UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



ý	Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, ~~2017.~~2018.



o	Transition 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, ~~2017~~2018 there were ~~4,688,739~~4,691,102 shares of the Registrant’s common stock outstanding.

Table of Contents

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q



		Page
		Number

Part I	Financial Information

Item 1.	Financial Statements	3

Consolidated Balance Sheet (Unaudited) as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017		3

Consolidated Statement of Income (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017		4

Consolidated Statement of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017		5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017		6

Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017		78

Notes to Consolidated Financial Statements (Unaudited)		89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

Item 4.	Controls and Procedures	49

Part II	Other Information

Item 1.	Legal Proceedings	5051

Item 1A.	Risk Factors	5051

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5051

Item 3.	Defaults Upon Senior Securities	5051

Item 4.	Mine Safety Disclosures	5051

Item 5.	Other Information	5051

Item 6.	Exhibits	5152

Signatures		5253

Exhibit Index and Exhibits		5354

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE LOSS			TREASURY STOCK			NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
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		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE LOSS			TREASURY STOCK			NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
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.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF ~~CASH FLOWS~~CHANGES 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		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE LOSS			TREASURY STOCK			NON-CONTROLLING INTEREST			TOTAL SHAREHOLDERS’ EQUITY
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		ADDITIONAL PAID-IN CAPITAL		RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE LOSS			TREASURY STOCK			NON-CONTROLLING INTEREST		TOTAL SHAREHOLDERS’ EQUITY
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, ~~2017~~2018 and ~~2016~~2017 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	)

810

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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, ~~2017~~2018 and ~~2016~~2017 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			Affected Line Item in the Consolidated Statement of Income	Three Months Ended September 30, 2018			Three Months Ended September 30, 2017			Affected Line Item in the Consolidated Statement of Income
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			Affected Line Item in the Consolidated Statement of Income	Nine months ended September 30, 2018			Nine months ended September 30, 2017			Affected Line Item in the Consolidated Statement of Income
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,~~ 2017-06~~Other 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 within~~remove the ~~scope~~requirement 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 amendments~~their 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 or~~increased 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 periods~~fiscal 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,~~ permitte~~Compensation-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 ~~Leases~~transition 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 ~~842~~320)): 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 ~~Announcements~~Accounting 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 that~~amendments make the ~~SEC staff would~~Codification 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 to~~require transition guidance and will be ~~included~~effective upon issuance of this ASU. However, many of the amendments in ~~another entity’s SEC filing use the~~this 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 Customers~~Codification 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 ~~ASC~~the 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 paragraphs~~the 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 ASC~~Topic 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 ~~95,000~~263,700 stock options, with an average exercise price of ~~$43.64,~~$45.11, outstanding on September 30, ~~2017. These~~2018. 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 ~~31,000~~95,000 stock options outstanding for the same period end in ~~2016~~2017 that had an average exercise price of ~~$42.03~~$43.64 and were excluded, ~~from~~on 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 be~~is 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 sale~~portfolio at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 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 periods~~months 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 were~~are 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, ~~2017~~2018 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.

~~Table of Contents~~

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, ~~2017~~2018 were ~~$6,478,000~~$10,450,000 and ~~$15,443,000,~~$14,528,000, a decrease from the ~~2016~~2017 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

~~Table of Contents~~

~~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, ~~2017~~2018 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, ~~2017~~2018 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, ~~2017~~2018 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, ~~2017~~2018 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 ~~does~~do 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, ~~2017~~2018 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, ~~2017~~2018 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

Table of Contents


	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 $10,000~~zero 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 ~~two~~five 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, ~~2016~~2018 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, ~~2017~~2018 and December 31, ~~2016.~~2017.

The amount of foreclosed residential real estate held at September 30, ~~2017~~2018 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, ~~2017~~2018 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, ~~2017~~2018 and December 31, ~~2016:~~2017:



	September 30, 2018
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer automobile		Other consumer installment loans
(In Thousands)	Commercial, Financial, and Agricultural		Residential		Commercial		Construction		Consumer automobile		Other consumer installment loans		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)	Commercial, Financial, and Agricultural		Residential		Commercial		Construction		Consumer automobile		Other consumer installment loans		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, ~~2017~~2018 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				Installment Loans to Individuals			Unallocated				Totals				Commercial, Financial, and Agricultural			Residential				Commercial				Construction							Unallocated				Totals
Beginning Balance	Commercial, Financial, and Agricultural	$	1,731			$	5,337			$	3,727			$	172		$	779			$	1,363			$	13,109		$	1,055			$	5,583			$	3,814			$	118	Consumer automobile		$	1,069	Other consumer installment			$	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				Installment Loans to Individuals			Unallocated				Totals				Commercial, Financial, and Agricultural			Residential				Commercial				Construction							Unallocated				Totals
Beginning Balance	Commercial, Financial, and Agricultural	$	1,273			$	5,851			$	4,001			$	143		$	277			$	972			$	12,517		$	1,731			$	5,337			$	3,727			$	172	Consumer automobile		$	349	Other consumer installment			$	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				Installment Loans to Individuals			Unallocated				Totals				Commercial, Financial, and Agricultural			Residential				Commercial				Construction							Unallocated				Totals
Beginning Balance	Commercial, Financial, and Agricultural	$	1,532			$	5,116			$	4,217			$	160		$	243			$	776			$	12,044		$	1,177			$	5,679			$	4,277			$	155	Consumer automobile		$	804	Other consumer installment			$	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)	Commercial, Financial, and Agricultural			Residential			Commercial			Construction			Consumer automobile			Other consumer installment			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 ~~shifts~~shift in allocation of the loan provision is primarily due to ~~an increase~~portfolio 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, ~~2017~~2018 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, ~~2017~~2018 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, Financial, and Agricultural		Commercial		Construction				Totals			Other consumer installment		Unallocated
Allowance for Loan Losses:	Commercial, Financial, and Agricultural											Installment Loans to Individuals			Unallocated													Consumer Automobile
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, Financial, and Agricultural		Commercial		Construction				Totals			Other consumer installment		Unallocated
Allowance for Loan Losses:	Commercial, Financial, and Agricultural											Installment Loans to Individuals			Unallocated													Consumer Automobile
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, ~~2017~~2018 and ~~2016,~~2017, there were ~~1,611~~1,725 and 1,617 shares issued under the plan, respectively.

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Note 9. ~~Off Balance~~Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the 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, ~~2017~~2018 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, ~~2017~~2018 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
(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
—
—
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, ~~2017~~2018 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, ~~2017~~2018 and December 31, ~~2016:~~2017:

September 30, 2017

September 30, 2018

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)%

705

Appraisal of collateral (1)

Appraisal adjustments (1)

(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

(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)%

143

Appraisal of collateral (1)

Appraisal adjustments (1)

(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, ~~2017~~2018 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 value~~financial instrument is ~~equal to~~carried at cost at September 30, 2018, which approximate the ~~carrying value.~~

~~Investment Securities:~~

~~The~~ fair value of ~~investment securities available for sale~~the instruments

The methods and ~~trading~~assumptions used by the Company in estimating fair values of financial instruments at September 30, 2018 is ~~equal~~in 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 using~~calculations 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 ~~38,750~~25,000 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 70,000~~149,700 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 ~~2017~~2018 all expire ten years from the grant date ~~however,~~however; of the ~~70,000~~174,700 grants awarded, ~~46,250~~62,700 of the options have a three year vesting period while the remaining ~~23,750~~112,000 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 periods~~months ended September 30, ~~2017~~2018 compared to ~~$6,000~~$7,000 and ~~$17,000~~$14,000 for the same ~~periods~~period 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 ending~~months ended September 30, ~~2017~~2018 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 ~~3.56~~3.91 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, ~~2016~~2017 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

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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.

~~Table of Contents~~

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, ~~2017~~2018 and ~~2016~~2017

Summary Results

Net income for the three and nine months ended September 30, ~~2017~~2018 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 ~~period~~periods of ~~2016 as~~2017, including the effects of a decrease in after-tax securities gains ~~increased $25,000~~of $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, ~~2017~~2018 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, ~~2017~~2018 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, ~~2017~~2018 compared to ~~0.95% and 9.14% for~~ the corresponding ~~period~~2017 returns of ~~2016.~~0.87% and 8.69%. Net income from core operations (“~~operating~~adjusted earnings”) ~~increased~~was $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, ~~2017~~2018 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 ~~period~~periods of ~~2016.~~2017.

Management uses the non-GAAP measure of net income from core operations, or ~~operating~~adjusted 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 ~~operating~~adjusted 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, ~~2017~~2018 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 portfolio~~Investment securities income ~~increase was offset by a decrease in investment portfolio interest due to a slight~~remained flat for the nine month period as the decline in the average ~~taxable equivalent yield as~~balance 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, ~~2017~~2018 and ~~2016~~2017 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, ~~2017~~2018 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 in~~environment. 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~~

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, ~~2017~~2018 and ~~2016~~2017 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, ~~2017~~2018 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, ~~2016~~2017 to September 30, ~~2017.~~2018. The ~~primary funding for the~~ loan growth was primarily funded by an increase in ~~core~~average borrowings along with growth in total deposits. ~~These~~Core deposits represent a lower cost funding source than time deposits and comprise ~~81.94%~~77.63% of total deposits at September 30, ~~2017~~2018 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, ~~2017~~2018 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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	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, ~~2017~~2018 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

Table of Contents

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, ~~2017~~2018 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, ~~2016~~2017 to ~~$12,933,000~~$13,343,000 at September 30, ~~2017.~~2018. The increase in the allowance for loan losses was driven by ~~growth~~an 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, ~~2017~~2018 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

Table of Contents

~~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 of~~2018 compared to the ~~provision for loan losses~~prior periods was primarily due to the ~~result of~~growth in the loan ~~growth offset by minimal net charge-offs.~~portfolio.

Nonperforming loans ~~decreased~~increased 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, ~~2017~~2018 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, ~~2017~~2018 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, ~~2017~~2018 compared to the same period in ~~2016~~2017 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, ~~2017~~2018 increased $171,000 and decreased ~~$379,000~~$589,000, respectively, compared to the same ~~period~~periods 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 decreased~~The fluctuation in other income consists primarily due to ~~decreased usage of debit cards.~~

~~Total non-interest income~~increases 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 period~~was reported in ~~2016 decreased $1,102,000. Excluding net securities gains, non-interest income decreased $359,000 compared the 2016 period. The reasons noted~~accordance 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, ~~2017~~2018 and ~~2016~~2017 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	)%

Table of Contents


	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, ~~2017~~2018 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 ~~were~~where branches ~~will be opened~~opened. The fluctuation in ~~the next several months. Other non-interest expenses increased~~professional fees consists primarily ~~due~~ to a decrease in legal ~~expenses~~fees. 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-interest~~equipment expense ~~for~~between the nine months ended September 30, 2018 and 2017 ~~compared~~was 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, ~~2017~~2018 and ~~2016~~2017 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	%

Table of Contents


	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 $9,000~~decreased $425,000 and ~~$184,000~~$1,312,000 for the three and nine months ended September 30, ~~2017~~2018 compared to the same periods of ~~2016.~~2017. The effective tax rate for the three and nine months ended September 30, ~~2017~~2018 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 expense~~driver 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 $15,924,000~~increased $45,104,000 from ~~$43,671,000~~$27,243,000 at December 31, ~~2016~~2017 to ~~$27,747,000~~$72,347,000 at September 30, ~~2017~~2018 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 ~~leading~~trailing 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, ~~2016~~2017 due primarily to an increase in ~~installment loans to individuals. The growth in installment loans was driven by~~consumer automobile ~~indirect lending.~~loans. Loan growth has also ~~picked up~~occurred in ~~our~~the residential and commercial ~~financial, and agricultural loan products.~~real estate portfolios.

Table of Contents

The allocation of the loan portfolio, by category, as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 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, ~~2017~~2018 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 $1,027,000~~2018 increased $20,278,000 since December 31, ~~2016~~2017 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.

~~Table of Contents~~

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 $1,604,000~~decreased $209,000 to ~~$12,837,000~~$1,628,000 at September 30, ~~2017~~2018 from ~~$11,233,000~~$1,837,000 at December 31, ~~2016~~2017 while the fair value ~~increased $1,465,000~~decreased $614,000 over the same time period.

~~The equity portion~~

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, ~~2017~~2018 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, ~~2016~~2017 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	%

Table of Contents

~~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��s~~Company’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.” To~~undercapitalized” 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.

~~Table of Contents~~

~~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

~~Table of Contents~~

~~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 final~~Under 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 at~~of 8.0% ~~under the new rules~~ (10.0% to be considered “well capitalized”). Under ~~the new~~existing 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.

Table of Contents

The ~~Company~~Company's capital ratios as of September 30, 2018 and ~~the Banks will continue to analyze these new rules~~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	$	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, operations~~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	$	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

Table of Contents

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 ~~GAP~~gap 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.

~~Table of Contents~~

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, ~~2018~~2019 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, ~~2017~~2018 there have been ~~91,856~~139,554 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



3(i)		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).
3(ii)		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).
~~10(i)~~		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).
31(i)		Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
31(ii)		Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.
32(i)		Section 1350 Certification of Chief Executive Officer.
32(ii)		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, ~~2017~~2018 and December 31, ~~2016;~~2017; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016;~~2017; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016;~~2017; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, ~~2017~~2018 and ~~2016;~~2017; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2017~~2018 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, ~~2017~~2018	/s/ Richard A. Grafmyre
		Richard A. Grafmyre, Chief Executive Officer
		(Principal Executive Officer)


Date:	November 8, ~~2017~~2018	/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, ~~2017~~2018 and December 31, ~~2016;~~2017; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016;~~2017; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016;~~2017; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, ~~2017~~2018 and ~~2016;~~2017; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2017~~2018 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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