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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 
ýQuarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2017.2018. 
oTransition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from                    to                   .

No. 0-17077
(Commission File Number)

PENNS WOODS BANCORP, INC.
(Exact name of Registrant as specified in its charter) 
PENNSYLVANIA 23-2226454
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
 
300 Market Street, P.O. Box 967 Williamsport, Pennsylvania 17703-0967
(Address of principal executive offices) (Zip Code)
 

(570) 322-1111
Registrant’s telephone number, including area code

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 ý NO o

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 ý NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. or an emerging growth company.  See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):

 
Large accelerated filer o
 
                 Accelerated filer x
  Non-accelerated filer o
 
   Small reporting company ox
  
Emerging growth company o

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO ý

On November 1, 20172018 there were 4,688,7394,691,102 shares of the Registrant’s common stock outstanding.


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PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

  Page
  Number
 
   
   
  
  
  
  
  
   
   
   
   
 
   
   
   
   
   
   
   
   
  

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Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 September 30, December 31, September 30, December 31,
(In Thousands, Except Share Data) 2017 2016 2018 2017
ASSETS:  
  
  
  
Noninterest-bearing balances $22,042
 $26,766
 $33,675
 $25,692
Interest-bearing balances in other financial institutions 5,705
 16,905
 38,672
 1,551
Total cash and cash equivalents 27,747
 43,671
 72,347
 27,243
        
Investment securities, available for sale, at fair value 132,313
 133,492
Investment debt securities, available for sale, at fair value 128,905
 108,627
Investment equity securities, at fair value 1,902

2,516
Investment securities, trading 210
 58
 45
 190
Restricted investment in bank stock, at fair value 17,834
 13,332
Loans held for sale 1,734
 1,953
 3,727
 1,196
Loans 1,189,714
 1,093,681
 1,369,105
 1,246,614
Allowance for loan losses (12,933) (12,896) (13,343) (12,858)
Loans, net 1,176,781
 1,080,785
 1,355,762
 1,233,756
Premises and equipment, net 25,895
 24,275
 27,361
 27,386
Accrued interest receivable 4,289
 3,672
 5,353
 4,321
Bank-owned life insurance 27,827
 27,332
 28,472
 27,982
Goodwill 17,104
 17,104
 17,104
 17,104
Intangibles 1,543
 1,799
 1,233
 1,462
Deferred tax asset 7,984
 8,397
 5,310
 4,388
Other assets 6,770
 6,052
 4,993
 4,989
TOTAL ASSETS $1,430,197
 $1,348,590
 $1,670,348
 $1,474,492
        
LIABILITIES:  
  
  
  
Interest-bearing deposits $843,166
 $791,937
 $897,366
 $843,004
Noninterest-bearing deposits 310,830
 303,277
 313,111
 303,316
Total deposits 1,153,996
 1,095,214
 1,210,477
 1,146,320
        
Short-term borrowings 41,596
 13,241
 164,465
 100,748
Long-term borrowings 80,998
 85,998
 138,970
 70,970
Accrued interest payable 483
 455
 1,051
 502
Other liabilities 13,455
 15,433
 14,846
 17,758
TOTAL LIABILITIES 1,290,528
 1,210,341
 1,529,809
 1,336,298
        
SHAREHOLDERS’ EQUITY:  
  
  
  
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued 
 
 
 
Common stock, par value $8.33, 15,000,000 shares authorized; 5,008,720 and 5,007,109 shares issued; 4,688,570 and 4,734,657 outstanding 41,739
 41,726
Common stock, par value $8.33, 15,000,000 shares authorized; 5,011,063 and 5,009,339 shares issued; 4,690,913 and 4,689,189 outstanding 41,757
 41,744
Additional paid-in capital 50,142
 50,075
 50,577
 50,173
Retained earnings 64,033
 61,610
 67,802
 63,364
Accumulated other comprehensive loss:  
  
  
  
Net unrealized gain (loss) on available for sale securities 73
 (639)
Net unrealized loss on available for sale securities (2,663) (54)
Defined benefit plan (4,203) (4,289) (4,820) (4,920)
Treasury stock at cost, 320,150 and 272,452 shares (12,115) (10,234)
TOTAL SHAREHOLDERS’ EQUITY 139,669
 138,249
Treasury stock at cost, 320,150 (12,115) (12,115)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY 140,538
 138,192
Non-controlling interest 1
 2
TOTAL SHAREHOLDERS' EQUITY 140,539
 138,194
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $1,430,197
 $1,348,590
 $1,670,348
 $1,474,492

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
 
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands, Except Per Share Data) 2017 2016 2017 2016 2018 2017 2018 2017
INTEREST AND DIVIDEND INCOME:  
  
  
  
  
  
  
  
Loans, including fees $11,906
 $10,541
 $33,642
 $31,362
 $13,982
 $11,906
 $39,172
 $33,642
Investment securities:  
  
  
  
  
  
  
  
Taxable 553
 601
 1,665
 1,825
 713
 553
 1,898
 1,665
Tax-exempt 319
 329
 940
 1,203
 207
 319
 678
 940
Dividend and other interest income 170
 189
 592
 666
 296
 170
 762
 592
TOTAL INTEREST AND DIVIDEND INCOME 12,948
 11,660
 36,839
 35,056
 15,198
 12,948
 42,510
 36,839
INTEREST EXPENSE:  
  
  
  
  
  
  
  
Deposits 1,058
 909
 2,968
 2,624
 1,659
 1,058
 4,371
 2,968
Short-term borrowings 31
 7
 39
 41
 528
 31
 1,004
 39
Long-term borrowings 407
 497
 1,220
 1,481
 756
 407
 2,024
 1,220
TOTAL INTEREST EXPENSE 1,496
 1,413
 4,227
 4,146
 2,943
 1,496
 7,399
 4,227
NET INTEREST INCOME 11,452
 10,247
 32,612
 30,910
 12,255
 11,452
 35,111
 32,612
PROVISION FOR LOAN LOSSES 60
 258
 605
 866
 480
 60
 975
 605
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,392
 9,989
 32,007
 30,044
 11,775
 11,392
 34,136
 32,007
NON-INTEREST INCOME:  
  
  
  
  
  
  
  
Service charges 550
 585
 1,637
 1,678
 645
 550
 1,788
 1,637
Net securities gains, available for sale 302
 253
 487
 1,174
Net securities (losses) gains, trading (4) 8
 (2) 54
Net debt securities (losses) gains, available for sale (22) 302
 (17) 487
Net equity securities (losses) (16) 
 (44) 
Net securities gains (losses), trading 14
 (4) 12
 (2)
Bank-owned life insurance 166
 172
 499
 516
 165
 166
 496
 499
Gain on sale of loans 455
 658
 1,316
 1,691
 398
 455
 1,053
 1,316
Insurance commissions 109
 198
 399
 604
 85
 109
 266
 399
Brokerage commissions 352
 290
 1,044
 817
 340
 352
 1,013
 1,044
Debit card fees 514
 690
 1,450
 1,413
 359
 514
 1,065
 1,450
Other 296
 228
 1,325
 1,310
 621
 296
 1,400
 1,325
TOTAL NON-INTEREST INCOME 2,740
 3,082
 8,155
 9,257
 2,589
 2,740
 7,032
 8,155
NON-INTEREST EXPENSE:  
  
  
  
  
  
  
  
Salaries and employee benefits 4,738
 4,507
 14,116
 13,433
 5,420
 4,738
 15,387
 14,116
Occupancy 603
 544
 1,855
 1,630
 640
 603
 2,080
 1,855
Furniture and equipment 816
 662
 2,129
 2,042
 780
 816
 2,328
 2,129
Software amortization 235
 580
 750
 950
 208
 235
 504
 750
Pennsylvania shares tax 228
 220
 696
 698
 278
 228
 833
 696
Professional fees 560
 502
 1,816
 1,512
 459
 560
 1,674
 1,816
Federal Deposit Insurance Corporation deposit insurance 194
 202
 514
 670
 237
 194
 639
 514
Debit card expenses 168
 246
 478
 456
Marketing 315
 173
 690
 568
 245
 315
 764
 690
Intangible amortization 81
 90
 256
 276
 71
 81
 229
 256
Other 1,628
 1,013
 4,314
 4,230
 1,343
 1,796
 4,037
 4,792
TOTAL NON-INTEREST EXPENSE 9,566
 8,739
 27,614
 26,465
 9,681
 9,566
 28,475
 27,614
INCOME BEFORE INCOME TAX PROVISION 4,566
 4,332
 12,548
 12,836
 4,683
 4,566
 12,693
 12,548
INCOME TAX PROVISION 1,282
 1,273
 3,491
 3,307
 857
 1,282
 2,179
 3,491
NET INCOME $3,284
 $3,059
 $9,057
 $9,529
EARNINGS PER SHARE - BASIC AND DILUTED $0.70
 $0.65
 $1.92
 $2.01
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 4,688,222
 4,733,800
 4,711,282
 4,735,844
CONSOLIDATED NET INCOME $3,826
 $3,284
 $10,514
 $9,057
Less: Net loss attributable to noncontrolling interest 
 
 (1) 
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC. $3,826
 $3,284
 $10,515
 $9,057
EARNINGS PER SHARE - BASIC $0.82
 $0.70
 $2.24
 $1.92
EARNINGS PER SHARE - DILUTED $0.82
 $0.70
 $2.24
 $1.92
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 4,690,560
 4,688,222
 4,689,960
 4,711,282
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 4,690,560
 4,688,222
 4,689,960
 4,711,282
DIVIDENDS DECLARED PER SHARE $0.47
 $0.47
 $1.41
 $1.41
 $0.47
 $0.47
 $1.41
 $1.41
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Net Income $3,284
 $3,059
 $9,057
 $9,529
 $3,826
 $3,284
 $10,515
 $9,057
Other comprehensive income (loss):  
  
  
  
Change in unrealized gain (loss) on available for sale securities 437
 (276) 1,565
 3,039
Other comprehensive (loss) income:  
  
  
  
Change in unrealized (loss) gain on available for sale securities (789) 437
 (2,641) 1,565
Tax effect (150) 94
 (532) (1,032) 166
 (150) 556
 (532)
Net realized gain on available for sale securities included in net income (302) (253) (487) (1,174)
Net realized loss (gain) on available for sale securities included in net income 22
 (302) 17
 (487)
Tax effect 104
 86
 166
 398
 (5) 104
 (4) 166
Amortization of unrecognized pension loss 45
 39
 129
 117
Amortization of unrecognized pension gain 41
 45
 125
 129
Tax effect (15) (13) (43) (40) (8) (15) (25) (43)
Total other comprehensive income (loss) 119
 (323) 798
 1,308
Total other comprehensive (loss) income (573) 119
 (1,972) 798
Comprehensive income $3,403
 $2,736
 $9,855
 $10,837
 $3,253
 $3,403
 $8,543
 $9,855
 
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)


  COMMON STOCK 
ADDITIONAL
PAID-IN CAPITAL
 RETAINED EARNINGS 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 TREASURY STOCK 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data) SHARES AMOUNT     
Balance, December 31, 2015 5,004,984
 $41,708
 $49,992
 $58,038
 $(3,799) $(9,660) $136,279
Net income  
  
  
 9,529
  
  
 9,529
Other comprehensive income  
  
  
  
 1,308
  
 1,308
Dividends declared, ($1.41 per share)  
  
  
 (6,678)  
  
 (6,678)
Common shares issued for employee stock purchase plan 1,617
 13
 58
  
  
  
 71
Purchase of treasury stock (14,600 shares)           (574) (574)
Balance, September 30, 2016 5,006,601
 $41,721
 $50,050
 $60,889
 $(2,491) $(10,234) $139,935

Three months ended:

  COMMON STOCK 
ADDITIONAL
PAID-IN CAPITAL
 RETAINED EARNINGS 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 TREASURY STOCK 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data) SHARES AMOUNT     
Balance, December 31, 2016 5,007,109
 $41,726
 $50,075
 $61,610
 $(4,928) $(10,234) $138,249
Net income  
  
  
 9,057
  
  
 9,057
Other comprehensive income  
  
  
  
 798
  
 798
Dividends declared, ($1.41 per share)  
  
  
 (6,634)  
  
 (6,634)
Common shares issued for employee stock purchase plan 1,611
 13
 67
  
  
  
 80
Purchase of treasury stock (47,698 shares)           (1,881) (1,881)
Balance, September 30, 2017 5,008,720
 $41,739
 $50,142
 $64,033
 $(4,130) $(12,115) $139,669
  COMMON STOCK 
ADDITIONAL
PAID-IN CAPITAL
 RETAINED EARNINGS 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 TREASURY STOCK NON-CONTROLLING INTEREST 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data) SHARES AMOUNT      
Balance, June 30, 2018 5,010,535
 $41,753
 $50,225
 $66,181
 $(6,910) $(12,115) $1
 $139,135
Net income  
  
  
 3,826
  
  
   3,826
Other comprehensive loss         (573)     (573)
Stock-based compensation     333
    
  
   333
Dividends declared ($0.47 per share)  
  
  
 (2,205)  
  
   (2,205)
Common shares issued for employee stock purchase plan 528
 4
 19
  
       23
Balance, September 30, 2018 5,011,063
 $41,757
 $50,577
 $67,802
 $(7,483) $(12,115) $1
 $140,539


  COMMON STOCK 
ADDITIONAL
PAID-IN CAPITAL
 RETAINED EARNINGS 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 TREASURY STOCK NON-CONTROLLING INTEREST 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data) SHARES AMOUNT      
Balance, June 30, 2017 5,008,192
 $41,735
 $50,117
 $62,952
 $(4,249) $(12,115) $
 $138,440
Net income  
  
  
 3,284
  
  
   3,284
Other comprehensive income  
  
  
  
 119
  
   119
Stock-based compensation     7
         7
Dividends declared ($0.47 per share)  
  
  
 (2,203)  
  
   (2,203)
Common shares issued for employee stock purchase plan 528
 4
 18
  
  
  
   22
Balance, September 30, 2017 5,008,720
 $41,739
 $50,142
 $64,033
 $(4,130) $(12,115) $
 $139,669





See accompanying notes to the unaudited consolidated financial statements.





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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWSCHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)


Nine months ended:

  Nine Months Ended September 30,
(In Thousands) 2017 2016
OPERATING ACTIVITIES:  
  
Net Income $9,057
 $9,529
Adjustments to reconcile net income to net cash provided by operating activities:  
  
Depreciation and amortization 1,979
 2,394
Amortization of intangible assets 256
 276
Provision for loan losses 605
 866
Accretion and amortization of investment security discounts and premiums 688
 657
Net securities gains, available for sale (487) (1,174)
Originations of loans held for sale (41,503) (50,824)
Proceeds of loans held for sale 43,038
 51,112
Gain on sale of loans (1,316) (1,691)
Net securities gains, trading 2
 (54)
Proceeds from the sale of trading securities 332
 3,723
Purchases of trading securities (486) (3,596)
Earnings on bank-owned life insurance (499) (516)
Decrease in deferred tax asset 46
 952
Other, net (4,361) 508
Net cash provided by operating activities 7,351
 12,162
INVESTING ACTIVITIES:  
  
Proceeds from sales of available for sale securities 15,443
 42,180
Proceeds from calls and maturities of available for sale securities 7,198
 19,267
Purchases of available for sale securities (18,434) (24,040)
Net increase in loans (97,109) (24,548)
Acquisition of premises and equipment (2,849) (2,347)
Proceeds from the sale of foreclosed assets 958
 486
Purchase of bank-owned life insurance (34) (27)
Proceeds from redemption of regulatory stock 4,844
 2,644
Purchases of regulatory stock (6,994) (2,569)
Net cash (used for) provided by investing activities (96,977) 11,046
FINANCING ACTIVITIES:  
  
Net increase in interest-bearing deposits 51,229
 40,901
Net increase in noninterest-bearing deposits 7,553
 15,516
Proceeds from long-term borrowings 30,000
 
Repayment of long-term borrowings (35,000) 
Net increase (decrease) in short-term borrowings 28,355
 (35,059)
Dividends paid (6,634) (6,678)
Issuance of common stock 80
 71
Purchases of treasury stock (1,881) (574)
Net cash provided by financing activities 73,702
 14,177
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,924) 37,385
CASH AND CASH EQUIVALENTS, BEGINNING 43,671
 22,796
CASH AND CASH EQUIVALENTS, ENDING $27,747
 $60,181
  COMMON STOCK 
ADDITIONAL
PAID-IN CAPITAL
 RETAINED EARNINGS 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 TREASURY STOCK NON-CONTROLLING INTEREST 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data) SHARES AMOUNT      
Balance, December 31, 2017 5,009,339
 $41,744
 $50,173
 $63,364
 $(4,974) $(12,115) $2
 $138,194
Net income  
  
  
 10,515
  
  
 (1) 10,514
Adoption of ASU 2016-01       537
 (537)     
Other comprehensive loss  
  
  
  
 (1,972)  
   (1,972)
Stock-based compensation     345
         345
Dividends declared ($1.41 per share)  
  
  
 (6,614)  
  
   (6,614)
Common shares issued for employee stock purchase plan 1,724
 13
 59
  
  
  
   72
Balance, September 30, 2018 5,011,063
 $41,757
 $50,577
 $67,802
 $(7,483) $(12,115) $1
 $140,539


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
  
Interest paid $4,199
 $4,091
Income taxes paid 3,950
 3,050
Transfer of loans to foreclosed real estate 508
 83
  COMMON STOCK 
ADDITIONAL
PAID-IN CAPITAL
 RETAINED EARNINGS 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 TREASURY STOCK NON-CONTROLLING INTEREST 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data) SHARES AMOUNT      
Balance, December 31, 2016 5,007,109
 $41,726
 $50,075
 $61,610
 $(4,928) $(10,234) $
 $138,249
Net income  
  
  
 9,057
  
  
   9,057
Other comprehensive income  
  
  
   798
  
   798
Stock-based compensation     14
         14
Dividends declared ($1.41 per share)  
  
  
 (6,634)  
  
   (6,634)
Common shares issued for employee stock purchase plan 1,611
 13
 53
  
  
  
   66
Purchase of treasury stock (47,698 shares)           (1,881)   (1,881)
Balance, September 30, 2017 5,008,720
 $41,739
 $50,142
 $64,033
 $(4,130) $(12,115) $
 $139,669




See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
  Nine Months Ended September 30,
(In Thousands) 2018 2017
OPERATING ACTIVITIES:  
  
Net Income $10,515
 $9,057
Adjustments to reconcile net income to net cash provided by operating activities:  
  
Depreciation and amortization 1,907
 1,979
Amortization of intangible assets 229
 256
Provision for loan losses 975
 605
Accretion and amortization of investment security discounts and premiums 591
 688
Net securities losses (gains), available for sale 17
 (487)
Originations of loans held for sale (39,979) (41,503)
Proceeds of loans held for sale 38,501
 43,038
Gain on sale of loans (1,053) (1,316)
Net equity securities losses 44
 
Net securities (gains) losses, trading (12) 2
Proceeds from the sale of trading securities 466
 332
Purchases of trading securities (309) (486)
Earnings on bank-owned life insurance (496) (499)
(Decrease) increase in deferred tax asset (370) 46
Other, net (953) (4,361)
Net cash provided by operating activities 10,073
 7,351
INVESTING ACTIVITIES:  
  
Proceeds from sales of available for sale securities 14,528
 15,443
Proceeds from calls and maturities of available for sale securities 6,160
 7,198
Purchases of available for sale securities (45,473) (18,434)
Net increase in loans (123,857) (97,109)
Acquisition of premises and equipment (1,374) (2,849)
Proceeds from the sale of foreclosed assets 253
 958
Purchase of bank-owned life insurance (36) (34)
Proceeds from redemption of regulatory stock 12,073
 4,844
Purchases of regulatory stock (16,575) (6,994)
Net cash used for investing activities (154,301) (96,977)
FINANCING ACTIVITIES:  
  
Net increase in interest-bearing deposits 54,362
 51,229
Net increase in noninterest-bearing deposits 9,795
 7,553
Proceeds from long-term borrowings 80,000
 30,000
Repayment of long-term borrowings (12,000) (35,000)
Net increase in short-term borrowings 63,717
 28,355
Dividends paid (6,614) (6,634)
Issuance of common stock 72
 80
Purchases of treasury stock 
 (1,881)
Net cash provided by financing activities 189,332
 73,702
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45,104
 (15,924)
CASH AND CASH EQUIVALENTS, BEGINNING 27,243
 43,671
CASH AND CASH EQUIVALENTS, ENDING $72,347
 $27,747
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
  
Interest paid $6,850
 $4,199
Income taxes paid 1,925
 3,950
Transfer of loans to foreclosed real estate 876
 508
Transfer due to adoption of ASU 2016-01, equity securities fair value adjust, reclassification from AOCI to Retained Earnings, net of tax 537
 
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

Note 1.  Basis of Presentation
 
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”).  The Company also owns a controlling interest in United Insurance Solutions, LLC. All significant inter-company balances and transactions have been eliminated in the consolidation.

The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Tax Cuts and Jobs Act

Public law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 34% to 21% effective January 1, 2018. Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the rules, the Company estimated the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities. The amount recorded in the fourth quarter of 2017 related to the remeasurement of the Company's deferred tax balance resulted in additional income tax expense of $2.7 million.

Newly Adopted Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 13.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

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All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption on January 1, 2018, the Company made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $537,000. The net effect was anincreaseto retained earnings.

In August 2018, the Securities and Exchange Commission issued Final Rule Release No. 33-10532 - “Disclosure Update and Simplification.” The rule changes implemented by the Release amend, effective November 5, 2018, various SEC disclosure requirements that have been determined to be redundant, duplicative, overlapping, outdated, or superseded. The changes are generally expected to reduce or eliminate certain disclosures; however, the amendments did expand interim period disclosure requirements related to changes in shareholders' equity. The presentation of the Statement of Changes in Shareholders' Equity contained herein for the three and nine months ended September 30, 2018 includes the disclosures required by the Release.

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 3940 through 4850 of the Form 10-K for the year ended December 31, 2016.2017.

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.
 
Note 2.  Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component shown net of tax and parenthesis indicating debits, as of September 30, 20172018 and 20162017 were as follows:
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Three Months Ended September 30, 2018 Three Months Ended September 30, 2017
(In Thousands) 
Net Unrealized Loss
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total 
Net Unrealized Gain
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total 
Net Unrealized Loss
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total 
Net Unrealized Gain
(Loss) on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total
Beginning balance $(16) $(4,233)
$(4,249) $1,838
 $(4,006) $(2,168) $(2,057) $(4,853) $(6,910) $(16) $(4,233) $(4,249)
Other comprehensive income (loss) before reclassifications 287



287
 (182) 
 (182)
Other comprehensive (loss) gain before reclassifications (623) 
 (623) 287
 
 287
Amounts reclassified from accumulated other comprehensive loss (198)
30

(168) (167) 26
 (141) 17
 33
 50
 (198) 30
 (168)
Net current-period other comprehensive income 89

30

119
 (349) 26
 (323)
Net current-period other comprehensive (loss) income (606) 33
 (573) 89
 30
 119
Ending balance $73

$(4,203)
$(4,130) $1,489
 $(3,980) $(2,491) $(2,663) $(4,820) $(7,483) $73
 $(4,203) $(4,130)
 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017
(In Thousands) 
Net Unrealized Loss
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total 
Net Unrealized Gain on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total 
Net Unrealized Loss
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total 
Net Unrealized Gain (Loss) on Available
for Sale Securities
 
Defined
Benefit 
Plan
 Total
Beginning balance $(639) $(4,289) $(4,928) $258
 $(4,057) $(3,799) $(54) $(4,920) $(4,974) $(639) $(4,289) $(4,928)
Other comprehensive income before reclassifications 1,033
 
 1,033
 2,007
 
 2,007
Other comprehensive (loss) gain before reclassifications (2,085) 
 (2,085) 1,033
 
 1,033
Amounts reclassified from accumulated other comprehensive loss (321) 86
 (235) (776) 77
 (699) 13
 100
 113
 (321) 86
 (235)
Net current-period other comprehensive income 712
 86
 798
 1,231
 77
 1,308
Net current-period other comprehensive (loss) income (2,072) 100
 (1,972) 712
 86
 798
Reclassification from adoption of 2016-01 (537) 
 (537) 
 
 
Ending balance $73
 $(4,203) $(4,130) $1,489
 $(3,980) $(2,491) $(2,663) $(4,820) $(7,483) $73
 $(4,203) $(4,130)








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The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of September 30, 20172018 and 20162017 were as follows:
Details about Accumulated Other Comprehensive Loss Components Amount Reclassified from Accumulated Other Comprehensive Loss Affected Line Item
 in the Consolidated 
Statement of Income
 Amount Reclassified from Accumulated Other Comprehensive Loss Affected Line Item
 in the Consolidated 
Statement of Income
Three Months Ended September 30, 2017 Three Months Ended September 30, 2016  Three Months Ended September 30, 2018 Three Months Ended September 30, 2017 
Net unrealized (loss) gain on available for sale securities $302
 $253
 Net securities (losses) gains, available for sale $(22) $302
 Net securities (losses) gains, available for sale
Income tax effect (104) (86) Income tax provision 5
 (104) Income tax provision
Total reclassifications for the period $198
 $167
  $(17) $198
 
          
Net unrecognized pension costs (45) (39) Salaries and employee benefits $(41) $(45) Salaries and employee benefits
Income tax effect 15
 13
 Income tax provision 8
 15
 Income tax provision
Total reclassifications for the period (30) (26)  $(33) $(30) 
Details about Accumulated Other Comprehensive Loss Components Amount Reclassified from Accumulated Other Comprehensive Loss 
Affected Line Item
 in the Consolidated 
Statement of Income
 Amount Reclassified from Accumulated Other Comprehensive Loss 
Affected Line Item
 in the Consolidated 
Statement of Income
Nine months ended September 30, 2017 Nine months ended September 30, 2016  Nine months ended September 30, 2018 Nine months ended September 30, 2017 
Net unrealized gain on available for sale securities $487
 $1,174
 Net securities gains, available for sale
Net unrealized (loss) gain on available for sale securities $(17) $487
 Net securities gains, available for sale
Income tax effect (166) (398) Income tax provision 4
 (166) Income tax provision
Total reclassifications for the period $321
 $776
  $(13) $321
 
          
Net unrecognized pension costs (129) (117) Salaries and employee benefits $(125) $(129) Salaries and employee benefits
Income tax effect 43
 40
 Income tax provision 25
 43
 Income tax provision
Total reclassifications for the period (86) (77)  $(100) $(86) 


Note 3.  Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. Subsequently, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's financial instruments are not within the scope of Topic 606.  However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and

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employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow-scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.




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In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company’s financial statements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. The provisions in ASU 2016-17 are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the Update is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the Update in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Company’s financial statements.





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In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value

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of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”)(SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.

In February 2017, the FASB issued ASU 2017-05, 2017-06Other Income-Gains, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)Health and Welfare Benefit Plans (Topic 965). This Update relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require a plan's interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in this Update clarify what constitutes a financial asset withinremove the scoperequirement to disclose the percentage interest in the master trust for plans with divided interests and require that all plans disclose the dollar amount of Subtopic 610-20. The amendmentstheir interest in each of those general types of investments, which supplements the existing requirement to disclose the master trusts balances in each general type of investments. There are also clarify that entities should identify each distinct nonfinancial asset orincreased disclosure requirements for investments in substance nonfinancial asset that is promised to a counterparty and to derecognize each asset when the counterparty obtains control. There is also additional guidance provided for partial sales of a nonfinancial asset and when derecognition, and the related gain or loss, should be recognized.master trusts. The amendments in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periodsfiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. This Update2018. Early adoption is not expected to have a significant impact on the Company’s financial statements, or the Company is currently evaluating the impact the adoption.


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In March 2017, the FASB issued ASU 2017-07, permitteCompensation-Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The guidance is effective for public business entities for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. For all other entities (including all nonprofit organizations “NPOs”), it is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. This guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost and on a prospective basis for the capitalization of only the service cost component of net benefit cost.d. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award.  This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards.  The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2017, the FASB issued ASU 2017-10, Service Concession Arrangements (Topic 853), which applies to the accounting by operating entities for service concession arrangements within the scope of Topic 853. The amendments in this Update clarify that the grantor (government), rather than the third-party drivers, is the customer of the operation services in all cases for service concession arrangements within the scope of Topic 853. For an entity that has not adopted Topic 606 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update generally are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606)). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, deferred the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”)(EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in

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Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes

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that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. This Update is not expected to have a significant impact on the Company’s financial statements.

In September 2017,January 2018, the FASB issued ASU 2017-13,2018-01, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840)842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and Leasestransition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Company’s financial statements.

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10-45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging-Embedded Derivatives, or 825-10, Financial Instruments-Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services- Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.


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In March 2018, the FASB issued ASU 2018-04, Investments - Debt Securities (Topic 842320)): and Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff AnnouncementsAccounting Bulletin No. 117 and Observer Comments. SEC Release No. 33-9273, ASU 2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The SEC Observer said thatamendments make the SEC staff wouldCodification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not object if entities that are considered public business entities only because their financial statements or financial information is required torequire transition guidance and will be includedeffective upon issuance of this ASU. However, many of the amendments in another entity’s SEC filing use thethis ASU do have transition guidance with effective dates for private companies when they adopt ASC 606,annual periods beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-10, Revenue from Contracts with CustomersCodification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and ASCthe transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, Leases. The Update also supersedes certain SEC paragraphsthe effective date and transition requirements will be the same as the effective date and transition requirements in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASCTopic 842. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This Update provides another transition method which allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods in accordance with ASC 840, Leases. In addition, this Update provides a practical expedient under which lessors may elect, by class of underlying assets, to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (b) the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC 606, Revenue from Contracts with Customers. Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud

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computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.


Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 95,000263,700 stock options, with an average exercise price of $43.64,$45.11, outstanding on September 30, 2017. These2018. All options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $43.53 being less than$43.84 for the exercise price of the options.period. There were a total of 31,00095,000 stock options outstanding for the same period end in 20162017 that had an average exercise price of $42.03$43.64 and were excluded, fromon a weighted average basis, in the computation of diluted earnings per share because the quarterly average closing market price of common shares was $41.10$43.53 for the period. Net income as presented on the consolidated statement of income will beis used as the numerator.  The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive earnings per share computation.
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Weighted average common shares outstanding - basic 4,688,222
 5,006,252
 4,711,282
 5,005,707
Weighted average treasury stock shares (320,150) (272,452) (296,514) (269,863)
Weighted average common shares outstanding - diluted 4,368,072
 4,733,800
 4,414,768
 4,735,844
  Three Months Ended September 30, Nine Months Ended September 30,
  2018 2017 2018 2017
Weighted average common shares issued 5,010,710
 5,008,372
 5,010,110
 5,007,796
Weighted average treasury stock shares (320,150) (320,150) (320,150) (296,514)
Weighted average common shares outstanding - basic and diluted 4,690,560
 4,688,222
 4,689,960
 4,711,282
 





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Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities available for saleportfolio at September 30, 20172018 and December 31, 20162017 are as follows:
  September 30, 2017
    Gross Gross  
  Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
Available for sale (AFS):  
  
  
  
Mortgage-backed securities $4,544
 $79
 $(93) $4,530
State and political securities 61,868
 640
 (181) 62,327
Other debt securities 52,954
 220
 (1,201) 51,973
Total debt securities 119,366
 939
 (1,475) 118,830
Financial institution equity securities 11,537
 687
 
 12,224
Non-financial institution equity securities 1,300
 
 (41) 1,259
Total equity securities 12,837
 687
 (41) 13,483
Total investment securities AFS $132,203
 $1,626
 $(1,516) $132,313

  December 31, 2016
    Gross Gross  
  Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
Available for sale (AFS):  
  
  
  
Mortgage-backed securities $9,295
 $182
 $(164) $9,313
Asset-backed securities 109
 
 
 109
State and political securities 60,777
 666
 (509) 60,934
Other debt securities 53,046
 137
 (2,065) 51,118
Total debt securities 123,227
 985
 (2,738) 121,474
Financial institution equity securities 9,566
 969
 
 10,535
Non-financial institution equity securities 1,667
 
 (184) 1,483
Total equity securities 11,233
 969
 (184) 12,018
Total investment securities AFS $134,460
 $1,954
 $(2,922) $133,492
The amortized cost and fair values of trading investment securities at September 30, 2017 and December 31, 2016 are as follows:

 September 30, 2017 September 30, 2018
   Gross Gross     Gross Gross  
 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value Cost Gains Losses Value
Available for sale (AFS):  
  
  
  
Mortgage-backed securities $6,475
 $7
 $(255) $6,227
State and political securities 75,859
 68
 (1,264) 74,663
Other debt securities 49,942
 2
 (1,929) 48,015
Total debt securities $132,276
 $77
 $(3,448) $128,905
        
Investment equity securities:        
Financial institution equity securities $328
 $362
 $
 $690
Other equity securities 1,300
 
 (88) 1,212
Investment equity securities $1,628
 $362
 $(88) $1,902
        
Trading:                
Financial institution equity securities $61
 $3
 $(1) $63
Non-financial institution equity securities 157
 4
 (14) 147
Total trading securities $218
 $7
 $(15) $210
Other equity securities $49
 $
 $(4) $45
        

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 December 31, 2016 December 31, 2017
   Gross Gross     Gross Gross  
 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value Cost Gains Losses Value
Available for sale (AFS):  
  
  
  
Mortgage-backed securities $4,273
 $51
 $(111) $4,213
State and political securities 56,295
 411
 (198) 56,508
Other debt securities 48,806
 180
 (1,080) 47,906
Total debt securities $109,374
 $642
 $(1,389) $108,627
        
Investment equity securities:        
Financial institution equity securities $537
 $728
 $
 $1,265
Other equity securities 1,300
 
 (49) 1,251
Investment equity securities $1,837
 $728
 $(49) $2,516
       

Trading:                
Financial institution equity securities $
 $
 $
 $
 $20
 $
 $
 $20
Non-financial institution equity securities 56
 2
 
 58
Total trading securities $56
 $2
 $
 $58
Other equity securities 192
 2
 (24) 170
Trading investment equity securities $212
 $2
 $(24) $190
        

Total net trading gains of $14,000 and $12,000 for the three and nine months ended September 30, 2018 along with net trading losses of $4,000 and $2,000 for the three and nine month periodsmonths ended September 30, 2017 compared to net trading gains of $8,000 and $54,000 for the three and nine month periods ended September 30, 2016 wereare included in the Consolidated Statement of Income.

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at September 30, 20172018 and December 31, 2016.2017.
  September 30, 2018
  Less than Twelve Months Twelve Months or Greater Total
    Gross   Gross   Gross
  Fair Unrealized Fair Unrealized Fair Unrealized
(In Thousands) Value Losses Value Losses Value Losses
Available for sale (AFS):            
Mortgage-backed securities $3,084
 $(42) $2,943
 $(213) $6,027
 $(255)
State and political securities 47,314
 (774) 11,311
 (490) 58,625
 (1,264)
Other debt securities 18,225
 (436) 27,779
 (1,493) 46,004
 (1,929)
Total debt securities $68,623
 $(1,252) $42,033
 $(2,196) $110,656
 $(3,448)
             

 September 30, 2017 December 31, 2017
 Less than Twelve Months Twelve Months or Greater Total Less than Twelve Months Twelve Months or Greater Total
   Gross   Gross   Gross   Gross   Gross   Gross
 Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized
(In Thousands) Value Losses Value Losses Value Losses Value Losses Value Losses Value Losses
Available for sale (AFS):                        
Mortgage-backed securities $1,048
 $(4) $2,302
 $(89) $3,350
 $(93) $981
 $(12) $2,276
 $(99) $3,257
 $(111)
State and political securities 13,651
 (120) 2,170
 (61) 15,821
 (181) 15,691
 (104) 3,018
 (94) 18,709
 (198)
Other debt securities 9,689
 (145) 22,733
 (1,056) 32,422
 (1,201) 7,512
 (148) 28,517
 (932) 36,029
 (1,080)
Total debt securities 24,388
 (269) 27,205
 (1,206) 51,593
 (1,475) $24,184
 $(264) $33,811
 $(1,125) $57,995
 $(1,389)
Non-financial institution equity securities 1,259
 (41) 
 
 1,259
 (41)
Total equity securities 1,259
 (41) 
 
 1,259
 (41)
Total investment securities AFS $25,647
 $(310) $27,205
 $(1,206) $52,852
 $(1,516)
            
Other equity securities $1,251
 $(49) $
 $
 $1,251
 $(49)

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  December 31, 2016
  Less than Twelve Months Twelve Months or Greater Total
    Gross   Gross   Gross
  Fair Unrealized Fair Unrealized Fair Unrealized
(In Thousands) Value Losses Value Losses Value Losses
Available for sale (AFS):            
Mortgage-backed securities $3,572
 $(106) $3,627
 $(58) $7,199
 $(164)
State and political securities 26,113
 (509) 
 
 26,113
 (509)
Other debt securities 28,140
 (1,179) 12,240
 (886) 40,380
 (2,065)
Total debt securities 57,825
 (1,794) 15,867
 (944) 73,692
 (2,738)
Non-financial institution equity securities 727
 (140) 756
 (44) 1,483
 (184)
Total equity securities 727
 (140) 756
 (44) 1,483
 (184)
Total investment securities AFS $58,552
 $(1,934) $16,623
 $(988) $75,175
 $(2,922)

At September 30, 2017,2018, there were a total of 3471 securities in a continuous unrealized loss position for less than twelve months and 2042 individual securities that were in a continuous unrealized loss position for twelve months or greater.



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The Company reviews its position quarterly and has determined that, at September 30, 2017,2018, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.  The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at September 30, 2017,2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands) Amortized Cost Fair Value Amortized Cost Fair Value
Due in one year or less $4,839
 $4,836
 $3,972
 $3,967
Due after one year to five years 45,064
 44,918
 45,584
 44,327
Due after five years to ten years 54,858
 54,301
 64,109
 62,345
Due after ten years 14,605
 14,775
 18,611
 18,266
Total $119,366
 $118,830
 $132,276
 $128,905

Total gross proceeds from sales of debt securities available for sale for the three and nine months ended September 30, 20172018 were $6,478,000$10,450,000 and $15,443,000,$14,528,000, a decrease from the 20162017 totals of $16,168,000$6,478,000 and $42,180,000.$15,443,000.

The following table represents gross realized gains and losses within the available for sale portfolio:
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Gross realized gains:  
  
  
  
U.S. Government and agency securities $
 $11
 $
 $11
Mortgage-backed securities 
 29
 69
 35
State and political securities 313
 146
 343
 784
Other debt securities 5
 
 5
 258
Financial institution equity securities 
 68
 288
 150
  Non-financial institution equity securities 
 73
 
 217
Total gross realized gains $318
 $327
 $705
 $1,455
         
Gross realized losses:  
  
  
  
U.S. Government and agency securities $
 $2
 $
 $5
Mortgage-backed securities 
 
 
 
Asset-backed securities 
 
 
 
State and political securities 16
 1
 17
 1
Other debt securities 
 26
 51
 189
Financial institution equity securities 
 
 
 
  Non-financial institution equity securities 
 45
 150
 86
Total gross realized losses $16
 $74
 $218
 $281










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The following table represents gross realized gains and losses within the trading portfolios:

 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Available for sale (AFS):        
Gross realized gains:  
  
  
  
  
  
  
  
Financial institution equity securities $3
 $
 $3
 $6
Non-financial institution equity securities 4
 8
 12
 76
Mortgage-backed securities $22
 $
 $27
 $69
State and political securities 
 313
 19
 343
Other debt securities 3
 5
 3
 5
Total gross realized gains $7
 $8
 $15
 $82
 $25
 $318
 $49
 $417
                
Gross realized losses:  
  
  
  
  
  
  
  
State and political securities $47
 $16
 $56
 $17
Other debt securities 
 
 10
 51
Total gross realized losses $47
 $16
 $66
 $68
        
Investment equity securities:        
Gross realized gains:        
Financial institution equity securities $
 $
 $
 $12
 $
 $
 $
 $288
Non-financial institution equity securities 11
 
 17
 16
Total gross realized losses $11
 $
 $17
 $28
        
Gross realized losses:        
Other equity securities $
 $
 $
 $150
        
There were no impairment charges included in gross realized losses for the three and nine months ended September 30, 20172018 and 2016,2017, respectively.

Investment securities with a carrying value of approximately $98,157,000$80,035,000 and $95,199,000$90,286,000 at September 30, 20172018 and December 31, 2016,2017, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At September 30, 2018 and December 31, 2017, we had $1,902,000 and $2,516,000, respectively, in equity securities recorded at fair value. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. At December 31, 2017, net unrealized gains of $679,000 had been recognized in AOCI. On January

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1, 2018, these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net equity securities gains (losses). The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2018:
(In Thousands) Three Months Ended September 30, 2018 Nine months ended September 30, 2018
Net gains (losses) recognized in equity securities during the period $(16) $(44)
Less: Net gains (losses) realized on the sale of equity securities during the period 5
 13
Unrealized gains (losses) recognized in equity securities held at reporting date $(21) $(57)
     

Net gains and losses on trading account securities are as follows for the three and nine months ended September 30, 2018:
  Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2018 2017 2018 2017
Net gains (losses) on sale transactions $9
 $(2) $17
 $7
Net mark-to-market gains (losses) 5
 (2) (5) (9)
Net gain (loss) on trading account securities $14
 $(4) $12
 $(2)
         


Note 6. Loans

Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics.  Loans are segmented based on the underlying collateral characteristics.  Categories include commercial, financial, and agricultural, real estate, and installment loans to individuals.loans.  Real estate loans are further segmented into three categories: residential, commercial, and construction.construction, while installment loans are classified as either consumer automobile loans or other installment loans.

The following table presents the related aging categories of loans, by segment, as of September 30, 20172018 and December 31, 2016:
2017:
 September 30, 2017 September 30, 2018
   Past Due Past Due 90       Past Due Past Due 90    
   30 To 89 Days Or More Non-     30 To 89 Days Or More Non-  
(In Thousands) Current Days & Still Accruing Accrual Total Current Days & Still Accruing Accrual Total
Commercial, financial, and agricultural $174,993
 $6
 $53
 $247
 $175,299
 $185,951
 $305
 $
 $1,244
 $187,500
Real estate mortgage:  
  
  
  
  
  
  
  
  
  
Residential 572,303
 1,929
 26
 1,876
 576,134
 611,989
 3,663
 442
 2,080
 618,174
Commercial 316,493
 1,144
 
 5,873
 323,510
 365,334
 2,427
 
 4,815
 372,576
Construction 29,243
 9
 100
 
 29,352
 39,831
 149
 12
 
 39,992
Installment loans to individuals 85,872
 625
 82
 60
 86,639
Consumer automobile loans 123,943
 499
 58
 88
 124,588
Other consumer installment loans 25,012
 511
 
 
 25,523
 1,178,904
 $3,713
 $261
 $8,056
 1,190,934
 1,352,060
 $7,554
 $512
 $8,227
 1,368,353
Net deferred loan fees and discounts (1,220)  
  
  
 (1,220) 752
  
  
  
 752
Allowance for loan losses (12,933)  
  
  
 (12,933) (13,343)  
  
  
 (13,343)
Loans, net $1,164,751
  
  
  
 $1,176,781
 $1,339,469
  
  
  
 $1,355,762


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 December 31, 2016 December 31, 2017
   Past Due Past Due 90       Past Due Past Due 90    
   30 To 89 Days Or More Non-     30 To 89 Days Or More Non-  
(In Thousands) Current Days & Still Accruing Accrual Total Current Days & Still Accruing Accrual Total
Commercial, financial, and agricultural $145,179
 $785
 $14
 $132
 $146,110
 $178,022
 $663
 $86
 $114
 $178,885
Real estate mortgage:  
  
  
  
  
  
  
  
  
  
Residential 553,053
 9,112
 587
 1,988
 564,740
 588,278
 6,853
 318
 1,628
 597,077
Commercial 296,537
 786
 268
 8,591
 306,182
 325,148
 1,823
 80
 4,968
 332,019
Construction 33,879
 771
 
 
 34,650
 31,547
 116
 20
 
 31,683
Installment loans to individuals 43,008
 202
 1
 45
 43,256
Consumer automobile loans 79,595
 87
 
 32
 79,714
Other consumer installment loans 26,740
 202
 5
 17
 26,964
 1,071,656
 $11,656
 $870
 $10,756
 1,094,938
 1,229,330
 $9,744
 $509
 $6,759
 1,246,342
Net deferred loan fees and discounts (1,257)  
  
  
 (1,257) 272
  
  
  
 272
Allowance for loan losses (12,896)  
  
  
 (12,896) (12,858)  
  
  
 (12,858)
Loans, net $1,057,503
  
  
  
 $1,080,785
 $1,216,744
  
  
  
 $1,233,756
 
Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three and nine months ended September 30, 20172018 and 2016:2017:
  Three Months Ended September 30,
  2018 2017
(In Thousands) 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
Commercial, financial, and agricultural $61
 $51
 $8
 $2
Real estate mortgage:  
  
  
  
Residential 21
 31
 29
 30
Commercial 33
 4
 90
 23
Construction 
 
 
 
Consumer automobile loans 
 
 
 
Other consumer installment loans 2
 1
 1
 1
  $117
 $87
 $128
 $56

  Three Months Ended September 30,
  2017 2016
(In Thousands) 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
Commercial, financial, and agricultural $8
 $2
 $1
 $
Real estate mortgage:  
  
  
  
Residential 29
 30
 57
 68
Commercial 90
 23
 109
 90
Construction 
 
 

 
Installment 1
 1
 
 
  $128
 $56
 $167
 $158
 Nine Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2018 2017
(In Thousands) 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
Commercial, financial, and agricultural $21
 $8
 $5
 $1
 $65
 $52
 $21
 $8
Real estate mortgage:  
  
  
  
  
  
  
  
Residential 123
 81
 113
 95
 89
 65
 123
 81
Commercial 322
 42
 388
 170
 171
 43
 322
 42
Construction 
 
 
 
 
 
 
 
Installment 3
 2
 
 
Consumer automobile loans 
 
 
 
Other consumer installment loans 3
 2
 3
 2
 $469
 $133
 $506
 $266
 $328
 $162
 $469
 $133




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Impaired Loans

Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Banks evaluate such loans for impairment individually and doesdo not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap.  The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value.  The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan.  When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard.  Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis.

Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired.  Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.  Interest income for impaired loans is recorded consistent with the Banks' policy on non-accrual loans.

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of September 30, 20172018 and December 31, 2016:

2017:
 September 30, 2017 September 30, 2018
 Recorded Unpaid Principal Related Recorded Unpaid Principal Related
(In Thousands) Investment Balance Allowance Investment Balance Allowance
With no related allowance recorded:  
  
  
  
  
  
Commercial, financial, and agricultural $1,141
 $1,141
 $
 $1,028
 $1,028
 $
Real estate mortgage:  
  
  
  
  
  
Residential 1,775
 1,775
 
 1,614
 1,614
 
Commercial 2,222
 2,222
 
 2,117
 2,117
 
Installment loans to individuals 
 
 
 
 
 
 5,138
 5,138
 
 4,759
 4,759
 
With an allowance recorded:  
  
  
  
  
  
Commercial, financial, and agricultural 255
 255
 207
 75
 75
 50
Real estate mortgage:  
  
  
  
  
  
Residential 1,022
 1,070
 224
 1,698
 1,747
 121
Commercial 8,433
 8,529
 1,629
 6,205
 6,205
 1,187
Installment loans to individuals 
 
 
 40
 40
 20
 9,710
 9,854
 2,060
 8,018
 8,067
 1,378
Total:  
  
  
  
  
  
Commercial, financial, and agricultural 1,396
 1,396
 207
 1,103
 1,103
 50
Real estate mortgage:  
  
  
  
  
  
Residential 2,797
 2,845
 224
 3,312
 3,361
 121
Commercial 10,655
 10,751
 1,629
 8,322
 8,322
 1,187
Installment loans to individuals 
 
 
 40
 40
 20
 $14,848
 $14,992
 $2,060
 $12,777
 $12,826
 $1,378


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 December 31, 2016 December 31, 2017
 Recorded Unpaid Principal Related Recorded Unpaid Principal Related
(In Thousands) Investment Balance Allowance Investment Balance Allowance
With no related allowance recorded:  
  
  
  
  
  
Commercial, financial, and agricultural $109
 $109
 $
 $1,033
 $1,033
 $
Real estate mortgage:  
  
  
  
  
  
Residential 1,584
 1,584
 
 1,428
 1,428
 
Commercial 1,833
 1,833
 
 1,465
 1,465
 
Installment loans to individuals 
 
 
 3,526
 3,526
 
 3,926
 3,926
 
With an allowance recorded:  
  
  
  
  
  
Commercial, financial, and agricultural 132
 132
 74
 235
 235
 96
Real estate mortgage:  
  
  
  
  
  
Residential 1,893
 1,893
 437
 2,304
 2,353
 367
Commercial 10,425
 10,520
 1,668
 7,981
 8,031
 1,721
Installment loans to individuals 
 
 
 12,450
 12,545
 2,179
 10,520
 10,619
 2,184
Total:  
  
  
  
  
  
Commercial, financial, and agricultural 241
 241
 74
 1,268
 1,268
 96
Real estate mortgage:  
  
  
  
  
  
Residential 3,477
 3,477
 437
 3,732
 3,781
 367
Commercial 12,258
 12,353
 1,668
 9,446
 9,496
 1,721
Installment loans to individuals 
 
 
 $15,976
 $16,071
 $2,179
 $14,446
 $14,545
 $2,184

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three and nine months ended for September 30, 20172018 and 2016:

2017:
 Three Months Ended September 30, Three Months Ended September 30,
 2017 2016 2018 2017
(In Thousands) 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural $394
 $17
 $1
 $346
 $4
 $
 $1,154
 $18
 $51
 $394
 $17
 $1
Real estate mortgage:  
  
  
  
  
  
  
  
  
  
  
  
Residential 3,199
 12
 34
 2,784
 23
 41
 3,703
 40
 31
 3,199
 12
 34
Commercial 12,885
 52
 23
 12,383
 83
 16
 8,547
 97
 4
 12,885
 52
 23
Construction 
 
 
 67
 
 
 
 
 
 
 
 
Installment loans to individuals 
 
 
 
 
 
Consumer automobile 
 
 
 
 
 
Other consumer installment loans 20
 2
 1
 
 
 

 $16,478
 $81
 $58
 $15,580
 $110
 $57
 $13,404
 $155
 $87
 $16,478
 $81
 $58

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 Nine Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2018 2017
(In Thousands) 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural $324
 $24
 $7
 $586
 $12
 $1
 $1,206
 $52
 $52
 $324
 $24
 $7
Real estate mortgage:  
  
  
  
  
  
  
  
  
  
  
  
Residential 3,212
 48
 80
 4,539
 67
 68
 3,901
 107
 65
 3,212
 48
 80
Commercial 12,635
 137
 42
 16,988
 247
 96
 8,988
 191
 43
 12,635
 137
 42
Construction 
 
 
 208
 
 
 
 
 
 
 
 
Installment loans to individuals 8
 
 2
 
 
 
Consumer automobile 
 
 
 
 
 
Other consumer installment loans 10
 3
 1
 8
 
 2
 $16,179
 $209
 $131
 $22,321
 $326
 $165
 $14,095
 $350
 $161
 $16,179
 $209
 $131

Currently, there is $10,000zero funds are committed to be advanced in connection with impaired loans.

Troubled Debt Restructurings

The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.  These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were twofive loan modifications that were considered TDRs completed during the three and nine months ended September 30, 2017.2018. Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 20162018 were as follows:
 Three Months Ended September 30, Three Months Ended September 30,
 2017 2016 2018 2017
(In Thousands, Except Number of Contracts) 
Number
of
Contracts
 Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number
of
Contracts
 Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment 
Number
of
Contracts
 Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number
of
Contracts
 Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural 
 $
 $
 
 $
 $
 1
 $1,028
 $1,028
 
 $
 $
Real estate mortgage:  
  
  
        
  
  
      
Residential 
 
 
 2
 580
 580
 
 
 
 
 $
 $
Commercial 2
 375
 375
 
 
 
 
 
 
 2
 375
 375
Construction 
 
 
 
 
 
 2
 $375
 $375
 2
 $580
 $580
 1
 $1,028
 $1,028
 2
 $375
 $375
            
 Nine Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2018 2017
(In Thousands, Except Number of Contracts) 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
Commercial, financial, and agricultural 
 $
 $
 
 $
 $
 1
 $1,028
 $1,028
 
 $
 $
Real estate mortgage:  
  
  
  
  
  
  
  
  
  
  
  
Residential 
 
 
 4
 922
 922
 3
 169
 169
 
 $
 $
Commercial 2
 375
 375
 1
 838
 838
 1
 106
 106
 2
 375
 375
Construction 
 
 
 
 
 
 2
 $375
 $375
 5
 $1,760
 $1,760
 5
 $1,303
 $1,303
 2
 $375
 $375


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There was one loan modification considered to be a TDR made during the twelve months previous to September 30, 2018 that defaulted during the nine months ended September 30, 2018. This defaulted loan type and recorded investment as of September 30, 2018 is as follows: a residential real estate loan with a recorded investment of $3,000. There were no loan modifications considered to be TDRs made during the twelve months previous to September 30, 2017 that defaulted during the three and nine months ended September 30, 2017.  There were five loan modifications considered TDRs made during the twelve months previous to September 30, 2016 that defaulted during the nine months ended September 30, 2016. The defaulted loan types and recorded investments at September 30, 2016 are as follows: one commercial loan with a recorded investment of $103,000, one commercial real estate loan with a recorded investment of $239,000, and three residential real estate loan with a recorded investment of $173,000.

Troubled debt restructurings amounted to $8,429,000$9,558,000 and $9,180,000$9,048,000 as of September 30, 20172018 and December 31, 2016.2017.

The amount of foreclosed residential real estate held at September 30, 20172018 and December 31, 2016,2017, totaled $458,000$705,000 and $839,000,$143,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 20172018 and December 31, 2016,2017, totaled $458,000$223,000 and $167,000,$378,000, respectively.

Internal Risk Ratings

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated for substandard classification.  Loans in the doubtful category exhibit the same weaknesses found in the substandard loans, however, the weaknesses are more pronounced.  Such loans are static and collection in full is improbable.  However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.  Loans classified loss are considered uncollectible and charge-off is imminent.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. Confirmation of the appropriate risk category is included in the review. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.

The following table presents the credit quality categories identified above as of September 30, 20172018 and December 31, 2016:2017:
  September 30, 2018
  Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment loans  
(In Thousands)  Residential Commercial Construction   Totals
Pass $178,507
 $616,578
 $352,676
 $39,992
 $124,588
 $25,523
 $1,337,864
Special Mention 7,766
 345
 10,247
 
 
 
 18,358
Substandard 1,227
 1,251
 9,653
 
 
 
 12,131
  $187,500
 $618,174
 $372,576
 $39,992
 $124,588
 $25,523
 $1,368,353

  September 30, 2017
  Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals  
(In Thousands)  Residential Commercial Construction  Totals
Pass $170,812
 $572,591
 $300,679
 $29,202
 $86,639
 $1,159,923
Special Mention 775
 1,287
 8,522
 
 
 10,584
Substandard 3,712
 2,256
 14,309
 150
 
 20,427
  $175,299
 $576,134
 $323,510
 $29,352
 $86,639
 $1,190,934

  December 31, 2016
  Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals  
(In Thousands)  Residential Commercial Construction  Totals
Pass $140,497
 $561,440
 $277,916
 $34,493
 $43,256
 $1,057,602
Special Mention 2,943
 740
 11,143
 
 
 14,826
Substandard 2,670
 2,560
 17,123
 157
 
 22,510
  $146,110
 $564,740
 $306,182
 $34,650
 $43,256
 $1,094,938







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  December 31, 2017
  Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment loans  
(In Thousands)  Residential Commercial Construction   Totals
Pass $175,603
 $593,828
 $311,209
 $31,535
 $79,714
 $26,964
 $1,218,853
Special Mention 738
 1,043
 7,337
 
 
 
 9,118
Substandard 2,544
 2,206
 13,473
 148
 
 
 18,371
  $178,885
 $597,077
 $332,019
 $31,683
 $79,714
 $26,964
 $1,246,342

Allowance for Loan Losses

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.

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The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.  The total of the two components represents the Banks' ALL.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.  Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring.  Loans that are collectively evaluated for impairment are grouped into two classes for evaluation.  A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.

For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.  A historical charge-off factor is calculated utilizing a twelve quarter moving average.  However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the economic cycle. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.  Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience.

Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

Activity in the allowance is presented for the three and nine months ended September 30, 20172018 and 2016:2017:
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2018
 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals     Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment    
(In Thousands) Residential Commercial Construction Unallocated Totals Residential Commercial Construction Unallocated Totals
Beginning Balance $1,731
 $5,337
 $3,727
 $172
 $779
 $1,363
 $13,109
 $1,055
 $5,583
 $3,814
 $118
 $1,069
 $317
 $1,078
 $13,034
Charge-offs (68) (155) 
 
 (55) 
 (278) (6) (81) 
 
 (31) (90) 
 (208)
Recoveries 6
 16
 
 2
 18
 
 42
 5
 
 
 2
 9
 21
 
 37
Provision (81) 232
 300
 (26) 144
 (509) 60
 187
 (161) (370) 11
 138
 28
 647
 480
Ending Balance $1,588
 $5,430
 $4,027
 $148
 $886
 $854
 $12,933
 $1,241
 $5,341
 $3,444
 $131
 $1,185
 $276
 $1,725
 $13,343
 
 Three Months Ended September 30, 2016 Three Months Ended September 30, 2017
 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals     Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment    
(In Thousands) Residential Commercial Construction Unallocated Totals Residential Commercial Construction Unallocated Totals
Beginning Balance $1,273
 $5,851
 $4,001
 $143
 $277
 $972
 $12,517
 $1,731
 $5,337
 $3,727
 $172
 $349
 $430
 $1,363
 $13,109
Charge-offs (18) (4) 
 
 (67) 
 (89) (68) (155) 
 
 
 (55) 
 (278)
Recoveries 4
 8
 3
 1
 16
 
 32
 6
 16
 
 2
 1
 17
 
 42
Provision (9) (550) 642
 (29) 111
 93
 258
 (81) 232
 300
 (26) 100
 44
 (509) 60
Ending Balance $1,250
 $5,305
 $4,646
 $115
 $337
 $1,065
 $12,718
 $1,588
 $5,430
 $4,027
 $148
 $450
 $436
 $854
 $12,933
 

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  Nine Months Ended September 30, 2017
  Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals    
(In Thousands)  Residential Commercial Construction  Unallocated Totals
Beginning Balance $1,554
 $5,383
 $4,975
 $178
 $416
 $390
 $12,896
Charge-offs (81) (540) 
 
 (186) 
 (807)
Recoveries 117
 51
 1
 7
 63
 
 239
Provision (2) 536
 (949) (37) 593
 464
 605
Ending Balance $1,588
 $5,430
 $4,027
 $148
 $886
 $854
 $12,933
 Nine Months Ended September 30, 2016 Nine Months Ended September 30, 2018
 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals     Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment    
(In Thousands) Residential Commercial Construction Unallocated Totals Residential Commercial Construction Unallocated Totals
Beginning Balance $1,532
 $5,116
 $4,217
 $160
 $243
 $776
 $12,044
 $1,177
 $5,679
 $4,277
 $155
 $804
 $271
 $495
 $12,858
Charge-offs (167) (11) 
 
 (171) 
 (349) (42) (223) (55) 
 (83) (208) 
 (611)
Recoveries 56
 14
 8
 6
 73
 
 157
 20
 25
 
 7
 12
 57
 
 121
Provision (171) 186
 421
 (51) 192
 289
 866
 86
 (140) (778) (31) 452
 156
 1,230
 975
Ending Balance $1,250
 $5,305
 $4,646
 $115
 $337
 $1,065
 $12,718
 $1,241
 $5,341
 $3,444
 $131
 $1,185
 $276
 $1,725
 $13,343
  Nine Months Ended September 30, 2017
  Commercial, Financial, and Agricultural Real Estate Mortgages Consumer automobile Other consumer installment    
(In Thousands)  Residential Commercial Construction   Unallocated Totals
Beginning Balance $1,554
 $5,383
 $4,975
 $178
 $143
 $273
 $390
 $12,896
Charge-offs (81) (540) 
 
 (17) (169) 
 (807)
Recoveries 117
 51
 1
 7
 1
 62
 
 239
Provision (2) 536
 (949) (37) 323
 270
 464
 605
Ending Balance $1,588
 $5,430
 $4,027
 $148
 $450
 $436
 $854
 $12,933

The shiftsshift in allocation of the loan provision is primarily due to an increaseportfolio growth in residential originations along with a tapering of commercial originations along with the increase in installment loan volume. Within installment loans to individuals is indirect auto lending that was started during 2016.consumer automobile segment and improved credit metrics within the real estate mortgage portfolio.

The Company grants commercial, industrial, residential, and installment loans to customers primarily throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.

The Company has a concentration of the following to gross loans at September 30, 20172018 and 2016:
2017: 
 September 30, September 30,
 2017 2016 2018 2017
Owners of residential rental properties 15.34% 16.64% 14.72% 15.34%
Owners of commercial rental properties 13.45% 14.11% 13.18% 13.45%
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 20172018 and December 31, 2016:

2017:
 September 30, 2017 September 30, 2018
 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals Unallocated   Commercial, Financial, and Agricultural Real Estate Mortgages Consumer Automobile Other consumer installment Unallocated  
(In Thousands) Residential Commercial Construction Totals Residential Commercial Construction Totals
Allowance for Loan Losses:  
  
  
  
  
  
  
  
  
  
  
    
  
  
Ending allowance balance attributable to loans:  
  
  
  
  
  
  
  
  
  
  
    
  
  
Individually evaluated for impairment $207
 $224
 $1,629
 $
 $
 $
 $2,060
 $50
 $121
 $1,187
 $
 $
 $20
 $
 $1,378
Collectively evaluated for impairment 1,381
 5,206
 2,398
 148
 886
 854
 10,873
 1,191
 5,220
 2,257
 131
 1,185
 256
 1,725
 11,965
Total ending allowance balance $1,588
 $5,430
 $4,027
 $148
 $886
 $854
 $12,933
 $1,241
 $5,341
 $3,444
 $131
 $1,185
 $276
 $1,725
 $13,343
                              
Loans:  
  
  
  
  
  
  
  
  
  
  
    
  
  
Individually evaluated for impairment $1,396
 $2,797
 $10,655
 $
 $
 

 $14,848
 $1,103
 $3,312
 $8,322
 $
 $
 $40
 

 $12,777
Collectively evaluated for impairment 173,903
 573,337
 312,855
 29,352
 86,639
 

 1,176,086
 186,397
 614,862
 364,254
 39,992
 124,588
 25,483
 

 1,355,576
Total ending loans balance $175,299
 $576,134
 $323,510
 $29,352
 $86,639
 

 $1,190,934
 $187,500
 $618,174
 $372,576
 $39,992
 $124,588
 $25,523
 

 $1,368,353


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 December 31, 2016 December 31, 2017
 Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals Unallocated   Commercial, Financial, and Agricultural Real Estate Mortgages Consumer Automobile Other consumer installment Unallocated  
(In Thousands) Residential Commercial Construction Totals Residential Commercial Construction Totals
Allowance for Loan Losses:  
  
  
  
  
  
  
  
  
  
  
    
  
  
Ending allowance balance attributable to loans:  
  
  
  
  
  
  
  
  
  
  
    
  
  
Individually evaluated for impairment $74
 $437
 $1,668
 $
 $
 $
 $2,179
 $96
 $367
 $1,721
 $
 $
 $
 $
 $2,184
Collectively evaluated for impairment 1,480
 4,946
 3,307
 178
 416
 390
 10,717
 1,081
 5,312
 2,556
 155
 804
 271
 495
 10,674
Total ending allowance balance $1,554
 $5,383
 $4,975
 $178
 $416
 $390
 $12,896
 $1,177
 $5,679
 $4,277
 $155
 $804
 $271
 $495
 $12,858
                              
Loans:  
  
  
  
  
  
  
  
  
  
  
    
  
  
Individually evaluated for impairment $241
 $3,477
 $12,258
 $
 $
  
 $15,976
 $1,268
 $3,732
 $9,446
 $
 $
 $
  
 $14,446
Collectively evaluated for impairment 145,869
 561,263
 293,924
 34,650
 43,256
  
 1,078,962
 177,617
 593,345
 322,573
 31,683
 79,714
 26,964
  
 1,231,896
Total ending loans balance $146,110
 $564,740
 $306,182
 $34,650
 $43,256
  
 $1,094,938
 $178,885
 $597,077
 $332,019
 $31,683
 $79,714
 $26,964
  
 $1,246,342


Note 7.  Net Periodic Benefit Cost-Defined Benefit Plans

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2016.2017.

The following sets forth the components of the net periodic benefit/cost of the domestic non-contributory defined benefit plan for the three and nine months ended September 30, 2018 and 2017, and 2016, respectively:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Service cost $41
 $17
 $124
 $51
 $
 $41
 $
 $124
Interest cost 188
 193
 566
 579
 177
 188
 530
 566
Expected return on plan assets (262) (251) (787) (753) (272) (262) (820) (787)
Amortization of net loss 45
 39
 129
 117
 41
 45
 125
 129
Net periodic benefit cost $12
 $(2) $32
 $(6)
Net periodic (benefit) cost $(54) $12
 $(165) $32

Employer Contributions

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2016,2017, that it expected to contribute a minimum of $500,000 to its defined benefit plan in 2017.2018.  As of September 30, 2017,2018, there were contributions of $500,000 made to the plan with additional contributions of at least $250,000 anticipated during the remainder of 2017.2018.
 

Note 8.  Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (“Plan”).  The Plan is intended to encourage employee participation in the ownership and economic progress of the Company.  The Plan allows for up to 1,000,000 shares to be purchased by employees.  The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually.  During the nine months ended September 30, 20172018 and 2016,2017, there were 1,6111,725 and 1,617 shares issued under the plan, respectively.







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Note 9.  Off BalanceOff-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 financing needs of its customers.  These financial instruments are primarily comprised of commitments to extend credit, standby letters of credit, and credit exposure from the sale of assets with recourse.  These instruments involve, to varying degrees, elements of credit,

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interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet.  The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.

Financial instruments whose contract amounts represent credit risk are as follows at September 30, 20172018 and December 31, 2016:

2017:
(In Thousands) September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
Commitments to extend credit $270,046
 $263,487
 $249,765
 $264,982
Standby letters of credit 9,923
 6,515
 10,989
 10,406
Credit exposure from the sale of assets with recourse 4,699
 6,341
 5,830
 4,893
 $284,668
 $276,343
 $266,584
 $280,281
 
Commitments to extend credit are legally binding agreements to lend to customers.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity 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, on an extension of credit is based on management’s credit assessment of the counterparty.

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  These instruments are issued primarily to support bid or performance related contracts.  The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management.  Fees earned from the issuance of these letters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.


Note 10.  Fair Value Measurements

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
   
Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
   
Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

This hierarchy requires the use of observable market data when available.








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The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of September 30, 20172018 and December 31, 2016,2017, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

27

  September 30, 2017
(In Thousands) Level I Level II Level III Total
Assets measured on a recurring basis:  
  
  
  
Investment securities, available for sale:  
  
  
  
Mortgage-backed securities $
 $4,530
 $
 $4,530
State and political securities 
 62,327
 
 62,327
Other debt securities 
 51,973
 
 51,973
Financial institution equity securities 12,224
 
 
 12,224
  Non-financial institution equity securities 1,259
 
 
 1,259
Investment securities, trading:        
Financial institution equity securities 63
 
 
 63
   Non-financial institution equity securities 147
 
 
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 December 31, 2016 September 30, 2018
(In Thousands) Level I Level II Level III Total Level I Level II Level III Total
Assets measured on a recurring basis:  
  
  
  
  
  
  
  
Investment securities, available for sale:  
  
  
  
  
  
  
  
Mortgage-backed securities $
 $9,313
 $
 $9,313
 $
 $6,227
 $
 $6,227
Asset-backed securities 
 109
 
 109
State and political securities 
 60,934
 
 60,934
 
 74,663
 
 74,663
Other debt securities 
 51,118
 
 51,118
 
 48,015
 
 48,015
Investment equity securities:        
Financial institution equity securities 10,535
 
 
 10,535
 690
 
 
 690
Non-financial institution equity securities 1,483
 
 
 1,483
Other equity securities 1,212
 
 
 1,212
Investment securities, trading:                
Non-financial institution equity securities 58
 
 
 58
Other equity securities 45
 
 
 45

  December 31, 2017
(In Thousands) Level I Level II Level III Total
Assets measured on a recurring basis:  
  
  
  
Investment securities, available for sale:  
  
  
  
Mortgage-backed securities $
 $4,213
 $
 $4,213
State and political securities 
 56,508
 
 56,508
Other debt securities 
 47,906
 
 47,906
Financial institution equity securities 1,265
 
 
 1,265
  Other equity securities 1,251
 
 
 1,251
Investment securities, trading:        
  Other equity securities 190
 
 
 190

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of September 30, 20172018 and December 31, 2016,2017, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 
 September 30, 2017 September 30, 2018
(In Thousands) Level I Level II Level III Total Level I Level II Level III Total
Assets measured on a non-recurring basis:  
  
  
  
  
  
  
  
Impaired loans $
 $
 $12,788
 $12,788
 $
 $
 $11,399
 $11,399
Other real estate owned 
 
 108
 108
 
 
 705
 705

 December 31, 2016 December 31, 2017
(In Thousands) Level I Level II Level III Total Level I Level II Level III Total
Assets measured on a non-recurring basis:  
  
  
  
  
  
  
  
Impaired loans $
 $
 $13,797
 $13,797
 $
 $
 $12,262
 $12,262
Other real estate owned 
 
 839
 839
 
 
 143
 143










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The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of September 30, 20172018 and December 31, 2016:2017: 
 September 30, 2017 September 30, 2018
 Quantitative Information About Level III Fair Value Measurements Quantitative Information About Level III Fair Value Measurements
(In Thousands) Fair Value Valuation Technique(s) Unobservable Inputs Range Weighted Average Fair Value Valuation Technique(s) Unobservable Inputs Range Weighted Average
Impaired loans $5,753
 Discounted cash flow Temporary reduction in payment amount 0 to (100)% (18)% $6,387
 Discounted cash flow Temporary reduction in payment amount 0 to (70)% (8)%
 7,035
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 0 to (20)% (16)% 5,012
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 0 to (20)% (15)%
Other real estate owned $108
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 (20)% (20)% $705
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 (20)% (20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
 December 31, 2016 December 31, 2017
 Quantitative Information About Level III Fair Value Measurements Quantitative Information About Level III Fair Value Measurements
(In Thousands) Fair Value Valuation Technique(s) Unobservable Inputs Range Weighted Average Fair Value Valuation Technique(s) Unobservable Inputs Range Weighted Average
Impaired loans $5,304
 Discounted cash flow Temporary reduction in payment amount 0 to (70)% (20)% $6,583
 Discounted cash flow Temporary reduction in payment amount 3 to (70)% (4)%
 8,493
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 0 to (20)% (15)% 5,679
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 0 to (20)% (17)%
Other real estate owned $839
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 (20)% (20)% $143
 
Appraisal of collateral (1)
 
Appraisal adjustments (1)
 (20)% (20)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The discounted cash flow valuation technique is utilized to determine the fair value of performing impaired loans, while non-performing impaired loans utilize the appraisal of collateral method.

The significant unobservable inputs used in the fair value measurement of the Company’s impaired loans using the discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default.  Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements.  The probability of default is 0% for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using the appraisal of collateral valuation technique.

The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The significant unobservable input used in the fair value measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique.
 

Note 11. Fair Value of Financial Instruments

The Company is required to disclose fair values for its financial instruments.  Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions can significantly affect the fair values.

Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments.  The Company’s fair values, methods, and assumptions are set forth below for the Company’s other financial instruments.


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As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.

The fair values of the Company’s financial instruments not recorded at fair value on a recurring or nonrecurring basis are as follows at September 30, 20172018 and December 31, 2016:2017:
  Carrying Fair Fair Value Measurements at September 30, 2017
(In Thousands) Value Value Level I Level II Level III
Financial assets:  
  
  
  
  
Cash and cash equivalents $27,747
 $27,747
 $27,747
 $
 $
Investment securities:  
  
  
  
  
Available for sale 132,313
 132,313
 13,483
 118,830
 
Trading 210
 210
 210
 
 
Loans held for sale 1,734
 1,734
 1,734
 
 
Loans, net 1,176,781
 1,210,822
 
 
 1,210,822
Bank-owned life insurance 27,827
 27,827
 27,827
 
 
Accrued interest receivable 4,289
 4,289
 4,289
 
 
           
Financial liabilities:  
  
  
  
  
Interest-bearing deposits $843,166
 $845,103
 $637,841
 $
 $207,262
Noninterest-bearing deposits 310,830
 310,830
 310,830
 
 
Short-term borrowings 41,596
 41,596
 41,596
 
 
Long-term borrowings 80,998
 80,787
 
 
 80,787
Accrued interest payable 483
 483
 483
 
 
  Carrying Fair Fair Value Measurements at September 30, 2018
(In Thousands) Value Value Level I Level II Level III
Financial assets:  
  
  
  
  
Cash and cash equivalents (1) $72,347
 $72,347
 $72,347
 $
 $
Restricted investment in bank stock 17,834
 17,834
 
 17,834
 
Loans held for sale (1) 3,727
 3,727
 3,727
 
 
Loans, net 1,355,762
 1,353,088
 
 
 1,353,088
Bank-owned life insurance (1) 28,472
 28,472
 28,472
 
 
Accrued interest receivable (1) 5,353
 5,353
 5,353
 
 
           
Financial liabilities:  
  
  
  
  
Interest-bearing deposits $897,366
 $863,487
 $597,024
 $
 $266,463
Noninterest-bearing deposits (1) 313,111
 313,111
 313,111
 
 
Short-term borrowings (1) 164,465
 164,465
 164,465
 
 
Long-term borrowings 138,970
 137,028
 
 
 137,028
Accrued interest payable (1) 1,051
 1,051
 1,051
 
 

(1) The financial instrument is carried at cost at September 30, 2018, which approximate the fair value of the instruments
 Carrying Fair Fair Value Measurements at December 31, 2016 Carrying Fair Fair Value Measurements at December 31, 2017
(In Thousands) Value Value Level I Level II Level III Value Value Level I Level II Level III
Financial assets:  
  
  
  
  
  
  
  
  
  
Cash and cash equivalents $43,671
 $43,671
 $43,671
 $
 $
 $27,243
 $27,243
 $27,243
 $
 $
Investment securities:  
  
  
  
  
  
  
  
  
  
Available for sale 133,492
 133,492
 12,018
 121,474
 
 111,143
 111,143
 2,516
 108,627
 
Trading 58
 58
 58
 
 
 190
 190
 190
 
 
Restricted investment in bank stock 13,332
 13,332
 
 13,332
 
Loans held for sale 1,953
 1,953
 1,953
 
 
 1,196
 1,196
 1,196
 
 
Loans, net 1,080,785
 1,088,122
 
 
 1,088,122
 1,233,756
 1,264,584
 
 
 1,264,584
Bank-owned life insurance 27,332
 27,332
 27,332
 
 
 27,982
 27,982
 27,982
 
 
Accrued interest receivable 3,672
 3,672
 3,672
 
 
 4,321
 4,321
 4,321
 
 
                    
Financial liabilities:  
  
  
  
  
  
  
  
  
  
Interest-bearing deposits $791,937
 $789,401
 $571,768
 $
 $217,633
 $843,004
 $838,441
 $611,187
 $
 $227,254
Noninterest-bearing deposits 303,277
 303,277
 303,277
 
 
 303,316
 303,316
 303,316
 
 
Short-term borrowings 13,241
 13,241
 13,241
 
 
 100,748
 100,748
 100,748
 
 
Long-term borrowings 85,998
 86,353
 
 
 86,353
 70,970
 70,280
 
 
 70,280
Accrued interest payable 455
 455
 455
 
 
 502
 502
 502
 
 
Cash and Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and Accrued Interest Payable:
(1) The fair valuefinancial instrument is equal tocarried at cost at September 30, 2018, which approximate the carrying value.

Investment Securities:
The fair value of investment securities available for salethe instruments
The methods and tradingassumptions used by the Company in estimating fair values of financial instruments at September 30, 2018 is equalin accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the available quoted market price. If no quoted market price is available,calculation of the above tables. Prior period fair value is estimated usingcalculations were ran on the quoted market price for similar securities.  Regulatory stocks’assumption of entry pricing and therefore the comparability between the periods above are diminished.

Restricted Stock:
The carrying value of restricted securities such as stock in the Federal Home Loan Bank ("FHLB") and other bankers' bank stock approximates fair value is equal to the carrying value.



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Loans:
Fair values are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, financial, and agricultural, commercial real estate, residential real estate, construction real estate, and installment loans to individuals.  Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.

The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.  The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.

Fair value for significant nonperforming loans is based on recent external appraisals.  If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.

Bank-Owned Life Insurance:
The fair value is equal to the cash surrender value of the life insurance policies.

Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market accounts, is equal to the amount payable on demand.  The fair value of certificates of deposit is based on the discounted value of contractual cash flows.

The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.


Long Term Borrowings:
The fair value of long term borrowings is based on the discounted value of contractual cash flows.

Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the notional amount and the estimated fair value of off-balance sheet items.  The contractual amounts of unfunded commitments and letters of credit are presented in Note 9 (Off Balance(Off-Balance Sheet Risk).
 

Note 12.  Stock Options

In 2014, the Company adopted the 2014 Equity Incentive Plan designed to help the Company attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, and restricted stock may be granted as part of the plan.

On August 27, 2015,As of January 1, 2018, the Company had a total of 93,500 stock options outstanding. During the period ended September 30, 2018, the Company issued 38,75025,000 stock options with a strike price of $42.03 to employees that have a five year vesting period$45.11 and expire ten years from the grant date. On March 24, 2017, the Company issued 70,000149,700 stock options in total,with a strike price of $46.00, to a group of employees, that have a strike price of $44.21.employees. The options granted in 20172018 all expire ten years from the grant date however,however; of the 70,000174,700 grants awarded, 46,25062,700 of the options have a three year vesting period while the remaining 23,750112,000 options vest in five years.

Stock Options Granted
Date Shares Forfeited Outstanding Strike Price Vesting Period Expiration Shares Forfeited Outstanding Strike Price Vesting Period Expiration
August 24, 2018 50,200
 
 50,200
 $46.00
 3 years 10 years
August 24, 2018 99,500
 
 99,500
 46.00
 5 years 10 years
January 5, 2018 12,500
 
 12,500
 45.11
 3 years 10 years
January 5, 2018 12,500
 
 12,500
 45.11
 5 years 10 years
March 24, 2017 46,250
 
 46,250
 $44.21
 3 years 10 years 46,250
 (4,500) 41,750
 44.21
 3 years 10 years
March 24, 2017 23,750
 
 23,750
 44.21
 5 years 10 years 23,750
 
 23,750
 44.21
 5 years 10 years
August 27, 2015 38,750
 (13,750) 25,000
 42.03
 5 years 10 years 38,750
 (15,250) 23,500
 42.03
 5 years 10 years










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A summary of stock option activity is presented below:
 September 30, 2017 September 30, 2016 September 30, 2018 September 30, 2017
 Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Outstanding, beginning of year 26,500
 $42.03
 34,750
 $42.03
 93,500
 $43.59
 26,500
 $42.03
Granted 70,000
 44.21
 
 
 174,700
 45.87
 70,000
 44.21
Exercised 
 
 
 
 
 
 
 
Forfeited (1,500) 42.03
 (3,750) 42.03
 (4,500) 42.76
 (1,500) 42.03
Expired 
 
 
 
 
 
 
 
Outstanding, end of year 95,000
 $43.64
 31,000
 $42.03
Outstanding, end of period 263,700
 $45.11
 95,000
 $43.64
                
Exercisable, end of year 
 $
 
 $
Exercisable, end of period 
 $
 
 $

The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straightline basis
over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the
value of the vested portion of the award at that date. The Company determines the fair value of options granted using the Black-Scholes option-pricing model. The risk-free interest rate is based on the United States Treasury bond with a similar term to the expected life of the options at the grant date. Expected volatility was estimated based on the adjusted historic volatility of the Company’s shares. The expected life was estimated to equal the contractual life of the options. The dividend yield rate was based upon recent historical dividends paid on shares.

Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense, with a corresponding increase in contributed surplus, related to stock options was $8,000$333,000 and $21,000$345,000 for the three and nine month periodsmonths ended September 30, 20172018 compared to $6,000$7,000 and $17,000$14,000 for the same periodsperiod of 2016.2017. As of September 30, 2017,2018, no stock options were exercisable and the weighted average years to expiration were 98.97 years. The fair value of options granted during the three and nine month periods endingmonths ended September 30, 20172018 was approximately zero$2,800,000 and $2,173,000 respectively$2,048,000 or zero$18.70 and $31.04$11.72 per award.award, respectively. Total unrecognized compensation cost for non-vested shares, $99,000,options was $1,806,000 and will be recognized over their weighted average remaining vesting period of 3.563.91 years.


Note 13.  Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 using the modified retrospective method, and applied the guidance to all contracts in scope that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

The core principle of Topic 606, Revenue from Contracts with Customers, is that an entity recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. Topic 606 requires entities to exercise more judgment when considering the terms of a contract than under Topic 605, Revenue Recognition. Topic 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope.

Topic 606 does not apply to revenue associated with interest income on financial instruments, including loans and securities. Additionally, certain noninterest income streams such as certain credit and debit card fees, income from bank owned life insurance, and gain and losses on sales of investment securities are out of scope of Topic 606.

Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, merchant income, wire transfer income, check cashing fees, check printing fees, safe deposit box rental fees, life insurance and brokerage commissions. These revenue streams are largely transactional based and revenue is recognized upon completion of transaction.





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Principal versus Agent Considerations

When more than one party is involved in providing goods or services to a customer, Topic 606 requires the Company to determine whether it is the principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is a principal and therefore records revenue on a gross basis if it controls a promised good or service before transferring that good or service to the customer. An entity is an agent and records as revenue the net amount it retains for its agency services if its role is to arrange for another entity to provide the goods or services. The Company most commonly acts as a principal and records revenue on a gross basis, except in certain circumstances. As an example, revenues earned from interchange fees, in which the Company acts as an agent, are recorded as non-interest income, net of the related expenses paid to the principal. Brokerage and insurance commissions are recognized when The M Group's services to the broker dealer and investment representative are complete.

Debit Card Fees

Interchange fees are one source of debit and credit card income that is comprised of an amount merchants pay card-issuing banks for the processing of their electronic transactions as a form of payment. ATM service charges, check card usage, and POS debit card transactions generate interchange and debit card income. Per Topic 606 interchange and debit card transaction fees are reported net of related network costs. See Note 1 - Newly Adopted Accounting Standards. Prior to the adoption of Topic 606, non-interest expense included network costs. Interchange and debit card transaction fees for the three and nine months ended September 30, 2018 reported on a net basis totaled $359,000 and $1,065,000; for the corresponding periods of 2017 such amounts were $328,000 and $939,000, respectively. The below table compares gross interchange and debit card transaction fees net network costs for 2018 and 2017:
  Three Months Ended September 30, Nine months ended September 30,
(In Thousands) 2018 2017 2018 2017
Debit card transaction fees $489
 $514
 $1,549
 $1,449
Other processing service fees 69
 57
 197
 179
Gross interchange and card based transaction fees 558
 571
 1,746
 1,628
Network costs 199
 243
 681
 689
Net interchange and card based transaction fees $359
 $328
 $1,065
 $939


Note 13.14.  Reclassification of Comparative Amounts

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.


CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact.  The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein:  (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the  increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (vi) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 20162017 and in other filings made by the Company under the Securities Exchange Act of 1934.


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You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise.  The Company undertakes

33

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no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

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

EARNINGS SUMMARY

Comparison of the Three and Nine Months Ended September 30, 20172018 and 20162017

Summary Results

Net income for the three and nine months ended September 30, 20172018 was $3,284,000$3,826,000 and $10,514,000 compared to $3,059,000$3,284,000 and $9,057,000 for the same periodperiods of 2016 as2017, including the effects of a decrease in after-tax securities gains increased $25,000of $216,000 (from a gain of $172,000$197,000 to a loss of $197,000)$19,000) for the three-month periods and a decrease in after-tax securities gains of $359,000 (from a gain of $320,000 to a loss of $39,000 for the nine-month periods). Basic and diluted earnings per share for the three and nine months ended September 30, 20172018 was $0.82 and 2016 were$2.24 compared to $0.70 and $0.65, respectively.$1.92, respectively, for 2017. Return on average assets and return on average equity were 0.93%0.96% and 9.43%10.94% for the three months ended September 30, 20172018 compared to 0.91%0.93% and 8.69%9.43% for the corresponding period of 2016. Net income from core operations (“operating earnings”) was $3,087,000 for the three months ended September 30, 2017 compared to $2,887,000 for the same period of 2016. Basic and diluted operating earnings per share for the three months ended September 30, 2017 were $0.66 compared to $0.61 basic and diluted for the corresponding period of 2016. Impacting the level of operating earnings were several factors including the continued shift of earning assets from the investment portfolio to the loan portfolio as the balance sheet is actively managed to reduce market risk and interest rate risk in a rising rate environment. In addition, the effective tax rate has increased due to the conclusion of the ten year tax credit generation period of several low income elderly housing projects in our market footprint in which the company participates.

Net income for the nine months ended September 30, 2017 was $9,057,000 compared to $9,529,000 for the same period of 2016 as after-tax securities gains decreased $490,000 (from a gain of $810,000 to a gain of $320,000). Basic and diluted earnings per share for the nine months ended September 30, 2017 and 2016 were $1.92 and $2.01, respectively.2017. Return on average assets and return on average equity were 0.87%0.91% and 8.69%10.19% for the nine months ended September 30, 20172018 compared to 0.95% and 9.14% for the corresponding period2017 returns of 2016.0.87% and 8.69%. Net income from core operations (“operatingadjusted earnings”) increasedwas $3,845,000 for the three months ended September 30, 2018 and $10,553,000 for the nine months end September 30, 2018 compared to $3,087,000 and $8,737,000 for the same periods of 2017. Basic and diluted adjusted earnings per share for the three and nine months ended September 30, 20172018 were $0.82 and $2.24 compared to $8,719,000 for the same period of 2016. Basic$0.66 and diluted operating earnings per share for the nine months ended September 30, 2017 were $1.85 compared to $1.84 basic and diluted for the corresponding periodperiods of 2016.2017.

Management uses the non-GAAP measure of net income from core operations, or operatingadjusted earnings, in its analysis of the Company’s performance.  This measure, as used by the Company, adjusts net income by excluding significant gains or losses that are unusual in nature.  Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses.  For purposes of this Quarterly Report on Form 10-Q, net income from core operations, or operatingadjusted earnings, means net income adjusted to exclude after-tax net securities gains or losses and bank-owned life insurance gains on death benefit.  These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Reconciliation of GAAP and Non-GAAP Financial Measures
(Dollars in Thousands, Except Per Share Data) Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016 2018 2017 2018 2017
GAAP net income $3,284
 $3,059
 $9,057
 $9,529
 $3,826
 $3,284
 $10,515
 $9,057
Less: net securities gains, net of tax 197
 172
 320
 810
Non-GAAP operating earnings $3,087
 $2,887
 $8,737
 $8,719
Less: net securities (losses) gains, net of tax (19) 197
 (39) 320
Non-GAAP adjusted earnings $3,845
 $3,087
 $10,554
 $8,737
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Return on average assets (ROA) 0.93% 0.91% 0.87% 0.95%
Less: net securities gains, net of tax 0.05% 0.05% 0.03% 0.08%
Non-GAAP operating ROA 0.88% 0.86% 0.84% 0.87%
  Three Months Ended September 30, Nine Months Ended September 30,
  2018 2017 2018 2017
Return on average assets (ROA) 0.96% 0.93% 0.91% 0.87%
Less: net securities (losses) gains, net of tax % 0.05% % 0.03%
Non-GAAP adjusted ROA 0.96% 0.88% 0.91% 0.84%
  Three Months Ended September 30, Nine Months Ended September 30,
  2018 2017 2018 2017
Return on average equity (ROE) 10.94 % 9.43% 10.19 % 8.69%
Less: net securities (losses) gains, net of tax (0.05)% 0.56% (0.04)% 0.31%
Non-GAAP adjusted ROE 10.99 % 8.87% 10.23 % 8.38%

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  Three Months Ended September 30, Nine Months Ended September 30,
  2018 2017 2018 2017
Basic earnings per share (EPS) $0.82
 $0.70
 $2.24
 $1.92
Less: net securities (losses) gains, net of tax 
 0.04
 
 0.07
Non-GAAP basic operating EPS $0.82
 $0.66
 $2.24
 $1.85
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Return on average equity (ROE) 9.43% 8.69% 8.69% 9.14%
Less: net securities gains, net of tax 0.56% 0.49% 0.31% 0.78%
Non-GAAP operating ROE 8.87% 8.20% 8.38% 8.36%
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Basic earnings per share (EPS) $0.70
 $0.65
 $1.92
 $2.01
Less: net securities gains, net of tax 0.04
 0.04
 0.07
 0.17
Non-GAAP basic operating EPS $0.66
 $0.61
 $1.85
 $1.84
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Dilutive EPS $0.70
 $0.65
 $1.92
 $2.01
Less: net securities gains, net of tax 0.04
 0.04
 0.07
 0.17
Non-GAAP dilutive operating EPS $0.66
 $0.61
 $1.85
 $1.84
  Three Months Ended September 30, Nine Months Ended September 30,
  2018 2017 2018 2017
Diluted EPS $0.82
 $0.70
 $2.24
 $1.92
Less: net securities (losses) gains, net of tax 
 0.04
 
 0.07
Non-GAAP diluted operating EPS $0.82
 $0.66
 $2.24
 $1.85
 

Interest and Dividend Income

Interest and dividend income for the three months ended September 30, 20172018 increased to $12,948,000$15,198,000 compared to $11,660,000$12,948,000 for the same period of 2016.2017. Current year to date interest and dividend income for 2018 increased $5,671,000 from the prior year level of $36,839,000 to $42,510,000. Loan portfolio income increased due to the impact of portfolio growth, primarily in home equity products and indirect auto lending. The loan portfolioInvestment securities income increase was offset by a decrease in investment portfolio interest due to a slightremained flat for the nine month period as the decline in the average taxable equivalent yield asbalance of the duration in the investment portfolio continues to be shortened in order to reduce interest rate and market risk in the future. This is being undertaken primarily through the sale of long-term municipal bonds that have a maturity date of 2025 or later and securities with a call date within the next five years.

During the nine months ended September 30, 2017, interest and dividend income was $36,839,000,offset by an increase of $1,783,000 over the same period of 2016. Interest income on the loan portfolio increased as the growth in the portfolio was countered by a 2 bp decline in average yield. The investment portfolio interest income decreased as the portfolio size was decreased in order to reduce interest rate and market risk, while the yield on the investment portfolio declined 27 bp.

Interest and dividend income composition for the three and nine months ended September 30, 20172018 and 20162017 was as follows:
 Three Months Ended Three Months Ended
 September 30, 2017 September 30, 2016 Change September 30, 2018 September 30, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Loans including fees $11,906
 91.95% $10,541
 90.40% $1,365
 12.95
% $13,982
 92.00% $11,906
 91.95% $2,076
 17.44
%
Investment securities:  
    
    
  
   
    
    
  
 
Taxable 553
 4.27 601
 5.15 (48) (7.99)  713
 4.69 553
 4.27 160
 28.93
 
Tax-exempt 319
 2.46 329
 2.82 (10) (3.04)  207
 1.36 319
 2.46 (112) (35.11) 
Dividend and other interest income 170
 1.32 189
 1.63 (19) (10.05)  296
 1.95 170
 1.32 126
 74.12
 
Total interest and dividend income $12,948
 100.00% $11,660
 100.00% $1,288
 11.05
% $15,198
 100.00% $12,948
 100.00% $2,250
 17.38
%
  Nine Months Ended 
  September 30, 2017 September 30, 2016 Change 
(In Thousands) Amount % Total Amount % Total Amount % 
Loans including fees $33,642
 91.32% $31,362
 89.46% $2,280
 7.27
%
Investment securities:  
     
     
  
 
Taxable 1,665
 4.52  1,825
 5.21  (160) (8.77) 
Tax-exempt 940
 2.55  1,203
 3.43  (263) (21.86) 
Dividend and other interest income 592
 1.61  666
 1.90  (74) (11.11) 
Total interest and dividend income $36,839
 100.00% $35,056
 100.00% $1,783
 5.09
%

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  Nine Months Ended 
  September 30, 2018 September 30, 2017 Change 
(In Thousands) Amount % Total Amount % Total Amount % 
Loans including fees $39,172
 92.15% $33,642
 91.32% $5,530
 16.44
%
Investment securities:  
     
     
  
 
Taxable 1,898
 4.46  1,665
 4.52  233
 13.99
 
Tax-exempt 678
 1.59  940
 2.55  (262) (27.87) 
Dividend and other interest income 762
 1.80  592
 1.61  170
 28.72
 
Total interest and dividend income $42,510
 100.00% $36,839
 100.00% $5,671
 15.39
%

Interest Expense

Interest expense for the three months ended September 30, 20172018 increased $83,000$1,447,000 to $1,496,000$2,943,000 compared to $1,413,000$1,496,000 for the same period of 2016.2017 with the nine months ended September 30, 2018 increasing by $3,172,000 to $7,399,000 compared to the 2017 level of $4,227,000. The increase in interest expense is the result of growth within the deposit portfolio and the lengthening of the time deposit portfolio as part of a strategy to build balance sheet protection in a rising rate environment, offset by a decrease inenvironment. In addition, short and long-term borrowing utilization.borrowings have been utilized to assist with the funding of the loan portfolio growth.

Interest expense for the nine months ended September 30, 2017 increased $81,000 from the same period




35

Table of 2016. The reasons noted for the three month period comparison also apply to the nine month period.Contents


Interest expense composition for the three and nine months ended September 30, 20172018 and 20162017 was as follows:
 Three Months Ended Three Months Ended
 September 30, 2017 September 30, 2016 Change September 30, 2018 September 30, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Deposits $1,058
 70.72% $909
 64.33% $149
 16.39
% $1,659
 56.37% $1,058
 70.72% $601
 56.81%
Short-term borrowings 31
 2.07 7
 0.50 24
 342.86
  528
 17.94 31
 2.07 497
 1,603.23 
Long-term borrowings 407
 27.21  497
 35.17  (90) (18.11)  756
 25.69  407
 27.21  349
 85.75 
Total interest expense $1,496
 100.00% $1,413
 100.00% $83
 5.87
% $2,943
 100.00% $1,496
 100.00% $1,447
 96.72%
 Nine Months Ended Nine Months Ended
 September 30, 2017 September 30, 2016 Change September 30, 2018 September 30, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Deposits $2,968
 70.22% $2,624
 63.29% $344
 13.11
% $4,371
 59.08% $2,968
 70.22% $1,403
 47.27%
Short-term borrowings 39
 0.92 41
 0.99 (2) (4.88)  1,004
 13.57 39
 0.92 965
 2,474.36 
Long-term borrowings 1,220
 28.86  1,481
 35.72  (261) (17.62)  2,024
 27.35  1,220
 28.86  804
 65.90 
Total interest expense $4,227
 100.00% $4,146
 100.00% $81
 1.95
% $7,399
 100.00% $4,227
 100.00% $3,172
 75.04%

Net Interest Margin

The net interest margin (“NIM”) for the three and nine months ended September 30, 20172018 was 3.57%3.30% and 3.31% compared to 3.37%3.57% and 3.47% for the corresponding period of 2016.2017.  The decrease in the net interest margin was driven by an increase in the cost of interest-bearing liabilities of 41 basis points ("bps") for the three month period and 31 bps for the nine month period primarily from an increase in the rate paid on time deposits as the liabilities are lengthened. The impact of the increased cost of funds was limited by an increase in the yield on earning assets of 6 bps and 8 bps for the three and nine month periods. The increase in the yield on earning assets was driven by an increase in the loan portfolio yield in conjunction with an increase in the average loan portfolio of $193,866,000 and $177,802,000 million respectively. The impact of the decreasing investment portfolio balance was offset by 9.68% growth in the balance of the average loan portfolio from September 30, 20162017 to September 30, 2017.2018. The primary funding for the loan growth was primarily funded by an increase in coreaverage borrowings along with growth in total deposits. TheseCore deposits represent a lower cost funding source than time deposits and comprise 81.94%77.63% of total deposits at September 30, 20172018 compared to 79.60%81.94% at September 30, 2016.2017. Limiting the positive impact on the net interest margin caused by the growth in core deposits was the lengthening of the time deposit portfolio.

The NIM for the nine months ended September 30, 2017 was 3.47% compared to 3.45% for the same period of 2016.  The impact of the decreasing investment portfolio balance was partially offset by growth in the balance of the average loan portfolio from September 30, 2016 to September 30, 2017. The rate on interest-bearing liabilities decreased slightly as the usage of borrowed funds declined.

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The following is a schedule of average balances and associated yields for the three and nine months ended September 30, 20172018 and 2016:

2017:
 AVERAGE BALANCES AND INTEREST RATES AVERAGE BALANCES AND INTEREST RATES
 Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Three Months Ended September 30, 2018 Three Months Ended September 30, 2017
(In Thousands) Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate
Assets:  
  
  
  
  
  
  
  
  
  
  
  
Tax-exempt loans (3)
 $53,850
 $494
 3.64% $45,715
 $452
 3.93% $75,182
 $559
 2.95% $53,850
 $494
 3.64%
All other loans 1,105,615
 11,580
 4.16% 1,011,393
 10,243
 4.03% 1,278,149
 13,541
 4.20% 1,105,615
 11,580
 4.16%
Total loans (2)
 1,159,465
 12,074
 4.13% 1,057,108
 10,695
 4.02% 1,353,331
 14,100
 4.13% 1,159,465
 12,074
 4.13%
                        
Taxable securities 83,106
 674
 3.24% 93,893
 725
 3.09% 104,321
 991
 3.80% 83,106
 674
 3.24%
Tax-exempt securities (3)
 53,320
 483
 3.62% 49,231
 498
 4.05% 34,444
 262
 3.04% 53,320
 483
 3.62%
Total securities 136,426
 1,157
 3.39% 143,124
 1,223
 3.42% 138,765
 1,253
 3.61% 136,426
 1,157
 3.39%
                        
Interest-bearing deposits 14,085
 49
 1.38% 48,125
 65
 0.54% 3,403
 18
 2.10% 14,085
 49
 1.38%
                        
Total interest-earning assets 1,309,976
 13,280
 4.02% 1,248,357
 11,983
 3.82% 1,495,499
 15,371
 4.08% 1,309,976
 13,280
 4.02%
                        
Other assets 101,035
  
  
 101,312
  
  
 99,132
  
  
 101,035
  
  
                        
Total assets $1,411,011
  
  
 $1,349,669
  
  
 $1,594,631
  
  
 $1,411,011
  
  
                        
Liabilities and shareholders’ equity:  
  
  
  
  
  
  
  
  
  
  
  
Savings $157,341
 15
 0.04% $151,464
 15
 0.04% $166,181
 17
 0.04% $157,341
 15
 0.04%
Super Now deposits 203,531
 140
 0.27% 184,440
 107
 0.23% 225,677
 264
 0.46% 203,531
 140
 0.27%
Money market deposits 284,155
 267
 0.37% 245,643
 170
 0.28% 241,977
 314
 0.51% 284,155
 267
 0.37%
Time deposits 206,563
 636
 1.22% 223,082
 617
 1.10% 263,399
 1,064
 1.60% 206,563
 636
 1.22%
Total interest-bearing deposits 851,590
 1,058
 0.49% 804,629
 909
 0.45% 897,234
 1,659
 0.73% 851,590
 1,058
 0.49%
                        
Short-term borrowings 19,127
 31
 0.64% 15,748
 7
 0.18% 99,867
 528
 2.07% 19,127
 31
 0.64%
Long-term borrowings 81,107
 407
 1.96% 91,025
 497
 2.14% 134,731
 756
 2.19% 81,107
 407
 1.96%
Total borrowings 100,234
 438
 1.71% 106,773
 504
 1.85% 234,598
 1,284
 2.14% 100,234
 438
 1.71%
                        
Total interest-bearing liabilities 951,824
 1,496
 0.62% 911,402
 1,413
 0.61% 1,131,832
 2,943
 1.03% 951,824
 1,496
 0.62%
                        
Demand deposits 304,244
  
  
 281,586
  
  
 305,707
  
  
 304,244
  
  
Other liabilities 15,708
  
  
 15,916
  
  
 17,156
  
  
 15,708
  
  
Shareholders’ equity 139,235
  
  
 140,765
  
  
 139,936
  
  
 139,235
  
  
                        
Total liabilities and shareholders’ equity $1,411,011
  
  
 $1,349,669
  
  
 $1,594,631
  
  
 $1,411,011
  
  
Interest rate spread  
  
 3.40%  
  
 3.21%  
  
 3.05%  
  
 3.40%
Net interest income/margin  
 $11,784
 3.57%  
 $10,570
 3.37%  
 $12,428
 3.30%  
 $11,784
 3.57%

1.             Information on this table has been calculated using average daily balance sheets to obtain average balances.
2.             Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.
3.             Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% for 2018 and 34% tax rate.for 2017.

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Table of Contents


 AVERAGE BALANCES AND INTEREST RATES AVERAGE BALANCES AND INTEREST RATES
 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017
(In Thousands) Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate Average Balance (1) Interest Average Rate
Assets:  
  
  
  
  
  
  
  
  
  
  
  
Tax-exempt loans (3) $46,752
 $1,315
 3.76% $49,204
 $1,432
 3.89% $75,389
 $1,689
 2.99% $46,752
 $1,315
 3.76%
All other loans 1,081,148
 32,774
 4.05% 999,685
 30,417
 4.06% 1,230,313
 37,838
 4.11% 1,081,148
 32,774
 4.05%
Total loans (2) 1,127,900
 34,089
 4.04% 1,048,889
 31,849
 4.06% 1,305,702
 39,527
 4.05% 1,127,900
 34,089
 4.04%
                        
Taxable securities 85,417
 2,039
 3.18% 95,652
 2,344
 3.27% 93,944
 2,621
 3.72% 85,417
 2,039
 3.18%
Tax-exempt securities 50,972
 1,424
 3.72% 56,291
 1,823
 4.32% 38,940
 858
 2.94% 50,972
 1,424
 3.72%
Total securities 136,389
 3,463
 3.39% 151,943
 4,167
 3.66% 132,884
 3,479
 3.49% 136,389
 3,463
 3.39%
                        
Interest-bearing deposits 27,901
 218
 1.04% 38,411
 147
 0.51% 2,872
 39
 1.82% 27,901
 218
 1.04%
                        
Total interest-earning assets 1,292,190
 37,770
 3.91% 1,239,243
 36,163
 3.90% 1,441,458
 43,045
 3.99% 1,292,190
 37,770
 3.91%
                        
Other assets 102,181
  
  
 99,295
  
  
 97,930
  
  
 102,181
  
  
                        
Total assets $1,394,371
  
  
 $1,338,538
  
  
 $1,539,388
  
   $1,394,371
  
  
                        
Liabilities and shareholders’ equity:  
  
  
  
  
  
  
�� 
 

 

  
  
Savings $157,396
 45
 0.04% $151,158
 43
 0.04% $164,828
 49
 0.04% $157,396
 45
 0.04%
Super Now deposits 198,560
 377
 0.25% 190,190
 356
 0.25% 229,159
 713
 0.42% 198,560
 377
 0.25%
Money market deposits 278,436
 713
 0.34% 234,918
 471
 0.27% 240,751
 814
 0.45% 278,436
 713
 0.34%
Time deposits 207,331
 1,833
 1.18% 221,676
 1,754
 1.06% 251,071
 2,795
 1.49% 207,331
 1,833
 1.18%
Total interest-bearing deposits 841,723
 2,968
 0.47% 797,942
 2,624
 0.44% 885,809
 4,371
 0.66% 841,723
 2,968
 0.47%
                        
Short-term borrowings 13,714
 39
 0.26% 20,273
 41
 0.27% 72,873
 1,004
 1.82% 13,714
 39
 0.26%
Long-term borrowings 79,881
 1,220
 2.01% 91,025
 1,481
 2.14% 124,483
 2,024
 2.14% 79,881
 1,220
 2.01%
Total borrowings 93,595
 1,259
 1.76% 111,298
 1,522
 1.80% 197,356
 3,028
 2.02% 93,595
 1,259
 1.76%
                        
Total interest-bearing liabilities 935,318
 4,227
 0.60% 909,240
 4,146
 0.61% 1,083,165
 7,399
 0.91% 935,318
 4,227
 0.60%
                        
Demand deposits 301,567
  
  
 274,488
  
  
 300,604
  
  
 301,567
  
  
Other liabilities 18,455
  
  
 15,775
  
  
 18,070
  
  
 18,455
  
  
Shareholders’ equity 139,031
  
  
 139,035
  
  
 137,549
  
  
 139,031
  
  
                        
Total liabilities and shareholders’ equity $1,394,371
  
  
 $1,338,538
  
  
 $1,539,388
  
  
 $1,394,371
  
  
Interest rate spread  
  
 3.31%  
  
 3.29%  
  
 3.08%  
  
 3.31%
Net interest income/margin  
 $33,543
 3.47%  
 $32,017
 3.45%  
 $35,646
 3.31%  
 $33,543
 3.47%

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 20172018 and 2016:

2017:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016 2018 2017 2018 2017
Total interest income $12,948
 $11,660
 $36,839
 $35,056
 $15,198
 $12,948
 $42,510
 $36,839
Total interest expense 1,496
 1,413
 4,227
 4,146
 2,943
 1,496
 7,399
 4,227
Net interest income 11,452
 10,247
 32,612
 30,910
 12,255
 11,452
 35,111
 32,612
Tax equivalent adjustment 332
 323
 931
 1,107
 173
 332
 535
 931
Net interest income (fully taxable equivalent) $11,784
 $10,570
 $33,543
 $32,017
 $12,428
 $11,784
 $35,646
 $33,543
 

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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, 20172018 and 2016:

2017:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
 2017 vs. 2016 2017 vs. 2016 2018 vs. 2017 2018 vs. 2017
 Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to Increase (Decrease) Due to
(In Thousands) Volume Rate Net Volume Rate Net Volume Rate Net Volume Rate Net
Interest income:  
  
  
  
  
  
  
  
  
  
  
  
Tax-exempt loans $76
 $(34) $42
 $(70) $(47) $(117) $170
 $(105) $65
 $548
 $(174) $374
All other loans 993
 344
 1,337
 2,384
 (27) 2,357
 1,847
 114
 1,961
 4,573
 491
 5,064
Taxable investment securities (86) 35
 (51) (242) (63) (305) 190
 127
 317
 215
 367
 582
Tax-exempt investment securities 40
 (55) (15) (163) (236) (399) (152) (69) (221) (300) (266) (566)
Interest bearing deposits (68) 52
 (16) (27) 98
 71
 (48) 17
 (31) (130) (49) (179)
Total interest-earning assets 955
 342
 1,297
 1,882
 (275) 1,607
 2,007
 84
 2,091
 4,906
 369
 5,275
                        
Interest expense:  
  
  
  
  
  
  
  
  
  
  
  
Savings deposits 
 
 
 2
 
 2
 2
 
 2
 2
 2
 4
Super Now deposits 12
 21
 33
 15
 6
 21
 17
 107
 124
 66
 270
 336
Money market deposits 31
 66
 97
 99
 143
 242
 (43) 90
 47
 (60) 161
 101
Time deposits (47) 66
 19
 (68) 147
 79
 201
 227
 428
 431
 531
 962
Short-term borrowings 2
 22
 24
 (2) 
 (2) 323
 174
 497
 406
 559
 965
Long-term borrowings (51) (39) (90) (176) (85) (261) 297
 52
 349
 721
 83
 804
Total interest-bearing liabilities (53) 136
 83
 (130) 211
 81
 797
 650
 1,447
 1,566
 1,606
 3,172
Change in net interest income $1,008
 $206
 $1,214
 $2,012
 $(486) $1,526
 $1,210
 $(566) $644
 $3,340
 $(1,237) $2,103


Provision for Loan Losses

The provision for loan losses is based upon management’s quarterly review of the loan portfolio.  The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served.  An external independent loan review is also performed annually for the Banks.  Management remains committed to an aggressive program of problem loan identification and resolution.

The allowance for loan losses is determined by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined.  Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience.  In addition, management considers industry standards and trends with respect to non-performing loans and its knowledge and experience with specific lending segments.

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at September 30, 2017,2018, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations.  A downturn in the local economy, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Banks' loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

When determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

The allowance for loan losses increased slightly from $12,896,000$12,858,000 at December 31, 20162017 to $12,933,000$13,343,000 at September 30, 2017.2018. The increase in the allowance for loan losses was driven by growthan increases in the home equity and indirect auto segments of the loan portfolio. In addition, the increase was limited due to the payoff of a large commercial loan that had a significant specific allocation within the allowance for loan losses. The majority of the loans charged-off had a specific allowance within the allowance for losses.  At September 30, 20172018 and December 31, 2016,2017, the allowance for loan losses to total loans was 1.09%0.97% and 1.18%1.03%, respectively.

The provision for loan losses totaled $480,000 and $975,000 for the three and nine months ended September 30, 2018 and the respective amounts for the corresponding 2017 periods were $60,000 and $605,000.  The increase in the provision for loan losses

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The provision for loan losses totaled $60,000 and $258,000 for the three months ended September 30, 2017 and 2016 and $605,000 and $866,000 for the nine months ended September 30, 2017 and 2016, respectively.  The amount of2018 compared to the provision for loan lossesprior periods was primarily due to the result ofgrowth in the loan growth offset by minimal net charge-offs.portfolio.

Nonperforming loans decreasedincreased to $8,739,000 at September 30, 2018 from $8,317,000 at September 30, 2017 from $11,530,000 at September 30, 2016.2017. The majority of nonperforming loans are centered on loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses. The ratio of nonperforming loans to total loans was 0.70%0.64% and 1.08%0.69% at September 30, 20172018 and 2016,2017, respectively, and the ratio of the allowance for loan losses to nonperforming loans was 155.50%151.28% and 110.30%155.50% at September 30, 20172018 and 2016,2017, respectively. Internal loan review and analysis coupled with loan growth dictated a provision for loan losses of $605,000$975,000 for the nine months ended September 30, 2017.   

2018
.
The following is a table showing total nonperforming loans as of:

  Total Nonperforming Loans
(In Thousands) 90 Days Past Due
Non-accrual
Total
September 30, 2017 $261
 $8,056
 $8,317
June 30, 2017 1,329
 11,169
 12,498
March 31, 2017 141
 10,730
 10,871
December 31, 2016 870
 10,756
 11,626
September 30, 2016 114
 11,416
 11,530
  Total Nonperforming Loans
(In Thousands) 90 Days Past Due
Non-accrual
Total
September 30, 2018 $512
 $8,227
 $8,739
June 30, 2018 463
 6,669
 7,132
March 31, 2018 446
 7,195
 7,641
December 31, 2017 509
 6,759
 7,268
September 30, 2017 261
 8,056
 8,317
 
Non-interest Income

Total non-interest income for the three months ended September 30, 20172018 compared to the same period in 20162017 decreased $342,000$151,000 to $2,740,000.$2,589,000 and decreased by $1,123,000 for the nine months ended September 30, 2018 to $7,032,000. Excluding net securities gains, non-interest income for the three and nine months ended September 30, 20172018 increased $171,000 and decreased $379,000$589,000, respectively, compared to the same periodperiods in 2016.2017. The decrease in gain on sale of loans was driven by a shift in product mix and decreased volume. The changes in insurance and brokerage commissions are due to a change in the product mix of consumer purchases. Debit card fees decreasedThe fluctuation in other income consists primarily due to decreased usage of debit cards.

Total non-interest incomeincreases in loans sold on the secondary market. Debit cards fees as reported under ASC 606 for the three and nine months ended September 30, 2018 was reported on a net basis while the corresponding period for 2017 compared to the same periodwas reported in 2016 decreased $1,102,000. Excluding net securities gains, non-interest income decreased $359,000 compared the 2016 period. The reasons notedaccordance with ASC 605 on a gross basis. See note 13 for the three month period comparison also apply to the nine month period.further information.

Non-interest income composition for the three and nine months ended September 30, 20172018 and 20162017 was as follows:
 Three Months Ended Three Months Ended
 September 30, 2017 September 30, 2016 Change September 30, 2018 September 30, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Service charges $550
 20.07 % $585
 18.98% $(35) (5.98)% $645
 24.92 % $550
 20.07 % $95
 17.27 %
Net securities gains, available for sale 302
 11.02
 253
 8.21
 49
 19.37
Net securities (losses) gains, trading (4) (0.15) 8
 0.26
 (12) (150.00)
Net debt securities (losses) gains, available for sale (22) (0.85) 302
 11.02
 (324) (107.28)
Net equity securities (losses) (16) (0.62) 
 
 (16) (100.00)
Net securities gains (losses), trading 14
 0.54
 (4) (0.15) 18
 100.00
Bank-owned life insurance 166
 6.06
 172
 5.58
 (6) (3.49) 165
 6.37
 166
 6.06
 (1) (0.60)
Gain on sale of loans 455
 16.61
 658
 21.35
 (203) (30.85) 398
 15.37
 455
 16.61
 (57) (12.53)
Insurance commissions 109
 3.98
 198
 6.42
 (89) (44.95) 85
 3.28
 109
 3.98
 (24) (22.02)
Brokerage commissions 352
 12.85
 290
 9.41
 62
 21.38
 340
 13.13
 352
 12.85
 (12) (3.41)
Debit card fees 514
 18.76
 690
 22.39
 (176) (25.51) 359
 13.87
 514
 18.76
 (155) (30.16)
Other 296
 10.80
 228
 7.40
 68
 29.82
 621
 23.99
 296
 10.80
 325
 109.80
Total non-interest income $2,740
 100.00 % $3,082
 100.00% $(342) (11.10)% $2,589
 100.00 % $2,740
 100.00 % $(151) (5.51)%

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 Nine Months Ended Nine Months Ended
 September 30, 2017 September 30, 2016 Change September 30, 2018 September 30, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Service charges $1,637
 20.07 % $1,678
 18.13% $(41) (2.44)% $1,788
 25.43 % $1,637
 20.07 % $151
 9.22 %
Net securities gains, available for sale 487
 5.97
 1,174
 12.68
 (687) (58.52)
Net securities (losses) gains, trading (2) (0.02) 54
 0.58
 (56) (103.70)
Net debt securities (losses) gains, available for sale (17) (0.24) 487
 5.97
 (504) (103.49)
Net equity securities gains (losses) (44) (0.63) 
 
 (44) (100.00)
Net securities gains (losses), trading 12
 0.17
 (2) (0.02) 14
 (700.00)
Bank-owned life insurance 499
 6.12
 516
 5.57
 (17) (3.29) 496
 7.05
 499
 6.12
 (3) (0.60)
Gain on sale of loans 1,316
 16.14
 1,691
 18.27
 (375) (22.18) 1,053
 14.97
 1,316
 16.14
 (263) (19.98)
Insurance commissions 399
 4.89
 604
 6.52
 (205) (33.94) 266
 3.78
 399
 4.89
 (133) (33.33)
Brokerage commissions 1,044
 12.80
 817
 8.83
 227
 27.78
 1,013
 14.41
 1,044
 12.80
 (31) (2.97)
Debit card fees 1,450
 17.78
 1,413
 15.26
 37
 2.62
 1,065
 15.15
 1,450
 17.78
 (385) (26.55)
Other 1,325
 16.25
 1,310
 14.16
 15
 1.15
 1,400
 19.91
 1,325
 16.25
 75
 5.66
Total non-interest income $8,155
 100.00 % $9,257
 100.00% $(1,102) (11.90)% $7,032
 100.00 % $8,155
 100.00 % $(1,123) (13.77)%

Non-interest Expense

Total non-interest expense increased $827,000$115,000 and $861,000 for the three and nine months ended September 30, 20172018 compared to the same period of 2016.2017. The increase in salaries and employee benefits is primarily attributable to routine wage increases coupled with an increase in the cost of health insurance.insurance and the opening of two additional branches. Occupancy expense increased primarily due to the opening of additional branches and various maintenance projects to refresh facilities. Furniture and equipment expense increased as an acquired building was outfitted. Software amortization decreased as the number of vendors utilized is consolidated. Marketing expenses increased as targeted marketing was increased in the localities werewhere branches will be openedopened. The fluctuation in the next several months. Other non-interest expenses increasedprofessional fees consists primarily due to a decrease in legal expensesfees. The increase in furniture and a reduction in the amortization of investment in limited partnerships as several of the partnerships have reached the end of their tax credit generating life and have been fully amortized.

Total non-interestequipment expense forbetween the nine months ended September 30, 2018 and 2017 comparedwas a result of outfitting two newly opened branches during the period. The decrease in other expense is due to a decrease in data processing expense along with the same period in 2016 increased $1,149,000. The reasons noted for the three month period comparison also apply to the nine month period.adoption of Topic 606 (See Note 13 - Revenue Recognition).

Non-interest expense composition for the three and nine months ended September 30, 20172018 and 20162017 was as follows:
 Three Months Ended Three Months Ended
 September 30, 2017 September 30, 2016 Change September 30, 2018 September 30, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Salaries and employee benefits $4,738
 49.53% $4,507
 51.57% $231
 5.13 % $5,420
 55.99% $4,738
 49.54% $682
 14.39 %
Occupancy 603
 6.30
 544
 6.22
 59
 10.85
 640
 6.61
 603
 6.30
 37
 6.14
Furniture and equipment 816
 8.53
 662
 7.58
 154
 23.26
 780
 8.06
 816
 8.53
 (36) (4.41)
Software amortization 235
 2.46
 580
 6.64
 (345) (59.48) 208
 2.15
 235
 2.46
 (27) (11.49)
Pennsylvania shares tax 228
 2.38
 220
 2.52
 8
 3.64
 278
 2.87
 228
 2.38
 50
 21.93
Professional fees 560
 5.85
 502
 5.74
 58
 11.55
 459
 4.74
 560
 5.85
 (101) (18.04)
Federal Deposit Insurance Corporation deposit insurance 194
 2.03
 202
 2.31
 (8) (3.96) 237
 2.45
 194
 2.03
 43
 22.16
Debit card expenses 168
 1.76
 246
 2.81
 (78) (31.71)
Marketing 315
 3.29
 173
 1.98
 142
 82.08
 245
 2.53
 315
 3.29
 (70) (22.22)
Intangible amortization 81
 0.85
 90
 1.03
 (9) (10.00) 71
 0.73
 81
 0.85
 (10) (12.35)
Other 1,628
 17.02
 1,013
 11.60
 615
 60.71
 1,343
 13.87
 1,796
 18.77
 (453) (25.22)
Total non-interest expense $9,566
 100.00% $8,739
 100.00% $827
 9.46 % $9,681
 100.00% $9,566
 100.00% $115
 1.20 %

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 Nine Months Ended Nine Months Ended
 September 30, 2017 September 30, 2016 Change September 30, 2018 September 30, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Salaries and employee benefits $14,116
 51.11% $13,433
 50.76% $683
 5.08 % $15,387
 54.04% $14,116
 51.11% $1,271
 9.00 %
Occupancy 1,855
 6.72
 1,630
 6.16
 225
 13.80
 2,080
 7.30
 1,855
 6.72
 225
 12.13
Furniture and equipment 2,129
 7.71
 2,042
 7.72
 87
 4.26
 2,328
 8.18
 2,129
 7.71
 199
 9.35
Software amortization 750
 2.72
 950
 3.59
 (200) (21.05) 504
 1.77
 750
 2.72
 (246) (32.80)
Pennsylvania shares tax 696
 2.52
 698
 2.64
 (2) (0.29) 833
 2.93
 696
 2.52
 137
 19.68
Professional fees 1,816
 6.58
 1,512
 5.71
 304
 20.11
 1,674
 5.88
 1,816
 6.58
 (142) (7.82)
Federal Deposit Insurance Corporation deposit insurance 514
 1.86
 670
 2.53
 (156) (23.28) 639
 2.24
 514
 1.86
 125
 24.32
Debit card expenses 478
 1.73
 456
 1.72
 22
 4.82
Marketing 690
 2.50
 568
 2.15
 122
 21.48
 764
 2.68
 690
 2.50
 74
 10.72
Intangible amortization 256
 0.93
 276
 1.04
 (20) (7.25) 229
 0.80
 256
 0.93
 (27) (10.55)
Other 4,314
 15.62
 4,230
 15.98
 84
 1.99
 4,037
 14.18
 4,792
 17.35
 (755) (15.76)
Total non-interest expense $27,614
 100.00% $26,465
 100.00% $1,149
 4.34 % $28,475
 100.00% $27,614
 100.00% $861
 3.12 %

Provision for Income Taxes

Income taxes increased $9,000decreased $425,000 and $184,000$1,312,000 for the three and nine months ended September 30, 20172018 compared to the same periods of 2016.2017. The effective tax rate for the three and nine months ended September 30, 20172018 was 29.39%18.30% and 25.76%17.17%, respectively, compared to 2.15%28.08% and 20.58%27.82% for the same periods of 2016.2017. The change made to the corporate statutory federal income tax rate, from 34% to 21% effective January 1, 2018, is the primary cause of the increase in tax expensedriver responsible for the three and nine months ended September 30, 2017 compared to 2016 is the impact of a reduction of tax-exempt interest income within the investment portfolio as the portfolio was strategically reduced and a reduction in the amount of federal tax credits recognized from low income elderly housing partnerships. Excluding the impact of securities gains and losses, the effective tax rate for the three and nine months ended September 30, 2017 was 27.66% and 27.57% compared to 29.08% and 24.89% for the same periods of 2016.aforementioned variance. The Company currently is in a deferred tax asset position. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate carry forward period and therefore does not require a valuation allowance.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents decreased $15,924,000increased $45,104,000 from $43,671,000$27,243,000 at December 31, 20162017 to $27,747,000$72,347,000 at September 30, 20172018 primarily as a result of the following activities during the nine months ended September 30, 2017.2018.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds leadingtrailing loan originations, less $1,316,000$1,053,000 in realized gains, by $219,000$2,531,000 for the nine months ended September 30, 2017.2018.

Loans

Gross loans increased $96,033,000$122,491,000 since December 31, 20162017 due primarily to an increase in installment loans to individuals. The growth in installment loans was driven byconsumer automobile indirect lending.loans. Loan growth has also picked upoccurred in ourthe residential and commercial financial, and agricultural loan products.real estate portfolios.


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The allocation of the loan portfolio, by category, as of September 30, 20172018 and December 31, 20162017 is presented below:
 September 30, 2017 December 31, 2016 Change September 30, 2018 December 31, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount % Amount % Total Amount % Total Amount %
Commercial, financial, and agricultural $175,299
 14.73 % $146,110
 13.36 % $29,189
 19.98 % $187,500
 13.70% $178,885
 14.35% $8,615
 4.82 %
Real estate mortgage:  
  
  
  
  
  
  
  
  
  
  
  
Residential 576,134
 48.43
 564,740
 51.63
 11,394
 2.02 % 618,174
 45.15
 597,077
 47.91
 21,097
 3.53 %
Commercial 323,510
 27.19
 306,182
 27.99
 17,328
 5.66 % 372,576
 27.21
 332,019
 26.63
 40,557
 12.22 %
Construction 29,352
 2.47
 34,650
 3.17
 (5,298) (15.29)% 39,992
 2.92
 31,683
 2.54
 8,309
 26.23 %
Installment loans to individuals 86,639
 7.28
 43,256
 3.96
 43,383
 100.29 %
Consumer automobile loans 124,588
 9.10
 79,714
 6.39
 44,874
 56.29 %
Other consumer installment loans 25,523
 1.86
 26,964
 2.16
 (1,441) (5.34)%
Net deferred loan fees and discounts (1,220) (0.10) (1,257) (0.11) 37
 (2.94)% 752
 0.06
 272
 0.02
 480
 176.47 %
Gross loans $1,189,714
 100.00 % $1,093,681
 100.00 % $96,033
 8.78 % $1,369,105
 100.00% $1,246,614
 100.00% $122,491
 9.83 %

The following table shows the amount of accrual and non-accrual TDRs at September 30, 20172018 and December 31, 2016:
2017:
 September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
(In Thousands) Accrual Non-accrual Total Accrual Non-accrual Total Accrual Non-accrual Total Accrual Non-accrual Total
Commercial, financial, and agricultural $22
 $120
 $142
 $109
 $132
 $241
 $
 $1,130
 $1,130
 $5
 $114
 $119
Real estate mortgage:  
  
  
  
  
  
  
  
  
  
  
  
Residential 1,199
 341
 1,540
 1,491
 541
 2,032
 2,119
 160
 2,279
 2,151
 273
 2,424
Commercial 4,495
 2,252
 6,747
 4,723
 2,184
 6,907
 4,013
 2,136
 6,149
 4,429
 2,076
 6,505
 $5,716
 $2,713
 $8,429
 $6,323
 $2,857
 $9,180
 $6,132
 $3,426
 $9,558
 $6,585
 $2,463
 $9,048
 
Investments

The fair value of the investment debt securities portfolio at September 30, 2017 decreased $1,027,0002018 increased $20,278,000 since December 31, 20162017 while the amortized cost of the portfolio decreased $2,095,000.increased $22,902,000.  The growth in the investment portfolio has occurred within the municipal segment as bonds with a final maturity of inside of ten years have been purchased. The portfolio continues to be actively managed in order to reduce interest rate and market risk. This is being undertaken primarily through the sale of long-term municipal bonds that have a maturity date of 2025 or later and securities with a call date within the next five years.  The proceeds of the bond sales are being deployed into loans and intermediate term corporate bonds and short and intermediate term municipal bonds.  The strategy to sell a portion of the long-term bond portfolio does negatively impact current earnings, but this action plays a key role in our long-term asset liability management strategy as the balance sheet is shortened in anticipation of a steadily rising rate environment. The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 87.34%83.33% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

The Company considers various factors, which include examples from applicable accounting guidance, when analyzing the available for sale portfolio for possible other than temporary impairment.  The Company primarily considers the following factors in its analysis: length of time and severity of the fair value being less than carrying value; reduction of dividend paid (equities); continued payment of dividend/interest, credit rating, and financial condition of an issuer; intent and ability to hold until anticipated recovery (which may be maturity); and general outlook for the economy, specific industry, and entity in question.

The bond portion of the portfolio review is conducted with emphases on several factors.  Continued payment of principal and interest is given primary importance with credit rating and financial condition of the issuer following as the next most important.  Credit ratings were reviewed with the ratings of the bonds being satisfactory.  Bonds that were not currently rated were discussed with a third party and/or underwent an internal financial review.  The Company also monitors whether each of the investments incurred a decline in fair value from carrying value of at least 20% for twelve consecutive months or a similar decline of at least 50% for three consecutive months.  Each bond is reviewed to determine whether it is a general obligation bond, which is backed by the credit and taxing power of the issuing jurisdiction, or a revenue bond, which is only payable from specified revenues.  Based on the review undertaken by the Company, the Company determined that the decline in value of the various bond holdings were temporary and were the result of the general market downturns and interest rate/yield curve changes, not credit issues.  The fact that almost all of such bonds are general obligation bonds further solidified the Company’s determination that the decline in the value of these bond holdings is temporary.


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The fair value of the equity portfolio continues to fluctuate as the economic and political environment continues to impact stock pricing. The amortized cost of the available for sale equity securities portfolio has increased $1,604,000decreased $209,000 to $12,837,000$1,628,000 at September 30, 20172018 from $11,233,000$1,837,000 at December 31, 20162017 while the fair value increased $1,465,000decreased $614,000 over the same time period.

The equity portion
43

Table of the portfolio is reviewed for possible other than temporary impairment in a similar manner to the bond portfolio with greater emphasis placed on the length of time the fair value has been less than the carrying value and financial sector outlook.  The Company also reviews dividend payment activities.  The starting point for the equity analysis is the length and severity of a market price decline.  The Company monitors two primary measures: 20% decline in fair value from carrying value for twelve consecutive months and 50% decline for three consecutive months.Contents


The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at September 30, 20172018 follows:
 A- to AAA B- to BBB+ Not Rated Total A- to AAA B- to BBB+ Not Rated Total
(In Thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Available for sale (AFS):  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Mortgage-backed securities $4,544
 $4,530
 $
 $
 $
 $
 $4,544
 $4,530
 $6,475
 $6,227
 $
 $
 $
 $
 $6,475
 $6,227
State and political securities 61,293
 61,751
 
 
 575
 576
 61,868
 62,327
 74,332
 73,220
 1,457
 1,373
 70
 70
 75,859
 74,663
Other debt securities 38,422
 37,917
 13,478
 13,059
 1,054
 997
 52,954
 51,973
 29,420
 28,561
 14,477
 13,738
 6,045
 5,716
 49,942
 48,015
Total debt securities AFS $104,259
 $104,198
 $13,478
 $13,059
 $1,629
 $1,573
 $119,366
 $118,830
 $110,227
 $108,008
 $15,934
 $15,111
 $6,115
 $5,786
 $132,276
 $128,905
 
Financing Activities

Deposits

Total deposits increased $58,782,000$64,157,000 from December 31, 20162017 to September 30, 2017.  The growth was led by an increase in money market and NOW deposit accounts from December 31, 2016 to September 30, 2017 of $29,407,000 and $29,091,000, respectively.2018. The increase in core deposits (deposits less time deposits) has provided relationship driven funding for the loan and investment portfolios. While deposit gathering efforts have centered on core deposits, the lengthening of the time deposit portfolio is moving forward as part of the strategy to build balance sheet protection in a rising rate environment. The increase in deposits is the result of our focus on building relationships, not by offering market leading rates.

Deposit balances and their changes for the periods being discussed follow:
  September 30, 2018 December 31, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount %
Demand deposits $313,111
 25.87% $303,316
 26.46% $9,795
 3.23%
NOW accounts 223,963
 18.50
 215,021
 18.76
 8,942
 4.16
Money market deposits 238,131
 19.67
 237,818
 20.75
 313
 0.13
Savings deposits 164,449
 13.59
 160,698
 14.02
 3,751
 2.33
Time deposits 270,823
 22.37
 229,467
 20.01
 41,356
 18.02
 Total deposits $1,210,477
 100.00% $1,146,320
 100.00% $64,157
 5.60%

Borrowed Funds

Total borrowed funds increased 76.71%, or $131,717,000, to $303,435,000 at September 30, 2018 compared to $171,718,000 at December 31, 2017. The increase in total borrowing was utilized to supplement the growth in deposits as a funding source for the loan portfolio growth. The long-term borrowings originating during the nine months ended September 30, 2018 had maturity dates ranging from 2019 to 2023 with a blended interest rate of 2.56%.

  September 30, 2017 December 31, 2016 Change
(In Thousands) Amount % Total Amount % Total Amount %
Demand deposits $310,830
 26.94% $303,277
 27.69% $7,553
 2.49 %
NOW accounts 203,744
 17.66
 174,653
 15.95
 29,091
 16.66
Money market deposits 274,528
 23.79
 245,121
 22.38
 29,407
 12.00
Savings deposits 156,437
 13.56
 153,788
 14.04
 2,649
 1.72
Time deposits 208,457
 18.05
 218,375
 19.94
 (9,918) (4.54)
 Total deposits $1,153,996
 100.00% $1,095,214
 100.00% $58,782
 5.37 %








  September 30, 2018 December 31, 2017 Change
(In Thousands) Amount % Total Amount % Total Amount %
Short-term borrowings:  
  
  
  
  
  
FHLB repurchase agreements $133,503
 44.00% $92,870
 54.08% $40,633
 43.75 %
Federal funds purchased 24,000
 7.91
 
 
 24,000
 100.00 %
Securities sold under agreement to repurchase 6,962
 2.29
 7,878
 4.59
 (916) (11.63)
Total short-term borrowings 164,465
 54.20
 100,748
 58.67
 63,717
 63.24
Long-term borrowings:            
Long-term FHLB borrowings 138,625
 45.69
 70,625
 41.13
 68,000
 96.28
Long-term capital lease 345
 0.11
 345
 0.20
 
 
Total long-term borrowings 138,970
 45.80
 70,970
 41.33
 68,000
 95.82
Total borrowed funds $303,435
 100.00% $171,718
 100.00% $131,717
 76.71 %





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Borrowed Funds

Total borrowed funds decreased 23.53%, or $23,355,000, to $122,594,000 at September 30, 2017 compared to $99,239,000 at December 31, 2016.  The reduction in long-term borrowings was the result of a maturity. The increase in short-term borrowed funds supplemented deposit growth in the funding of the loan portfolio growth with overnight borrowings from the FHLB being the primary source of short-term borrowings. The decline in securities sold under agreement to repurchase is due to the phasing out of a product the bank offers.

  September 30, 2017 December 31, 2016 Change
(In Thousands) Amount % Total Amount % Total Amount %
Short-term borrowings:  
  
  
  
  
  
FHLB repurchase agreements $32,434
 26.46% $
 % $32,434
  %
Securities sold under agreement to repurchase 9,162
 7.47
 13,241
 13.34
 (4,079) (30.81)
Total short-term borrowings 41,596
 33.93
 13,241
 13.34
 28,355
 214.15
Long-term borrowings:            
Long-term FHLB borrowings 80,625
 65.77
 85,625
 86.28
 (5,000) (5.84)
Long-term capital lease 373
 0.30
 373
 0.38
 
 
Total long-term borrowings 80,998
 66.07
 85,998
 86.66
 (5,000) (5.81)
Total borrowed funds $122,594
 100.00% $99,239
 100.00% $23,355
 23.53 %

Short-Term Borrowings

The following table provides further information in regards to secured borrowings that have been accounted for as repurchase agreements.

 Remaining Contractual Maturity Overnight and Continuous Remaining Contractual Maturity Overnight and Continuous
(In Thousands) September 30, 2017 December 31, 2016 September 30, 2018 December 31, 2017
Mortgage-backed and state and political securities pledged, fair value $13,884
 $15,574
Investment debt securities pledged, fair value $8,699
 $17,454
Repurchase agreements 9,162
 13,241
 6,962
 7,878

Capital

The adequacy of the Company��sCompany’s capital is reviewed on an ongoing basis with reference to the size, composition, and quality of the Company’s resources and regulatory guidelines.  Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings.

Bank holding companies are required to comply with the Federal Reserve Board’s risk-based capital guidelines.  The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.  Specifically, each is required to maintain certain minimum dollar amounts and ratios of common equity tier I risk-based, tier I risk-based, total risk-based, and tier I leverage capital. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act (FDICIA)("FDICIA") established five capital categories for banks ranging from “well capitalized” to “critically undercapitalized.” Toundercapitalized” for purposes of the FDIC's prompt corrective action rules to be classified as “well capitalized”, under the prompt corrective action rules, common equity tier I risk-based, tier I risked-based, total risk-based, and tier I leverage capital ratios must be at least 6.5%, 8%, 10%, and 5%, respectively.











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The Company's capital ratios as of September 30, 2017 and December 31, 2016 were as follows:

  September 30, 2017 December 31, 2016
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $126,491
 11.781% $125,804
 12.620%
For Capital Adequacy Purposes 48,316
 4.500
 44,849
 4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 61,737
 5.750
 51,078
 5.125
To Be Well Capitalized 69,790
 6.500
 64,782
 6.500
Total Capital (to Risk-weighted Assets)  
  
  
  
Actual $128,801
 11.996% $133,393
 13.380%
For Capital Adequacy Purposes 85,896
 8.000
 79,732
 8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 99,317
 9.250
 85,961
 8.625
To Be Well Capitalized 107,370
 10.000
 99,665
 10.000
Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $126,491
 11.781% $125,804
 12.620%
For Capital Adequacy Purposes 64,421
 6.000
 59,799
 6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 77,842
 7.250
 66,028
 6.625
To Be Well Capitalized 85,895
 8.000
 79,732
 8.000
Tier I Capital (to Average Assets)  
  
  
  
Actual $126,491
 9.074% $125,804
 9.432%
For Capital Adequacy Purposes 55,760
 4.000
 53,352
 4.000
To Be Well Capitalized 69,700
 5.000
 66,691
 5.000
Jersey Shore State Bank's capital ratios as of September 30, 2017 and December 31, 2016 were as follows:

  September 30, 2017 December 31, 2016
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $88,724
 10.603% $86,397
 11.136%
For Capital Adequacy Purposes 37,655
 4.500
 34,914
 4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 48,115
 5.750
 39,763
 5.125
To Be Well Capitalized 54,391
 6.500
 50,431
 6.500
Total Capital (to Risk-weighted Assets)  
  
  
  
Actual $89,351
 10.678% $90,992
 11.728%
For Capital Adequacy Purposes 66,942
 8.000
 62,069
 8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 77,402
 9.250
 66,918
 8.625
To Be Well Capitalized 83,678
 10.000
 77,587
 10.000
Tier I Capital (to Risk-weighted Assets) -
  
  
  
Actual $88,724
 10.603% $86,397
 11.136%
For Capital Adequacy Purposes 50,207
 6.000
 46,552
 6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 60,667
 7.250
 51,401
 6.625
To Be Well Capitalized 66,943
 8.000
 62,069
 8.000
Tier I Capital (to Average Assets)  
  
  
  
Actual $88,724
 8.556% $86,397
 8.894%
For Capital Adequacy Purposes 41,479
 4.000
 38,856
 4.000
To Be Well Capitalized 51,849
 5.000
 48,570
 5.000





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Luzerne Bank's capital ratios as of September 30, 2017 and December 31, 2016 were as follows:

  September 30, 2017 December 31, 2016
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $31,619
 9.916% $31,102
 10.165%
For Capital Adequacy Purposes 14,349
 4.500
 13,769
 4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 18,335
 5.750
 15,682
 5.125
To Be Well Capitalized 20,726
 6.500
 19,889
 6.500
Total Capital (to Risk-weighted Assets)  
  
  
  
Actual $33,011
 10.353% $33,589
 10.977%
For Capital Adequacy Purposes 25,508
 8.000
 24,479
 8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 29,494
 9.250
 26,391
 8.625
To Be Well Capitalized 31,885
 10.000
 30,599
 10.000
Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $31,619
 9.916% $31,102
 10.165%
For Capital Adequacy Purposes 19,132
 6.000
 18,359
 6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 23,118
 7.250
 20,272
 6.625
To Be Well Capitalized 25,509
 8.000
 24,479
 8.000
Tier I Capital (to Average Assets)  
  
  
  
Actual $31,619
 8.703% $31,102
 8.535%
For Capital Adequacy Purposes 14,532
 4.000
 14,576
 4.000
To Be Well Capitalized 18,166
 5.000
 18,220
 5.000

In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III.  The July 2013 finalUnder existing capital rules, generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital.  The newthe minimum capital to risk-adjusted assets requirements for banking organizations, are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and, a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% (8.0% to be considered “well capitalized”); the, and total capital ratio remains atof 8.0% under the new rules (10.0% to be considered “well capitalized”).  Under the newexisting capital rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements were effective beginning on January 1, 2015.  The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.
























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The CompanyCompany's capital ratios as of September 30, 2018 and the Banks will continue to analyze these new rulesDecember 31, 2017 were as follows:
  September 30, 2018 December 31, 2017
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $130,315
 10.157% $125,513
 11.254%
For Capital Adequacy Purposes 57,735
 4.500
 50,187
 4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 81,792
 6.375
 64,128
 5.750
To Be Well Capitalized 83,395
 6.500
 72,493
 6.500
Total Capital (to Risk-weighted Assets)  
  
  
  
Actual $139,831
 10.898% $132,094
 11.844%
For Capital Adequacy Purposes 102,647
 8.000
 89,223
 8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 126,705
 9.875
 103,164
 9.250
To Be Well Capitalized 128,309
 10.000
 111,528
 10.000
Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $130,315
 10.157% $125,513
 11.254%
For Capital Adequacy Purposes 76,980
 6.000
 66,916
 6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 101,037
 7.875
 80,857
 7.250
To Be Well Capitalized 102,641
 8.000
 89,222
 8.000
Tier I Capital (to Average Assets)  
  
  
  
Actual $130,315
 8.249% $125,513
 8.766%
For Capital Adequacy Purposes 63,191
 4.000
 57,273
 4.000
To Be Well Capitalized 78,988
 5.000
 71,591
 5.000
Jersey Shore State Bank's capital ratios as of September 30, 2018 and their effects on the business, operationsDecember 31, 2017 were as follows:
  September 30, 2018 December 31, 2017
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $92,207
 9.816% $88,289
 10.120%
For Capital Adequacy Purposes 42,271
 4.500
 39,259
 4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 59,884
 6.375
 50,164
 5.750
To Be Well Capitalized 61,058
 6.500
 56,707
 6.500
Total Capital (to Risk-weighted Assets)  
  
  
  
Actual $100,055
 10.651% $93,145
 10.677%
For Capital Adequacy Purposes 75,152
 8.000
 69,791
 8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 92,765
 9.875
 80,696
 9.250
To Be Well Capitalized 93,940
 10.000
 87,239
 10.000
Tier I Capital (to Risk-weighted Assets) -
  
  
  
Actual $92,207
 9.816% $88,289
 10.120%
For Capital Adequacy Purposes 56,361
 6.000
 52,345
 6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 73,974
 7.875
 63,251
 7.250
To Be Well Capitalized 75,148
 8.000
 69,794
 8.000
Tier I Capital (to Average Assets)  
  
  
  
Actual $92,207
 7.725% $88,289
 8.235%
For Capital Adequacy Purposes 47,745
 4.000
 42,885
 4.000
To Be Well Capitalized 59,681
 5.000
 53,606
 5.000





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Luzerne Bank's capital ratios as of September 30, 2018 and capital levels of the Company and the Banks.December 31, 2017 were as follows:
  September 30, 2018 December 31, 2017
(In Thousands) Amount Ratio Amount Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $34,032
 9.879% $31,116
 9.731%
For Capital Adequacy Purposes 15,502
 4.500
 14,389
 4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date 21,961
 6.375
 18,386
 5.750
To Be Well Capitalized 22,392
 6.500
 20,785
 6.500
Total Capital (to Risk-weighted Assets)  
  
  
  
Actual $35,700
 10.363% $32,533
 10.174%
For Capital Adequacy Purposes 27,560
 8.000
 25,581
 8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 34,019
 9.875
 29,578
 9.250
To Be Well Capitalized 34,449
 10.000
 31,977
 10.000
Tier I Capital (to Risk-weighted Assets)  
  
  
  
Actual $34,032
 9.879% $31,116
 9.731%
For Capital Adequacy Purposes 20,669
 6.000
 19,186
 6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date 27,128
 7.875
 23,183
 7.250
To Be Well Capitalized 27,559
 8.000
 25,581
 8.000
Tier I Capital (to Average Assets)  
  
  
  
Actual $34,032
 8.708% $31,116
 8.384%
For Capital Adequacy Purposes 15,633
 4.000
 14,845
 4.000
To Be Well Capitalized 19,541
 5.000
 18,557
 5.000

Liquidity; Interest Rate Sensitivity and Market Risk

The asset/liability committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio.  In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.

The following liquidity measures are monitored for compliance and were within the limits cited, except for net loans to total deposits, at September 30, 2017:2018:

1.           Net Loans to Total Assets, 85% maximum
2.             Net Loans to Total Deposits, 100% maximum
3.             Cumulative 90 day Maturity GAP %, +/- 20% maximum
4.             Cumulative 1 Year Maturity GAP %, +/- 25% maximum



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Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk. The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business opportunities as they arise.  The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.

The Banks, like other financial institutions, must have sufficient funds available to meet liquidity needs for deposit withdrawals, loan commitments and originations, and expenses. In order to control cash flow, the Banks estimate future cash flows from deposits, loan payments, and investment security payments. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, FHLB borrowings, and brokered deposits. Management believes the Banks have adequate resources to meet their normal funding requirements.

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale and trading investment securities, loan repayments and maturities, and liquidating money market

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investments such as federal funds sold. The use of these resources, in conjunction with access to credit provides core funding to satisfy depositor, borrower, and creditor needs.

Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a total current maximum borrowing capacity at the FHLB of $438,674,000.$582,895,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $52,000,000.$57,000,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled $113,059,000$296,128,000 as of September 30, 2017.2018.

Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process by segments both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted.  However, if market rates behave in a manner contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap management, the Company has an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s balance sheet.

The Company currently maintains a GAPgap position of being asset sensitive.  The Company has strategically taken this position as it has decreased the duration of the earning asset portfolio by adding quality short and intermediate term loans such as home equity loans and the selling of long-term municipal bonds.  Lengthening of the liability portfolio is being undertaken to build protection in a rising rate environment.

A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Company’s balance sheet and more specifically shareholders’ equity.  The Company does not manage the balance sheet structure in order to maintain compliance with this calculation.  The calculation serves as a guideline with greater emphases placed on interest rate sensitivity.  Changes to calculation results from period to period are reviewed as changes in results could be a signal of future events.  As of the most recent analysis, the results of the market value at risk calculation were within established guidelines due to the strategic direction being taken.











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Interest Rate Sensitivity

In this analysis the Company examines the result of a 100, 200, 300, and 400 basis point change in market interest rates and the effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner.  Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.

The following is a rate shock forecast for the twelve month period ending September 30, 20182019 assuming a static balance sheet as of September 30, 2017.

2018.
 Parallel Rate Shock in Basis Points Parallel Rate Shock in Basis Points
(In Thousands) -200 -100 Static +100 +200 +300 +400 -200 -100 Static +100 +200 +300 +400
Net interest income $41,960
 $44,460
 $46,574
 $48,284
 $49,787
 $51,179
 $52,592
 $49,605
 $51,557
 $53,012
 $53,909
 $54,651
 $55,259
 $55,837
Change from static (4,614) (2,114) 
 1,710
 3,213
 4,605
 6,018
 (3,407) (1,455) 
 897
 1,639
 2,247
 2,825
Percent change from static -9.91 % -4.54 % 
 3.67% 6.90% 9.89% 12.92% -6.43 % -2.74 % 
 1.69% 3.09% 4.24% 5.33%
 
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities.  Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change.  In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.




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Inflation

The asset and liability structure of a financial institution is primarily monetary in nature.  Therefore, interest rates rather than inflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors which are not measured by a price index.
 
New Banking Reform Legislation

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Most of the changes made by the new Act can be grouped into five general areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified a systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation. Some of the key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets. The Company continues to analyze the changes implemented by the Act, but does not believe that such changes will materially impact the Company’s business, operations, or financial results.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk.  Interest rate risk and liquidity risk management is performed at both the level of the Company and the Banks.  The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party.  There have been no substantial changes in the Company’s gap analysis or simulation analysis compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2016.2017.  Additional information and details are provided in the “Liquidity, Interest Rate Sensitivity, and Market Risk” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.2018.







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Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2017,2018, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II.  OTHER INFORMATION
Item 1.                          Legal Proceedings
 
None.

Item 1A.  Risk Factors
 
There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.  Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.

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

The following table provides certain information with respect to the Company's repurchase of common stock during the quarter ended September 30, 2017.2018.
Period 
Total
Number of
Shares (or
Units) Purchased
 
Average
Price Paid
per Share
(or Units) Purchased
 
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced Plans or Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased Under the Plans or Programs
Month #1 (July 1 - July 31, 2017)2018) 
 
 
 342,446
Month #2 (August 1 - August 31, 2017)2018) 
 
 
 342,446
Month #3 (September 1 - September 30, 2017)2018) 
 
 
 342,446
 
On April 24, 2017,20, 2018, the Board of Directors extended the previously approved authorization to repurchase up to 482,000 shares, or approximately 10%, of the outstanding shares of the Company for an additional year to April 30, 2018.2019.  As of September 30, 20172018 there have been 91,856139,554 shares repurchased under this plan.

Item 3.                          Defaults Upon Senior Securities
 
None.
 
Item 4.                          Mine Safety Disclosures
 
Not applicable.
 
Item 5.                          Other Information
 
None.
 

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Item 6.                          Exhibits
 
 Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2012).
 Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011).
Employment Agreement, dated October 30, 2017, by and between Penns Woods Bancorp, Inc. and Brian L. Knepp (incorporated by reference to Exhibit 10 (i) of the Registrant's Current Report on Form 8-K filed on November 2, 2017).
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
 Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
 Section 1350 Certification of Chief Executive Officer.
 Section 1350 Certification of Chief Financial Officer.
101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at September 30, 20172018 and December 31, 2016;2017; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, 20172018 and 2016;2017; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 20172018 and 2016;2017; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 20172018 and 2016;2017; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 20172018 and 2016;2017 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.

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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.
 
  PENNS WOODS BANCORP, INC.
  (Registrant)
   
Date:    November 8, 20172018/s/ Richard A. Grafmyre
  Richard A. Grafmyre, Chief Executive Officer
  (Principal Executive Officer)
   
   
Date:November 8, 20172018/s/ Brian L. Knepp
  Brian L. Knepp, President and Chief Financial Officer
  (Principal Financial Officer and Principal Accounting
  Officer)

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EXHIBIT INDEX
 
Exhibit 31(i) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer
Exhibit 31(ii) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer
Exhibit 32(i) Section 1350 Certification of Chief Executive Officer
Exhibit 32(ii) Section 1350 Certification of Chief Financial Officer
Exhibit 101 
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at September 30, 20172018 and December 31, 2016;2017; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, 20172018 and 2016;2017; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 20172018 and 2016;2017; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, 20172018 and 2016;2017; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, 20172018 and 2016;2017 and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.

5354