000, and an increase of $1,031,000, or 6.3% from March 31, 2015. In efforts by Company personnel to work through risk assets in order to reduce the risk of future credit losses in the portfolio, one relationship totaling $6,692,000 was identified in the third quarter of 2015 with potential weaknesses, and was moved to nonaccrual status. In connection with the evaluation of this impaired loan, it was determined that the Company was adequately secured, and no reserve allocation or partial charge-off was required at this time. The Company continues to work through risk assets in order to reduce the level of nonperforming assets and the risk of future credit losses.

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A further breakdown of impaired loans at March 31, 2016 and December 31, 2015 is as follows:

	March 31, 2016						December 31, 2015
(Dollars in thousands)	Nonaccrual Loans		Restructured Loans Still Accruing		Total		Nonaccrual Loans		Restructured Loans Still Accruing		Total
Commercial real estate:
Owner occupied	$	2,029	$	0	$	2,029	$	2,109	$	0	$	2,109
Non-owner occupied	7,686		0		7,686		7,856		0		7,856
Multi-family	225		0		225		233		0		233
Non-owner occupied residential	830		0		830		895		0		895
Acquisition and development
Commercial and land development	3		0		3		5		0		5
Commercial and industrial	714		0		714		734		0		734
Residential mortgage:
First lien	3,737		1,044		4,781		4,015		793		4,808
Home equity - term	99		0		99		103		0		103
Home equity - lines of credit	567		0		567		590		0		590
Installment and other loans	16		0		16		17		0		17
	$	15,906	$	1,044	$	16,950	$	16,557	$	793	$	17,350

As of March 31, 2016, the Company had 83 lending relationships with loans that were considered impaired, and were included in the impaired loan balance of $16,950,000, compared to 84 lending relationships with an impaired loan balance of $17,350,000 at December 31, 2015. The exposure to these borrowers with impaired loans is summarized in the following table, along with the partial charge-offs taken to date and the specific reserves established on the relationships at March 31, 2016 and December 31, 2015.

(Dollars in thousands)	# of Relationships	Recorded Investment		Partial Charge-offs to Date		Specific Reserves
March 31, 2016
Relationships greater than $1,000,000	1	$	6,393	$	0	$	0
Relationships greater than $500,000 but less than $1,000,000	2	1,416		620		0
Relationships greater than $250,000 but less than $500,000	6	2,603		120		40
Relationships less than $250,000	74	6,538		1,345		109
	83	$	16,950	$	2,085	$	149
December 31, 2015
Relationships greater than $1,000,000	1	$	6,542	$	0	$	0
Relationships greater than $500,000 but less than $1,000,000	2	1,578		475		164
Relationships greater than $250,000 but less than $500,000	7	2,659		188		0
Relationships less than $250,000	74	6,571		1,294		125
	84	$	17,350	$	1,957	$	289

The Company takes partial charge-offs on collateral-dependent loans whose carrying value exceeded their estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. ASC 310 impairment reserves remain in those situations in which updated appraisals are pending, and represent management’s estimate of potential loss, or on restructured loans that are still accruing, and the impairment is based on discounted cash flows.

Of the relationships deemed to be impaired at March 31, 2016, one had an outstanding book balance in excess of $1,000,000. Seventy-four (74) of the relationships, or 89% of the total number of impaired relationships, have recorded balances less than $250,000, which reduces the likelihood of a large loss on one particular loan.

The largest impaired loan relationship, with an outstanding loan balance of $6,616,000 migrated to impaired status during the third quarter of 2015. Despite the loan being current as to both principal and interest, the Company moved this loan secured by non-owner occupied commercial property to impaired status as the long-term revenue stream and the guarantors'

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ability to keep the loan current have weakened. The Company believes the loan is well secured, and no loss is anticipated at this time.

In its individual loan impairment analysis, the Company determines the extent of any full or partial charge-offs that may be required, or any ASC 310 reserves that may be needed. The determination of the Company’s charge-offs or impairment reserve determination included an evaluation of the outstanding loan balance, and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships as of March 31, 2016. However, over time, additional information may become known that could result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.

The Company’s foreclosed real estate balance of $495,000 consists of nine properties owned by the Company, five of which were commercial properties and totaled $155,000, and four residential properties that totaled $340,000. All properties have carrying values of $130,000 or less and are carried at the lower of cost or fair value, less costs to dispose.

As of March 31, 2016, the Company believes the value of foreclosed assets represents their fair values, but if the real estate market remains challenging, additional charges may be needed.

Credit Risk Management

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level believed adequate by management for probable incurred credit losses. The allowance is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the allowance for loan losses utilizing a defined methodology, which considers specific credit evaluation of impaired loans, past loan loss historical experience, and qualitative factors. Management believes the approach properly addresses the requirements of ASC Section 310-10-35 for loans individually identified as impaired, and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. See Note 3, “Loans Receivable and Allowance for Loan Losses” in the Notes to the Consolidated Financial Statements for a description of the methodology for establishing the allowance and provision for loan losses and related procedures in establishing the appropriate level of reserve, which information is incorporated herein by reference.

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The following tables summarize the Bank’s ratings based on its internal risk rating system as of March 31, 2016 and December 31, 2015:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
March 31, 2016
Commercial real estate:
Owner-occupied	$	98,959	$	1,771	$	3,705	$	2,029	$	0	$	106,464
Non-owner occupied	134,518		12,419		108		7,686		0		154,731
Multi-family	34,863		1,763		813		225		0		37,664
Non-owner occupied residential	51,490		1,282		1,231		792		39		54,834
Acquisition and development:
1-4 family residential construction	7,270		0		0		0		0		7,270
Commercial and land development	41,105		215		922		3		0		42,245
Commercial and industrial	74,651		1,352		560		714		0		77,277
Municipal	62,302		0		0		0		0		62,302
Residential mortgage:
First lien	120,882		0		44		4,780		0		125,706
Home equity - term	16,478		0		1		99		0		16,578
Home equity - lines of credit	110,850		251		102		567		0		111,770
Installment and other loans	7,846		0		0		9		7		7,862
	$	761,214	$	19,053	$	7,486	$	16,904	$	46	$	804,703
December 31, 2015
Commercial real estate:
Owner-occupied	$	96,715	$	1,124	$	3,630	$	2,109	$	0	$	103,578
Non-owner occupied	125,043		12,394		108		7,856		0		145,401
Multi-family	31,957		1,779		1,140		233		0		35,109
Non-owner occupied residential	50,601		1,305		1,374		895		0		54,175
Acquisition and development:
1-4 family residential construction	9,364		0		0		0		0		9,364
Commercial and land development	40,181		219		934		5		0		41,339
Commercial and industrial	70,967		1,380		544		734		0		73,625
Municipal	57,511		0		0		0		0		57,511
Residential mortgage:
First lien	121,214		0		0		4,808		0		126,022
Home equity - term	17,234		0		0		103		0		17,337
Home equity - lines of credit	109,731		230		180		590		0		110,731
Installment and other loans	7,504		0		0		17		0		7,521
	$	738,022	$	18,431	$	7,910	$	17,350	$	0	$	781,713

Potential problem loans are defined as performing loans, which have characteristics that cause management to have concerns as to the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as non-performing loans in the future. Generally, management feels that “Substandard” loans that are currently performing and not considered impaired, result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan, and represent potential problem loans. Additionally, the “Special Mention” classification is intended to be a temporary classification, and is reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. “Special Mention” loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified rating. These loans require follow-up by lenders on the cause of the potential weakness, and once resolved, the loan classification may be downgraded to “Substandard,” or alternatively, could be upgraded to “Pass.”

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Activity in the allowance for loan losses for the three months ended March 31, 2016 and 2015 was as follows:

	Commercial															Consumer
(Dollars in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Municipal			Total			Residential Mortgage			Installment and Other			Total			Unallocated			Total
March 31, 2016
Balance, beginning of period	$	7,883		$	850		$	1,012		$	58		$	9,803		$	2,870		$	121		$	2,991		$	774		$	13,568
Provision for loan losses	33			(111		)	37			4			(37		)	45			102			147			(110		)	0
Charge-offs	0			0			(21		)	0			(21		)	(244		)	(64		)	(308		)	0			(329		)
Recoveries	80			0			2			0			82			6			20			26			0			108
Balance, end of period	$	7,996		$	739		$	1,030		$	62		$	9,827		$	2,677		$	179		$	2,856		$	664		$	13,347
March 31, 2015
Balance, beginning of period	$	9,462		$	697		$	806		$	183		$	11,148		$	2,262		$	119		$	2,381		$	1,218		$	14,747
Provision for loan losses	(63		)	(87		)	(137		)	(62		)	(349		)	494			15			509			(160		)	0
Charge-offs	(66		)	(22		)	(26		)	0			(114		)	(201		)	(20		)	(221		)	0			(335		)
Recoveries	13			0			22			0			35			12			2			14			0			49
Balance, end of period	$	9,346		$	588		$	665		$	121		$	10,720		$	2,567		$	116		$	2,683		$	1,058		$	14,461

The allowance for loan losses totaled $13,347,000 at March 31, 2016, a decrease of $221,000 from $13,568,000 at December 31, 2015, due to net charge-offs for the period. The allowance for loan losses to nonaccrual loans totaled 83.9% at March 31, 2016 compared to 82.0% at December 31, 2015, and the allowance for loan losses to nonaccrual loans and restructured loans still accruing totaled 78.7% at March 31, 2016, compared to 78.2% at December 31, 2015. Management believes the allowance for loan losses to total loans ratio remains adequate at 1.66% as of March 31, 2016. Classified loans, defined as loans rated substandard, doubtful or loss, totaled $24,436,000 at March 31, 2016, or approximately 3.0% of total loans outstanding, and decreased from $25,260,000 at December 31, 2015, or 3.2% of loans outstanding.

Net charge-offs were $221,000 for the three months ended March 31, 2016, compared to $286,000 for the same period in 2015, resulting in a ratio of annualized net charge-offs to average loans outstanding of 0.11% for the three months ended March 31, 2016 and 0.16% for the same period in 2015. Favorable historical charge-off data combined with stable economic and market conditions has resulted in the determination that no additional provision for loan losses were required to offset net charge-offs and no additional reserves were needed on impaired loans or for loan growth experienced during both periods, as more fully discussed in the "Provision for Loan Losses" section in this Management and Discussion and Analysis.

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The following summarizes the ending loan balances individually or collectively evaluated for impairment based upon loan type, as well as the allowance for loan losses allocation for each at March 31, 2016 and December 31, 2015.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
March 31, 2016
Loans allocated by:
Individually evaluated for impairment	$	10,771	$	3	$	714	$	0	$	11,488	$	5,446	$	16	$	5,462	$	0	$	16,950
Collectively evaluated for impairment	342,922		49,512		76,563		62,302		531,299		248,608		7,846		256,454		0		787,753
	$	353,693	$	49,515	$	77,277	$	62,302	$	542,787	$	254,054	$	7,862	$	261,916	$	0	$	804,703
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	39	$	0	$	0	$	0	$	39	$	103	$	7	$	110	$	0	$	149
Collectively evaluated for impairment	7,957		739		1,030		62		9,788		2,574		172		2,746		664		13,198
	$	7,996	$	739	$	1,030	$	62	$	9,827	$	2,677	$	179	$	2,856	$	664	$	13,347
December 31, 2015
Loans allocated by:
Individually evaluated for impairment	$	11,093	$	5	$	734	$	0	$	11,832	$	5,501	$	17	$	5,518	$	0	$	17,350
Collectively evaluated for impairment	327,170		50,698		72,891		57,511		508,270		248,589		7,504		256,093		0		764,363
	$	338,263	$	50,703	$	73,625	$	57,511	$	520,102	$	254,090	$	7,521	$	261,611	$	0	$	781,713
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	281	$	8	$	289	$	0	$	289
Collectively evaluated for impairment	7,883		850		1,012		58		9,803		2,589		113		2,702		774		13,279
	$	7,883	$	850	$	1,012	$	58	$	9,803	$	2,870	$	121	$	2,991	$	774	$	13,568

The allowance for loan losses allocations presented above represent the reserve allocations on loan balances outstanding at March 31, 2016 and December 31, 2015. In addition to the reserve allocations on impaired loans noted above, 21 loans, with aggregate outstanding general ledger principal balances of $3,841,000, have had cumulative partial charge-offs to the allowance for loan losses recorded totaling $2,085,000 at March 31, 2016. As updated appraisals were received on collateral dependent loans, partial charge-offs were taken to the extent the loans’ principal balance exceeded their fair value.

Management believes the allocation of the allowance for loan losses between the various loan segments adequately reflects the probable incurred credit losses in each portfolio, and is based on the methodology outlined in “Note 3 – Loans Receivable and Allowance for Loan Losses” included in the Notes to the Consolidated Financial Statements. Management re-evaluates and makes certain enhancements to its methodology used to establish a reserve to better reflect the risks inherent in the different segments of the portfolio, particularly in light of changes in levels of charge-offs, with noticeable differences between the different loan segments. Management believes these enhancements to the allowance for loan losses methodology improve the accuracy of quantifying losses presently inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for loan losses on the overall analysis taking the methodology into account.

The unallocated portion of the allowance for loan losses reflects estimated probable incurred losses within the portfolio that have not been identified to specific loans or portfolio segments. This reserve results due to risk of error in the specific and general reserve allocation, other potential exposure in the loan portfolio, variances in management’s assessment of national and local economic conditions and other factors management believes appropriate at the time. The unallocated portion of the allowance has decreased from $774,000 at December 31, 2015 to $664,000 at March 31, 2016 and represents 5.0% of the entire allowance for loan losses balance at March 31, 2016.

While management believes the Company’s allowance for loan losses is adequate based on information currently available, future adjustments to the reserve and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.

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Deposits

Total deposits were $1,048,376,000 at March 31, 2016, an increase of $16,209,000, or 1.6%, from $1,032,167,000 at December 31, 2015. Non-interest bearing deposits comprised the majority of the increase, and totaled $146,094,000 at March 31, 2016. The Company has been able to gather additional non-interest bearing deposits as it increases it commercial relationships. The additional deposits that the Company obtained in the first quarter of 2016 were used to pay down short-term borrowings.

Capital Adequacy and Regulatory Matters

Capital Resources. The management of capital in a regulated financial services industry must properly balance return on equity to its stockholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company’s capital management strategies have historically been developed to provide attractive rates of returns to its shareholders, while maintaining a “well capitalized” position of regulatory strength.

Shareholders’ equity totaled $138,247,000 at March 31, 2016, an increase of $5,186,000 or 3.9%, from $133,061,000 at December 31, 2015. This increase was primarily the result of an increase in accumulated other comprehensive income, net of taxes of $3,235,000 and net income of $2,580,000 for the three months ended March 31, 2016, offset by dividends declared on common stock of $664,000.    

Capital Adequacy. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Although applicable to the Bank, prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

Quantitative measures established by regulators to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (as set forth in the following table) of total and Tier 1 capital (as defined in regulations) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to risk weighted assets, and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2016 and December 31, 2015, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Effective January 1, 2015, the Company and the Bank became subject to the Basel III Capital Rules, which substantially revised the risk-based capital requirements in comparison to the previously effective U.S. risk-based capital rules. The Basel III Capital Rules, among other things, (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) increased the minimum requirements for Tier 1 Capital ratio as well as the minimum levels to be considered well capitalized under prompt corrective action; (iii) and introduced the “capital conservation buffer”, designed to absorb losses during periods of economic stress. Institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer are subject to constraints on dividends, equity repurchases and discretionary bonuses to executive officers based on the amount of the shortfall.

Under the Basel III Capital Rules, the Company and Bank took the one-time option to permanently opt out of the requirement to include most components of accumulated other comprehensive income ("AOCI"), including unrealized gains or losses on certain securities available for sale, in regulatory capital. The Company and Bank made the one-time permanent election to opt out, with the result that most AOCI items will be excluded from regulatory capital.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. As of March 31, 2016, $7,255,000 of the Company's deferred tax asset was disallowed for Tier 1, CET1 and Total risk based capital, as it relates to operating loss and tax credit carryforwards which are not permissible as capital under Basel III Capital Rules.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter until fully phased-in at January 1, 2018). The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and be

51

phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expands the risk-weighting categories from the four categories of the previous capital standards (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Significant provisions of the Basel III Capital Rules that impact the Company's capital calculations include, among other things: 

• Restricting the amount of deferred tax assets that can be included in CET1 capital with assets relating to net operating loss and credit carry forwards being excluded, and a 10% - 15% limitation on deferred tax assets arising from temporary differences that cannot be realized through net operating loss carry backs.

• Applying a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;

• Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due or in nonaccrual status; and

• Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable.

The allowance for credit losses, including the allowance for loan losses and reserve for off-balance sheet credit commitments, is included as Tier 2 capital to the extent it does not exceed 1.25% of risk weighted assets. The amount that exceeds 1.25% of risk weighted assets, is disallowed as Tier 2 capital, but also reduces the Company’s risk weighted assets. As of March 31, 2016, $2,902,000 of the allowance for credit losses was excluded from Tier 2 capital.

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Regulatory Capital. As of March 31, 2016 and December 31, 2015, the Bank was considered well capitalized under applicable banking regulations. The Company’s and the Bank’s capital ratios as of March 31, 2016 and December 31, 2015 were as follows:

	Actual				Minimum Capital Requirement				Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2016
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	137,389	15.7	%	$	70,181	8.0	%	n/a		n/a
Orrstown Bank	121,703		13.9	%	70,133		8.0	%	$	87,666	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	52,636		6.0	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	52,599		6.0	%	70,133		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	39,477		4.5	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	39,450		4.5	%	56,983		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	126,352		9.8	%	51,579		4.0	%	n/a		n/a
Orrstown Bank	110,673		8.6	%	51,609		4.0	%	64,511		5.0	%
December 31, 2015
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	134,562	15.8	%	$	68,078	8.0	%	n/a		n/a
Orrstown Bank	118,671		14.0	%	68,027		8.0	%	$	85,034	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	51,058		6.0	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	51,021		6.0	%	68,027		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	38,294		4.5	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	38,265		4.5	%	55,272		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	123,825		9.8	%	50,684		4.0	%	n/a		n/a
Orrstown Bank	107,942		8.5	%	50,695		4.0	%	63,368		5.0	%

As noted above, the Bank’s capital ratios exceed the regulatory minimums to be considered well capitalized under applicable banking regulations. The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. In addition to the minimum capital ratio requirement and minimum capital ratio to be well capitalized presented above, the Company must maintain a capital conservation buffer as discussed above. As of the March 31, 2016, the Company's capital conservation buffer, based on the most restrictive capital ratio, is 7.66%, well above the phase in requirements of 0.625% for December 31, 2016.

On January 19, 2016, the Company filed a shelf registration statement on Form S-3 with the SEC, covering up to an aggregate of $100,000,000 of securities, through the sale of common stock, preferred stock, warrants, debt securities, and units. To date, the Company has not issued any securities under this shelf registration.

In October 2011, the Company announced it had discontinued its quarterly dividend, which was the result of regulatory guidance from the Federal Reserve Bank. Under the Written Agreement entered into with the Federal Reserve Bank in March 2012, the Company was restricted from paying any dividends or repurchasing any stock without prior regulatory approval. The Written Agreement was terminated by the Federal Reserve Bank on April 1, 2015, and the Company resumed its quarterly dividend to common stockholders in April 2015.

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On September 14, 2015, the Board of Directors of the Company authorized a stock repurchase program under which Orrstown Financial Services, Inc. may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. Purchases may be made from time to time on open market or privately negotiated transactions. The repurchase program may be suspended or discontinued at any time. As of March 31, 2016, 61,298 shares had been repurchased under the program at a total cost of $1,051,000, or $17.15 per share.

Liquidity

The primary function of asset/liability management is to ensure adequate liquidity and manage the Company’s sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities, the sale of mortgage loans and borrowings from the Federal Home Loan Bank of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management policy.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is defined as the exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. For domestic banks, including the Company, the majority of market risk is related to interest rate risk. Interest rate sensitivity management requires the maintenance of an appropriate balance between reward, in the form of net interest margin, and risk as measured by the amount of earnings and value at risk.

Interest Rate Risk

Interest rate risk is the exposure to fluctuations in the Company’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests, and security and contractual interest rate changes.

Management, through its asset/liability management process, attempts to manage the level of repricing and maturity mismatch so that fluctuations in net interest income is maintained within policy limits across a range of market conditions while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure the Company’s profitability. Thus, the goal of interest rate risk management is to evaluate the amount of reward for taking risk and adjusting both the size and composition of the balance sheet relative to the level of reward available for taking risk.

Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The Company primarily uses the securities portfolio, FHLB advances, and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives. At present, there is no use of hedging instruments.

The asset/liability committee operates under management policies defining guidelines and limits on the level of risk. These policies are approved by the Board of Directors.

The Company uses simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of the Company’s interest rate risk exposure. These modeling techniques involve assumptions and estimates that inherently cannot be measured with complete precision. Key assumptions in the analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturity deposit sensitivity, and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies,

54

among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of the Company’s interest rate risk position over time.

Earnings at Risk

Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of the Company’s short-term interest rate risk. The analysis assumes recent trends in new loan and deposit volumes will continue while the amount of investment securities remains constant. Additional assumptions are applied to modify volumes and pricing under the various rate scenarios. These include prepayment assumptions on mortgage assets, sensitivity of non-maturity deposit rates, and other factors deemed significant.

The simulation analysis results are presented in Table 3a. These results, as of March 31, 2016, indicate that the Company would expect net interest income to decrease over the next twelve months by 2.1% assuming a downward shock in market interest rates of 1.00%, and to increase by 2.2% assuming an upward shock of 2.00%. A decrease in interest rates of 1.00% would create an environment in which deposit rates could not practically decline further, thus decreasing net interest income.

Earnings at risk simulations for March 31, 2016, exhibited greater sensitivity to rising interest rates and similar sensitivity in a declining rate environment, and asset/liability management strategies were taken in the first quarter of 2016 that resulted in a reduction of the Company's risk in an upward interest rate environment.

Value at Risk

Net present value analysis provides information on the risk inherent in the balance sheet that might not be taken into account in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.

The net present value analysis results are presented in Table 3b. These results, as of March 31, 2016, indicate that the net present value would increase0.8% assuming a downward shift in market interest rates of 1.00% and increase6.1% if interest rates shifted up 2.00% in the same manner, and indicates the Company would be positioned better in rises in interest rates than it would if interest rates fell.

Table 3a - Earnings at Risk						Table 3b - Value at Risk
		% Change in Net Interest Income						% Change in Market Value
Change in Market Interest Rates		March 31, 2016		December 31, 2015		Change in Market Interest Rates		March 31, 2016		December 31, 2015
(100	)	(2.1	%)	(1.4	%)	(100	)	0.8	%	1.8	%
100		0.7	%	(1.2	%)	100		3.6	%	0.5	%
200		2.2	%	(1.8	%)	200		6.1	%	0.0	%

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2016. Based on such evaluation, such officers have concluded that the Company’s disclosure controls and procedures were designed and functioning effectively, as of March 31, 2016, to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

55

(b) Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.

On May 25, 2012, SEPTA filed a putative class action complaint in the United States District Court for the Middle District of Pennsylvania against the Company, the Bank and certain current and former directors and executive officers (collectively, the “Defendants”). The complaint alleges, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 24, 2010 through October 27, 2011, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), motions for appointment of Lead Plaintiff in this case were due by July 24, 2012. SEPTA was the sole movant and the Court appointed SEPTA Lead Plaintiff on August 20, 2012.

Pursuant to the PSLRA and the Court’s September 27, 2012 Order, SEPTA was given until October 26, 2012 to file an amended complaint and the Defendants until December 7, 2012 to file a motion to dismiss the amended complaint. SEPTA’s opposition to the Defendant’s motion to dismiss was originally due January 11, 2013. Under the PSLRA, discovery and all other proceedings in the case were stayed pending the Court’s ruling on the motion to dismiss. The September 27, 2012 Order specified that if the motion to dismiss were denied, the Court would schedule a conference to address discovery and the filing of a motion for class certification. On October 26, 2012, SEPTA filed an unopposed motion for enlargement of time to file its amended complaint in order to permit the parties and new defendants to be named in the amended complaint time to discuss plaintiff’s claims and defendants’ defenses. On October 26, 2012, the Court granted SEPTA’s motion, mooting its September 27, 2012 scheduling Order, and requiring SEPTA to file its amended complaint on or before January 16, 2013 or otherwise advise the Court of circumstances that require a further enlargement of time. On January 14, 2013, the Court granted SEPTA’s second unopposed motion for enlargement of time to file an amended complaint on or before March 22, 2013.

On March 4, 2013, SEPTA filed an amended complaint. The amended complaint expands the list of defendants in the action to include the Company’s independent registered public accounting firm and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extends the purported 1934 Exchange Act class period from March 15, 2010 through April 5, 2012. Pursuant to the Court’s March 28, 2013 Second Scheduling Order, on May 28, 2013 all defendants filed their motions to dismiss the amended complaint, and on July 22, 2013 SEPTA filed its “omnibus” opposition to all of the defendants’ motions to dismiss. On August 23, 2013, all defendants filed reply briefs in further support of their motions to dismiss. On December 5, 2013, the Court ordered oral argument on the Orrstown Defendants’ motion to dismiss the amended complaint to be heard on February 7, 2014. Oral argument on the pending motions to dismiss SEPTA’s amended complaint was held on April 29, 2014.

The Second Scheduling Order stayed all discovery in the case pending the outcome of the motions to dismiss, and informed the parties that, if required, a telephonic conference to address discovery and the filing of SEPTA’s motion for class certification would be scheduled after the Court’s ruling on the motions to dismiss.

On April 10, 2015, pursuant to Court order, all parties filed supplemental briefs addressing the impact of the United States Supreme Court’s March 24, 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund on defendants’ motions to dismiss the amended complaint.

On June 22, 2015, in a 96-page Memorandum, the Court dismissed without prejudice SEPTA’s amended complaint against all defendants, finding that SEPTA failed to state a claim under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. The Court ordered that, within 30 days, SEPTA either seek leave to amend its

56

amended complaint, accompanied by the proposed amendment, or file a notice of its intention to stand on the amended complaint.

On July 22, 2015, SEPTA filed a motion for leave to amend under Local Rule 15.1, and attached a copy of its proposed second amended complaint to its motion. Many of the allegations of the proposed second amended complaint are essentially the same or similar to the allegations of the dismissed amended complaint. The proposed second amended complaint also alleges that the Orrstown Defendants did not publicly disclose certain alleged failures of internal controls over loan underwriting, risk management, and financial reporting during the period 2009 to 2012, in violation of the federal securities laws. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend and SEPTA filed its second amended complaint that same day.

The allegations of SEPTA’s proposed second amended complaint disclosed the existence of a confidential, non-public, fact-finding inquiry regarding the Company being conducted by the Commission. The Commission inquiry is not an indication that the Commission believes the Company or anyone else has violated federal securities laws or regulations. Nor does it mean that the Commission has a negative opinion of any person, entity, or security. The investigation is ongoing and the Company has been cooperating fully with the Commission.

On February 25, 2016, the Court issued a scheduling Order directing: all defendants to file any motions to dismiss by March 18, 2016; SEPTA to file an omnibus opposition to defendants’ motions to dismiss by April 8, 2016; and all defendants to file reply briefs in support of their motions to dismiss by April 22, 2016. Defendants timely filed their motions to dismiss the second amended complaint and the parties filed their briefs in accordance with the Court-ordered schedule, above. The February 25, 2016 Order stays all discovery and other deadlines in the case (including the filing of SEPTA’s motion for class certification) pending the outcome of the motions to dismiss.

The Company believes that the allegations of SEPTA’s second amended complaint are without merit and intends to vigorously defend itself against those claims.

Given that the litigation is still in the pleading stage, it is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.

Item 1A – Risk Factors

There have been no material changes from the risk factors as disclosed in the Company’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

The following table represents the Company's monthly repurchases of its common stock during the quarter ended March 31, 2016:

	Total Number of Shares Repurchased	Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2016 to January 31, 2016	2,488	$	17.46	2,488	366,435
February 1, 2016 to February 29, 2016	4,056	17.22		4,056	362,379
March 1, 2016 to March 31, 2016	7,677	17.17		7,677	354,702

On September 14, 2015, the Board of Directors of the Company authorized a stock repurchase program under which Orrstown Financial Services, Inc. may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.

The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. Purchases may be made from time to time on open market or privately negotiated transactions. The repurchase

57

program may be suspended or discontinued at any time. As of March 31, 2016, 61,298 shares had been repurchased under the program at a total cost of $1,051,000, or $17.15 per share.

The Company did not sell any unregistered securities during the quarter ended March 31, 2016.

Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

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Item 6 – Exhibits

3.1	Articles of Incorporation as amended, incorporated by reference to Exhibit 3.1 of the Registrant’s Report on Form 8-K filed on January 29, 2010.
3.2	By-laws as amended, incorporated by reference to Exhibit 3.1 to the Registrant’s Report on Form 8-K filed March 1, 2013.
4.1	Specimen Common Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 filed February 8, 2010 (File No. 333-164780).
31.1	Rule 13a – 14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2	Rule 13a – 14(a)/15d-14(a) Certifications (Principal Financial Officer)
32.1	Section 1350 Certifications (Principal Executive Officer)
32.2	Section 1350 Certifications (Principal Financial Officer)
101.LAB	XBRL Taxonomy Extension Label Linkbase *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase *
101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase *
101.DEF	XBRL Taxonomy Extension Definition Linkbase *

* Attached as Exhibit 101 to this Form 10-Q are documents formatted in XBRL (Extensive Business Reporting Language).

59

SIGNATURES

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

/s/ Thomas R. Quinn, Jr.

Thomas R. Quinn, Jr.

President and Chief Executive Officer

(Principal Executive Officer)

/s/ David P. Boyle

David P. Boyle

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: May 6, 2016

60

ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES

EXHIBIT INDEX

3.1	Articles of Incorporation as amended, incorporated by reference to Exhibit 3.1 of the Registrant’s Report on Form 8-K filed on January 29, 2010.
3.2	By-laws as amended, incorporated by reference to Exhibit 3.1 to the Registrant’s Report on Form 8-K filed March 1, 2013.
4.1	Specimen Common Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 filed February 8, 2010 (File No. 333-164780).
31.1	Rule 13a – 14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2	Rule 13a – 14(a)/15d-14(a) Certifications (Principal Financial Officer)
32.1	Section 1350 Certifications (Principal Executive Officer)
32.2	Section 1350 Certifications (Principal Financial Officer)
101.LAB	XBRL Taxonomy Extension Label Linkbase *
101.PRE	XBRL Taxonomy Extension Presentation Linkbase *
101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Extension Schema *
101.CAL	XBRL Taxonomy Extension Calculation Linkbase *
101.DEF	XBRL Taxonomy Extension Definition Linkbase *

All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

* Attached as Exhibits 101 to this Form 10-Q are documents formatted in XBRL (Extensive Business Reporting Language).

61

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Thomas R. Quinn, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Orrstown Financial Services, Inc.;

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;

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 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.

Date: May 6, 2016	By:	/s/ Thomas R. Quinn, Jr.
		Thomas R. Quinn, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David P. Boyle, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Orrstown Financial Services, Inc.;

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;

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 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.

Date: May 6, 2016	By:	/s/ David P. Boyle
		David P. Boyle
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION 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 of Orrstown Financial Services, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2016 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, Thomas R. Quinn, Jr., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date: May 6, 2016	By:	/s/ Thomas R. Quinn, Jr.
		Thomas R. Quinn, Jr.
		President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION 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 of Orrstown Financial Services, Inc. (the “Company”) on Form 10-Q for the period ending March 31, 2016 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, David P. Boyle, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date: May 6, 2016	By:	/s/ David P. Boyle
		David P. Boyle
		Executive Vice President and Chief Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2016	Apr. 29, 2016
Document And Entity Information [Abstract]
Entity Registrant Name	ORRSTOWN FINANCIAL SERVICES INC
Entity Central Index Key	0000826154
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Document Type	10-Q
Document Period End Date	Mar. 31, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q1
Trading Symbol	ORRF
Amendment Flag	false
Entity Common Stock, Shares Outstanding		8,283,144

XML

Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Assets
Cash and due from banks	$ 12,281	$ 11,412
Interest bearing deposits with banks	54,634	16,928
Cash and cash equivalents	66,915	28,340
Restricted investments in bank stocks	6,270	8,720
Securities available for sale	327,590	394,124
Loans held for sale	3,499	5,917
Loans	804,703	781,713
Less: Allowance for loan losses	(13,347)	(13,568)
Net loans	791,356	768,145
Premises and equipment, net	29,689	23,960
Cash surrender value of life insurance	31,438	31,224
Intangible assets	155	207
Accrued interest receivable	3,582	3,845
Other assets	26,785	28,334
Total assets	1,287,279	1,292,816
Deposits:
Non-interest bearing	146,094	131,390
Interest bearing	902,282	900,777
Total deposits	1,048,376	1,032,167
Short-term borrowings	62,693	89,156
Long-term debt	24,413	24,495
Accrued interest and other liabilities	13,550	13,937
Total liabilities	1,149,032	1,159,755
Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	0	0
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 8,348,441 and 8,320,479 shares issued; 8,288,793 and 8,272,591 shares outstanding	437	435
Additional paid - in capital	124,548	124,317
Retained earnings	9,855	7,939
Accumulated other comprehensive income	4,434	1,199
Treasury stock—common, 59,648 and 47,888 shares, at cost	(1,027)	(829)
Total shareholders’ equity	138,247	133,061
Total liabilities and shareholders’ equity	$ 1,287,279	$ 1,292,816

XML

Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Mar. 31, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Preferred Stock, par value (usd per share)	$ 1.25	$ 1.25
Preferred Stock, shares authorized	500,000	500,000
Preferred Stock, shares issued	0	0
Preferred Stock, shares outstanding	0	0
Common Stock, stated value (usd per share)	$ 0.05205	$ 0.05205
Common Stock, shares authorized	50,000,000	50,000,000
Common Stock, shares issued	8,348,441	8,320,479
Common Stock, shares outstanding	8,288,793	8,272,591
Treasury stock shares	59,648	47,888

XML

Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Interest and dividend income
Interest and fees on loans	$ 7,991	$ 7,327
Interest and dividends on investment securities
Taxable	1,464	1,820
Tax-exempt	441	55
Short-term investments	65	26
Total interest and dividend income	9,961	9,228
Interest expense
Interest on deposits	1,139	777
Interest on short-term borrowings	66	60
Interest on long-term debt	106	76
Total interest expense	1,311	913
Net interest income	8,650	8,315
Provision for loan losses	0	0
Net interest income after provision for loan losses	8,650	8,315
Noninterest income
Service charges on deposit accounts	1,303	1,193
Other service charges, commissions and fees	160	173
Trust department income	1,336	1,247
Brokerage income	449	437
Mortgage banking activities	642	520
Earnings on life insurance	268	229
Other income	87	40
Investment securities gains	1,420	1,529
Total noninterest income	5,665	5,368
Noninterest expenses
Salaries and employee benefits	6,183	5,900
Occupancy expense	526	624
Furniture and equipment	786	743
Data processing	635	511
Telephone and communication	176	190
Automated teller and interchange fees	161	206
Advertising and bank promotions	456	245
FDIC insurance	232	246
Legal	181	213
Other professional services	339	299
Directors compensation	231	157
Collection and problem loan	52	96
Real estate owned expenses	43	25
Taxes other than income	155	226
Intangible asset amortization	51	51
Other operating expenses	914	774
Total noninterest expenses	11,121	10,506
Income before income taxes	3,194	3,177
Income tax expense	614	715
Net income	$ 2,580	$ 2,462
Per share information:
Basic earnings per share (usd per share)	$ 0.32	$ 0.30
Diluted earnings per share (usd per share)	0.32	0.30
Dividends per share (usd per share)	$ 0.08	$ 0

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Statement of Comprehensive Income [Abstract]
Net income	$ 2,580	$ 2,462
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale arising during the period	6,396	4,523
Reclassification adjustment for gains realized in net income	(1,420)	(1,529)
Net unrealized gains	4,976	2,994
Tax effect	(1,741)	(1,048)
Total other comprehensive income, net of tax and reclassification adjustments	3,235	1,946
Total comprehensive income	$ 5,815	$ 4,408

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income	Treasury Stock
Beginning Balance at Dec. 31, 2014	$ 127,265	$ 430	$ 123,392	$ 1,887	$ 1,576	$ (20)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	2,462	0	0	2,462	0	0
Total other comprehensive income, net of taxes	1,946	0	0	0	1,946	0
Cash dividends ($0.08 per share in 2016)	0	0	0	0	0	0
Stock-based compensation plans:
Issuance of stock (31,358 shares), including compensation expense of $134	181	0	181	0	0	0
Issuance of stock through dividend reinvestment plan (10 shares)	0	0	0	0	0	0
Ending Balance at Mar. 31, 2015	131,854	430	123,573	4,349	3,522	(20)
Beginning Balance at Dec. 31, 2015	133,061	435	124,317	7,939	1,199	(829)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income	2,580	0	0	2,580	0	0
Total other comprehensive income, net of taxes	3,235	0	0	0	3,235	0
Cash dividends ($0.08 per share in 2016)	(664)	0	0	(664)	0	0
Stock-based compensation plans:
Issuance of stock (27,962 shares), including compensation expense of $237	237	2	235	0	0	0
Issuance of treasury stock (2,461 shares), including compensation expense of $3	43	0	(4)	0	0	47
Acquisition of treasury stock (14,221 shares)	(245)	0	0	0	0	(245)
Ending Balance at Mar. 31, 2016	$ 138,247	$ 437	$ 124,548	$ 9,855	$ 4,434	$ (1,027)

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Statement of Stockholders' Equity [Abstract]
Cash dividends (usd per share)	$ 0.08
Stock-based compensation plans, issuance of stock, shares		31,358
Stock-based compensation plans, issuance of stock, restricted shares	27,962
Compensation expense, issuance of stock		$ 134
Compensation expense, issuance of stock, restricted shares	$ 237
Issuance of treasury stock, shares (employee stock purchase plan in 2016)	2,461
Compensation expense, issuance of treasury stock	$ 3
Issuance of stock through dividend reinvestment plan, shares		10
Acquisition of treasury stock (in shares)	14,221

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash flows from operating activities
Net income	$ 2,580	$ 2,462
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of premiums on securities available for sale	1,372	1,534
Depreciation and amortization	741	741
Provision for loan losses	0	0
Stock-based compensation	240	134
Gain on sales of loans originated for sale	(547)	(415)
Mortgage loans originated for sale	(18,041)	(16,023)
Proceeds from sales of loans originated for sale	20,839	14,420
Net gain on disposal of other real estate owned	(55)	(7)
Writedown of other real estate owned	51	0
Net loss on disposal of premises and equipment	25	0
Deferred income taxes	728	726
Investment securities gains	(1,420)	(1,529)
Earnings on cash surrender value of life insurance	(268)	(229)
Decrease in accrued interest receivable	263	48
Increase in accrued interest payable and other liabilities	(387)	(116)
Other, net	(1,037)	(986)
Net cash provided by operating activities	5,084	760
Cash flows from investing activities
Proceeds from sales of available for sale securities	64,743	41,382
Maturities, repayments and calls of available for sale securities	6,816	7,838
Purchases of available for sale securities	0	(19,859)
Net redemptions of restricted investments in bank stocks	2,450	672
Net increase in loans	(23,262)	(23,842)
Purchases of bank premises and equipment	(6,321)	(126)
Improvements to other real estate owned	(35)	0
Proceeds from disposal of other real estate owned	305	253
Net cash provided by investing activities	44,696	6,318
Cash flows from financing activities
Net increase (decrease) in deposits	16,209	(3,948)
Net decrease in short term purchased funds	(26,463)	(11,470)
Proceeds from long-term debt	0	20,000
Payments on long-term debt	(82)	(10,078)
Dividends paid	(664)	0
Net proceeds from issuance of common stock	0	47
Acquisition of treasury stock	(245)	0
Issuance of treasury stock	40	0
Net cash (used in) financing activities	(11,205)	(5,449)
Net increase in cash and cash equivalents	38,575	1,629
Cash and cash equivalents at beginning of period	28,340	31,409
Cash and cash equivalents at end of period	66,915	33,038
Supplemental disclosures of cash flow information:
Interest	1,301	923
Income taxes	0	0
Supplemental schedule of noncash investing activities:
Other real estate acquired in settlement of loans	$ 51	$ 745

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – Orrstown Financial Services, Inc. (the “Company”) is a bank holding company (that has elected status as a financial holding company with the Board of Governors of the Federal Reserve System (the “FRB”)) whose primary activity consists of supervising its wholly-owned subsidiary, Orrstown Bank (the “Bank”). The Company operates through its office in Shippensburg, Pennsylvania. The Bank provides services through its network of 21 offices in Cumberland, Franklin, Lancaster, and Perry Counties of Pennsylvania and in Washington County, Maryland. The Bank engages in lending services for commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending. Deposit services include checking, savings, time, and money market deposits. The Bank also provides investment and brokerage services through its Orrstown Financial Advisors division. The Company and the Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation – The unaudited condensed consolidated financial statements of the Company and its subsidiary are presented for the three months ended March 31, 2016 and 2015 and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. However, unaudited information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. Information presented at December 31, 2015 is condensed from audited year-end financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 2015. The consolidated financial statements include the accounts of the Company and the Bank. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. All significant intercompany transactions and accounts have been eliminated.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Subsequent Events – GAAP establishes standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The subsequent events principle sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and specifies the disclosures that should be made about events or transactions that occur after the balance sheet date.

Concentration of Credit Risk – The Company generally grants commercial, residential, construction, municipal, and various forms of consumer lending to customers in its market area. Although the Company maintains a diversified loan portfolio, a significant portion of its customers’ ability to honor their contracts is dependent upon economic sectors for commercial real estate, including office space, retail strip centers, multi-family and hospitality, residential building operators, sales finance, sub-dividers and developers. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if collateral is deemed necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but generally includes real estate and equipment.

The types of securities the Company invests in are included in Note 2, “Securities Available for Sale” and the type of lending the Company engages in are included in Note 3, “Loans Receivable and Allowance for Loan Losses.”

Cash and Cash Equivalents – For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks, federal funds sold and interest bearing deposits due on demand, all of which have original maturities of 90 days or less. Net cash flows are reported for customer loan and deposit transactions, loans held for sale and redemption (purchases) of restricted investments in bank stocks, and short-term borrowings.

Restricted Investments in Bank Stocks – Restricted investments in bank stocks, which represents required investments in the common stock of correspondent banks, is carried at cost as of March 31, 2016 and December 31, 2015, and consists of common stock of the Federal Reserve Bank of Philadelphia (“Federal Reserve Bank”), Atlantic Community Bankers Bank and the Federal Home Loan Bank of Pittsburgh (“FHLB”).

Management evaluates the restricted investment in bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted, (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank.

Management believes no impairment charge is necessary related to the restricted investments in bank stocks as of March 31, 2016. However, security impairment analysis is completed quarterly and the determination that no impairment had occurred as of March 31, 2016 is no assurance that impairment may not occur in the future.

Securities – Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. “Trading” securities are recorded at fair value with changes in fair value included in earnings. As of March 31, 2016 and December 31, 2015, the Company had no held to maturity or trading securities. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities and approximate the level yield method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

The Company had no debt securities it deemed to be other than temporarily impaired at March 31, 2016 or December 31, 2015.

The Company’s securities are exposed to various risks, such as interest rate risk, market risk, and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the consolidated financial statements.

Loans Held for Sale – Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value (LOCM). Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in non-interest income.

Loans – The Company grants commercial, residential, commercial mortgage, construction, municipal, mortgage and various forms of consumer loans to its customers located principally in south-central Pennsylvania and northern Maryland. The ability of the Company’s debtors to honor their contracts is dependent largely upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a yield adjustment over the respective term of the loan.

For all classes of loans, the accrual of interest income on loans, including impaired loans, generally ceases when principal or interest is past due 90 days or more or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is reversed and charged against current interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending upon management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contractual terms of the loan.

Loans, the terms of which are modified, are classified as troubled debt restructurings ("TDRs") if a concession was granted in connection with the modification, for legal or economic reasons, related to the debtor’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, a temporary reduction in interest rates, or granting of an interest rate below market rates given the risk of the transaction. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs may be restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs are evaluated individually for impairment on a quarterly basis including monitoring of performance according to their modified terms.

Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

See Note 3, “Loans Receivable and Allowance for Loan Losses,” for additional details.

Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Loans Serviced – The Bank administers secondary market mortgage programs available through the FHLB and the Federal National Mortgage Association and offers residential mortgage products and services to customers. The Bank originates single-family residential mortgage loans for immediate sale in the secondary market, and retains the servicing of those loans. At March 31, 2016 and December 31, 2015, the balance of loans serviced for others was $324,221,000 and $317,793,000.

Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Cash Surrender Value of Life Insurance – The Company has purchased life insurance policies on certain employees. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Premises and Equipment – Buildings, improvements, equipment, furniture and fixtures are carried at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization has been provided generally on the straight-line method and is computed over the estimated useful lives of the various assets as follows: buildings and improvements, including leasehold improvements – 10 to 40 years; and furniture and equipment – 3 to 15 years. Repairs and maintenance are charged to operations as incurred, while major additions and improvements are capitalized. Gain or loss on retirement or disposal of individual assets is recorded as income or expense in the period of retirement or disposal.

Intangible Assets – Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. The Company’s intangible assets have finite lives and are amortized, on a straight line basis, over their estimated lives, generally 10 years for deposit premiums and 15 years for customer lists.

Mortgage Servicing Rights – The estimated fair value of mortgage servicing rights (MSRs) related to loans sold and serviced by the Company is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment, by comparing the carrying amount to estimated fair value. Fair value is determined periodically through a discounted cash flows valuation performed by a third party. Significant inputs to the valuation include expected servicing income, net of expense, the discount rate and the expected life of the underlying loans. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment through a charge against servicing income on the consolidated statement of income. If the Company determines, based on subsequent valuations, that impairment no longer exists or is reduced, the valuation allowance is reduced through a credit to earnings. The balance of mortgage servicing rights was $2,710,000 and $2,672,000 as of March 31, 2016 and December 31, 2015, and is included in other assets.

Foreclosed Real Estate – Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell the underlying collateral. Capitalized costs include any costs that significantly improve the value of the properties. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell. Foreclosed real estate totaled $495,000 and $710,000 as of March 31, 2016 and December 31, 2015 and is included in other assets.

Investments in Real Estate Partnerships – The Company currently has a 99% limited partner interest in several real estate partnerships in central Pennsylvania. These investments are affordable housing projects which entitle the Company to tax deductions and credits that expire through 2025. The Company accounts for its investments in affordable housing projects under the proportional amortization method when the criteria is met, which is limited to one investment entered into in 2015. Investments prior to 2015 did not meet the criteria, and are accounted for under the equity method of accounting. The recorded investment in these real estate partnerships, included in other assets in the balance sheet, totaled $5,328,000 and $5,450,000 as of March 31, 2016 and December 31, 2015, of which $2,150,000 and $2,205,000 will be accounted for under the proportional amortization method, respectively. Losses of $89,000 and $85,000 were recorded for the three months ended March 31, 2016 and 2015 and are included in other noninterest income. Losses on the investments accounted for under the proportional amortization method of $33,000, net of federal income tax benefit, is netted against income tax expense for the three months ended March 31, 2016. During the three months ended 2016 and 2015, the Company recognized federal tax credits from the projects totaling $184,000, and $119,000, which is included in income tax expense.

Advertising – The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expense was $151,000 and $112,000 for the three months ended March 31, 2016 and 2015.

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”) – The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities which are included in short-term borrowings. Under these Repurchase Agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these Repurchase Agreements are accounted for as collateralized financing arrangements (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 in the Company’s consolidated balance sheet, while the securities underlying the Repurchase Agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the Repurchase Agreement liabilities. In addition, as the Company 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 Company be in default (e.g., fails to make an interest payment to the counterparty). For the Repurchase Agreements, the collateral is held by the Company in a segregated custodial account under a third party agreement. Repurchase agreements are secured by U.S. Government Sponsored Enterprises mortgage-backed securities and mature overnight.

Stock Compensation Plans – The Company has stock compensation plans that cover employees and non-employee directors. Stock compensation accounting guidance (Financial Accounting Standards Board ("FASB") ASC 718, Compensation – Stock Compensation) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the grant date fair value of the stock award, including a Black-Scholes model for stock options. Compensation cost for all stock awards is calculated and recognized over the employees’ service period, generally defined as the vesting period.

Income Taxes – The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.

Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Treasury Stock – Common stock shares repurchased are recorded as treasury stock at cost.

Earnings Per Share – Basic earnings per share represent net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Restricted stock awards are included in weighted average common shares outstanding as they are earned. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company related solely to outstanding stock options and restricted stock awards.

Treasury shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income – Comprehensive income consists of net income and other comprehensive income. Other comprehensive income is limited to unrealized gains on securities available for sale for all years presented. The component of accumulated other comprehensive income, net of taxes, at March 31, 2016 and December 31, 2015 consisted of unrealized gains on securities available for sale and totaled $4,434,000 and $1,199,000.

Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Segment Reporting – The Company only operates in one significant segment – Community Banking. The Company’s non-banking activities are insignificant to the consolidated financial statements.

Reclassification – Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation. Reclassifications had no effect on prior year net income or shareholders' equity.

Recent Accounting Pronouncements – In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606). ASU 2014-9, as amended, creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The Company is evaluating the impact of this standard on its financial position and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as subsequently amended by ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. Further, the amendment indicates the SEC would not object to a ratable amortization of debt issuance costs on line-of-credit arrangements. These amendments were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company’s adoption of this standard on January 1, 2016 did not have a significant impact on the Company’s operating results or financial condition.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update provides updated accounting and reporting requirements for both public and non-public entities. The most significant provisions that will impact the Company is: 1) equity securities available for sale will be measured at fair value, with the changes in fair value recognized in the income statement; 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the balance sheet; 3) utilization of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) require separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The update will be effective for interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. Early adoption is not permitted. The Company is evaluating the impact of this standard on its financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update provides updated accounting and reporting requirements, which, among other things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) 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. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees 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 modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company anticipates that the impact on the balance sheet will result in an increase in assets and liabilities for its right of use assets and related lease liabilities for those leases that are outstanding at the date of adoption, however, it does not anticipate it will have a material impact on its results of operations. We are currently evaluating the other effects of adoption of this new standard on our financial position, including regulatory capital.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). The update will require recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled, eliminating the additional paid-in-capital pools. The guidance will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not anticipate this update will have a material impact on its financial position or results of operations.

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SECURITIES AVAILABLE FOR SALE

3 Months Ended

Mar. 31, 2016

Investments, Debt and Equity Securities [Abstract]

SECURITIES AVAILABLE FOR SALE

SECURITIES AVAILABLE FOR SALE

At March 31, 2016 and December 31, 2015, the investment securities portfolio was comprised exclusively of securities classified as “available for sale,” resulting in investment securities being carried at fair value. The amortized cost and fair values of investment securities available for sale at March 31, 2016 and December 31, 2015 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2016
U.S. Government Agencies	$	45,072	$	188	$	121	$	45,139
States and political subdivisions	124,302		5,246		367		129,181
U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities	129,219		1,556		0		130,775
GSE residential collateralized mortgage obligations (CMOs)	14,040		384		20		14,404
Private label CMOs	8,086		0		68		8,018
Total debt securities	320,719		7,374		576		327,517
Equity securities	50		23		0		73
Totals	$	320,769	$	7,397	$	576	$	327,590
December 31, 2015
U.S. Government Agencies	$	47,209	$	200	$	182	$	47,227
States and political subdivisions	124,421		2,483		943		125,961
GSE residential mortgage-backed securities	132,389		229		269		132,349
GSE residential CMOs	15,668		215		40		15,843
GSE commercial CMOs	63,598		735		563		63,770
Private label CMOs	8,944		0		43		8,901
Total debt securities	392,229		3,862		2,040		394,051
Equity securities	50		23		0		73
Totals	$	392,279	$	3,885	$	2,040	$	394,124

The following table shows gross unrealized losses and fair value of the Company’s available for sale securities that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015:

	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2016
U.S. Government Agencies	$	19,951	$	121	$	0	$	0	$	19,951	$	121
States and political subdivisions	1,205		2		5,313		365		6,518		367
GSE residential collateralized mortgage obligations (CMOs)	0		0		2,555		20		2,555		20
Private label CMOs	8,018		68		0		0		8,018		68
Total temporarily impaired securities	$	29,174	$	191	$	7,868	$	385	$	37,042	$	576
December 31, 2015
U.S. Government Agencies	$	27,640	$	182	$	0	$	0	$	27,640	$	182
States and political subdivisions	30,252		373		14,139		570		44,391		943
GSE residential mortgage-backed securities	82,911		269		0		0		82,911		269
GSE residential CMOs	0		0		4,237		40		4,237		40
GSE commercial CMOs	33,606		563		0		0		33,606		563
Private label CMOs	8,901		43		0		0		8,901		43
Total temporarily impaired securities	$	183,310	$	1,430	$	18,376	$	610	$	201,686	$	2,040

The Company had 11 securities and 53 securities at March 31, 2016 and December 31, 2015 in which the amortized cost exceed their values, as discussed below.

U.S. Agencies and Government Sponsored Enterprises (GSE).Six U.S. Agencies and GSE securities, including mortgage-backed securities and collateralized mortgage obligations, have amortized costs which exceed their fair values, four of which are in the less than 12 months, and two have amortized costs which exceed their fair value for more than 12 months at March 31, 2016. At December 31, 2015, the Company had 29 U.S. Government Agencies and GSE securities, including mortgage-backed and collateralized mortgage obligations with unrealized losses, 25 GSE securities have amortized costs which exceed their fair values for less than 12 months, and four have amortized costs which exceed their fair values for more than 12 months. These unrealized losses have been caused by a rise in interest rates or widening of spreads from the time the securities were purchased. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the par value basis of the investments. Because the Company did not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 or at December 31, 2015.

State and Political Subdivisions.Two state and political subdivision securities have amortized costs which exceeded their fair values, one in the less than 12 months, and one in the more than 12 months category at March 31, 2016. At December 31, 2015, 21 state and political subdivision securities have an amortized cost which exceeds their fair value, 16 of which are in the less than 12 months category, and five have amortized costs which exceed their fair value for more than 12 months. These unrealized losses have been caused by a rise in interest rates or a widening of spreads from the time the securities were purchased. Management considers the investment rating, the state of the issuer of the security and other credit support in determining whether the security is other-than-temporarily impaired. Because the Company did not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 or at December 31, 2015.

Private Label.Three private label collateralized mortgage obligations have unrealized losses, all of which were in the less than 12 months category at March 31, 2016. At December 31, 2015, three private label securities have an amortized cost which exceeds their fair value for less than 12 months. These unrealized losses have been caused by a rise in interest rates from the time the securities were purchased. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 or at December 31, 2015.

The amortized cost and fair values of securities available for sale at March 31, 2016 by contractual maturity are shown below. Contractual maturities will differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	365	$	366
Due after one year through five years	3,232		3,381
Due after five years through ten years	62,821		65,147
Due after ten years	102,956		105,426
Mortgage-backed securities and collateralized mortgage obligations	151,345		153,197
Total debt securities	320,719		327,517
Equity securities	50		73
	$	320,769	$	327,590

Gross gains on the sales of securities were $1,468,000 and $1,553,000 for the three months ended March 31, 2016 and 2015. Gross losses on securities available for sale were $48,000 and $24,000 for the three months ended March 31, 2016 and 2015.

Securities with a fair value of $254,252,000 and $250,397,000 at March 31, 2016 and December 31, 2015 were pledged to secure public funds and for other purposes as required or permitted by law.

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LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2016

Receivables [Abstract]

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The Company’s loan portfolio is broken down into segments to an appropriate level of disaggregation to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the segments were further broken down into classes, to allow for differing risk characteristics within a segment.

The risks associated with lending activities differ among the various loan classes, and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact the borrower’s ability to repay its loans, and impact the associated collateral.

The Company has various types of commercial real estate loans which have differing levels of credit risk associated with them. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.

Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner-occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships as compared to owner-occupied loans mentioned above.

Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, including the guarantors of the project or other collateral securing the loan.

Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured for our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy, as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the credit worthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending.

Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its customers for a specific utility.

The Company originates loans to its retail customers, including fixed-rate and adjustable rate first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the credit worthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The credit worthiness of the borrower is considered including credit scores and debt-to-income ratios, which generally cannot exceed 43%.

Installment and other loans’ credit risk are mitigated through prudent underwriting standards, including the evaluation of the credit worthiness of the borrower through credit scores and debt-to-income ratios, and if secured, the collateral value of the assets. As these loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, they typically present a greater risk to the Company than 1-4 family residential loans.

The loan portfolio, excluding residential loans held for sale, broken out by class, as of March 31, 2016 and December 31, 2015 was as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial real estate:
Owner-occupied	$	106,464	$	103,578
Non-owner occupied	154,731		145,401
Multi-family	37,664		35,109
Non-owner occupied residential	54,834		54,175
Acquisition and development:
1-4 family residential construction	7,270		9,364
Commercial and land development	42,245		41,339
Commercial and industrial	77,277		73,625
Municipal	62,302		57,511
Residential mortgage:
First lien	125,706		126,022
Home equity - term	16,578		17,337
Home equity - lines of credit	111,770		110,731
Installment and other loans	7,862		7,521
	$	804,703	$	781,713

In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including special mention, substandard, doubtful or loss. The “Special Mention” category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. “Substandard” loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. “Substandard” loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A “Doubtful” loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification of loss is deferred. “Loss” assets are considered uncollectible, as the underlying borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as “Loss,” there is little prospect of collecting the loan’s principal or interest and it is generally written off.

The Bank has a loan review policy and program which is designed to identify and manage risk in the lending function. The Enterprise Risk Management (“ERM”) Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Bank’s loan portfolio. This includes the monitoring of the lending activities of all Bank personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. The loan review program provides the Bank with an independent review of the Bank’s loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the “Pass” categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500,000, which includes confirmation of risk rating by the appropriate credit authority, including Credit Administration for loans in excess of $1,000,000. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the ERM Committee.

The following summarizes the Bank’s ratings based on its internal risk rating system as of March 31, 2016 and December 31, 2015:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
March 31, 2016
Commercial real estate:
Owner-occupied	$	98,959	$	1,771	$	3,705	$	2,029	$	0	$	106,464
Non-owner occupied	134,518		12,419		108		7,686		0		154,731
Multi-family	34,863		1,763		813		225		0		37,664
Non-owner occupied residential	51,490		1,282		1,231		792		39		54,834
Acquisition and development:
1-4 family residential construction	7,270		0		0		0		0		7,270
Commercial and land development	41,105		215		922		3		0		42,245
Commercial and industrial	74,651		1,352		560		714		0		77,277
Municipal	62,302		0		0		0		0		62,302
Residential mortgage:
First lien	120,882		0		44		4,780		0		125,706
Home equity - term	16,478		0		1		99		0		16,578
Home equity - lines of credit	110,850		251		102		567		0		111,770
Installment and other loans	7,846		0		0		9		7		7,862
	$	761,214	$	19,053	$	7,486	$	16,904	$	46	$	804,703
December 31, 2015
Commercial real estate:
Owner-occupied	$	96,715	$	1,124	$	3,630	$	2,109	$	0	$	103,578
Non-owner occupied	125,043		12,394		108		7,856		0		145,401
Multi-family	31,957		1,779		1,140		233		0		35,109
Non-owner occupied residential	50,601		1,305		1,374		895		0		54,175
Acquisition and development:
1-4 family residential construction	9,364		0		0		0		0		9,364
Commercial and land development	40,181		219		934		5		0		41,339
Commercial and industrial	70,967		1,380		544		734		0		73,625
Municipal	57,511		0		0		0		0		57,511
Residential mortgage:
First lien	121,214		0		0		4,808		0		126,022
Home equity - term	17,234		0		0		103		0		17,337
Home equity - lines of credit	109,731		230		180		590		0		110,731
Installment and other loans	7,504		0		0		17		0		7,521
	$	738,022	$	18,431	$	7,910	$	17,350	$	0	$	781,713

Classified loans may also be evaluated for impairment. For commercial real estate, acquisition and development and commercial and industrial loans, a loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, 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. Generally, loans that are more than 90 days past due are deemed 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 to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. The updated fair values are incorporated into the impairment analysis as of the next reporting period.

Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value; the loan has been identified as uncollectible; and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.

As of March 31, 2016 and December 31, 2015, nearly all of the Company’s impaired loans’ extent of impairment were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All restructured loan impairments were determined based on discounted cash flows for those loans classified as TDRs and still accruing interest. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it would also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.

According to policy, updated appraisals are generally required every 18 months for classified loans in excess of $250,000. The “as is value” provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances dictate that another value provided by the appraiser is more appropriate.

Generally, impaired loans secured by real estate are measured at fair value using certified real estate appraisals that had been completed within the last year. Appraised values are further discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on one or a combination of the following approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted. The approaches are as follows:

• Original appraisal – if the original appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the original certified appraised value may be used. Discounts as deemed appropriate for selling costs are factored into the appraised value in arriving at fair value.

• Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.

Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable agings or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.

The Company distinguishes Substandard loans on both an impaired and non-impaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A “Substandard” classification does not automatically meet the definition of “impaired.” A "Substandard" loan is one that is inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Extensions of credit so classified have well-defined weaknesses which may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as "Substandard." As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development and commercial and industrial loans rated “Substandard” to be collectively evaluated for impairment as opposed to evaluating these loans individually for impairment. Although we believe these loans have well defined weaknesses and meet the definition of “Substandard,” they are generally performing and management has concluded that it is likely it will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The following table summarizes impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as of March 31, 2016 and December 31, 2015. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and the partial charge-off will be recorded when final information is received.

	Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance
(Dollars in thousands)	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
March 31, 2016
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,029	$	3,301
Non-owner occupied	0		0		0		7,686		8,521
Multi-family	0		0		0		225		381
Non-owner occupied residential	39		39		39		792		1,080
Acquisition and development:
Commercial and land development	0		0		0		3		18
Commercial and industrial	0		0		0		714		768
Residential mortgage:
First lien	1,357		1,392		103		3,423		4,133
Home equity - term	0		0		0		99		106
Home equity - lines of credit	0		0		0		567		712
Installment and other loans	7		8		7		9		35
	$	1,403	$	1,439	$	149	$	15,547	$	19,055
December 31, 2015
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,109	$	3,344
Non-owner occupied	0		0		0		7,856		8,600
Multi-family	0		0		0		233		385
Non-owner occupied residential	0		0		0		895		1,211
Acquisition and development:
Commercial and land development	0		0		0		5		19
Commercial and industrial	0		0		0		734		780
Residential mortgage:
First lien	1,952		1,984		271		2,856		3,369
Home equity - term	0		0		0		103		110
Home equity - lines of credit	22		23		10		568		688
Installment and other loans	8		9		8		9		35
	$	1,982	$	2,016	$	289	$	15,368	$	18,541

The following tables summarize the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired, generally on a cash basis, for the three months ended March 31, 2016 and 2015:

	2016				2015
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,069	$	0	$	3,159	$	0
Non-owner occupied	7,771		0		1,658		0
Multi-family	229		0		521		0
Non-owner occupied residential	875		0		1,303		0
Acquisition and development:
Commercial and land development	4		0		392		2
Commercial and industrial	724		0		2,346		0
Residential mortgage:
First lien	4,776		9		5,241		9
Home equity - term	101		0		93		0
Home equity - lines of credit	589		0		512		0
Installment and other loans	17		0		25		0
	$	17,155	$	9	$	15,250	$	11

The following table presents impaired loans that are TDRs, with the recorded investment as of March 31, 2016 and December 31, 2015.

	March 31, 2016			December 31, 2015
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Residential mortgage:
First lien	9	$	1,044	8	$	793
	9	1,044		8	793
Nonaccruing:
Residential mortgage:
First lien	12	1,128		12	1,153
Installment and other loans	1	9		1	10
	13	1,137		13	1,163
	22	$	2,181	21	$	1,956

The loans presented above were considered TDRs as the result of the Company agreeing to below market interest rates for the risk of the transaction, allowing the loan to remain on interest-only status, or a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For TDRs in default of their original terms, impairment is generally determined on a collateral-dependent approach, except for accruing residential mortgage TDRs, which are generally on the discounted cash flow approach.

The following table presents the number of loans modified, and their pre-modification and post-modification investment balances for the three months ended March 31, 2016 and 2015:

	2016					2015
(Dollars in thousands)	Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment		Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment
Three Months Ended March 31,
Residential mortgage:
First lien	1	$	257	$	0	1	$	59	$	59
	1	$	257	$	0	1	$	59	$	59

Certain loans modified during a period may no longer be outstanding at the end of the period if the loan was paid off.

The following table presents restructured loans, included in nonaccrual loans, that were modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended March 31, 2016 and 2015:

	2016			2015
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Three Months Ended March 31,
Residential mortgage:
First lien	0	$	0	5	$	323
	0	$	0	5	$	323

No additional commitments have been made to borrowers whose loans are considered TDRs.

Management further monitors the performance and credit quality of the loan portfolio by analyzing the average length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2016 and December 31, 2015:

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
March 31, 2016
Commercial real estate:
Owner-occupied	$	104,251	$	184	$	0	$	0	$	184	$	2,029	$	106,464
Non-owner occupied	146,986		59		0		0		59		7,686		154,731
Multi-family	37,439		0		0		0		0		225		37,664
Non-owner occupied residential	53,970		34		0		0		34		830		54,834
Acquisition and development:
1-4 family residential construction	7,270		0		0		0		0		0		7,270
Commercial and land development	42,241		1		0		0		1		3		42,245
Commercial and industrial	76,563		0		0		0		0		714		77,277
Municipal	62,302		0		0		0		0		0		62,302
Residential mortgage:
First lien	121,180		746		43		0		789		3,737		125,706
Home equity - term	16,478		0		0		1		1		99		16,578
Home equity - lines of credit	110,902		301		0		0		301		567		111,770
Installment and other loans	7,823		23		0		0		23		16		7,862
	$	787,405	$	1,348	$	43	$	1	$	1,392	$	15,906	$	804,703
December 31, 2015
Commercial real estate:
Owner-occupied	$	101,395	$	74	$	0	$	0	$	74	$	2,109	$	103,578
Non-owner occupied	137,545		0		0		0		0		7,856		145,401
Multi-family	34,876		0		0		0		0		233		35,109
Non-owner occupied residential	53,280		0		0		0		0		895		54,175
Acquisition and development:
1-4 family residential construction	9,364		0		0		0		0		0		9,364
Commercial and land development	41,236		0		98		0		98		5		41,339
Commercial and industrial	72,846		24		21		0		45		734		73,625
Municipal	57,511		0		0		0		0		0		57,511
Residential mortgage:
First lien	120,119		1,844		44		0		1,888		4,015		126,022
Home equity - term	17,200		34		0		0		34		103		17,337
Home equity - lines of credit	109,740		286		91		24		401		590		110,731
Installment and other loans	7,488		16		0		0		16		17		7,521
	$	762,600	$	2,278	$	254	$	24	$	2,556	$	16,557	$	781,713

The Company maintains the allowance for loan losses at a level believed to be adequate by management for probable incurred credit losses. The allowance is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the allowance for loan losses utilizing a defined methodology, which considers specific credit evaluation of impaired loans as discussed above, past loan loss historical experience, and qualitative factors. Management believes the approach properly addresses the requirements of ASC Subtopic 310-10-35 for loans individually identified as impaired, and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance.

In connection with its quarterly evaluation of the adequacy of the allowance for loan losses, management continually reviews its methodology to determine if it continues to properly address the risk in the loan portfolio. For each loan class presented above, general allowances are provided for loans that are collectively evaluated for impairment, which is based on quantitative factors, principally historical loss trends for the respective loan class, adjusted for qualitative factors. In addition, an adjustment to the historical loss factors is made to account for delinquency and other potential risk not elsewhere defined within the Allowance for Loan and Lease Loss methodology.

Prior to December 31, 2015, the look back period for historical losses was 12 quarters, weighted one-half for the most recent four quarters, and one-quarter for each of the two previous four quarter periods in order to appropriately capture the loss history in the loan segment. Effective December 31, 2015, the Company extended the look back period to 16 quarters which will increase to 20 quarters through December 31, 2016. The extended period was on a prospective basis, more heavily weighted to the most recent four quarters. The look back period was extended as it was determined that a longer look back period is more consistent with the duration of an economic cycle. Management considers current economic, business, and real estate conditions, and the trends in historical charge-off percentages that resulted from applying partial charge-offs to impaired loans, and the impact of distressed loan sales during the year in determining the look back period.

In addition to the quantitative analysis, adjustments to the reserve requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors. As of March 31, 2016 and December 31, 2015, the qualitative factors used by management to adjust the historical loss percentage to the anticipated loss allocation, which may range from a minus 150 basis points to a positive 150 basis points per factor, include:

Nature and Volume of Loans – Loan growth in the current and subsequent quarters based on the Bank’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture, and the number of exceptions to loan policy, and supervisory loan to value exceptions, etc.

Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the composition of the Bank’s overall portfolio and management’s evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.

Underwriting Standards and Recovery Practices – Factors considered include changes to underwriting standards and perceived impact on anticipated losses, trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.

Delinquency Trends – Factors considered include the delinquency percentages noted in the portfolio relative to economic conditions, severity of the delinquencies, and whether the ratios are trending upwards or downwards.

Classified Loans Trends – Factors considered include the internal loan ratings of the portfolio, the severity of the ratings, and whether the loan segment’s ratings show a more favorable or less favorable trend, and underlying market conditions and their impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – Factors considered include the years of experience of senior and middle management and the lending staff and turnover of the staff, and instances of repeat criticisms of ratings.

Quality of Loan Review – Factors include the years of experience of the loan review staff, in-house versus outsourced provider of review, turnover of staff and the perceived quality of their work in relation to other external information.

National and Local Economic Conditions – Ratios and factors considered include trends in the consumer price index (CPI), unemployment rates, housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition

Activity in the allowance for loan losses for the three months ended March 31, 2016 and 2015 was as follows:

	Commercial															Consumer
(Dollars in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Municipal			Total			Residential Mortgage			Installment and Other			Total			Unallocated			Total
March 31, 2016
Balance, beginning of period	$	7,883		$	850		$	1,012		$	58		$	9,803		$	2,870		$	121		$	2,991		$	774		$	13,568
Provision for loan losses	33			(111		)	37			4			(37		)	45			102			147			(110		)	0
Charge-offs	0			0			(21		)	0			(21		)	(244		)	(64		)	(308		)	0			(329		)
Recoveries	80			0			2			0			82			6			20			26			0			108
Balance, end of period	$	7,996		$	739		$	1,030		$	62		$	9,827		$	2,677		$	179		$	2,856		$	664		$	13,347
March 31, 2015
Balance, beginning of period	$	9,462		$	697		$	806		$	183		$	11,148		$	2,262		$	119		$	2,381		$	1,218		$	14,747
Provision for loan losses	(63		)	(87		)	(137		)	(62		)	(349		)	494			15			509			(160		)	0
Charge-offs	(66		)	(22		)	(26		)	0			(114		)	(201		)	(20		)	(221		)	0			(335		)
Recoveries	13			0			22			0			35			12			2			14			0			49
Balance, end of period	$	9,346		$	588		$	665		$	121		$	10,720		$	2,567		$	116		$	2,683		$	1,058		$	14,461

The following table summarizes the ending loan balances individually evaluated for impairment based upon loan segment, as well as the related allowance for loan losses allocation for each at March 31, 2016 and December 31, 2015:

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
March 31, 2016
Loans allocated by:
Individually evaluated for impairment	$	10,771	$	3	$	714	$	0	$	11,488	$	5,446	$	16	$	5,462	$	0	$	16,950
Collectively evaluated for impairment	342,922		49,512		76,563		62,302		531,299		248,608		7,846		256,454		0		787,753
	$	353,693	$	49,515	$	77,277	$	62,302	$	542,787	$	254,054	$	7,862	$	261,916	$	0	$	804,703
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	39	$	0	$	0	$	0	$	39	$	103	$	7	$	110	$	0	$	149
Collectively evaluated for impairment	7,957		739		1,030		62		9,788		2,574		172		2,746		664		13,198
	$	7,996	$	739	$	1,030	$	62	$	9,827	$	2,677	$	179	$	2,856	$	664	$	13,347
December 31, 2015
Loans allocated by:
Individually evaluated for impairment	$	11,093	$	5	$	734	$	0	$	11,832	$	5,501	$	17	$	5,518	$	0	$	17,350
Collectively evaluated for impairment	327,170		50,698		72,891		57,511		508,270		248,589		7,504		256,093		0		764,363
	$	338,263	$	50,703	$	73,625	$	57,511	$	520,102	$	254,090	$	7,521	$	261,611	$	0	$	781,713
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	281	$	8	$	289	$	0	$	289
Collectively evaluated for impairment	7,883		850		1,012		58		9,803		2,589		113		2,702		774		13,279
	$	7,883	$	850	$	1,012	$	58	$	9,803	$	2,870	$	121	$	2,991	$	774	$	13,568

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INCOME TAXES

3 Months Ended

Mar. 31, 2016

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Pennsylvania. The Bank also files an income tax return in the State of Maryland. The Company is no longer subject to U.S. federal, state or local income tax examination by tax authorities for years before 2012.

The components of income tax expense for the three months ended March 31, 2016 and 2015 are summarized as follows:

	Three months ended March 31,
(Dollars in thousands)	2016			2015
Current year provision (benefit):
Federal	$	(112	)	$	(15	)
State	(2		)	4
	(114		)	(11		)
Deferred tax expense
Federal	722			720
State	6			6
	728			726
Net income tax expense	$	614		$	715

The provision for income taxes includes $497,000 and $535,000 of applicable income tax expense related to net securities gains for the three months ended March 31, 2016 and 2015.

The components of the net deferred tax asset, included in other assets, are as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	5,078	$	5,111
Deferred compensation	546		547
Retirement plans and salary continuation	1,865		1,824
Share-based compensation	417		343
Off balance sheet reserves	224		218
Nonaccrual loan interest	315		246
Goodwill	116		124
Bonus accrual	69		359
Low income housing credit carryforward	1,735		1,652
Alternative minimum tax credit carryforward	2,262		2,195
Charitable contribution carryforward	69		211
Net operating loss carryforward	3,798		4,431
Other	190		182
Total deferred tax assets	16,684		17,443
Deferred tax liabilities:
Depreciation	771		815
Net unrealized gains on securities available for sale	2,387		646
Mortgage servicing rights	699		669
Purchase accounting adjustments	336		352
Other	180		181
Total deferred tax liabilities	4,373		2,663
Net deferred tax asset	$	12,311	$	14,780

The provision for income taxes differs from that computed by applying statutory rates to income before income taxes primarily due to the effects of tax-exempt income, non-deductible expenses and tax credits.

As of March 31, 2016, the Company had charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2019, 2036 and 2032, respectively.

In assessing whether or not some or all of our deferred tax asset is more likely than not to be realized in the future, management considers all positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of deferred tax assets is dependent upon existence, or generation, of taxable income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible. Management considered projected future taxable income, length of time needed for carryforwards to reverse, available tax planning strategies, and other factors in making its assessment that it was more likely than not the net deferred tax assets would be realized, and that no valuation allowance was required at March 31, 2016 or December 31, 2015.

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SHARE-BASED COMPENSATION PLANS

3 Months Ended

Mar. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

SHARE-BASED COMPENSATION PLANS

SHARE-BASED COMPENSATION PLANS

The Company maintains share-based compensation plans, the purpose of which are to provide officers, employees, and non-employee members of the Board of Directors of the Company and the Bank, with additional incentive to further the success of the Company. In May 2011, the shareholders of the Company approved the 2011 Orrstown Financial Services, Inc. Incentive Stock Plan (the “Plan”). Under the Plan, 381,920 shares of the common stock of the Company were reserved to be issued. As of March 31, 2016, 151,445 shares were available to be issued under the Plan.

Incentive awards under the Plan may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees of the Company and its present or future subsidiaries, and members of the Board of Directors of the Company or any subsidiary of the Company, are eligible to participate in the Plan. The Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting of awards and restrictions on shares. Generally, awards are nonqualified under the IRS code, unless the awards are deemed to be incentive awards to employees, at the Compensation Committee’s discretion.

A roll forward of the Company’s nonvested restricted shares for the three months ended March 31, 2016 is presented below:

	Shares		Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	197,381		$	16.17
Granted	29,045		17.69
Forfeited	(1,083	)	17.26
Vested	(2,500	)	10.43
Nonvested shares, at period end	222,843		$	16.43

For thethreemonths endedMarch 31, 2016and 2015,$237,000and$131,000was recognized as expense on the restricted stock awards, with tax benefits recorded of$83,000and$46,000for the respective periods.As of March 31, 2016 and December 31, 2015, the unrecognized compensation expense related to the stock awards were $2,495,000 and $2,293,000. The unrecognized compensation expense is expected to be recognized over a weighted-average period of 3.0 years.

A roll forward of the Company’s outstanding stock options for the three months ended March 31, 2016 is presented below:

	Shares		Weighted Average Exercise Price
Outstanding at beginning of year	101,460		$	28.72
Forfeited	(2,050	)	26.54
Options outstanding and exercisable, at period end	99,410		$	28.76

The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. All options are fully vested upon issuance. Information pertaining to options outstanding and exercisable at March 31, 2016 is as follows:

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$21.14 - $24.99	35,674	4.15	$	21.47
$25.00 - $29.99	2,792	4.01	25.76
$30.00 - $34.99	38,640	1.53	31.28
$35.00 - $37.59	22,304	1.25	36.44
$21.14 - $37.59	99,410	2.48	$	28.76

The options outstanding and exercisable had no intrinsic value at March 31, 2016 and December 31, 2015 as each exercise price exceeded the market value.

The Company also maintains an employee stock purchase plan, in order to provide employees of the Company and its subsidiaries an opportunity to purchase stock of the Company. Under the employee stock purchase plan, eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary, up to the IRS limit, at the lower of 95% of the fair market value of the shares on the semi-annual offering date, or related purchase date. The Company reserved 350,000 shares of its common stock, after making adjustments for stock dividends and a stock split, to be issued under the employee stock purchase plan. As of March 31, 2016, 189,877 shares were available to be issued under the employee stock purchase plan. Employees purchased 2,461 and 2,964 shares at a weighted average price of $16.57 and $15.74 for the three months ended March 31, 2016 and 2015. Compensation expense recognized on the employee stock purchase plan totaled $3,000 and $3,000 for the three months ended March 31, 2016 and 2015.

The Company uses a combination of issuing new shares or treasury shares to meet stock compensation exercises depending on market conditions.

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SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

3 Months Ended

Mar. 31, 2016

Equity [Abstract]

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

On January 19, 2016, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (the "Commission") that provides for up to an aggregate of $100,000,000, through the sale of common stock, preferred stock, warrants, debt securities, and units. To date, the Company has not issued any securities under this shelf registration.

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Although applicable to the Bank, prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

Quantitative measures established by regulators to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (as set forth in the following table) of total and Tier 1 capital (as defined in regulations) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to risk weighted assets, and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2016 and December 31, 2015, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Effective January 1, 2015, the Company and Bank became subject to final rules establishing a new comprehensive capital framework for U.S. banking organizations, including community banks (the "Basel III Capital Rules"), which substantially revised the risk-based capital requirements in comparison to the previously existing U.S. risk-based capital rules. The Basel III Capital Rules, among other things, (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) increased the minimum requirements for Tier 1 Capital ratio as well as the minimum levels to be considered well capitalized under prompt corrective action; (iii) and introduced the "capital conservation buffer”, designed to absorb losses during periods of economic stress. Institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer are subject to constraints on dividends, equity repurchases and discretionary bonuses to executive officers based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

As of March 31, 2016, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.

The Company and the Bank’s actual capital ratios as of March 31, 2016 and December 31, 2015, are also presented in the table.

	Actual				Minimum Capital Requirement				Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2016
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	137,389	15.7	%	$	70,181	8.0	%	n/a		n/a
Orrstown Bank	121,703		13.9	%	70,133		8.0	%	$	87,666	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	52,636		6.0	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	52,599		6.0	%	70,133		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	39,477		4.5	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	39,450		4.5	%	56,983		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	126,352		9.8	%	51,579		4.0	%	n/a		n/a
Orrstown Bank	110,673		8.6	%	51,609		4.0	%	64,511		5.0	%
December 31, 2015
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	134,562	15.8	%	$	68,078	8.0	%	n/a		n/a
Orrstown Bank	118,671		14.0	%	68,027		8.0	%	$	85,034	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	51,058		6.0	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	51,021		6.0	%	68,027		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	38,294		4.5	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	38,265		4.5	%	55,272		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	123,825		9.8	%	50,684		4.0	%	n/a		n/a
Orrstown Bank	107,942		8.5	%	50,695		4.0	%	63,368		5.0	%

On September 14, 2015, the Board of Directors of the Company authorized a stock repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in the open market, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. Purchases may be made from time to time on open market or privately negotiated transactions. The repurchase program may be suspended or discontinued at any time. As of March 31, 2016, 61,298 shares had been repurchased under the program at a total cost of $1,051,000, or $17.15 per share.

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EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2016

Earnings Per Share [Abstract]

EARNINGS PER SHARE

EARNINGS PER SHARE

Earnings per share for the three months ended March 31, 2016 and 2015 were as follows:

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2016		2015
Net income	$	2,580	$	2,462
Weighted average shares outstanding (basic)	8,071		8,110
Impact of common stock equivalents	68		24
Weighted average shares outstanding (diluted)	8,139		8,134
Per share information:
Basic earnings per share	$	0.32	$	0.30
Diluted earnings per share	0.32		0.30

Stock options amounting to 99,000 and 130,000 shares of common stock were not considered in computing diluted earnings per share for the three months ended March 31, 2016 and 2015 as their exercise would have been antidilutive as the exercise price exceeded the average market value.

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

3 Months Ended

Mar. 31, 2016

Fair Value Disclosures [Abstract]

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. 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 balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’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 and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

	Contract or Notional Amount
(Dollars in thousands)	March 31, 2016		December 31, 2015
Commitments to fund:
Revolving, open ended home equity loans	$	115,813	$	110,473
1-4 family residential construction loans	5,464		6,153
Commercial real estate, construction and land development loans	41,065		14,174
Commercial, industrial and other loans	87,971		84,480
Standby letters of credit	7,002		6,510

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 and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company holds collateral supporting those commitments when deemed necessary by management. The current amount of liability, as of March 31, 2016 and December 31, 2015, for guarantees under standby letters of credit issued was not material.

The Company currently maintains a reserve in other liabilities totaling $519,000 and $472,000 at March 31, 2016 and December 31, 2015 for off-balance sheet credit exposures that currently are not funded, based on historical loss experience of the related loan class. For the three months ended March 31, 2016 and 2015, the amount expensed (recovered) was $47,000 and $(68,000).

The Company has sold loans to the Federal Home Loan Bank of Chicago as part of its Mortgage Partnership Finance Program (“MPF Program”). Under the terms of the MPF Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan that is sold under the program is “credit enhanced” such that the individual loan’s rating is raised to “AA,” as determined by the Federal Home Loan Bank of Chicago. The sum of total loans sold under the MPF Program with limited recourse was $42,478,000 and $44,124,000 at March 31, 2016 and December 31, 2015, with limited recourse back to the Company on these loans of $8,199,000 and $8,230,000 at these dates. Many of the loans sold under the MPF Program have primary mortgage insurance, which reduces the Company’s overall exposure. The Company is in the process of foreclosing on loans sold under the MPF Program or recovering amounts previously charged off, with a resulting net charge (recovery) of $(52,000) and $40,000 for the three months ended March 31, 2016 and 2015. These amounts, charged to other expenses represent an estimate of the Company’s loss under its recourse exposure.

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FAIR VALUE DISCLOSURES

3 Months Ended

Mar. 31, 2016

Fair Value Disclosures [Abstract]

FAIR VALUE DISCLOSURES

FAIR VALUE DISCLOSURES

The Company meets the requirements for disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Fair value measurements under GAAP describes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that employ unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value.

The three levels are defined as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market for the asset or liability, for substantially the full term of the financial instrument. Level 3 – the valuation methodology is derived from model-based techniques in which at least one significant input is unobservable to the fair value measurement and based on the Company’s own assumptions about market participants’ assumptions.

Following is a description of the valuation methodologies used for instruments measured on a recurring basis at estimated fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. All of the Company’s securities are classified as available for sale.

The Company had no fair value liabilities measured on a recurring basis at March 31, 2016 and December 31, 2015. A summary of assets at March 31, 2016 and December 31, 2015, measured at estimated fair value on a recurring basis was as follows:

(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2016
Securities available for sale:
U.S. Government Agencies	$	0	$	45,139	$	0	$	45,139
States and political subdivisions	0		129,181		0		129,181
U.S. Government Sponsored enterprises (GSE) residential mortgage-backed securities	0		130,775		0		130,775
GSE residential collateralized mortgage obligations (CMOs)	0		14,404		0		14,404
Private label CMOs	0		8,018		0		8,018
Total debt securities	0		327,517		0		327,517
Equity securities - financial services	0		73		0		73
Total securities	$	0	$	327,590	$	0	$	327,590
December 31, 2015
Securities available for sale:
U.S. Government Agencies	$	0	$	47,227	$	0	$	47,227
States and political subdivisions	0		125,961		0		125,961
GSE residential mortgage-backed securities	0		132,349		0		132,349
GSE residential collateralized mortgage obligations (CMOs)	0		15,843		0		15,843
GSE commercial CMOs	0		63,770		0		63,770
Private label CMOs	0		8,901		0		8,901
Total debt securities	0		394,051		0		394,051
Equity securities - financial services	0		73		0		73
Total securities	$	0	$	394,124	$	0	$	394,124

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans

The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral, or discounted cash flows based on a market rate of interest for performing TDRs. For collateral dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). For discounted cash flow impairment measurement on residential mortgage loans, the Company discounts cash flows on a particular credit, utilizing a market rate of interest that adequately reflects the terms and conditions of the note, and the credit risk associated with it. Impaired loans with an allocation to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income. Specific allocations to the allowance for loan losses or partial charge-offs were $2,234,000 and $2,246,000 at March 31, 2016 and December 31, 2015. Changes in the fair value of impaired loans for those still held at March 31, considered in the determination as to the provision for loan losses, totaled $(5,000) and $862,000 for the three months ended March 31, 2016 and 2015.

Foreclosed Real Estate

Other real estate property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Specific charges to value the real estate owned at the lower of cost or fair value on properties held at March 31, 2016 and December 31, 2015 were $168,000 and $129,000. Changes in the fair value of foreclosed real estate for those still held at March 31, charged to real estate expenses, totaled $51,000 and $0 for the three months ended March 31, 2016 and 2015.

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

(Dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
March 31, 2016
Impaired loans	$	4,850	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0% - 60% discount
				Management adjustments for liquidation expenses	6% - 44% discount
Foreclosed real estate	265		Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	10% - 20% discount
				Management adjustments for liquidation expenses	5% - 6% discount
December 31, 2015
Impaired loans	$	4,757	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0% - 70% discount
				Management adjustments for liquidation expenses	6% - 44% discount
Foreclosed real estate	175		Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	10% - 20% discount
				Management adjustments for liquidation expenses	5% - 6% discount

A summary of assets at March 31, 2016 and December 31, 2015, measured at estimated fair value on a nonrecurring basis was as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2016
Impaired Loans
Commercial real estate:
Owner-occupied	$	0	$	0	$	836	$	836
Non-owner occupied	0		0		736		736
Multi-family	0		0		225		225
Non-owner occupied residential	0		0		507		507
Acquisition and development:
Commercial and land development	0		0		3		3
Residential mortgage:
First lien	0		0		2,340		2,340
Home equity - lines of credit	0		0		194		194
Installment and other loans	0		0		9		9
Impaired loans, net	$	0	$	0	$	4,850	$	4,850
Foreclosed real estate
Residential	$	0	$	0	$	186	$	186
Commercial and land development	0		0		79		79
Total foreclosed real estate	$	0	$	0	$	265	$	265
December 31, 2015
Impaired Loans
Commercial real estate:
Owner-occupied	$	0	$	0	$	881	$	881
Non-owner occupied	0		0		736		736
Multi-family	0		0		233		233
Non-owner occupied residential	0		0		570		570
Acquisition and development:
Commercial and land development	0		0		5		5
Residential mortgage:
First lien	0		0		2,094		2,094
Home equity - lines of credit	0		0		229		229
Installment and other loans	0		0		9		9
Impaired loans, net	$	0	$	0	$	4,757	$	4,757
Foreclosed real estate
Residential	$	0	$	0	$	101	$	101
Commercial and land development	0		0		74		74
Total foreclosed real estate	$	0	$	0	$	175	$	175

Fair values of financial instruments

In addition to those disclosed above, the following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and Due from Banks and Interest Bearing Deposits with Banks

The carrying amounts of cash and due from banks and interest bearing deposits with banks approximate their fair value.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. These loans typically consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.

Loans Receivable

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality.

Restricted Investment in Bank Stock

These investments are carried at cost. The Company is required to maintain minimum investment balances in these stocks, which are not actively traded and therefore have no readily determinable market value.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposits and IRAs are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market to a schedule of aggregated expected maturities on time deposits.

Short-Term Borrowings

The carrying amounts of federal funds purchased, borrowings under Repurchase Agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements.

Long-Term Debt

The fair value of the Company’s fixed rate long-term borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts of variable-rate long-term borrowings approximate their fair values at the reporting date.

Accrued Interest

The carrying amounts of accrued interest receivable and payable approximate their fair values.

Off-Balance-Sheet Instruments

The Company generally does not charge commitment fees. Fees for standby letters of credit and other off-balance-sheet instruments are not significant.

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2016 and December 31, 2015:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2016
Financial Assets
Cash and due from banks	$	12,281	$	12,281	$	12,281	$	0	$	0
Interest bearing deposits with banks	54,634		54,634		54,634		0		0
Restricted investments in bank stocks	6,270		n/a		n/a		n/a		n/a
Securities available for sale	327,590		327,590		0		327,590		0
Loans held for sale	3,499		3,595		0		3,595		0
Loans, net of allowance for loan losses	791,356		810,260		0		0		810,260
Accrued interest receivable	3,582		3,582		0		1,709		1,873
Financial Liabilities
Deposits	1,048,376		1,055,702		0		1,055,702		0
Short-term borrowings	62,693		62,693		0		62,693		0
Long-term debt	24,413		25,259		0		25,259		0
Accrued interest payable	376		376		0		376		0
Off-balance sheet instruments	0		0		0		0		0
December 31, 2015
Financial Assets
Cash and due from banks	$	11,412	$	11,412	$	11,412	$	0	$	0
Interest bearing deposits with banks	16,928		16,928		16,928		0		0
Restricted investments in bank stocks	8,720		n/a		n/a		n/a		n/a
Securities available for sale	394,124		394,124		0		394,124		0
Loans held for sale	5,917		6,045		0		6,045		0
Loans, net of allowance for loan losses	768,145		776,067		0		0		776,067
Accrued interest receivable	3,845		3,845		0		2,257		1,588
Financial Liabilities
Deposits	1,032,167		1,032,265		0		1,032,265		0
Short-term borrowings	89,156		89,156		0		89,156		0
Long-term debt	24,495		25,357		0		25,357		0
Accrued interest payable	366		366		0		366		0
Off-balance sheet instruments	0		0		0		0		0

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CONTINGENCIES

3 Months Ended

Mar. 31, 2016

Commitments and Contingencies Disclosure [Abstract]

CONTINGENCIES

CONTINGENCIES

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.

The Company, the Bank and certain current and former directors and executive officers (collectively, “Orrstown Defendants”) are defendants in a putative class action filed by Southeastern Pennsylvania Transportation Authority (“SEPTA”) on May 25, 2012, in the United States District Court for the Middle District of Pennsylvania. In a later amended complaint, the list of defendants was expanded to include the Company’s independent registered public accounting firm and the underwriters of the Company’s March 2010 public offering of common stock. The complaint, as amended, alleges among other things that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 15, 2010 through April 5, 2012, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief.

On June 22, 2015, the Court dismissed without prejudice SEPTA’s amended complaint against all defendants, finding that SEPTA failed to state a claim under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. The Court ordered that, within 30 days, SEPTA either seek leave to amend its amended complaint, accompanied by the proposed amendment, or file a notice of its intention to stand on the amended complaint.

On July 22, 2015, SEPTA filed a motion for leave to amend under Local Rule 15.1, as allowed by the Court’s ruling on June 22, 2015. Many of the allegations of the proposed second amended complaint are essentially the same or similar to the allegations of the dismissed amended complaint. The proposed second amended complaint also alleges that the Orrstown Defendants did not publicly disclose certain alleged failures of internal controls over loan underwriting, risk management, and financial reporting during the period 2009 to 2012, in violation of the federal securities laws. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend and SEPTA filed its second amended complaint that same day.

On February 25, 2016, the Court issued a scheduling Order directing: all defendants to file any motions to dismiss by March 18, 2016; SEPTA to file an omnibus opposition to defendants’ motions to dismiss by April 8, 2016; and all defendants to file reply briefs in support of their motions to dismiss by April 22, 2016. Defendants timely filed their motions to dismiss the second amended complaint and the parties filed their briefs in accordance with the Court-ordered schedule. The February 25, 2016 Order stays all discovery and other deadlines in the case (including the filing of SEPTA’s motion for class certification) pending the outcome of the motions to dismiss.

The Company believes that the allegations of SEPTA’s second amended complaint are without merit and intends to vigorously defend itself against those claims.

Given the litigation is still in the pleading stage, it is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

Nature of Operations

Nature of Operations – Orrstown Financial Services, Inc. (the “Company”) is a bank holding company (that has elected status as a financial holding company with the Board of Governors of the Federal Reserve System (the “FRB”)) whose primary activity consists of supervising its wholly-owned subsidiary, Orrstown Bank (the “Bank”). The Company operates through its office in Shippensburg, Pennsylvania. The Bank provides services through its network of 21 offices in Cumberland, Franklin, Lancaster, and Perry Counties of Pennsylvania and in Washington County, Maryland. The Bank engages in lending services for commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending. Deposit services include checking, savings, time, and money market deposits. The Bank also provides investment and brokerage services through its Orrstown Financial Advisors division. The Company and the Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation

Basis of Presentation – The unaudited condensed consolidated financial statements of the Company and its subsidiary are presented for the three months ended March 31, 2016 and 2015 and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. However, unaudited information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. Information presented at December 31, 2015 is condensed from audited year-end financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 2015. The consolidated financial statements include the accounts of the Company and the Bank. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. All significant intercompany transactions and accounts have been eliminated.

Use of Estimates

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Subsequent Events

Subsequent Events – GAAP establishes standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The subsequent events principle sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and specifies the disclosures that should be made about events or transactions that occur after the balance sheet date.

Concentration of Credit Risk

Concentration of Credit Risk – The Company generally grants commercial, residential, construction, municipal, and various forms of consumer lending to customers in its market area. Although the Company maintains a diversified loan portfolio, a significant portion of its customers’ ability to honor their contracts is dependent upon economic sectors for commercial real estate, including office space, retail strip centers, multi-family and hospitality, residential building operators, sales finance, sub-dividers and developers. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if collateral is deemed necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but generally includes real estate and equipment.

The types of securities the Company invests in are included in Note 2, “Securities Available for Sale” and the type of lending the Company engages in are included in Note 3, “Loans Receivable and Allowance for Loan Losses.”

Cash and Cash Equivalents

Cash and Cash Equivalents – For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks, federal funds sold and interest bearing deposits due on demand, all of which have original maturities of 90 days or less. Net cash flows are reported for customer loan and deposit transactions, loans held for sale and redemption (purchases) of restricted investments in bank stocks, and short-term borrowings.

Restricted Investments in Bank Stocks

Restricted Investments in Bank Stocks – Restricted investments in bank stocks, which represents required investments in the common stock of correspondent banks, is carried at cost as of March 31, 2016 and December 31, 2015, and consists of common stock of the Federal Reserve Bank of Philadelphia (“Federal Reserve Bank”), Atlantic Community Bankers Bank and the Federal Home Loan Bank of Pittsburgh (“FHLB”).

Management evaluates the restricted investment in bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted, (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank.

Management believes no impairment charge is necessary related to the restricted investments in bank stocks as of March 31, 2016. However, security impairment analysis is completed quarterly and the determination that no impairment had occurred as of March 31, 2016 is no assurance that impairment may not occur in the future.

Securities

Securities – Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. “Trading” securities are recorded at fair value with changes in fair value included in earnings. As of March 31, 2016 and December 31, 2015, the Company had no held to maturity or trading securities. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities and approximate the level yield method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

The Company had no debt securities it deemed to be other than temporarily impaired at March 31, 2016 or December 31, 2015.

The Company’s securities are exposed to various risks, such as interest rate risk, market risk, and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the consolidated financial statements.

Loans Held for Sale

Loans Held for Sale – Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value (LOCM). Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in non-interest income.

Loans

Loans – The Company grants commercial, residential, commercial mortgage, construction, municipal, mortgage and various forms of consumer loans to its customers located principally in south-central Pennsylvania and northern Maryland. The ability of the Company’s debtors to honor their contracts is dependent largely upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a yield adjustment over the respective term of the loan.

For all classes of loans, the accrual of interest income on loans, including impaired loans, generally ceases when principal or interest is past due 90 days or more or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is reversed and charged against current interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending upon management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contractual terms of the loan.

Loans, the terms of which are modified, are classified as troubled debt restructurings ("TDRs") if a concession was granted in connection with the modification, for legal or economic reasons, related to the debtor’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, a temporary reduction in interest rates, or granting of an interest rate below market rates given the risk of the transaction. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs may be restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs are evaluated individually for impairment

Allowance for Loan Losses

Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Loan Commitments and Related Financial Instruments

Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Loans Serviced

Loans Serviced – The Bank administers secondary market mortgage programs available through the FHLB and the Federal National Mortgage Association and offers residential mortgage products and services to customers. The Bank originates single-family residential mortgage loans for immediate sale in the secondary market, and retains the servicing of those loans.

Transfers of Financial Assets

Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Cash Surrender Value of Life Insurance

Cash Surrender Value of Life Insurance – The Company has purchased life insurance policies on certain employees. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Premises and Equipment

Premises and Equipment – Buildings, improvements, equipment, furniture and fixtures are carried at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization has been provided generally on the straight-line method and is computed over the estimated useful lives of the various assets as follows: buildings and improvements, including leasehold improvements – 10 to 40 years; and furniture and equipment – 3 to 15 years. Repairs and maintenance are charged to operations as incurred, while major additions and improvements are capitalized. Gain or loss on retirement or disposal of individual assets is recorded as income or expense in the period of retirement or disposal.

Intangible Assets

Intangible Assets – Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. The Company’s intangible assets have finite lives and are amortized, on a straight line basis, over their estimated lives, generally 10 years for deposit premiums and 15 years for customer lists.

Mortgage Servicing Rights

Mortgage Servicing Rights – The estimated fair value of mortgage servicing rights (MSRs) related to loans sold and serviced by the Company is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment, by comparing the carrying amount to estimated fair value. Fair value is determined periodically through a discounted cash flows valuation performed by a third party. Significant inputs to the valuation include expected servicing income, net of expense, the discount rate and the expected life of the underlying loans. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment through a charge against servicing income on the consolidated statement of income. If the Company determines, based on subsequent valuations, that impairment no longer exists or is reduced, the valuation allowance is reduced through a credit to earnings.

Foreclosed Real Estate

Foreclosed Real Estate – Real estate properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell the underlying collateral. Capitalized costs include any costs that significantly improve the value of the properties. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated costs to sell.

Investments In Real Estate Partnerships

Investments in Real Estate Partnerships – The Company currently has a 99% limited partner interest in several real estate partnerships in central Pennsylvania. These investments are affordable housing projects which entitle the Company to tax deductions and credits that expire through 2025. The Company accounts for its investments in affordable housing projects under the proportional amortization method when the criteria is met, which is limited to one investment entered into in 2015. Investments prior to 2015 did not meet the criteria, and are accounted for under the equity method of accounting.

Advertising

Advertising – The Company follows the policy of charging costs of advertising to expense as incurred.

Securities Sold Under Agreements to Repurchase

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”) – The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities which are included in short-term borrowings. Under these Repurchase Agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these Repurchase Agreements are accounted for as collateralized financing arrangements (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 in the Company’s consolidated balance sheet, while the securities underlying the Repurchase Agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the Repurchase Agreement liabilities. In addition, as the Company 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 Company be in default (e.g., fails to make an interest payment to the counterparty). For the Repurchase Agreements, the collateral is held by the Company in a segregated custodial account under a third party agreement. Repurchase agreements are secured by U.S. Government Sponsored Enterprises mortgage-backed securities and mature overnight.

Stock Compensation Plans

Stock Compensation Plans – The Company has stock compensation plans that cover employees and non-employee directors. Stock compensation accounting guidance (Financial Accounting Standards Board ("FASB") ASC 718, Compensation – Stock Compensation) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured based on the grant date fair value of the stock award, including a Black-Scholes model for stock options. Compensation cost for all stock awards is calculated and recognized over the employees’ service period, generally defined as the vesting period.

Income Taxes

Income Taxes – The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.

Loss Contingencies

Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Treasury Stock

Treasury Stock – Common stock shares repurchased are recorded as treasury stock at cost.

Earnings Per Share

Earnings Per Share – Basic earnings per share represent net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Restricted stock awards are included in weighted average common shares outstanding as they are earned. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company related solely to outstanding stock options and restricted stock awards.

Treasury shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income

Comprehensive Income – Comprehensive income consists of net income and other comprehensive income. Other comprehensive income is limited to unrealized gains on securities available for sale for all years presented.

Fair Value of Financial Instruments

Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Segment Reporting

Segment Reporting – The Company only operates in one significant segment – Community Banking. The Company’s non-banking activities are insignificant to the consolidated financial statements.

Reclassification

Reclassification – Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation.

Recent Accounting Pronouncements

Recent Accounting Pronouncements – In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606). ASU 2014-9, as amended, creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that period. The Company is evaluating the impact of this standard on its financial position and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as subsequently amended by ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The update simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. Further, the amendment indicates the SEC would not object to a ratable amortization of debt issuance costs on line-of-credit arrangements. These amendments were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company’s adoption of this standard on January 1, 2016 did not have a significant impact on the Company’s operating results or financial condition.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update provides updated accounting and reporting requirements for both public and non-public entities. The most significant provisions that will impact the Company is: 1) equity securities available for sale will be measured at fair value, with the changes in fair value recognized in the income statement; 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the balance sheet; 3) utilization of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) require separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The update will be effective for interim and annual periods beginning after December 15, 2017, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. Early adoption is not permitted. The Company is evaluating the impact of this standard on its financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update provides updated accounting and reporting requirements, which, among other things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) 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. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees 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 modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company anticipates that the impact on the balance sheet will result in an increase in assets and liabilities for its right of use assets and related lease liabilities for those leases that are outstanding at the date of adoption, however, it does not anticipate it will have a material impact on its results of operations. We are currently evaluating the other effects of adoption of this new standard on our financial position, including regulatory capital.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). The update will require recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled, eliminating the additional paid-in-capital pools. The guidance will be effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not anticipate this update will have a material impact on its financial position or results of operations.

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SECURITIES AVAILABLE FOR SALE (Tables)

3 Months Ended

Mar. 31, 2016

Investments, Debt and Equity Securities [Abstract]

Amortized Cost and Fair Values of Investment Securities Available for Sale

The amortized cost and fair values of investment securities available for sale at March 31, 2016 and December 31, 2015 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2016
U.S. Government Agencies	$	45,072	$	188	$	121	$	45,139
States and political subdivisions	124,302		5,246		367		129,181
U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities	129,219		1,556		0		130,775
GSE residential collateralized mortgage obligations (CMOs)	14,040		384		20		14,404
Private label CMOs	8,086		0		68		8,018
Total debt securities	320,719		7,374		576		327,517
Equity securities	50		23		0		73
Totals	$	320,769	$	7,397	$	576	$	327,590
December 31, 2015
U.S. Government Agencies	$	47,209	$	200	$	182	$	47,227
States and political subdivisions	124,421		2,483		943		125,961
GSE residential mortgage-backed securities	132,389		229		269		132,349
GSE residential CMOs	15,668		215		40		15,843
GSE commercial CMOs	63,598		735		563		63,770
Private label CMOs	8,944		0		43		8,901
Total debt securities	392,229		3,862		2,040		394,051
Equity securities	50		23		0		73
Totals	$	392,279	$	3,885	$	2,040	$	394,124

Gross Unrealized Losses and Fair Value of Company's Available for Sale Securities

The following table shows gross unrealized losses and fair value of the Company’s available for sale securities that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015:

	Less Than 12 Months				12 Months or More				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2016
U.S. Government Agencies	$	19,951	$	121	$	0	$	0	$	19,951	$	121
States and political subdivisions	1,205		2		5,313		365		6,518		367
GSE residential collateralized mortgage obligations (CMOs)	0		0		2,555		20		2,555		20
Private label CMOs	8,018		68		0		0		8,018		68
Total temporarily impaired securities	$	29,174	$	191	$	7,868	$	385	$	37,042	$	576
December 31, 2015
U.S. Government Agencies	$	27,640	$	182	$	0	$	0	$	27,640	$	182
States and political subdivisions	30,252		373		14,139		570		44,391		943
GSE residential mortgage-backed securities	82,911		269		0		0		82,911		269
GSE residential CMOs	0		0		4,237		40		4,237		40
GSE commercial CMOs	33,606		563		0		0		33,606		563
Private label CMOs	8,901		43		0		0		8,901		43
Total temporarily impaired securities	$	183,310	$	1,430	$	18,376	$	610	$	201,686	$	2,040

Schedule of Amortized Cost and Fair Values of Securities Available for Sale by Contractual Maturity

The amortized cost and fair values of securities available for sale at March 31, 2016 by contractual maturity are shown below. Contractual maturities will differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	365	$	366
Due after one year through five years	3,232		3,381
Due after five years through ten years	62,821		65,147
Due after ten years	102,956		105,426
Mortgage-backed securities and collateralized mortgage obligations	151,345		153,197
Total debt securities	320,719		327,517
Equity securities	50		73
	$	320,769	$	327,590

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LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Tables)

3 Months Ended

Mar. 31, 2016

Receivables [Abstract]

Summary of Loan Portfolio, Excluding Residential Loans Held for Sale, Broken Out by Classes

The loan portfolio, excluding residential loans held for sale, broken out by class, as of March 31, 2016 and December 31, 2015 was as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial real estate:
Owner-occupied	$	106,464	$	103,578
Non-owner occupied	154,731		145,401
Multi-family	37,664		35,109
Non-owner occupied residential	54,834		54,175
Acquisition and development:
1-4 family residential construction	7,270		9,364
Commercial and land development	42,245		41,339
Commercial and industrial	77,277		73,625
Municipal	62,302		57,511
Residential mortgage:
First lien	125,706		126,022
Home equity - term	16,578		17,337
Home equity - lines of credit	111,770		110,731
Installment and other loans	7,862		7,521
	$	804,703	$	781,713

Bank's Ratings Based on its Internal Risk Rating System

The following summarizes the Bank’s ratings based on its internal risk rating system as of March 31, 2016 and December 31, 2015:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
March 31, 2016
Commercial real estate:
Owner-occupied	$	98,959	$	1,771	$	3,705	$	2,029	$	0	$	106,464
Non-owner occupied	134,518		12,419		108		7,686		0		154,731
Multi-family	34,863		1,763		813		225		0		37,664
Non-owner occupied residential	51,490		1,282		1,231		792		39		54,834
Acquisition and development:
1-4 family residential construction	7,270		0		0		0		0		7,270
Commercial and land development	41,105		215		922		3		0		42,245
Commercial and industrial	74,651		1,352		560		714		0		77,277
Municipal	62,302		0		0		0		0		62,302
Residential mortgage:
First lien	120,882		0		44		4,780		0		125,706
Home equity - term	16,478		0		1		99		0		16,578
Home equity - lines of credit	110,850		251		102		567		0		111,770
Installment and other loans	7,846		0		0		9		7		7,862
	$	761,214	$	19,053	$	7,486	$	16,904	$	46	$	804,703
December 31, 2015
Commercial real estate:
Owner-occupied	$	96,715	$	1,124	$	3,630	$	2,109	$	0	$	103,578
Non-owner occupied	125,043		12,394		108		7,856		0		145,401
Multi-family	31,957		1,779		1,140		233		0		35,109
Non-owner occupied residential	50,601		1,305		1,374		895		0		54,175
Acquisition and development:
1-4 family residential construction	9,364		0		0		0		0		9,364
Commercial and land development	40,181		219		934		5		0		41,339
Commercial and industrial	70,967		1,380		544		734		0		73,625
Municipal	57,511		0		0		0		0		57,511
Residential mortgage:
First lien	121,214		0		0		4,808		0		126,022
Home equity - term	17,234		0		0		103		0		17,337
Home equity - lines of credit	109,731		230		180		590		0		110,731
Installment and other loans	7,504		0		0		17		0		7,521
	$	738,022	$	18,431	$	7,910	$	17,350	$	0	$	781,713

Impaired Loans by Class

The following table summarizes impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as of March 31, 2016 and December 31, 2015. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and the partial charge-off will be recorded when final information is received.

	Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance
(Dollars in thousands)	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
March 31, 2016
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,029	$	3,301
Non-owner occupied	0		0		0		7,686		8,521
Multi-family	0		0		0		225		381
Non-owner occupied residential	39		39		39		792		1,080
Acquisition and development:
Commercial and land development	0		0		0		3		18
Commercial and industrial	0		0		0		714		768
Residential mortgage:
First lien	1,357		1,392		103		3,423		4,133
Home equity - term	0		0		0		99		106
Home equity - lines of credit	0		0		0		567		712
Installment and other loans	7		8		7		9		35
	$	1,403	$	1,439	$	149	$	15,547	$	19,055
December 31, 2015
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,109	$	3,344
Non-owner occupied	0		0		0		7,856		8,600
Multi-family	0		0		0		233		385
Non-owner occupied residential	0		0		0		895		1,211
Acquisition and development:
Commercial and land development	0		0		0		5		19
Commercial and industrial	0		0		0		734		780
Residential mortgage:
First lien	1,952		1,984		271		2,856		3,369
Home equity - term	0		0		0		103		110
Home equity - lines of credit	22		23		10		568		688
Installment and other loans	8		9		8		9		35
	$	1,982	$	2,016	$	289	$	15,368	$	18,541

Average Recorded Investment in Impaired Loans and Related Interest Income

The following tables summarize the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired, generally on a cash basis, for the three months ended March 31, 2016 and 2015:

	2016				2015
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,069	$	0	$	3,159	$	0
Non-owner occupied	7,771		0		1,658		0
Multi-family	229		0		521		0
Non-owner occupied residential	875		0		1,303		0
Acquisition and development:
Commercial and land development	4		0		392		2
Commercial and industrial	724		0		2,346		0
Residential mortgage:
First lien	4,776		9		5,241		9
Home equity - term	101		0		93		0
Home equity - lines of credit	589		0		512		0
Installment and other loans	17		0		25		0
	$	17,155	$	9	$	15,250	$	11

Troubled Debt Restructurings

The following table presents impaired loans that are TDRs, with the recorded investment as of March 31, 2016 and December 31, 2015.

	March 31, 2016			December 31, 2015
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Residential mortgage:
First lien	9	$	1,044	8	$	793
	9	1,044		8	793
Nonaccruing:
Residential mortgage:
First lien	12	1,128		12	1,153
Installment and other loans	1	9		1	10
	13	1,137		13	1,163
	22	$	2,181	21	$	1,956

Number of Loans Modified and Their Pre-Modification and Post-Modification Investment Balances

The following table presents the number of loans modified, and their pre-modification and post-modification investment balances for the three months ended March 31, 2016 and 2015:

	2016					2015
(Dollars in thousands)	Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment		Number of Contracts	Pre- Modification Recorded Investment		Post Modification Recorded Investment
Three Months Ended March 31,
Residential mortgage:
First lien	1	$	257	$	0	1	$	59	$	59
	1	$	257	$	0	1	$	59	$	59

Restructured Loans Included in Nonaccrual Status Modified as Troubled Debt Restructurings Within the Previous 12 Months and for which There was Payment Default

The following table presents restructured loans, included in nonaccrual loans, that were modified as TDRs within the previous 12 months and for which there was a payment default during the three months ended March 31, 2016 and 2015:

	2016			2015
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Three Months Ended March 31,
Residential mortgage:
First lien	0	$	0	5	$	323
	0	$	0	5	$	323

Loan Portfolio Summarized by Aging Categories of Performing Loans and Nonaccrual Loans

The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2016 and December 31, 2015:

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
March 31, 2016
Commercial real estate:
Owner-occupied	$	104,251	$	184	$	0	$	0	$	184	$	2,029	$	106,464
Non-owner occupied	146,986		59		0		0		59		7,686		154,731
Multi-family	37,439		0		0		0		0		225		37,664
Non-owner occupied residential	53,970		34		0		0		34		830		54,834
Acquisition and development:
1-4 family residential construction	7,270		0		0		0		0		0		7,270
Commercial and land development	42,241		1		0		0		1		3		42,245
Commercial and industrial	76,563		0		0		0		0		714		77,277
Municipal	62,302		0		0		0		0		0		62,302
Residential mortgage:
First lien	121,180		746		43		0		789		3,737		125,706
Home equity - term	16,478		0		0		1		1		99		16,578
Home equity - lines of credit	110,902		301		0		0		301		567		111,770
Installment and other loans	7,823		23		0		0		23		16		7,862
	$	787,405	$	1,348	$	43	$	1	$	1,392	$	15,906	$	804,703
December 31, 2015
Commercial real estate:
Owner-occupied	$	101,395	$	74	$	0	$	0	$	74	$	2,109	$	103,578
Non-owner occupied	137,545		0		0		0		0		7,856		145,401
Multi-family	34,876		0		0		0		0		233		35,109
Non-owner occupied residential	53,280		0		0		0		0		895		54,175
Acquisition and development:
1-4 family residential construction	9,364		0		0		0		0		0		9,364
Commercial and land development	41,236		0		98		0		98		5		41,339
Commercial and industrial	72,846		24		21		0		45		734		73,625
Municipal	57,511		0		0		0		0		0		57,511
Residential mortgage:
First lien	120,119		1,844		44		0		1,888		4,015		126,022
Home equity - term	17,200		34		0		0		34		103		17,337
Home equity - lines of credit	109,740		286		91		24		401		590		110,731
Installment and other loans	7,488		16		0		0		16		17		7,521
	$	762,600	$	2,278	$	254	$	24	$	2,556	$	16,557	$	781,713

Activity in Allowance for Loan Losses

Activity in the allowance for loan losses for the three months ended March 31, 2016 and 2015 was as follows:

	Commercial															Consumer
(Dollars in thousands)	Commercial Real Estate			Acquisition and Development			Commercial and Industrial			Municipal			Total			Residential Mortgage			Installment and Other			Total			Unallocated			Total
March 31, 2016
Balance, beginning of period	$	7,883		$	850		$	1,012		$	58		$	9,803		$	2,870		$	121		$	2,991		$	774		$	13,568
Provision for loan losses	33			(111		)	37			4			(37		)	45			102			147			(110		)	0
Charge-offs	0			0			(21		)	0			(21		)	(244		)	(64		)	(308		)	0			(329		)
Recoveries	80			0			2			0			82			6			20			26			0			108
Balance, end of period	$	7,996		$	739		$	1,030		$	62		$	9,827		$	2,677		$	179		$	2,856		$	664		$	13,347
March 31, 2015
Balance, beginning of period	$	9,462		$	697		$	806		$	183		$	11,148		$	2,262		$	119		$	2,381		$	1,218		$	14,747
Provision for loan losses	(63		)	(87		)	(137		)	(62		)	(349		)	494			15			509			(160		)	0
Charge-offs	(66		)	(22		)	(26		)	0			(114		)	(201		)	(20		)	(221		)	0			(335		)
Recoveries	13			0			22			0			35			12			2			14			0			49
Balance, end of period	$	9,346		$	588		$	665		$	121		$	10,720		$	2,567		$	116		$	2,683		$	1,058		$	14,461

Summary of Ending Loan Balances Individually Evaluated for Impairment Based on Loan Segment

The following table summarizes the ending loan balances individually evaluated for impairment based upon loan segment, as well as the related allowance for loan losses allocation for each at March 31, 2016 and December 31, 2015:

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
March 31, 2016
Loans allocated by:
Individually evaluated for impairment	$	10,771	$	3	$	714	$	0	$	11,488	$	5,446	$	16	$	5,462	$	0	$	16,950
Collectively evaluated for impairment	342,922		49,512		76,563		62,302		531,299		248,608		7,846		256,454		0		787,753
	$	353,693	$	49,515	$	77,277	$	62,302	$	542,787	$	254,054	$	7,862	$	261,916	$	0	$	804,703
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	39	$	0	$	0	$	0	$	39	$	103	$	7	$	110	$	0	$	149
Collectively evaluated for impairment	7,957		739		1,030		62		9,788		2,574		172		2,746		664		13,198
	$	7,996	$	739	$	1,030	$	62	$	9,827	$	2,677	$	179	$	2,856	$	664	$	13,347
December 31, 2015
Loans allocated by:
Individually evaluated for impairment	$	11,093	$	5	$	734	$	0	$	11,832	$	5,501	$	17	$	5,518	$	0	$	17,350
Collectively evaluated for impairment	327,170		50,698		72,891		57,511		508,270		248,589		7,504		256,093		0		764,363
	$	338,263	$	50,703	$	73,625	$	57,511	$	520,102	$	254,090	$	7,521	$	261,611	$	0	$	781,713
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	281	$	8	$	289	$	0	$	289
Collectively evaluated for impairment	7,883		850		1,012		58		9,803		2,589		113		2,702		774		13,279
	$	7,883	$	850	$	1,012	$	58	$	9,803	$	2,870	$	121	$	2,991	$	774	$	13,568

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INCOME TAXES (Tables)

3 Months Ended

Mar. 31, 2016

Income Tax Disclosure [Abstract]

Components of Income Tax Expense

The components of income tax expense for the three months ended March 31, 2016 and 2015 are summarized as follows:

	Three months ended March 31,
(Dollars in thousands)	2016			2015
Current year provision (benefit):
Federal	$	(112	)	$	(15	)
State	(2		)	4
	(114		)	(11		)
Deferred tax expense
Federal	722			720
State	6			6
	728			726
Net income tax expense	$	614		$	715

Components of Net Deferred Tax Asset

The components of the net deferred tax asset, included in other assets, are as follows:

(Dollars in thousands)	March 31, 2016		December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	5,078	$	5,111
Deferred compensation	546		547
Retirement plans and salary continuation	1,865		1,824
Share-based compensation	417		343
Off balance sheet reserves	224		218
Nonaccrual loan interest	315		246
Goodwill	116		124
Bonus accrual	69		359
Low income housing credit carryforward	1,735		1,652
Alternative minimum tax credit carryforward	2,262		2,195
Charitable contribution carryforward	69		211
Net operating loss carryforward	3,798		4,431
Other	190		182
Total deferred tax assets	16,684		17,443
Deferred tax liabilities:
Depreciation	771		815
Net unrealized gains on securities available for sale	2,387		646
Mortgage servicing rights	699		669
Purchase accounting adjustments	336		352
Other	180		181
Total deferred tax liabilities	4,373		2,663
Net deferred tax asset	$	12,311	$	14,780

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SHARE-BASED COMPENSATION PLANS (Tables)

3 Months Ended

Mar. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Summary of Outstanding Nonvested Restricted Shares

A roll forward of the Company’s nonvested restricted shares for the three months ended March 31, 2016 is presented below:

	Shares		Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	197,381		$	16.17
Granted	29,045		17.69
Forfeited	(1,083	)	17.26
Vested	(2,500	)	10.43
Nonvested shares, at period end	222,843		$	16.43

Summary of Outstanding Stock Options

A roll forward of the Company’s outstanding stock options for the three months ended March 31, 2016 is presented below:

	Shares		Weighted Average Exercise Price
Outstanding at beginning of year	101,460		$	28.72
Forfeited	(2,050	)	26.54
Options outstanding and exercisable, at period end	99,410		$	28.76

Information Pertaining to Outstanding and Exercisable Options

Information pertaining to options outstanding and exercisable at March 31, 2016 is as follows:

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$21.14 - $24.99	35,674	4.15	$	21.47
$25.00 - $29.99	2,792	4.01	25.76
$30.00 - $34.99	38,640	1.53	31.28
$35.00 - $37.59	22,304	1.25	36.44
$21.14 - $37.59	99,410	2.48	$	28.76

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SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL (Tables)

3 Months Ended

Mar. 31, 2016

Equity [Abstract]

Bank's Actual Capital Ratios

The Company and the Bank’s actual capital ratios as of March 31, 2016 and December 31, 2015, are also presented in the table.

	Actual				Minimum Capital Requirement				Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2016
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	137,389	15.7	%	$	70,181	8.0	%	n/a		n/a
Orrstown Bank	121,703		13.9	%	70,133		8.0	%	$	87,666	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	52,636		6.0	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	52,599		6.0	%	70,133		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	126,352		14.4	%	39,477		4.5	%	n/a		n/a
Orrstown Bank	110,673		12.6	%	39,450		4.5	%	56,983		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	126,352		9.8	%	51,579		4.0	%	n/a		n/a
Orrstown Bank	110,673		8.6	%	51,609		4.0	%	64,511		5.0	%
December 31, 2015
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	134,562	15.8	%	$	68,078	8.0	%	n/a		n/a
Orrstown Bank	118,671		14.0	%	68,027		8.0	%	$	85,034	10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	51,058		6.0	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	51,021		6.0	%	68,027		8.0	%
CET1 to risk weighted assets
Orrstown Financial Services, Inc.	123,825		14.6	%	38,294		4.5	%	n/a		n/a
Orrstown Bank	107,942		12.7	%	38,265		4.5	%	55,272		6.5	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.	123,825		9.8	%	50,684		4.0	%	n/a		n/a
Orrstown Bank	107,942		8.5	%	50,695		4.0	%	63,368		5.0	%

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EARNINGS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2016

Earnings Per Share [Abstract]

Earnings Per Share

Earnings per share for the three months ended March 31, 2016 and 2015 were as follows:

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2016		2015
Net income	$	2,580	$	2,462
Weighted average shares outstanding (basic)	8,071		8,110
Impact of common stock equivalents	68		24
Weighted average shares outstanding (diluted)	8,139		8,134
Per share information:
Basic earnings per share	$	0.32	$	0.30
Diluted earnings per share	0.32		0.30

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Tables)

3 Months Ended

Mar. 31, 2016

Fair Value Disclosures [Abstract]

Commitments and Conditional Obligations

	Contract or Notional Amount
(Dollars in thousands)	March 31, 2016		December 31, 2015
Commitments to fund:
Revolving, open ended home equity loans	$	115,813	$	110,473
1-4 family residential construction loans	5,464		6,153
Commercial real estate, construction and land development loans	41,065		14,174
Commercial, industrial and other loans	87,971		84,480
Standby letters of credit	7,002		6,510

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FAIR VALUE DISCLOSURES (Tables)

3 Months Ended

Mar. 31, 2016

Fair Value Disclosures [Abstract]

Summary of Assets Measured at Estimated Fair Value on Recurring Basis

A summary of assets at March 31, 2016 and December 31, 2015, measured at estimated fair value on a recurring basis was as follows:

(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2016
Securities available for sale:
U.S. Government Agencies	$	0	$	45,139	$	0	$	45,139
States and political subdivisions	0		129,181		0		129,181
U.S. Government Sponsored enterprises (GSE) residential mortgage-backed securities	0		130,775		0		130,775
GSE residential collateralized mortgage obligations (CMOs)	0		14,404		0		14,404
Private label CMOs	0		8,018		0		8,018
Total debt securities	0		327,517		0		327,517
Equity securities - financial services	0		73		0		73
Total securities	$	0	$	327,590	$	0	$	327,590
December 31, 2015
Securities available for sale:
U.S. Government Agencies	$	0	$	47,227	$	0	$	47,227
States and political subdivisions	0		125,961		0		125,961
GSE residential mortgage-backed securities	0		132,349		0		132,349
GSE residential collateralized mortgage obligations (CMOs)	0		15,843		0		15,843
GSE commercial CMOs	0		63,770		0		63,770
Private label CMOs	0		8,901		0		8,901
Total debt securities	0		394,051		0		394,051
Equity securities - financial services	0		73		0		73
Total securities	$	0	$	394,124	$	0	$	394,124

Summary of Additional Qualitative Information

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

(Dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
March 31, 2016
Impaired loans	$	4,850	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0% - 60% discount
				Management adjustments for liquidation expenses	6% - 44% discount
Foreclosed real estate	265		Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	10% - 20% discount
				Management adjustments for liquidation expenses	5% - 6% discount
December 31, 2015
Impaired loans	$	4,757	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0% - 70% discount
				Management adjustments for liquidation expenses	6% - 44% discount
Foreclosed real estate	175		Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	10% - 20% discount
				Management adjustments for liquidation expenses	5% - 6% discount

Summary of Assets Measured at Fair Value on Nonrecurring Basis

A summary of assets at March 31, 2016 and December 31, 2015, measured at estimated fair value on a nonrecurring basis was as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2016
Impaired Loans
Commercial real estate:
Owner-occupied	$	0	$	0	$	836	$	836
Non-owner occupied	0		0		736		736
Multi-family	0		0		225		225
Non-owner occupied residential	0		0		507		507
Acquisition and development:
Commercial and land development	0		0		3		3
Residential mortgage:
First lien	0		0		2,340		2,340
Home equity - lines of credit	0		0		194		194
Installment and other loans	0		0		9		9
Impaired loans, net	$	0	$	0	$	4,850	$	4,850
Foreclosed real estate
Residential	$	0	$	0	$	186	$	186
Commercial and land development	0		0		79		79
Total foreclosed real estate	$	0	$	0	$	265	$	265
December 31, 2015
Impaired Loans
Commercial real estate:
Owner-occupied	$	0	$	0	$	881	$	881
Non-owner occupied	0		0		736		736
Multi-family	0		0		233		233
Non-owner occupied residential	0		0		570		570
Acquisition and development:
Commercial and land development	0		0		5		5
Residential mortgage:
First lien	0		0		2,094		2,094
Home equity - lines of credit	0		0		229		229
Installment and other loans	0		0		9		9
Impaired loans, net	$	0	$	0	$	4,757	$	4,757
Foreclosed real estate
Residential	$	0	$	0	$	101	$	101
Commercial and land development	0		0		74		74
Total foreclosed real estate	$	0	$	0	$	175	$	175

Financial Instruments at Estimated Fair Values

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2016 and December 31, 2015:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2016
Financial Assets
Cash and due from banks	$	12,281	$	12,281	$	12,281	$	0	$	0
Interest bearing deposits with banks	54,634		54,634		54,634		0		0
Restricted investments in bank stocks	6,270		n/a		n/a		n/a		n/a
Securities available for sale	327,590		327,590		0		327,590		0
Loans held for sale	3,499		3,595		0		3,595		0
Loans, net of allowance for loan losses	791,356		810,260		0		0		810,260
Accrued interest receivable	3,582		3,582		0		1,709		1,873
Financial Liabilities
Deposits	1,048,376		1,055,702		0		1,055,702		0
Short-term borrowings	62,693		62,693		0		62,693		0
Long-term debt	24,413		25,259		0		25,259		0
Accrued interest payable	376		376		0		376		0
Off-balance sheet instruments	0		0		0		0		0
December 31, 2015
Financial Assets
Cash and due from banks	$	11,412	$	11,412	$	11,412	$	0	$	0
Interest bearing deposits with banks	16,928		16,928		16,928		0		0
Restricted investments in bank stocks	8,720		n/a		n/a		n/a		n/a
Securities available for sale	394,124		394,124		0		394,124		0
Loans held for sale	5,917		6,045		0		6,045		0
Loans, net of allowance for loan losses	768,145		776,067		0		0		776,067
Accrued interest receivable	3,845		3,845		0		2,257		1,588
Financial Liabilities
Deposits	1,032,167		1,032,265		0		1,032,265		0
Short-term borrowings	89,156		89,156		0		89,156		0
Long-term debt	24,495		25,357		0		25,357		0
Accrued interest payable	366		366		0		366		0
Off-balance sheet instruments	0		0		0		0		0

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Detail)	3 Months Ended		12 Months Ended
	Mar. 31, 2016 USD ($) segment component office	Mar. 31, 2015 USD ($)	Dec. 31, 2015 USD ($) investment
Accounting Policies [Abstract]
Number of offices in which the company operates throughout the country | office	21
Accounting Policies [Line Items]
Impairment charge related to investment	$ 0
Held to maturity or trading securities	$ 0		$ 0
Number of impairment components | component	2
Debt securities other than temporarily impaired	$ 0		0
Maturity of interest bearing deposits	90 days
Evaluation period to return past due loans to accrual status	6 months
Balance of loans serviced for others	$ 324,221,000		317,793,000
Foreclosed real estate totaled	$ 495,000		$ 710,000
Percentage of limited partner interest	99.00%
Number of investments accounted for under the proportional amortization method | investment			1
Investment in real estate partnership	$ 5,328,000		$ 5,450,000
Investment in real estate partnerships, proportional amortization method	2,150,000		2,205,000
Loss investment in real estate partnership	89,000	$ 85,000
Losses on investments accounted for under the proportional amortization method	33,000
Recognition of federal tax credits	184,000	119,000
Advertising expense	151,000	$ 112,000
Accumulated other comprehensive income (loss), net of taxes	$ 4,434,000		1,199,000
Number of significant operating segment | segment	1
Other Assets
Accounting Policies [Line Items]
Mortgage servicing rights	$ 2,710,000		$ 2,672,000
Deposit Premium
Accounting Policies [Line Items]
Finite lives of intangible assets	10 years
Customer Lists
Accounting Policies [Line Items]
Finite lives of intangible assets	15 years
Minimum | Building and Improvements
Accounting Policies [Line Items]
Plant and equipment, useful life	10 years
Minimum | Furniture and Equipment
Accounting Policies [Line Items]
Plant and equipment, useful life	3 years
Maximum
Accounting Policies [Line Items]
Cash and cash equivalents, original maturities	90 days
Maximum | Building and Improvements
Accounting Policies [Line Items]
Plant and equipment, useful life	40 years
Maximum | Furniture and Equipment
Accounting Policies [Line Items]
Plant and equipment, useful life	15 years

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SECURITIES AVAILABLE FOR SALE - Amortized Cost and Fair Values of Investment Securities Available for Sale (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost	$ 320,719
Equity securities, amortized cost	50
Totals, amortized cost	320,769	$ 392,279
Totals, gross unrealized gains	7,397	3,885
Totals, gross unrealized losses	576	2,040
Total debt securities, fair value	327,517
Equity securities, fair value	73
Totals, fair value	327,590	394,124
Debt Securities
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost	320,719	392,229
Total debt securities, gross unrealized gains	7,374	3,862
Total debt securities, gross unrealized losses	576	2,040
Total debt securities, fair value	327,517	394,051
Debt Securities | U.S. Government Agencies
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost	45,072	47,209
Total debt securities, gross unrealized gains	188	200
Total debt securities, gross unrealized losses	121	182
Total debt securities, fair value	45,139	47,227
Debt Securities | States and political subdivisions
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost	124,302	124,421
Total debt securities, gross unrealized gains	5,246	2,483
Total debt securities, gross unrealized losses	367	943
Total debt securities, fair value	129,181	125,961
Debt Securities | U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost	129,219	132,389
Total debt securities, gross unrealized gains	1,556	229
Total debt securities, gross unrealized losses	0	269
Total debt securities, fair value	130,775	132,349
Debt Securities | GSE residential collateralized mortgage obligations (CMOs)
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost	14,040	15,668
Total debt securities, gross unrealized gains	384	215
Total debt securities, gross unrealized losses	20	40
Total debt securities, fair value	14,404	15,843
Debt Securities | GSE commercial CMOs
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost		63,598
Total debt securities, gross unrealized gains		735
Total debt securities, gross unrealized losses		563
Total debt securities, fair value		63,770
Debt Securities | Private label CMOs
Schedule of Available-for-sale Securities [Line Items]
Total debt securities, amortized cost	8,086	8,944
Total debt securities, gross unrealized gains	0	0
Total debt securities, gross unrealized losses	68	43
Total debt securities, fair value	8,018	8,901
Equity Securities
Schedule of Available-for-sale Securities [Line Items]
Equity securities, amortized cost	50	50
Equity securities, gross unrealized gains	23	23
Equity securities, gross unrealized losses	0	0
Equity securities, fair value	$ 73	$ 73

XML

SECURITIES AVAILABLE FOR SALE - Gross Unrealized Losses and Fair Value of Company's Available for Sale Securities (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Schedule of Available-for-sale Securities [Line Items]
Total temporarily impaired securities, less than 12 months, fair value	$ 29,174	$ 183,310
Total temporarily impaired securities, less than 12 months, unrealized losses	191	1,430
Total temporarily impaired securities, 12 months or more, fair value	7,868	18,376
Total temporarily impaired securities, 12 months or more, unrealized losses	385	610
Total temporarily impaired securities, total, fair value	37,042	201,686
Total temporarily impaired securities, total, unrealized losses	576	2,040
U.S. Government Agencies
Schedule of Available-for-sale Securities [Line Items]
Total temporarily impaired securities, less than 12 months, fair value	19,951	27,640
Total temporarily impaired securities, less than 12 months, unrealized losses	121	182
Total temporarily impaired securities, 12 months or more, fair value	0	0
Total temporarily impaired securities, 12 months or more, unrealized losses	0	0
Total temporarily impaired securities, total, fair value	19,951	27,640
Total temporarily impaired securities, total, unrealized losses	121	182
States and political subdivisions
Schedule of Available-for-sale Securities [Line Items]
Total temporarily impaired securities, less than 12 months, fair value	1,205	30,252
Total temporarily impaired securities, less than 12 months, unrealized losses	2	373
Total temporarily impaired securities, 12 months or more, fair value	5,313	14,139
Total temporarily impaired securities, 12 months or more, unrealized losses	365	570
Total temporarily impaired securities, total, fair value	6,518	44,391
Total temporarily impaired securities, total, unrealized losses	367	943
GSE residential mortgage-backed securities
Schedule of Available-for-sale Securities [Line Items]
Total temporarily impaired securities, less than 12 months, fair value		82,911
Total temporarily impaired securities, less than 12 months, unrealized losses		269
Total temporarily impaired securities, 12 months or more, fair value		0
Total temporarily impaired securities, 12 months or more, unrealized losses		0
Total temporarily impaired securities, total, fair value		82,911
Total temporarily impaired securities, total, unrealized losses		269
GSE residential collateralized mortgage obligations (CMOs)
Schedule of Available-for-sale Securities [Line Items]
Total temporarily impaired securities, less than 12 months, fair value	0	0
Total temporarily impaired securities, less than 12 months, unrealized losses	0	0
Total temporarily impaired securities, 12 months or more, fair value	2,555	4,237
Total temporarily impaired securities, 12 months or more, unrealized losses	20	40
Total temporarily impaired securities, total, fair value	2,555	4,237
Total temporarily impaired securities, total, unrealized losses	20	40
GSE commercial CMOs
Schedule of Available-for-sale Securities [Line Items]
Total temporarily impaired securities, less than 12 months, fair value		33,606
Total temporarily impaired securities, less than 12 months, unrealized losses		563
Total temporarily impaired securities, 12 months or more, fair value		0
Total temporarily impaired securities, 12 months or more, unrealized losses		0
Total temporarily impaired securities, total, fair value		33,606
Total temporarily impaired securities, total, unrealized losses		563
Private label CMOs
Schedule of Available-for-sale Securities [Line Items]
Total temporarily impaired securities, less than 12 months, fair value	8,018	8,901
Total temporarily impaired securities, less than 12 months, unrealized losses	68	43
Total temporarily impaired securities, 12 months or more, fair value	0	0
Total temporarily impaired securities, 12 months or more, unrealized losses	0	0
Total temporarily impaired securities, total, fair value	8,018	8,901
Total temporarily impaired securities, total, unrealized losses	$ 68	$ 43

XML

SECURITIES AVAILABLE FOR SALE - Additional Information (Detail) $ in Thousands	3 Months Ended
	Mar. 31, 2016 USD ($) security	Mar. 31, 2015 USD ($)	Dec. 31, 2015 USD ($) security
Schedule of Available-for-sale Securities [Line Items]
Securities held	11		53
Gross gains on the sales of securities | $	$ 1,468	$ 1,553
Gross losses on securities available for sale | $	48	$ 24
Fair value of securities pledged to secure public funds and other purposes | $	$ 254,252		$ 250,397
U.S Agencies and Government Sponsored Enterprises (GSE)
Schedule of Available-for-sale Securities [Line Items]
Securities held	6		29
Securities held, less than 12 months category	4		25
Securities held, more than 12 months category	2		4
State and Political Subdivisions
Schedule of Available-for-sale Securities [Line Items]
Securities held	2		21
Securities held, less than 12 months category	1		16
Securities held, more than 12 months category	1		5
Private Label
Schedule of Available-for-sale Securities [Line Items]
Securities held, less than 12 months category	3		3

XML

SECURITIES AVAILABLE FOR SALE - Schedule of Amortized Cost and Fair Values of Securities Available for Sale by Contractual Maturity (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Investments, Debt and Equity Securities [Abstract]
Due in one year or less, amortized cost	$ 365
Due after one year through five years, amortized cost	3,232
Due after five years through ten years, amortized cost	62,821
Due after ten years, amortized cost	102,956
Mortgage-backed securities and collateralized mortgage obligations, amortized cost	151,345
Total debt securities, amortized cost	320,719
Equity securities, amortized cost	50
Totals, amortized cost	320,769	$ 392,279
Due in one year or less, fair value	366
Due after one year through five years, fair value	3,381
Due after five years through ten years, fair value	65,147
Due after ten years, fair value	105,426
Mortgage-backed securities and collateralized mortgage obligations, fair value	153,197
Total debt securities, fair value	327,517
Equity securities, fair value	73
Totals, fair value	$ 327,590	$ 394,124

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Additional Information (Detail)				3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 30, 2015	Mar. 31, 2016 USD ($) note
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans that are deemed impaired, number of days past due (more than)				90 days
Number of notes split | note				2
Look-back period for historical losses		4 years	3 years
Look-back, loss history weight, most recent 12 months			50.00%
Look-back, loss history weight, 2 years ago			25.00%
Look-back, loss history weight, 3 years ago			25.00%
Forecast
Financing Receivable, Allowance for Credit Losses [Line Items]
Look-back period for historical losses	5 years
Minimum
Financing Receivable, Allowance for Credit Losses [Line Items]
Amount of loan on which reviews have been made annually				$ 500,000
Amount of loan rated as substandard, doubtful or loss subject to quarterly review				$ 250,000
Historical loss percentage adjustment to anticipated loss allocation		(1.50%)		(1.50%)
Maximum
Financing Receivable, Allowance for Credit Losses [Line Items]
Percentage of loan-to-value ratio upon loan origination				80.00%
Percentage of loan-to-value ratios of the value of the real estate taken as collateral				90.00%
Percentage of credit worthiness of the borrower				43.00%
Historical loss percentage adjustment to anticipated loss allocation		1.50%		1.50%
Percentage of strong loan-to-value				70.00%

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Summary of Loan Portfolio, Excluding Residential Loans Held for Sale, Broken Out by Classes (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	$ 804,703	$ 781,713
Commercial real estate | Owner-occupied
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	106,464	103,578
Commercial real estate | Non-owner occupied
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	154,731	145,401
Commercial real estate | Multi-family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	37,664	35,109
Commercial real estate | Non-owner occupied residential
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	54,834	54,175
Acquisition and development | 1-4 family residential construction
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	7,270	9,364
Acquisition and development | Commercial and land development
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	42,245	41,339
Commercial and industrial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	77,277	73,625
Municipal
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	62,302	57,511
Residential mortgage | First lien
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	125,706	126,022
Residential mortgage | Home equity - term
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	16,578	17,337
Residential mortgage | Home equity - lines of credit
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	111,770	110,731
Installment and other loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	$ 7,862	$ 7,521

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Bank's Ratings Based on its Internal Risk Rating System (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Financing Receivable, Recorded Investment [Line Items]
Total Loans	$ 804,703	$ 781,713
Commercial real estate | Owner-occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	106,464	103,578
Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	154,731	145,401
Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	37,664	35,109
Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	54,834	54,175
Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7,270	9,364
Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	42,245	41,339
Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	77,277	73,625
Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	62,302	57,511
Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	125,706	126,022
Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	16,578	17,337
Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	111,770	110,731
Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7,862	7,521
Pass
Financing Receivable, Recorded Investment [Line Items]
Total Loans	761,214	738,022
Pass | Commercial real estate | Owner-occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	98,959	96,715
Pass | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	134,518	125,043
Pass | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	34,863	31,957
Pass | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	51,490	50,601
Pass | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7,270	9,364
Pass | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	41,105	40,181
Pass | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	74,651	70,967
Pass | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	62,302	57,511
Pass | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	120,882	121,214
Pass | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	16,478	17,234
Pass | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	110,850	109,731
Pass | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7,846	7,504
Special Mention
Financing Receivable, Recorded Investment [Line Items]
Total Loans	19,053	18,431
Special Mention | Commercial real estate | Owner-occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,771	1,124
Special Mention | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	12,419	12,394
Special Mention | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,763	1,779
Special Mention | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,282	1,305
Special Mention | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Special Mention | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	215	219
Special Mention | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,352	1,380
Special Mention | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Special Mention | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Special Mention | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Special Mention | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	251	230
Special Mention | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7,486	7,910
Non-Impaired Substandard | Commercial real estate | Owner-occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	3,705	3,630
Non-Impaired Substandard | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	108	108
Non-Impaired Substandard | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	813	1,140
Non-Impaired Substandard | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,231	1,374
Non-Impaired Substandard | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	922	934
Non-Impaired Substandard | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	560	544
Non-Impaired Substandard | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	44	0
Non-Impaired Substandard | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1	0
Non-Impaired Substandard | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	102	180
Non-Impaired Substandard | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Impaired - Substandard
Financing Receivable, Recorded Investment [Line Items]
Total Loans	16,904	17,350
Impaired - Substandard | Commercial real estate | Owner-occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	2,029	2,109
Impaired - Substandard | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7,686	7,856
Impaired - Substandard | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	225	233
Impaired - Substandard | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	792	895
Impaired - Substandard | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Impaired - Substandard | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	3	5
Impaired - Substandard | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	714	734
Impaired - Substandard | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Impaired - Substandard | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	4,780	4,808
Impaired - Substandard | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	99	103
Impaired - Substandard | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	567	590
Impaired - Substandard | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	9	17
Doubtful
Financing Receivable, Recorded Investment [Line Items]
Total Loans	46	0
Doubtful | Commercial real estate | Owner-occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	39	0
Doubtful | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	$ 7	$ 0

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Impaired Loans by Class (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	$ 1,403	$ 1,982
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	1,439	2,016
Impaired Loans with a Specific Allowance, Related Allowance	149	289
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	15,547	15,368
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	19,055	18,541
Commercial real estate | Owner-occupied
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	2,029	2,109
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	3,301	3,344
Commercial real estate | Non-owner occupied
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	7,686	7,856
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	8,521	8,600
Commercial real estate | Multi-family
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	225	233
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	381	385
Commercial real estate | Non-owner occupied residential
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	39	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	39	0
Impaired Loans with a Specific Allowance, Related Allowance	39	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	792	895
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	1,080	1,211
Acquisition and development | Commercial and land development
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	3	5
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	18	19
Commercial and industrial
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	714	734
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	768	780
Residential mortgage | First lien
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	1,357	1,952
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	1,392	1,984
Impaired Loans with a Specific Allowance, Related Allowance	103	271
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	3,423	2,856
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	4,133	3,369
Residential mortgage | Home equity - term
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	99	103
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	106	110
Residential mortgage | Home equity - lines of credit
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	22
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	23
Impaired Loans with a Specific Allowance, Related Allowance	0	10
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	567	568
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	712	688
Installment and other loans
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	7	8
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	8	9
Impaired Loans with a Specific Allowance, Related Allowance	7	8
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	9	9
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	$ 35	$ 35

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Average Recorded Investment in Impaired Loans and Related Interest Income (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	$ 17,155	$ 15,250
Interest Income Recognized	9	11
Commercial real estate | Owner-occupied
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	2,069	3,159
Interest Income Recognized	0	0
Commercial real estate | Non-owner occupied
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	7,771	1,658
Interest Income Recognized	0	0
Commercial real estate | Multi-family
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	229	521
Interest Income Recognized	0	0
Commercial real estate | Non-owner occupied residential
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	875	1,303
Interest Income Recognized	0	0
Acquisition and development | Commercial and land development
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	4	392
Interest Income Recognized	0	2
Commercial and industrial
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	724	2,346
Interest Income Recognized	0	0
Residential mortgage | First lien
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	4,776	5,241
Interest Income Recognized	9	9
Residential mortgage | Home equity - term
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	101	93
Interest Income Recognized	0	0
Residential mortgage | Home equity - lines of credit
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	589	512
Interest Income Recognized	0	0
Installment and other loans
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	17	25
Interest Income Recognized	$ 0	$ 0

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Troubled Debt Restructurings (Detail) $ in Thousands	Mar. 31, 2016 USD ($) contract	Dec. 31, 2015 USD ($) contract
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	22	21
Recorded Investment | $	$ 2,181	$ 1,956
Accruing
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	9	8
Recorded Investment | $	$ 1,044	$ 793
Nonaccruing
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	13	13
Recorded Investment | $	$ 1,137	$ 1,163
Residential mortgage | Accruing | First lien
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	9	8
Recorded Investment | $	$ 1,044	$ 793
Residential mortgage | Nonaccruing | First lien
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	12	12
Recorded Investment | $	$ 1,128	$ 1,153
Installment and other loans | Nonaccruing
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	1	1
Recorded Investment | $	$ 9	$ 10

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Number of Loans Modified and Their Pre-Modification and Post-Modification Investment Balances (Detail) $ in Thousands	3 Months Ended
	Mar. 31, 2016 USD ($) contract	Mar. 31, 2015 USD ($) contract
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	1	1
Pre- Modification Recorded Investment	$ 257	$ 59
Post Modification Recorded Investment	$ 0	$ 59
Residential mortgage | First lien
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	1	1
Pre- Modification Recorded Investment	$ 257	$ 59
Post Modification Recorded Investment	$ 0	$ 59

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Restructured Loans Included in Nonaccrual Status were Modified as Troubled Debt Restructurings within Previous 12 Months and for which There was Payment Default (Detail) $ in Thousands	3 Months Ended
	Mar. 31, 2016 USD ($) contract	Mar. 31, 2015 USD ($) contract
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	0	5
Recorded Investment | $	$ 0	$ 323
Residential mortgage | First lien
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	0	5
Recorded Investment | $	$ 0	$ 323

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Loan Portfolio Summarized by Aging Categories of Performing Loans and Nonaccrual Loans (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	$ 787,405	$ 762,600
Past Due	1,392	2,556
90+ (still accruing) Days Past Due	1	24
Non- Accrual	15,906	16,557
Total Loans	804,703	781,713
30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	1,348	2,278
60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	43	254
Commercial real estate | Owner-occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	104,251	101,395
Past Due	184	74
90+ (still accruing) Days Past Due	0	0
Non- Accrual	2,029	2,109
Total Loans	106,464	103,578
Commercial real estate | Owner-occupied | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	184	74
Commercial real estate | Owner-occupied | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	146,986	137,545
Past Due	59	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	7,686	7,856
Total Loans	154,731	145,401
Commercial real estate | Non-owner occupied | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	59	0
Commercial real estate | Non-owner occupied | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Multi-family
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	37,439	34,876
Past Due	0	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	225	233
Total Loans	37,664	35,109
Commercial real estate | Multi-family | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Multi-family | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	53,970	53,280
Past Due	34	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	830	895
Total Loans	54,834	54,175
Commercial real estate | Non-owner occupied residential | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	34	0
Commercial real estate | Non-owner occupied residential | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	7,270	9,364
Past Due	0	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	0	0
Total Loans	7,270	9,364
Acquisition and development | 1-4 family residential construction | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Acquisition and development | 1-4 family residential construction | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	42,241	41,236
Past Due	1	98
90+ (still accruing) Days Past Due	0	0
Non- Accrual	3	5
Total Loans	42,245	41,339
Acquisition and development | Commercial and land development | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	1	0
Acquisition and development | Commercial and land development | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	98
Commercial and industrial
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	76,563	72,846
Past Due	0	45
90+ (still accruing) Days Past Due	0	0
Non- Accrual	714	734
Total Loans	77,277	73,625
Commercial and industrial | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	24
Commercial and industrial | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	21
Municipal
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	62,302	57,511
Past Due	0	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	0	0
Total Loans	62,302	57,511
Municipal | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Municipal | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Residential mortgage | First lien
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	121,180	120,119
Past Due	789	1,888
90+ (still accruing) Days Past Due	0	0
Non- Accrual	3,737	4,015
Total Loans	125,706	126,022
Residential mortgage | First lien | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	746	1,844
Residential mortgage | First lien | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	43	44
Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	16,478	17,200
Past Due	1	34
90+ (still accruing) Days Past Due	1	0
Non- Accrual	99	103
Total Loans	16,578	17,337
Residential mortgage | Home equity - term | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	34
Residential mortgage | Home equity - term | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	110,902	109,740
Past Due	301	401
90+ (still accruing) Days Past Due	0	24
Non- Accrual	567	590
Total Loans	111,770	110,731
Residential mortgage | Home equity - lines of credit | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	301	286
Residential mortgage | Home equity - lines of credit | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	91
Installment and other loans
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	7,823	7,488
Past Due	23	16
90+ (still accruing) Days Past Due	0	0
Non- Accrual	16	17
Total Loans	7,862	7,521
Installment and other loans | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	23	16
Installment and other loans | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	$ 0	$ 0

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Activity in Allowance for Loan Losses (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Activity in allowance for loan losses
Balance, beginning of period	$ 13,568	$ 14,747
Provision for loan losses	0	0
Charge-offs	(329)	(335)
Recoveries	108	49
Balance, end of period	13,347	14,461
Commercial
Activity in allowance for loan losses
Balance, beginning of period	9,803	11,148
Provision for loan losses	(37)	(349)
Charge-offs	(21)	(114)
Recoveries	82	35
Balance, end of period	9,827	10,720
Commercial | Commercial Real Estate
Activity in allowance for loan losses
Balance, beginning of period	7,883	9,462
Provision for loan losses	33	(63)
Charge-offs	0	(66)
Recoveries	80	13
Balance, end of period	7,996	9,346
Commercial | Acquisition and Development
Activity in allowance for loan losses
Balance, beginning of period	850	697
Provision for loan losses	(111)	(87)
Charge-offs	0	(22)
Recoveries	0	0
Balance, end of period	739	588
Commercial | Commercial and Industrial
Activity in allowance for loan losses
Balance, beginning of period	1,012	806
Provision for loan losses	37	(137)
Charge-offs	(21)	(26)
Recoveries	2	22
Balance, end of period	1,030	665
Commercial | Municipal
Activity in allowance for loan losses
Balance, beginning of period	58	183
Provision for loan losses	4	(62)
Charge-offs	0	0
Recoveries	0	0
Balance, end of period	62	121
Consumer
Activity in allowance for loan losses
Balance, beginning of period	2,991	2,381
Provision for loan losses	147	509
Charge-offs	(308)	(221)
Recoveries	26	14
Balance, end of period	2,856	2,683
Consumer | Residential Mortgage
Activity in allowance for loan losses
Balance, beginning of period	2,870	2,262
Provision for loan losses	45	494
Charge-offs	(244)	(201)
Recoveries	6	12
Balance, end of period	2,677	2,567
Consumer | Installment and Other
Activity in allowance for loan losses
Balance, beginning of period	121	119
Provision for loan losses	102	15
Charge-offs	(64)	(20)
Recoveries	20	2
Balance, end of period	179	116
Unallocated
Activity in allowance for loan losses
Balance, beginning of period	774	1,218
Provision for loan losses	(110)	(160)
Charge-offs	0	0
Recoveries	0	0
Balance, end of period	$ 664	$ 1,058

XML

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES - Summary of Ending Loan Balances Evaluated for Impairment and Related Allowance for Loan Losses Allocation (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015	Mar. 31, 2015	Dec. 31, 2014
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	$ 16,950	$ 17,350
Loans, Collectively evaluated for impairment	787,753	764,363
Total Loans	804,703	781,713
Allowance for loan losses, Individually evaluated for impairment	149	289
Allowance for loan losses, Collectively evaluated for impairment	13,198	13,279
Allowance for loan losses, Total	13,347	13,568	$ 14,461	$ 14,747
Commercial and Industrial
Financing Receivable, Allowance for Credit Losses [Line Items]
Total Loans	77,277	73,625
Municipal
Financing Receivable, Allowance for Credit Losses [Line Items]
Total Loans	62,302	57,511
Installment and other loans
Financing Receivable, Allowance for Credit Losses [Line Items]
Total Loans	7,862	7,521
Commercial
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	11,488	11,832
Loans, Collectively evaluated for impairment	531,299	508,270
Total Loans	542,787	520,102
Allowance for loan losses, Individually evaluated for impairment	39	0
Allowance for loan losses, Collectively evaluated for impairment	9,788	9,803
Allowance for loan losses, Total	9,827	9,803	10,720	11,148
Commercial | Commercial Real Estate
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	10,771	11,093
Loans, Collectively evaluated for impairment	342,922	327,170
Total Loans	353,693	338,263
Allowance for loan losses, Individually evaluated for impairment	39	0
Allowance for loan losses, Collectively evaluated for impairment	7,957	7,883
Allowance for loan losses, Total	7,996	7,883	9,346	9,462
Commercial | Acquisition and Development
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	3	5
Loans, Collectively evaluated for impairment	49,512	50,698
Total Loans	49,515	50,703
Allowance for loan losses, Individually evaluated for impairment	0	0
Allowance for loan losses, Collectively evaluated for impairment	739	850
Allowance for loan losses, Total	739	850	588	697
Commercial | Commercial and Industrial
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	714	734
Loans, Collectively evaluated for impairment	76,563	72,891
Total Loans	77,277	73,625
Allowance for loan losses, Individually evaluated for impairment	0	0
Allowance for loan losses, Collectively evaluated for impairment	1,030	1,012
Allowance for loan losses, Total	1,030	1,012	665	806
Commercial | Municipal
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	0	0
Loans, Collectively evaluated for impairment	62,302	57,511
Total Loans	62,302	57,511
Allowance for loan losses, Individually evaluated for impairment	0	0
Allowance for loan losses, Collectively evaluated for impairment	62	58
Allowance for loan losses, Total	62	58	121	183
Consumer
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	5,462	5,518
Loans, Collectively evaluated for impairment	256,454	256,093
Total Loans	261,916	261,611
Allowance for loan losses, Individually evaluated for impairment	110	289
Allowance for loan losses, Collectively evaluated for impairment	2,746	2,702
Allowance for loan losses, Total	2,856	2,991	2,683	2,381
Consumer | Residential Mortgage
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	5,446	5,501
Loans, Collectively evaluated for impairment	248,608	248,589
Total Loans	254,054	254,090
Allowance for loan losses, Individually evaluated for impairment	103	281
Allowance for loan losses, Collectively evaluated for impairment	2,574	2,589
Allowance for loan losses, Total	2,677	2,870	2,567	2,262
Consumer | Installment and other loans
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	16	17
Loans, Collectively evaluated for impairment	7,846	7,504
Total Loans	7,862	7,521
Allowance for loan losses, Individually evaluated for impairment	7	8
Allowance for loan losses, Collectively evaluated for impairment	172	113
Allowance for loan losses, Total	179	121	116	119
Unallocated
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	0	0
Loans, Collectively evaluated for impairment	0	0
Total Loans	0	0
Allowance for loan losses, Individually evaluated for impairment	0	0
Allowance for loan losses, Collectively evaluated for impairment	664	774
Allowance for loan losses, Total	$ 664	$ 774	$ 1,058	$ 1,218

XML

INCOME TAXES - Components of Income Tax Expenses (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Current year provision (benefit):
Federal	$ (112)	$ (15)
State	(2)	4
Current income tax expense (benefit)	(114)	(11)
Deferred tax expense
Federal	722	720
State	6	6
Deferred tax expense (benefit)	728	726
Net income tax expense	$ 614	$ 715

XML

INCOME TAXES - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Income Tax Disclosure [Abstract]
Income tax expense related to net securities gains	$ 497	$ 535
Charitable contribution, expiry period	2019
Low-income housing, expiry period	2036
Net operating loss carryforwards, expiry period	2032

XML

INCOME TAXES - Components of Net Deferred Tax Asset (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Deferred tax assets:
Allowance for loan losses	$ 5,078	$ 5,111
Deferred compensation	546	547
Retirement plans and salary continuation	1,865	1,824
Share-based compensation	417	343
Off balance sheet reserves	224	218
Nonaccrual loan interest	315	246
Goodwill	116	124
Bonus accrual	69	359
Low income housing credit carryforward	1,735	1,652
Alternative minimum tax credit carryforward	2,262	2,195
Charitable contribution carryforward	69	211
Net operating loss carryforward	3,798	4,431
Other	190	182
Total deferred tax assets	16,684	17,443
Deferred tax liabilities:
Depreciation	771	815
Net unrealized gains on securities available for sale	2,387	646
Mortgage servicing rights	699	669
Purchase accounting adjustments	336	352
Other	180	181
Total deferred tax liabilities	4,373	2,663
Net deferred tax asset	$ 12,311	$ 14,780

XML

SHARE-BASED COMPENSATION PLANS - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015	May. 31, 2011
Orrstown 2011 Incentive Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares reserved to be issued				381,920
Shares to be issued under employee stock purchase plan	151,445
Orrstown 2011 Incentive Stock Plan | Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expense on restricted stock awards	$ 237	$ 131
Tax benefits from compensation expense	83	$ 46
Unrecognized compensation expense	$ 2,495		$ 2,293
Unrecognized compensation expense, recognition period	3 years
Orrstown 2011 Incentive Stock Plan | Employee Stock Option | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum term to exercise option	10 years
Employee Stock Purchase Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares reserved to be issued	350,000
Shares to be issued under employee stock purchase plan	189,877
Maximum shares purchase, as percentage of salary	10.00%
Percentage of value of the shares on the semi-annual offering	95.00%
Shares purchased by employees	2,461	2,964
Weighted average price (in usd per share)	$ 16.57	$ 15.74
Compensation expense recognized	$ 3	$ 3

XML

SHARE-BASED COMPENSATION PLANS - Summary of Outstanding Nonvested Restricted Shares (Details) - Orrstown 2011 Incentive Stock Plan - Restricted Stock	3 Months Ended
	Mar. 31, 2016 $ / shares shares
Shares
Nonvested shares, beginning of year (in shares) | shares	197,381
Granted (in shares) | shares	29,045
Forfeited (in shares) | shares	(1,083)
Vested (in shares) | shares	(2,500)
Nonvested shares, at period end (in shares) | shares	222,843
Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year (in usd per share) | $ / shares	$ 16.17
Granted (in usd per share) | $ / shares	17.69
Forfeited (in usd per share) | $ / shares	17.26
Vested (in usd per share) | $ / shares	10.43
Nonvested shares, at period end (in usd per share) | $ / shares	$ 16.43

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SHARE-BASED COMPENSATION PLANS - Summary of Outstanding Stock Options (Detail) - Orrstown 2011 Incentive Stock Plan - Employee Stock Option	3 Months Ended
	Mar. 31, 2016 $ / shares shares
Shares
Outstanding at beginning of year (in shares) | shares	101,460
Forfeited (in shares) | shares	(2,050)
Options outstanding and exercisable, at period end (in shares) | shares	99,410
Weighted Average Exercise Price
Outstanding at beginning of year (in usd per share) | $ / shares	$ 28.72
Forfeited (in usd per share) | $ / shares	26.54
Options outstanding and exercisable, at period end (in usd per share) | $ / shares	$ 28.76

XML

SHARE-BASED COMPENSATION PLANS - Information Pertaining to Outstanding and Exercisable Options (Detail) - Orrstown 2011 Incentive Stock Plan - Employee Stock Option	3 Months Ended
	Mar. 31, 2016 $ / shares shares
Range of Exercise Prices
Range of Exercise Prices, Minimum (in usd per share)	$ 21.14
Range of Exercise Prices, Maximum (in usd per share)	$ 37.59
Number Outstanding (in shares) | shares	99,410
Weighted Average Remaining Contractual Life	2 years 5 months 23 days
Weighted Average Exercise Price (in usd per share)	$ 28.76
$21.14 - $24.99
Range of Exercise Prices
Range of Exercise Prices, Minimum (in usd per share)	21.14
Range of Exercise Prices, Maximum (in usd per share)	$ 24.99
Number Outstanding (in shares) | shares	35,674
Weighted Average Remaining Contractual Life	4 years 1 month 24 days
Weighted Average Exercise Price (in usd per share)	$ 21.47
$25.00 - $29.99
Range of Exercise Prices
Range of Exercise Prices, Minimum (in usd per share)	25.00
Range of Exercise Prices, Maximum (in usd per share)	$ 29.99
Number Outstanding (in shares) | shares	2,792
Weighted Average Remaining Contractual Life	4 years 4 days
Weighted Average Exercise Price (in usd per share)	$ 25.76
$30.00 - $34.99
Range of Exercise Prices
Range of Exercise Prices, Minimum (in usd per share)	30.00
Range of Exercise Prices, Maximum (in usd per share)	$ 34.99
Number Outstanding (in shares) | shares	38,640
Weighted Average Remaining Contractual Life	1 year 6 months 11 days
Weighted Average Exercise Price (in usd per share)	$ 31.28
$35.00 - $37.59
Range of Exercise Prices
Range of Exercise Prices, Minimum (in usd per share)	35.00
Range of Exercise Prices, Maximum (in usd per share)	$ 37.59
Number Outstanding (in shares) | shares	22,304
Weighted Average Remaining Contractual Life	1 year 3 months
Weighted Average Exercise Price (in usd per share)	$ 36.44

XML

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL - Additional Information (Detail)	Jan. 19, 2016 USD ($)
Equity [Abstract]
Aggregate capital, amount	$ 100,000,000

XML

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL - Bank's Actual Capital Ratios (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Orrstown Financial Services, Inc.
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Actual, Amount, Total capital to risk weighted assets	$ 137,389	$ 134,562
Actual, Amount, Tier 1 capital to risk weighted assets	126,352	123,825
Actual, Amount, CET1 capital to risk weighted assets	126,352	123,825
Actual, Amount, Tier 1 capital to average assets	$ 126,352	$ 123,825
Actual, Ratio, Total capital to risk weighted assets	15.70%	15.80%
Actual, Ratio, Tier 1 capital to risk weighted assets	14.40%	14.60%
Actual, Ratio, CET1 capital to risk weighted assets	14.40%	14.60%
Actual, Ratio, Tier 1 capital to average assets	9.80%	9.80%
Minimum Capital Requirement, Amount, Total capital to risk weighted assets	$ 70,181	$ 68,078
Minimum Capital Requirement, Amount, Tier 1 capital to risk weighted assets	52,636	51,058
Minimum Capital Requirement, Amount, CET1 capital to risk weighted assets	39,477	38,294
Minimum Capital Requirement, Amount, Tier 1 capital to average assets	$ 51,579	$ 50,684
Minimum Capital Requirement, Ratio, Total capital to risk weighted assets	8.00%	8.00%
Minimum Capital Requirement, Ratio, Tier 1 capital to risk weighted assets	6.00%	6.00%
Minimum Capital Requirement, Ratio, CET1 capital to risk weighted assets	4.50%	4.50%
Minimum Capital Requirement, Ratio, Tier 1 capital to average assets	4.00%	4.00%
Orrstown Bank
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Actual, Amount, Total capital to risk weighted assets	$ 121,703	$ 118,671
Actual, Amount, Tier 1 capital to risk weighted assets	110,673	107,942
Actual, Amount, CET1 capital to risk weighted assets	110,673	107,942
Actual, Amount, Tier 1 capital to average assets	$ 110,673	$ 107,942
Actual, Ratio, Total capital to risk weighted assets	13.90%	14.00%
Actual, Ratio, Tier 1 capital to risk weighted assets	12.60%	12.70%
Actual, Ratio, CET1 capital to risk weighted assets	12.60%	12.70%
Actual, Ratio, Tier 1 capital to average assets	8.60%	8.50%
Minimum Capital Requirement, Amount, Total capital to risk weighted assets	$ 70,133	$ 68,027
Minimum Capital Requirement, Amount, Tier 1 capital to risk weighted assets	52,599	51,021
Minimum Capital Requirement, Amount, CET1 capital to risk weighted assets	39,450	38,265
Minimum Capital Requirement, Amount, Tier 1 capital to average assets	$ 51,609	$ 50,695
Minimum Capital Requirement, Ratio, Total capital to risk weighted assets	8.00%	8.00%
Minimum Capital Requirement, Ratio, Tier 1 capital to risk weighted assets	6.00%	6.00%
Minimum Capital Requirement, Ratio, CET1 capital to risk weighted assets	4.50%	4.50%
Minimum Capital Requirement, Ratio, Tier 1 capital to average assets	4.00%	4.00%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount, Total capital to risk weighted assets	$ 87,666	$ 85,034
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount, Tier 1 capital to risk weighted assets	70,133	68,027
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount, CET1 capital to risk weighted assets	56,983	55,272
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount, Tier 1 capital to average assets	$ 64,511	$ 63,368
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio, Total capital to risk weighted assets	10.00%	10.00%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio, Tier 1 capital to risk weighted assets	8.00%	8.00%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio, CET1 capital to risk weighted assets	6.50%	6.50%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio, Tier 1 capital to average assets	5.00%	5.00%

XML

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL - Treasury Stock (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	7 Months Ended
	Mar. 31, 2016	Mar. 31, 2016	Sep. 14, 2015
Equity [Abstract]
Stock repurchase program authorized, maximum percentage of outstanding shares of common stock			5.00%
Number of shares authorized to be repurchased			416,000
Acquisition of treasury stock (in shares)	14,221	61,298
Acquisition of treasury stock	$ 245	$ 1,051
Acquisition of treasury stock (in usd per share)		$ 17.15

XML

EARNINGS PER SHARE - Calculation of Basic and Diluted Earnings per Share(Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Earnings Per Share [Abstract]
Net income	$ 2,580	$ 2,462
Weighted average shares outstanding (basic)	8,071	8,110
Impact of common stock equivalents (in shares)	68	24
Weighted average shares outstanding (diluted)	8,139	8,134
Per share information:
Basic earnings per share (usd per share)	$ 0.32	$ 0.30
Diluted earnings per share (usd per share)	$ 0.32	$ 0.30

XML

EARNINGS PER SHARE - Additional Information (Detail) - shares shares in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Employee Stock Option
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Stock options excluded from diluted earnings per share (in shares)	99	130

XML

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Commitments and Conditional Obligations (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Revolving, open ended home equity loans
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Contract or Notional Amount	$ 115,813	$ 110,473
1-4 family residential construction loans
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Contract or Notional Amount	5,464	6,153
Commercial real estate, construction and land development loans
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Contract or Notional Amount	41,065	14,174
Commercial, industrial and other loans
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Contract or Notional Amount	87,971	84,480
Standby letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Contract or Notional Amount	$ 7,002	$ 6,510

XML

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Reserve for off-balance sheet credit exposures	$ 519		$ 472
Amount expensed to (recovered from) calculation of reserves based on historical loss experience	47	$ (68)
Mortgage Partnership Finance Program
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Sum of total loans sold under the MPF Program	42,478	44,124
Limited recourse debt	8,199		$ 8,230
Other expenses, loss (recovery) estimate	$ (52)	$ 40

XML

FAIR VALUE DISCLOSURES - Additional Information (Detail) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Allowance for loan losses	$ 2,234,000		$ 2,246,000
Specific charges to value the real estate owned	168,000		129,000
Changes in the fair value of foreclosed real estate	$ 51,000	$ 0
Short term borrowing maturity period	90 days
Impaired loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Changes in the fair value of impaired loans	$ (5,000)	$ 862,000
Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value liabilities	$ 0		$ 0

XML

FAIR VALUE DISCLOSURES - Summary of Assets Measured at Estimated Fair Value on Recurring Basis (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	$ 327,590	$ 394,124
Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	327,590	394,124
Fair Value, Measurements, Recurring | Debt Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	327,517	394,051
Fair Value, Measurements, Recurring | Debt Securities | U.S. Government Agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	45,139	47,227
Fair Value, Measurements, Recurring | Debt Securities | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	129,181	125,961
Fair Value, Measurements, Recurring | Debt Securities | U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	130,775	132,349
Fair Value, Measurements, Recurring | Debt Securities | GSE residential collateralized mortgage obligations (CMOs)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	14,404	15,843
Fair Value, Measurements, Recurring | Debt Securities | GSE commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		63,770
Fair Value, Measurements, Recurring | Debt Securities | Private label CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	8,018	8,901
Fair Value, Measurements, Recurring | Equity Securities | Equity securities - financial services
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	73	73
Fair Value, Measurements, Recurring | Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Debt Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Debt Securities | U.S. Government Agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Debt Securities | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Debt Securities | U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Debt Securities | GSE residential collateralized mortgage obligations (CMOs)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Debt Securities | GSE commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		0
Fair Value, Measurements, Recurring | Level 1 | Debt Securities | Private label CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Equity Securities | Equity securities - financial services
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	327,590	394,124
Fair Value, Measurements, Recurring | Level 2 | Debt Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	327,517	394,051
Fair Value, Measurements, Recurring | Level 2 | Debt Securities | U.S. Government Agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	45,139	47,227
Fair Value, Measurements, Recurring | Level 2 | Debt Securities | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	129,181	125,961
Fair Value, Measurements, Recurring | Level 2 | Debt Securities | U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	130,775	132,349
Fair Value, Measurements, Recurring | Level 2 | Debt Securities | GSE residential collateralized mortgage obligations (CMOs)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	14,404	15,843
Fair Value, Measurements, Recurring | Level 2 | Debt Securities | GSE commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		63,770
Fair Value, Measurements, Recurring | Level 2 | Debt Securities | Private label CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	8,018	8,901
Fair Value, Measurements, Recurring | Level 2 | Equity Securities | Equity securities - financial services
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	73	73
Fair Value, Measurements, Recurring | Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Debt Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Debt Securities | U.S. Government Agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Debt Securities | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Debt Securities | U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Debt Securities | GSE residential collateralized mortgage obligations (CMOs)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Debt Securities | GSE commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		0
Fair Value, Measurements, Recurring | Level 3 | Debt Securities | Private label CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Equity Securities | Equity securities - financial services
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	$ 0	$ 0

XML

FAIR VALUE DISCLOSURES - Summary of Additional Qualitative Information (Detail) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2016	Dec. 31, 2015
Impaired loans
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Valuation Techniques	Appraisal of collateral	Appraisal of collateral
Impaired loans | Management adjustments on appraisals for property type and recent activity
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input	Management adjustments on appraisals for property type and recent activity	Management adjustments on appraisals for property type and recent activity
Impaired loans | Management adjustments for liquidation expenses
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input	Management adjustments for liquidation expenses	Management adjustments for liquidation expenses
Foreclosed real estate
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Valuation Techniques	Appraisal of collateral	Appraisal of collateral
Foreclosed real estate | Management adjustments on appraisals for property type and recent activity
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input	Management adjustments on appraisals for property type and recent activity	Management adjustments on appraisals for property type and recent activity
Foreclosed real estate | Management adjustments for liquidation expenses
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input	Management adjustments for liquidation expenses	Management adjustments for liquidation expenses
Fair Value, Measurements, Nonrecurring | Impaired loans
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate	$ 4,850	$ 4,757
Fair Value, Measurements, Nonrecurring | Impaired loans | Minimum | Management adjustments for liquidation expenses
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	6.00%	6.00%
Fair Value, Measurements, Nonrecurring | Impaired loans | Minimum | Appraisal of collateral | Management adjustments on appraisals for property type and recent activity
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	0.00%	0.00%
Fair Value, Measurements, Nonrecurring | Impaired loans | Maximum | Management adjustments for liquidation expenses
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	44.00%	44.00%
Fair Value, Measurements, Nonrecurring | Impaired loans | Maximum | Appraisal of collateral | Management adjustments on appraisals for property type and recent activity
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	60.00%	70.00%
Fair Value, Measurements, Nonrecurring | Foreclosed real estate
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate	$ 265	$ 175
Fair Value, Measurements, Nonrecurring | Foreclosed real estate | Minimum | Management adjustments for liquidation expenses
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	5.00%	5.00%
Fair Value, Measurements, Nonrecurring | Foreclosed real estate | Minimum | Appraisal of collateral | Management adjustments on appraisals for property type and recent activity
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	10.00%	10.00%
Fair Value, Measurements, Nonrecurring | Foreclosed real estate | Maximum | Management adjustments for liquidation expenses
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	6.00%	6.00%
Fair Value, Measurements, Nonrecurring | Foreclosed real estate | Maximum | Appraisal of collateral | Management adjustments on appraisals for property type and recent activity
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Unobservable Input, Discount rate	20.00%	20.00%

XML

FAIR VALUE DISCLOSURES - Summary of Assets Measured at Fair Value on Nonrecurring Basis (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	$ 495	$ 710
Fair Value, Measurements, Nonrecurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	4,850	4,757
Foreclosed real estate	265	175
Fair Value, Measurements, Nonrecurring | Commercial real estate | Owner-occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	836	881
Fair Value, Measurements, Nonrecurring | Commercial real estate | Non-owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	736	736
Fair Value, Measurements, Nonrecurring | Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	225	233
Fair Value, Measurements, Nonrecurring | Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	507	570
Fair Value, Measurements, Nonrecurring | Acquisition and development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	79	74
Fair Value, Measurements, Nonrecurring | Acquisition and development | Commercial and land development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	3	5
Fair Value, Measurements, Nonrecurring | Residential mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	186	101
Fair Value, Measurements, Nonrecurring | Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	2,340	2,094
Fair Value, Measurements, Nonrecurring | Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	194	229
Fair Value, Measurements, Nonrecurring | Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	9	9
Fair Value, Measurements, Nonrecurring | Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Foreclosed real estate	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Commercial real estate | Owner-occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Commercial real estate | Non-owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Acquisition and development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Acquisition and development | Commercial and land development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Residential mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 1 | Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Foreclosed real estate	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Commercial real estate | Owner-occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Commercial real estate | Non-owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Acquisition and development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Acquisition and development | Commercial and land development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Residential mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 2 | Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Fair Value, Measurements, Nonrecurring | Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	4,850	4,757
Foreclosed real estate	265	175
Fair Value, Measurements, Nonrecurring | Level 3 | Commercial real estate | Owner-occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	836	881
Fair Value, Measurements, Nonrecurring | Level 3 | Commercial real estate | Non-owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	736	736
Fair Value, Measurements, Nonrecurring | Level 3 | Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	225	233
Fair Value, Measurements, Nonrecurring | Level 3 | Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	507	570
Fair Value, Measurements, Nonrecurring | Level 3 | Acquisition and development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	79	74
Fair Value, Measurements, Nonrecurring | Level 3 | Acquisition and development | Commercial and land development
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	3	5
Fair Value, Measurements, Nonrecurring | Level 3 | Residential mortgage
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Foreclosed real estate	186	101
Fair Value, Measurements, Nonrecurring | Level 3 | Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	2,340	2,094
Fair Value, Measurements, Nonrecurring | Level 3 | Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	194	229
Fair Value, Measurements, Nonrecurring | Level 3 | Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	$ 9	$ 9

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FAIR VALUE DISCLOSURES - Financial Instruments at Estimated Fair Values (Detail) - USD ($) $ in Thousands	Mar. 31, 2016	Dec. 31, 2015
Financial Assets
Interest bearing deposits with banks	$ 54,634	$ 16,928
Restricted investments in bank stocks	6,270	8,720
Securities available for sale	327,590	394,124
Carrying Amount
Financial Assets
Cash and due from banks	12,281	11,412
Interest bearing deposits with banks	54,634	16,928
Restricted investments in bank stocks	6,270	8,720
Securities available for sale	327,590	394,124
Loans held for sale	3,499	5,917
Loans, net of allowance for loan losses	791,356	768,145
Accrued interest receivable	3,582	3,845
Financial Liabilities
Deposits	1,048,376	1,032,167
Short-term borrowings	62,693	89,156
Long-term debt	24,413	24,495
Accrued interest payable	376	366
Off-balance sheet instruments	0	0
Fair Value
Financial Assets
Cash and due from banks	12,281	11,412
Interest bearing deposits with banks	54,634	16,928
Securities available for sale	327,590	394,124
Loans held for sale	3,595	6,045
Loans, net of allowance for loan losses	810,260	776,067
Accrued interest receivable	3,582	3,845
Financial Liabilities
Deposits	1,055,702	1,032,265
Short-term borrowings	62,693	89,156
Long-term debt	25,259	25,357
Accrued interest payable	376	366
Off-balance sheet instruments	0	0
Fair Value | Level 1
Financial Assets
Cash and due from banks	12,281	11,412
Interest bearing deposits with banks	54,634	16,928
Securities available for sale	0	0
Loans held for sale	0	0
Loans, net of allowance for loan losses	0	0
Accrued interest receivable	0	0
Financial Liabilities
Deposits	0	0
Short-term borrowings	0	0
Long-term debt	0	0
Accrued interest payable	0	0
Off-balance sheet instruments	0	0
Fair Value | Level 2
Financial Assets
Cash and due from banks	0	0
Interest bearing deposits with banks	0	0
Securities available for sale	327,590	394,124
Loans held for sale	3,595	6,045
Loans, net of allowance for loan losses	0	0
Accrued interest receivable	1,709	2,257
Financial Liabilities
Deposits	1,055,702	1,032,265
Short-term borrowings	62,693	89,156
Long-term debt	25,259	25,357
Accrued interest payable	376	366
Off-balance sheet instruments	0	0
Fair Value | Level 3
Financial Assets
Cash and due from banks	0	0
Interest bearing deposits with banks	0	0
Securities available for sale	0	0
Loans held for sale	0	0
Loans, net of allowance for loan losses	810,260	776,067
Accrued interest receivable	1,873	1,588
Financial Liabilities
Deposits	0	0
Short-term borrowings	0	0
Long-term debt	0	0
Accrued interest payable	0	0
Off-balance sheet instruments	$ 0	$ 0

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CONTINGENCIES (Detail) - claim	Jun. 22, 2015	Mar. 31, 2016
Commitments and Contingencies Disclosure [Abstract]
Legal proceedings		0
Number of days to file an amendment or stand on current amended complaint	30 days