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, 2013

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	23-2530374
(State or Other Jurisdiction of Incorporation or Organization)	(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 May 1, 2013: 8,090,988.

ORRSTOWN FINANCIAL SERVICES, INC.

INDEX

		Page
Part I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed consolidated balance sheets – March 31, 2013 and December 31, 2012		3
	Condensed consolidated statements of operations – Three months ended March 31, 2013 and 2012		4
	Condensed consolidated statements of comprehensive income (loss) – Three months ended March  31, 2013 and 2012		5
	Condensed consolidated statements of changes in shareholders’ equity – Three months ended March 31, 2013 and 2012		6
	Condensed consolidated statements of cash flows – Three months ended March 31, 2013 and 2012		7
	Notes to condensed consolidated financial statements		8-31
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31-50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
Item 4.	Controls and Procedures		50
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		51
Item 1A.	Risk Factors		51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		51-52
Item 3.	Defaults upon Senior Securities		52
Item 4.	Mine Safety Disclosures		52
Item 5.	Other Information		52
Item 6.	Exhibits		52
SIGNATURES			53
EXHIBIT INDEX			54

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, 2013			December 31, 2012*
Assets
Cash and due from banks	$	10,713		$	16,933
Interest bearing deposits with banks		84,057			133,755
Cash and cash equivalents		94,770			150,688
Restricted investments in bank stock		9,582			9,804
Securities available for sale		349,733			301,970
Loans held for sale		7,180			7,862
Loans		674,748			703,739
Less: Allowance for loan losses		(21,917	)		(23,166	)
Net loans		660,011			688,435
Premises and equipment, net		26,457			26,782
Cash surrender value of life insurance		25,230			25,030
Intangible assets		780			832
Accrued interest receivable		3,444			3,188
Other assets		27,031			25,939
Total assets	$	1,197,038		$	1,232,668
Liabilities
Deposits:
Non-interest bearing	$	116,926		$	121,090
Interest bearing		927,371			963,949
Total deposits		1,044,297			1,085,039
Short-term borrowings		15,244			9,650
Long-term debt		37,128			37,470
Accrued interest and other liabilities		11,520			12,815
Total liabilities		1,108,189			1,144,974
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; 8,091,800 and 8,080,411 shares issued; 8,090,988 and 8,079,599 shares outstanding		421			421
Additional paid – in capital		122,822			122,724
Retained earnings (accumulated deficit)		(35,699	)		(37,259	)
Accumulated other comprehensive income		1,325			1,828
Treasury stock – common, 812 shares, at cost		(20	)		(20	)
Total shareholders’ equity		88,849			87,694
Total liabilities and shareholders’ equity	$	1,197,038		$	1,232,668

* The consolidated balance sheet at December 31, 2012 has been derived from audited financial statements at that date.

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

3

Consolidated Statements of Operations (Unaudited)

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

	Three Months Ended
(Dollars in thousands, Except per Share Data)	March 31, 2013			March 31, 2012
Interest and dividend income
Interest and fees on loans	$	8,217		$	11,106
Interest and dividends on investment securities
Taxable		941			1,308
Tax-exempt		265			614
Short-term investments		61			61
Total interest and dividend income		9,484			13,089
Interest expense
Interest on deposits		1,224			1,978
Interest on short-term borrowings		6			52
Interest on long-term debt		147			217
Total interest expense		1,377			2,247
Net interest income		8,107			10,842
Provision for loan losses		0			19,200
Net interest income after provision for loan losses		8,107			(8,358	)
Noninterest income
Service charges on deposit accounts		1,414			1,519
Other service charges, commissions and fees		228			314
Trust department income		1,127			1,136
Brokerage income		637			362
Mortgage banking activities		752			492
Earnings on life insurance		239			248
Other income (loss)		(87	)		(108	)
Investment securities gains		122			2,231
Total noninterest income		4,432			6,194
Noninterest expense
Salaries and employee benefits		5,746			4,657
Occupancy expense		548			514
Furniture and equipment		777			678
Data processing		128			128
Telephone		109			160
Advertising and bank promotions		211			372
FDIC Insurance		665			521
Professional services		761			801
Collection and problem loan expenses		182			719
Real estate owned expenses		43			376
Taxes other than income		244			235
Intangible asset amortization		52			52
Other operating expenses		1,483			1,673
Total noninterest expenses		10,949			10,886
Income (loss) before income tax (benefit)		1,590			(13,050	)
Income tax expense (benefit)		30			(4,832	)
Net income (loss)	$	1,560		$	(8,218	)
Per share information:
Basic earnings (loss) per share	$	0.19		$	(1.02	)
Diluted earnings (loss) per share		0.19			(1.02	)
Dividends per share		0.00			0.00

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

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Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

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

	Three Months Ended
(Dollars in thousands)	March 31, 2013			March 31, 2012
Net income (loss)	$	1,560		$	(8,218	)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available for sale arising during the period		(652	)		1,037
Reclassification adjustment for gains realized in net income (loss)		(122	)		(2,231	)
Net unrealized losses		(774	)		(1,194	)
Tax effect		271			419
Total other comprehensive income (loss), net of tax and reclassification adjustments		(503	)		(775	)
Total comprehensive income (loss)	$	1,057		$	(8,993	)

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, 2013 and 2012
(Dollars in thousands, except per share data)	Common Stock		Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Shareholders’ Equity
Balance, January 1, 2012	$	419	$	122,514	$	1,195		$	4,089		$	(20	)	$	128,197
Net income (loss)		0		0		(8,218	)		0			0			(8,218	)
Total other comprehensive income (loss), net of taxes		0		0		0			(775	)		0			(775	)
Stock-based compensation plans:
Compensation expense		0		18		0			0			0			18
Issuance of stock through dividend reinvestment plan (352 shares)		0		3		0			0			0			3
Balance, March 31, 2012	$	419	$	122,535	$	(7,023	)	$	3,314		$	(20	)	$	119,225
Balance, January 1, 2013	$	421	$	122,724	$	(37,259	)	$	1,828		$	(20	)	$	87,694
Net income (loss)		0		0		1,560			0			0			1,560
Total other comprehensive income (loss), net of taxes		0		0		0			(503	)		0			(503	)
Stock-based compensation plans:
Issuance of stock (11,175 shares)		0		95		0			0			0			95
Issuance of stock through dividend reinvestment plan (214 shares)		0		3		0			0			0			3
Balance, March 31, 2013	$	421	$	122,822	$	(35,699	)	$	1,325		$	(20	)	$	88,849

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, Except per Share Data)	March 31, 2013			March 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1 ,560		$	(8,218	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of premiums on securities available for sale		1,720			1,590
Depreciation and amortization		661			654
Provision for loan losses		0			19,200
Stock based compensation		39			18
Net change in loans held for sale		682			(1,615	)
Net loss on disposal of other real estate owned		122			138
Write-down of other real estate owned		0			309
Deferred income taxes, including valuation allowance		0			(2,582	)
Investment securities gains		(122	)		(2,231	)
Earnings on cash surrender value of life insurance		(200	)		(215	)
(Increase) decrease in accrued interest receivable		(256	)		117
Increase (decrease) in accrued interest payable		1			(148	)
Other, net		(2,156	)		(1,628	)
Net cash provided by operating activities		2,051			5,389
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available for sale securities		19,786			30,865
Maturities, repayments and calls of available for sale securities		22,035			13,868
Purchases of available for sale securities		(91,956	)		(46,404	)
Net change in restricted investments in bank stocks		222			132
Net decrease in loans		27,437			30,269
Purchases of bank premises and equipment		(184	)		(208	)
Proceeds from disposal of other real estate owned		122			855
Net cash provided (used) by investing activities		(22,538	)		29,377
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits		(40,742	)		(3,179	)
Net increase in short term purchased funds		5,594			18,739
Payments on long-term debt		(342	)		(5,326	)
Proceeds from issuance of common stock		59			3
Net cash provided (used) by financing activities		(35,431	)		10,237
Net increase (decrease) in cash and cash equivalents		(55,918	)		45,003
Cash and cash equivalents at beginning of period		150,688			109,669
Cash and cash equivalents at end of period	$	94,770		$	154,672
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,378		$	2,395
Income taxes		0			42
Supplemental schedule of noncash investing activities:
Other real estate acquired in settlement of loans	$	293		$	1,550

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

7

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) whose primary activity consists of supervising its wholly-owned subsidiary, the Orrstown Bank (the “Bank”). The Company operates through its office in Shippensburg, Pennsylvania. The Bank provides services through its network of 21 offices in Franklin, Cumberland and Perry Counties of Pennsylvania and in Washington County, Maryland. The Bank engages in lending services for commercial loans, residential loans, commercial mortgages 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 its subsidiary are subject to the regulation of certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation – The unaudited financial statements of the Company and its subsidiary are presented for the three months ended March 31, 2013 and 2012 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, 2012 is condensed from audited year-end financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto, included in the Annual Report Form 10-K for the year ended December 31, 2012. The consolidated financial statements include the accounts of the Company and the Bank. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation allowance required on its deferred tax assets. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans and foreclosed real estate; future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance based on their judgments concerning information available to them at the time of their examination. Because of these factors, management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term.

The Company has established a full valuation allowance on its net deferred tax assets at March 31, 2013, based on the Company’s previous taxable losses, projections for future taxable income, and other available evidence, in which management determined it was “more likely than not” that some portion of the asset would not be realized. Management may need to modify its judgment in this regard from one quarter to the next, and should improvement occur in operating performance, the need for a full valuation allowance may be reduced or eliminated.

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. In preparing these financial statements, the Company evaluated the events and transactions that occurred after March 31, 2013, through the date these financial statements were filed with the Securities and Exchange Commission (the “Commission”).

Concentration of Credit Risk – The Company grants commercial, residential and consumer loans 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 construction contractors, residential and non-residential building operators, sales finance, sub-dividers

8

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.

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, 2013 and December 31, 2012, and consists of common stock of the Federal Reserve Bank of Philadelphia, Atlantic Central Bankers Bank and the Federal Home Loan Bank (“FHLB”) of Pittsburgh stocks.

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 investment in bank stocks as of March 31, 2013. However, security impairment analysis is completed quarterly and the determination that no impairment had occurred as of March 31, 2013 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, 2013 and December 31, 2012 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 approximates 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.

The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment (FASB ASC 820-10). This guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery; the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

The Company had no debt securities it deemed to be other than temporarily impaired at March 31, 2013 and December 31, 2012.

The Company’s securities are exposed to various risks, such as interest rate, 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.

For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.

9

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, mortgage, and 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 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, 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 payment 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.

Loan terms which are modified are classified as troubled debt restructurings if a concession was granted, for legal or economic reasons, related to a debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, 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 troubled debt restructurings 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. Troubled debt restructurings 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.

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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.

Loans Serviced – The Bank administers secondary market mortgage programs available through the Federal Home Loan Bank of Pittsburgh 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, 2013 and December 31, 2012 the balance of loans serviced for others was $328,513,000 and $329,360,000.

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.

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 – 10 to 40 years; equipment, furniture and fixtures – 3 to 15 years; and computer software – 3 to 5 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.

10

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 loan. 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 – Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold 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 $1,925,000 and $1,876,000 as of March 31, 2013 and December 31, 2012 and is included in other assets.

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 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 statements of condition, 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.

Advertising – The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expense was $74,000 and $227,000 for the three months ended March 31, 2013 and 2012.

Stock Compensation Plans – The Company has a stock compensation plan that covers employees and non-employee directors. Stock compensation accounting guidance (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 are 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.

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

Earnings Per Share – Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. 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 relate solely to outstanding stock options.

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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 (losses) on securities available for sale for all years presented.

The component of accumulated other comprehensive income, net of taxes, at March 31, 2013 and December 31, 2012 consisted of unrealized gains on securities available for sale and totaled $1,325,000 and $1,828,000.

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 8. 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.

Recent Accounting Pronouncements – In December 2011, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures About Offsetting Assets and Liabilities. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The provisions of ASU No. 2013-01 limits the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions. The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impacted the disclosure requirements related to the offsetting of assets and liabilities and information about instruments and transactions eligible for offset in the statement of financial position, the adoption had no impact on the Company’s consolidated statements of operations and financial condition.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income (e.g., unrealized gains or losses on available-for-sale investment securities) and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also requires that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., unrealized gains or losses on available-for-sale investment securities) and the income statement line item affected by the reclassification (e.g., realized gains (losses) on sales of investment securities). If a component is not required to be reclassified to net income in its entirety (e.g., amortization of defined benefit plan items), entities would instead cross reference to the related note to the financial statements for additional information (e.g., pension footnote). The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. As the Company’s only item of accumulated other comprehensive income is unrealized gains or losses on securities available for sale, the adoption of this standard had no impact on our Consolidated Financial Statements.

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NOTE 2. SECURITIES AVAILABLE FOR SALE

At March 31, 2013 and December 31, 2012, 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, 2013 and December 31, 2012 were:

(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2013
U.S. Treasury	$	25,996	$	21	$	0	$	26,017
U.S. Government Agencies		28,220		47		203		28,064
U.S. Government Sponsored Enterprises (GSE)		40,843		330		7		41,166
States and political subdivisions		56,909		1,250		164		57,995
GSE residential mortgage-backed securities		164,445		1,279		233		165,491
GSE commercial mortgage-backed securities		31,232		0		301		30,931
Total debt securities		347,645		2,927		908		349,664
Equity securities – financial services		50		19		0		69
Totals	$	347,695	$	2,946	$	908	$	349,733
December 31, 2012
U.S. Treasury	$	25,996	$	14	$	0	$	26,010
U.S. Government Sponsored Enterprises (GSE)		44,331		431		0		44,762
States and political subdivisions		37,324		1,588		3		38,909
GSE residential mortgage-backed securities		160,118		1,014		333		160,799
GSE commercial mortgage-backed securities		31,339		143		61		31,421
Total debt securities		299,108		3,190		397		301,901
Equity securities – financial services		50		19		0		69
Totals	$	299,158	$	3,209	$	397	$	301,970

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 individual securities have been in a continuous unrealized loss position at March 31, 2013 and December 31, 2012:

	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, 2013
U.S. Government Agencies	$	12,891	$	203	$	0	$	0	$	12,891	$	203
U.S. Government Sponsored Enterprises (GSE)		2,194		7		0		0		2,194		7
States and political subdivisions		18,090		164		0		0		18,090		164
GSE residential mortgage-backed securities		51,613		218		1,951		15		53,564		233
GSE commercial mortgage-backed securities		30,931		301		0		0		30,931		301
Total temporarily impaired securities	$	115,719	$	893	$	1,951	$	15	$	117,670	$	908
December 31, 2012
States and political subdivisions	$	885	$	3	$	0	$	0	$	885	$	3
GSE residential mortgage-backed securities		64,952		312		2,657		21		67,609		333
GSE commercial mortgage-backed securities		20,396		61		0		0		20,396		61
Total temporarily impaired securities	$	86,233	$	376	$	2,657	$	21	$	88,890	$	397

The Company had 37 securities and 27 securities at March 31, 2013 and December 31, 2012 in which the amortized cost exceeds their values, as discussed below.

U.S. Agencies and Government Sponsored Enterprises (GSE). Twenty eight U.S. Agencies and GSE securities, including mortgage-backed securities, have amortized costs which exceed their fair values, all but one of which are in the less than 12 months category at March 31, 2013. At December 31, 2012, the Company had 26 GSE securities with amortized costs which exceed their fair values, all but one of which was in the less than 12 months category. These unrealized losses have been caused by a rise in interest rates 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 amortized cost bases of the investments. 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 bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013 or at December 31, 2012.

State and Political Subdivisions. Nine state and political subdivision securities had amortized costs which exceeded their fair value for less than 12 months at March 31, 2013. At December 31, 2012, one state and political subdivision security had an unrealized loss, which was less than 12 months. These unrealized losses have been caused by a rise in interest rates from the time the securities

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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 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 bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013 or at December 31, 2012.

The amortized cost and fair values of securities available for sale at March 31, 2013 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	$	26,627	$	26,699
Due after one year through five years		31,688		31,781
Due after five years through ten years		21,058		21,657
Due after ten years		72,595		73,105
GSE residential mortgage-backed securities		164,445		165,491
GSE commercial mortgage-backed securities		31,232		30,931
Total debt securities		347,645		349,664
Equity securities		50		69
	$	347,695	$	349,733

Proceeds from sales of securities available for sale for the quarters ended March 31, 2013 and 2012 were $19,786,000 and $30,865,000. Gross gains on the sales of securities were $259,000 and $2,260,000 for the quarters ended March 31, 2013 and 2012. Gross losses on securities available for sale were $137,000 and $29,000 for the quarters ended March 31, 2013 and 2012.

Securities with a fair value of $243,107,000 and $258,024,000 at March 31, 2013 and December 31, 2012 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. Management has incorporated the provisions of ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, resulting in a refinement in its portfolio segregation. Consistent with the standard, 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 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 properties present a different credit risk to the Company than owner-occupied commercial real estate, 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 hinder 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 in its loan pricing.

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.

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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 to 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, or by revenue obligations, or 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 first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the credit. 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 limits 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 conservative 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 classes, as of March 31, 2013 and December 31, 2012 was as follows:

(Dollars in thousands)	March 31, 2013		December 31, 2012
Commercial real estate:
Owner-occupied	$	137,354	$	144,290
Non-owner occupied		108,256		120,930
Multi-family		21,181		21,745
Non-owner occupied residential		64,621		66,381
Acquisition and development:
1-4 family residential construction		1,989		2,850
Commercial and land development		24,878		30,375
Commercial and industrial		42,443		39,340
Municipal		67,470		68,018
Residential mortgage:
First lien		108,964		108,601
Home equity – term		15,333		14,747
Home equity – Lines of credit		75,724		79,448
Installment and other loans		6,535		7,014
	$	674,748	$	703,739

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In order to monitor ongoing risk associated with its loan portfolio and specific credits 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 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 mitigate risk in the lending function. The Credit Administration Committee, comprised of executive officers and loan department personnel, was charged with the oversight of overall credit quality and risk exposure of the Company’s loan portfolio. Effective December 31, 2012, the Credit Administration Committee became a subcommittee of the Enterprise Risk Management (“ERM”) Committee. From that date forward, the ERM Committee is responsible for oversight of the overall credit quality and risk exposure. 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.

Loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000. Loan review documentation is submitted to the ERM Committee no less than quarterly with a formal review and confirmation of risk rating as presented by independent loan review personnel. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed by the ERM Committee on a quarterly basis, with reaffirmation of the rating as approved by the Bank’s Loan Work Out Committee or loan review staff.

The following summarizes the Bank’s ratings based on its internal risk rating system as of March 31, 2013 and December 31, 2012:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
March 31, 2013
Commercial real estate:
Owner-occupied	$	118,677	$	9,998	$	6,514	$	2,165	$	0	$	137,354
Non-owner occupied		81,661		12,342		11,255		2,998		0		108,256
Multi-family		17,050		3,412		719		0		0		21,181
Non-owner occupied residential		44,226		11,547		4,931		3,917		0		64,621
Acquisition and development:
1-4 family residential construction		1,018		162		0		293		516		1,989
Commercial and land development		13,163		6,263		2,619		2,833		0		24,878
Commercial and industrial		37,042		2,896		1,176		564		765		42,443
Municipal		67,470		0		0		0		0		67,470
Residential mortgage:
First lien		102,760		3,515		0		2,689		0		108,964
Home equity – term		15,014		210		72		37		0		15,333
Home equity – Lines of credit		73,013		844		1,348		519		0		75,724
Installment and other loans		6,523		10		1		1		0		6,535
	$	577,617	$	51,199	$	28,635	$	16,016	$	1,281	$	674,748

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(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
December 31, 2012
Commercial real estate:
Owner-occupied	$	121,333	$	11,917	$	8,623	$	2,229	$	188	$	144,290
Non-owner occupied		95,876		7,351		14,241		3,462		0		120,930
Multi-family		17,205		3,936		585		19		0		21,745
Non-owner occupied residential		45,468		12,199		3,346		5,368		0		66,381
Acquisition and development:
1-4 family residential construction		1,608		333		0		198		711		2,850
Commercial and land development		14,793		8,937		2,836		3,208		601		30,375
Commercial and industrial		33,380		3,713		429		566		1,252		39,340
Municipal		68,018		0		0		0		0		68,018
Residential mortgage:
First lien		101,390		3,026		1,604		2,581		0		108,601
Home equity – term		14,403		52		235		57		0		14,747
Home equity – Lines of credit		76,418		1,073		1,365		592		0		79,448
Installment and other loans		6,998		11		3		2		0		7,014
	$	596,890	$	52,548	$	33,267	$	18,282	$	2,752	$	703,739

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 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 will be 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. As of the periods presented, the Company has no loans to borrowers that resulted from splitting impaired loans into multiple notes. 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, 2013 and December 31, 2012, nearly all of the Company’s impaired loans’ extent of impairment was measured based on the estimated fair value of the collateral securing the credit, except for troubled debt restructurings. By definition, troubled debt restructurings are considered impaired. All restructured loans’ impairment was determined based on discount cash flows for those loans classified as trouble debt restructurings but are 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 required annually 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 were 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 properties’ 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 (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.

17

Collateral on certain impaired loans is not limited to real estate, and consists 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. “Substandard” classification does not automatically meet the definition of “impaired”. A substandard credit is one that is inadequately protected by current sound worth, 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 credits, does not have to exist in individual extensions of credit classified substandard. As a result, the Company revised its methodology in its 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 homogenous 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 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, 2013 and December 31, 2012. Allowances established at March 31, 2013 and December 31, 2012 generally pertain to those credits 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, 2013
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,165	$	2,426
Non-owner occupied		1,248		1,249		325		1,750		3,730
Non-owner occupied residential		202		202		45		3,715		5,353
Acquisition and development:
1-4 family residential construction		516		536		9		293		299
Commercial and land development		0		0		0		2,833		7,427
Commercial and industrial		885		914		627		444		444
Residential mortgage:
First lien		0		0		0		2,689		2,906
Home equity – term		0		0		0		37		58
Home equity – Lines of credit		0		0		0		519		528
Installment and other loans		0		0		0		1		2
	$	2,851	$	2,901	$	1,006	$	14,446	$	23,173

18

	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)
December 31, 2012
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,417	$	2,680
Non-owner occupied		1,257		1,257		329		2,205		5,487
Multi-family		0		0		0		19		198
Non-owner occupied residential		204		204		46		5,164		6,510
Acquisition and development:
1-4 family residential construction		711		725		9		198		202
Commercial and land development		0		0		0		3,809		8,556
Commercial and industrial		1,373		1,402		928		445		445
Residential mortgage:
First lien		0		0		0		2,581		2,784
Home equity – term		0		0		0		57		75
Home equity – Lines of credit		0		0		0		592		597
Installment and other loans		0		0		0		2		2
	$	3,545	$	3,588	$	1,312	$	17,489	$	27,536

The following summarizes the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired for the three months ended March 31:

	2013				2012
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,291	$	0	$	11,229		40
Non-owner occupied		3,230		0		19,270		67
Multi-family		10		0		2,814		0
Non-owner occupied residential		4,643		3		41,380		146
Acquisition and development:
1-4 family residential construction		859		0		1,714		0
Commercial and land development		3,321		0		16,117		71
Commercial and industrial		1,574		0		2,128		8
Residential mortgage:
First lien		2,635		2		2,001		0
Home equity – term		47		0		316		0
Home equity – lines of credit		555		0		489		0
Installment and other loans		2		0		13		0
Total	$	19,167	$	5	$	97,471	$	332

The following presents impaired loans that are troubled debt restructurings, with the recorded investment being both the pre-modification and post-modification balances as of March 31, 2013 and December 31, 2012.

	March 31, 2013				December 31, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial real estate:
Non-owner occupied		2	$	1,967		2	$	1,981
Non-owner occupied residential		1		202		1		204
Commercial and industrial		1		120		1		122
Residential mortgage:
First lien		2		753		2		749
Home equity – lines of credit		1		36		1		36
		7		3,078		7		3,092
Nonaccruing:
Commercial real estate:
Owner-occupied		1		7		1		7
Non-owner occupied		4		984		4		1,209
		5		991		5		1,216
		12	$	4,069		12	$	4,308

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The following table presents restructured loans, included in nonaccrual status, that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the period March 31, 2013 and 2012.

	March 31, 2013				March 31, 2012
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Non-owner occupied residential		0	$	0		5	$	1,217
Owner occupied		0		0		3		1,294
		0	$	0		8	$	2,511

The following presents the number of loans modified, and their pre-modification and post-modification investment balances for the three months ended March 31, 2013 and 2012:

	2013				2012
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial and industrial		0	$	0		1	$	37
		0		0		1		37
Nonaccruing:
Commercial real estate:
Non-owner occupied		0		0		1		473
Commercial and industrial		0		0		1		302
		0		0		2		775
		0	$	0		3	$	812

The loans presented above were considered troubled debt restructurings 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 for residential mortgage loans, a temporary reduction in interest rates for periods not exceeding 12 months in order to assist the borrowers to improve cash flows during such periods. For troubled debt restructurings in default of their modified terms, impairment is determined on a collateral dependent approach.

No additional commitments have been made to borrowers whose loans are considered troubled debt restructurings.

Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2013 and December 31, 2012:

			Days Past Due
Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
March 31, 2013
Commercial real estate:
Owner-occupied	$	134,381	$	202	$	606	$	0	$	808	$	2,165	$	137,354
Non-owner occupied		107,003		0		222		0		222		1,031		108,256
Multi-family		21,042		0		139		0		139		0		21,181
Non-owner occupied residential		59,827		476		603		0		1,079		3,715		64,621
Acquisition and development:
1-4 family residential construction		1,180		0		0		0		0		809		1,989
Commercial and land development		21,190		855		0		0		855		2,833		24,878
Commercial and industrial		40,954		219		61		0		280		1,209		42,443
Municipal		67,470		0		0		0		0		0		67,470
Residential mortgage:
First lien		104,963		1,990		74		0		2,064		1,937		108,964
Home equity – term		15,150		140		6		0		146		37		15,333
Home equity – Lines of credit		74,820		208		213		0		421		483		75,724
Installment and other loans		6,479		52		3		0		55		1		6,535
	$	654,459	$	4,142	$	1,927	$	0	$	6,069	$	14,220	$	674,748

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			Days Past Due
	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2012
Commercial real estate:
Owner-occupied	$	141,833	$	40	$	0	$	0	$	40	$	2,417	$	144,290
Non-owner occupied		119,320		129		0		0		129		1,481		120,930
Multi-family		21,726		0		0		0		0		19		21,745
Non-owner occupied residential		60,890		122		205		0		327		5,164		66,381
Acquisition and development:
1-4 family residential construction		1,770		0		171		0		171		909		2,850
Commercial and land development		26,054		511		1		0		512		3,809		30,375
Commercial and industrial		37,348		296		0		0		296		1,696		39,340
Municipal		68,018		0		0		0		0		0		68,018
Residential mortgage:
First lien		104,933		1,565		270		0		1,835		1,833		108,601
Home equity – term		14,609		81		0		0		81		57		14,747
Home equity – Lines of credit		78,880		0		12		0		12		556		79,448
Installment and other loans		6,837		161		14		0		175		2		7,014
	$	682,218	$	2,905	$	673	$	0	$	3,578	$	17,943	$	703,739

The Company’s maintains the allowance for loan losses at a level believed adequate by management to absorb losses inherent in the portfolio. 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 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.

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 response to the improved risk profile within the loan portfolio at December 31, 2012, the look back period for historical losses was extended to 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. Again, management considered current economic 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. Based on management’s assessment and in compliance with regulatory guidance, the Company began recording partial charge offs on collateral dependent loans in the first quarter of 2012, eliminating the need for specific reserves. Although both methods are acceptable under ASC 310, the revised method is more consistent with regulatory directives and was implemented by the Company resulting in increased charge-offs during 2012.

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, 2013 and December 31, 2012, 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 number of exceptions to loan policy; supervisory loan to value exceptions etc.

Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the Bank’s overall portfolio makeup and managements 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.

21

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 its impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – Factors considered include the years 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.

Prior to December 31, 2012, qualitative factors were also utilized in the determination of loans collectively evaluated for impairment, but consisted of only five factors, which are included in the eight factors listed above, with anticipated loss allocations that ranged from 0-8 basis points. It was determined that the qualitative adjustments would be expanded to the current range of a minus 150 basis points to a positive 150 basis points, as the prior range of 0-8 basis points was deemed to be too restrictive and did not adequately address the credit improvement in the remaining loan portfolio.

Activity in the allowance for loan losses for three months ended March 31, 2013 and 2012 is 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, 2013
Balance, beginning of period	$	13,719		$	3,502		$	1,635		$	223	$	19,079		$	2,275		$	85		$	2,360		$	1,727	$	23,166
Provision for loan losses		(473	)		(746	)		(292	)		62		(1,449	)		1,145			31			1,176			273		0
Charge-offs		(1,142	)		(145	)		0			0		(1,287	)		(38	)		(20	)		(58	)		0		(1,345	)
Recoveries		61			3			10			0		74			6			16			22			0		96
Balance, end of period	$	12,165		$	2,614		$	1,353		$	285	$	16,417		$	3,388		$	112		$	3,500		$	2,000	$	21,917
March 31, 2012
Balance, beginning of period	$	29,559		$	9,708		$	1,085		$	789	$	41,141		$	933		$	75		$	1,008		$	1,566	$	43,715
Provision for loan losses		13,364			3,850			855			116		18,185			592			(24	)		568			447		19,200
Charge-offs		(26,663	)		(7,312	)		(1,068	)		0		(35,043	)		(228	)		(12	)		(240	)		0		(35,283	)
Recoveries		22			473			19			0		514			4			6			10			0		524
Balance, end of period	$	16,282		$	6,719		$	891		$	905	$	24,797		$	1,301		$	45		$	1,346		$	2,013	$	28,156

The following summarizes the ending loan balance individually evaluated for impairment based upon loan segment, as well as the related allowance for loan loss allocation for each at March 31, 2013 and December 31, 2012:

(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Residential Mortgage		Installment and Other		Unallocated		Total
March 31, 2013
Loans allocated by:
Individually evaluated for impairment	$	9,080	$	3,642	$	1,329	$	0	$	3,245	$	1	$	0	$	17,297
Collectively evaluated for impairment		322,332		23,225		41,114		67,470		196,776		6,534		0		657,451
	$	331,412	$	26,867	$	42,443	$	67,470	$	200,021	$	6,535	$	0	$	674,748
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	370	$	9	$	627	$	0	$	0	$	0	$	0	$	1,006
Collectively evaluated for impairment		11,795		2,605		726		285		3,388		112		2,000		20,911
	$	12,165	$	2,614	$	1,353	$	285	$	3,388	$	112	$	2,000	$	21,917

22

(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Residential Mortgage		Installment and Other		Unallocated		Total
December 31, 2012
Loans allocated by:
Individually evaluated for impairment	$	11,266	$	4,718	$	1,818	$	0	$	3,230	$	2	$	0	$	21,034
Collectively evaluated for impairment		342,080		28,507		37,522		68,018		199,566		7,012		0		682,705
	$	353,346	$	33,225	$	39,340	$	68,018	$	202,796	$	7,014	$	0	$	703,739
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	375	$	9	$	928	$	0	$	0	$	0	$	0	$	1,312
Collectively evaluated for impairment		13,344		3,493		707		223		2,275		85		1,727		21,854
	$	13,719	$	3,502	$	1,635	$	223	$	2,275	$	85	$	1,727	$	23,166

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 or state income tax examination by tax authorities for years before 2009.

Included in the balance sheet at March 31, 2013 and December 31, 2012, are tax positions related to loan charge-offs for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the tax authority to an earlier period.

The components of income tax expense for the three months ended March 31, 2013 and 2012 are summarized as follows:

	Three Months Ended March 31
(Dollars in thousands)	2013			2012
Current year provision:
Federal	$	30		$	(2,292	)
State		0			42
Deferred tax expense (benefit)		69			(2,582	)
Valuation allowance on deferred taxes		(69	)		0
Net income tax expense (benefit)	$	30		$	(4,832	)

The provision for income taxes includes $43,000 and $781,000 of applicable income tax expense related to net security gains for March 31, 2013 and 2012.

23

The components of the net deferred tax liability, included in other liabilities, are as follows:

(Dollars in thousands)	March 31, 2013			December 31, 2012
Deferred tax assets:
Allowance for loan losses	$	9,234		$	9,672
Deferred compensation		478			477
Retirement plans and salary continuation		1,505			1,473
Stock compensation		184			184
Off balance sheet commitment reserves		218			231
Nonaccrual loan interest		268			228
Goodwill		214			214
Low income housing credit carry forward		925			806
Alternative minimum tax credit carryforward		30			0
Charitable contribution carry forward		393			391
Net operating loss carry forward		8,589			8,466
Other		221			237
Total deferred tax assets		22,259			22,379
Valuation allowance		(20,166	)		(20,235	)
		2,093			2,144
Deferred tax liabilities:
Depreciation		1,173			1,232
Net unrealized gains on securities available for sale		713			984
Purchase accounting adjustments		554			575
Other		366			337
Total deferred tax liabilities		2,806			3,128
Net deferred tax liability	$	(713	)	$	(984	)

As of March 31, 2013, the Company has charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2018, 2032 and 2032, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxes paid in prior years, projected future taxable income and available tax planning strategies, and other factors in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods and other available evidence, management believed it wasn’t more likely than not that the net deferred tax asset would be realized at March 31, 2013 and December 31, 2012.

Accordingly, a full valuation allowance for the net amount of the deferred tax assets, which represented future deductible temporary differences on our tax returns, was established at March 31, 2013 and December 31, 2012. Primary factors contributing to this determination at March 31, 2013 and December 31, 2012 included:

• The Company has exhausted all of its carryback availability to 2010 – 2011, as we had recognized current federal income tax receivable which fully offset 2010 and 2011’s taxable income.

• As of March 31, 2013 and December 31, 2012, the Company was in a three-year cumulative loss position, representing significant negative evidence against the realizability of the deferred tax asset, and we do not expect to be out of a cumulative loss position over the next few quarters.

• The entire balance of the deferred tax asset is disallowed for purposes of calculating regulatory capital ratios as of March 31, 2013 and December 31, 2012.

Given the current uncertainty of the economy and in the event economic and real estate conditions decline, additional losses may result in our loan portfolio above those already provided for. As a result, we have placed less weight on our current forecast of earnings until the point where we demonstrate sustainable earnings for the realization of the deferred tax asset.

NOTE 5. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal 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

24

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. Prompt corrective actions provisions are not applicable to 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) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2013 and December 31, 2012, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2013, 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 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, 2013 and December 31, 2012 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, 2013
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	96,288		12.8	%	$	60,384		8.0	%		n/a		n/a
Orrstown Bank		94,264		12.5	%		60,336		8.0	%	$	75,420		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		86,692		11.5	%		30,192		4.0	%		n/a		n/a
Orrstown Bank		84,675		11.2	%		30,168		4.0	%		45,252		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		86,692		7.2	%		48,049		4.0	%		n/a		n/a
Orrstown Bank		84,675		7.0	%		48,071		4.0	%		60,089		5.0	%
December 31, 2012
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	94,928		12.2	%	$	62,438		8.0	%		n/a		n/a
Orrstown Bank		92,466		11.9	%		62,418		8.0	%	$	78,023		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		84,999		10.9	%		31,219		4.0	%		n/a		n/a
Orrstown Bank		82,540		10.6	%		31,209		4.0	%		46,814		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		84,999		6.8	%		49,840		4.0	%		n/a		n/a
Orrstown Bank		82,540		6.6	%		49,873		4.0	%		62,341		5.0	%

NOTE 6. EARNINGS PER SHARE

Earnings per share for the three months ended March 31, 2013 and 2012 were as follows:

	Three Months Ended March 31,
(In thousands, except per share data)	2013		2012
Net income (loss)	$	1,560	$	(8,218	)
Weighted average shares outstanding		8,084		8,055
Impact of common stock equivalents		0		0
Weighted average shares outstanding (diluted)		8,084		8,055
Per share information:
Basic earnings (loss) per share	$	0.19	$	(1.02	)
Diluted earnings (loss) per share		0.19		(1.02	)

Stock options for 242,603 and 346,405 shares of common stock were not considered in computing diluted earnings per share for the three months ended March 31, 2013 and 2012 as their exercise would have been antidilutive as the exercise price exceeded the average market value.

NOTE 7. 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.

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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, 2013		December 31, 2012
Commitments to fund:
Revolving, open ended home equity loans	$	79,887	$	77,674
1-4 family residential construction loans		1,636		1,002
Commercial real estate, construction and land development loans		593		1,021
Commercial, industrial and other loans		45,559		60,250
Standby letters of credit		11,428		11,551

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 first 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, 2013 and December 31, 2012, for guarantees under standby letters of credit issued was not material.

The Company currently maintains a reserve in other liabilities totaling $559,000 and $583,000 at March 31, 2013 and December 31, 2012 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, 2013 and 2012, ($24,000) and $103,000 was charged to other noninterest expense for this exposure.

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 was $107,602,000 and $115,630,000 at March 31, 2013 and December 31, 2012, with limited recourse back to the Company on these loans of $8,420,000 at these dates. Many of the loans sold under the MPF Program have primary mortgage insurance, which reduces the Company’s overall exposure. For the three months ended March 31, 2013 and 2012, the Company is in the process of foreclosing on loans sold under the MPF program or recovered amounts previously charged off, with a resulting charge of ($26,000) and $98,000 to other expenses representing an estimate of the Company’s loss under its recourse exposure.

NOTE 8. 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 generally accepted accounting principles defines fair value, 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

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markets for identical assets or liabilities (Level 1) and the lowest priority to 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 at March 31, 2013 and December 31, 2012. A summary of assets at March 31, 2013 and December 31, 2012, 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, 2013
Securities available for sale:
U.S. Treasury	$	0	$	26,017	$	0	$	26,017
U.S. Government Agencies		0		28,064		0		28,064
U.S. Government Sponsored Enterprises (GSE)		0		41,166		0		41,166
States and political subdivisions		0		57,995		0		57,995
GSE residential mortgage-backed securities		0		165,491		0		165,491
GSE commercial mortgage-backed securities		0		30,931		0		30,931
Total debt securities		0		349,664		0		349,664
Equity securities – Financial services		0		69		0		69
Total securities	$	0	$	349,733	$	0	$	349,733
December 31, 2012
Securities available for sale:
U.S. Treasury	$	0	$	26,010	$	0	$	26,010
U.S. Government Sponsored Enterprises (GSE)		0		44,762		0		44,762
States and political subdivisions		0		38,909		0		38,909
GSE residential mortgage-backed securities		0		160,799		0		160,799
GSE commercial mortgage-backed securities		0		31,421		0		31,421
Total debt securities		0		301,901		0		301,901
Equity securities – Financial services		0		69		0		69
Total securities	$	0	$	301,970	$	0	$	301,970

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.

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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

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. 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. 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). Impaired loans with an allocation to the allowance for loan losses are measured at fair value on a nonrecurring basis; however not all impaired loans have an allocation to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as a provision for loan losses on the consolidated statements of operations. Specific allocations to the allowance for loan losses or cumulative partial charge-offs were $9,227,000 and $10,843,000 at March 31, 2013 and December 31, 2012.

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 cumulative charges to value the real estate owned at the lower of cost or fair value on properties held at March 31, 2013 and December 31, 2012 were $533,000 and $581,000.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income as less than its carrying value, in which case a lower of cost or fair value charge is taken. As of March 31, 2013 and December 31, 2012, a $575,000 and $644,000 lower of cost or fair value reserve existed on the mortgage servicing rights portfolio.

A summary of assets at March 31, 2013 and December 31, 2012 measured at fair value on a nonrecurring basis is as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair  Value Measurements
March 31, 2013
Impaired loans, net	$	0	$	0	$	8,421	$	8,421
Foreclosed real estate		0		0		1,060		1,060
Mortgage servicing rights		0		0		2,330		2,330
December 31, 2012
Impaired loans, net	$	0	$	0	$	10,675	$	10,675
Foreclosed real estate		0		0		1,101		1,101
Mortgage servicing rights		0		0		2,296		2,296

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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, 2013
Impaired loans	$	8,421	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Foreclosed real estate		1,060	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-25% discount
Mortgage servicing rights		2,330	Discounted cash flows	Remaining term Discount rate	4.5 years 10.70%
December 31, 2012
Impaired loans	$	10,675	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Foreclosed real estate		1,101	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Mortgage servicing rights		2,296	Discounted cash flows	Remaining term Discount rate	4.0 years 10.70%

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.

Deposit Liabilities

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.

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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 analyses based on the Company’s current incremental 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 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 statements were as follows at March 31, 2013 and December 31, 2012:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2013:
Financial Assets
Cash and due from banks	$	10,713	$	10,713	$	10,713	$	0	$	0
Interest bearing deposits with banks		84,057		84,057		84,057		0		0
Restricted investments in bank stock		9,582		9,582		0		0		9,582
Securities available for sale		349,733		349,733		0		349,733		0
Loans held for sale		7,180		7,180		0		7,180		0
Loans, net of allowance for loan losses		652,831		648,286		0		0		648,286
Accrued interest receivable		3,444		3,444		0		0		3,444
Mortgage servicing rights		2,330		2,330		0		0		2,330
Financial Liabilities
Deposits		1,044,297		1,048,186		0		1,048,186		0
Short-term borrowings		15,244		15,244		0		15,244		0
Long-term debt		37,128		38,216		0		38,216		0
Accrued interest payable		425		425		0		425		0
Off-balance sheet instruments		0		0		0		0		0
December 31, 2012:
Financial Assets
Cash and due from banks	$	16,933	$	16,933	$	16,933	$	0	$	0
Interest bearing deposits with banks		133,755		133,755		133,755		0		0
Restricted investments in bank stock		9,804		9,804		0		0		9,804
Securities available for sale		301,970		301,970		0		301,970		0
Loans held for sale		7,862		7,862		0		7,862		0
Loans, net of allowance for loan losses		680,573		681,414		0		0		681,414
Accrued interest receivable		3,188		3,188		0		0		3,188
Mortgage servicing rights		2,296		2,296		0		0		2,296
Financial Liabilities
Deposits	$	1,085,039	$	1,089,344		0	$	1,089,344		0
Short-term borrowings		9,650		9,650		0		9,650		0
Long-term debt		37,470		38,676		0		38,676		0
Accrued interest payable		424		424		0		424		0
Off-balance sheet instruments		0		0		0		0		0

NOTE 9. 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.

On May 25, 2012, an investor in the Company’s stock 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

30

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 the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief.

On March 4, 2013, SEPTA filed an amended complaint. In addition, among other things, the amended complaint extends the purported class period to March 15, 2010 through April 5, 2012 related to certain claims and asserts certain new claims against other third parties.

On March 28, 2013, the Court issued a Second Scheduling Order requiring defendants to file their motions to dismiss the amended complaint by May 28, 2013. The Order gives SEPTA until July 22, 2013 to file its oppositions to defendants’ motions to dismiss, and requires defendants to file reply briefs in support of their motions to dismiss by August 23, 2013.

The matter is currently progressing through the legal process. The Defendants believe that the allegations in the complaint are without merit, and intends to defend vigorously against those claims.

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

The Company is a bank holding company (that has elected status as a financial holding company with the Federal Reserve Board), with a wholly-owned bank subsidiary, Orrstown Bank (the “Bank”). The following is a discussion of our consolidated financial condition at March 31, 2013 and results of operations for the three months ended March 31, 2013 and 2012. 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 Condensed 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.

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. Such forward-looking statements refer to a future period or periods, reflecting management’s current views as to likely future developments, and use words like “may,” “will,” “expect,” “estimate,” “anticipate” or similar terms. Because forward-looking statements involve certain risks, uncertainties and other factors over which the Company has no direct control, actual results could differ materially from those contemplated in such statements. These factors include (but are not limited to) the following: general economic conditions, changes in interest rates, changes in the Company’s cost of funds, changes in government monetary policy, changes in government regulation and taxation of financial institutions, including changes resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, changes in the rate of inflation, changes in technology, our ability to attract skilled personnel and retain key members of our senior management team, the intensification of competition within the Company’s market area, the outcome of litigation against the Company and other similar factors. For a discussion of these forward-looking statements and important factors that could cause results to differ materially from the forward-looking statements contained in this Report, see “Caution About Forward Looking Statements” section included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“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 SEC. 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.

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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 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 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 their judgments 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. Based upon the Company’s prior cumulative taxable losses, projections for future taxable income and other available evidence, management determined that there was not sufficient positive evidence to outweigh the cumulative loss, and concluded it was not more likely than not that the net deferred tax asset would be realized. Accordingly, a full valuation allowance was recorded at March 31, 2013 and December 31, 2012. Management will continue to update its analysis quarterly, and after a period of sustainable taxable income, the valuation allowance may be reversed in part or in total.

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, 2013 COMPARED TO QUARTER ENDED MARCH 31, 2012

Summary

The Company recorded a net income of $1,560,000 for the first quarter of 2013 compared to net loss of $8,218,000 for the same period in 2012. Basic and diluted earnings (loss) per share (EPS) for the first quarter of 2013 were $0.19, compared to ($1.02) for the first quarter of 2012. The significant improvement in earnings is primarily the result of improved asset quality which resulted in, or reduction of, the provision for loan losses of $19,200,000 from the three months ended March 31, 2012 to 2013. Net interest income of $8,107,000 was $2,735,000 less for the three months ended March 31, 2013 than in 2012, as largely lower levels of net earning assets led to the decrease.

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 interest bearing deposits with banks. 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 noninterest bearing, demand deposits, certain other liabilities, and stockholders’ equity, the net interest margin exceeds the net interest spread, as these funding sources are non-interest bearing.

The “Analysis of Net Interest Income” table below presents net interest income on a fully taxable equivalent basis, net interest spread and net interest margin for the quarters ended March 31, 2013 and 2012.

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For the three months ended March 31, 2013, net interest income measured on a fully tax equivalent basis decreased $2,932,000 to $8,562,000 from $11,494,000 in the corresponding period in 2012. The primary reason for the decrease in net interest income was a decrease in average earning assets from $1,381,317,000 for the first quarter of 2012 to $1,131,862,000 for the same period in 2013.

Interest income earned on loans decreased from $11,427,000 for the quarter ended March 31, 2012 to $8,529,000 for the same period in 2013, a $2,898,000 decline. The primary reason for the decline was the average balance of loans decreased from $954,070,000 for the first quarter of 2012 to $694,935,000 for the same period in 2013 due largely to the two loans sales which took place in 2012, combined with scheduled amortization of loans. Partially offsetting the volume variance was an increase in rates earned from 4.86% in 2012 to 4.98% in 2013, as the Company has been able to reduce its non-accrual loans.

Securities interest income also declined in 2013 and totaled $1,349,000 for the quarter ended March 31, 2013, a decrease of $904,000, compared to $2,253,000 for the same period in 2012. Although the average balance on securities has increased from $334,645,000 in the first quarter of 2012 to $342,073,000 for the same period in 2013, the volume increase was not enough to offset the decrease in rates earned on securities, which declined from a tax equivalent yield of 2.69% for the three months ended March 31, 2012 to 1.60% in the same period in 2013. The low interest rate environment has resulted in increased refinancing activity and accelerated prepayments on mortgage backed securities, many of which have premiums associated with them. As the prepayments have accelerated, the amortization of the premiums has been faster than in the past, which has placed pressure on the yields earned on the securities. Further, the proceeds from the sales or maturities of securities have been reinvested at lower interest rates, also negatively impacting the yield earned on securities.

Interest expense on deposits and borrowings for the three months ended March 31, 2013 was $1,377,000, a decrease of $870,000, from $2,247,000 in the same period in 2012. The Company’s cost of funds on interest bearing liabilities has declined to 0.56% for the quarter ended March 31, 2013 from 0.75% for the same period in 2012. The interest rate environment has allowed the Company to lower the rates offered on its demand deposits, including interest bearing demand, money market and savings in 2013 compared to 2012, and as time deposits and long-term debt mature, it has also been able to replace the funds at slightly lower rates.

The Company’s net interest spread of 3.00% declined 28 basis points in the quarter ended March 31, 2013 as compared to the same period in 2012. Net interest margin for the quarter ended March 31, 2013 was 3.07%, a 30 basis point decline from 3.37% for the quarter ended March 31, 2012. Management anticipates continued pressure on the net interest margin in future quarters as rates earned on loans and securities will continue to pay off or mature, and be reinvested at lower interest rates.

The table that follows shows average balances and interest yields on a fully taxable equivalent basis (FTE):

Analysis of Net Interest Income

	March 31, 2013								March 31, 2012
(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	$	94,854		61			0.26	%	$	92,602	$	61			0.26	%
Securities		342,073		1,349			1.60			334,645		2,253			2.69
Loans		694,935		8,529			4.98			954,070		11,427			4.86
Total interest-earning assets		1,131,862		9,939			3.56			1,381,317		13,741			4.03
Other assets		70,189								59,398
Total	$	1,202,051							$	1,440,715
Liabilities and Shareholders’ Equity
Interest bearing demand deposits	$	482,401		217			0.18		$	541,673	$	404			0.28
Savings deposits		75,493		31			0.17			74,019		31			0.17
Time deposits		384,593		976			1.03			477,890		1,543			1.30
Short term borrowings		10,916		6			0.22			47,971		52			0.47
Long term debt		37,330		147			1.60			51,077		217			1.71
Total interest bearing liabilities		990,733		1,377			0.56			1,192,630		2,247			0.75
Non-interest bearing demand deposits		112,410								109,628
Other		11,219								10,259
Total Liabilities		1,114,362								1,312,517
Shareholders’ Equity		87,689								128,198
Total	$	1,202,051					0.49	%	$	1,440,715					0.66	%
Net interest income (FTE)/ net interest spread				8,562			3.00	%				11,494			3.28	%
Net interest margin							3.07	%							3.37	%
Tax-equivalent adjustment				(455	)							(652	)
Net interest income			$	8,107							$	10,842

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, 2013 compared to $19,200,000 for the same period in 2012 and $1,000,000 for the linked quarter ended December 31, 2012. The Company continues to reduce its level of nonperforming and restructured loans, and with lower charge-offs in the last two quarters, it was determined that a provision for loan losses was not required in the first quarter of 2013. Despite no provision and net charge-offs of $1,249,000, the reduction in nonperforming loans allowed for improvements in the ratio of the allowance for loan losses to nonaccrual and restructured loans still accruing from 110.1% at December 31, 2012 to 126.7% at March 31, 2013.

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

Noninterest Income

Noninterest income, excluding securities gains, totaled $4,310,000 for the three months ended March 31, 2013, compared to $3,963,000 for the same period in 2012.

• Trust department and brokerage income, in total, increased $266,000, or 17.8%, to $1,764,000 for the three months ended March 31, 2013 compared to the same period in 2012. The Company has been able to attract new products, accounts and customers which contributed to the increase.

• Mortgage banking activities revenue for the quarter ended March 31, 2013 was $752,000, a $260,000 increase from the 2012 quarter’s total of $492,000. The low interest rate environment has positively impacted loan origination volume, as refinancing activity has increased. In addition, the low interest rate environment has positively impacted the fair value of our mortgage servicing rights, which allowed for the recovery of $68,000 of our impairment reserve in the first quarter of 2013, compared to an additional charge of $104,000 in the first quarter of 2012.

• Other income (loss) consists principally of losses on the sale of other real estate owned in both periods presented.

Securities gains totaled $122,000 for the three months ended March 31, 2013 compared to $2,231,000 for the same period in 2012. In 2013, asset/liability management strategies and favorable interest rate conditions led to the sale of securities. These same factors, as well as maintaining capital levels factored into the decision as to the extent and timing of security gains in the first quarter of 2012.

Noninterest Expenses

Noninterest expenses amounted to $10,949,000 for the three months ended March 31, 2013 relatively consistent with the $10,886,000 for the corresponding prior year period.

• Salaries and employee benefits totaled $5,746,000 for the three months ended March 31, 2013, compared to $4,657,000 for the three months ended March 31, 2012, an increase of $1,089,000. A large component of the difference pertains to health insurance costs, in which favorable cumulative claims history allowed for the reduction of a self-insured reserve of $400,000 in the first quarter of 2012, with no similar benefit in 2013. In addition, with the Company’s return to profitability, certain incentive based employee benefits have been restored, which has resulted in approximately $250,000 in increased expenses.

• Advertising and bank promotions expense decreased $161,000 to $211,000 for the three months ended March 31, 2013 from $372,000 for the same period in 2012. This reduction in expense relates to the nature and timing of promotions, which were more heavily weighted in the first quarter of 2012 than 2013.

• FDIC insurance expense increased $144,000 to $665,000 for the three months ended March 31, 2013. The increase in expense is the result of an increased risk rating and associated increased depository insurance rate which has been partially offset by a reduction in the Bank’s assets and deposits.

• Professional service fees, including loan review assistance, legal fees and accounting expenses, have decreased $40,000 to $761,000 in the first quarter of 2013 from $801,000 in the same period in 2012. During the first quarter of 2013, the Company has been able to reduce consulting fees by $215,000 over the same period in 2012. Partially offsetting these savings were increased legal costs associated with claims against the Company, including a settlement of one claim in the first quarter of 2013 that resulted in a charge of $216,000.

• Asset quality related costs, including collection problem loan and real estate owned expenses, total $225,000 for the three months ended March 31, 2013, an $870,000 reduction from $1,095,000 for the same period in 2012. Significant reductions in nonperforming assets led to the 79.5% reduction in asset quality related costs.

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In order to better understand how noninterest expenses increased in relation to related increases in revenue, operating expense levels are often measured in the financial services industry by the efficiency ratio, which expresses non-interest expense, as a percentage of tax-equivalent net interest income and noninterest income. The Company’s efficiency ratio was 84.3% for the three months ended March 31, 2013, compared to 67.7% for the same period in 2012. The increase in the ratio was primarily driven by a decrease in net interest income, without a corresponding decline in noninterest expenses.

Income Tax Expense

Income tax expense totaled $30,000 for the three months ended March 31, 2013, on pre-tax income of $1,590,000, compared to income tax benefit of $4,832,000 recorded on pre-tax loss of $13,050,000 for the three months ended March 31, 2012. During the third quarter of 2012, an evaluation was completed on the net deferred tax asset that existed, which principally resulted from credit and credit related losses and expenses that the company experienced. As a result of the taxable losses that were generated during 2012, and our inability to fully offset the tax to the two preceding carryback years allowed by tax regulation, our net deferred tax asset was dependent on tax planning strategies and future taxable income. Based on forecasted taxable income in the near future, combined with limited tax planning strategies, we were not able to conclude that the deferred tax asset would more likely than not be realized in its entirety, and as such, a valuation allowance was established for the full amount beginning in the third quarter of 2012. An updated evaluation was completed at March 31, 2013, and we continue to believe that the valuation allowance is appropriate, and as such, the $30,000 expense for the quarter pertains to alternative minimum tax, in which an incremental valuation allowance is required on the deferred tax asset.

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, enhancing income through interest and dividend income, to provide liquidity and to provide collateral for certain deposits and borrowings. As of March 31, 2013, securities available for sale were $349,733,000, an increase of $47,763,000 from December 31, 2012’s balance of $301,970,000. The growth in the portfolio for each security type is the result of investing the Company’s excess liquidity in the securities available for sale portfolio, as loan balances have declined and securities return a better yield than overnight funds.

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.

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 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 properties present a different credit risk to the Company than owner-occupied commercial real estate, 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 hinder 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 in its loan pricing.

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.

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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 to 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 a commercial and industrial loan, as they are generally secured by the municipality’s full taxing authority, or by revenue obligations, or 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 first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the credit. 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 limits 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 conservative 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 classes as of March 31, 2013 and December 31, 2012 is as follows:

(Dollars in thousands)	March 31, 2013		December 31, 2012
Commercial real estate:
Owner-occupied	$	137,354	$	144,290
Non-owner occupied		108,256		120,930
Multi-family		21,181		21,745
Non-owner occupied residential		64,621		66,381
Acquisition and development:
1-4 family residential construction		1,989		2,850
Commercial and land development		24,878		30,375
Commercial and industrial		42,443		39,340
Municipal		67,470		68,018
Residential mortgage:
First lien		108,964		108,601
Home equity – term		15,333		14,747
Home equity – Lines of credit		75,724		79,448
Installment and other loans		6,535		7,014
	$	674,748	$	703,739

The loan portfolio at March 31, 2013 of $674,748,000 decreased $28,991,000 from $703,739,000 at December 31, 2012 and $224,000,000 from March 31, 2012. During the first quarter of 2013, the Company began to transition from an emphasis on working out troubled credits to a focus on growing the loan portfolio. As the Company restores its pipeline, repayments on existing loans outpaced new loans originated, and is the primary reason for the reduction in assets.

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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 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 and restructured loans and foreclosed real estate. In addition, loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, 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 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 troubled debt restructurings if a concession was granted, for legal or economic reasons, related to a debtor’s financial difficulties. Concessions granted under a troubled debt restructuring 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 troubled debt restructurings 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. Troubled debt restructurings 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, 2013, December 31, 2012 and March 31, 2012. Relevant asset quality ratios are also presented.

(Dollars in Thousands)	March 31, 2013			December 31, 2012			March 31, 2012
Nonaccrual loans (cash basis)	$	14,220		$	17,943		$	82,058
Other real estate (OREO)		1,925			1,876			2,413
Total nonperforming assets		16,145			19,819			84,471
Restructured loans still accruing		3,078			3,092			3,844
Loans past due 90 days or more and still accruing		0			0			2
Total risk assets	$	19,223		$	22,911		$	88,317
Loans 30-89 days past due	$	6,069		$	3,578		$	6,501
Asset quality ratios:
Nonaccrual loans to loans		2.11	%		2.55	%		9.13	%
Nonperforming assets to assets		1.35	%		1.61	%		5.84	%
Total nonperforming assets to total loans and OREO		2.39	%		2.81	%		9.37	%
Total risk assets to total loans and OREO		2.84	%		3.25	%		9.80	%
Total risk assets to total assets		1.61	%		1.86	%		6.10	%
Allowance for loan losses to total loans		3.25	%		3.29	%		3.13	%
Allowance for loan losses to nonaccrual loans		154.13	%		129.11	%		34.31	%
Allowance for loan losses to nonaccrual and restructured loans still accruing		126.70	%		110.13	%		32.78	%

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A further breakdown of impaired loans at March 31, 2013 and December 31, 2012 is as follows:

	March 31, 2013						December 31, 2012
	Nonaccrual Loans		Restructured Loans Still Accruing		Total		Nonaccrual Loans		Restructured Loans Still Accruing		Total
Commercial real estate:
Owner occupied	$	2,165	$	0	$	2,165	$	2,417		0	$	2,417
Non-owner occupied		1,031		1,967		2,998		1,481		1,981		3,462
Multi-family		0		0		0		19		0		19
Non-owner occupied residential		3,715		202		3,917		5,164		204		5,368
Acquisition and development
1-4 family residential construction		809		0		809		909		0		909
Commercial and land development		2,833		0		2,833		3,809		0		3,809
Commercial and industrial		1,209		120		1,329		1,696		122		1,818
Residential mortgage:
First lien		1,937		753		2,690		1,833		749		2,582
Home equity – term		37		0		37		57		0		57
Home equity – lines of credit		483		36		519		556		36		592
Installment and other loans		1		0		1		2		0		2
	$	14,220	$	3,078	$	17,298	$	17,943	$	3,092	$	21,035

During the first quarter of 2013, the Company continued to actively identify and monitor nonperforming assets and other risk assets, and has acted to address the remaining credit quality issues. Risk assets, defined as nonaccrual loans, restructured and loans past due 90 days or more and still accruing, and real estate owned, declined from $22,911,000 at December 31, 2012 to $19,223,000 at March 31, 2013, an improvement of $3,688,000, or 16.1%

Nonaccrual loans at March 31, 2013 totaled December 31, 2012 totaled $14,220,000, a decrease of $3,723,000 from December 31, 2012’s balance of $17,943,000. The Company remains focused on asset quality remediation, and is diligently working with borrowers to reduce levels of classified and impaired loans.

The allowance for loan losses totaled $21,917,000 at March 31, 2013 compared to $23,166,000 at December 31, 2012, a $1,249,000 decrease attributable to net charge offs during the period. As of March 31, 2013, the allowance for loan losses to total loans was 3.25%, consistent with 3.29% at December 31, 2012. Despite the lower allowance for loan losses balance and lower ratio to outstanding loans, the allowance to loan losses coverage ratio of nonaccrual loans and restructured loans has increased. The allowance for loan losses to nonaccrual loans and restructured loans still accruing increased to 127% at March 31, 2013, from 110% at December 31, 2012. The increase in the coverage ratios reflects lower levels of risk assets, particularly the significant decrease in non-accrual loans discussed above.

A priority of the Company is to continue to work through its nonaccrual loans and other risk elements, in an attempt to reduce the levels of these underperforming assets. As new information is learned about borrowers or updated appraisals on real estate with lower fair values are obtained, the Company may continue to experience additional impaired loans. Through credit underwriting and administrative policies and procedures, the Company believes it can continue to mitigate its risk of loss, and to reduce its level of nonaccrual and classified loans.

As of March 31, 2013, the Company had approximately 36 lending relationships that had loans that were considered impaired, and included in the impaired loan balance of $17,298,000. Of these relationships, 5 have outstanding book balances in excess of $1,200,000 totaling $10,434,000, or 60% of the total impaired loan balance. In connection with the determination of the impairment associated with these five collateral dependent relationships, partial charge-offs on 3 relationships totaling $3,276,000 were taken and another $1,005,000 of ASC 310 impairment reserves were recorded on the balances at March 31, 2013. 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.

The largest impaired relationship that the Company has had a book balance of approximately $2,785,000 at March 31, 2013, is a wholesaler that supplies inventory to the commercial construction industry. As a result of the deterioration in real estate conditions, the borrower’s business has been negatively impacted; leading management to conclude that it will be unable to continue to service its debt requirements. The relationship also includes financing for a residence. Based on recently obtained appraisals and impairment charges, partial charge-offs representing 2.6% of the outstanding March 31, 2013 loan balance have been taken. Extensions of credit to this borrower with subordinate lien positions have been fully charged off. The borrower has filed for bankruptcy, and the Company is working with legal counsel to liquidate the collateral.

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A second relationship that the Company has determined to be impaired at March 31, 2013 is with a real estate developer who also actively leases residential properties and operates trailer parks. This relationship consists of separate loans with total outstanding book balances of $2,583,000, secured by different parcels of land or residential structures. Recent appraisals on the collateral securing the outstanding loans received during 2012 resulted in the relationship being placed in nonaccrual status, as the softening of real estate prices and rental prices, and the lengthening of absorption periods resulted in it being classified and evaluated as a collateral dependent impaired loan. To date, partial charge-offs or specific reserves of approximately 48% of the outstanding loan balances have been taken. The Company is actively working with the borrower to reduce its outstanding loan balances, and has resulted in a reduction of the loan balance of $374,000 during the first quarter of 2013.

An additional relationship that includes impaired loans and had a balance of approximately $1,950,000 is with a borrower that purchased a large parcel of land in the Company’s market area. The loan is current with respect to the interest only payment requirements. Since there have been no sales to date, and several extension requests, the loan was placed in nonaccrual status. Due to the guarantee of this debt by several municipal authorities, combined with a strong loan to value ratio, no partial charge-offs or specific reserves have been established on this loan as of March 31, 2013.

Another relationship that includes impaired loans with a book balance of $1,840,000 is with a real estate developer that was developing townhomes to be sold to interested parties. Due to the softness in the real estate market and longer absorption periods to sell the townhomes, the properties were converted to residential properties that are being leased. Updated appraisals were obtained in the first quarter of 2013 on the units, and partial charge-offs totaling approximately 44% of the legal balance of the loans were taken. The borrower has been uncooperative with the Company, which has resulted in the Bank exercising its right to assignment of the leases, and collection of rental payments directly from the tenants of the properties. The Company is pursuing foreclosure action.

The final relationship, which has a book balance in excess of nearly $1,280,000, is with a contractor whose business has been negatively impacted by the slow residential construction market. As a result of the deterioration in real estate conditions, volumes have decreased which has had a negative impact on the borrower’s cash flow. As a result, it was determined the borrower would not be able to continue its debt service requirements. As of March 31, 2013, however, the borrower is current with respect to scheduled payments. The Company is still in the process of determining the fair value of the collateral securing the related loans, and has established a preliminary ASC 310 reserve on this relationship totaling approximately 47% of the overall outstanding loan balance at March 31, 2013. During the quarter ended March 31, 2013, the borrower made payments of over $1,200,000 on outstanding obligations.

The Company has another 31 relationships with borrowers that include loans that are individually evaluated for impairment, and has taken a similar approach to those mentioned above in determining the extent of full or partial charge-offs that were required, or ASC 310 reserves that may be needed. The determination of the Company’s charge-offs or impairment reserve determination properly 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 totaling $4,945,000, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships as of March 31, 2013. 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.

Credit Risk Management

Allowance for Loan Losses

The Company maintains the allowance for loan losses at a level believed adequate by management to absorb losses inherent in the portfolio. 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.

In order to monitor ongoing risk associated with its loan portfolio and specific credits 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,

39

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 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 mitigate risk in the lending function. The Credit Administration Committee, comprised of executive officers and loan department personnel, was charged with oversight of the overall credit quality and risk exposure of the Company’s loan portfolio. Effective December 31, 2012, the Credit Administration Committee became a subcommittee of the Enterprise Risk Management Committee (“ERM Committee”). From that date forward, the ERM Committee is responsible for the oversight of the overall credit quality and risk exposure. 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 internal, 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.

Loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000. Loan review documentation is submitted to the ERM Committee no less than quarterly with a formal review and confirmation of risk rating as presented by independent loan review personnel. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed by the ERM Committee on a quarterly basis, with reaffirmation of the rating as approved by the Bank’s Loan Work Out Committee and confirmed by the loan review staff.

40

The following tables summarize the Bank’s ratings based on its internal risk rating system as of March 31, 2013 and December 31, 2012:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired Substandard		Doubtful		Total
March 31, 2013
Commercial real estate:
Owner-occupied	$	118,677	$	9,998	$	6,514	$	2,165	$	0	$	137,354
Non-owner occupied		81,661		12,342		11,255		2,998		0		108,256
Multi-family		17,050		3,412		719		0		0		21,181
Non-owner occupied residential		44,226		11,547		4,931		3,917		0		64,621
Acquisition and development:
1-4 family residential construction		1,018		162		0		293		516		1,989
Commercial and land development		13,163		6,263		2,619		2,833		0		24,878
Commercial and industrial		37,042		2,896		1,176		564		765		42,443
Municipal		67,470		0		0		0		0		67,470
Residential mortgage:
First lien		102,760		3,515		0		2,689		0		108,964
Home equity – term		15,014		210		72		37		0		15,333
Home equity – Lines of credit		73,013		844		1,348		519		0		75,724
Installment and other loans		6,523		10		1		1		0		6,535
	$	577,617	$	51,199	$	28,635	$	16,016	$	1,281	$	674,748
December 31, 2012
Commercial real estate:
Owner-occupied	$	121,333	$	11,917	$	8,623	$	2,229	$	188	$	144,290
Non-owner occupied		95,876		7,351		14,241		3,462		0		120,930
Multi-family		17,205		3,936		585		19		0		21,745
Non-owner occupied residential		45,468		12,199		3,346		5,368		0		66,381
Acquisition and development:
1-4 family residential construction		1,608		333		0		198		711		2,850
Commercial and land development		14,793		8,937		2,836		3,208		601		30,375
Commercial and industrial		33,380		3,713		429		566		1,252		39,340
Municipal		68,018		0		0		0		0		68,018
Residential mortgage:
First lien		101,390		3,026		1,604		2,581		0		108,601
Home equity – term		14,403		52		235		57		0		14,747
Home equity – Lines of credit		76,418		1,073		1,365		592		0		79,448
Installment and other loans		6,998		11		3		2		0		7,014
	$	596,890	$	52,548	$	33,267	$	18,282	$	2,752	$	703,739

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 information that may cause the potential weakness, and once resolved, the loan classification may be downgraded to “Substandard”, or alternatively, could be upgraded to “Pass”.

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 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 will be incorporated into the impairment analysis as of the next reporting period. In the event an updated appraisal that requires a higher impairment reserve is received after a reporting period, but prior to the issuance of the financial statements, an evaluation is made as to the significance of the difference and whether the amounts need to be reflected in the financial statements not yet issued.

41

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. As of the periods presented, the Company has no loans to borrowers that resulted from splitting impaired loans into multiple notes. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve allocated to it after the partial charge-off, if factors warrant.

As of March 31, 2013 and December 31, 2012, nearly all of the Company’s impaired loans’ extent of impairment was measured based on the estimated fair value of the collateral securing the credit, except for troubled debt restructurings. By definition, troubled debt restructurings are considered impaired. All restructured loans’ impairment was determined based on discounted cash flows for those loans classified as troubled debt restructurings but are 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 required annually 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 were 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 properties’ 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 (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 consists 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. “Substandard” classification does not automatically meet the definition of “impaired”. A substandard credit is one that is inadequately protected by current sound worth, 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 credits, does not have to exist in individual extensions of credit classified substandard. As a result, the Company revised its methodology in its evaluation of certain accruing commercial real estate, acquisition and development and commercial and industrial loans rated “Substandard” collectively 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 homogenous 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.

42

The following 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, 2013 and December 31, 2012. Allowances established at March 31, 2013 and December 31, 2012 generally pertain to those credits 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, 2013
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,165	$	2,426
Non-owner occupied		1,248		1,249		325		1,750		3,730
Non-owner occupied residential		202		202		45		3,715		5,353
Acquisition and development:
1-4 family residential construction		516		536		9		293		299
Commercial and land development		0		0		0		2,833		7,427
Commercial and industrial		885		914		627		444		444
Residential mortgage:
First lien		0		0		0		2,689		2,906
Home equity – term		0		0		0		37		58
Home equity – Lines of credit		0		0		0		519		528
Installment and other loans		0		0		0		1		2
	$	2,851	$	2,901	$	1,006	$	14,446	$	23,173

	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)
December 31, 2012
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,417	$	2,680
Non-owner occupied		1,257		1,257		329		2,205		5,487
Multi-family		0		0		0		19		198
Non-owner occupied residential		204		204		46		5,164		6,510
Acquisition and development:
1-4 family residential construction		711		725		9		198		202
Commercial and land development		0		0		0		3,809		8,556
Commercial and industrial		1,373		1,402		928		445		445
Residential mortgage:
First lien		0		0		0		2,581		2,784
Home equity – term		0		0		0		57		75
Home equity – Lines of credit		0		0		0		592		597
Installment and other loans		0		0		0		2		2
	$	3,545	$	3,588	$	1,312	$	17,489	$	27,536

The difference between the recorded investment (book balance) and the unpaid principal balance (legal balance) generally results from partial charge-offs taken on loans and payments applied entirely to principal on those loans placed on nonaccrual status.

43

The following presents impaired loans that are troubled debt restructurings, with the recorded investment being both the pre-modification and post-modification balances, as well as the number of loans modified during the time period, as of March 31, 2013 and December 31, 2012.

	March 31, 2013				December 31, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial real estate:
Non-owner occupied		2	$	1,967		2	$	1,981
Non-owner occupied residential		1		202		1		204
Commercial and industrial		1		120		1		122
Residential mortgage:
First lien		2		753		2		749
Home equity – lines of credit		1		36		1		36
		7		3,078		7		3,092
Nonaccruing:
Commercial real estate:
Owner-occupied		1		7		1		7
Non-owner occupied		4		984		4		1,209
		5		991		5		1,216
		12	$	4,069		12	$	4,308

The following restructured loans, included in nonaccrual status, were modified as troubled debt restructings within the previous 12 months and for which there was a payment default during the period March 31, 2013 and 2012.

	March 31, 2013				March 31, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Non-owner occupied residential		0	$	0		5	$	1,217
Owner occupied		0		0		3		1,294
		0	$	0		8	$	2,511

The following presents the number of loans modified, and their pre-modification and post-modification investment balances for the three months ended March 31, 2013 and 2012:

	2013				2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial and industrial		0	$	0		1	$	37
		0		0		1		37
Nonaccuring:
Commercial real estate:
Non-owner occupied		0		0		1		473
Commercial and industrial		0		0		1		302
		0		0		2		775
		0	$	0		3	$	812

The loans presented above were considered troubled debt restructurings 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 for residential mortgage loans, a temporary reduction in interest rates for periods not exceeding 12 months in order to assist the borrowers to improve cash flows during such periods.

No additional commitments have been made to borrowers whose loans are considered troubled debt restructurings.

44

The following summarizes the average recorded investment in impaired loans and related interest income recognized, on loans deemed impaired at March 31, 2013 on a cash basis, and interest income earned but not recognized for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013				2012
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,291	$	0	$	11,229	$	40
Non-owner occupied		3,230		0		19,270		67
Multi-family		10		0		2,814		0
Non-owner occupied residential		4,643		3		41,380		146
Acquisition and development:
1-4 family residential construction		859		0		1,714		0
Commercial and land development		3,321		0		16,117		71
Commercial and industrial		1,574		0		2,128		8
Residential mortgage:
First lien		2,635		2		2,001		0
Home equity – term		47		0		316		0
Home equity – lines of credit		555		0		489		0
Installment and other loans		2		0		13		0
Total	$	19,167	$	5	$	97,471	$	332

Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of loans in the portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2013 and December 31, 2012.

	Current		Days Past Due						Total Past Due		Non- Accrual		Total Loans
			30-59		60-89		90+ (still accruing)
March 31, 2013
Commercial real estate:
Owner-occupied	$	134,381	$	202	$	606	$	0	$	808	$	2,165	$	137,354
Non-owner occupied		107,003		0		222		0		222		1,031		108,256
Multi-family		21,042		0		139		0		139		0		21,181
Non-owner occupied		59,827		476		603		0		1,079		3,715		64,621
Acquisition and development:
1-4 family residential construction		1,180		0		0		0		0		809		1,989
Commercial and land development		21,190		855		0		0		855		2,833		24,878
Commercial and industrial		40,954		219		61		0		280		1,209		42,443
Municipal		67,470		0		0		0		0		0		67,470
Residential mortgage:
First lien		104,963		1,990		74		0		2,064		1,937		108,964
Home equity – term		15,150		140		6		0		146		37		15,333
Home equity – Lines of credit		74,820		208		213		0		421		483		75,724
Installment and other loans		6,479		52		3		0		55		1		6,535
	$	654,459	$	4,142	$	1,927	$	0	$	6,069	$	14,220	$	674,748
December 31, 2012
Commercial real estate:
Owner-occupied	$	141,833	$	40	$	0	$	0	$	40	$	2,417	$	144,290
Non-owner occupied		119,320		129		0		0		129		1,481		120,930
Multi-family		21,726		0		0		0		0		19		21,745
Non-owner occupied residential		60,890		122		205		0		327		5,164		66,381
Acquisition and development:
1-4 family residential construction		1,770		0		171		0		171		909		2,850
Commercial and land development		26,054		511		1		0		512		3,809		30,375
Commercial and industrial		37,348		296		0		0		296		1,696		39,340
Municipal		68,018		0		0		0		0		0		68,018
Residential mortgage:
First lien		104,933		1,565		270		0		1,835		1,833		108,601
Home equity – term		14,609		81		0		0		81		57		14,747
Home equity – lines of credit		78,880		0		12		0		12		556		79,448
Installment and other loans		6,837		161		14		0		175		2		7,014
	$	682,218	$	2,905	$	673	$	0	$	3,578	$	17,943	$	703,739

45

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 response to the improved risk profile within the loan portfolio at December 31, 2012, the look back period for historical losses was extended to 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. Again, management considered current economic 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. Based on management’s assessment and in compliance with regulatory guidance, the Company began recording partial charge offs on collateral dependent loans in the first quarter of 2012, eliminating the need for specific reserves. Although both methods are acceptable under ASC 310, the revised method is more consistent with regulatory directives and was implemented by the Company resulting in increased charge-offs during 2012.

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, 2013 and December 31, 2012, 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 number of exceptions to loan policy; supervisory loan to value exceptions etc.

Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the Bank’s overall portfolio makeup 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 its 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.

Prior to December 31, 2012, qualitative factors were also utilized in the determination of loans collectively evaluated for impairment, but consisted of only five factors, which are included in the eight factors listed above, with anticipated loss allocations that ranged from 0 – 8 basis points. It was determined that the qualitative adjustments would be expanded to the current range of a minus 150 basis points to a positive 150 basis, as the prior range of 0 – 8 basis points was deemed to be too restrictive and did not adequately address the credit improvement in the remaining loan portfolio.

46

A summary of the activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012 is 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, 2013
Balance, beginning of period	$	13,719		$	3,502		$	1,635		$	223	$	19,079		$	2,275		$	85		$	2,360		$	1,727	$	23,166
Provision for loan losses		(473	)		(746	)		(292	)		62		(1,449	)		1,145			31			1,176			273		0
Charge-offs		(1,142	)		(145	)		0			0		(1,287	)		(38	)		(20	)		(58	)		0		(1,345	)
Recoveries		61			3			10			0		74			6			16			22			0		96
Balance, end of period	$	12,165		$	2,614		$	1,353		$	285	$	16,417		$	3,388		$	112		$	3,500		$	2,000	$	21,917
March 31, 2012
Balance, beginning of period	$	29,559		$	9,708		$	1,085		$	789	$	41,141		$	933		$	75		$	1,008		$	1,566	$	43,715
Provision for loan losses		13,364			3,850			855			116		18,185			592			(24	)		568			447		19,200
Charge-offs		(26,663	)		(7,312	)		(1,068	)		0		(35,043	)		(228	)		(12	)		(240	)		0		(35,283	)
Recoveries		22			473			19			0		514			4			6			10			0		524
Balance, end of period	$	16,282		$	6,719		$	891		$	905	$	24,797		$	1,301		$	45		$	1,346		$	2,013	$	28,156

The allowance for loan losses totaled $21,917,000 at March 31, 2013, a $1,249,000 decline from December 31, 2012. As of March 31, 2013, the allowance for loan losses to total loans was 3.25% compared to 3.29% as of December 31, 2012, and the allowance for loan losses to nonaccrual loans and restructured loans still accruing improved from 110.13% at December 31, 2012 to 126.70% at March 31, 2013. The increase in the coverage ratio of nonaccrual and restructured loans reflects lower levels of risk assets, particularly the significant decrease in non-accrual loans discussed above.

A summary of relevant asset quality ratios for the three months ended March 31, 2013 and 2012 are as follows:

	March 31, 2013			March 31, 2012
Ratio of net charge-offs to average loans outstanding (annualized)		0.7	%		14.6	%
Provision for loan losses to net charge-offs		0.0	%		55.2	%

Net charge-offs were $1,249,000 for the three months ended March 31, 2013, compared to $34,759,000 for the same period in 2012, and the provision for loan losses to net charge-offs was 0.00% for the three months ended March 31, 2013 compared to 55.2% for the same period in 2012. The lower levels of charge-offs in 2013 significantly decreased the annualized ratio of charge-offs to average loans outstanding and reduced the provision for loan losses to charge-off ratio. The elevated charge-offs for the quarter ended March 31, 2012 significantly increased the annualized charge-offs to average loans outstanding ratio, and was the result of the Company changing its approach to partial charge-offs on impaired loans, versus reserving them as was general practice prior to this quarter. The majority of the charge-offs remain in the non owner-occupied commercial real estate, owner-occupied commercial real estate and commercial and land development loan portfolios.

The following summarizes the ending loan balance individually or collectively evaluated for impairment based upon loan type, as well as the allowance for loan loss allocation for each at March 31, 2013 and December 31, 2012.

(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Residential Mortgage		Installment and Other		Unallocated		Total
March 31, 2013
Loans allocated by:
Individually evaluated for impairment	$	9,080	$	3,642	$	1,329	$	0	$	3,245	$	1	$	0	$	17,297
Collectively evaluated for impairment		322,332		23,225		41,114		67,470		196,776		6,534		0		657,451
	$	331,412	$	26,867	$	42,443	$	67,470	$	200,021	$	6,535	$	0	$	674,748
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	370	$	9	$	627	$	0	$	0	$	0	$	0	$	1,006
Collectively evaluated for impairment		11,795		2,605		726		285		3,388		112		2,000		20,911
	$	12,165	$	2,614	$	1,353	$	285	$	3,388	$	112	$	2,000	$	21,917

47

(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Residential Mortgage		Installment and Other		Unallocated		Total
December 31, 2012
Loans allocated by:
Individually evaluated for impairment	$	11,266	$	4,718	$	1,818	$	0	$	3,230	$	2	$	0	$	21,034
Collectively evaluated for impairment		342,080		28,507		37,522		68,018		199,566		7,012		0		682,705
	$	353,346	$	33,225	$	39,340	$	68,018	$	202,796	$	7,014	$	0	$	703,739
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	375	$	9	$	928	$	0	$	0	$	0	$	0	$	1,312
Collectively evaluated for impairment		13,344		3,493		707		223		2,275		85		1,727		21,854
	$	13,719	$	3,502	$	1,635	$	223	$	2,275	$	85	$	1,727	$	23,166

The allowance for loan losses allocations presented above represent the reserve allocations on loan balances outstanding at March 31, 2013 and December 31, 2012. In addition to the reserve allocations on impaired loans noted above, approximately 24 loans, with outstanding general ledger principal balances of $6,574,000, have had cumulative partial charge-offs to the allowance for loan losses recorded totaling $8,222,000. 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 inherent risk in each portfolio, and is based on the methodology previously discussed. Management routinely reviews its methodology, and may make revisions in order to enhance its analysis, and improves 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. To the extent recoveries of loans previously charged off may be recovered, or improvements in charge-off percentages are experienced, future quarters may include a reversal of the allowance level, or a negative provision for loan losses.

A large component of the reserve for the last two years has been allocated to the commercial real estate segment, which is consistent with this segment having the largest amount of impaired loans at both March 31, 2013 and December 31, 2012.

The unallocated portion of the allowance for loan losses reflects estimated inherent losses within the portfolio that have not been detected. 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 increased in 2012, from $1,727,000 at December 31, 2012 to $2,000,000 at March 31, 2013 and represents 9.2% of the entire allowance for loan losses balance at March 31, 2012, compared to 7.5% at December 31, 2012.

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.

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.

Total shareholders’ equity increased $1,155,000 from $87,694,000 at December 31, 2012 to $88,849,000 at March 31, 2013. The primary reason for the increase in shareholders’ equity was the $1,560,000 net income for the quarter ended off set by a decline in the unrealized gains on securities available for sale, net of tax.

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal 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. Prompt corrective action provisions are not applicable to financial holding companies.

48

Capital Adequacy. In the determination of Tier 1 and Total risk based capital, generally accumulated other comprehensive income (loss) is excluded from capital, as are intangible assets, a portion of mortgage servicing rights and deferred tax assets that is dependent on future taxable income greater than one year from the reporting date. As of March 31, 2013 and December 31, 2012, the Company provided a full valuation allowance on its deferred tax asset, which reduced the deferred tax asset, excluding other comprehensive income items, to zero.

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 exceeds 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, 2013 and December 31, 2012, $12,880,000 and $13,820,000 of the allowance for credit losses was excluded from Tier 2 capital.

Regulatory Capital. As of March 31, 2013 and December 31, 2012, the Bank was considered well capitalized under applicable banking regulations. The Company’s and the Bank’s capital ratios as of March 31, 2013 and December 31, 2012 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, 2013
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	96,288		12.8	%	$	60,384		8.0	%		n/a		n/a
Orrstown Bank		94,264		12.5	%		60,336		8.0	%	$	75,420		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		86,692		11.5	%		30,192		4.0	%		n/a		n/a
Orrstown Bank		84,675		11.2	%		30,168		4.0	%		45,252		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		86,692		7.2	%		48,049		4.0	%		n/a		n/a
Orrstown Bank		84,675		7.0	%		48,071		4.0	%		60,089		5.0	%
December 31, 2012
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	94,928		12.2	%	$	62,438		8.0	%		n/a		n/a
Orrstown Bank		92,466		11.9	%		62,418		8.0	%	$	78,023		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		84,999		10.9	%		31,219		4.0	%		n/a		n/a
Orrstown Bank		82,540		10.6	%		31,209		4.0	%		46,814		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		84,999		6.8	%		49,840		4.0	%		n/a		n/a
Orrstown Bank		82,540		6.6	%		49,873		4.0	%		62,341		5.0	%

As noted above, the Bank’s capital ratios exceed those 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 March 2012, the Company and the Bank entered into a Written Agreement with the Federal Reserve Bank of Philadelphia and the Bank entered into a Consent Order with the Pennsylvania Department of Banking. In accordance therewith, the Bank has filed a confidential Capital Plan with each of those banking regulators.

In October 2011, the Company announced it had discontinued its quarterly dividend, which was the result of regulatory guidance from the Federal Reserve indicating that the Company’s dividend application would not be approved. Due to the regulatory restrictions included in the Written Agreement and the Consent Order with the respective regulators, the Company is restricted from paying any dividends or repurchasing any stock without prior regulatory approval. Accordingly, there can be no assurance that we will be permitted to pay a cash dividend or conduct any stock repurchases in the near future.

Liquidity

The primary function of asset/liability management is to assure adequate liquidity and to 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 and borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB). 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.

49

In the second quarter of 2012, the FHLB notified that Bank that all borrowings from the FHLB must be secured with acceptable collateral, consisting principally of eligible loans and securities. The FHLB took delivery of the collateral to further protect their risk of loss through the fourth quarter of 2012. In the first quarter of 2013, the collateral was returned to the Bank, however it continues to be pledged for current borrowings outstanding.

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 interest sensitive assets and liabilities. Management, through its ALCO process, attempts to manage the level of repricing and maturity mismatch so that fluctuations in net interest income is maintained within policy limits in current and expected market conditions. The Company has consistently followed a strategy of pricing assets and liabilities according to prevailing market rates while largely matching maturities, within the guidelines of sound marketing and competitive practices. Rate spreads will be sacrificed at times in order to enable the sensitivity position to stay within the guidelines called for by asset/liability management policy. Investment and pricing decisions are made using both liquidity and sensitivity analyses as tools. Rate sensitivity is measured by monthly gap analysis, quarterly rate shocks, and periodic simulation.

The Company’s Risk Sensitive Assets (RSA) to Risk Sensitive Liabilities (RSL) ratio at March 31, 2013 has decreased since December 31, 2012, and is more liability sensitive than at year end. The primary reason for the decrease in the RSA/RSL ratio for each cumulative period presented is due to investing greater liquidity in securities available for sale, and less in interest-bearing deposits in banks in order to capture greater yield.

The following gap summary demonstrates the shift in RSA/RSL (cumulative) position since year end:

	Within 3 Months		Within 6 Months		Within 12 Months		Within 36 Months
March 31, 2013		0.90		0.84		0.92		1.09
December 31, 2012		1.02		0.99		0.94		1.09

Management closely monitors the fiscal and monetary policies of our government and acts in anticipation of changes in order to maintain a healthy earning asset interest bearing liabilities balance.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of its Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Change in Internal Control Over Financial Reporting

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

50

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

The nature of Orrstown Financial Services, Inc.’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, Southeastern Pennsylvania Transportation Authority (“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 Defendants’ motion to dismiss was originally due January 11, 2013, and Defendants’ reply brief in further support of its motion to dismiss was originally due on January 25, 2013. Under the PSLRA, discovery and all other proceedings in the case are 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 .

On March 28, 2013, the Court issued a Second Scheduling Order requiring defendants to file their motions to dismiss the amended complaint by May 28, 2013. The Order gives SEPTA until July 22, 2013 to file its oppositions to defendants’ motions to dismiss, and requires defendants to file reply briefs in support of their motions to dismiss by August 23, 2013. The Second Scheduling Order stays all discovery in the case pending the outcome of the motions to dismiss, and informs the parties that a telephonic conference to address discovery and the filing of SEPTA’s motion for class certification will be scheduled after the Court’s ruling on the motions to dismiss.

The Defendants believe that the allegations in SEPTA’s complaint are without merit, and intend to defend vigorously against those claims.

Item 1A – Risk Factors

There have been no material changes from the risk factors as disclosed in the Annual Report on Form 10-K for the year ended December  31, 2012.

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

For the quarter ended March 31, 2013, there were no repurchases of common equity securities by the Company under the announced Stock Repurchase Plan. In connection with the formal written agreements entered into with the Federal Reserve Bank of Philadelphia and the Pennsylvania Department of Banking, the Company’s Stock Repurchase Plan has been suspended, and the Company does not expect to repurchase shares in the foreseeable future.

51

The Company did not sell any unregistered securities during the quarter ended March 31, 2013.

Item 3 – Defaults upon Senior Securities

Not applicable

Item 4 – Mine Safety Disclosures

Not applicable

Item 5 – Other Information

None

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). Pursuant to Rule 406 of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospects for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

52

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 CEO

(Principal Executive Officer)

/s/ David P. Boyle

David P. Boyle

Executive Vice President and CFO

(Principal Financial Officer)

Date: May 9, 2013

53

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), Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

54

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; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of the 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 9, 2013	By:	/s/ Thomas R. Quinn, Jr.
		Thomas R. Quinn, Jr.
		President and CEO
		(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; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of the 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 9, 2013	By:	/s/ David P. Boyle
		David P. Boyle
		Executive Vice President and CFO
		(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, 2013 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 9, 2013	/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, 2013 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 9, 2013	/s/ David P. Boyle
	David P. Boyle
	Executive Vice President and
	Chief Financial Officer

XML

Loans Receivable And Allowance For Loan Losses (Details 8) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Activity in the allowance for loan losses
Balance, beginning of period	$ 23,166	$ 43,715
Provision for loan losses	0	19,200
Charge-offs	(1,345)	(35,283)
Recoveries	96	524
Balance, end of period	21,917	28,156
Commercial Real Estate [Member]
Activity in the allowance for loan losses
Balance, beginning of period	13,719	29,559
Provision for loan losses	(473)	13,364
Charge-offs	(1,142)	(26,663)
Recoveries	61	22
Balance, end of period	12,165	16,282
Acquisition and Development [Member]
Activity in the allowance for loan losses
Balance, beginning of period	3,502	9,708
Provision for loan losses	(746)	3,850
Charge-offs	(145)	(7,312)
Recoveries	3	473
Balance, end of period	2,614	6,719
Commercial and Industrial [Member]
Activity in the allowance for loan losses
Balance, beginning of period	1,635	1,085
Provision for loan losses	(292)	855
Charge-offs	0	(1,068)
Recoveries	10	19
Balance, end of period	1,353	891
Municipal [Member]
Activity in the allowance for loan losses
Balance, beginning of period	223	789
Provision for loan losses	62	116
Charge-offs	0	0
Recoveries	0	0
Balance, end of period	285	905
Commercial [Member]
Activity in the allowance for loan losses
Balance, beginning of period	19,079	41,141
Provision for loan losses	(1,449)	18,185
Charge-offs	(1,287)	(35,043)
Recoveries	74	514
Balance, end of period	16,417	24,797
Residential Mortgage [Member]
Activity in the allowance for loan losses
Balance, beginning of period	2,275	933
Provision for loan losses	1,145	592
Charge-offs	(38)	(228)
Recoveries	6	4
Balance, end of period	3,388	1,301
Installment and other [Member]
Activity in the allowance for loan losses
Balance, beginning of period	85	75
Provision for loan losses	31	(24)
Charge-offs	(20)	(12)
Recoveries	16	6
Balance, end of period	112	45
Consumer [Member]
Activity in the allowance for loan losses
Balance, beginning of period	2,360	1,008
Provision for loan losses	1,176	568
Charge-offs	(58)	(240)
Recoveries	22	10
Balance, end of period	3,500	1,346
Unallocated [Member]
Activity in the allowance for loan losses
Balance, beginning of period	1,727	1,566
Provision for loan losses	273	447
Charge-offs	0	0
Recoveries	0	0
Balance, end of period	$ 2,000	$ 2,013

XML

Fair Value Disclosures (Details Textual) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Fair Value Disclosures (Textual) [Abstract]
Fair value liabilities	$ 0	$ 0
Allowance for loan losses	9,227,000	10,843,000
Specific charges to value the real estate owned	533,000	581,000
Lower of cost or fair value reserve	$ 575,000	$ 644,000
Short term borrowings maturity period	90 days

XML

Financial Instruments with Off-Balance-Sheet Risk (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Revolving, open ended home equity loans [Member]
Commitments and conditional obligations
Contract or Notional Amount	$ 79,887	$ 77,674
1-4 family residential construction loans [Member]
Commitments and conditional obligations
Contract or Notional Amount	1,636	1,002
Commercial real estate, construction and land development loans [Member]
Commitments and conditional obligations
Contract or Notional Amount	593	1,021
Commercial, industrial and other loans [Member]
Commitments and conditional obligations
Contract or Notional Amount	45,559	60,250
Standby letters of credit [Member]
Commitments and conditional obligations
Contract or Notional Amount	$ 11,428	$ 11,551

XML

Contingencies (Details)	3 Months Ended
	Mar. 31, 2013 Claim
Contingencies (Textual) [Abstract]
Legal Proceedings	0
Contigencies dismiss date	Aug. 23, 2013

XML

Earnings Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Earnings (loss) per share
Net income (loss)	$ 1,560	$ (8,218)
Weighted average shares outstanding	8,084	8,055
Impact of common stock equivalents	0	0
Weighted average shares outstanding (diluted)	8,084	8,055
Per share information:
Basic earnings (loss) per share	$ 0.19	$ (1.02)
Diluted earnings (loss) per share	$ 0.19	$ (1.02)

XML

Loans Receivable and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Impaired loans by class
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	$ 2,851	$ 3,545
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	2,901	3,588
Impaired Loans with a Specific Allowance, Related Allowance	1,006	1,312
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	14,446	17,489
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	23,173	27,536
Commercial real estate [Member] | Owner-occupied [Member]
Impaired loans by class
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)	2,165	2,417
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	2,426	2,680
Commercial real estate [Member] | Non-owner occupied [Member]
Impaired loans by class
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	1,248	1,257
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	1,249	1,257
Impaired Loans with a Specific Allowance, Related Allowance	325	329
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	1,750	2,205
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	3,730	5,487
Commercial real estate [Member] | Multi-family [Member]
Impaired loans by class
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)		0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)		0
Impaired Loans with a Specific Allowance, Related Allowance		0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)		19
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)		198
Commercial real estate [Member] | Non-owner occupied residential [Member]
Impaired loans by class
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	202	204
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	202	204
Impaired Loans with a Specific Allowance, Related Allowance	45	46
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	3,715	5,164
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	5,353	6,510
Acquisition and development [Member] | 1-4 family residential construction [Member]
Impaired loans by class
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	516	711
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	536	725
Impaired Loans with a Specific Allowance, Related Allowance	9	9
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	293	198
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	299	202
Acquisition and development [Member] | Commercial and land development [Member]
Impaired loans by class
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)	2,833	3,809
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	7,427	8,556
Commercial and industrial [Member]
Impaired loans by class
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	885	1,373
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	914	1,402
Impaired Loans with a Specific Allowance, Related Allowance	627	928
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	444	445
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	444	445
Residential mortgage [Member] | First lien [Member]
Impaired loans by class
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)	2,689	2,581
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	2,906	2,784
Residential mortgage [Member] | Home equity - term [Member]
Impaired loans by class
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)	37	57
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	58	75
Residential mortgage [Member] | Home equity - Lines of credit [Member]
Impaired loans by class
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)	519	592
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	528	597
Installment and other loans [Member]
Impaired loans by class
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)	1	2
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	$ 2	$ 2

XML

Fair Value Disclosures (Tables)

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

Summary of assets measured at fair value on a recurring basis

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2013
Securities available for sale:
U.S. Treasury	$	0	$	26,017	$	0	$	26,017
U.S. Government Agencies		0		28,064		0		28,064
U.S. Government Sponsored Enterprises (GSE)		0		41,166		0		41,166
States and political subdivisions		0		57,995		0		57,995
GSE residential mortgage-backed securities		0		165,491		0		165,491
GSE commercial mortgage-backed securities		0		30,931		0		30,931
Total debt securities		0		349,664		0		349,664
Equity securities – Financial services		0		69		0		69
Total securities	$	0	$	349,733	$	0	$	349,733
December 31, 2012
Securities available for sale:
U.S. Treasury	$	0	$	26,010	$	0	$	26,010
U.S. Government Sponsored Enterprises (GSE)		0		44,762		0		44,762
States and political subdivisions		0		38,909		0		38,909
GSE residential mortgage-backed securities		0		160,799		0		160,799
GSE commercial mortgage-backed securities		0		31,421		0		31,421
Total debt securities		0		301,901		0		301,901
Equity securities – Financial services		0		69		0		69
Total securities	$	0	$	301,970	$	0	$	301,970

Summary of assets measured at fair value on a nonrecurring basis

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair  Value Measurements
March 31, 2013
Impaired loans, net	$	0	$	0	$	8,421	$	8,421
Foreclosed real estate		0		0		1,060		1,060
Mortgage servicing rights		0		0		2,330		2,330
December 31, 2012
Impaired loans, net	$	0	$	0	$	10,675	$	10,675
Foreclosed real estate		0		0		1,101		1,101
Mortgage servicing rights		0		0		2,296		2,296

Summary of additional qualitative information

(Dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
March 31, 2013
Impaired loans	$	8,421	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Foreclosed real estate		1,060	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-25% discount
Mortgage servicing rights		2,330	Discounted cash flows	Remaining term Discount rate	4.5 years 10.70%
December 31, 2012
Impaired loans	$	10,675	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Foreclosed real estate		1,101	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Mortgage servicing rights		2,296	Discounted cash flows	Remaining term Discount rate	4.0 years 10.70%

Financial statements at estimated fair values

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2013:
Financial Assets
Cash and due from banks	$	10,713	$	10,713	$	10,713	$	0	$	0
Interest bearing deposits with banks		84,057		84,057		84,057		0		0
Restricted investments in bank stock		9,582		9,582		0		0		9,582
Securities available for sale		349,733		349,733		0		349,733		0
Loans held for sale		7,180		7,180		0		7,180		0
Loans, net of allowance for loan losses		652,831		648,286		0		0		648,286
Accrued interest receivable		3,444		3,444		0		0		3,444
Mortgage servicing rights		2,330		2,330		0		0		2,330
Financial Liabilities
Deposits		1,044,297		1,048,186		0		1,048,186		0
Short-term borrowings		15,244		15,244		0		15,244		0
Long-term debt		37,128		38,216		0		38,216		0
Accrued interest payable		425		425		0		425		0
Off-balance sheet instruments		0		0		0		0		0
December 31, 2012:
Financial Assets
Cash and due from banks	$	16,933	$	16,933	$	16,933	$	0	$	0
Interest bearing deposits with banks		133,755		133,755		133,755		0		0
Restricted investments in bank stock		9,804		9,804		0		0		9,804
Securities available for sale		301,970		301,970		0		301,970		0
Loans held for sale		7,862		7,862		0		7,862		0
Loans, net of allowance for loan losses		680,573		681,414		0		0		681,414
Accrued interest receivable		3,188		3,188		0		0		3,188
Mortgage servicing rights		2,296		2,296		0		0		2,296
Financial Liabilities
Deposits	$	1,085,039	$	1,089,344		0	$	1,089,344		0
Short-term borrowings		9,650		9,650		0		9,650		0
Long-term debt		37,470		38,676		0		38,676		0
Accrued interest payable		424		424		0		424		0
Off-balance sheet instruments		0		0		0		0		0

XML

Fair Value Disclosures (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Level 1 [Member]
Estimated fair value on a recurring basis
Total securities	$ 0	$ 0
Level 2 [Member]
Estimated fair value on a recurring basis
Total securities	349,733	301,970
Level 3 [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member]
Estimated fair value on a recurring basis
Total securities	349,733	301,970
Fair Value, Measurements, Recurring [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	349,664	301,901
Fair Value, Measurements, Recurring [Member] | U.S. Treasury [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	26,017	26,010
Fair Value, Measurements, Recurring [Member] | US Government Agencies [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	28,064
Fair Value, Measurements, Recurring [Member] | U.S. Government Sponsored Enterprises (GSE) [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	41,166	44,762
Fair Value, Measurements, Recurring [Member] | States and political subdivisions [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	57,995	38,909
Fair Value, Measurements, Recurring [Member] | GSE residential mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	165,491	160,799
Fair Value, Measurements, Recurring [Member] | GSE commercial mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	30,931	31,421
Fair Value, Measurements, Recurring [Member] | Financial services [Member] | Equity securities - financial services [Member]
Estimated fair value on a recurring basis
Total securities	69	69
Fair Value, Measurements, Recurring [Member] | Level 1 [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | U.S. Treasury [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | US Government Agencies [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | U.S. Government Sponsored Enterprises (GSE) [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | States and political subdivisions [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | GSE residential mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | GSE commercial mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 1 [Member] | Financial services [Member] | Equity securities - financial services [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 2 [Member]
Estimated fair value on a recurring basis
Total securities	349,733	301,970
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	349,664	301,901
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | U.S. Treasury [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	26,017	26,010
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | US Government Agencies [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	28,064
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | U.S. Government Sponsored Enterprises (GSE) [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	41,166	44,762
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | States and political subdivisions [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	57,995	38,909
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | GSE residential mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	165,491	160,799
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | GSE commercial mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	30,931	31,421
Fair Value, Measurements, Recurring [Member] | Level 2 [Member] | Financial services [Member] | Equity securities - financial services [Member]
Estimated fair value on a recurring basis
Total securities	69	69
Fair Value, Measurements, Recurring [Member] | Level 3 [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | U.S. Treasury [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | US Government Agencies [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | U.S. Government Sponsored Enterprises (GSE) [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | States and political subdivisions [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | GSE residential mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | GSE commercial mortgage-backed securities [Member] | Total debt securities [Member]
Estimated fair value on a recurring basis
Total securities	0	0
Fair Value, Measurements, Recurring [Member] | Level 3 [Member] | Financial services [Member] | Equity securities - financial services [Member]
Estimated fair value on a recurring basis
Total securities	$ 0	$ 0

XML

Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Current year provision:
Federal	$ 30	$ (2,292)
State	0	42
Deferred tax expense (benefit)	69	(2,582)
Valuation allowance on deferred taxes	(69)	0
Net income tax expense (benefit)	$ 30	$ (4,832)

XML

Loans Receivable and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013 Contract	Mar. 31, 2012 Contract
Number of loans modified, and their pre-modification and post-modification investment balances
Number of Contracts	0	3
Recorded Investment	$ 0	$ 812
Accruing [Member]
Number of loans modified, and their pre-modification and post-modification investment balances
Number of Contracts	0	1
Recorded Investment	0	37
Nonaccruing [Member]
Number of loans modified, and their pre-modification and post-modification investment balances
Number of Contracts	0	2
Recorded Investment	0	775
Commercial and industrial [Member] | Accruing [Member]
Number of loans modified, and their pre-modification and post-modification investment balances
Number of Contracts	0	1
Recorded Investment	0	37
Commercial and industrial [Member] | Nonaccruing [Member]
Number of loans modified, and their pre-modification and post-modification investment balances
Number of Contracts	0	1
Recorded Investment	0	302
Non-owner occupied [Member] | Commercial real estate [Member] | Nonaccruing [Member]
Number of loans modified, and their pre-modification and post-modification investment balances
Number of Contracts	0	1
Recorded Investment	$ 0	$ 473

XML

Fair Value Disclosures (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Impaired loans [Member]
Summary of additional qualitative information
Fair Value Estimate	$ 8,421	$ 10,675
Valuation Techniques	Appraisal of collateral	Appraisal of collateral
Foreclosed real estate [Member]
Summary of additional qualitative information
Fair Value Estimate	1,060	1,101
Valuation Techniques	Appraisal of collateral	Appraisal of collateral
Mortgage servicing rights [Member]
Summary of additional qualitative information
Fair Value Estimate	$ 2,330	$ 2,296
Valuation Techniques	Discounted cash flows	Discounted cash flows
Mortgage servicing rights, Unobservable Input, Remaining term	4 years 6 months 0 days	4 years
Mortgage servicing rights, Unobservable Input, Discount rate	10.70%	10.70%
Management adjustments for liquidation expenses [Member] | Impaired loans [Member]
Summary of additional qualitative information
Unobservable Input	Management adjustments for liquidation expenses	Management adjustments for liquidation expenses
Management adjustments for liquidation expenses [Member] | Impaired loans [Member] | Maximum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	10.00%	10.00%
Management adjustments for liquidation expenses [Member] | Impaired loans [Member] | Minimum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	5.00%	5.00%
Management adjustments for liquidation expenses [Member] | Foreclosed real estate [Member]
Summary of additional qualitative information
Unobservable Input	Management adjustments for liquidation expenses	Management adjustments for liquidation expenses
Management adjustments for liquidation expenses [Member] | Foreclosed real estate [Member] | Maximum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	25.00%	10.00%
Management adjustments for liquidation expenses [Member] | Foreclosed real estate [Member] | Minimum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	5.00%	5.00%
Remaining term [Member] | Mortgage servicing rights [Member]
Summary of additional qualitative information
Unobservable Input	Remaining term	Remaining term
Discount rate [Member] | Mortgage servicing rights [Member]
Summary of additional qualitative information
Unobservable Input	Discount rate	Discount rate
Appraisal of collateral [Member] | Management adjustments on appraisals for property type and recent activity [Member] | Impaired loans [Member]
Summary of additional qualitative information
Unobservable Input	Management adjustments on appraisals for property type and recent activity	Management adjustments on appraisals for property type and recent activity
Appraisal of collateral [Member] | Management adjustments on appraisals for property type and recent activity [Member] | Impaired loans [Member] | Maximum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	30.00%	30.00%
Appraisal of collateral [Member] | Management adjustments on appraisals for property type and recent activity [Member] | Impaired loans [Member] | Minimum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	0.00%	0.00%
Appraisal of collateral [Member] | Management adjustments on appraisals for property type and recent activity [Member] | Foreclosed real estate [Member]
Summary of additional qualitative information
Unobservable Input	Management adjustments on appraisals for property type and recent activity	Management adjustments on appraisals for property type and recent activity
Appraisal of collateral [Member] | Management adjustments on appraisals for property type and recent activity [Member] | Foreclosed real estate [Member] | Maximum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	30.00%	30.00%
Appraisal of collateral [Member] | Management adjustments on appraisals for property type and recent activity [Member] | Foreclosed real estate [Member] | Minimum [Member]
Summary of additional qualitative information
Mortgage servicing rights, Unobservable Input, Discount rate	0.00%	0.00%

XML

Earnings Per Share (Details Textual) (Stock options [Member])	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Stock options [Member]
Earnings Per Share (Textual) [Abstract]
Shares of common stock were not considered in computing diluted earnings per share	242,603	346,405

XML

Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2013

Summary of Significant Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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) whose primary activity consists of supervising its wholly-owned subsidiary, the Orrstown Bank (the “Bank”). The Company operates through its office in Shippensburg, Pennsylvania. The Bank provides services through its network of 21 offices in Franklin, Cumberland and Perry Counties of Pennsylvania and in Washington County, Maryland. The Bank engages in lending services for commercial loans, residential loans, commercial mortgages 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 its subsidiary are subject to the regulation of certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation – The unaudited financial statements of the Company and its subsidiary are presented for the three months ended March 31, 2013 and 2012 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, 2012 is condensed from audited year-end financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto, included in the Annual Report Form 10-K for the year ended December 31, 2012. The consolidated financial statements include the accounts of the Company and the Bank. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation allowance required on its deferred tax assets. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans and foreclosed real estate; future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance based on their judgments concerning information available to them at the time of their examination. Because of these factors, management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term.

The Company has established a full valuation allowance on its net deferred tax assets at March 31, 2013, based on the Company’s previous taxable losses, projections for future taxable income, and other available evidence, in which management determined it was “more likely than not” that some portion of the asset would not be realized. Management may need to modify its judgment in this regard from one quarter to the next, and should improvement occur in operating performance, the need for a full valuation allowance may be reduced or eliminated.

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. In preparing these financial statements, the Company evaluated the events and transactions that occurred after March 31, 2013, through the date these financial statements were filed with the Securities and Exchange Commission (the “Commission”).

Concentration of Credit Risk – The Company grants commercial, residential and consumer loans 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 construction contractors, residential and non-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.

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, 2013 and December 31, 2012, and consists of common stock of the Federal Reserve Bank of Philadelphia, Atlantic Central Bankers Bank and the Federal Home Loan Bank (“FHLB”) of Pittsburgh stocks.

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 investment in bank stocks as of March 31, 2013. However, security impairment analysis is completed quarterly and the determination that no impairment had occurred as of March 31, 2013 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, 2013 and December 31, 2012 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 approximates 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.

The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment (FASB ASC 820-10). This guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery; the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

The Company had no debt securities it deemed to be other than temporarily impaired at March 31, 2013 and December 31, 2012.

The Company’s securities are exposed to various risks, such as interest rate, 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.

For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.

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, mortgage, and 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 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, 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 payment 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.

Loan terms which are modified are classified as troubled debt restructurings if a concession was granted, for legal or economic reasons, related to a debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, 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 troubled debt restructurings 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. Troubled debt restructurings 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.

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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.

Loans Serviced – The Bank administers secondary market mortgage programs available through the Federal Home Loan Bank of Pittsburgh 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, 2013 and December 31, 2012 the balance of loans serviced for others was $328,513,000 and $329,360,000.

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.

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 – 10 to 40 years; equipment, furniture and fixtures – 3 to 15 years; and computer software – 3 to 5 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.

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 loan. 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 – Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold 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 $1,925,000 and $1,876,000 as of March 31, 2013 and December 31, 2012 and is included in other assets.

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 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 statements of condition, 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.

Advertising – The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expense was $74,000 and $227,000 for the three months ended March 31, 2013 and 2012.

Stock Compensation Plans – The Company has a stock compensation plan that covers employees and non-employee directors. Stock compensation accounting guidance (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 are 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.

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

Earnings Per Share – Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. 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 relate solely to outstanding stock options.

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 (losses) on securities available for sale for all years presented.

The component of accumulated other comprehensive income, net of taxes, at March 31, 2013 and December 31, 2012 consisted of unrealized gains on securities available for sale and totaled $1,325,000 and $1,828,000.

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 8. 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.

Recent Accounting Pronouncements – In December 2011, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures About Offsetting Assets and Liabilities. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The provisions of ASU No. 2013-01 limits the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions. The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impacted the disclosure requirements related to the offsetting of assets and liabilities and information about instruments and transactions eligible for offset in the statement of financial position, the adoption had no impact on the Company’s consolidated statements of operations and financial condition.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income (e.g., unrealized gains or losses on available-for-sale investment securities) and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also requires that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., unrealized gains or losses on available-for-sale investment securities) and the income statement line item affected by the reclassification (e.g., realized gains (losses) on sales of investment securities). If a component is not required to be reclassified to net income in its entirety (e.g., amortization of defined benefit plan items), entities would instead cross reference to the related note to the financial statements for additional information (e.g., pension footnote). The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. As the Company’s only item of accumulated other comprehensive income is unrealized gains or losses on securities available for sale, the adoption of this standard had no impact on our Consolidated Financial Statements.

XML

Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Deferred tax assets:
Allowance for loan losses	$ 9,234	$ 9,672
Deferred compensation	478	477
Retirement plans and salary continuation	1,505	1,473
Stock compensation	184	184
Off balance sheet commitment reserves	218	231
Nonaccrual loan interest	268	228
Goodwill	214	214
Low income housing credit carry forward	925	806
Alternative minimum tax credit carryforward	30	0
Charitable contribution carry forward	393	391
Net operating loss carry forward	8,589	8,466
Other	221	237
Total deferred tax assets	22,259	22,379
Valuation allowance	(20,166)	(20,235)
Total deferred tax assets	2,093	2,144
Deferred tax liabilities:
Depreciation	1,173	1,232
Net unrealized gains on securities available for sale	713	984
Purchase accounting adjustments	554	575
Other	366	337
Total deferred tax liabilities	2,806	3,128
Net deferred tax liability	$ (713)	$ (984)

XML

Securities Available for Sale (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Schedule of amortized cost and fair values of securities available for sale by contractual maturity
Due in one year or less, amortized cost	$ 26,627
Due in one year or less, fair value	26,699
Due after one year through five years, amortized cost	31,688
Due after one year through five years, fair value	31,781
Due after five years through ten years, amortized cost	21,058
Due after five years through ten years, fair value	21,657
Due after ten years, amortized cost	72,595
Due after ten years, fair value	73,105
GSE residential mortgage-backed securities, amortized cost	164,445
GSE residential mortgage-backed securities, fair value	165,491
GSE commercial mortgage-backed securities, amortized cost	31,232
GSE commercial mortgage-backed securities, fair value	30,931
Total debt securities, amortized cost	347,645
Total debt securities, fair value	349,664
Equity securities, amortized cost	50
Equity securities, fair value	69
Available for sale securities, Total, amortized cost	347,695	299,158
Available for sale securities, Total	$ 349,733	$ 301,970

XML

Securities Available for Sale (Details 1) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Gross unrealized losses and fair value of the Company's available for sale securities
Total temporarily impaired securities, Less Than 12 Months, Fair Value	$ 115,719	$ 86,233
Total temporarily impaired securities, Less Than 12 Months, Unrealized Losses	893	376
Total temporarily impaired securities, 12 Months or More, Fair Value	1,951	2,657
Total temporarily impaired securities, 12 Months or More, Unrealized Losses	15	21
Total temporarily impaired securities, Total, Fair Value	117,670	88,890
Total temporarily impaired securities, Total, Unrealized Losses	908	397
U.S. Government Agencies [Member] | Total debt securities [Member]
Gross unrealized losses and fair value of the Company's available for sale securities
Total temporarily impaired securities, Less Than 12 Months, Fair Value	12,891
Total temporarily impaired securities, Less Than 12 Months, Unrealized Losses	203
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	12,891
Total temporarily impaired securities, Total, Unrealized Losses	203
U.S. Government Sponsored Enterprises (GSE) [Member] | Total debt securities [Member]
Gross unrealized losses and fair value of the Company's available for sale securities
Total temporarily impaired securities, Less Than 12 Months, Fair Value	2,194
Total temporarily impaired securities, Less Than 12 Months, Unrealized Losses	7
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	2,194
Total temporarily impaired securities, Total, Unrealized Losses	7
States and political subdivisions [Member] | Total debt securities [Member]
Gross unrealized losses and fair value of the Company's available for sale securities
Total temporarily impaired securities, Less Than 12 Months, Fair Value	18,090	885
Total temporarily impaired securities, Less Than 12 Months, Unrealized Losses	164	3
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	18,090	885
Total temporarily impaired securities, Total, Unrealized Losses	164	3
GSE residential mortgage-backed securities [Member] | Total debt securities [Member]
Gross unrealized losses and fair value of the Company's available for sale securities
Total temporarily impaired securities, Less Than 12 Months, Fair Value	51,613	64,952
Total temporarily impaired securities, Less Than 12 Months, Unrealized Losses	218	312
Total temporarily impaired securities, 12 Months or More, Fair Value	1,951	2,657
Total temporarily impaired securities, 12 Months or More, Unrealized Losses	15	21
Total temporarily impaired securities, Total, Fair Value	53,564	67,609
Total temporarily impaired securities, Total, Unrealized Losses	233	333
GSE commercial mortgage-backed securities [Member] | Total debt securities [Member]
Gross unrealized losses and fair value of the Company's available for sale securities
Total temporarily impaired securities, Less Than 12 Months, Fair Value	30,931	20,396
Total temporarily impaired securities, Less Than 12 Months, Unrealized Losses	301	61
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	30,931	20,396
Total temporarily impaired securities, Total, Unrealized Losses	$ 301	$ 61

XML

Income Taxes (Details Textual) (USD $)	3 Months Ended		12 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Income Taxes (Textual) [Abstract]
Provision for income taxes	$ 43,000	$ 781,000
Cumulative loss position, significant negative evidence against the realizability of the deferred tax asset	3 years		3 years

XML

Securities Available for Sale (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2013 Security	Mar. 31, 2012	Dec. 31, 2012 Security
Securities Available for Sale (Textual) [Abstract]
Securities held	37		27
Securities Available for Sale (Additional Textual) [Abstract]
Sales of available for sale securities	$ 19,786,000	$ 30,865,000
Gross gains on the sales of securities	259,000	2,260,000
Gross losses on securities available for sale	137,000	29,000
Securities with fair value	$ 243,107,000		$ 258,024,000
States and political subdivisions [Member]
Securities Available for Sale (Textual) [Abstract]
Securities held	9		1
Unrealized loss for security	Less than 12 months
Mortgage-backed securities issued by U.S. Treasuries and Government Sponsored Enterprises (GSE) [Member]
Securities Available for Sale (Textual) [Abstract]
Securities held	28		26
U.S Treasury and GSE, less than 12 months category	1		1
Unrealized loss for security	Less than 12 months

XML

Loans Receivable and Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	$ 674,748	$ 703,739
Commercial real estate [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	331,412	353,346
Commercial real estate [Member] | Owner-occupied [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	137,354	144,290
Commercial real estate [Member] | Non-owner occupied [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	108,256	120,930
Commercial real estate [Member] | Multi-family [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	21,181	21,745
Commercial real estate [Member] | Non-owner occupied residential [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	64,621	66,381
Acquisition and development [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	26,867	33,225
Acquisition and development [Member] | 1-4 family residential construction [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	1,989	2,850
Acquisition and development [Member] | Commercial and land development [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	24,878	30,375
Commercial and industrial [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	42,443	39,340
Municipal [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	67,470	68,018
Residential mortgage [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	200,021	202,796
Residential mortgage [Member] | First lien [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	108,964	108,601
Residential mortgage [Member] | Home equity - term [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	15,333	14,747
Residential mortgage [Member] | Home equity - Lines of credit [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	75,724	79,448
Installment and other loans [Member]
Summary of loan portfolio, excluding residential loans held for sale, broken out by classes
Total Loans	$ 6,535	$ 7,014

XML

Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$ 1,560	$ (8,218)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of premiums on securities available for sale	1,720	1,590
Depreciation and amortization	661	654
Provision for loan losses	0	19,200
Stock based compensation	39	18
Net change in loans held for sale	682	(1,615)
Net loss on disposal of other real estate owned	122	138
Write-down of other real estate owned	0	309
Deferred income taxes, including valuation allowance	0	(2,582)
Investment securities gains	(122)	(2,231)
Earnings on cash surrender value of life insurance	(200)	(215)
(Increase) decrease in accrued interest receivable	(256)	117
Increase (decrease) in accrued interest payable	1	(148)
Other, net	(2,156)	(1,628)
Net cash provided by operating activities	2,051	5,389
CASH FLOWS FROM INVESTING ACTIVITIES
Sales of available for sale securities	19,786	30,865
Maturities, repayments and calls of available for sale securities	22,035	13,868
Purchases of available for sale securities	(91,956)	(46,404)
Net change in restricted investments in bank stocks	222	132
Net decrease in loans	27,437	30,269
Purchases of bank premises and equipment	(184)	(208)
Proceeds from disposal of other real estate owned	122	855
Net cash provided (used) by investing activities	(22,538)	29,377
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits	(40,742)	(3,179)
Net increase in short term purchased funds	5,594	18,739
Payments on long-term debt	(342)	(5,326)
Proceeds from issuance of common stock	59	3
Net cash provided (used) by financing activities	(35,431)	10,237
Net increase (decrease) in cash and cash equivalents	(55,918)	45,003
Cash and cash equivalents at beginning of period	150,688	109,669
Cash and cash equivalents at end of period	94,770	154,672
Cash paid during the period for:
Interest	1,378	2,395
Income taxes	0	42
Supplemental schedule of noncash investing activities:
Other real estate acquired in settlement of loans	$ 293	$ 1,550

XML

Loans Receivable and Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Bank's ratings based on its internal risk rating system
Total Loans	$ 674,748	$ 703,739
Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	577,617	596,890
Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	51,199	52,548
Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	28,635	33,267
Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	16,016	18,282
Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	1,281	2,752
Commercial real estate [Member]
Bank's ratings based on its internal risk rating system
Total Loans	331,412	353,346
Acquisition and development [Member]
Bank's ratings based on its internal risk rating system
Total Loans	26,867	33,225
Commercial and industrial [Member]
Bank's ratings based on its internal risk rating system
Total Loans	42,443	39,340
Commercial and industrial [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	37,042	33,380
Commercial and industrial [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	2,896	3,713
Commercial and industrial [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	1,176	429
Commercial and industrial [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	564	566
Commercial and industrial [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	765	1,252
Municipal [Member]
Bank's ratings based on its internal risk rating system
Total Loans	67,470	68,018
Municipal [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	67,470	68,018
Municipal [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Municipal [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Municipal [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Municipal [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Residential mortgage [Member]
Bank's ratings based on its internal risk rating system
Total Loans	200,021	202,796
Installment and other loans [Member]
Bank's ratings based on its internal risk rating system
Total Loans	6,535	7,014
Installment and other loans [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	6,523	6,998
Installment and other loans [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	10	11
Installment and other loans [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	1	3
Installment and other loans [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	1	2
Installment and other loans [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Owner-occupied [Member] | Commercial real estate [Member]
Bank's ratings based on its internal risk rating system
Total Loans	137,354	144,290
Owner-occupied [Member] | Commercial real estate [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	118,677	121,333
Owner-occupied [Member] | Commercial real estate [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	9,998	11,917
Owner-occupied [Member] | Commercial real estate [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	6,514	8,623
Owner-occupied [Member] | Commercial real estate [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	2,165	2,229
Owner-occupied [Member] | Commercial real estate [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	188
Non-owner occupied [Member] | Commercial real estate [Member]
Bank's ratings based on its internal risk rating system
Total Loans	108,256	120,930
Non-owner occupied [Member] | Commercial real estate [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	81,661	95,876
Non-owner occupied [Member] | Commercial real estate [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	12,342	7,351
Non-owner occupied [Member] | Commercial real estate [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	11,255	14,241
Non-owner occupied [Member] | Commercial real estate [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	2,998	3,462
Non-owner occupied [Member] | Commercial real estate [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Multi-family [Member] | Commercial real estate [Member]
Bank's ratings based on its internal risk rating system
Total Loans	21,181	21,745
Multi-family [Member] | Commercial real estate [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	17,050	17,205
Multi-family [Member] | Commercial real estate [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	3,412	3,936
Multi-family [Member] | Commercial real estate [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	719	585
Multi-family [Member] | Commercial real estate [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	19
Multi-family [Member] | Commercial real estate [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Non-owner occupied residential [Member] | Commercial real estate [Member]
Bank's ratings based on its internal risk rating system
Total Loans	64,621	66,381
Non-owner occupied residential [Member] | Commercial real estate [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	44,226	45,468
Non-owner occupied residential [Member] | Commercial real estate [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	11,547	12,199
Non-owner occupied residential [Member] | Commercial real estate [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	4,931	3,346
Non-owner occupied residential [Member] | Commercial real estate [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	3,917	5,368
Non-owner occupied residential [Member] | Commercial real estate [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
1-4 family residential construction [Member] | Acquisition and development [Member]
Bank's ratings based on its internal risk rating system
Total Loans	1,989	2,850
1-4 family residential construction [Member] | Acquisition and development [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	1,018	1,608
1-4 family residential construction [Member] | Acquisition and development [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	162	333
1-4 family residential construction [Member] | Acquisition and development [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
1-4 family residential construction [Member] | Acquisition and development [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	293	198
1-4 family residential construction [Member] | Acquisition and development [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	516	711
Commercial and land development [Member] | Acquisition and development [Member]
Bank's ratings based on its internal risk rating system
Total Loans	24,878	30,375
Commercial and land development [Member] | Acquisition and development [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	13,163	14,793
Commercial and land development [Member] | Acquisition and development [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	6,263	8,937
Commercial and land development [Member] | Acquisition and development [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	2,619	2,836
Commercial and land development [Member] | Acquisition and development [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	2,833	3,208
Commercial and land development [Member] | Acquisition and development [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	601
First lien [Member] | Residential mortgage [Member]
Bank's ratings based on its internal risk rating system
Total Loans	108,964	108,601
First lien [Member] | Residential mortgage [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	102,760	101,390
First lien [Member] | Residential mortgage [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	3,515	3,026
First lien [Member] | Residential mortgage [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	1,604
First lien [Member] | Residential mortgage [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	2,689	2,581
First lien [Member] | Residential mortgage [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Home equity - term [Member] | Residential mortgage [Member]
Bank's ratings based on its internal risk rating system
Total Loans	15,333	14,747
Home equity - term [Member] | Residential mortgage [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	15,014	14,403
Home equity - term [Member] | Residential mortgage [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	210	52
Home equity - term [Member] | Residential mortgage [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	72	235
Home equity - term [Member] | Residential mortgage [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	37	57
Home equity - term [Member] | Residential mortgage [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	0	0
Home equity - Lines of credit [Member] | Residential mortgage [Member]
Bank's ratings based on its internal risk rating system
Total Loans	75,724	79,448
Home equity - Lines of credit [Member] | Residential mortgage [Member] | Pass [Member]
Bank's ratings based on its internal risk rating system
Total Loans	73,013	76,418
Home equity - Lines of credit [Member] | Residential mortgage [Member] | Special Mention [Member]
Bank's ratings based on its internal risk rating system
Total Loans	844	1,073
Home equity - Lines of credit [Member] | Residential mortgage [Member] | Non-Impaired Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	1,348	1,365
Home equity - Lines of credit [Member] | Residential mortgage [Member] | Impaired - Substandard [Member]
Bank's ratings based on its internal risk rating system
Total Loans	519	592
Home equity - Lines of credit [Member] | Residential mortgage [Member] | Doubtful [Member]
Bank's ratings based on its internal risk rating system
Total Loans	$ 0	$ 0

XML

Loans Receivable And Allowance For Loan Losses (Details 9) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2011
Summary of allowance for loan loss allocation
Loans, Individually evaluated for impairment	$ 17,297	$ 21,034
Loans, Collectively evaluated for impairment	657,451	682,705
Total Loans	674,748	703,739
Allowance for loan losses, Individually evaluated for impairment	1,006	1,312
Allowance for loan losses, Collectively evaluated for impairment	20,911	21,854
Allowance for loan losses, Total	21,917	23,166	28,156	43,715
Commercial Real Estate [Member]
Summary of allowance for loan loss allocation
Loans, Individually evaluated for impairment	9,080	11,266
Loans, Collectively evaluated for impairment	322,332	342,080
Total Loans	331,412	353,346
Allowance for loan losses, Individually evaluated for impairment	370	375
Allowance for loan losses, Collectively evaluated for impairment	11,795	13,344
Allowance for loan losses, Total	12,165	13,719	16,282	29,559
Acquisition and Development [Member]
Summary of allowance for loan loss allocation
Loans, Individually evaluated for impairment	3,642	4,718
Loans, Collectively evaluated for impairment	23,225	28,507
Total Loans	26,867	33,225
Allowance for loan losses, Individually evaluated for impairment	9	9
Allowance for loan losses, Collectively evaluated for impairment	2,605	3,493
Allowance for loan losses, Total	2,614	3,502	6,719	9,708
Commercial and Industrial [Member]
Summary of allowance for loan loss allocation
Loans, Individually evaluated for impairment	1,329	1,818
Loans, Collectively evaluated for impairment	41,114	37,522
Total Loans	42,443	39,340
Allowance for loan losses, Individually evaluated for impairment	627	928
Allowance for loan losses, Collectively evaluated for impairment	726	707
Allowance for loan losses, Total	1,353	1,635	891	1,085
Municipal [Member]
Summary of allowance for loan loss allocation
Loans, Individually evaluated for impairment	0	0
Loans, Collectively evaluated for impairment	67,470	68,018
Total Loans	67,470	68,018
Allowance for loan losses, Individually evaluated for impairment	0	0
Allowance for loan losses, Collectively evaluated for impairment	285	223
Allowance for loan losses, Total	285	223	905	789
Residential Mortgage [Member]
Summary of allowance for loan loss allocation
Loans, Individually evaluated for impairment	3,245	3,230
Loans, Collectively evaluated for impairment	196,776	199,566
Total Loans	200,021	202,796
Allowance for loan losses, Individually evaluated for impairment	0	0
Allowance for loan losses, Collectively evaluated for impairment	3,388	2,275
Allowance for loan losses, Total	3,388	2,275	1,301	933
Installment and other [Member]
Summary of allowance for loan loss allocation
Loans, Individually evaluated for impairment	1	2
Loans, Collectively evaluated for impairment	6,534	7,012
Total Loans	6,535	7,014
Allowance for loan losses, Individually evaluated for impairment	0	0
Allowance for loan losses, Collectively evaluated for impairment	112	85
Allowance for loan losses, Total	112	85	45	75
Unallocated [Member]
Summary of allowance for loan loss allocation
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	2,000	1,727
Allowance for loan losses, Total	$ 2,000	$ 1,727	$ 2,013	$ 1,566

XML

Fair Value Disclosures (Details 3) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2011
Financial Assets
Cash and due from banks	$ 10,713	$ 16,933
Interest bearing deposits with banks	84,057	133,755
Restricted investments in bank stock	9,582	9,804
Securities available for sale	349,733	301,970
Loans held for sale	7,180	7,862
Loans, net of allowance for loan losses	21,917	23,166	28,156	43,715
Accrued interest receivable	3,444	3,188
Financial Liabilities
Deposits	1,044,297	1,085,039
Short-term borrowings	15,244	9,650
Long-term debt	37,128	37,470
Level 1 [Member]
Financial Assets
Cash and due from banks	10,713	16,933
Interest bearing deposits with banks	84,057	133,755
Restricted investments in bank stock	0	0
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
Mortgage servicing rights	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
Level 2 [Member]
Financial Assets
Cash and due from banks	0	0
Interest bearing deposits with banks	0	0
Restricted investments in bank stock	0	0
Securities available for sale	349,733	301,970
Loans held for sale	7,180	7,862
Loans, net of allowance for loan losses	0	0
Accrued interest receivable	0	0
Mortgage servicing rights	0	0
Financial Liabilities
Deposits	1,048,186	1,089,344
Short-term borrowings	15,244	9,650
Long-term debt	38,216	38,676
Accrued interest payable	425	424
Off-balance sheet instruments	0	0
Level 3 [Member]
Financial Assets
Cash and due from banks	0	0
Interest bearing deposits with banks	0	0
Restricted investments in bank stock	9,582	9,804
Securities available for sale	0	0
Loans held for sale	0	0
Loans, net of allowance for loan losses	648,286	681,414
Accrued interest receivable	3,444	3,188
Mortgage servicing rights	2,330	2,296
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
Carrying Amount [Member]
Financial Assets
Cash and due from banks	10,713	16,933
Interest bearing deposits with banks	84,057	133,755
Restricted investments in bank stock	9,582	9,804
Securities available for sale	349,733	301,970
Loans held for sale	7,180	7,862
Loans, net of allowance for loan losses	652,831	680,573
Accrued interest receivable	3,444	3,188
Mortgage servicing rights	2,330	2,296
Financial Liabilities
Deposits	1,044,297	1,085,039
Short-term borrowings	15,244	9,650
Long-term debt	37,128	37,470
Accrued interest payable	425	424
Off-balance sheet instruments	0	0
Fair Value [Member]
Financial Assets
Cash and due from banks	10,713	16,933
Interest bearing deposits with banks	84,057	133,755
Restricted investments in bank stock	9,582	9,804
Securities available for sale	349,733	301,970
Loans held for sale	7,180	7,862
Loans, net of allowance for loan losses	648,286	681,414
Accrued interest receivable	3,444	3,188
Mortgage servicing rights	2,330	2,296
Financial Liabilities
Deposits	1,048,186	1,089,344
Short-term borrowings	15,244	9,650
Long-term debt	38,216	38,676
Accrued interest payable	425	424
Off-balance sheet instruments	$ 0	$ 0

XML

Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 10,713	$ 16,933
Interest bearing deposits with banks	84,057	133,755
Cash and cash equivalents	94,770	150,688
Restricted investments in bank stock	9,582	9,804
Securities available for sale	349,733	301,970
Loans held for sale	7,180	7,862
Loans	674,748	703,739
Less: Allowance for loan losses	(21,917)	(23,166)
Net loans	660,011	688,435
Premises and equipment, net	26,457	26,782
Cash surrender value of life insurance	25,230	25,030
Intangible assets	780	832
Accrued interest receivable	3,444	3,188
Other assets	27,031	25,939
Total assets	1,197,038	1,232,668
Deposits:
Non-interest bearing	116,926	121,090
Interest bearing	927,371	963,949
Total deposits	1,044,297	1,085,039
Short-term borrowings	15,244	9,650
Long-term debt	37,128	37,470
Accrued interest and other liabilities	11,520	12,815
Total liabilities	1,108,189	1,144,974
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; 8,091,800 and 8,080,411 shares issued; 8,090,988 and 8,079,599 shares outstanding	421	421
Additional paid - in capital	122,822	122,724
Retained earnings (accumulated deficit)	(35,699)	(37,259)
Accumulated other comprehensive income	1,325	1,828
Treasury stock - common, 812 shares, at cost	(20)	(20)
Total shareholders' equity	88,849	87,694
Total liabilities and shareholders' equity	$ 1,197,038	$ 1,232,668

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Shareholders' Equity and Regulatory Capital (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Orrstown Financial Services, Inc. [Member]
Bank's actual capital ratios
Actual, Amount, Total capital to risk weighted assets	$ 96,288	$ 94,928
Actual, Ratio, Total capital to risk weighted assets	12.80%	12.20%
Minimum Capital Requirement, Amount, Total capital to risk weighted assets	60,384	62,438
Minimum Capital Requirement, Ratio, Total capital to risk weighted assets	8.00%	8.00%
Actual, Amount, Tier 1 capital to risk weighted assets	86,692	84,999
Actual, Ratio, Tier 1 capital to risk weighted assets	11.50%	10.90%
Minimum Capital Requirement, Amount, Tier 1 capital to risk weighted assets	30,192	31,219
Minimum Capital Requirement, Ratio, Tier 1 capital to risk weighted assets	4.00%	4.00%
Actual, Amount, Tier 1 capital to average assets	86,692	84,999
Actual, Ratio, Tier 1 capital to average assets	7.20%	6.80%
Minimum Capital Requirement, Amount, Tier 1 capital to average assets	48,049	49,840
Minimum Capital Requirement, Ratio, Tier 1 capital to average assets	4.00%	4.00%
Orrstown Bank [Member]
Bank's actual capital ratios
Actual, Amount, Total capital to risk weighted assets	94,264	92,466
Actual, Ratio, Total capital to risk weighted assets	12.50%	11.90%
Minimum Capital Requirement, Amount, Total capital to risk weighted assets	60,336	62,418
Minimum Capital Requirement, Ratio, Total capital to risk weighted assets	8.00%	8.00%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount, Total capital to risk weighted assets	75,420	78,023
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio, Total capital to risk weighted assets	10.00%	10.00%
Actual, Amount, Tier 1 capital to risk weighted assets	84,675	82,540
Actual, Ratio, Tier 1 capital to risk weighted assets	11.20%	10.60%
Minimum Capital Requirement, Amount, Tier 1 capital to risk weighted assets	30,168	31,209
Minimum Capital Requirement, Ratio, Tier 1 capital to risk weighted assets	4.00%	4.00%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount, Tier 1 capital to risk weighted assets	45,252	46,814
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio, Tier 1 capital to risk weighted assets	6.00%	6.00%
Actual, Amount, Tier 1 capital to average assets	84,675	82,540
Actual, Ratio, Tier 1 capital to average assets	7.00%	6.60%
Minimum Capital Requirement, Amount, Tier 1 capital to average assets	48,071	49,873
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, Tier 1 capital to average assets	$ 60,089	$ 62,341
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio, Tier 1 capital to average assets	5.00%	5.00%

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Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Additional Paid-In Capital	Retained Earnings (Accumulated Deficit)	Accumulated Other Comprehensive Income (Loss)	Treasury Stock
Beginning Balance at Dec. 31, 2011	$ 128,197	$ 419	$ 122,514	$ 1,195	$ 4,089	$ (20)
Net income (loss)	(8,218)	0	0	(8,218)	0	0
Total other comprehensive income (loss), net of taxes	(775)	0	0	0	(775)	0
Stock-based compensation plans:
Compensation expense	18	0	18	0	0	0
Issuance of stock through dividend reinvestment plan (214 and 352 shares in 2013 and 2012 respectively)	3	0	3	0	0	0
Ending Balance at Mar. 31, 2012	119,225	419	122,535	(7,023)	3,314	(20)
Beginning Balance at Dec. 31, 2012	87,694	421	122,724	(37,259)	1,828	(20)
Net income (loss)	1,560	0	0	1,560	0	0
Total other comprehensive income (loss), net of taxes	(503)	0	0	0	(503)	0
Stock-based compensation plans:
Issuance of stock (11,175 shares)	95	0	95	0	0	0
Issuance of stock through dividend reinvestment plan (214 and 352 shares in 2013 and 2012 respectively)	3	0	3	0	0	0
Ending Balance at Mar. 31, 2013	$ 88,849	$ 421	$ 122,822	$ (35,699)	$ 1,325	$ (20)

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Loans Receivable and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013 Contract	Dec. 31, 2012 Contract
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	12	12
Troubled Debt Restructurings At Period End, Recorded Investment	$ 4,069	$ 4,308
Accruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	7	7
Troubled Debt Restructurings At Period End, Recorded Investment	3,078	3,092
Nonaccruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	5	5
Troubled Debt Restructurings At Period End, Recorded Investment	991	1,216
Commercial and industrial [Member] | Accruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	1	1
Troubled Debt Restructurings At Period End, Recorded Investment	120	122
Owner-occupied [Member] | Commercial real estate [Member] | Nonaccruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	1	1
Troubled Debt Restructurings At Period End, Recorded Investment	7	7
Non-owner occupied [Member] | Commercial real estate [Member] | Accruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	2	2
Troubled Debt Restructurings At Period End, Recorded Investment	1,967	1,981
Non-owner occupied residential [Member] | Commercial real estate [Member] | Accruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	1	1
Troubled Debt Restructurings At Period End, Recorded Investment	202	204
Non-owner occupied residential [Member] | Commercial real estate [Member] | Nonaccruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	4	4
Troubled Debt Restructurings At Period End, Recorded Investment	984	1,209
First lien [Member] | Residential mortgage [Member] | Accruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	2	2
Troubled Debt Restructurings At Period End, Recorded Investment	753	749
Home equity - lines of credit [Member] | Residential mortgage [Member] | Accruing [Member]
Troubled debt restructurings
Troubled Debt Restructurings At Periods End, Number of Contracts	1	1
Troubled Debt Restructurings At Period End, Recorded Investment	$ 36	$ 36

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Shareholders' Equity and Regulatory Capital (Tables)

3 Months Ended

Mar. 31, 2013

Shareholders' Equity and Regulatory Capital [Abstract]

Bank's actual capital ratios

	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, 2013
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	96,288		12.8	%	$	60,384		8.0	%		n/a		n/a
Orrstown Bank		94,264		12.5	%		60,336		8.0	%	$	75,420		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		86,692		11.5	%		30,192		4.0	%		n/a		n/a
Orrstown Bank		84,675		11.2	%		30,168		4.0	%		45,252		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		86,692		7.2	%		48,049		4.0	%		n/a		n/a
Orrstown Bank		84,675		7.0	%		48,071		4.0	%		60,089		5.0	%
December 31, 2012
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	94,928		12.2	%	$	62,438		8.0	%		n/a		n/a
Orrstown Bank		92,466		11.9	%		62,418		8.0	%	$	78,023		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		84,999		10.9	%		31,219		4.0	%		n/a		n/a
Orrstown Bank		82,540		10.6	%		31,209		4.0	%		46,814		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		84,999		6.8	%		49,840		4.0	%		n/a		n/a
Orrstown Bank		82,540		6.6	%		49,873		4.0	%		62,341		5.0	%

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Loans Receivable and Allowance for Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013 Contract	Mar. 31, 2012 Contract
Restructured loans included in nonaccrual status were modified as troubled debt restructings within the previous 12 months and for which there was a payment default
Troubled Debt Restructurings at Periods End, Number of Contracts	0	8
Troubled Debt Restructurings at Period End, Recorded Investment	$ 0	$ 2,511
Non-owner occupied residential [Member]
Restructured loans included in nonaccrual status were modified as troubled debt restructings within the previous 12 months and for which there was a payment default
Troubled Debt Restructurings at Periods End, Number of Contracts	0	5
Troubled Debt Restructurings at Period End, Recorded Investment	0	1,217
Owner occupied [Member]
Restructured loans included in nonaccrual status were modified as troubled debt restructings within the previous 12 months and for which there was a payment default
Troubled Debt Restructurings at Periods End, Number of Contracts	0	3
Troubled Debt Restructurings at Period End, Recorded Investment	$ 0	$ 1,294

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Financial Instruments with Off-Balance-Sheet Risk (Tables)

3 Months Ended

Mar. 31, 2013

Financial Instruments with Off-Balance-Sheet Risk/Contingencies [Abstract]

Commitments and conditional obligations

	Contract or Notional Amount
(Dollars in thousands)	March 31, 2013		December 31, 2012
Commitments to fund:
Revolving, open ended home equity loans	$	79,887	$	77,674
1-4 family residential construction loans		1,636		1,002
Commercial real estate, construction and land development loans		593		1,021
Commercial, industrial and other loans		45,559		60,250
Standby letters of credit		11,428		11,551

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Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (Parenthetical)	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Consolidated Statements of Changes in Shareholders' Equity [Abstract]
Issuance of stock through dividend reinvestment plan, shares	214	352
Stock-based compensation plans, issuance of stock, shares	11,175

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)	Mar. 31, 2013	Dec. 31, 2012
Consolidated Balance Sheets [Abstract]
Preferred stock, par value	$ 1.25	$ 1.25
Preferred stock, shares authorized	500,000	500,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
Common stock, stated value	$ 0.05205	$ 0.05205
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	8,091,800	8,080,411
Common stock, shares outstanding	8,090,988	8,079,599
Treasury stock, shares	812	812

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Contingencies

3 Months Ended

Mar. 31, 2013

Financial Instruments with Off-Balance-Sheet Risk/Contingencies [Abstract]

CONTINGENCIES

NOTE 9. 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.

On May 25, 2012, an investor in the Company’s stock 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 the Securities Act of 1933 and the Securities Exchange Act of 1934, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief.

On March 4, 2013, SEPTA filed an amended complaint. In addition, among other things, the amended complaint extends the purported class period to March 15, 2010 through April 5, 2012 related to certain claims and asserts certain new claims against other third parties.

On March 28, 2013, the Court issued a Second Scheduling Order requiring defendants to file their motions to dismiss the amended complaint by May 28, 2013. The Order gives SEPTA until July 22, 2013 to file its oppositions to defendants’ motions to dismiss, and requires defendants to file reply briefs in support of their motions to dismiss by August 23, 2013.

The matter is currently progressing through the legal process. The Defendants believe that the allegations in the complaint are without merit, and intends to defend vigorously against those claims.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2013	May 01, 2013
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q1
Entity Registrant Name	ORRSTOWN FINANCIAL SERVICES INC
Entity Central Index Key	0000826154
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		8,090,988

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2013

Summary of Significant 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) whose primary activity consists of supervising its wholly-owned subsidiary, the Orrstown Bank (the “Bank”). The Company operates through its office in Shippensburg, Pennsylvania. The Bank provides services through its network of 21 offices in Franklin, Cumberland and Perry Counties of Pennsylvania and in Washington County, Maryland. The Bank engages in lending services for commercial loans, residential loans, commercial mortgages 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 its subsidiary 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 financial statements of the Company and its subsidiary are presented for the three months ended March 31, 2013 and 2012 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, 2012 is condensed from audited year-end financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto, included in the Annual Report Form 10-K for the year ended December 31, 2012. The consolidated financial statements include the accounts of the Company and the Bank. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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 that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation allowance required on its deferred tax assets. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans and foreclosed real estate; future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance based on their judgments concerning information available to them at the time of their examination. Because of these factors, management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term.

The Company has established a full valuation allowance on its net deferred tax assets at March 31, 2013, based on the Company’s previous taxable losses, projections for future taxable income, and other available evidence, in which management determined it was “more likely than not” that some portion of the asset would not be realized. Management may need to modify its judgment in this regard from one quarter to the next, and should improvement occur in operating performance, the need for a full valuation allowance may be reduced or eliminated.

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. In preparing these financial statements, the Company evaluated the events and transactions that occurred after March 31, 2013, through the date these financial statements were filed with the Securities and Exchange Commission (the “Commission”).

Concentration of Credit Risk

Concentration of Credit Risk – The Company grants commercial, residential and consumer loans 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 construction contractors, residential and non-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.

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, 2013 and December 31, 2012, and consists of common stock of the Federal Reserve Bank of Philadelphia, Atlantic Central Bankers Bank and the Federal Home Loan Bank (“FHLB”) of Pittsburgh stocks.

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 investment in bank stocks as of March 31, 2013. However, security impairment analysis is completed quarterly and the determination that no impairment had occurred as of March 31, 2013 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, 2013 and December 31, 2012 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 approximates 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.

The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment (FASB ASC 820-10). This guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery; the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not, the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

The Company had no debt securities it deemed to be other than temporarily impaired at March 31, 2013 and December 31, 2012.

The Company’s securities are exposed to various risks, such as interest rate, 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.

For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.

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, mortgage, and 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 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, 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 payment 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.

Loan terms which are modified are classified as troubled debt restructurings if a concession was granted, for legal or economic reasons, related to a debtor’s financial difficulties. Concessions granted under a troubled debt restructuring typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, 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 troubled debt restructurings 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. Troubled debt restructurings 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.

Allowance for Loan Losses

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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.

Loans Serviced

Loans Serviced – The Bank administers secondary market mortgage programs available through the Federal Home Loan Bank of Pittsburgh 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, 2013 and December 31, 2012 the balance of loans serviced for others was $328,513,000 and $329,360,000.

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.

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 – 10 to 40 years; equipment, furniture and fixtures – 3 to 15 years; and computer software – 3 to 5 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.

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 loan. 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 to be sold 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 $1,925,000 and $1,876,000 as of March 31, 2013 and December 31, 2012 and is included in other assets.

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 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 statements of condition, 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.

Advertising

Advertising – The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expense was $74,000 and $227,000 for the three months ended March 31, 2013 and 2012.

Stock Compensation Plans

Stock Compensation Plans – The Company has a stock compensation plan that covers employees and non-employee directors. Stock compensation accounting guidance (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 are 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.

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 income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. 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 relate solely to outstanding stock options.

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 (losses) on securities available for sale for all years presented.

The component of accumulated other comprehensive income, net of taxes, at March 31, 2013 and December 31, 2012 consisted of unrealized gains on securities available for sale and totaled $1,325,000 and $1,828,000.

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 8. 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.

Recent Accounting Pronouncements

Recent Accounting Pronouncements – In December 2011, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures About Offsetting Assets and Liabilities. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The provisions of ASU No. 2013-01 limits the scope of the new balance sheet offsetting disclosures to the following financial instruments, to the extent they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the statement of financial position: (1) derivative financial instruments; (2) repurchase agreements and reverse repurchase agreements; and (3) securities borrowing and securities lending transactions. The Company adopted the provisions of ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. As the provisions of ASU No. 2011-11 and ASU No. 2013-01 only impacted the disclosure requirements related to the offsetting of assets and liabilities and information about instruments and transactions eligible for offset in the statement of financial position, the adoption had no impact on the Company’s consolidated statements of operations and financial condition.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. ASU No. 2013-02 does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income (e.g., unrealized gains or losses on available-for-sale investment securities) and separately present reclassification adjustments and current period other comprehensive income. The provisions of ASU No. 2013-02 also requires that entities present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., unrealized gains or losses on available-for-sale investment securities) and the income statement line item affected by the reclassification (e.g., realized gains (losses) on sales of investment securities). If a component is not required to be reclassified to net income in its entirety (e.g., amortization of defined benefit plan items), entities would instead cross reference to the related note to the financial statements for additional information (e.g., pension footnote). The Company adopted the provisions of ASU No. 2013-02 effective January 1, 2013. As the Company’s only item of accumulated other comprehensive income is unrealized gains or losses on securities available for sale, the adoption of this standard had no impact on our Consolidated Financial Statements.

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Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Interest and dividend income
Interest and fees on loans	$ 8,217	$ 11,106
Interest and dividends on investment securities
Taxable	941	1,308
Tax-exempt	265	614
Short-term investments	61	61
Total interest and dividend income	9,484	13,089
Interest expense
Interest on deposits	1,224	1,978
Interest on short-term borrowings	6	52
Interest on long-term debt	147	217
Total interest expense	1,377	2,247
Net interest income	8,107	10,842
Provision for loan losses	0	19,200
Net interest income after provision for loan losses	8,107	(8,358)
Noninterest income
Service charges on deposit accounts	1,414	1,519
Other service charges, commissions and fees	228	314
Trust department income	1,127	1,136
Brokerage income	637	362
Mortgage banking activities	752	492
Earnings on life insurance	239	248
Other income (loss)	(87)	(108)
Investment securities gains	122	2,231
Total noninterest income	4,432	6,194
Noninterest expense
Salaries and employee benefits	5,746	4,657
Occupancy expense	548	514
Furniture and equipment	777	678
Data processing	128	128
Telephone	109	160
Advertising and bank promotions	211	372
FDIC Insurance	665	521
Professional services	761	801
Collection and problem loan expenses	182	719
Real estate owned expenses	43	376
Taxes other than income	244	235
Intangible asset amortization	52	52
Other operating expenses	1,483	1,673
Total noninterest expenses	10,949	10,886
Income (loss) before income tax expense (benefit)	1,590	(13,050)
Income tax expense (benefit)	30	(4,832)
Net income (loss)	$ 1,560	$ (8,218)
Per share information:
Basic earnings (loss) per share	$ 0.19	$ (1.02)
Diluted earnings (loss) per share	$ 0.19	$ (1.02)
Dividends per share	$ 0.00	$ 0.00

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Income Taxes

3 Months Ended

Mar. 31, 2013

Income Taxes [Abstract]

INCOME TAXES

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 or state income tax examination by tax authorities for years before 2009.

Included in the balance sheet at March 31, 2013 and December 31, 2012, are tax positions related to loan charge-offs for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the tax authority to an earlier period.

The components of income tax expense for the three months ended March 31, 2013 and 2012 are summarized as follows:

	Three Months Ended March 31
(Dollars in thousands)	2013			2012
Current year provision:
Federal	$	30		$	(2,292	)
State		0			42
Deferred tax expense (benefit)		69			(2,582	)
Valuation allowance on deferred taxes		(69	)		0
Net income tax expense (benefit)	$	30		$	(4,832	)

The provision for income taxes includes $43,000 and $781,000 of applicable income tax expense related to net security gains for March 31, 2013 and 2012.

The components of the net deferred tax liability, included in other liabilities, are as follows:

(Dollars in thousands)	March 31, 2013			December 31, 2012
Deferred tax assets:
Allowance for loan losses	$	9,234		$	9,672
Deferred compensation		478			477
Retirement plans and salary continuation		1,505			1,473
Stock compensation		184			184
Off balance sheet commitment reserves		218			231
Nonaccrual loan interest		268			228
Goodwill		214			214
Low income housing credit carry forward		925			806
Alternative minimum tax credit carryforward		30			0
Charitable contribution carry forward		393			391
Net operating loss carry forward		8,589			8,466
Other		221			237
Total deferred tax assets		22,259			22,379
Valuation allowance		(20,166	)		(20,235	)
		2,093			2,144
Deferred tax liabilities:
Depreciation		1,173			1,232
Net unrealized gains on securities available for sale		713			984
Purchase accounting adjustments		554			575
Other		366			337
Total deferred tax liabilities		2,806			3,128
Net deferred tax liability	$	(713	)	$	(984	)

As of March 31, 2013, the Company has charitable contribution, low-income housing, and net operating loss carryforwards that expire through 2018, 2032 and 2032, respectively.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers taxes paid in prior years, projected future taxable income and available tax planning strategies, and other factors in making this assessment. Based upon the level of historical taxable income, projections for future taxable income over the periods and other available evidence, management believed it wasn’t more likely than not that the net deferred tax asset would be realized at March 31, 2013 and December 31, 2012.

Accordingly, a full valuation allowance for the net amount of the deferred tax assets, which represented future deductible temporary differences on our tax returns, was established at March 31, 2013 and December 31, 2012. Primary factors contributing to this determination at March 31, 2013 and December 31, 2012 included:

• The Company has exhausted all of its carryback availability to 2010 – 2011, as we had recognized current federal income tax receivable which fully offset 2010 and 2011’s taxable income.

• As of March 31, 2013 and December 31, 2012, the Company was in a three-year cumulative loss position, representing significant negative evidence against the realizability of the deferred tax asset, and we do not expect to be out of a cumulative loss position over the next few quarters.

• The entire balance of the deferred tax asset is disallowed for purposes of calculating regulatory capital ratios as of March 31, 2013 and December 31, 2012.

Given the current uncertainty of the economy and in the event economic and real estate conditions decline, additional losses may result in our loan portfolio above those already provided for. As a result, we have placed less weight on our current forecast of earnings until the point where we demonstrate sustainable earnings for the realization of the deferred tax asset.

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Loans Receivable and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2013

Loans Receivable and Allowance for Loan Losses [Abstract]

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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. Management has incorporated the provisions of ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, resulting in a refinement in its portfolio segregation. Consistent with the standard, 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 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 properties present a different credit risk to the Company than owner-occupied commercial real estate, 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 hinder 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 in its loan pricing.

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 to 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, or by revenue obligations, or 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 first lien mortgage loans with the underlying 1-4 family owner-occupied residential property securing the credit. 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 limits 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 conservative 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 classes, as of March 31, 2013 and December 31, 2012 was as follows:

(Dollars in thousands)	March 31, 2013		December 31, 2012
Commercial real estate:
Owner-occupied	$	137,354	$	144,290
Non-owner occupied		108,256		120,930
Multi-family		21,181		21,745
Non-owner occupied residential		64,621		66,381
Acquisition and development:
1-4 family residential construction		1,989		2,850
Commercial and land development		24,878		30,375
Commercial and industrial		42,443		39,340
Municipal		67,470		68,018
Residential mortgage:
First lien		108,964		108,601
Home equity – term		15,333		14,747
Home equity – Lines of credit		75,724		79,448
Installment and other loans		6,535		7,014
	$	674,748	$	703,739

In order to monitor ongoing risk associated with its loan portfolio and specific credits 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 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 mitigate risk in the lending function. The Credit Administration Committee, comprised of executive officers and loan department personnel, was charged with the oversight of overall credit quality and risk exposure of the Company’s loan portfolio. Effective December 31, 2012, the Credit Administration Committee became a subcommittee of the Enterprise Risk Management (“ERM”) Committee. From that date forward, the ERM Committee is responsible for oversight of the overall credit quality and risk exposure. 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.

Loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1,000,000. Loan review documentation is submitted to the ERM Committee no less than quarterly with a formal review and confirmation of risk rating as presented by independent loan review personnel. In addition, all relationships greater than $250,000 rated Substandard, Doubtful or Loss are reviewed by the ERM Committee on a quarterly basis, with reaffirmation of the rating as approved by the Bank’s Loan Work Out Committee or loan review staff.

The following summarizes the Bank’s ratings based on its internal risk rating system as of March 31, 2013 and December 31, 2012:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
March 31, 2013
Commercial real estate:
Owner-occupied	$	118,677	$	9,998	$	6,514	$	2,165	$	0	$	137,354
Non-owner occupied		81,661		12,342		11,255		2,998		0		108,256
Multi-family		17,050		3,412		719		0		0		21,181
Non-owner occupied residential		44,226		11,547		4,931		3,917		0		64,621
Acquisition and development:
1-4 family residential construction		1,018		162		0		293		516		1,989
Commercial and land development		13,163		6,263		2,619		2,833		0		24,878
Commercial and industrial		37,042		2,896		1,176		564		765		42,443
Municipal		67,470		0		0		0		0		67,470
Residential mortgage:
First lien		102,760		3,515		0		2,689		0		108,964
Home equity – term		15,014		210		72		37		0		15,333
Home equity – Lines of credit		73,013		844		1,348		519		0		75,724
Installment and other loans		6,523		10		1		1		0		6,535
	$	577,617	$	51,199	$	28,635	$	16,016	$	1,281	$	674,748

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
December 31, 2012
Commercial real estate:
Owner-occupied	$	121,333	$	11,917	$	8,623	$	2,229	$	188	$	144,290
Non-owner occupied		95,876		7,351		14,241		3,462		0		120,930
Multi-family		17,205		3,936		585		19		0		21,745
Non-owner occupied residential		45,468		12,199		3,346		5,368		0		66,381
Acquisition and development:
1-4 family residential construction		1,608		333		0		198		711		2,850
Commercial and land development		14,793		8,937		2,836		3,208		601		30,375
Commercial and industrial		33,380		3,713		429		566		1,252		39,340
Municipal		68,018		0		0		0		0		68,018
Residential mortgage:
First lien		101,390		3,026		1,604		2,581		0		108,601
Home equity – term		14,403		52		235		57		0		14,747
Home equity – Lines of credit		76,418		1,073		1,365		592		0		79,448
Installment and other loans		6,998		11		3		2		0		7,014
	$	596,890	$	52,548	$	33,267	$	18,282	$	2,752	$	703,739

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 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 will be 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. As of the periods presented, the Company has no loans to borrowers that resulted from splitting impaired loans into multiple notes. 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, 2013 and December 31, 2012, nearly all of the Company’s impaired loans’ extent of impairment was measured based on the estimated fair value of the collateral securing the credit, except for troubled debt restructurings. By definition, troubled debt restructurings are considered impaired. All restructured loans’ impairment was determined based on discount cash flows for those loans classified as trouble debt restructurings but are 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 required annually 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 were 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 properties’ 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 (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 consists 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. “Substandard” classification does not automatically meet the definition of “impaired”. A substandard credit is one that is inadequately protected by current sound worth, 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 credits, does not have to exist in individual extensions of credit classified substandard. As a result, the Company revised its methodology in its 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 homogenous 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 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, 2013 and December 31, 2012. Allowances established at March 31, 2013 and December 31, 2012 generally pertain to those credits 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, 2013
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,165	$	2,426
Non-owner occupied		1,248		1,249		325		1,750		3,730
Non-owner occupied residential		202		202		45		3,715		5,353
Acquisition and development:
1-4 family residential construction		516		536		9		293		299
Commercial and land development		0		0		0		2,833		7,427
Commercial and industrial		885		914		627		444		444
Residential mortgage:
First lien		0		0		0		2,689		2,906
Home equity – term		0		0		0		37		58
Home equity – Lines of credit		0		0		0		519		528
Installment and other loans		0		0		0		1		2
	$	2,851	$	2,901	$	1,006	$	14,446	$	23,173

	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)
December 31, 2012
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,417	$	2,680
Non-owner occupied		1,257		1,257		329		2,205		5,487
Multi-family		0		0		0		19		198
Non-owner occupied residential		204		204		46		5,164		6,510
Acquisition and development:
1-4 family residential construction		711		725		9		198		202
Commercial and land development		0		0		0		3,809		8,556
Commercial and industrial		1,373		1,402		928		445		445
Residential mortgage:
First lien		0		0		0		2,581		2,784
Home equity – term		0		0		0		57		75
Home equity – Lines of credit		0		0		0		592		597
Installment and other loans		0		0		0		2		2
	$	3,545	$	3,588	$	1,312	$	17,489	$	27,536

The following summarizes the average recorded investment in impaired loans and related interest income recognized on loans deemed impaired for the three months ended March 31:

	2013				2012
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,291	$	0	$	11,229		40
Non-owner occupied		3,230		0		19,270		67
Multi-family		10		0		2,814		0
Non-owner occupied residential		4,643		3		41,380		146
Acquisition and development:
1-4 family residential construction		859		0		1,714		0
Commercial and land development		3,321		0		16,117		71
Commercial and industrial		1,574		0		2,128		8
Residential mortgage:
First lien		2,635		2		2,001		0
Home equity – term		47		0		316		0
Home equity – lines of credit		555		0		489		0
Installment and other loans		2		0		13		0
Total	$	19,167	$	5	$	97,471	$	332

The following presents impaired loans that are troubled debt restructurings, with the recorded investment being both the pre-modification and post-modification balances as of March 31, 2013 and December 31, 2012.

	March 31, 2013				December 31, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial real estate:
Non-owner occupied		2	$	1,967		2	$	1,981
Non-owner occupied residential		1		202		1		204
Commercial and industrial		1		120		1		122
Residential mortgage:
First lien		2		753		2		749
Home equity – lines of credit		1		36		1		36
		7		3,078		7		3,092
Nonaccruing:
Commercial real estate:
Owner-occupied		1		7		1		7
Non-owner occupied		4		984		4		1,209
		5		991		5		1,216
		12	$	4,069		12	$	4,308

The following table presents restructured loans, included in nonaccrual status, that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the period March 31, 2013 and 2012.

	March 31, 2013				March 31, 2012
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Non-owner occupied residential		0	$	0		5	$	1,217
Owner occupied		0		0		3		1,294
		0	$	0		8	$	2,511

The following presents the number of loans modified, and their pre-modification and post-modification investment balances for the three months ended March 31, 2013 and 2012:

	2013				2012
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial and industrial		0	$	0		1	$	37
		0		0		1		37
Nonaccruing:
Commercial real estate:
Non-owner occupied		0		0		1		473
Commercial and industrial		0		0		1		302
		0		0		2		775
		0	$	0		3	$	812

The loans presented above were considered troubled debt restructurings 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 for residential mortgage loans, a temporary reduction in interest rates for periods not exceeding 12 months in order to assist the borrowers to improve cash flows during such periods. For troubled debt restructurings in default of their modified terms, impairment is determined on a collateral dependent approach.

No additional commitments have been made to borrowers whose loans are considered troubled debt restructurings.

Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans as of March 31, 2013 and December 31, 2012:

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
March 31, 2013
Commercial real estate:
Owner-occupied	$	134,381	$	202	$	606	$	0	$	808	$	2,165	$	137,354
Non-owner occupied		107,003		0		222		0		222		1,031		108,256
Multi-family		21,042		0		139		0		139		0		21,181
Non-owner occupied residential		59,827		476		603		0		1,079		3,715		64,621
Acquisition and development:
1-4 family residential construction		1,180		0		0		0		0		809		1,989
Commercial and land development		21,190		855		0		0		855		2,833		24,878
Commercial and industrial		40,954		219		61		0		280		1,209		42,443
Municipal		67,470		0		0		0		0		0		67,470
Residential mortgage:
First lien		104,963		1,990		74		0		2,064		1,937		108,964
Home equity – term		15,150		140		6		0		146		37		15,333
Home equity – Lines of credit		74,820		208		213		0		421		483		75,724
Installment and other loans		6,479		52		3		0		55		1		6,535
	$	654,459	$	4,142	$	1,927	$	0	$	6,069	$	14,220	$	674,748
December 31, 2012
Commercial real estate:
Owner-occupied	$	141,833	$	40	$	0	$	0	$	40	$	2,417	$	144,290
Non-owner occupied		119,320		129		0		0		129		1,481		120,930
Multi-family		21,726		0		0		0		0		19		21,745
Non-owner occupied residential		60,890		122		205		0		327		5,164		66,381
Acquisition and development:
1-4 family residential construction		1,770		0		171		0		171		909		2,850
Commercial and land development		26,054		511		1		0		512		3,809		30,375
Commercial and industrial		37,348		296		0		0		296		1,696		39,340
Municipal		68,018		0		0		0		0		0		68,018
Residential mortgage:
First lien		104,933		1,565		270		0		1,835		1,833		108,601
Home equity – term		14,609		81		0		0		81		57		14,747
Home equity – Lines of credit		78,880		0		12		0		12		556		79,448
Installment and other loans		6,837		161		14		0		175		2		7,014
	$	682,218	$	2,905	$	673	$	0	$	3,578	$	17,943	$	703,739

The Company’s maintains the allowance for loan losses at a level believed adequate by management to absorb losses inherent in the portfolio. 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 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.

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 response to the improved risk profile within the loan portfolio at December 31, 2012, the look back period for historical losses was extended to 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. Again, management considered current economic 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. Based on management’s assessment and in compliance with regulatory guidance, the Company began recording partial charge offs on collateral dependent loans in the first quarter of 2012, eliminating the need for specific reserves. Although both methods are acceptable under ASC 310, the revised method is more consistent with regulatory directives and was implemented by the Company resulting in increased charge-offs during 2012.

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, 2013 and December 31, 2012, 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 number of exceptions to loan policy; supervisory loan to value exceptions etc.

Concentrations of Credit and Changes within Credit Concentrations – Factors considered include the Bank’s overall portfolio makeup and managements 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 its impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – Factors considered include the years 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.

Prior to December 31, 2012, qualitative factors were also utilized in the determination of loans collectively evaluated for impairment, but consisted of only five factors, which are included in the eight factors listed above, with anticipated loss allocations that ranged from 0-8 basis points. It was determined that the qualitative adjustments would be expanded to the current range of a minus 150 basis points to a positive 150 basis points, as the prior range of 0-8 basis points was deemed to be too restrictive and did not adequately address the credit improvement in the remaining loan portfolio.

Activity in the allowance for loan losses for three months ended March 31, 2013 and 2012 is 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, 2013
Balance, beginning of period	$	13,719		$	3,502		$	1,635		$	223	$	19,079		$	2,275		$	85		$	2,360		$	1,727	$	23,166
Provision for loan losses		(473	)		(746	)		(292	)		62		(1,449	)		1,145			31			1,176			273		0
Charge-offs		(1,142	)		(145	)		0			0		(1,287	)		(38	)		(20	)		(58	)		0		(1,345	)
Recoveries		61			3			10			0		74			6			16			22			0		96
Balance, end of period	$	12,165		$	2,614		$	1,353		$	285	$	16,417		$	3,388		$	112		$	3,500		$	2,000	$	21,917
March 31, 2012
Balance, beginning of period	$	29,559		$	9,708		$	1,085		$	789	$	41,141		$	933		$	75		$	1,008		$	1,566	$	43,715
Provision for loan losses		13,364			3,850			855			116		18,185			592			(24	)		568			447		19,200
Charge-offs		(26,663	)		(7,312	)		(1,068	)		0		(35,043	)		(228	)		(12	)		(240	)		0		(35,283	)
Recoveries		22			473			19			0		514			4			6			10			0		524
Balance, end of period	$	16,282		$	6,719		$	891		$	905	$	24,797		$	1,301		$	45		$	1,346		$	2,013	$	28,156

The following summarizes the ending loan balance individually evaluated for impairment based upon loan segment, as well as the related allowance for loan loss allocation for each at March 31, 2013 and December 31, 2012:

(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Residential Mortgage		Installment and Other		Unallocated		Total
March 31, 2013
Loans allocated by:
Individually evaluated for impairment	$	9,080	$	3,642	$	1,329	$	0	$	3,245	$	1	$	0	$	17,297
Collectively evaluated for impairment		322,332		23,225		41,114		67,470		196,776		6,534		0		657,451
	$	331,412	$	26,867	$	42,443	$	67,470	$	200,021	$	6,535	$	0	$	674,748
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	370	$	9	$	627	$	0	$	0	$	0	$	0	$	1,006
Collectively evaluated for impairment		11,795		2,605		726		285		3,388		112		2,000		20,911
	$	12,165	$	2,614	$	1,353	$	285	$	3,388	$	112	$	2,000	$	21,917
December 31, 2012
Loans allocated by:
Individually evaluated for impairment	$	11,266	$	4,718	$	1,818	$	0	$	3,230	$	2	$	0	$	21,034
Collectively evaluated for impairment		342,080		28,507		37,522		68,018		199,566		7,012		0		682,705
	$	353,346	$	33,225	$	39,340	$	68,018	$	202,796	$	7,014	$	0	$	703,739
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	375	$	9	$	928	$	0	$	0	$	0	$	0	$	1,312
Collectively evaluated for impairment		13,344		3,493		707		223		2,275		85		1,727		21,854
	$	13,719	$	3,502	$	1,635	$	223	$	2,275	$	85	$	1,727	$	23,166

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Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2013

Earnings Per Share [Abstract]

Earnings (loss) per share

	Three Months Ended March 31,
(In thousands, except per share data)	2013		2012
Net income (loss)	$	1,560	$	(8,218	)
Weighted average shares outstanding		8,084		8,055
Impact of common stock equivalents		0		0
Weighted average shares outstanding (diluted)		8,084		8,055
Per share information:
Basic earnings (loss) per share	$	0.19	$	(1.02	)
Diluted earnings (loss) per share		0.19		(1.02	)

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Securities Available for Sale (Tables)

3 Months Ended

Mar. 31, 2013

Securities Available for Sale [Abstract]

Amortized cost and fair values of investment securities available for sale

(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2013
U.S. Treasury	$	25,996	$	21	$	0	$	26,017
U.S. Government Agencies		28,220		47		203		28,064
U.S. Government Sponsored Enterprises (GSE)		40,843		330		7		41,166
States and political subdivisions		56,909		1,250		164		57,995
GSE residential mortgage-backed securities		164,445		1,279		233		165,491
GSE commercial mortgage-backed securities		31,232		0		301		30,931
Total debt securities		347,645		2,927		908		349,664
Equity securities – financial services		50		19		0		69
Totals	$	347,695	$	2,946	$	908	$	349,733
December 31, 2012
U.S. Treasury	$	25,996	$	14	$	0	$	26,010
U.S. Government Sponsored Enterprises (GSE)		44,331		431		0		44,762
States and political subdivisions		37,324		1,588		3		38,909
GSE residential mortgage-backed securities		160,118		1,014		333		160,799
GSE commercial mortgage-backed securities		31,339		143		61		31,421
Total debt securities		299,108		3,190		397		301,901
Equity securities – financial services		50		19		0		69
Totals	$	299,158	$	3,209	$	397	$	301,970

Gross unrealized losses and fair value of the Company's available for sale securities

	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, 2013
U.S. Government Agencies	$	12,891	$	203	$	0	$	0	$	12,891	$	203
U.S. Government Sponsored Enterprises (GSE)		2,194		7		0		0		2,194		7
States and political subdivisions		18,090		164		0		0		18,090		164
GSE residential mortgage-backed securities		51,613		218		1,951		15		53,564		233
GSE commercial mortgage-backed securities		30,931		301		0		0		30,931		301
Total temporarily impaired securities	$	115,719	$	893	$	1,951	$	15	$	117,670	$	908
December 31, 2012
States and political subdivisions	$	885	$	3	$	0	$	0	$	885	$	3
GSE residential mortgage-backed securities		64,952		312		2,657		21		67,609		333
GSE commercial mortgage-backed securities		20,396		61		0		0		20,396		61
Total temporarily impaired securities	$	86,233	$	376	$	2,657	$	21	$	88,890	$	397

Schedule of amortized cost and fair values of securities available for sale by contractual maturity

	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	26,627	$	26,699
Due after one year through five years		31,688		31,781
Due after five years through ten years		21,058		21,657
Due after ten years		72,595		73,105
GSE residential mortgage-backed securities		164,445		165,491
GSE commercial mortgage-backed securities		31,232		30,931
Total debt securities		347,645		349,664
Equity securities		50		69
	$	347,695	$	349,733

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Financial Instruments with Off-Balance-Sheet Risk

3 Months Ended

Mar. 31, 2013

Financial Instruments with Off-Balance-Sheet Risk/Contingencies [Abstract]

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

NOTE 7. 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, 2013		December 31, 2012
Commitments to fund:
Revolving, open ended home equity loans	$	79,887	$	77,674
1-4 family residential construction loans		1,636		1,002
Commercial real estate, construction and land development loans		593		1,021
Commercial, industrial and other loans		45,559		60,250
Standby letters of credit		11,428		11,551

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 first 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, 2013 and December 31, 2012, for guarantees under standby letters of credit issued was not material.

The Company currently maintains a reserve in other liabilities totaling $559,000 and $583,000 at March 31, 2013 and December 31, 2012 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, 2013 and 2012, ($24,000) and $103,000 was charged to other noninterest expense for this exposure.

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 was $107,602,000 and $115,630,000 at March 31, 2013 and December 31, 2012, with limited recourse back to the Company on these loans of $8,420,000 at these dates. Many of the loans sold under the MPF Program have primary mortgage insurance, which reduces the Company’s overall exposure. For the three months ended March 31, 2013 and 2012, the Company is in the process of foreclosing on loans sold under the MPF program or recovered amounts previously charged off, with a resulting charge of ($26,000) and $98,000 to other expenses representing an estimate of the Company’s loss under its recourse exposure.

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Shareholders' Equity and Regulatory Capital

3 Months Ended

Mar. 31, 2013

Shareholders' Equity and Regulatory Capital [Abstract]

SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL

NOTE 5. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal 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. Prompt corrective actions provisions are not applicable to 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) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2013 and December 31, 2012, the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2013, 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 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, 2013 and December 31, 2012 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, 2013
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	96,288		12.8	%	$	60,384		8.0	%		n/a		n/a
Orrstown Bank		94,264		12.5	%		60,336		8.0	%	$	75,420		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		86,692		11.5	%		30,192		4.0	%		n/a		n/a
Orrstown Bank		84,675		11.2	%		30,168		4.0	%		45,252		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		86,692		7.2	%		48,049		4.0	%		n/a		n/a
Orrstown Bank		84,675		7.0	%		48,071		4.0	%		60,089		5.0	%
December 31, 2012
Total capital to risk weighted assets
Orrstown Financial Services, Inc.	$	94,928		12.2	%	$	62,438		8.0	%		n/a		n/a
Orrstown Bank		92,466		11.9	%		62,418		8.0	%	$	78,023		10.0	%
Tier 1 capital to risk weighted assets
Orrstown Financial Services, Inc.		84,999		10.9	%		31,219		4.0	%		n/a		n/a
Orrstown Bank		82,540		10.6	%		31,209		4.0	%		46,814		6.0	%
Tier 1 capital to average assets
Orrstown Financial Services, Inc.		84,999		6.8	%		49,840		4.0	%		n/a		n/a
Orrstown Bank		82,540		6.6	%		49,873		4.0	%		62,341		5.0	%

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Earnings Per Share

3 Months Ended

Mar. 31, 2013

Earnings Per Share [Abstract]

EARNINGS PER SHARE

NOTE 6. EARNINGS PER SHARE

Earnings per share for the three months ended March 31, 2013 and 2012 were as follows:

	Three Months Ended March 31,
(In thousands, except per share data)	2013		2012
Net income (loss)	$	1,560	$	(8,218	)
Weighted average shares outstanding		8,084		8,055
Impact of common stock equivalents		0		0
Weighted average shares outstanding (diluted)		8,084		8,055
Per share information:
Basic earnings (loss) per share	$	0.19	$	(1.02	)
Diluted earnings (loss) per share		0.19		(1.02	)

Stock options for 242,603 and 346,405 shares of common stock were not considered in computing diluted earnings per share for the three months ended March 31, 2013 and 2012 as their exercise would have been antidilutive as the exercise price exceeded the average market value.

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Fair Value Disclosures

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE DISCLOSURES

NOTE 8. 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 generally accepted accounting principles defines fair value, 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 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 at March 31, 2013 and December 31, 2012. A summary of assets at March 31, 2013 and December 31, 2012, 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, 2013
Securities available for sale:
U.S. Treasury	$	0	$	26,017	$	0	$	26,017
U.S. Government Agencies		0		28,064		0		28,064
U.S. Government Sponsored Enterprises (GSE)		0		41,166		0		41,166
States and political subdivisions		0		57,995		0		57,995
GSE residential mortgage-backed securities		0		165,491		0		165,491
GSE commercial mortgage-backed securities		0		30,931		0		30,931
Total debt securities		0		349,664		0		349,664
Equity securities – Financial services		0		69		0		69
Total securities	$	0	$	349,733	$	0	$	349,733
December 31, 2012
Securities available for sale:
U.S. Treasury	$	0	$	26,010	$	0	$	26,010
U.S. Government Sponsored Enterprises (GSE)		0		44,762		0		44,762
States and political subdivisions		0		38,909		0		38,909
GSE residential mortgage-backed securities		0		160,799		0		160,799
GSE commercial mortgage-backed securities		0		31,421		0		31,421
Total debt securities		0		301,901		0		301,901
Equity securities – Financial services		0		69		0		69
Total securities	$	0	$	301,970	$	0	$	301,970

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

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. 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. 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). Impaired loans with an allocation to the allowance for loan losses are measured at fair value on a nonrecurring basis; however not all impaired loans have an allocation to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as a provision for loan losses on the consolidated statements of operations. Specific allocations to the allowance for loan losses or cumulative partial charge-offs were $9,227,000 and $10,843,000 at March 31, 2013 and December 31, 2012.

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 cumulative charges to value the real estate owned at the lower of cost or fair value on properties held at March 31, 2013 and December 31, 2012 were $533,000 and $581,000.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income as less than its carrying value, in which case a lower of cost or fair value charge is taken. As of March 31, 2013 and December 31, 2012, a $575,000 and $644,000 lower of cost or fair value reserve existed on the mortgage servicing rights portfolio.

A summary of assets at March 31, 2013 and December 31, 2012 measured at fair value on a nonrecurring basis is as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair  Value Measurements
March 31, 2013
Impaired loans, net	$	0	$	0	$	8,421	$	8,421
Foreclosed real estate		0		0		1,060		1,060
Mortgage servicing rights		0		0		2,330		2,330
December 31, 2012
Impaired loans, net	$	0	$	0	$	10,675	$	10,675
Foreclosed real estate		0		0		1,101		1,101
Mortgage servicing rights		0		0		2,296		2,296

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, 2013
Impaired loans	$	8,421	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Foreclosed real estate		1,060	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-25% discount
Mortgage servicing rights		2,330	Discounted cash flows	Remaining term Discount rate	4.5 years 10.70%
December 31, 2012
Impaired loans	$	10,675	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Foreclosed real estate		1,101	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	0%-30% discount
				Management adjustments for liquidation expenses	5%-10% discount
Mortgage servicing rights		2,296	Discounted cash flows	Remaining term Discount rate	4.0 years 10.70%

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.

Deposit Liabilities

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 analyses based on the Company’s current incremental 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 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 statements were as follows at March 31, 2013 and December 31, 2012:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2013:
Financial Assets
Cash and due from banks	$	10,713	$	10,713	$	10,713	$	0	$	0
Interest bearing deposits with banks		84,057		84,057		84,057		0		0
Restricted investments in bank stock		9,582		9,582		0		0		9,582
Securities available for sale		349,733		349,733		0		349,733		0
Loans held for sale		7,180		7,180		0		7,180		0
Loans, net of allowance for loan losses		652,831		648,286		0		0		648,286
Accrued interest receivable		3,444		3,444		0		0		3,444
Mortgage servicing rights		2,330		2,330		0		0		2,330
Financial Liabilities
Deposits		1,044,297		1,048,186		0		1,048,186		0
Short-term borrowings		15,244		15,244		0		15,244		0
Long-term debt		37,128		38,216		0		38,216		0
Accrued interest payable		425		425		0		425		0
Off-balance sheet instruments		0		0		0		0		0
December 31, 2012:
Financial Assets
Cash and due from banks	$	16,933	$	16,933	$	16,933	$	0	$	0
Interest bearing deposits with banks		133,755		133,755		133,755		0		0
Restricted investments in bank stock		9,804		9,804		0		0		9,804
Securities available for sale		301,970		301,970		0		301,970		0
Loans held for sale		7,862		7,862		0		7,862		0
Loans, net of allowance for loan losses		680,573		681,414		0		0		681,414
Accrued interest receivable		3,188		3,188		0		0		3,188
Mortgage servicing rights		2,296		2,296		0		0		2,296
Financial Liabilities
Deposits	$	1,085,039	$	1,089,344		0	$	1,089,344		0
Short-term borrowings		9,650		9,650		0		9,650		0
Long-term debt		37,470		38,676		0		38,676		0
Accrued interest payable		424		424		0		424		0
Off-balance sheet instruments		0		0		0		0		0

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Loans Receivable and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	$ 19,167	$ 97,471
Interest Income Recognized	5	332
Commercial real estate [Member] | Owner-occupied [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	2,291	11,229
Interest Income Recognized	0	40
Commercial real estate [Member] | Non-owner occupied [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	3,230	19,270
Interest Income Recognized	0	67
Commercial real estate [Member] | Multi-family [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	10	2,814
Interest Income Recognized	0	0
Commercial real estate [Member] | Non-owner occupied residential [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	4,643	41,380
Interest Income Recognized	3	146
Acquisition and development [Member] | 1-4 family residential construction [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	859	1,714
Interest Income Recognized	0	0
Acquisition and development [Member] | Commercial and land development [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	3,321	16,117
Interest Income Recognized	0	71
Commercial and industrial [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	1,574	2,128
Interest Income Recognized	0	8
Residential mortgage [Member] | First lien [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	2,635	2,001
Interest Income Recognized	2	0
Residential mortgage [Member] | Home equity - term [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	47	316
Interest Income Recognized	0	0
Residential mortgage [Member] | Home equity - lines of credit [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	555	489
Interest Income Recognized	0	0
Installment and other loans [Member]
Average recorded investment in impaired loans and related interest income
Average Impaired Balance	2	13
Interest Income Recognized	$ 0	$ 0

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Fair Value Disclosures (Details 1) (USD $)	Mar. 31, 2013	Dec. 31, 2012
Summary of assets measured at fair value on a nonrecurring basis
Foreclosed real estate	$ 1,925,000	$ 1,876,000
Level 1 [Member]
Summary of assets measured at fair value on a nonrecurring basis
Mortgage servicing rights	0	0
Level 2 [Member]
Summary of assets measured at fair value on a nonrecurring basis
Mortgage servicing rights	0	0
Level 3 [Member]
Summary of assets measured at fair value on a nonrecurring basis
Mortgage servicing rights	2,330,000	2,296,000
Fair Value, Measurements, Nonrecurring [Member]
Summary of assets measured at fair value on a nonrecurring basis
Impaired loans, net	8,421,000	10,675,000
Foreclosed real estate	1,060,000	1,101,000
Mortgage servicing rights	2,330,000	2,296,000
Fair Value, Measurements, Nonrecurring [Member] | Level 1 [Member]
Summary of assets measured at fair value on a nonrecurring basis
Impaired loans, net	0	0
Foreclosed real estate	0	0
Mortgage servicing rights	0	0
Fair Value, Measurements, Nonrecurring [Member] | Level 2 [Member]
Summary of assets measured at fair value on a nonrecurring basis
Impaired loans, net	0	0
Foreclosed real estate	0	0
Mortgage servicing rights	0	0
Fair Value, Measurements, Nonrecurring [Member] | Level 3 [Member]
Summary of assets measured at fair value on a nonrecurring basis
Impaired loans, net	8,421,000	10,675,000
Foreclosed real estate	1,060,000	1,101,000
Mortgage servicing rights	$ 2,330,000	$ 2,296,000

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Income Taxes (Tables)

3 Months Ended

Mar. 31, 2013

Income Taxes [Abstract]

Components of income tax expenses

	Three Months Ended March 31
(Dollars in thousands)	2013			2012
Current year provision:
Federal	$	30		$	(2,292	)
State		0			42
Deferred tax expense (benefit)		69			(2,582	)
Valuation allowance on deferred taxes		(69	)		0
Net income tax expense (benefit)	$	30		$	(4,832	)

Components of the net deferred tax asset (liability)

(Dollars in thousands)	March 31, 2013			December 31, 2012
Deferred tax assets:
Allowance for loan losses	$	9,234		$	9,672
Deferred compensation		478			477
Retirement plans and salary continuation		1,505			1,473
Stock compensation		184			184
Off balance sheet commitment reserves		218			231
Nonaccrual loan interest		268			228
Goodwill		214			214
Low income housing credit carry forward		925			806
Alternative minimum tax credit carryforward		30			0
Charitable contribution carry forward		393			391
Net operating loss carry forward		8,589			8,466
Other		221			237
Total deferred tax assets		22,259			22,379
Valuation allowance		(20,166	)		(20,235	)
		2,093			2,144
Deferred tax liabilities:
Depreciation		1,173			1,232
Net unrealized gains on securities available for sale		713			984
Purchase accounting adjustments		554			575
Other		366			337
Total deferred tax liabilities		2,806			3,128
Net deferred tax liability	$	(713	)	$	(984	)

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Summary of Significant Accounting Policies (Details) (USD $)	3 Months Ended
	Mar. 31, 2013 Segment Office	Mar. 31, 2012	Dec. 31, 2012
Summary of Significant Accounting Policies (Textual) [Abstract]
Number of offices in which the company operates throughout the country	21
Cash and cash equivalents, original maturities	90 days
Impairment charge related to investment	$ 0
Held to maturity or trading securities	0		0
Debt securities other than temporarily impaired	0		0
Maturity of interest bearing deposits	90 days
Balance of loans serviced for others	328,513,000		329,360,000
Foreclosed real estate totaled	1,925,000		1,876,000
Advertising expense	74,000	227,000
Percentage of deferred tax assets	50.00%
Accumulated other comprehensive income, net of taxes	$ 1,325,000		$ 1,828,000
Number of operating significant segment	1
Maximum [Member] | Building and improvements [Member]
Property, Plant and Equipment [Line Items]
Plant and Equipment, Useful Life	40 years
Maximum [Member] | Equipment furniture and fixtures [Member]
Property, Plant and Equipment [Line Items]
Plant and Equipment, Useful Life	15 years
Maximum [Member] | Computer software [Member]
Property, Plant and Equipment [Line Items]
Plant and Equipment, Useful Life	5 years
Minimum [Member] | Building and improvements [Member]
Property, Plant and Equipment [Line Items]
Plant and Equipment, Useful Life	10 years
Minimum [Member] | Equipment furniture and fixtures [Member]
Property, Plant and Equipment [Line Items]
Plant and Equipment, Useful Life	3 years
Minimum [Member] | Computer software [Member]
Property, Plant and Equipment [Line Items]
Plant and Equipment, Useful Life	3 years

XML

Financial Instruments with Off-Balance-Sheet Risk (Details Textual) (USD $)	3 Months Ended		12 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Financial Instruments with Off-Balance-Sheet Risk (Textual) [Abstract]
Reserve for off-balance sheet credit exposures	$ 559,000		$ 583,000
Charged to other noninterest expense	(24,000)	103,000
Sum total of loans sold under the MPF Program	107,602,000		115,630,000
Limited recourse debt	8,420,000
Other expenses estimating losses	$ (26,000)	$ 98,000

XML

Loans Receivable and Allowance for Loan Losses (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2013 Note	Mar. 31, 2013 Maximum [Member]	Dec. 31, 2012 Maximum [Member]	Mar. 31, 2013 Minimum [Member]	Dec. 31, 2012 Minimum [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Anticipated loss allocation basis points range		1.50%	0.08%	(1.50%)	0.00%
Loans Receivable and Allowance for Loan Losses (Textual) [Abstract]
Maximum percentage of loan-to-value ratio upon loan origination	80.00%
Maximum percentage of loan-to-value ratios of the value of the real estate taken as collateral	90.00%
Maximum Percentage of credit worthiness of the borrower	43.00%
Minimum amount of loan on which reviews have been made annually	$ 1,000,000
Minimum amount of loan rated as Substandard	250,000
Number of notes split	2
Minimum amount on which annual updated appraisals for criticized loans is required	250,000
Percentage of strong loan-to-value	70.00%
Maximum period for temporary reduction in interest rates	12 months
Rating on loans that are deemed impaired	More than 90 days
Loans to borrowers	$ 0

XML

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Consolidated Statements of Comprehensive Income (Loss) [Abstract]
Net income (loss)	$ 1,560	$ (8,218)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available for sale arising during the period	(652)	1,037
Reclassification adjustment for gains realized in net income (loss)	(122)	(2,231)
Net unrealized losses	(774)	(1,194)
Tax effect	271	419
Total other comprehensive income (loss), net of tax and reclassification adjustments	(503)	(775)
Total comprehensive income (loss)	$ 1,057	$ (8,993)

XML

Securities Available for Sale

3 Months Ended

Mar. 31, 2013

Securities Available for Sale [Abstract]

SECURITIES AVAILABLE FOR SALE

NOTE 2. SECURITIES AVAILABLE FOR SALE

At March 31, 2013 and December 31, 2012, 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, 2013 and December 31, 2012 were:

(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2013
U.S. Treasury	$	25,996	$	21	$	0	$	26,017
U.S. Government Agencies		28,220		47		203		28,064
U.S. Government Sponsored Enterprises (GSE)		40,843		330		7		41,166
States and political subdivisions		56,909		1,250		164		57,995
GSE residential mortgage-backed securities		164,445		1,279		233		165,491
GSE commercial mortgage-backed securities		31,232		0		301		30,931
Total debt securities		347,645		2,927		908		349,664
Equity securities – financial services		50		19		0		69
Totals	$	347,695	$	2,946	$	908	$	349,733
December 31, 2012
U.S. Treasury	$	25,996	$	14	$	0	$	26,010
U.S. Government Sponsored Enterprises (GSE)		44,331		431		0		44,762
States and political subdivisions		37,324		1,588		3		38,909
GSE residential mortgage-backed securities		160,118		1,014		333		160,799
GSE commercial mortgage-backed securities		31,339		143		61		31,421
Total debt securities		299,108		3,190		397		301,901
Equity securities – financial services		50		19		0		69
Totals	$	299,158	$	3,209	$	397	$	301,970

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 individual securities have been in a continuous unrealized loss position at March 31, 2013 and December 31, 2012:

	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, 2013
U.S. Government Agencies	$	12,891	$	203	$	0	$	0	$	12,891	$	203
U.S. Government Sponsored Enterprises (GSE)		2,194		7		0		0		2,194		7
States and political subdivisions		18,090		164		0		0		18,090		164
GSE residential mortgage-backed securities		51,613		218		1,951		15		53,564		233
GSE commercial mortgage-backed securities		30,931		301		0		0		30,931		301
Total temporarily impaired securities	$	115,719	$	893	$	1,951	$	15	$	117,670	$	908
December 31, 2012
States and political subdivisions	$	885	$	3	$	0	$	0	$	885	$	3
GSE residential mortgage-backed securities		64,952		312		2,657		21		67,609		333
GSE commercial mortgage-backed securities		20,396		61		0		0		20,396		61
Total temporarily impaired securities	$	86,233	$	376	$	2,657	$	21	$	88,890	$	397

The Company had 37 securities and 27 securities at March 31, 2013 and December 31, 2012 in which the amortized cost exceeds their values, as discussed below.

U.S. Agencies and Government Sponsored Enterprises (GSE). Twenty eight U.S. Agencies and GSE securities, including mortgage-backed securities, have amortized costs which exceed their fair values, all but one of which are in the less than 12 months category at March 31, 2013. At December 31, 2012, the Company had 26 GSE securities with amortized costs which exceed their fair values, all but one of which was in the less than 12 months category. These unrealized losses have been caused by a rise in interest rates 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 amortized cost bases of the investments. 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 bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013 or at December 31, 2012.

State and Political Subdivisions. Nine state and political subdivision securities had amortized costs which exceeded their fair value for less than 12 months at March 31, 2013. At December 31, 2012, one state and political subdivision security had an unrealized loss, which was less than 12 months. These unrealized losses have been caused by a rise in interest rates 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 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 bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013 or at December 31, 2012.

The amortized cost and fair values of securities available for sale at March 31, 2013 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	$	26,627	$	26,699
Due after one year through five years		31,688		31,781
Due after five years through ten years		21,058		21,657
Due after ten years		72,595		73,105
GSE residential mortgage-backed securities		164,445		165,491
GSE commercial mortgage-backed securities		31,232		30,931
Total debt securities		347,645		349,664
Equity securities		50		69
	$	347,695	$	349,733

Proceeds from sales of securities available for sale for the quarters ended March 31, 2013 and 2012 were $19,786,000 and $30,865,000. Gross gains on the sales of securities were $259,000 and $2,260,000 for the quarters ended March 31, 2013 and 2012. Gross losses on securities available for sale were $137,000 and $29,000 for the quarters ended March 31, 2013 and 2012.

Securities with a fair value of $243,107,000 and $258,024,000 at March 31, 2013 and December 31, 2012 were pledged to secure public funds and for other purposes as required or permitted by law.

XML

Securities Available for Sale (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Amortized cost and fair values of investment securities available for sale
Available for sale equity securities - financial services, Amortized Cost	$ 50
Available for sale securities, Total	347,695	299,158
Available for sale securities, Unrealized Gains	2,946	3,209
Available for sale securities, Unrealized Losses	908	397
Available for sale securities, debt securities, Fair Value	349,664
Available for sale securities, equity securities - financial services, Fair Value	69
Securities available for sale	349,733	301,970
Total debt securities [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale debt securities, Amortized Cost	347,645	299,108
Available for sale securities, Unrealized Gains	2,927	3,190
Available for sale securities, Unrealized Losses	908	397
Available for sale securities, debt securities, Fair Value	349,664	301,901
Equity securities - financial services [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale equity securities - financial services, Amortized Cost	50	50
Available for sale securities, Unrealized Gains	19	19
Available for sale securities, Unrealized Losses	0	0
Available for sale securities, equity securities - financial services, Fair Value	69	69
U.S. Treasury [Member] | Total debt securities [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale debt securities, Amortized Cost	25,996	25,996
Available for sale securities, Unrealized Gains	21	14
Available for sale securities, Unrealized Losses	0	0
Available for sale securities, debt securities, Fair Value	26,017	26,010
U.S. Government Agencies [Member] | Total debt securities [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale debt securities, Amortized Cost	28,220
Available for sale securities, Unrealized Gains	47
Available for sale securities, Unrealized Losses	203
Available for sale securities, debt securities, Fair Value	28,064
U.S. Government Sponsored Enterprises (GSE) [Member] | Total debt securities [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale debt securities, Amortized Cost	40,843	44,331
Available for sale securities, Unrealized Gains	330	431
Available for sale securities, Unrealized Losses	7	0
Available for sale securities, debt securities, Fair Value	41,166	44,762
States and political subdivisions [Member] | Total debt securities [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale debt securities, Amortized Cost	56,909	37,324
Available for sale securities, Unrealized Gains	1,250	1,588
Available for sale securities, Unrealized Losses	164	3
Available for sale securities, debt securities, Fair Value	57,995	38,909
GSE residential mortgage-backed securities [Member] | Total debt securities [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale debt securities, Amortized Cost	164,445	160,118
Available for sale securities, Unrealized Gains	1,279	1,014
Available for sale securities, Unrealized Losses	233	333
Available for sale securities, debt securities, Fair Value	165,491	160,799
GSE commercial mortgage-backed securities [Member] | Total debt securities [Member]
Amortized cost and fair values of investment securities available for sale
Available for sale debt securities, Amortized Cost	31,232	31,339
Available for sale securities, Unrealized Gains	0	143
Available for sale securities, Unrealized Losses	301	61
Available for sale securities, debt securities, Fair Value	$ 30,931	$ 31,421

XML

Loans Receivable and Allowance for Loan Losses (Details 7) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	$ 654,459	$ 682,218
30-59 Days Past Due	4,142	2,905
60-89 Days Past Due	1,927	673
90+ (still accruing) Days Past Due	0	0
Total Past Due	6,069	3,578
Non-Accrual	14,220	17,943
Total Loans	674,748	703,739
Commercial real estate [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Total Loans	331,412	353,346
Acquisition and development [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Total Loans	26,867	33,225
Commercial and industrial [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	40,954	37,348
30-59 Days Past Due	219	296
60-89 Days Past Due	61	0
90+ (still accruing) Days Past Due	0	0
Total Past Due	280	296
Non-Accrual	1,209	1,696
Total Loans	42,443	39,340
Municipal [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	67,470	68,018
30-59 Days Past Due	0	0
60-89 Days Past Due	0	0
90+ (still accruing) Days Past Due	0	0
Total Past Due	0	0
Non-Accrual	0	0
Total Loans	67,470	68,018
Residential mortgage [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Total Loans	200,021	202,796
Installment and other loans [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	6,479	6,837
30-59 Days Past Due	52	161
60-89 Days Past Due	3	14
90+ (still accruing) Days Past Due	0	0
Total Past Due	55	175
Non-Accrual	1	2
Total Loans	6,535	7,014
Owner-occupied [Member] | Commercial real estate [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	134,381	141,833
30-59 Days Past Due	202	40
60-89 Days Past Due	606	0
90+ (still accruing) Days Past Due	0	0
Total Past Due	808	40
Non-Accrual	2,165	2,417
Total Loans	137,354	144,290
Non-owner occupied [Member] | Commercial real estate [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	107,003	119,320
30-59 Days Past Due	0	129
60-89 Days Past Due	222	0
90+ (still accruing) Days Past Due	0	0
Total Past Due	222	129
Non-Accrual	1,031	1,481
Total Loans	108,256	120,930
Multi-family [Member] | Commercial real estate [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	21,042	21,726
30-59 Days Past Due	0	0
60-89 Days Past Due	139	0
90+ (still accruing) Days Past Due	0	0
Total Past Due	139	0
Non-Accrual	0	19
Total Loans	21,181	21,745
Non-owner occupied residential [Member] | Commercial real estate [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	59,827	60,890
30-59 Days Past Due	476	122
60-89 Days Past Due	603	205
90+ (still accruing) Days Past Due	0	0
Total Past Due	1,079	327
Non-Accrual	3,715	5,164
Total Loans	64,621	66,381
1-4 family residential construction [Member] | Acquisition and development [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	1,180	1,770
30-59 Days Past Due	0	0
60-89 Days Past Due	0	171
90+ (still accruing) Days Past Due	0	0
Total Past Due	0	171
Non-Accrual	809	909
Total Loans	1,989	2,850
Commercial and land development [Member] | Acquisition and development [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	21,190	26,054
30-59 Days Past Due	855	511
60-89 Days Past Due	0	1
90+ (still accruing) Days Past Due	0	0
Total Past Due	855	512
Non-Accrual	2,833	3,809
Total Loans	24,878	30,375
First lien [Member] | Residential mortgage [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	104,963	104,933
30-59 Days Past Due	1,990	1,565
60-89 Days Past Due	74	270
90+ (still accruing) Days Past Due	0	0
Total Past Due	2,064	1,835
Non-Accrual	1,937	1,833
Total Loans	108,964	108,601
Home equity - term [Member] | Residential mortgage [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	15,150	14,609
30-59 Days Past Due	140	81
60-89 Days Past Due	6	0
90+ (still accruing) Days Past Due	0	0
Total Past Due	146	81
Non-Accrual	37	57
Total Loans	15,333	14,747
Home equity - Lines of credit [Member] | Residential mortgage [Member]
Loan portfolio summarized by aging categories of performing loans and nonaccrual loans
Current	74,820	78,880
30-59 Days Past Due	208	0
60-89 Days Past Due	213	12
90+ (still accruing) Days Past Due	0	0
Total Past Due	421	12
Non-Accrual	483	556
Total Loans	$ 75,724	$ 79,448

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Loans Receivable and Allowance for Loan Losses (Tables)

3 Months Ended

Mar. 31, 2013

Loans Receivable and Allowance for Loan Losses [Abstract]

Summary of loan portfolio, excluding residential loans held for sale, broken out by classes

(Dollars in thousands)	March 31, 2013		December 31, 2012
Commercial real estate:
Owner-occupied	$	137,354	$	144,290
Non-owner occupied		108,256		120,930
Multi-family		21,181		21,745
Non-owner occupied residential		64,621		66,381
Acquisition and development:
1-4 family residential construction		1,989		2,850
Commercial and land development		24,878		30,375
Commercial and industrial		42,443		39,340
Municipal		67,470		68,018
Residential mortgage:
First lien		108,964		108,601
Home equity – term		15,333		14,747
Home equity – Lines of credit		75,724		79,448
Installment and other loans		6,535		7,014
	$	674,748	$	703,739

Bank's ratings based on its internal risk rating system

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
March 31, 2013
Commercial real estate:
Owner-occupied	$	118,677	$	9,998	$	6,514	$	2,165	$	0	$	137,354
Non-owner occupied		81,661		12,342		11,255		2,998		0		108,256
Multi-family		17,050		3,412		719		0		0		21,181
Non-owner occupied residential		44,226		11,547		4,931		3,917		0		64,621
Acquisition and development:
1-4 family residential construction		1,018		162		0		293		516		1,989
Commercial and land development		13,163		6,263		2,619		2,833		0		24,878
Commercial and industrial		37,042		2,896		1,176		564		765		42,443
Municipal		67,470		0		0		0		0		67,470
Residential mortgage:
First lien		102,760		3,515		0		2,689		0		108,964
Home equity – term		15,014		210		72		37		0		15,333
Home equity – Lines of credit		73,013		844		1,348		519		0		75,724
Installment and other loans		6,523		10		1		1		0		6,535
	$	577,617	$	51,199	$	28,635	$	16,016	$	1,281	$	674,748

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		Total
December 31, 2012
Commercial real estate:
Owner-occupied	$	121,333	$	11,917	$	8,623	$	2,229	$	188	$	144,290
Non-owner occupied		95,876		7,351		14,241		3,462		0		120,930
Multi-family		17,205		3,936		585		19		0		21,745
Non-owner occupied residential		45,468		12,199		3,346		5,368		0		66,381
Acquisition and development:
1-4 family residential construction		1,608		333		0		198		711		2,850
Commercial and land development		14,793		8,937		2,836		3,208		601		30,375
Commercial and industrial		33,380		3,713		429		566		1,252		39,340
Municipal		68,018		0		0		0		0		68,018
Residential mortgage:
First lien		101,390		3,026		1,604		2,581		0		108,601
Home equity – term		14,403		52		235		57		0		14,747
Home equity – Lines of credit		76,418		1,073		1,365		592		0		79,448
Installment and other loans		6,998		11		3		2		0		7,014
	$	596,890	$	52,548	$	33,267	$	18,282	$	2,752	$	703,739

Impaired loans by class

	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, 2013
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,165	$	2,426
Non-owner occupied		1,248		1,249		325		1,750		3,730
Non-owner occupied residential		202		202		45		3,715		5,353
Acquisition and development:
1-4 family residential construction		516		536		9		293		299
Commercial and land development		0		0		0		2,833		7,427
Commercial and industrial		885		914		627		444		444
Residential mortgage:
First lien		0		0		0		2,689		2,906
Home equity – term		0		0		0		37		58
Home equity – Lines of credit		0		0		0		519		528
Installment and other loans		0		0		0		1		2
	$	2,851	$	2,901	$	1,006	$	14,446	$	23,173

	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)
December 31, 2012
Commercial real estate:
Owner-occupied	$	0	$	0	$	0	$	2,417	$	2,680
Non-owner occupied		1,257		1,257		329		2,205		5,487
Multi-family		0		0		0		19		198
Non-owner occupied residential		204		204		46		5,164		6,510
Acquisition and development:
1-4 family residential construction		711		725		9		198		202
Commercial and land development		0		0		0		3,809		8,556
Commercial and industrial		1,373		1,402		928		445		445
Residential mortgage:
First lien		0		0		0		2,581		2,784
Home equity – term		0		0		0		57		75
Home equity – Lines of credit		0		0		0		592		597
Installment and other loans		0		0		0		2		2
	$	3,545	$	3,588	$	1,312	$	17,489	$	27,536

Average recorded investment in impaired loans and related interest income

	2013				2012
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Commercial real estate:
Owner-occupied	$	2,291	$	0	$	11,229		40
Non-owner occupied		3,230		0		19,270		67
Multi-family		10		0		2,814		0
Non-owner occupied residential		4,643		3		41,380		146
Acquisition and development:
1-4 family residential construction		859		0		1,714		0
Commercial and land development		3,321		0		16,117		71
Commercial and industrial		1,574		0		2,128		8
Residential mortgage:
First lien		2,635		2		2,001		0
Home equity – term		47		0		316		0
Home equity – lines of credit		555		0		489		0
Installment and other loans		2		0		13		0
Total	$	19,167	$	5	$	97,471	$	332

Troubled debt restructurings

	March 31, 2013				December 31, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial real estate:
Non-owner occupied		2	$	1,967		2	$	1,981
Non-owner occupied residential		1		202		1		204
Commercial and industrial		1		120		1		122
Residential mortgage:
First lien		2		753		2		749
Home equity – lines of credit		1		36		1		36
		7		3,078		7		3,092
Nonaccruing:
Commercial real estate:
Owner-occupied		1		7		1		7
Non-owner occupied		4		984		4		1,209
		5		991		5		1,216
		12	$	4,069		12	$	4,308

Restructured loans included in nonaccrual status were modified as troubled debt restructings within the previous 12 months and for which there was a payment default

	March 31, 2013				March 31, 2012
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Non-owner occupied residential		0	$	0		5	$	1,217
Owner occupied		0		0		3		1,294
		0	$	0		8	$	2,511

Number of loans modified and their pre-modification and post-modification investment balances

	2013				2012
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Accruing:
Commercial and industrial		0	$	0		1	$	37
		0		0		1		37
Nonaccruing:
Commercial real estate:
Non-owner occupied		0		0		1		473
Commercial and industrial		0		0		1		302
		0		0		2		775
		0	$	0		3	$	812

Loan portfolio summarized by aging categories of performing loans and nonaccrual loans

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
March 31, 2013
Commercial real estate:
Owner-occupied	$	134,381	$	202	$	606	$	0	$	808	$	2,165	$	137,354
Non-owner occupied		107,003		0		222		0		222		1,031		108,256
Multi-family		21,042		0		139		0		139		0		21,181
Non-owner occupied residential		59,827		476		603		0		1,079		3,715		64,621
Acquisition and development:
1-4 family residential construction		1,180		0		0		0		0		809		1,989
Commercial and land development		21,190		855		0		0		855		2,833		24,878
Commercial and industrial		40,954		219		61		0		280		1,209		42,443
Municipal		67,470		0		0		0		0		0		67,470
Residential mortgage:
First lien		104,963		1,990		74		0		2,064		1,937		108,964
Home equity – term		15,150		140		6		0		146		37		15,333
Home equity – Lines of credit		74,820		208		213		0		421		483		75,724
Installment and other loans		6,479		52		3		0		55		1		6,535
	$	654,459	$	4,142	$	1,927	$	0	$	6,069	$	14,220	$	674,748
December 31, 2012
Commercial real estate:
Owner-occupied	$	141,833	$	40	$	0	$	0	$	40	$	2,417	$	144,290
Non-owner occupied		119,320		129		0		0		129		1,481		120,930
Multi-family		21,726		0		0		0		0		19		21,745
Non-owner occupied residential		60,890		122		205		0		327		5,164		66,381
Acquisition and development:
1-4 family residential construction		1,770		0		171		0		171		909		2,850
Commercial and land development		26,054		511		1		0		512		3,809		30,375
Commercial and industrial		37,348		296		0		0		296		1,696		39,340
Municipal		68,018		0		0		0		0		0		68,018
Residential mortgage:
First lien		104,933		1,565		270		0		1,835		1,833		108,601
Home equity – term		14,609		81		0		0		81		57		14,747
Home equity – Lines of credit		78,880		0		12		0		12		556		79,448
Installment and other loans		6,837		161		14		0		175		2		7,014
	$	682,218	$	2,905	$	673	$	0	$	3,578	$	17,943	$	703,739

Activity in the allowance for loan losses

	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, 2013
Balance, beginning of period	$	13,719		$	3,502		$	1,635		$	223	$	19,079		$	2,275		$	85		$	2,360		$	1,727	$	23,166
Provision for loan losses		(473	)		(746	)		(292	)		62		(1,449	)		1,145			31			1,176			273		0
Charge-offs		(1,142	)		(145	)		0			0		(1,287	)		(38	)		(20	)		(58	)		0		(1,345	)
Recoveries		61			3			10			0		74			6			16			22			0		96
Balance, end of period	$	12,165		$	2,614		$	1,353		$	285	$	16,417		$	3,388		$	112		$	3,500		$	2,000	$	21,917
March 31, 2012
Balance, beginning of period	$	29,559		$	9,708		$	1,085		$	789	$	41,141		$	933		$	75		$	1,008		$	1,566	$	43,715
Provision for loan losses		13,364			3,850			855			116		18,185			592			(24	)		568			447		19,200
Charge-offs		(26,663	)		(7,312	)		(1,068	)		0		(35,043	)		(228	)		(12	)		(240	)		0		(35,283	)
Recoveries		22			473			19			0		514			4			6			10			0		524
Balance, end of period	$	16,282		$	6,719		$	891		$	905	$	24,797		$	1,301		$	45		$	1,346		$	2,013	$	28,156

Summary of allowance for loan loss allocation

(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Residential Mortgage		Installment and Other		Unallocated		Total
March 31, 2013
Loans allocated by:
Individually evaluated for impairment	$	9,080	$	3,642	$	1,329	$	0	$	3,245	$	1	$	0	$	17,297
Collectively evaluated for impairment		322,332		23,225		41,114		67,470		196,776		6,534		0		657,451
	$	331,412	$	26,867	$	42,443	$	67,470	$	200,021	$	6,535	$	0	$	674,748
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	370	$	9	$	627	$	0	$	0	$	0	$	0	$	1,006
Collectively evaluated for impairment		11,795		2,605		726		285		3,388		112		2,000		20,911
	$	12,165	$	2,614	$	1,353	$	285	$	3,388	$	112	$	2,000	$	21,917
December 31, 2012
Loans allocated by:
Individually evaluated for impairment	$	11,266	$	4,718	$	1,818	$	0	$	3,230	$	2	$	0	$	21,034
Collectively evaluated for impairment		342,080		28,507		37,522		68,018		199,566		7,012		0		682,705
	$	353,346	$	33,225	$	39,340	$	68,018	$	202,796	$	7,014	$	0	$	703,739
Allowance for loan losses allocated by:
Individually evaluated for impairment	$	375	$	9	$	928	$	0	$	0	$	0	$	0	$	1,312
Collectively evaluated for impairment		13,344		3,493		707		223		2,275		85		1,727		21,854
	$	13,719	$	3,502	$	1,635	$	223	$	2,275	$	85	$	1,727	$	23,166