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.~~2019.



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.~~INC.

(Exact name of Registrant as specified in its charter)



~~PENNSYLVANIA~~Pennsylvania	300 Market Street, P.O. Box 967	23-2226454
(State or other jurisdiction of	Williamsport	(I.R.S. Employer Identification No.)
incorporation or organization)		~~Identification No.)~~



~~300 Market Street, P.O. Box 967 Williamsport,~~ Pennsylvania		17703-0967
	(Address of principal executive offices)		(Zip Code)

~~(570)~~ (570) 322-1111

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $8.33 par value	PWOD	The Nasdaq Global Select Market

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~~ ýYes ☒ 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~~ ýYes ☒ 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 filero	☐	Accelerated filerx	☒
Non-accelerated filero	☐		~~Small~~Smaller reporting companyo	☒
		Emerging growth companyo	☐

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

Yes ☐ No ☒

On November 1, ~~2017~~2019 there were ~~4,688,739~~7,037,823 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~~2019 and December 31, ~~2016~~2018		3

Consolidated Statement of Income (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018		4

Consolidated Statement of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018		5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018		6

Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018		78

Notes to Consolidated Financial Statements (Unaudited)		89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3433

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4.	Controls and Procedures	48

Part II	Other Information

Item 1.	Legal Proceedings	49

Item 4.1A.	~~Controls and Procedures~~Risk Factors	49

~~Part II~~Item 2.	~~Other Information~~Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 1.3.	~~Legal Proceedings~~Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

~~Item 1A.~~		~~Risk Factors~~	50

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	50

~~Item 3.~~	~~Defaults Upon Senior Securities~~	50

~~Item 4.~~	~~Mine Safety Disclosures~~	50

~~Item 5.~~	~~Other Information~~	50

~~Item 6.~~	~~Exhibits~~Signatures	51

~~Signatures~~Exhibit Index and Exhibits		52

~~Exhibit Index and Exhibits~~		53

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			2019			2018
ASSETS:
Noninterest-bearing balances	$	22,042		$	26,766		$	25,990		$	24,325
Interest-bearing balances in other financial institutions	5,705			16,905			31,351			42,417
Total cash and cash equivalents	27,747			43,671			57,341			66,742

Investment securities, available for sale, at fair value	132,313			133,492
Investment debt securities, available for sale, at fair value							149,075			134,285
Investment equity securities, at fair value							1,820			1,776
Investment securities, trading	210			58			47			36
Restricted investment in bank stock, at fair value							13,502			18,862
Loans held for sale	1,734			1,953			1,868			2,929
Loans	1,189,714			1,093,681			1,364,984			1,384,757
Allowance for loan losses	(12,933		)	(12,896		)	(14,249		)	(13,837		)
Loans, net	1,176,781			1,080,785			1,350,735			1,370,920
Premises and equipment, net	25,895			24,275			33,366			27,580
Accrued interest receivable	4,289			3,672			5,267			5,334
Bank-owned life insurance	27,827			27,332			29,107			28,627
Goodwill	17,104			17,104			17,104			17,104
Intangibles	1,543			1,799			960			1,162
Operating lease right-of-use asset							4,217			—
Deferred tax asset	7,984			8,397			3,744			5,154
Other assets	6,770			6,052			4,942			4,260
TOTAL ASSETS	$	1,430,197		$	1,348,590		$	1,673,095		$	1,684,771

LIABILITIES:
Interest-bearing deposits	$	843,166		$	791,937		$	1,005,078		$	899,089
Noninterest-bearing deposits	310,830			303,277			327,329			320,814
Total deposits	1,153,996			1,095,214			1,332,407			1,219,903

Short-term borrowings	41,596			13,241			5,987			167,865
Long-term borrowings	80,998			85,998			162,290			138,942
Accrued interest payable	483			455			1,666			1,150
Operating lease liability							4,228			—
Other liabilities	13,455			15,433			11,456			13,367
TOTAL LIABILITIES	1,290,528			1,210,341			1,518,034			1,541,227

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 $5.55, 22,500,000 shares authorized; 7,517,796 and 7,517,546 shares issued; 7,037,571 and 7,037,321 outstanding							41,758			41,763
Additional paid-in capital	50,142			50,075			51,290			50,737
Retained earnings	64,033			61,610			76,009			69,787
Accumulated other comprehensive loss:
Accumulated other comprehensive gain (loss):
Net unrealized gain (loss) on available for sale securities	73			(639		)	3,266			(1,360		)
Defined benefit plan	(4,203		)	(4,289		)	(5,165		)	(5,276		)
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, 480,225							(12,115		)	(12,115		)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY							155,043			143,536
Non-controlling interest							18			8
TOTAL SHAREHOLDERS' EQUITY							155,061			143,544
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,430,197		$	1,348,590		$	1,673,095		$	1,684,771

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		2019			2018			2019		2018
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	11,906		$	10,541	$	33,642		$	31,362	$	15,426		$	13,982		$	45,595	$	39,172
Investment securities:
Taxable	553			601		1,665			1,825		998			713			2,899		1,898
Tax-exempt	319			329		940			1,203		167			207			520		678
Dividend and other interest income	170			189		592			666		493			296			1,345		762
TOTAL INTEREST AND DIVIDEND INCOME	12,948			11,660		36,839			35,056		17,084			15,198			50,359		42,510
INTEREST EXPENSE:
Deposits	1,058			909		2,968			2,624		3,165			1,659			8,336		4,371
Short-term borrowings	31			7		39			41		7			528			790		1,004
Long-term borrowings	407			497		1,220			1,481		1,009			756			2,739		2,024
TOTAL INTEREST EXPENSE	1,496			1,413		4,227			4,146		4,181			2,943			11,865		7,399
NET INTEREST INCOME	11,452			10,247		32,612			30,910		12,903			12,255			38,494		35,111
PROVISION FOR LOAN LOSSES	60			258		605			866		360			480			1,035		975
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	11,392			9,989		32,007			30,044		12,543			11,775			37,459		34,136
NON-INTEREST INCOME:
Service charges	550			585		1,637			1,678		622			645			1,776		1,788
Net securities gains, available for sale	302			253		487			1,174
Net securities (losses) gains, trading	(4		)	8		(2		)	54
Net debt securities gains (losses), available for sale											189			(22		)	200		(17		)
Net equity securities (losses) gains											(21		)	(16		)	44		(44		)
Net securities gains (losses), trading											2			14			15		12
Bank-owned life insurance	166			172		499			516		143			165			434		496
Gain on sale of loans	455			658		1,316			1,691		583			398			1,246		1,053
Insurance commissions	109			198		399			604		93			85			346		266
Brokerage commissions	352			290		1,044			817		353			340			1,032		1,013
Debit card fees	514			690		1,450			1,413		333			359			1,032		1,065
Other	296			228		1,325			1,310		525			621			1,420		1,400
TOTAL NON-INTEREST INCOME	2,740			3,082		8,155			9,257		2,822			2,589			7,545		7,032
NON-INTEREST EXPENSE:
Salaries and employee benefits	4,738			4,507		14,116			13,433		5,488			5,420			16,512		15,387
Occupancy	603			544		1,855			1,630		638			640			2,085		2,080
Furniture and equipment	816			662		2,129			2,042		885			780			2,421		2,328
Software amortization	235			580		750			950		234			208			629		504
Pennsylvania shares tax	228			220		696			698		285			278			863		833
Professional fees	560			502		1,816			1,512		585			459			1,834		1,674
Federal Deposit Insurance Corporation deposit insurance	194			202		514			670		—			237			504		639
Debit card expenses	168			246		478			456
Marketing	315			173		690			568		98			245			233		764
Intangible amortization	81			90		256			276		62			71			202		229
Other	1,628			1,013		4,314			4,230		1,266			1,343			4,131		4,037
TOTAL NON-INTEREST EXPENSE	9,566			8,739		27,614			26,465		9,541			9,681			29,414		28,475
INCOME BEFORE INCOME TAX PROVISION	4,566			4,332		12,548			12,836		5,824			4,683			15,590		12,693
INCOME TAX PROVISION	1,282			1,273		3,491			3,307		1,170			857			2,741		2,179
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											$	4,654		$	3,826		$	12,849	$	10,514
Less: Net loss attributable to noncontrolling interest											4			—			10		(1		)
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.											$	4,650		$	3,826		$	12,839	$	10,515
EARNINGS PER SHARE - BASIC											$	0.66		$	0.54		$	1.82	$	1.49
EARNINGS PER SHARE - DILUTED											$	0.66		$	0.54		$	1.82	$	1.49
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC											7,037,055			7,035,840			7,036,181		7,034,940
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED											7,037,055			7,035,840			7,036,181		7,034,940
DIVIDENDS DECLARED PER SHARE	$	0.47		$	0.47	$	1.41		$	1.41	$	0.31		$	0.31		$	0.94	$	0.94

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			2019			2018			2019			2018
Net Income	$	3,284		$	3,059		$	9,057		$	9,529		$	4,650		$	3,826		$	12,839		$	10,515
Other comprehensive income (loss):
Other comprehensive income (loss) income:
Change in unrealized gain (loss) on available for sale securities	437			(276		)	1,565			3,039			1,261			(789		)	6,056			(2,641		)
Tax effect	(150		)	94			(532		)	(1,032		)	(265		)	166			(1,272		)	556
Net realized gain on available for sale securities included in net income	(302		)	(253		)	(487		)	(1,174		)
Net realized (gain) loss on available for sale securities included in net income													(189		)	22			(200		)	17
Tax effect	104			86			166			398			40			(5		)	42			(4		)
Amortization of unrecognized pension loss	45			39			129			117
Amortization of unrecognized pension gain													46			41			140			125
Tax effect	(15		)	(13		)	(43		)	(40		)	(9		)	(8		)	(29		)	(25		)
Total other comprehensive income (loss)	119			(323		)	798			1,308
Total other comprehensive gain (loss) income													884			(573		)	4,737			(1,972		)
Comprehensive income	$	3,403		$	2,736		$	9,855		$	10,837		$	5,534		$	3,253		$	17,576		$	8,543

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

Three months ended:


	COMMON STOCK			ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS				ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK			TOTAL SHAREHOLDERS’ EQUITY				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					RETAINED EARNINGS				ACCUMULATED OTHER COMPREHENSIVE LOSS			SHARES				TOTAL SHAREHOLDERS’ EQUITY			AMOUNT									RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE LOSS				TREASURY STOCK				NON-CONTROLLING INTEREST			TOTAL SHAREHOLDERS’ EQUITY
Balance, December 31, 2015	5,004,984	$	41,708	ADDITIONAL PAID-IN CAPITAL		$	49,992			$	58,038			$	TREASURY STOCK	(3,799	)	$	(9,660	)		$	136,279
Balance, June 30, 2019																						7,519,344		$	41,773		ADDITIONAL PAID-IN CAPITAL	$	51,067		$	73,565		$	(2,783	)		$	(12,115	)		$	14		$	151,521
Net income							9,529											9,529												4,650											4			4,654
Other comprehensive income											1,308							1,308															884											884
Dividends declared, ($1.41 per share)							(6,678		)									(6,678		)
Stock-based compensation																											185																	185
Dividends declared ($0.31 per share)																														(2,206		)												(2,206		)
Common shares issued for employee stock purchase plan	1,617	13		58														71				782		4			38																	42
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
Stock split fractional shares																						(2,330	)	(19		)																		(19		)
Balance, September 30, 2019																						7,517,796		$	41,758		$	51,290		$	76,009		$	(1,899	)		$	(12,115	)		$	18		$	155,061

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	7,515,803	$	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 ($0.31 per share)						(2,205		)									(2,205		)
Common shares issued for employee stock purchase plan	1,743	4		19													23
Balance, September 30, 2018	7,517,546	$	41,757	$	50,577	$	67,802		$	(7,483	)	$	(12,115	)	$	1	$	140,539

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Nine months ended:



	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, 2018	7,517,546		$	41,763		$	50,737	$	69,787		$	(6,636	)	$	(12,115	)	$	8	$	143,544
Net income								12,839									10		12,849
Other comprehensive income											4,737								4,737
Stock-based compensation						498													498
Dividends declared ($0.94 per share)								(6,617		)									(6,617		)
Common shares issued for employee stock purchase plan	2,580		14			55													69
Stock split fractional shares	(2,330	)	(19		)														(19		)
Balance, September 30, 2019	7,517,796		$	41,758		$	51,290	$	76,009		$	(1,899	)	$	(12,115	)	$	18	$	155,061



	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	7,514,009	$	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 ($0.94 per share)						(6,614		)										(6,614		)
Common shares issued for employee stock purchase plan	3,537	13		59														72
Balance, September 30, 2018	7,517,546	$	41,757	$	50,577	$	67,802		$	(7,483	)	$	(12,115	)	$	1		$	140,539

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2017			2016			2019			2018
OPERATING ACTIVITIES:
Net Income	$	9,057		$	9,529		$	12,849		$	10,514
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,979			2,394			1,904			1,907
Amortization of intangible assets	256			276			202			229
Provision for loan losses	605			866			1,035			975
Accretion and amortization of investment security discounts and premiums	688			657			499			591
Net securities gains, available for sale	(487		)	(1,174		)
Net securities (gains) losses, available for sale							(200		)	17
Originations of loans held for sale	(41,503		)	(50,824		)	(41,601		)	(39,979		)
Proceeds of loans held for sale	43,038			51,112			43,908			38,501
Gain on sale of loans	(1,316		)	(1,691		)	(1,246		)	(1,053		)
Net equity securities (gains) losses							(44		)	44
Net securities gains, trading	2			(54		)	(15		)	(12		)
Proceeds from the sale of trading securities	332			3,723			78			466
Purchases of trading securities	(486		)	(3,596		)	(74		)	(309		)
Earnings on bank-owned life insurance	(499		)	(516		)	(434		)	(496		)
Decrease in deferred tax asset	46			952
Decrease (increase) in deferred tax asset							180			(370		)
Other, net	(4,361		)	508			(1,268		)	(952		)
Net cash provided by operating activities	7,351			12,162			15,773			10,073
INVESTING ACTIVITIES:
Proceeds from sales of available for sale securities	15,443			42,180			16,289			14,528
Proceeds from calls and maturities of available for sale securities	7,198			19,267			3,089			6,160
Purchases of available for sale securities	(18,434		)	(24,040		)	(28,611		)	(45,473		)
Net increase in loans	(97,109		)	(24,548		)
Net decrease (increase) in loans							18,625			(123,857		)
Acquisition of premises and equipment	(2,849		)	(2,347		)	(1,798		)	(1,374		)
Proceeds from the sale of foreclosed assets	958			486			502			253
Purchase of bank-owned life insurance	(34		)	(27		)	(30		)	(36		)
Proceeds from redemption of regulatory stock	4,844			2,644			13,659			12,073
Purchases of regulatory stock	(6,994		)	(2,569		)	(8,299		)	(16,575		)
Net cash (used for) provided by investing activities	(96,977		)	11,046
Net cash provided (used) for investing activities							13,426			(154,301		)
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	51,229			40,901			105,989			54,362
Net increase in noninterest-bearing deposits	7,553			15,516			6,515			9,795
Proceeds from long-term borrowings	30,000			—			50,000			80,000
Repayment of long-term borrowings	(35,000		)	—			(32,608		)	(12,000		)
Net increase (decrease) in short-term borrowings	28,355			(35,059		)
Net (decrease) increase in short-term borrowings							(161,878		)	63,717
Finance lease principal payments							(70		)	—
Dividends paid	(6,634		)	(6,678		)	(6,617		)	(6,614		)
Issuance of common stock	80			71			69			72
Purchases of treasury stock	(1,881		)	(574		)
Net cash provided by financing activities	73,702			14,177
Net cash (used) provided by financing activities							(38,600		)	189,332
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(15,924		)	37,385			(9,401		)	45,104
CASH AND CASH EQUIVALENTS, BEGINNING	43,671			22,796			66,742			27,243
CASH AND CASH EQUIVALENTS, ENDING	$	27,747		$	60,181		$	57,341		$	72,347


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	4,199	$	4,091	$	11,349	$	6,850
Income taxes paid	3,950		3,050		3,125		1,925
Non-cash investing and financing activities:
Right-of-use lease assets obtained in exchange for lessee finance lease liabilities					6,026		—
Right-of-use lease assets obtained in exchange for lessee operating lease liabilities					4,298		—
Transfer of loans to foreclosed real estate	508		83		525		876
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.~~2018.

Newly Adopted Accounting Standards

In February 2016, the FASB issued the Leasing Standard, which is codified in ASC 842, Leases, and is intended to increase transparency and comparability among organizations and require lessees to record a right-of-use (ROU) asset and a liability representing the obligation to make lease payments for long-term leases. Accounting by lessors remains largely unchanged. The Company adopted the Standard on January 1, 2019, using the modified retrospective transition under the option to apply the Leasing Standard at its effective date without adjusting the prior period comparative financial statements. Among other things, these updates require lessees to recognize a lease liability, measured on a discounted basis, related to the lessee's obligation to make lease payments arising under a lease contract; and a right-of-use asset related to the lessee’s right to use, or control the use of, a specified asset for the lease term. On January 1, 2019, the Company recorded operating lease liabilities and ROU asset of $4.3 million and finance lease liabilities and ROU asset of $6.0 million upon adoption of the Standard. The balance sheet effects of the new lease accounting standard also impacted regulatory capital ratios, performance ratios and other measures which are dependent upon asset or liability balances. For additional information and required disclosures related to ASC 842, see Note 13, “Leases.”

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 3941 through 4850 of the Form 10-K for the year ended December 31, ~~2016.~~2018.

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~~Gain (loss)

The changes in accumulated other comprehensive ~~loss~~gain (loss) by component shown net of tax and parenthesis indicating debits, as of September 30, ~~2017~~2019 and ~~2016~~2018 were as follows:


	Three Months Ended September 30, 2017									Three Months Ended September 30, 2016									Three Months Ended September 30, 2019									Three Months Ended September 30, 2018
(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 Gain on Available for Sale Securities			Defined Benefit Plan			Total			Net Unrealized Loss on Available for Sale Securities			Defined Benefit Plan			Total
Beginning balance	$	(16	)	$	(4,233	)	$	(4,249	)	$	1,838		$	(4,006	)	$	(2,168	)	$	2,419		$	(5,202	)	$	(2,783	)	$	(2,057	)	$	(4,853	)	$	(6,910	)
Other comprehensive income (loss) before reclassifications	287			—			287			(182		)	—			(182		)
Amounts reclassified from accumulated other comprehensive loss	(198		)	30			(168		)	(167		)	26			(141		)
Net current-period other comprehensive income	89			30			119			(349		)	26			(323		)
Other comprehensive gain (loss) before reclassifications																			996			—			996			(623		)	—			(623		)
Amounts reclassified from accumulated other comprehensive (loss) gain																			(149		)	37			(112		)	17			33			50
Net current-period other comprehensive income (loss)																			847			37			884			(606		)	33			(573		)
Ending balance	$	73		$	(4,203	)	$	(4,130	)	$	1,489		$	(3,980	)	$	(2,491	)	$	3,266		$	(5,165	)	$	(1,899	)	$	(2,663	)	$	(4,820	)	$	(7,483	)

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
(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
Beginning balance $ (639 ) $ (4,289 ) $ (4,928 ) $ 258
$ (4,057 ) $ (3,799 )
Other comprehensive income before reclassifications 1,033
—
1,033
2,007
—
2,007
Amounts reclassified from accumulated other comprehensive loss (321 ) 86
(235 ) (776 ) 77
(699 )
Net current-period other comprehensive income 712
86
798
1,231
77
1,308
Ending balance $ 73
$ (4,203 ) $ (4,130 ) $ 1,489
$ (3,980 ) $ (2,491 )

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	Nine Months Ended September 30, 2019									Nine Months Ended September 30, 2018
(In Thousands)	Net Unrealized Gain (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	$	(1,360	)	$	(5,276	)	$	(6,636	)	$	(54	)	$	(4,920	)	$	(4,974	)
Other comprehensive gain (loss) before reclassifications	4,784			—			4,784			(2,085		)	—			(2,085		)
Amounts reclassified from accumulated other comprehensive (loss) gain	(158		)	111			(47		)	13			100			113
Net current-period other comprehensive income (loss)	4,626			111			4,737			(2,072		)	100			(1,972		)
Reclassification from adoption of 2016-01	—			—			—			(537		)	—			(537		)
Ending balance	$	3,266		$	(5,165	)	$	(1,899	)	$	(2,663	)	$	(4,820	)	$	(7,483	)

The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of September 30, ~~2017~~2019 and ~~2016~~2018 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, 2019			Three Months Ended September 30, 2018			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	$	189		$	(22	)	Net debt securities gains (losses), available for sale
Income tax effect	(104		)	(86		)	Income tax provision	(40		)	5			Income tax provision
Total reclassifications for the period	$	198		$	167			$	149		$	(17	)

Net unrecognized pension costs	(45		)	(39		)	Salaries and employee benefits	$	(46	)	$	(41	)	Salaries and employee benefits
Income tax effect	15			13			Income tax provision	9			8			Income tax provision
Total reclassifications for the period	(30		)	(26		)		$	(37	)	$	(33	)


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, 2019			Nine months ended September 30, 2018			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								$	200		$	(17	)	Net securities gains, available for sale
Income tax effect	(166		)	(398		)	Income tax provision	(42		)	4			Income tax provision
Total reclassifications for the period	$	321		$	776			$	158		$	(13	)

Net unrecognized pension costs	(129		)	(117		)	Salaries and employee benefits	$	(140	)	$	(125	)	Salaries and employee benefits
Income tax effect	43			40			Income tax provision	29			25			Income tax provision
Total reclassifications for the period	(86		)	(77		)		$	(111	)	$	(100	)

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.

~~Table of Contents~~

~~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. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments - Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. 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,

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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.

~~Table of Contents~~

~~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 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles - Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Company’s financial statements.

In ~~February 2017,~~August 2018, the FASB issued ASU ~~2017-05,~~ ~~Other Income-Gains~~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 ~~Losses from~~reasons for transfers between Level I and Level II of the ~~Derecognition~~fair value hierarchy; the policy for timing of ~~Nonfinancial Assets (Subtopic 610-20).~~ The amendments in this Update clarify what constitutes a financial asset within the scope of Subtopic 610-20. The amendments also clarify that entities should identify each distinct nonfinancial asset or 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,transfers between levels; and the ~~related gain or loss, should be recognized.~~valuation processes for Level III fair value measurements. The ~~amendments~~Update requires disclosure of changes in ~~this Update are effective~~unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the ~~same time as~~end of the ~~amendments in~~reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update ~~2014-09. Therefore, for public entities, the amendments are~~is effective for ~~annual reporting periods beginning after December 15, 2017, including~~all entities for fiscal years, and 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 periodsthose fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial ~~statements, or the Company is currently evaluating the impact the adoption.~~statements.

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In ~~March 2017,~~August 2018, the FASB issued ASU ~~2017-07,~~ ~~Compensation-Retirement~~2018-14, Compensation - Retirement Benefits (Topic ~~715)~~715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ~~amendments~~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 ~~Update require that an employer report the~~change in rates on service cost, ~~component in~~interest cost and 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 guidanceobligation for postretirement health care benefits. This Update is effective for public business entities for ~~annual reporting periods beginning~~fiscal years ending after December 15, ~~2017,~~2020, 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 tomust be applied on a retrospective ~~basis~~basis. For all other entities, this Update is effective 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.~~fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.

In ~~March 2017,~~August 2018, the FASB issued ASU ~~2017-08,~~ ~~Receivables~~2018-15, Intangibles - ~~Nonrefundable Fees~~Goodwill and Other ~~Costs~~- Internal-Use Software (Subtopic ~~310-20)~~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 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 ~~shorten~~can be applied either retrospectively or prospectively to all implementation costs incurred after the ~~amortization period~~date of adoption. On October 16, 2019, the FASB voted to defer the effective date for ~~certain callable debt securities held at~~ASC 350, Intangibles - Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. This Update is not expected to have a ~~premium. Specifically,~~significant impact on the Company’s financial statements.

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted

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Update 2017-12, the amendments ~~require the premium~~in this Update are required to be ~~amortized~~adopted concurrently with the amendments in Update 2017-12. For public business entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update 2017-12. This Update is not expected to have a significant impact on the ~~earliest call date. The amendments do~~Company’s financial statements.

In November 2018, the FASB issued ASU 018-18, Collaborative Arrangements (Topic 808), which made the following targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements (1) clarified that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (2) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606, and (3) require that in a transaction with a collaborative arrangement participant that is not ~~require an accounting change for securities held at~~directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a ~~discount; the discount continues to be amortized to maturity.~~customer. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal ~~years, beginning after December 15, 2018.~~years. 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. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to (1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is 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,~~April 2019, the FASB issued ASU ~~2017-09,~~ ~~Compensation~~2019-04, Codification Improvements to Topic 326, Financial Instruments - ~~Stock Compensation (Topic 718)~~, Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects ~~any entity that changes~~a variety of topics in 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,Codification 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~~all reporting entities ~~for service concession arrangements~~ within the scope of the affected accounting guidance. Topic ~~853. The~~ 326, Financial Instruments - Credit Losses 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”) 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~~SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, ~~2020. Early adoption is permitted~~2020, and for all other 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~~effective date is for fiscal years beginning after December 15, 2021.On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments - Credit Losses, for smaller reporting companies to fiscal years beginning of the fiscal year that includes 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 yearafter December 15, 2022, and interim ~~period(s) in which the pending content that links to this paragraph~~periods within those fiscal years. The final ASU 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~~be issued ~~ASU 2017-12,~~ in mid-November. Topic 815, 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~~are effective 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~~For entities that have adopted the amendments in Update 2017- 12, the effective date 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~~first annual period beginning after the ~~amendments in~~issuance of this Update. ~~The amended presentation~~Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and ~~disclosure guidance is required only prospectively.~~interim periods within fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In ~~September 2017,~~May 2019, the FASB issued ASU ~~2017-13,~~ ~~Revenue Recognition (Topic 605)~~2019-05, Financial Instruments - Credit Losses, Topic 326, ~~Revenue from Contracts with Customers (Topic 606), Leases (Topic 840),~~which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and ~~Leases (Topic 842~~): ~~Amendments to SEC Paragraphs Pursuant to~~eligible for the ~~Staff Announcement at~~applying the ~~July 20, 2017 EITF Meeting~~fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and ~~Rescission of Prior SEC Staff Announcements and Observer Comments.~~ ~~The SEC Observer said that the SEC staff would~~is not ~~object if~~available for either available-for-sale or held-to-maturity debt securities. For entities that ~~are considered public business~~elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities ~~only because their financial statements or financial information is required to be included in another entity’s SEC filing use~~that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for ~~private~~fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the

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FASB voted to defer the effective date for ASC 326, Financial Instruments - Credit Losses, for smaller reporting companies ~~when they adopt ASC 606,~~ ~~Revenue from Contracts with Customers~~,to fiscal years beginning after December 15, 2022, and ~~ASC 842,~~ ~~Leases~~.interim periods within those fiscal years. The ~~Update also supersedes certain SEC paragraphs~~final ASU is expected to be issued in ~~the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842.~~mid-November. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.

On September 30, 2019, the Company completed a three-for-two stock split (the “Stock Split”) of the Company’s common stock. As a result of the Stock Split, effective at 11:59 p.m. on September 30, 2019, each share of the Company’s common stock issued at that time was changed into one and one-half shares of the Company’s common stock with a stated par value of $5.55 per share. All share and per share amounts in this release, including in the accompanying financial statements and information, have been restated for all periods presented to give retroactive effect to the Stock Split.

Note 4. Per Share Data

There are no0 convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of ~~95,000~~635,550 stock options, with an average exercise price of ~~$43.64,~~$29.30, outstanding on September 30, ~~2017. These~~2019. All options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the three month and nine month period end due to the average market price of common shares ~~of $43.53~~ being less than the exercise price of the options. There were a total of 31,000 stock options outstanding for the same period end in 2016 that had an average exercise price of $42.03 and were excluded from the computation of diluted earnings per share because the average market price of common shares was $41.10$28.44 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,
	2019		2018		2019		2018
Weighted average common shares issued	7,517,280		7,516,065		7,516,406		7,515,165
Weighted average treasury stock shares	(480,225	)	(480,225	)	(480,225	)	(480,225	)
Weighted average common shares outstanding - basic and diluted	7,037,055		7,035,840		7,036,181		7,034,940

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

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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~~2019 and December 31, ~~2016~~2018 are as follows:


	September 30, 2017									September 30, 2019
			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	$	4,544	$	79	$	(93	)	$	4,530	$	5,160	$	60	$	(50	)	$	5,170
State and political securities	61,868		640		(181		)	62,327		78,685		4,194		(43		)	82,836
Other debt securities	52,954		220		(1,201		)	51,973		61,096		441		(468		)	61,069
Total debt securities	119,366		939		(1,475		)	118,830		$	144,941	$	4,695	$	(561	)	$	149,075

Investment equity securities:
Financial institution equity securities	11,537		687		—			12,224		$	328	$	225	$	—		$	553
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
Other equity securities										1,300		—		(33		)	1,267
Investment equity securities										$	1,628	$	225	$	(33	)	$	1,820

Trading:
Other equity securities										$	50	$	—	$	(3	)	$	47

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
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
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

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	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In Thousands)	Cost		Gains		Losses			Value
Available for sale (AFS):
Mortgage-backed securities	$	6,385	$	8	$	(240	)	$	6,153
State and political securities	79,358		609		(426		)	79,541
Other debt securities	50,264		17		(1,690		)	48,591
Total debt securities	$	136,007	$	634	$	(2,356	)	$	134,285

Investment equity securities:
Financial institution equity securities	$	328	$	224	$	—		$	552
Other equity securities	1,300		—		(76		)	1,224
Investment equity securities	$	1,628	$	224	$	(76	)	$	1,776

Trading:
Other equity securities	$	49	$	—	$	(13	)	$	36

December 31, 2016
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
Trading:
Financial institution equity securities $ —
$ —
$ —
$ —
Non-financial institution equity securities 56
2
—
58
Total trading securities $ 56
$ 2
$ —
$ 58

Total net trading losses of $4,000 and $2,000 for the three and nine month periods 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 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~~2019 and December 31, ~~2016.~~

2018.


	September 30, 2017															September 30, 2019
	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	)	$	—	$	—		$	2,125	$	(50	)	$	2,125	$	(50	)
State and political securities	13,651		(120		)	2,170		(61		)	15,821		(181		)	—		—			219		(43		)	219		(43		)
Other debt securities	9,689		(145		)	22,733		(1,056		)	32,422		(1,201		)	13,664		(156		)	14,275		(312		)	27,939		(468		)
Total debt securities	24,388		(269		)	27,205		(1,206		)	51,593		(1,475		)	$	13,664	$	(156	)	$	16,619	$	(405	)	$	30,283	$	(561	)
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	)



	December 31, 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	$	3,023	$	(75	)	$	2,930	$	(165	)	$	5,953	$	(240	)
State and political securities	14,819		(128		)	13,648		(298		)	28,467		(426		)
Other debt securities	10,133		(153		)	34,776		(1,537		)	44,909		(1,690		)
Total debt securities	$	27,975	$	(356	)	$	51,354	$	(2,000	)	$	79,329	$	(2,356	)

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,~~2019, there were a total of 347 securities in a continuous unrealized loss position for less than twelve months and 2015 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,~~2019, 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

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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,~~2019, 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
Due in one year or less	$	4,812	$	4,823
Due after one year to five years	54,762		54,755
Due after five years to ten years	66,277		69,897
Due after ten years	19,090		19,600
Total	$	144,941	$	149,075

(In Thousands) Amortized Cost Fair Value
Due in one year or less $ 4,839
$ 4,836
Due after one year to five years 45,064
44,918
Due after five years to ten years 54,858
54,301
Due after ten years 14,605
14,775
Total $ 119,366
$ 118,830

Total gross proceeds from sales of debt securities available for sale for the three and nine months ended September 30, ~~2017~~2019 were ~~$6,478,000~~$8,157,000 and ~~$15,443,000, a decrease~~$16,289,000, respectively, an increase from the ~~2016~~2018 totals of ~~$16,168,000~~$10,450,000 and ~~$42,180,000.~~$14,528,000.

The following table represents gross realized gains and losses ~~within~~from the sales of debt securities available for ~~sale portfolio:~~

sale:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2019		2018		2019		2018
Available for sale (AFS):
Gross realized gains:
Mortgage-backed securities	$	—	$	22	$	—	$	27
State and political securities	190		—		204		19
Other debt securities	—		3		4		3
Total gross realized gains	$	190	$	25	$	208	$	49

Gross realized losses:
State and political securities	$	—	$	47	$	3	$	56
Other debt securities	—		—		5		10
Total gross realized losses	$	1	$	47	$	8	$	66

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,
(In Thousands) 2017 2016 2017 2016
Gross realized gains:

Financial institution equity securities $ 3
$ —
$ 3
$ 6
Non-financial institution equity securities 4
8
12
76
Total gross realized gains $ 7
$ 8
$ 15
$ 82

Gross realized losses:

Financial institution equity securities $ —
$ —
$ —
$ 12
Non-financial institution equity securities 11
—
17
16
Total gross realized losses $ 11
$ —
$ 17
$ 28

There were no0 impairment charges included in gross realized losses for the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

Investment securities with a carrying value of approximately ~~$98,157,000~~$78,445,000 and ~~$95,199,000~~$73,327,000 at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At September 30, 2019 and December 31, 2018, we had $1,820,000 and $1,776,000, 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. 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, 2019 and 2018:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019		2018
Net (losses) gains recognized in equity securities during the period	$	(21	)	$	(16	)	$	44	$	(44	)
Less: Net gains realized on the sale of equity securities during the period	—			5			—		13
Unrealized (losses) gains recognized in equity securities held at reporting date	$	(21	)	$	(21	)	$	44	$	(57	)

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Net gains and losses on trading account securities are as follows for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2019		2018		2019		2018
Net gains on sale transactions	$	—	$	9	$	8	$	17
Net mark-to-market gains (losses)	2		5		7		(5		)
Net gain on trading account securities	$	2	$	14	$	15	$	12

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~~3 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~~2019 and December 31, ~~2016:~~

2018:


	September 30, 2017												September 30, 2019
				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		$	168,218		$	153	$	25	$	5,146	$	173,542
Real estate mortgage:
Residential	572,303			1,929		26		1,876		576,134			609,857			3,227		902		3,960		617,946
Commercial	316,493			1,144		—		5,873		323,510			355,491			1,961		216		6,686		364,354
Construction	29,243			9		100		—		29,352			39,362			—		132		69		39,563
Installment loans to individuals	85,872			625		82		60		86,639
Consumer automobile loans													144,472			285		29		38		144,824
Other consumer installment loans													23,320			493		—		5		23,818
	1,178,904			$	3,713	$	261	$	8,056	1,190,934			1,340,720			$	6,119	$	1,304	$	15,904	1,364,047
Net deferred loan fees and discounts	(1,220		)							(1,220		)	937									937
Allowance for loan losses	(12,933		)							(12,933		)	(14,249		)							(14,249		)
Loans, net	$	1,164,751								$	1,176,781		$	1,327,408								$	1,350,735

1816

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	December 31, 2018
				Past Due		Past Due 90
				30 To 89		Days Or More		Non-
(In Thousands)	Current			Days		& Still Accruing		Accrual		Total
Commercial, financial, and agricultural	$	182,651		$	616	$	—	$	5,294	$	188,561
Real estate mortgage:
Residential	611,281			7,688		1,238		2,172		622,379
Commercial	361,624			2,349		—		7,722		371,695
Construction	43,144			305		—		74		43,523
Consumer automobile loans	132,713			412		27		31		133,183
Other consumer installment loans	23,902			636		9		5		24,552
	1,355,315			$	12,006	$	1,274	$	15,298	1,383,893
Net deferred loan fees and discounts	864									864
Allowance for loan losses	(13,837		)							(13,837		)
Loans, net	$	1,342,342								$	1,370,920

December 31, 2016
Past Due Past Due 90
30 To 89 Days Or More Non-
(In Thousands) Current Days & Still Accruing Accrual Total
Commercial, financial, and agricultural $ 145,179
$ 785
$ 14
$ 132
$ 146,110
Real estate mortgage:

Residential 553,053
9,112
587
1,988
564,740
Commercial 296,537
786
268
8,591
306,182
Construction 33,879
771
—
—
34,650
Installment loans to individuals 43,008
202
1
45
43,256
1,071,656
$ 11,656
$ 870
$ 10,756
1,094,938
Net deferred loan fees and discounts (1,257 )

(1,257 )
Allowance for loan losses (12,896 )

(12,896 )
Loans, net $ 1,057,503

$ 1,080,785

~~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~~2019 and ~~2016:~~

2018:


	Three Months Ended September 30,								Three Months Ended September 30,
	2017				2016				2019				2018
(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	$	8	$	2	$	1	$	—	$	51	$	49	$	61	$	51
Real estate mortgage:
Residential	29		30		57		68		76		76		21		31
Commercial	90		23		109		90		68		30		33		4
Construction	—		—				—		1		1		—		—
Installment	1		1		—		—
Consumer automobile loans									—		—		—		—
Other consumer installment loans									1		1		2		1
	$	128	$	56	$	167	$	158	$	197	$	157	$	117	$	87



	Nine Months Ended September 30,
	2019				2018
(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	$	108	$	132	$	65	$	52
Real estate mortgage:
Residential	142		118		89		65
Commercial	233		104		171		43
Construction	3		3		—		—
Consumer automobile loans	3		2		—		—
Other consumer installment loans	2		1		3		2
	$	491	$	360	$	328	$	162

Nine 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 $ 21
$ 8
$ 5
$ 1
Real estate mortgage:

Residential 123
81
113
95
Commercial 322
42
388
170
Construction —
—
—
—
Installment 3
2
—
—
$ 469
$ 133
$ 506
$ 266

~~Table of Contents~~

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

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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~~2019 and December 31, ~~2016:~~

2018:


	September 30, 2017						September 30, 2019
	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	$	—	$	1,232	$	1,232	$	—
Real estate mortgage:
Residential	1,775		1,775		—		4,414		4,414		—
Commercial	2,222		2,222		—		2,344		2,344		—
Construction							69		69		—
Consumer automobile loans							—		—		—
Installment loans to individuals	—		—		—		5		5		—
	5,138		5,138		—		8,064		8,064		—
With an allowance recorded:
Commercial, financial, and agricultural	255		255		207		3,987		3,987		569
Real estate mortgage:
Residential	1,022		1,070		224		1,556		1,556		203
Commercial	8,433		8,529		1,629		6,417		6,417		1,430
Construction							—		—		—
Consumer automobile loans							38		38		10
Installment loans to individuals	—		—		—		—		—		—
	9,710		9,854		2,060		11,998		11,998		2,212
Total:
Commercial, financial, and agricultural	1,396		1,396		207		5,219		5,219		569
Real estate mortgage:
Residential	2,797		2,845		224		5,970		5,970		203
Commercial	10,655		10,751		1,629		8,761		8,761		1,430
Construction							69		69		—
Consumer automobile loans							38		38		10
Installment loans to individuals	—		—		—		5		5		—
	$	14,848	$	14,992	$	2,060	$	20,062	$	20,062	$	2,212

2018

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	December 31, 2018
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial, financial, and agricultural	$	1,152	$	1,152	$	—
Real estate mortgage:
Residential	2,619		2,619		—
Commercial	2,457		2,457		—
Construction	74		74		—
Consumer automobile loans	31		31		—
Installment loans to individuals	—		—		—
	6,333		6,333		—
With an allowance recorded:
Commercial, financial, and agricultural	4,111		4,111		650
Real estate mortgage:
Residential	1,591		1,591		168
Commercial	9,207		9,207		1,720
Construction	—		—		—
Consumer automobile loans	—		—		—
Installment loans to individuals	5		5		5
	14,914		14,914		2,543
Total:
Commercial, financial, and agricultural	5,263		5,263		650
Real estate mortgage:
Residential	4,210		4,210		168
Commercial	11,664		11,664		1,720
Construction	74		74		—
Consumer automobile loans	31		31		—
Installment loans to individuals	5		5		5
	$	21,247	$	21,247	$	2,543

December 31, 2016
Recorded Unpaid Principal Related
(In Thousands) Investment Balance Allowance
With no related allowance recorded:

Commercial, financial, and agricultural $ 109
$ 109
$ —
Real estate mortgage:

Residential 1,584
1,584
—
Commercial 1,833
1,833
—
Installment loans to individuals —
—
—
3,526
3,526
—
With an allowance recorded:

Commercial, financial, and agricultural 132
132
74
Real estate mortgage:

Residential 1,893
1,893
437
Commercial 10,425
10,520
1,668
Installment loans to individuals —
—
—
12,450
12,545
2,179
Total:

Commercial, financial, and agricultural 241
241
74
Real estate mortgage:

Residential 3,477
3,477
437
Commercial 12,258
12,353
1,668
Installment loans to individuals —
—
—
$ 15,976
$ 16,071
$ 2,179

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~~2019 and ~~2016:~~

2018:


	Three Months Ended September 30,												Three Months Ended September 30,
	2017						2016						2019						2018
(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	$	—	$	5,236	$	1	$	49	$	1,154	$	18	$	51
Real estate mortgage:
Residential	3,199		12		34		2,784		23		41		5,006		26		76		3,703		40		31
Commercial	12,885		52		23		12,383		83		16		9,037		30		31		8,547		97		4
Construction	—		—		—		67		—		—		70		—		1		—		—		—
Installment loans to individuals	—		—		—		—		—		—
Consumer automobile													37		—		—		—		—		—
Other consumer installment loans													5		—		—		20		2		1
	$	16,478	$	81	$	58	$	15,580	$	110	$	57	$	19,391	$	57	$	157	$	13,424	$	157	$	87

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	Nine Months Ended September 30,
	2019						2018
(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
Commercial, financial, and agricultural	$	5,269	$	3	$	131	$	1,206	$	52	$	52
Real estate mortgage:
Residential	4,584		81		115		3,901		107		65
Commercial	10,053		91		100		8,988		191		43
Construction	72		—		3		—		—		—
Consumer automobile	45		—		1		—		—		—
Other consumer installment loans	11		—		—		10		3		1
	$	20,034	$	175	$	350	$	14,105	$	353	$	161

Nine Months Ended September 30,
2017 2016
(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
Commercial, financial, and agricultural $ 324
$ 24
$ 7
$ 586
$ 12
$ 1
Real estate mortgage:

Residential 3,212
48
80
4,539
67
68
Commercial 12,635
137
42
16,988
247
96
Construction —
—
—
208
—
—
Installment loans to individuals 8
—
2
—
—
—
$ 16,179
$ 209
$ 131
$ 22,321
$ 326
$ 165

Currently, there is ~~$10,000~~$2,000 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~~5 loan modifications ~~that were~~ considered to be TDRs completed during the ~~three and~~ nine months ended September 30, ~~2017.~~2019. Loan modifications that are considered TDRs completed during the three and nine months ended September 30, ~~2016~~2019 and 2018 were as follows:

Three Months Ended September 30,
2017 2016
(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
Commercial, financial, and agricultural —
$ —
$ —
—
$ —
$ —
Real estate mortgage:

Residential —
—
—
2
580
580
Commercial 2
375
375
—
—
—
Construction —
—
—
—
—
—
2
$ 375
$ 375
2
$ 580
$ 580


	Nine Months Ended September 30,										Three Months Ended September 30,
	2017					2016					2019					2018
(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		1	2,059		2,059		—	—		—
Commercial	2	375		375		1	838		838		—	—		—		—	—		—
Construction	—	—		—		—	—		—
	2	$	375	$	375	5	$	1,760	$	1,760	1	$	2,059	$	2,059	1	$	1,028	$	1,028

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	Nine Months Ended September 30,
	2019					2018
(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
Commercial, financial, and agricultural	2	$	4,014	$	4,014	1	$	1,028	$	1,028
Real estate mortgage:
Residential	1	2,059		2,059		3	169		169
Commercial	2	2,862		2,862		1	106		106
	5	$	8,935	$	8,935	5	$	1,303	$	1,303

There were no0 loan modifications considered to be TDRs made during the twelve months previous to September 30, ~~2017~~2019 that defaulted during the nine months ended September 30, ~~2017.~~2019. There ~~were five~~was 1 loan ~~modifications~~modification considered ~~TDRs~~to be a TDR made during the twelve months previous to September 30, ~~2016~~2018 that defaulted during the nine months ended September 30, ~~2016. The~~2018. This defaulted loan ~~types~~type and recorded ~~investments at~~investment as of September 30, ~~2016 are~~2018 is 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.~~$3,000.

Troubled debt restructurings amounted to ~~$8,429,000~~$16,453,000 and ~~$9,180,000~~$9,599,000 as of September 30, ~~2017~~2019 and December 31, ~~2016.~~2018, respectively.

The amount of foreclosed residential real estate held at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, totaled ~~$458,000~~$731,690 and ~~$839,000,~~$624,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, totaled ~~$458,000~~$117,184 and $167,000, 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~~6 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~~2019 and December 31, ~~2016:~~

2018:


	September 30, 2017																						September 30, 2019
	Commercial, Financial, and Agricultural				Real Estate Mortgages											Installment Loans to Individuals							Commercial, Financial, and Agricultural				Real Estate Mortgages											Consumer automobile				Other consumer installment loans
(In Thousands)				Residential				Commercial				Construction				Installment Loans to Individuals			Totals				Commercial, Financial, and Agricultural			Residential				Commercial				Construction							Totals
Pass	Commercial, Financial, and Agricultural	$	170,812			$	572,591			$	300,679			$	29,202		$	86,639			$	1,159,923		$	163,531			$	613,577			$	349,910			$	39,424	Consumer automobile		$	144,824	Other consumer installment loans		$	23,818	$	1,335,084
Special Mention	775				1,287				8,522				—			—				10,584			3,344				2,640				5,687				—			—				—		11,671
Substandard	3,712				2,256				14,309				150			—				20,427			6,667				1,729				8,757				139			—				—		17,292
	$	175,299			$	576,134			$	323,510			$	29,352		$	86,639			$	1,190,934		$	173,542			$	617,946			$	364,354			$	39,563		$	144,824			$	23,818	$	1,364,047

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, 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	$	179,840	$	619,800	$	351,703	$	43,523	$	133,183	$	24,552	$	1,352,601
Special Mention	3,426		694		6,587		—		—		—		10,707
Substandard	5,295		1,885		13,405		—		—		—		20,585
	$	188,561	$	622,379	$	371,695	$	43,523	$	133,183	$	24,552	$	1,383,893

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.

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~~2 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~~2 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~~2019 and ~~2016:~~2018:


	Three Months Ended September 30, 2017																										Three Months Ended September 30, 2019
	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		$	1,584			$	5,749			$	3,523			$	132	Consumer automobile		$	1,435	Other consumer installment			$	240	$	1,338		$	14,001
Charge-offs	(68		)		(155		)		—				—			(55		)		—				(278		)	—				(114		)		—				—			(34		)		(73		)	—		(221		)
Recoveries	6				16				—				2			18				—				42			43				2				—				2			14				48			—		109
Provision	(81		)		232				300				(26		)	144				(509		)		60			159				4				(12		)		22			(41		)		27			201		360
Ending Balance	$	1,588			$	5,430			$	4,027			$	148		$	886			$	854			$	12,933		$	1,786			$	5,641			$	3,511			$	156		$	1,374			$	242		$	1,539	$	14,249

Three Months Ended September 30, 2016
Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals
(In Thousands) Residential Commercial Construction Unallocated Totals
Beginning Balance $ 1,273
$ 5,851
$ 4,001
$ 143
$ 277
$ 972
$ 12,517
Charge-offs (18 ) (4 ) —
—
(67 ) —
(89 )
Recoveries 4
8
3
1
16
—
32
Provision (9 ) (550 ) 642
(29 ) 111
93
258
Ending Balance $ 1,250
$ 5,305
$ 4,646
$ 115
$ 337
$ 1,065
$ 12,718

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	Nine 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	$	1,554			$	5,383			$	4,975			$	178		$	416			$	390			$	12,896		$	1,055			$	5,583			$	3,814			$	118	Consumer automobile		$	1,069	Other consumer installment			$	317	$	1,078		$	13,034
Charge-offs	(81		)		(540		)		—				—			(186		)		—				(807		)	(6		)		(81		)		—				—			(31		)		(90		)	—		(208		)
Recoveries	117				51				1				7			63				—				239			5				—				—				2			9				21			—		37
Provision	(2		)		536				(949		)		(37		)	593				464				605			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


	Nine Months Ended September 30, 2016
t																											Nine Months Ended September 30, 2019
	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		$	1,680			$	5,616			$	4,047			$	143	Consumer automobile		$	1,328	Other consumer installment			$	259	$	764		$	13,837
Charge-offs	(167		)		(11		)		—				—			(171		)		—				(349		)	(80		)		(251		)		(150		)		—			(172		)		(235		)	—		(888		)
Recoveries	56				14				8				6			73				—				157			84				3				1				10			74				93			—		265
Provision	(171		)		186				421				(51		)	192				289				866			102				273				(387		)		3			144				125			775		1,035
Ending Balance	$	1,250			$	5,305			$	4,646			$	115		$	337			$	1,065			$	12,718		$	1,786			$	5,641			$	3,511			$	156		$	1,374			$	242		$	1,539	$	14,249



	Nine Months Ended September 30, 2018
	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	$	1,177		$	5,679		$	4,277		$	155		$	804		$	271		$	495	$	12,858
Charge-offs	(42		)	(223		)	(55		)	—			(83		)	(208		)	—		(611		)
Recoveries	20			25			—			7			12			57			—		121
Provision	86			(140		)	(778		)	(31		)	452			156			1,230		975
Ending Balance	$	1,241		$	5,341		$	3,444		$	131		$	1,185		$	276		$	1,725	$	13,343

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

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~~2019 and ~~2016:~~

2018:



	September 30,
	2019		2018
Owners of residential rental properties	15.41	%	14.72	%
Owners of commercial rental properties	12.19	%	13.18	%

Table of Contents

September 30,
2017 2016
Owners of residential rental properties 15.34 % 16.64 %
Owners of commercial rental properties 13.45 % 14.11 %

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~~2019 and December 31, ~~2016:~~

2018:


	September 30, 2017																		September 30, 2019
	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	$	569	$	203	$	1,430	$	—		$	10	$	—	$	—	$	2,212
Collectively evaluated for impairment	1,381			5,206			2,398			148		886			854		10,873		1,217		5,438		2,081		156			1,364		242		1,539		12,037
Total ending allowance balance	$	1,588		$	5,430		$	4,027		$	148	$	886		$	854	$	12,933	$	1,786	$	5,641	$	3,511	$	156		$	1,374	$	242	$	1,539	$	14,249

Loans:
Individually evaluated for impairment	$	1,396		$	2,797		$	10,655		$	—	$	—				$	14,848	$	5,219	$	5,970	$	8,761	$	69		$	38	$	5			$	20,062
Collectively evaluated for impairment	173,903			573,337			312,855			29,352		86,639					1,176,086		168,323		611,976		355,593		39,494			144,786		23,813				1,343,985
Total ending loans balance	$	175,299		$	576,134		$	323,510		$	29,352	$	86,639				$	1,190,934	$	173,542	$	617,946	$	364,354	$	39,563		$	144,824	$	23,818			$	1,364,047



	December 31, 2018
	Commercial, Financial, and Agricultural		Real Estate Mortgages						Consumer Automobile		Other consumer installment		Unallocated
(In Thousands)	Commercial, Financial, and Agricultural		Residential		Commercial		Construction		Consumer Automobile		Other consumer installment		Unallocated		Totals
Allowance for Loan Losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	650	$	168	$	1,720	$	—	$	—	$	5	$	—	$	2,543
Collectively evaluated for impairment	1,030		5,448		2,327		143		1,328		254		764		11,294
Total ending allowance balance	$	1,680	$	5,616	$	4,047	$	143	$	1,328	$	259	$	764	$	13,837

Loans:
Individually evaluated for impairment	$	5,263	$	4,210	$	11,664	$	74	$	31	$	5			$	21,247
Collectively evaluated for impairment	183,298		618,169		360,031		43,449		133,152		24,547				1,362,646
Total ending loans balance	$	188,561	$	622,379	$	371,695	$	43,523	$	133,183	$	24,552			$	1,383,893

~~Table of Contents~~

December 31, 2016
Commercial, Financial, and Agricultural Real Estate Mortgages Installment Loans to Individuals Unallocated
(In Thousands) Residential Commercial Construction Totals
Allowance for Loan Losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 74
$ 437
$ 1,668
$ —
$ —
$ —
$ 2,179
Collectively evaluated for impairment 1,480
4,946
3,307
178
416
390
10,717
Total ending allowance balance $ 1,554
$ 5,383
$ 4,975
$ 178
$ 416
$ 390
$ 12,896

Loans:

Individually evaluated for impairment $ 241
$ 3,477
$ 12,258
$ —
$ —

$ 15,976
Collectively evaluated for impairment 145,869
561,263
293,924
34,650
43,256

1,078,962
Total ending loans balance $ 146,110
$ 564,740
$ 306,182
$ 34,650
$ 43,256

$ 1,094,938

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.~~2018.

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, ~~2017~~2019 and ~~2016,~~2018, respectively:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019			2018
Interest cost	$	191		$	177		$	573		$	530
Expected return on plan assets	(248		)	(272		)	(746		)	(820		)
Amortization of net loss	46			41			140			125
Net periodic benefit	$	(11	)	$	(54	)	$	(33	)	$	(165	)

Table of Contents

Three Months Ended September 30, Nine Months Ended September 30,
(In Thousands) 2017 2016 2017 2016
Service cost $ 41
$ 17
$ 124
$ 51
Interest cost 188
193
566
579
Expected return on plan assets (262 ) (251 ) (787 ) (753 )
Amortization of net loss 45
39
129
117
Net periodic benefit cost $ 12
$ (2 ) $ 32
$ (6 )

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,~~2018, that it expected to contribute a minimum of $500,000 to its defined benefit plan in ~~2017.~~2019. As of September 30, ~~2017,~~2019, there were contributions of ~~$500,000~~$750,000 made to the plan with additional contributions of at least $250,000 anticipated during the remainder of ~~2017.~~2019.

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~~2019 and ~~2016,~~2018, there were ~~1,611~~2,580 and ~~1,617~~3,537 shares issued under the plan, respectively.

~~Table of Contents~~

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, 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~~2019 and December 31, ~~2016:~~

2018:



(In Thousands)	September 30, 2019		December 31, 2018
Commitments to extend credit	$	160,342	$	166,417
Standby letters of credit	10,221		10,566
Credit exposure from the sale of assets with recourse	6,585		6,152
	$	177,148	$	183,135

(In Thousands) September 30, 2017 December 31, 2016
Commitments to extend credit $ 270,046
$ 263,487
Standby letters of credit 9,923
6,515
Credit exposure from the sale of assets with recourse 4,699
6,341
$ 284,668
$ 276,343

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.

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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.

~~Table of Contents~~

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~~2019 and December 31, ~~2016,~~2018, 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, 2019
(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	$	—	$	4,530	$	—	$	4,530	$	—	$	5,170	$	—	$	5,170
State and political securities	—		62,327		—		62,327		—		82,836		—		82,836
Other debt securities	—		51,973		—		51,973		—		61,069		—		61,069
Investment equity securities:
Financial institution equity securities	12,224		—		—		12,224		553		—		—		553
Non-financial institution equity securities	1,259		—		—		1,259
Other equity securities									1,267		—		—		1,267
Investment securities, trading:
Financial institution equity securities	63		—		—		63
Non-financial institution equity securities	147		—		—		147
Other equity securities									47		—		—		47



	December 31, 2018
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Investment securities, available for sale:
Mortgage-backed securities	$	—	$	6,153	$	—	$	6,153
State and political securities	—		79,541		—		79,541
Other debt securities	—		48,591		—		48,591
Financial institution equity securities	552		—		—		552
Other equity securities	1,224		—		—		1,224
Investment securities, trading:
Other equity securities	36		—		—		36

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December 31, 2016
(In Thousands) 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
Asset-backed securities —
109
—
109
State and political securities —
60,934
—
60,934
Other debt securities —
51,118
—
51,118
Financial institution equity securities 10,535
—
—
10,535
Non-financial institution equity securities 1,483
—
—
1,483
Investment securities, trading:
Non-financial institution equity securities 58
—
—
58

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~~2019 and December 31, ~~2016,~~2018, 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, 2019
(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	$	—	$	—	$	17,850	$	17,850
Other real estate owned	—		—		108		108		—		—		422		422



	December 31, 2018
(In Thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	—	$	—	$	18,704	$	18,704
Other real estate owned	—		—		402		402

December 31, 2016
(In Thousands) Level I Level II Level III Total
Assets measured on a non-recurring basis:

Impaired loans $ —
$ —
$ 13,797
$ 13,797
Other real estate owned —
—
839
839

~~Table of Contents~~

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~~2019 and December 31, ~~2016:~~2018:

September 30, 2017

September 30, 2019

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)%

13,278

Discounted cash flow

Temporary reduction in payment amount

0% to (70)%

(38)%

7,035

Appraisal of collateral (1)

Appraisal adjustments (1)

0 to (20)%

(16)%

4,572

Appraisal of collateral (1)

Appraisal adjustments (1)

0 to (30)%

(4)%

Other real estate owned

108

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

422

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, 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

5,304

Discounted cash flow

Temporary reduction in payment amount

0 to (70)%

(20)%

12,929

Discounted cash flow

Temporary reduction in payment amount

7 to (70)%

(6)%

8,493

Appraisal of collateral (1)

Appraisal adjustments (1)

0 to (20)%

(15)%

5,775

Appraisal of collateral (1)

Appraisal adjustments (1)

0 to (90)%

(20)%

Other real estate owned

839

Appraisal of collateral (1)

Appraisal adjustments (1)

(20)%

402

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.

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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.

~~Table of Contents~~

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~~2019 and December 31, ~~2016:~~2018:

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, 2019
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:
Cash and cash equivalents (1)	$	57,341	$	57,341	$	57,341	$	—	$	—
Restricted investment in bank stock (1)	13,502		13,502		13,502		—		—
Loans held for sale (1)	1,868		1,868		1,868		—		—
Loans, net	1,350,735		1,354,257		—		—		1,354,257
Bank-owned life insurance (1)	29,107		29,107		29,107		—		—
Accrued interest receivable (1)	5,267		5,267		5,267		—		—

Financial liabilities:
Interest-bearing deposits	$	1,005,078	$	1,028,938	$	653,123	$	—	$	375,815
Noninterest-bearing deposits (1)	327,329		327,329		327,329		—		—
Short-term borrowings (1)	5,987		5,987		5,987		—		—
Long-term borrowings	162,290		164,534		—		—		164,534
Accrued interest payable (1)	1,666		1,666		1,666		—		—

Carrying Fair Fair Value Measurements at December 31, 2016
(In Thousands) Value Value Level I Level II Level III
Financial assets:

Cash and cash equivalents $ 43,671
$ 43,671
$ 43,671
$ —
$ —
Investment securities:

Available for sale 133,492
133,492
12,018
121,474
—
Trading 58
58
58
—
—
Loans held for sale 1,953
1,953
1,953
—
—
Loans, net 1,080,785
1,088,122
—
—
1,088,122
Bank-owned life insurance 27,332
27,332
27,332
—
—
Accrued interest receivable 3,672
3,672
3,672
—
—

Financial liabilities:

Interest-bearing deposits $ 791,937
$ 789,401
$ 571,768
$ —
$ 217,633
Noninterest-bearing deposits 303,277
303,277
303,277
—
—
Short-term borrowings 13,241
13,241
13,241
—
—
Long-term borrowings 85,998
86,353
—
—
86,353
Accrued interest payable 455
455
455
—
—

~~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, 2019, which approximate the ~~carrying value.~~

~~Investment Securities:~~

~~The~~ fair value of ~~investment securities available for sale and trading is equal to~~ the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Regulatory stocks’ fair value is equal to the carrying value.instruments

3028

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	Carrying		Fair		Fair Value Measurements at December 31, 2018
(In Thousands)	Value		Value		Level I		Level II		Level III
Financial assets:
Cash and cash equivalents (1)	$	66,742	$	66,742	$	66,742	$	—	$	—
Restricted investment in bank stock (1)	18,862		18,862		18,862		—		—
Loans held for sale (1)	2,929		2,929		2,929		—		—
Loans, net	1,370,920		1,381,581		—		—		1,381,581
Bank-owned life insurance (1)	28,627		28,627		28,627		—		—
Accrued interest receivable (1)	5,334		5,334		5,334		—		—

Financial liabilities:
Interest-bearing deposits	$	899,089	$	882,108	$	612,478	$	—	$	269,630
Noninterest-bearing deposits (1)	320,814		320,814		320,814		—		—
Short-term borrowings (1)	167,865		167,865		167,865		—		—
Long-term borrowings	138,942		137,773		—		—		137,773
Accrued interest payable (1)	1,150		1,150		1,150		—		—

(1) The financial instrument is carried at cost at December 31, 2018, which approximate the fair value of the instruments

The methods and assumptions used by the Company in estimating fair values of financial instruments at September 30, 2019 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables.

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).

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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, 2019, the Company had a total of 395,550 stock options outstanding. During the period ended September 30, 2019, the Company issued ~~38,750~~240,000 stock options with a strike price of ~~$42.03~~$28.01 to ~~employees that have~~ a ~~five year vesting period and~~group of employees. The options granted in 2019 all expire ten years from the grant date. ~~On March 24, 2017,~~Of the ~~Company issued 70,000 stock options in total, to a group of employees, that have a strike price of $44.21. The options granted in 2017 all expire ten years from the grant date however, of the 70,000~~240,000 grants awarded ~~46,250~~in 2019, 120,900 of the options ~~have a three year vesting period~~vest in 3 years while the remaining ~~23,750~~119,100 options vest in five years.



Stock Options Granted
Date	Shares	Forfeited		Outstanding	Strike Price		Vesting Period	Expiration
March 15, 2019	120,900	—		120,900	$	28.01	3 years	10 years
March 15, 2019	119,100	—		119,100	28.01		5 years	10 years
August 24, 2018	75,300	—		75,300	30.67		3 years	10 years
August 24, 2018	149,250	—		149,250	30.67		5 years	10 years
January 5, 2018	18,750	—		18,750	30.07		3 years	10 years
January 5, 2018	18,750	—		18,750	30.07		5 years	10 years
March 24, 2017	69,375	(6,750	)	62,625	29.47		3 years	10 years
March 24, 2017	35,625	—		35,625	29.47		5 years	10 years
August 27, 2015	58,125	(22,875	)	35,250	28.02		5 years	10 years

Stock Options Granted
Date Shares Forfeited Outstanding Strike Price Vesting Period Expiration
March 24, 2017 46,250
—
46,250
$ 44.21
3 years 10 years
March 24, 2017 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

~~Table of Contents~~

A summary of stock option activity is presented below:



	September 30, 2019			September 30, 2018
	Shares	Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of year	395,550	$	30.08	140,250		$	29.06
Granted	240,000	28.01		262,050		30.58
Exercised	—	—		—		—
Forfeited	—	—		(6,750	)	28.51
Expired	—	—		—		—
Outstanding, end of period	635,550	$	29.30	395,550		$	30.07

Exercisable, end of period	—	$	—	—		$	—

September 30, 2017 September 30, 2016
Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
Outstanding, beginning of year 26,500
$ 42.03
34,750
$ 42.03
Granted 70,000
44.21
—
—
Exercised —
—
—
—
Forfeited (1,500 ) 42.03
(3,750 ) 42.03
Expired —
—
—
—
Outstanding, end of year 95,000
$ 43.64
31,000
$ 42.03

Exercisable, end of year —
$ —
—
$ —

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~~ $185,000 and ~~$21,000~~ $498,000 for the three and nine ~~month periods~~months ended September 30, ~~2017~~2019 compared to ~~$6,000~~ $333,000 and ~~$17,000~~ $345,000 for the same periods of ~~2016.~~2018. As of September 30, ~~2017, no~~2019, 0 stock options were exercisable and the weighted average years to expiration ~~were 9~~was 8.69 years. The fair value of options granted during the ~~three and~~ nine ~~month periods ending~~months ended September 30, ~~2017~~2019 was approximately ~~zero and $2,173,000 respectively~~$1,208,000 or ~~zero and $31.04~~$5.03 per award. Total unrecognized compensation cost for non-vested ~~shares, $99,000,~~options was $2,160,000 and will be recognized over their weighted average remaining vesting period of ~~3.56~~1.68 years.

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Note 13. Leases

The following table shows finance lease right of use assets and finance lease liabilities as of September 30, 2019:

The following table shows the components of finance and operating lease expense for the three and nine months ended September 30, 2019:



	Three Months Ended September 30,		Nine months ended September 30,
(In Thousands)	2019		2019

Finance Lease Cost:
Amortization of right-of-use asset	$	65	$	194
Interest expense	56		168
Operating lease cost	99		271
Variable lease cost	1		3
Total Lease Cost	$	221	$	636

Gross rental expense for the three and nine months ended September 30, 2018 was $137,000 and $392,000.

A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:



(In Thousands)	Operating			Finance
2019	$	90		$	108
2020	370			318
2021	378			320
2022	385			321
2023	360			322
2024 and thereafter	3,969			8,494
Total undiscounted cash flows	5,552			9,883
Discount on cash flows	(1,324		)	(3,927		)
Total lease liability	$	4,228		$	5,956

The following table shows the weighted average remaining lease term and weighted average discount rate for both operating and finance leases outstanding as of September 30, 2019.

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 no0 effect on net income or shareholders’ equity.

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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~~2018 and in other filings made by the Company under the Securities Exchange Act of 1934.

~~Table of Contents~~

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

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

EARNINGS SUMMARY

Comparison of the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018

Summary Results

Net income for the three and nine months ended September 30, ~~2017~~2019 was ~~$3,284,000~~$4,650,000 and $12,839,000 compared to ~~$3,059,000~~$3,826,000 and $10,515,000 for the same period of ~~2016 as~~2018, including the effects of an increase in after-tax securities gains ~~increased $25,000~~of $153,000 (from a loss of $19,000 to a gain of ~~$172,000 to~~$134,000) for the three month periods and $244,000 (from a loss of ~~$197,000).~~$39,000 to a gain of $205,000) for the nine month periods. Basic and diluted earnings per share for the three and nine months ended September 30, ~~2017~~2019 were $0.66 and ~~2016 were $0.70~~$1.82 compared to $0.54 and ~~$0.65, respectively.~~$1.49 for the corresponding periods of 2018. Return on average assets and return on average equity were ~~0.93%~~1.10% and ~~9.43%~~12.18% for the three months ended September 30, ~~2017~~2019 compared to ~~0.91%~~0.96% and ~~8.69%~~10.94% 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.2018. Return on average assets and return on average equity were ~~0.87%~~1.02% and ~~8.69%~~11.69% for the nine months ended September 30, ~~2017~~2019, compared to ~~0.95%~~0.91% and ~~9.14%~~10.19% for the corresponding period of ~~2016.~~2018. Net income from core operations (“~~operating~~core earnings”) ~~increased to $8,737,000~~was $4,516,000 and $12,634,000 for the three and nine months ended September 30, ~~2017~~2019 compared to ~~$8,719,000~~$3,845,000 and $10,554,000 for the ~~same period~~corresponding periods of ~~2016.~~2018. Basic and diluted ~~operating~~adjusted earnings per share for the three and nine months ended September 30, ~~2017~~2019 were ~~$1.85~~$0.64 and $1.80 compared to ~~$1.84~~$0.54 and $1.50 basic and diluted for the corresponding ~~period~~periods of ~~2016.~~2018.

Management uses the non-GAAP measure of net income from core operations ~~or operating 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 earnings,~~ means net income adjusted to exclude after-tax net securities gains or ~~losses and bank-owned life insurance gains on death benefit.~~losses. 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		2019		2018			2019		2018
GAAP net income	$	3,284	$	3,059	$	9,057	$	9,529	$	4,650	$	3,826		$	12,839	$	10,515
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 gains (losses), net of tax									134		(19		)	205		(39		)
Non-GAAP core earnings									$	4,516	$	3,845		$	12,634	$	10,554


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Return on average assets (ROA)	0.93	%	0.91	%	0.87	%	0.95	%	1.10	%	0.96	%	1.02	%	0.91	%
Less: net securities gains, net of tax	0.05	%	0.05	%	0.03	%	0.08	%	0.03	%	—	%	0.01	%	—	%
Non-GAAP operating ROA	0.88	%	0.86	%	0.84	%	0.87	%
Non-GAAP core ROA									1.07	%	0.96	%	1.01	%	0.91	%



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Return on average equity (ROE)	12.18	%	10.94	%	11.69	%	10.19	%
Less: net securities gains (losses), net of tax	0.36	%	(0.05	)%	0.20	%	(0.04	)%
Non-GAAP core ROE	11.82	%	10.99	%	11.49	%	10.23	%

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Basic earnings per share (EPS)	$	0.66	$	0.54	$	1.82	$	1.49
Less: net securities gains, net of tax	0.02		—		0.02		(0.01		)
Non-GAAP core operating EPS	$	0.64	$	0.54	$	1.80	$	1.50

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,
	2019		2018		2019		2018
Diluted EPS	$	0.66	$	0.54	$	1.82	$	1.49
Less: net securities gains (losses), net of tax	0.02		—		0.02		(0.01		)
Non-GAAP diluted core EPS	$	0.64	$	0.54	$	1.80	$	1.50

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

Interest and Dividend Income

Interest and dividend income for the three and nine months ended September 30, ~~2017~~2019 increased to ~~$12,948,000~~$17,084,000 and $50,359,000 compared to ~~$11,660,000~~$15,198,000 and $42,510,000 for the same ~~period~~periods of ~~2016.~~2018. Loan portfolio income increased due to the ~~impact of portfolio growth, primarily~~increase in ~~home equity products~~average rate paid on loans. Investment securities and ~~indirect auto lending. The loan portfolio~~dividend income ~~increase was offset~~increased by ~~a decrease in investment portfolio interest due to a slight decline in~~$442,000 and $1,426,000 for the three and nine month periods ended September 30, 2019 as the average ~~taxable equivalent yield as the duration in~~balance of the investment portfolio ~~continues to be shortened in order to reduce interest rate~~increased by $24,398,000 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.$25,380,000, respectively.

During the nine months ended September 30, 2017, interest and dividend income was $36,839,000, 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~~2019 and ~~2016~~2018 was as follows:


	Three Months Ended														Three Months Ended
	September 30, 2017				September 30, 2016				Change						September 30, 2019				September 30, 2018				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		%	$	15,426	90.30	%	$	13,982	92.00	%	$	1,444		10.33		%
Investment securities:
Taxable	553		4.27		601		5.15		(48		)	(7.99	)		998		5.84		713		4.69		285			39.97
Tax-exempt	319		2.46		329		2.82		(10		)	(3.04	)		167		0.98		207		1.36		(40		)	(19.32	)
Dividend and other interest income	170		1.32		189		1.63		(19		)	(10.05	)		493		2.88		296		1.95		197			66.55
Total interest and dividend income	$	12,948	100.00	%	$	11,660	100.00	%	$	1,288		11.05		%	$	17,084	100.00	%	$	15,198	100.00	%	$	1,886		12.41		%


	Nine Months Ended														Nine Months Ended
	September 30, 2017				September 30, 2016				Change						September 30, 2019				September 30, 2018				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount			%			Amount		% Total		Amount		% Total		Amount			%
Loans including fees	$	33,642	91.32	%	$	31,362	89.46	%	$	2,280		7.27		%	$	45,595	90.54	%	$	39,172	92.15	%	$	6,423		16.40		%
Investment securities:
Taxable	1,665		4.52		1,825		5.21		(160		)	(8.77	)		2,899		5.76		1,898		4.46		1,001			52.74
Tax-exempt	940		2.55		1,203		3.43		(263		)	(21.86	)		520		1.03		678		1.59		(158		)	(23.30	)
Dividend and other interest income	592		1.61		666		1.90		(74		)	(11.11	)		1,345		2.67		762		1.80		583			76.51
Total interest and dividend income	$	36,839	100.00	%	$	35,056	100.00	%	$	1,783		5.09		%	$	50,359	100.00	%	$	42,510	100.00	%	$	7,849		18.46		%

~~Table of Contents~~

Interest Expense

Interest expense for the three and nine months ended September 30, ~~2017~~2019 increased ~~$83,000~~$1,238,000 and $4,466,000 to ~~$1,496,000~~$4,181,000 and $11,865,000, respectively, compared to ~~$1,413,000~~$2,943,000 and $7,399,000 for the same ~~period~~periods of ~~2016.~~2018. The increase in interest expense is the result of growth within the deposit portfolio and the ~~lengthening~~use of the time deposit portfolio as part of a deposit acquisition strategy in select markets. In addition, short and long-term borrowings have been utilized to ~~build balance sheet protection in a rising rate environment, offset by a decrease in long-term borrowing utilization.~~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~~2019 and ~~2016~~2018 was as follows:


	Three Months Ended														Three Months Ended
	September 30, 2017				September 30, 2016				Change						September 30, 2019				September 30, 2018				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount			%			Amount		% Total		Amount		% Total		Amount			%
Deposits	$	1,058	70.72	%	$	909	64.33	%	$	149		16.39		%	$	3,165	75.70	%	$	1,659	56.37	%	$	1,506		90.78		%
Short-term borrowings	31		2.07		7		0.50		24			342.86			7		0.17		528		17.94		(521		)	(98.67	)
Long-term borrowings	407		27.21		497		35.17		(90		)	(18.11	)		1,009		24.13		756		25.69		253			33.47
Total interest expense	$	1,496	100.00	%	$	1,413	100.00	%	$	83		5.87		%	$	4,181	100.00	%	$	2,943	100.00	%	$	1,238		42.07		%


	Nine Months Ended														Nine Months Ended
	September 30, 2017				September 30, 2016				Change						September 30, 2019				September 30, 2018				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		%	$	8,336	70.26	%	$	4,371	59.08	%	$	3,965		90.71		%
Short-term borrowings	39		0.92		41		0.99		(2		)	(4.88	)		790		6.66		1,004		13.57		(214		)	(21.31	)
Long-term borrowings	1,220		28.86		1,481		35.72		(261		)	(17.62	)		2,739		23.08		2,024		27.36		715			35.33
Total interest expense	$	4,227	100.00	%	$	4,146	100.00	%	$	81		1.95		%	$	11,865	100.00	%	$	7,399	100.01	%	$	4,466		60.36		%

Net Interest Margin

The net interest margin (“NIM”) for the three months ended September 30, 2017 was 3.57% compared to 3.37% for the corresponding period of 2016. 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 to September 30, 2017. The primary funding for the loan growth was an increase in core deposits. These deposits represent a lower cost funding source than time deposits and comprise 81.94% of total deposits at September 30, 2017 compared to 79.60% at September 30, 2016. 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~~2019 was ~~3.47%~~3.32% and 3.34% compared to ~~3.45%~~3.30% and 3.31% for the ~~same period~~corresponding periods of ~~2016.~~2018. The increase in the net interest margin was driven by an increase in the yield on earning assets of 29 and 37 basis points ("bps") for the three and nine month periods. The impact of the ~~decreasing investment portfolio balance~~increase in yield on earning assets was ~~partially offset~~limited by ~~growth~~the increase in rate paid on interest-bearing liabilities of 36 bps and 41 bps for the three and nine month periods. The increase in the ~~balance of~~yield on earning assets was driven by an increase in the loan portfolio yield in conjunction with an increase in the average loan portfolio ~~from~~of $31,250,000 and $79,293,000, respectively. The loan growth for the three and nine month periods was primarily funded by an increase in average total interest-bearing deposits of $112,903,000 and $98,151,000, respectively. Noninterest-bearing deposits increased $14,218,000 to $327,329,000 at September 30, ~~2016~~2019 compared to September 30, ~~2017. The rate on interest-bearing liabilities decreased slightly as the usage of borrowed funds declined.~~2018.

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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~~2019 and ~~2016:~~

2018:


	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, 2019						Three Months Ended September 30, 2018
(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	%	$	66,617	$	505	3.04	%	$	75,182	$	559	2.95	%
All other loans	1,105,615		11,580		4.16	%	1,011,393		10,243		4.03	%	1,317,964		15,027		4.57	%	1,278,149		13,541		4.20	%
Total loans (2)	1,159,465		12,074		4.13	%	1,057,108		10,695		4.02	%	1,384,581		15,532		4.50	%	1,353,331		14,100		4.13	%

Taxable securities	83,106		674		3.24	%	93,893		725		3.09	%	137,394		1,284		3.79	%	104,321		991		3.80	%
Tax-exempt securities (3)	53,320		483		3.62	%	49,231		498		4.05	%	25,769		211		3.32	%	34,444		262		3.04	%
Total securities	136,426		1,157		3.39	%	143,124		1,223		3.42	%	163,163		1,495		3.72	%	138,765		1,253		3.61	%

Interest-bearing deposits	14,085		49		1.38	%	48,125		65		0.54	%	36,853		207		2.25	%	3,403		18		2.10	%

Total interest-earning assets	1,309,976		13,280		4.02	%	1,248,357		11,983		3.82	%	1,584,597		17,234		4.37	%	1,495,499		15,371		4.08	%

Other assets	101,035						101,312						101,318						99,132

Total assets	$	1,411,011					$	1,349,669					$	1,685,915					$	1,594,631

Liabilities and shareholders’ equity:
Savings	$	157,341	15		0.04	%	$	151,464	15		0.04	%	$	169,628	66		0.16	%	$	166,181	17		0.04	%
Super Now deposits	203,531		140		0.27	%	184,440		107		0.23	%	232,918		481		0.83	%	225,677		264		0.46	%
Money market deposits	284,155		267		0.37	%	245,643		170		0.28	%	237,362		581		0.98	%	241,977		314		0.51	%
Time deposits	206,563		636		1.22	%	223,082		617		1.10	%	370,229		2,037		2.21	%	263,399		1,064		1.60	%
Total interest-bearing deposits	851,590		1,058		0.49	%	804,629		909		0.45	%	1,010,137		3,165		1.26	%	897,234		1,659		0.73	%

Short-term borrowings	19,127		31		0.64	%	15,748		7		0.18	%	7,990		7		0.35	%	99,867		528		2.07	%
Long-term borrowings	81,107		407		1.96	%	91,025		497		2.14	%	169,017		1,009		2.26	%	134,731		756		2.19	%
Total borrowings	100,234		438		1.71	%	106,773		504		1.85	%	177,007		1,016		2.18	%	234,598		1,284		2.14	%

Total interest-bearing liabilities	951,824		1,496		0.62	%	911,402		1,413		0.61	%	1,187,144		4,181		1.39	%	1,131,832		2,943		1.03	%

Demand deposits	304,244						281,586						324,940						305,707
Other liabilities	15,708						15,916						21,151						17,156
Shareholders’ equity	139,235						140,765						152,680						139,936

Total liabilities and shareholders’ equity	$	1,411,011					$	1,349,669					$	1,685,915					$	1,594,631
Interest rate spread					3.40	%					3.21	%					2.98	%					3.05	%
Net interest income/margin			$	11,784	3.57	%			$	10,570	3.37	%			$	13,053	3.32	%			$	12,428	3.30	%

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 ~~34%~~ tax ~~rate.~~rate of 21%.

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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, 2019						Nine Months Ended September 30, 2018
(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	%	$	69,973	$	1,592	3.04	%	$	75,389	$	1,689	2.99	%
All other loans	1,081,148		32,774		4.05	%	999,685		30,417		4.06	%	1,315,022		44,337		4.51	%	1,230,313		37,838		4.11	%
Total loans (2)	1,127,900		34,089		4.04	%	1,048,889		31,849		4.06	%	1,384,995		45,929		4.43	%	1,305,702		39,527		4.05	%

Taxable securities	85,417		2,039		3.18	%	95,652		2,344		3.27	%	131,451		3,934		4.05	%	93,944		2,621		3.72	%
Tax-exempt securities	50,972		1,424		3.72	%	56,291		1,823		4.32	%	26,813		658		3.32	%	38,940		858		2.94	%
Total securities	136,389		3,463		3.39	%	151,943		4,167		3.66	%	158,264		4,592		3.92	%	132,884		3,479		3.49	%

Interest-bearing deposits	27,901		218		1.04	%	38,411		147		0.51	%	18,050		310		2.30	%	2,872		39		1.82	%

Total interest-earning assets	1,292,190		37,770		3.91	%	1,239,243		36,163		3.90	%	1,561,309		50,831		4.36	%	1,441,458		43,045		3.99	%

Other assets	102,181						99,295						109,278						97,930

Total assets	$	1,394,371					$	1,338,538					$	1,670,587					$	1,539,388

Liabilities and shareholders’ equity:
Savings	$	157,396	45		0.04	%	$	151,158	43		0.04	%	$	168,909	147		0.12	%	$	164,828	49		0.04	%
Super Now deposits	198,560		377		0.25	%	190,190		356		0.25	%	236,965		1,313		0.74	%	229,159		713		0.42	%
Money market deposits	278,436		713		0.34	%	234,918		471		0.27	%	242,630		1,649		0.91	%	240,751		814		0.45	%
Time deposits	207,331		1,833		1.18	%	221,676		1,754		1.06	%	335,456		5,227		2.08	%	251,071		2,795		1.49	%
Total interest-bearing deposits	841,723		2,968		0.47	%	797,942		2,624		0.44	%	983,960		8,336		1.13	%	885,809		4,371		0.66	%

Short-term borrowings	13,714		39		0.26	%	20,273		41		0.27	%	45,046		790		2.34	%	72,873		1,004		1.82	%
Long-term borrowings	79,881		1,220		2.01	%	91,025		1,481		2.14	%	153,684		2,739		2.24	%	124,483		2,024		2.14	%
Total borrowings	93,595		1,259		1.76	%	111,298		1,522		1.80	%	198,730		3,529		2.26	%	197,356		3,028		2.02	%

Total interest-bearing liabilities	935,318		4,227		0.60	%	909,240		4,146		0.61	%	1,182,690		11,865		1.32	%	1,083,165		7,399		0.91	%

Demand deposits	301,567						274,488						318,602						300,604
Other liabilities	18,455						15,775						22,705						18,070
Shareholders’ equity	139,031						139,035						146,590						137,549

Total liabilities and shareholders’ equity	$	1,394,371					$	1,338,538					$	1,670,587					$	1,539,388
Interest rate spread					3.31	%					3.29	%					3.04	%					3.08	%
Net interest income/margin			$	33,543	3.47	%			$	32,017	3.45	%			$	38,966	3.34	%			$	35,646	3.31	%

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~~2019 and ~~2016:~~

2018:


	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		2019		2018		2019		2018
Total interest income	$	12,948	$	11,660	$	36,839	$	35,056	$	17,084	$	15,198	$	50,359	$	42,510
Total interest expense	1,496		1,413		4,227		4,146		4,181		2,943		11,865		7,399
Net interest income	11,452		10,247		32,612		30,910		12,903		12,255		38,494		35,111
Tax equivalent adjustment	332		323		931		1,107		150		173		472		535
Net interest income (fully taxable equivalent)	$	11,784	$	10,570	$	33,543	$	32,017	$	13,053	$	12,428	$	38,966	$	35,646

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The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~

2018:


	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									2019 vs. 2018									2019 vs. 2018
	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	)	$	(69	)	$	15		$	(54	)	$	(109	)	$	12	$	(97	)
All other loans	993			344			1,337			2,384			(27		)	2,357			388			1,098			1,486			2,693			3,806		6,499
Taxable investment securities	(86		)	35			(51		)	(242		)	(63		)	(305		)	296			(3		)	293			1,074			239		1,313
Tax-exempt investment securities	40			(55		)	(15		)	(163		)	(236		)	(399		)	(73		)	22			(51		)	(245		)	45		(200		)
Interest bearing deposits	(68		)	52			(16		)	(27		)	98			71			188			1			189			138			133		271
Total interest-earning assets	955			342			1,297			1,882			(275		)	1,607			730			1,133			1,863			3,551			4,235		7,786

Interest expense:
Savings deposits	—			—			—			2			—			2			—			49			49			1			97		98
Super Now deposits	12			21			33			15			6			21			8			209			217			25			575		600
Money market deposits	31			66			97			99			143			242			(6		)	273			267			6			829		835
Time deposits	(47		)	66			19			(68		)	147			79			503			470			973			1,114			1,318		2,432
Short-term borrowings	2			22			24			(2		)	—			(2		)	(274		)	(247		)	(521		)	(338		)	124		(214		)
Long-term borrowings	(51		)	(39		)	(90		)	(176		)	(85		)	(261		)	225			28			253			599			116		715
Total interest-bearing liabilities	(53		)	136			83			(130		)	211			81			456			782			1,238			1,407			3,059		4,466
Change in net interest income	$	1,008		$	206		$	1,214		$	2,012		$	(486	)	$	1,526		$	274		$	351		$	625		$	2,144		$	1,176	$	3,320

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,~~2019, 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~~$13,837,000 at December 31, ~~2016~~2018 to ~~$12,933,000~~$14,249,000 at September 30, ~~2017.~~2019. The slight increase in the allowance for loan losses was driven by ~~growth~~an increase in the consumer automobile segment 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 during the nine month period had a specific allowance within the allowance for losses. At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the allowance for loan losses to total loans was ~~1.09%~~1.04% and ~~1.18%~~1.00%, respectively.

~~Table of Contents~~

The provision for loan losses totaled ~~$60,000~~$360,000 and ~~$258,000~~$1,035,000 for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~the respective amounts for the corresponding 2018 periods were $480,000 and ~~$605,000 and $866,000~~ $975,000. The increase in the provision for loan losses

Table of Contents

for the nine months ended September 30, ~~2017 and 2016, respectively.~~2019 compared to the corresponding 2018 period was due to the increase in impaired loans. The ~~amount of~~increase in the provision for loan losses for the nine months ended September 30, 2019 compared to the same period of 2018 was primarily ~~the result of loan growth offset by minimal~~due to an increase in net charge-offs.

Nonperforming loans ~~decreased~~increased to ~~$8,317,000~~$17,208,000 at September 30, ~~2017~~2019 from ~~$11,530,000~~$8,739,000 at September 30, ~~2016.~~2018. 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%~~1.26% and ~~1.08%~~0.64% at September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and the ratio of the allowance for loan losses to nonperforming loans was ~~155.50%~~82.80% and ~~110.30%~~152.68% at September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Internal loan review and analysis coupled with changes in the loan ~~growth~~portfolio composition dictated a provision for loan losses of ~~$605,000~~$360,000 and $1,035,000 for the three and nine months ended September 30, ~~2017.~~2019.

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, 2019	$	1,304	$	15,904	$	17,208
June 30, 2019	1,245		14,138		15,383
March 31, 2019	1,268		14,526		15,794
December 31, 2018	1,274		15,298		16,572
September 30, 2018	512		8,227		8,739

Non-interest Income

Total non-interest income for the three and nine months ended September 30, ~~2017~~2019 compared to the same ~~period~~periods in ~~2016 decreased $342,000~~2018 increased $233,000 and $513,000, respectively, to ~~$2,740,000.~~$2,822,000 and $7,545,000. Excluding net securities gains, non-interest income for the three and nine months ended September 30, ~~2017 decreased $379,000~~2019 increased $39,000 and $205,000 compared to the same ~~period~~periods in ~~2016. The decrease in gain on sale of loans was driven by a shift in product mix and decreased volume.~~2018. The changes in insurance ~~and~~commissions is primarily the result of continued growth in United Insurance Solutions, LLC. The increase in brokerage commissions are due to a change in the product mix of consumer purchases. ~~Debit card fees decreased due to decreased usage of debit cards.~~The fluctuation in other income results primarily from increases in loans sold on the secondary market.

Total non-interest income for the nine months ended September 30, 2017 compared to the same period in 2016 decreased $1,102,000. Excluding net securities gains, non-interest income decreased $359,000 compared the 2016 period. The reasons noted for the three month period comparison also apply to the nine month period.

Non-interest income composition for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was as follows:


	Three Months Ended														Three Months Ended
	September 30, 2017					September 30, 2016				Change					September 30, 2019					September 30, 2018					Change
(In Thousands)	Amount			% Total		Amount		% Total		Amount			%		Amount			% Total		Amount			% Total		Amount			%
Service charges	$	550		20.07	%	$	585	18.98	%	$	(35	)	(5.98	)%	$	622		22.04	%	$	645		24.92	%	$	(23	)	(3.57	)%
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 gains (losses), available for sale															189			6.70		(22		)	(0.85	)	211			959.09
Net equity securities (losses) gains															(21		)	(0.74	)	(16		)	(0.62	)	(5		)	(31.25	)
Net securities gains (losses), trading															2			0.07		14			0.54		(12		)	(85.71	)
Bank-owned life insurance	166			6.06		172		5.58		(6		)	(3.49	)	143			5.07		165			6.37		(22		)	(13.33	)
Gain on sale of loans	455			16.61		658		21.35		(203		)	(30.85	)	583			20.66		398			15.37		185			46.48
Insurance commissions	109			3.98		198		6.42		(89		)	(44.95	)	93			3.30		85			3.28		8			9.41
Brokerage commissions	352			12.85		290		9.41		62			21.38		353			12.51		340			13.13		13			3.82
Debit card fees	514			18.76		690		22.39		(176		)	(25.51	)	333			11.80		359			13.87		(26		)	(7.24	)
Other	296			10.80		228		7.40		68			29.82		525			18.59		621			23.99		(96		)	(15.46	)
Total non-interest income	$	2,740		100.00	%	$	3,082	100.00	%	$	(342	)	(11.10	)%	$	2,822		100.00	%	$	2,589		100.00	%	$	233		9.00	%

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	Nine Months Ended														Nine Months Ended
	September 30, 2017					September 30, 2016				Change					September 30, 2019				September 30, 2018					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	)%	$	1,776	23.54	%	$	1,788		25.43	%	$	(12	)	(0.67	)%
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 gains (losses), available for sale															200		2.65		(17		)	(0.24	)	217			1,276.47
Net equity securities gains (losses)															44		0.58		(44		)	(0.63	)	88			200.00
Net securities gains (losses), trading															15		0.20		12			0.17		3			25.00
Bank-owned life insurance	499			6.12		516		5.57		(17		)	(3.29	)	434		5.75		496			7.05		(62		)	(12.50	)
Gain on sale of loans	1,316			16.14		1,691		18.27		(375		)	(22.18	)	1,246		16.51		1,053			14.97		193			18.33
Insurance commissions	399			4.89		604		6.52		(205		)	(33.94	)	346		4.59		266			3.78		80			30.08
Brokerage commissions	1,044			12.80		817		8.83		227			27.78		1,032		13.68		1,013			14.41		19			1.88
Debit card fees	1,450			17.78		1,413		15.26		37			2.62		1,032		13.68		1,065			15.15		(33		)	(3.10	)
Other	1,325			16.25		1,310		14.16		15			1.15		1,420		18.82		1,400			19.91		20			1.43
Total non-interest income	$	8,155		100.00	%	$	9,257	100.00	%	$	(1,102	)	(11.90	)%	$	7,545	100.00	%	$	7,032		100.00	%	$	513		7.30	%

Non-interest Expense

Total non-interest expense increased ~~$827,000~~$140,000 and $939,000 for the three and nine months ended September 30, ~~2017~~2019 compared to the same period of ~~2016.~~2018. The increase in salaries and employee benefits is primarily attributable to routine wage increases coupled with an increase in the ~~cost~~number of ~~health insurance. Occupancy expense~~employees. Furniture and equipment expenses have increased as maintenance costs have increased and older equipment has been replaced. Software amortization increased due to 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.updating software programs that require new licensing fee structures. Marketing expenses ~~increased~~decreased as targeted marketing ~~was increased~~has replaced mass marketing. The fluctuation in professional fees consists primarily of an increase in legal fees. The decrease in deposit insurance reflects the FDIC assessment credit recorded in the ~~localities were branches will be opened in the next several months. Other non-interest expenses increased primarily due to legal expenses and a reduction in the amortization~~third quarter 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.~~2019.

Total non-interest expense for the nine months ended September 30, 2017 compared to 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.

Non-interest expense composition for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was as follows:


	Three Months Ended													Three Months Ended
	September 30, 2017				September 30, 2016				Change					September 30, 2019				September 30, 2018				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	%	$	5,488	57.52	%	$	5,420	55.99	%	$	68		1.25	%
Occupancy	603		6.30		544		6.22		59			10.85		638		6.69		640		6.61		(2		)	(0.31	)
Furniture and equipment	816		8.53		662		7.58		154			23.26		885		9.28		780		8.06		105			13.46
Software amortization	235		2.46		580		6.64		(345		)	(59.48	)	234		2.45		208		2.15		26			12.50
Pennsylvania shares tax	228		2.38		220		2.52		8			3.64		285		2.99		278		2.87		7			2.52
Professional fees	560		5.85		502		5.74		58			11.55		585		6.13		459		4.74		126			27.45
Federal Deposit Insurance Corporation deposit insurance	194		2.03		202		2.31		(8		)	(3.96	)	—		—		237		2.45		(237		)	(100.00	)
Debit card expenses	168		1.76		246		2.81		(78		)	(31.71	)
Marketing	315		3.29		173		1.98		142			82.08		98		1.03		245		2.53		(147		)	(60.00	)
Intangible amortization	81		0.85		90		1.03		(9		)	(10.00	)	62		0.65		71		0.73		(9		)	(12.68	)
Other	1,628		17.02		1,013		11.60		615			60.71		1,266		13.26		1,343		13.87		(77		)	(5.73	)
Total non-interest expense	$	9,566	100.00	%	$	8,739	100.00	%	$	827		9.46	%	$	9,541	100.00	%	$	9,681	100.00	%	$	(140	)	(1.45	)%

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	Nine Months Ended													Nine Months Ended
	September 30, 2017				September 30, 2016				Change					September 30, 2019				September 30, 2018				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	%	$	16,512	56.14	%	$	15,387	54.04	%	$	1,125		7.31	%
Occupancy	1,855		6.72		1,630		6.16		225			13.80		2,085		7.09		2,080		7.30		5			0.24
Furniture and equipment	2,129		7.71		2,042		7.72		87			4.26		2,421		8.23		2,328		8.18		93			3.99
Software amortization	750		2.72		950		3.59		(200		)	(21.05	)	629		2.14		504		1.77		125			24.80
Pennsylvania shares tax	696		2.52		698		2.64		(2		)	(0.29	)	863		2.93		833		2.93		30			3.60
Professional fees	1,816		6.58		1,512		5.71		304			20.11		1,834		6.24		1,674		5.88		160			9.56
Federal Deposit Insurance Corporation deposit insurance	514		1.86		670		2.53		(156		)	(23.28	)	504		1.71		639		2.24		(135		)	(21.13	)
Debit card expenses	478		1.73		456		1.72		22			4.82
Marketing	690		2.50		568		2.15		122			21.48		233		0.79		764		2.68		(531		)	(69.50	)
Intangible amortization	256		0.93		276		1.04		(20		)	(7.25	)	202		0.69		229		0.80		(27		)	(11.79	)
Other	4,314		15.62		4,230		15.98		84			1.99		4,131		14.04		4,037		14.18		94			2.33
Total non-interest expense	$	27,614	100.00	%	$	26,465	100.00	%	$	1,149		4.34	%	$	29,414	100.00	%	$	28,475	100.00	%	$	939		3.30	%

Provision for Income Taxes

Income taxes increased ~~$9,000~~$313,000 and ~~$184,000~~$562,000 for the three and nine months ended September 30, ~~2017~~2019 compared to the same periods of ~~2016.~~2018. The effective tax rate for the three and nine months ended September 30, ~~2017~~2019 was ~~29.39%~~20.09% and ~~25.76%~~17.58%, respectively, compared to ~~2.15%~~18.30% and ~~20.58%~~17.17% for the same periods of 2016. The primary cause of the increase in tax expense 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 2016.2018. 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. The decrease in deposit insurance reflects the FDIC assessment credit awards recorded in the third quarter of 2019.

ASSET/LIABILITY MANAGEMENT

Cash and Cash Equivalents

Cash and cash equivalents decreased ~~$15,924,000~~$9,401,000 from ~~$43,671,000~~$66,742,000 at December 31, ~~2016~~2018 to ~~$27,747,000~~$57,341,000 at September 30, ~~2017~~2019, primarily as a result of the following activities during the nine months ended September 30, ~~2017.~~2019.

Loans Held for Sale

Activity regarding loans held for sale resulted in sales proceeds ~~leading~~trailing loan originations, less ~~$1,316,000~~$1,246,000 in realized gains, by ~~$219,000~~$1,061,000 for the nine months ended September 30, ~~2017.~~2019.

Loans

Gross loans ~~increased $96,033,000~~decreased $19,773,000 since December 31, ~~2016~~2018 due primarily to ~~an increase~~a decrease across all three real estate mortgage categories. The decrease in ~~installment loans to individuals. The~~the real estate mortgage portfolio was partially offset by the growth in ~~installment loans was driven by~~the consumer automobile ~~indirect lending. Loan growth has also picked up in our commercial, financial, and agricultural~~ loan ~~products.~~segment.

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The allocation of the loan portfolio, by category, as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 is presented below:


	September 30, 2017					December 31, 2016					Change					September 30, 2019				December 31, 2018				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	%	$	173,542	12.71	%	$	188,561	13.62	%	$	(15,019	)	(7.97	)%
Real estate mortgage:
Residential	576,134			48.43		564,740			51.63		11,394			2.02	%	617,946		45.27		622,379		44.94		(4,433		)	(0.71	)%
Commercial	323,510			27.19		306,182			27.99		17,328			5.66	%	364,354		26.69		371,695		26.84		(7,341		)	(1.98	)%
Construction	29,352			2.47		34,650			3.17		(5,298		)	(15.29	)%	39,563		2.90		43,523		3.14		(3,960		)	(9.10	)%
Installment loans to individuals	86,639			7.28		43,256			3.96		43,383			100.29	%
Consumer automobile loans																144,824		10.61		133,183		9.63		11,641			8.74	%
Other consumer installment loans																23,818		1.74		24,552		1.77		(734		)	(2.99	)%
Net deferred loan fees and discounts	(1,220		)	(0.10	)	(1,257		)	(0.11	)	37			(2.94	)%	937		0.08		864		0.06		73			8.45	%
Gross loans	$	1,189,714		100.00	%	$	1,093,681		100.00	%	$	96,033		8.78	%	$	1,364,984	100.00	%	$	1,384,757	100.00	%	$	(19,773	)	(1.43	)%

The following table shows the amount of accrual and non-accrual TDRs at September 30, ~~2017~~2019 and December 31, ~~2016:~~

2018:


	September 30, 2017						December 31, 2016						September 30, 2019						December 31, 2018
(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	$	—	$	5,099	$	5,099	$	—	$	1,127	$	1,127
Real estate mortgage:
Residential	1,199		341		1,540		1,491		541		2,032		2,083		2,213		4,296		2,225		159		2,384
Commercial	4,495		2,252		6,747		4,723		2,184		6,907		2,169		4,889		7,058		3,959		2,129		6,088
	$	5,716	$	2,713	$	8,429	$	6,323	$	2,857	$	9,180	$	4,252	$	12,201	$	16,453	$	6,184	$	3,415	$	9,599

Investments

The fair value of the investment debt securities portfolio at September 30, ~~2017 decreased $1,027,000~~2019 increased $14,790,000 since December 31, ~~2016~~2018 while the amortized cost of the portfolio ~~decreased $2,095,000.~~increased $8,934,000. The growth in the investment portfolio has occurred within the municipal segment as bonds with a final maturity of ten to fifteen 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%~~77.84% 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 to $12,837,000~~remained flat at $1,628,000 for September 30, ~~2017 from $11,233,000 at~~2019 and December 31, ~~2016~~2018 while the fair value increased ~~$1,465,000~~$44,000 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~~2019 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	$	5,160	$	5,170	$	—	$	—	$	—	$	—	$	5,160	$	5,170
State and political securities	61,293		61,751		—		—		575		576		61,868		62,327		76,948		81,079		1,667		1,687		70		70		78,685		82,836
Other debt securities	38,422		37,917		13,478		13,059		1,054		997		52,954		51,973		30,714		30,439		22,139		22,376		8,243		8,254		61,096		61,069
Total debt securities AFS	$	104,259	$	104,198	$	13,478	$	13,059	$	1,629	$	1,573	$	119,366	$	118,830	$	112,822	$	116,688	$	23,806	$	24,063	$	8,313	$	8,324	$	144,941	$	149,075

Financing Activities

Deposits

Total deposits increased ~~$58,782,000~~$112,504,000 from December 31, ~~2016~~2018 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.~~2019. 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~~growth of the time deposit portfolio is ~~moving forward as part~~the result of ~~the strategy to build balance sheet protection~~targeted marketing efforts in ~~a rising rate environment.~~select markets. 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, 2017				December 31, 2016				Change					September 30, 2019				December 31, 2018				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount			%		Amount		% Total		Amount		% Total		Amount		%
Demand deposits	$	310,830	26.94	%	$	303,277	27.69	%	$	7,553		2.49	%	$	327,329	24.57	%	$	320,814	26.30	%	$	6,515	2.03	%
NOW accounts	203,744		17.66		174,653		15.95		29,091			16.66		219,466		16.47		207,819		17.04		11,647		5.60
Money market deposits	274,528		23.79		245,121		22.38		29,407			12.00		239,926		18.01		238,596		19.56		1,330		0.56
Savings deposits	156,437		13.56		153,788		14.04		2,649			1.72		171,370		12.86		166,063		13.61		5,307		3.20
Time deposits	208,457		18.05		218,375		19.94		(9,918		)	(4.54	)	374,316		28.09		286,611		23.49		87,705		30.60
Total deposits	$	1,153,996	100.00	%	$	1,095,214	100.00	%	$	58,782		5.37	%	$	1,332,407	100.00	%	$	1,219,903	100.00	%	$	112,504	9.22	%

~~Table of Contents~~

Borrowed Funds

Total borrowed funds decreased ~~23.53%~~45.15%, or ~~$23,355,000,~~$138,530,000, to ~~$122,594,000~~$168,277,000 at September 30, ~~2017~~2019 compared to ~~$99,239,000~~$306,807,000 at December 31, ~~2016.~~2018. The ~~reduction~~decrease in ~~long-term borrowings was~~total borrowing occurred due to the ~~result of a maturity. The increase in short-term borrowed funds supplemented deposit~~strong growth in ~~the~~deposits as a funding ofsource as the loan portfolio ~~growth with overnight~~remained flat. The long-term borrowings ~~from~~originating during the ~~FHLB being the primary source~~nine months ended September 30, 2019 have a blended interest rate 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.~~2.32% and mature by 2024.


	September 30, 2017				December 31, 2016				Change					September 30, 2019				December 31, 2018				Change
(In Thousands)	Amount		% Total		Amount		% Total		Amount			%		Amount		% Total		Amount		% Total		Amount			%
Short-term borrowings:
FHLB repurchase agreements	$	32,434	26.46	%	$	—	—	%	$	32,434		—	%	$	—	—	%	$	162,203	52.87	%	$	(162,203	)	(100.00	)%
Securities sold under agreement to repurchase	9,162		7.47		13,241		13.34		(4,079		)	(30.81	)	5,987		3.56		5,662		1.85		325			5.74
Total short-term borrowings	41,596		33.93		13,241		13.34		28,355			214.15		5,987		3.56		167,865		54.72		(161,878		)	(96.43	)
Long-term borrowings:
Long-term FHLB borrowings	80,625		65.77		85,625		86.28		(5,000		)	(5.84	)	156,334		92.90		138,625		45.18		17,709			12.77
Long-term finance lease														5,956		3.54		—		—		5,956			n/a
Long-term capital lease	373		0.30		373		0.38		—			—		—		—		317		0.10		(317		)	(100.00	)
Total long-term borrowings	80,998		66.07		85,998		86.66		(5,000		)	(5.81	)	162,290		96.44		138,942		45.28		23,348			16.80
Total borrowed funds	$	122,594	100.00	%	$	99,239	100.00	%	$	23,355		23.53	%	$	168,277	100.00	%	$	306,807	100.00	%	$	(138,530	)	(45.15	)%

Table of Contents

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, 2019		December 31, 2018
Mortgage-backed and state and political securities pledged, fair value	$	13,884	$	15,574
Investment debt securities pledged, fair value					$	7,408	$	8,380
Repurchase agreements	9,162		13,241		5,987		5,662

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.”~~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~~Under existing 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,~~rules, 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 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 new 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~~phased in over a three-year period beginning January 1, 2016.

Table of Contents

The ~~Company~~Company's capital ratios as of September 30, 2019 and ~~the Banks will continue to analyze these new rules~~December 31, 2018 were as follows:



	September 30, 2019				December 31, 2018
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	139,484	10.660	%	$	132,543	10.178	%
For Capital Adequacy Purposes	58,882		4.500		58,601		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	91,594		7.000		83,018		6.375
To Be Well Capitalized	85,051		6.500		84,646		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	151,103	11.548	%	$	142,876	10.972	%
For Capital Adequacy Purposes	104,678		8.000		104,175		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	137,390		10.500		128,591		9.875
To Be Well Capitalized	130,848		10.000		130,219		10.000
Tier I Capital (to Risk-weighted Assets)
Actual	$	139,484	10.660	%	$	132,543	10.178	%
For Capital Adequacy Purposes	78,509		6.000		78,135		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	111,221		8.500		102,552		7.875
To Be Well Capitalized	104,678		8.000		104,180		8.000
Tier I Capital (to Average Assets)
Actual	$	139,484	8.457	%	$	132,543	8.176	%
For Capital Adequacy Purposes	65,973		4.000		64,845		4.000
To Be Well Capitalized	82,467		5.000		81,056		5.000

Jersey Shore State Bank's capital ratios as of September 30, 2019 and ~~their effects on the business, operations~~December 31, 2018 were as follows:



	September 30, 2019				December 31, 2018
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	98,790	10.365	%	$	94,105	9.879	%
For Capital Adequacy Purposes	42,890		4.500		42,866		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	66,718		7.000		60,727		6.375
To Be Well Capitalized	61,952		6.500		61,917		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	107,921	11.323	%	$	102,534	10.764	%
For Capital Adequacy Purposes	76,249		8.000		76,205		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	100,077		10.500		94,066		9.875
To Be Well Capitalized	95,311		10.000		95,256		10.000
Tier I Capital (to Risk-weighted Assets)	-
Actual	$	98,790	10.364	%	$	94,105	9.879	%
For Capital Adequacy Purposes	57,192		6.000		57,155		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	81,022		8.500		75,015		7.875
To Be Well Capitalized	76,256		8.000		76,206		8.000
Tier I Capital (to Average Assets)
Actual	$	98,790	8.062	%	$	94,105	7.724	%
For Capital Adequacy Purposes	49,015		4.000		48,734		4.000
To Be Well Capitalized	61,269		5.000		60,917		5.000

Table of Contents

Luzerne Bank's capital ratios as of September 30, 2019 and ~~capital levels of the Company and the Banks.~~December 31, 2018 were as follows:



	September 30, 2019				December 31, 2018
(In Thousands)	Amount		Ratio		Amount		Ratio
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual	$	37,930	10.472	%	$	35,378	10.061	%
For Capital Adequacy Purposes	16,299		4.500		15,824		4.500
Minimum To Maintain Capital Conservation Buffer At Reporting Date	25,354		7.000		22,417		6.375
To Be Well Capitalized	23,543		6.500		22,856		6.500
Total Capital (to Risk-weighted Assets)
Actual	$	40,419	11.159	%	$	37,283	10.603	%
For Capital Adequacy Purposes	28,977		8.000		28,130		8.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	38,032		10.500		34,723		9.875
To Be Well Capitalized	36,221		10.000		35,163		10.000
Tier I Capital (to Risk-weighted Assets)
Actual	$	37,930	10.472	%	$	35,378	10.061	%
For Capital Adequacy Purposes	21,732		6.000		21,098		6.000
Minimum To Maintain Capital Conservation Buffer At Reporting Date	30,787		8.500		27,691		7.875
To Be Well Capitalized	28,976		8.000		28,131		8.000
Tier I Capital (to Average Assets)
Actual	$	37,930	8.545	%	$	35,378	8.655	%
For Capital Adequacy Purposes	17,755		4.000		16,350		4.000
To Be Well Capitalized	22,194		5.000		20,438		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:~~2019:

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

~~Table of Contents~~

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 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.

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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.~~$596,002,000. 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~~$156,334,000 as of September 30, ~~2017.~~2019.

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 consolidated 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~~emphasis 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~~2020 assuming a static balance sheet as of September 30, ~~2017.~~

2019.


	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		$	46,276		$	49,824		$	53,043	$	55,678		$	58,184		$	60,545		$	62,896
Change from static	(4,614		)	(2,114		)	—		1,710			3,213			4,605			6,018			(6,767		)	(3,219		)	—		2,635			5,141			7,502			9,853
Percent change from static	-9.91		%	-4.54		%	—		3.67		%	6.90		%	9.89		%	12.92		%	-12.76		%	-6.07		%	—		4.97		%	9.69		%	14.14		%	18.58		%

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.

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.~~2018. 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.~~2019.

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,~~2019 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.~~2018. 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.~~2019.

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)~~2019)

—

~~342,446~~513,669

Month #2 (August 1 - August 31, ~~2017)~~2019)

—

~~342,446~~513,669

Month #3 (September 1 - September 30, ~~2017)~~2019)

—

~~342,446~~513,669

On April ~~24, 2017,~~29, 2019, the Board of Directors extended the previously approved authorization to repurchase up to ~~482,000~~723,000 shares, or approximately 10%, of the outstanding shares of the Company for an additional year to April 30, ~~2018.~~2020. As of September 30, ~~2017~~2019 there have been ~~91,856~~209,331 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).~~effect.
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~~2019 and December 31, ~~2016;~~2018; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018 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~~2019	/s/ Richard A. Grafmyre
		Richard A. Grafmyre, Chief Executive Officer
		(Principal Executive Officer)


Date:	November 8, ~~2017~~2019	/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 3(i)		Articles of Incorporation of the Registrant, as presently in effect.
Exhibit 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).
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~~2019 and December 31, ~~2016;~~2018; (ii) the Consolidated Statement of Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; (iii) Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; (iv) the Consolidated Statement of Shareholders’ Equity for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; (v) the Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018 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.

5352

(In Thousands)

Statement of Financial Condition classification

September 30, 2019

Finance lease right of use assets

Premises and equipment, net

Finance lease liabilities

Long-term borrowings