UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10‑Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2016~~2017

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from_____________________ to ___________________

Commission file number 0‑13222

CITIZENS FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA 23‑2265045

(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

15 South Main Street

Mansfield, Pennsylvania 16933

(Address of principal executive offices)(Zip Code)

Registrant's telephone number, including area code: (570) 662‑2121

N/A

(Former Name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes __X__ No_____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and ~~"smaller reporting~~"emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ~~____~~ ____ Accelerated filer _X__

Non-accelerated filer____ Smaller reporting company ____

(Do not check if a smaller reporting company)Emerging growth company ____

If an emerging growth company, indicate by check mark if the 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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes____ No __X__

The number of outstanding shares of the Registrant's Common Stock, as of ~~July 26, 2016,~~August 1, 2017, was ~~3,349,753.~~3,493,270.

Citizens Financial Services, Inc.

Form 10-Q

INDEX

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheet as of June ~~30,2016~~30,2017 and December 31, ~~2015~~2016	1
	Consolidated Statement of Income for the Three and Six Months Ended June 30, ~~2016~~2017 and ~~2015~~2016	2
	Consolidated Statement of Comprehensive Income for the Three and Six Months ended June 30, ~~2016~~2017 and ~~2015~~2016	3
	Consolidated Statement of Cash Flows for the Six Months ended June 30, ~~2016~~2017 and ~~2015~~2016	4
	Notes to Consolidated Financial Statements	~~5-34~~5-31
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	~~35-57~~32-54
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5754
Item 4.	Controls and Procedures	5754

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	5754-55
Item 1A.	Risk Factors	5855
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5855
Item 3.	Defaults Upon Senior Securities	5855
Item 4.	Mine Safety Disclosures	5855
Item 5.	Other Information	5855
Item 6.	Exhibits	~~58-59~~55-56
	Signatures	6057

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

	June 30			December 31
(in thousands except share data)	2017			2016
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	18,298		$	16,854
Interest-bearing		1,064			900
Total cash and cash equivalents		19,362			17,754
Interest bearing time deposits with other banks		8,791			6,955
Available-for-sale securities		275,208			314,017
Loans held for sale		393			1,827

Loans (net of allowance for loan losses:
2017, $9,979 and 2016, $8,886)		878,070			790,725

Premises and equipment		16,771			17,030
Accrued interest receivable		3,697			4,089
Goodwill		21,089			21,089
Bank owned life insurance		26,556			26,223
Other intangibles		1,945			2,096
Other investment sale receivable		-			7,759
Other assets		12,974			13,454

TOTAL ASSETS	$	1,264,856		$	1,223,018

LIABILITIES:
Deposits:
Noninterest-bearing	$	156,374		$	147,425
Interest-bearing		894,835			858,078
Total deposits		1,051,209			1,005,503
Borrowed funds		69,998			79,662
Accrued interest payable		628			720
Other liabilities		15,251			13,865
TOTAL LIABILITIES		1,137,086			1,099,750
STOCKHOLDERS' EQUITY:
Preferred Stock
$1.00 par value; authorized 3,000,000 shares at June 30, 2017 and December 31, 2016;
none issued in 2017 or 2016		-			-
Common stock
$1.00 par value; authorized 15,000,000 shares; issued 3,869,939 at June 30, 2017 and
3,704,375 at December 31, 2016		3,870			3,704
Additional paid-in capital		51,085			42,250
Retained earnings		86,170			91,278
Accumulated other comprehensive loss		(969	)		(1,392	)
Treasury stock, at cost: 380,775 shares at June 30, 2017
and 384,671 shares at December 31, 2016		(12,386	)		(12,572	)
TOTAL STOCKHOLDERS' EQUITY		127,770			123,268
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	1,264,856		$	1,223,018

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

June 30 December 31
(in thousands except share data) 2016 2015
ASSETS:
Cash and due from banks:
  Noninterest-bearing $ 14,908 $ 14,088
  Interest-bearing 11,914 10,296
Total cash and cash equivalents 26,822 24,384
Interest bearing time deposits with other banks 6,954 7,696
Available-for-sale securities 360,944 359,737
Loans held for sale 1,304 603

Loans (net of allowance for loan losses:
  2016, $7,359 and 2015, $7,106) 701,756 687,925

Premises and equipment 17,239 17,263
Accrued interest receivable 4,176 4,211
Goodwill 21,089 21,089
Bank owned life insurance 25,877 25,535
Other intangibles 2,183 2,437
Other assets 11,174 12,104

TOTAL ASSETS $ 1,179,518 $ 1,162,984

LIABILITIES:
Deposits:
  Noninterest-bearing $ 142,327 $ 150,960
  Interest-bearing 861,155 837,071
Total deposits 1,003,482 988,031
Borrowed funds 38,786 41,631
Accrued interest payable 644 734
Other liabilities 12,150 12,828
TOTAL LIABILITIES 1,055,062 1,043,224
STOCKHOLDERS' EQUITY:
Preferred Stock
  $1.00 par value; authorized 3,000,000 shares June 30, 2016 and December 31, 2015;
   none issued in 2016 or 2015 - -
Common stock
  $1.00 par value; authorized 15,000,000 shares; issued 3,704,375 at June 30, 2016 and
   3,671,751 at December 31, 2015 3,704 3,672
Additional paid-in capital 42,241 40,715
Retained earnings 87,753 85,790
Accumulated other comprehensive income (loss) 2,042 (236 )
Treasury stock, at cost: 358,921 shares at June 30, 2016
  and 335,876 shares at December 31, 2015 (11,284 ) (10,181 )
TOTAL STOCKHOLDERS' EQUITY 124,456 119,760
TOTAL LIABILITIES AND
   STOCKHOLDERS' EQUITY $ 1,179,518 $ 1,162,984

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except share and per share data) 2016 2015 2016 2015
INTEREST INCOME:
Interest and fees on loans $ 8,587 $ 7,129 $ 17,183 $ 14,168
Interest-bearing deposits with banks 64 39 135 70
Investment securities:
` Taxable 959 765 1,903 1,519
    Nontaxable 755 801 1,526 1,649
    Dividends 61 34 141 133
TOTAL INTEREST INCOME 10,426 8,768 20,888 17,539
INTEREST EXPENSE:
Deposits 1,072 1,035 2,146 2,044
Borrowed funds 183 172 366 347
TOTAL INTEREST EXPENSE 1,255 1,207 2,512 2,391
NET INTEREST INCOME 9,171 7,561 18,376 15,148
Provision for loan losses 135 120 270 240
NET INTEREST INCOME AFTER
    PROVISION FOR LOAN LOSSES 9,036 7,441 18,106 14,908
NON-INTEREST INCOME:
Service charges 1,128 1,028 2,230 2,004
Trust 182 180 378 374
Brokerage and insurance 158 255 367 382
Gains on loans sold 70 60 116 98
Investment securities gains, net 128 175 155 301
Earnings on bank owned life insurance 172 154 342 306
Other 145 103 311 218
TOTAL NON-INTEREST INCOME 1,983 1,955 3,899 3,683
NON-INTEREST EXPENSES:
Salaries and employee benefits 3,900 2,993 7,782 6,049
Occupancy 455 348 900 717
Furniture and equipment 171 87 328 215
Professional fees 266 180 553 412
FDIC insurance 160 116 317 232
Pennsylvania shares tax 240 200 390 401
Amortization of other intangibles 82 - 164 -
ORE expenses 212 357 305 358
Other 1,815 1,147 3,474 2,379
TOTAL NON-INTEREST EXPENSES 7,301 5,428 14,213 10,763
Income before provision for income taxes 3,718 3,968 7,792 7,828
Provision for income taxes 687 779 1,478 1,519
NET INCOME $ 3,031 $ 3,189 $ 6,314 $ 6,309

PER COMMON SHARE DATA:
Net Income - Basic $ 0.91 $ 1.04 $ 1.88 $ 2.06
Net Income - Diluted $ 0.91 $ 1.04 $ 1.88 $ 2.06
Cash Dividends Paid $ 0.419 $ 0.402 $ 0.829 $ 0.802

Number of shares used in computation - basic 3,343,254 3,052,285 3,349,913 3,055,569
Number of shares used in computation - diluted 3,343,663 3,053,349 3,350,118 3,056,103

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except share and per share data)	2017		2016		2017		2016
INTEREST INCOME:
Interest and fees on loans	$	10,304	$	8,587	$	20,021	$	17,183
Interest-bearing deposits with banks		45		64		80		135
Investment securities:
Taxable		775		959		1,579		1,903
Nontaxable		601		755		1,269		1,526
Dividends		53		61		129		141
TOTAL INTEREST INCOME		11,778		10,426		23,078		20,888
INTEREST EXPENSE:
Deposits		1,143		1,072		2,188		2,146
Borrowed funds		231		183		489		366
TOTAL INTEREST EXPENSE		1,374		1,255		2,677		2,512
NET INTEREST INCOME		10,404		9,171		20,401		18,376
Provision for loan losses		625		135		1,240		270
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		9,779		9,036		19,161		18,106
NON-INTEREST INCOME:
Service charges		1,120		1,128		2,178		2,230
Trust		188		182		409		378
Brokerage and insurance		114		158		305		367
Gains on loans sold		148		70		249		116
Investment securities gains, net		23		128		195		155
Earnings on bank owned life insurance		167		172		333		342
Other		128		145		254		311
TOTAL NON-INTEREST INCOME		1,888		1,983		3,923		3,899
NON-INTEREST EXPENSES:
Salaries and employee benefits		4,324		3,900		8,643		7,782
Occupancy		477		455		1,004		900
Furniture and equipment		146		171		285		328
Professional fees		258		266		568		553
FDIC insurance		95		160		200		317
Pennsylvania shares tax		243		240		524		390
Amortization of intangibles		73		82		149		164
ORE expenses		82		212		172		305
Other		1,468		1,815		2,812		3,474
TOTAL NON-INTEREST EXPENSES		7,166		7,301		14,357		14,213
Income before provision for income taxes		4,501		3,718		8,727		7,792
Provision for income taxes		1,033		687		1,956		1,478
NET INCOME	$	3,468	$	3,031	$	6,771	$	6,314

PER COMMON SHARE DATA:
Net Income - Basic	$	1.00	$	0.86	$	1.95	$	1.80
Net Income - Diluted	$	1.00	$	0.86	$	1.95	$	1.80
Cash Dividends Paid	$	0.405	$	0.392	$	0.810	$	0.783

Number of shares used in computation - basic		3,480,122		3,508,818		3,479,653		3,515,477
Number of shares used in computation - diluted		3,481,310		3,509,227		3,480,263		3,515,682

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF
       COMPREHENSIVE INCOME `
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2016 2015 2016 2015
Net income $ 3,031 $ 3,189 $ 6,314 $ 6,309
Other comprehensive income (loss):
      Unrealized gains on available for sale securities 1,794 (2,049 ) 3,489 (704 )
      Income tax effect (610 ) 698 (1,188 ) 240
      Change in unrecognized pension cost 60 54 121 102
      Income tax effect (21 ) (19 ) (42 ) (35 )
      Less: Reclassification adjustment for investment
                 security gains included in net income (128 ) (175 ) (155 ) (301 )
      Income tax effect 44 59 53 102
Other comprehensive income (loss), net of tax 1,139 (1,432 ) 2,278 (596 )
Comprehensive income $ 4,170 $ 1,757 $ 8,592 $ 5,713

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
	Three Months Ended									Six Months Ended
	June 30,									June 30,
(in thousands)				2017				2016					2017				2016
Net income				$	3,468			$	3,031				$	6,771			$	6,314
Other comprehensive income:
Unrealized gains on available for sale securities		654				1,794					724				3,489
Income tax effect		(222	)			(610	)				(246	)			(1,188	)
Change in unrecognized pension cost		52				60					112				121
Income tax effect		(17	)			(21	)				(38	)			(42	)
Less: Reclassification adjustment for investment
security gains included in net income		(23	)			(128	)				(195	)			(155	)
Income tax effect		8				44					66				53
Other comprehensive income, net of tax					452				1,139					423				2,278
Comprehensive income				$	3,920			$	4,170				$	7,194			$	8,592

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) Six Months Ended
June 30,
(in thousands) 2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income $ 6,314 $ 6,309
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Provision for loan losses 270 240
    Provision for off-balance sheet items 30 -
    Depreciation and amortization 175 236
    Amortization and accretion of investment securities 1,148 992
    Deferred income taxes 81 112
    Investment securities gains, net (155 ) (301 )
    Earnings on bank owned life insurance (342 ) (306 )
    Originations of loans held for sale (8,580 ) (7,479 )
    Proceeds from sales of loans held for sale 7,995 6,922
    Realized gains on loans sold (116 ) (98 )
    Increase in accrued interest receivable 35 60
    Decrease in accrued interest payable (90 ) (81 )
    Other, net (519 ) (1,158 )
      Net cash provided by operating activities 6,246 5,448
CASH FLOWS FROM INVESTING ACTIVITIES:
  Available-for-sale securities:
    Proceeds from sales 12,077 18,393
    Proceeds from maturity and principal repayments 21,561 31,163
    Purchase of securities (32,507 ) (49,579 )
  Proceeds from matured interest bearing time deposits with other banks 744 -
  Proceeds from redemption of regulatory stock 184 1,513
  Purchase of regulatory stock (132 ) (1,342 )
  Net increase in loans (14,135 ) (17,792 )
  Purchase of premises and equipment (398 ) (514 )
  Proceeds from sale of foreclosed assets held for sale 374 100
      Net cash used in investing activities (12,232 ) (18,058 )
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits 15,451 17,954
  Proceeds from long-term borrowings 539 5,286
  Repayments of long-term borrowings (534 ) (551 )
  Net increase in short-term borrowed funds (2,850 ) (7,340 )
  Purchase of treasury and restricted stock (1,482 ) (997 )
  Dividends paid (2,700 ) (2,253 )
      Net cash provided by financing activities 8,424 12,099
          Net (decrease) increase in cash and cash equivalents 2,438 (511 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,384 11,423
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,822 $ 10,912

Supplemental Disclosures of Cash Flow Information:
    Interest paid $ 2,602 $ 2,472
    Income taxes paid $ 1,400 $ 2,025
    Loans transferred to foreclosed property $ 519 $ 241
    Investments purchased and not settled $ - $ 319

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)	Six Months Ended
	June 30,
(in thousands)	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,771		$	6,314
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		1,240			270
Provision for off-balance sheet items		-			30
Depreciation and amortization		199			175
Amortization and accretion of investment securities		735			1,148
Deferred income taxes		(105	)		81
Investment securities and interest bearing time deposit gains, net		(195	)		(155	)
Earnings on bank owned life insurance		(333	)		(342	)
Originations of loans held for sale		(10,247	)		(8,580	)
Proceeds from sales of loans held for sale		11,840			7,995
Realized gains on loans sold		(249	)		(116	)
Increase in accrued interest receivable		392			35
Decrease in accrued interest payable		(92	)		(90	)
Other, net		(166	)		(519	)
Net cash provided by operating activities		9,790			6,246
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales		25,407			12,077
Proceeds from maturity and principal repayments		36,510			21,561
Purchase of securities		(13,829	)		(32,507	)
Purchase of interest bearing time deposits with other banks		(4,069	)		-
Proceeds from matured interest bearing time deposits with other banks		496			744
Proceeds from sale of interest bearing time deposits with other banks		1,745			-
Proceeds from redemption of regulatory stock		4,303			184
Purchase of regulatory stock		(3,487	)		(132	)
Net increase in loans		(88,468	)		(14,135	)
Purchase of premises and equipment		(131	)		(398	)
Proceeds from sale of foreclosed assets held for sale		237			374
Net cash used in investing activities		(41,286	)		(12,232	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		45,706			15,451
Proceeds from long-term borrowings		5			539
Repayments of long-term borrowings		-			(534	)
Net decrease in short-term borrowed funds		(9,669	)		(2,850	)
Purchase of treasury and restricted stock		(509	)		(1,482	)
Dividends paid		(2,429	)		(2,700	)
Net cash provided by financing activities		33,104			8,424
Net increase in cash and cash equivalents		1,608			2,438
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		17,754			24,384
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	19,362		$	26,822

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	2,769		$	2,602
Income taxes paid	$	2,075		$	1,400
Loans transferred to foreclosed property	$	335		$	519
Investments purchased and not settled	$	1,541		$	-

The accompanying notes are an integral part of these unaudited consolidated financial statements.

CITIZENS FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation

Citizens Financial Services, Inc. (individually and collectively with its direct and indirect subsidiaries, the "Company") is a Pennsylvania corporation ~~organized as~~and the holding company of its wholly owned subsidiary, First Citizens Community Bank (the "Bank"), and of the Bank's wholly owned subsidiary, First Citizens Insurance Agency, Inc. ("First Citizens Insurance").~~On December 11, 2015, the Company completed its acquisition of The First National Bank of Fredericksburg (FNB) by merging FNB into the Bank.~~

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission ("SEC") and in conformity with U.S. generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. Certain of the prior year amounts have been reclassified to conform with the current year presentation. Such reclassifications had no effect on net income or stockholders' equity. All material inter‑company balances and transactions have been eliminated in consolidation.

In the opinion of management of the Company, the accompanying interim financial statements at June 30, ~~2016~~2017 and for the periods ended June 30, ~~2016~~2017 and ~~2015~~2016 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the periods. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. The financial performance reported for the Company for the six month period ended June 30, ~~2016~~2017 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

Note 2 - Earnings per Share

The following table sets forth the computation of earnings per share. Earnings per share calculations give retroactive effect to stock dividends declared by the Company.

	Three months ended				Six months ended				Three months ended				Six months ended
	June 30,				June 30,				June 30,				June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Net income applicable to common stock	$	3,031,000	$	3,189,000	$	6,314,000	$	6,309,000	$	3,468,000	$	3,031,000	$	6,771,000	$	6,314,000

Basic earnings per share computation
Weighted average common shares outstanding		3,343,254		3,052,285		3,349,913		3,055,569		3,480,122		3,508,818		3,479,653		3,515,477
Earnings per share - basic	$	0.91	$	1.04	$	1.88	$	2.06	$	1.00	$	0.86	$	1.95	$	1.80

Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		3,343,254		3,052,285		3,349,913		3,055,569		3,480,122		3,508,818		3,479,653		3,515,477
Add: Dilutive effects of restricted stock		409		1,064		205		534		1,188		409		610		205
Weighted average common shares outstanding for dilutive earnings per share		3,343,663		3,053,349		3,350,118		3,056,103		3,481,310		3,509,227		3,480,263		3,515,682
Earnings per share - diluted	$	0.91	$	1.04	$	1.88	$	2.06	$	1.00	$	0.86	$	1.95	$	1.80

For the three months ended June 30, ~~2016~~2017 and ~~2015,~~2016, there were ~~4,521~~1,562 and ~~3,287~~4,521 shares, respectively, related to the restricted stock plan that were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had per share prices ranging from $49.87-$53.15 for the three month period ended June 30, 2017 and per share prices ranging from $46.69-$53.15 for the three month period ended June 30, ~~2016 and prices ranging from $44.50-$53.15 for the three month period ended June 30, 2015.~~2016. For the six months ended June 30, 2017 and 2016, 4,921 and ~~2015,~~ 4,521 ~~and 3,287~~ shares, respectively, related to the restricted stock plan were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had prices ranging from $47.81-$53.15 for the six month period ended June 30, 2017 and prices ranging from $46.69-$53.15 for the six month period ended June 30, ~~2016 and prices ranging from $44.50-$53.15 for the six month period ended June 30, 2015.~~2016.

Note 3 - Income Tax Expense

Income tax expense is less than the amount calculated using the statutory tax rate, primarily as a result of tax-exempt income earned from state and municipal securities and loans and investments in affordable housing tax credits.

Investments in Qualified Affordable Housing Projects

As of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Company was invested in four partnerships that provide affordable housing. The balance of the investments, which is included within other assets in the Consolidated Balance Sheet, was ~~$829,000~~$631,000 and ~~$959,000~~$700,000 as of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. Investments purchased prior to January 1, 2015, are accounted for utilizing the effective yield method. As of June 30, ~~2016,~~2017, the Company ~~has $945,000~~had $775,000 of tax credits remaining that will be recognized over ~~6.4~~5.50 years. Tax credits of $35,000 and $49,000 were recognized as a reduction of tax expense during the three months ended Jun 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, ~~and 2015. Tax~~tax credits of $70,000 and $99,000, respectively, were recognized as a reduction of tax ~~expense~~expense. Amortization of the investment included in other expenses on the Consolidated Statement of Income was $40,000 and $64,000 during the three months ended June 30, 2017 and 2016, respectively. Amortization of the investment included in other expenses on the Consolidated Statement of Income was $80,000 and $129,000 during the six months ended June 30, 2017 and 2016, ~~and 2015.~~respectively.

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at June 30, ~~2016~~2017 and December 31, ~~2015~~2016 were as follows (in thousands):

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
June 30, 2016	Cost		Gains		Losses			Value
June 30, 2017										Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	203,461	$	2,359	$	(1	)	$	205,819	$	142,581	$	315	$	(146	)	$	142,750
U.S. treasury securities		5,046		7		-			5,053
Obligations of state and
political subdivisions		101,144		3,338		(10	)		104,472		84,731		1,578		(93	)		86,216
Corporate obligations		11,430		50		-			11,480		3,000		111		-			3,111
Mortgage-backed securities in
government sponsored entities		31,190		456		(40	)		31,606		41,489		147		(176	)		41,460
Equity securities in financial
Institutions		2,001		518		(5	)		2,514
Equity securities in financial institutions											900		771		-			1,671
Total available-for-sale securities	$	354,272	$	6,728	$	(56	)	$	360,944	$	272,701	$	2,922	$	(415	)	$	275,208


December 31, 2015
December 31, 2016
Available-for-sale securities:
U.S. agency securities	$	199,749	$	369	$	(527	)	$	199,591	$	170,276	$	407	$	(269	)	$	170,414
U.S. treasury securities		10,103		-		(21	)		10,082		2,999		1		-			3,000
Obligations of state and
political subdivisions		99,856		3,080		(73	)		102,863		95,956		1,463		(493	)		96,926
Corporate obligations		14,583		68		(86	)		14,565		3,000		50		-			3,050
Mortgage-backed securities in
government sponsored entities		30,107		186		(89	)		30,204		37,987		88		(347	)		37,728
Equity securities in financial institutions		2,001		436		(5	)		2,432		1,821		1,078		-			2,899
Total available-for-sale securities	$	356,399	$	4,139	$	(801	)	$	359,737	$	312,039	$	3,087	$	(1,109	)	$	314,017

The following table shows the Company's gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands). As of June 30, ~~2016,~~2017, the Company owned 1763 securities whose fair value was less than their cost basis.

June 30, 2016	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross			Less than Twelve Months					Twelve Months or Greater					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized					Gross					Gross					Gross
	Value		Losses			Value		Losses			Value		Losses			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2017																Value		Losses			Value		Losses			Value		Losses
U.S. agency securities	$	8,509	$	(1	)	$	-	$	-		$	8,509	$	(1	)	$	53,010	$	(142	)	$	995	$	(4	)	$	54,005	$	(146	)
Obligations of state and
political subdivisions		4,342		(9	)		503		(1	)		4,845		(10	)		7,811		(40	)		5,171		(53	)		12,982		(93	)
Mortgage-backed securities in
government sponsored entities		3,716		(22	)		1,987		(18	)		5,703		(40	)		18,873		(149	)		1,377		(27	)		20,250		(176	)
Equity securities in financial institutions		111		(5	)		-		-			111		(5	)
Total securities	$	16,678	$	(37	)	$	2,490	$	(19	)	$	19,168	$	(56	)	$	79,694	$	(331	)	$	7,543	$	(84	)	$	87,237	$	(415	)


December 31, 2015
December 31, 2016
U.S. agency securities	$	123,591	$	(527	)	$	-	$	-		$	123,591	$	(527	)	$	50,947	$	(269	)	$	-	$	-		$	50,947	$	(269	)
U.S. treasury securities		10,082		(21	)		-		-			10,082		(21	)
Obligations of states and
political subdivisions		7,023		(57	)		2,914		(16	)		9,937		(73	)		28,398		(472	)		767		(21	)		29,165		(493	)
Corporate obligations		5,822		(61	)		2,138		(25	)		7,960		(86	)
Mortgage-backed securities in
government sponsored entities		9,830		(77	)		227		(12	)		10,057		(89	)		26,717		(330	)		753		(17	)		27,470		(347	)
Equity securities in financial institutions		106		(5	)		-		-			106		(5	)
Total securities	$	156,454	$	(748	)	$	5,279	$	(53	)	$	161,733	$	(801	)	$	106,062	$	(1,071	)	$	1,520	$	(38	)	$	107,582	$	(1,109	)

As of June 30, 2017 and December 31, 2016, the Company's investment securities portfolio contained unrealized losses on agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, obligations of states and political subdivisions and mortgage backed securities issued by government sponsored ~~entities, and equity securities in financial institutions.~~entities. For fixed maturity investments management considers whether the present value of cash flows expected to be collected are less than the security's amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company's intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of the security's amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been significantly below cost for one year, the Company's policy is to recognize an impairment loss unless sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or issuer-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Proceeds from sales of securities available-for-sale for the six months ended June 30, 2017 and 2016 were $25,407,000 and ~~2015 were~~ $12,077,000, ~~and $18,393,000,~~ respectively. For the three months ended June 30, ~~2016~~2017 and ~~2015, there were~~2016, sales of available-for-sale securities were $6,641,000 and $7,057,000, ~~and $3,770,000, respectively, of available-for-sale securities.~~respectively. The gross gains and losses were as follows (in thousands):

	Three Months Ended				Six Months Ended					Three Months Ended					Six Months Ended
	June 30,				June 30,					June 30,					June 30,
	2016		2015		2016		2015			2017			2016		2017			2016
Gross gains	$	128	$	175	$	155	$	312		$	30		$	128	$	202		$	155
Gross losses		-		-		-		(11	)		(7	)		-		(7	)		-
Net gains	$	128	$	175	$	155	$	301		$	23		$	128	$	195		$	155

Investment securities with an approximate carrying value of ~~$221.9~~$233.4 million and ~~$203.8~~$206.3 million at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, were pledged to secure public funds and certain other deposits.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and fair value of debt securities (excludes equity securities) at June 30, ~~2016,~~2017, by contractual maturity, are shown below (in thousands):

	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	41,555	$	41,758	$	46,659	$	46,812
Due after one year through five years		190,450		193,673		130,797		131,827
Due after five years through ten years		41,023		42,092		37,314		37,598
Due after ten years		79,243		80,907		57,031		57,300
Total	$	352,271	$	358,430	$	271,801	$	273,537

Note 5 – Loans

The Company grants loans primarily to customers throughout north central, central and south central Pennsylvania and the southern tier of New York. Although the Company had a diversified loan portfolio at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):

June 30, 2016	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
June 30, 2017									Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	203,980	$	518	$	34	$	203,428	$	205,725	$	1,254	$	35	$	204,436
Commercial and agricultural		309,287		6,404		2,753		300,130
Commercial										271,342		13,680		1,989		255,673
Agricultural										188,547		3,728		734		184,085
Construction		10,481		-		-		10,481		25,569		-		-		25,569
Consumer		11,439		-		6		11,433		10,603		4		-		10,599
Other commercial and agricultural loans		74,089		5,682		876		67,531
Other commercial loans										56,952		4,902		868		51,182
Other agricultural loans										32,974		1,466		-		31,508
State and political subdivision loans		99,839		-		-		99,839		96,337		-		-		96,337
Total		709,115		12,604		3,669		692,842		888,049		25,034		3,626		859,389
Allowance for loan losses		7,359		587		-		6,772		9,979		457		-		9,522
Net loans	$	701,756	$	12,017	$	3,669	$	686,070	$	878,070	$	24,577	$	3,626	$	849,867

December 31, 2016
Real estate loans:
Residential									$	207,423	$	957	$	35	$	206,431
Commercial										252,577		5,742		1,969		244,866
Agricultural										123,624		3,346		738		119,540
Construction										25,441		-		-		25,441
Consumer										11,005		-		4		11,001
Other commercial loans										58,639		5,994		621		52,024
Other agricultural loans										23,388		1,654		-		21,734
State and political subdivision loans										97,514		-		-		97,514
Total										799,611		17,693		3,367		778,551
Allowance for loan losses										8,886		487		-		8,399
Net loans									$	790,725	$	17,206	$	3,367	$	770,152

December 31, 2015 Total Loans
Individually
evaluated for
impairment

Loans acquired
with deteriorated
credit quality

Collectively
evaluated for
impairment

Real estate loans:
     Residential $ 203,407 $ 304 $ 35 $ 203,068
     Commercial and agricultural 295,364 6,235 2,908 286,221
     Construction 15,011 - - 15,011
Consumer 11,543 - 9 11,534
Other commercial and agricultural loans 71,206 5,745 866 64,595
State and political subdivision loans 98,500 - - 98,500
Total 695,031 12,284 3,818 678,929
Allowance for loan losses 7,106 355 - 6,751
Net loans $ 687,925 $ 11,929 $ 3,818 $ 672,178

Purchased loans acquired in ~~the FNB~~The First National Bank of Fredericksburg (FNB) acquisition, completed in 2015, were recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

Upon acquisition, the Company evaluated whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired ("PCI") loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. ~~There~~Based upon management's review, there were no material increases or decreases in the expected cash flows of these loans between December 11, 2015 (the "acquisition date") and June 30, ~~2016.~~2017. The fair value of ~~purchased credit-impaired~~PCI loans, on the acquisition date, was determined, primarily based on the fair value of ~~loan~~the loans' collateral. The carrying value of ~~purchased~~PCI loans ~~acquired with deteriorated credit quality~~ was ~~$3,669,000~~$3,626,000 and ~~$3,818,000~~$3,367,000 at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the FNB acquisition was $6,969,000 and the estimated fair value of the loans was $3,809,000. Total contractually required payments on these loans, including interest, at the acquisition date was $9,913,000. However, the Company's preliminary estimate of expected cash flows was $4,474,000. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $5,439,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $665,000 on the acquisition date relating to these impaired loans.

The carrying value of the PCI loans ~~acquired in the FNB acquisition with specific evidence of deterioration in credit quality~~ was determined by projected discounted contractual cash flows.

Changes in the accretable yield for ~~purchased credit-impaired~~PCI loans were as follows for the three and six months ended June 30, 2017 and 2016, respectively (in thousands):

							Three months ended						Six months ended
							June 30,						June 30,
	Three Months Ended			Six Months Ended			2017			2016			2017			2016
Balance at beginning of period	$	551		$	637		$	275		$	551		$	389		$	637
Accretion		(87	)		(173	)		(108	)		(87	)		(222	)		(173	)
Balance at end of period	$	464		$	464		$	167		$	464		$	167		$	464

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30 (in thousands):

	June 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Outstanding balance	$	6,616	$	6,950	$	6,660	$	6,487
Carrying amount		3,669		3,818		3,626		3,367

The segments of the Company's loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or ~~commercial~~agricultural real estate used during the construction phase of residential, ~~and~~ commercial or agricultural projects. Consumer loans are typically unsecured or primarily secured by assets other than real estate and overdraft lines of credit are typically secured by customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivision loans are loans to state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers other commercial loans, other agricultural loans, state and political subdivision loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer's results of operations and cash flows or if the loan is modified in a troubled debt restructuring. In addition, certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation of the allowance for loan losses or a charge-off to the allowance for loan losses.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands):

			Recorded		Recorded								Recorded		Recorded
	Unpaid		Investment		Investment		Total				Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related		Principal		With No		With		Recorded		Related
June 30, 2016	Balance		Allowance		Allowance		Investment		Allowance
June 30, 2017											Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	502	$	114	$	345	$	459	$	35	$	1,246	$	281	$	903	$	1,184	$	67
Home Equity		59		-		59		59		11		70		16		54		70		10
Commercial		8,888		5,944		295		6,239		126		16,037		13,093		587		13,680		58
Agricultural		165		165		-		165		-		3,744		2,405		1,323		3,728		95
Construction		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		4		2		2		4		2
Other commercial loans		5,717		4,547		1,031		5,578		415		5,423		4,431		471		4,902		207
Other agricultural loans		104		104		-		104		-		1,466		1,448		18		1,466		18
State and political subdivision loans		-		-		-		-		-
State and political
subdivision loans												-		-		-		-		-
Total	$	15,435	$	10,874	$	1,730	$	12,604	$	587	$	27,990	$	21,676	$	3,358	$	25,034	$	457

December 31, 2015
December 31, 2016
Real estate loans:
Mortgages	$	281	$	114	$	129	$	243	$	26	$	953	$	570	$	330	$	900	$	22
Home Equity		61		-		61		61		11		57		-		57		57		10
Commercial		8,654		5,843		225		6,068		62		7,958		5,697		45		5,742		45
Agricultural		167		167		-		167		-		3,347		2,000		1,347		3,347		54
Construction		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Other commercial loans		5,535		4,653		987		5,640		256		6,159		5,135		859		5,994		326
Other agricultural loans		105		105		-		105		-		1,653		1,629		24		1,653		30
State and political subdivision loans		-		-		-		-		-
State and political
subdivision loans												-		-		-		-		-
Total	$	14,803	$	10,882	$	1,402	$	12,284	$	355	$	20,127	$	15,031	$	2,662	$	17,693	$	487

The following tables includes the average balance of impaired financing receivables by class and the income recognized on ~~impaired loans~~these receivables for the three and six month periods ended June 30, ~~2016~~2017 and ~~2015(~~2016(in thousands):

	For the Three Months Ended
	June 30, 2017						June 30, 2016
					Interest						Interest
	Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		Cash Basis		Investment		Recognized		Cash Basis
Real estate loans:
Mortgages	$	986	$	3	$	-	$	460	$	5	$	-
Home Equity		60		1		-		59		1		-
Commercial		12,980		134		-		6,158		26		-
Agricultural		3,641		32		-		165		3		-
Construction		-		-		-		-		-		-
Consumer		3		-		-		-		-		-
Other commercial loans		5,029		37		17		5,933		68		2
Other agricultural loans		1,515		22		-		104		2		-
State and political
subdivision loans		-		-		-		-		-		-
Total	$	24,214	$	229	$	17	$	12,879	$	105	$	2

	For the Six Months ended												For the Six Months ended
	June 30, 2016						June 30, 2015						June 30, 2017						June 30, 2016
					Interest						Interest						Interest						Interest
	Average		Interest		Income		Average		Interest		Income		Average		Interest		Income		Average		Interest		Income
	Recorded		Income		Recognized		Recorded		Income		Recognized		Recorded		Income		Recognized		Recorded		Income		Recognized
	Investment		Recognized		Cash Basis		Investment		Recognized		Cash Basis		Investment		Recognized		Cash Basis		Investment		Recognized		Cash Basis
Real estate loans:
Mortgages	$	425	$	9	$	-	$	224	$	4	$	5	$	940	$	6	$	-	$	425	$	9	$	-
Home Equity		60		2		-		114		2		-		58		2		-		60		2		-
Commercial		6,142		52		-		5,862		32		-		9,387		158		3		6,142		52		-
Agricultural		165		5		-		-		-		-		3,513		63		-		165		5		-
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		2		-		-		-		-		-
Other commercial loans		5,942		134		3		2,678		49		3		5,313		77		27		5,942		134		3
Other agricultural loans		104		3		-		-		-		-		1,571		45		-		104		3		-
State and political
subdivision loans		-		-		-		-		-		-		-		-		-		-		-		-
Total	$	12,838	$	205	$	3	$	8,878	$	87	$	8	$	20,784	$	351	$	30	$	12,838	$	205	$	3

	For the Three Months Ended
	June 30, 2016						June 30, 2015
Real estate loans:
Mortgages	$	460	$	5	$	-	$	259	$	2	$	5
Home Equity		59		1		-		103		1		-
Commercial		6,158		26		-		5,700		19		-
Agricultural		165		3		-		-		-		-
Construction		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Other commercial loans		5,933		68		2		2,629		24		2
Other agricultural loans		104		2		-		-		-		-
State and political
subdivision loans		-		-		-		-		-		-
Total	$	12,879	$	105	$	2	$	8,691	$	46	$	7

Credit Quality Information

For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision loans, management uses a nine grade internal risk rating system to monitor credit quality. The first five categories are considered not criticized and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

·	Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

·	Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

·	Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

·	Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

·	Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company's loan rating process includes several layers of internal and external oversight. The Company's loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial and agricultural loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to 1) review a minimum of 55% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated for over $1.0 million in the last year, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):

June 30, 2016	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
June 30, 2017													Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	228,452	$	3,619	$	14,796	$	28	$	-	$	246,895	$	244,957	$	13,913	$	12,472	$	-	$	-	$	271,342
Agricultural		53,701		5,951		2,740		-		-		62,392		176,551		5,457		6,539		-		-		188,547
Construction		10,481		-		-		-		-		10,481		25,569		-		-		-		-		25,569
Other commercial loans		48,344		2,148		5,061		133		-		55,686		51,577		608		4,684		83		-		56,952
Other agricultural loans		14,454		2,320		1,629		-		-		18,403		30,641		195		2,138		-		-		32,974
State and political
subdivision loans		91,639		8,200		-		-		-		99,839		82,665		2,926		10,746		-		-		96,337
Total	$	447,071	$	22,238	$	24,226	$	161	$	-	$	493,696	$	611,960	$	23,099	$	36,579	$	83	$	-	$	671,721

December 31, 2015
Real estate loans:
Commercial	$	217,544	$	4,150	$	15,816	$	32	$	-	$	237,542
Agricultural		53,695		2,865		1,262		-		-		57,822
Construction		14,422		589		-		-		-		15,011
Other commercial loans		51,297		446		5,669		137		-		57,549
Other agricultural loans		13,318		234		105		-		-		13,657
State and political
subdivision loans		98,500		-		-		-		-		98,500
Total	$	448,776	$	8,284	$	22,852	$	169	$	-	$	480,081

December 31, 2016	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	225,185	$	14,045	$	13,347	$	-	$	-	$	252,577
Agricultural		110,785		8,231		4,608		-		-		123,624
Construction		25,441		-		-		-		-		25,441
Other commercial loans		51,396		2,049		5,105		89		-		58,639
Other agricultural loans		20,178		1,733		1,477		-		-		23,388
State and political
subdivision loans		83,620		13,066		828		-		-		97,514
Total	$	516,605	$	39,124	$	25,365	$	89	$	-	$	581,183

For residential real estate mortgages, home equity and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days and still accruing. The following table presents the recorded investment in those loan classes based on payment activity as of June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):

June 30, 2016 Performing Non-performing PCI Total
Real estate loans:
Mortgages $ 142,633 $ 1,474 $ 34 $ 144,141
Home Equity 59,709 130 - 59,839
Consumer 11,385 48 6 11,439
Total $ 213,727 $ 1,652 $ 40 $ 215,419

December 31, 2015	Performing		Non-performing		PCI		Total
June 30, 2017									Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	139,734	$	1,270	$	35	$	141,039	$	146,736	$	1,509	$	35	$	148,280
Home Equity		62,236		132		-	$	62,368		57,256		189		-		57,445
Consumer		11,470		64		9	$	11,543		10,459		144		-		10,603
Total	$	213,440	$	1,466	$	44	$	214,950	$	214,451	$	1,842	$	35	$	216,328

December 31, 2016
Real estate loans:
Mortgages									$	147,047	$	1,648	$	35	$	148,730
Home Equity										58,438		255		-	$	58,693
Consumer										10,892		109		4	$	11,005
Total									$	216,377	$	2,012	$	39	$	218,428

Aging Analysis of Past Due Financing Receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due financing receivables as of June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):

Total 90 Days or
30-59 Days 60-89 Days 90 Days Total Past Financing Greater and
June 30, 2016 Past Due Past Due Or Greater Due Current PCI Receivables Accruing
Real estate loans:
     Mortgages $ 1,564 $ 25 $ 704 $ 2,293 $ 141,814 $ 34 $ 144,141 $ 195
     Home Equity 478 74 77 629 59,210 - 59,839 24
     Commercial 1,257 958 4,147 6,362 238,517 2,016 246,895 461
     Agricultural 166 58 165 389 61,266 737 62,392 165
     Construction - - - - 10,481 - 10,481 -
Consumer 210 39 48 297 11,136 6 11,439 9
Other commercial loans 15 3,062 1,012 4,089 50,721 876 55,686 146
Other agricultural loans 66 91 104 261 18,142 - 18,403 104
State and political
   subdivision loans - - - - 99,839 - 99,839 -
Total $ 3,756 $ 4,307 $ 6,257 $ 14,320 $ 691,126 $ 3,669 $ 709,115 $ 1,104

Loans considered non-accrual $ 373 $ 3,759 $ 5,153 $ 9,285 $ 921 $ - $ 10,206
Loans still accruing 3,383 548 1,104 5,035 690,205 3,669 698,909
Total $ 3,756 $ 4,307 $ 6,257 $ 14,320 $ 691,126 $ 3,669 $ 709,115

Total 90 Days or
30-59 Days 60-89 Days 90 Days Total Past Financing Greater and
December 31, 2015 Past Due Past Due Or Greater Due Current PCI Receivables Accruing
Real estate loans:
     Mortgages $ 487 $ 283 $ 687 $ 1,457 $ 139,547 $ 35 $ 141,039 $ 321
     Home Equity 630 15 121 766 61,602 - 62,368 73
     Commercial 824 57 4,139 5,020 230,352 2,170 237,542 60
     Agricultural 177 167 - 344 56,740 738 57,822 -
     Construction - - - - 15,011 - 15,011 -
Consumer 239 37 49 325 11,209 9 11,543 9
Other commercial loans 143 214 1,010 1,367 55,316 866 57,549 160
Other agricultural loans 9 - - 9 13,648 - 13,657 -
State and political
   subdivision loans - - - - 98,500 - 98,500 -
Total $ 2,509 $ 773 $ 6,006 $ 9,288 $ 681,925 $ 3,818 $ 695,031 $ 623

Loans considered non-accrual $ 54 $ 171 $ 5,383 $ 5,608 $ 923 $ - $ 6,531
Loans still accruing 2,455 602 623 3,680 681,002 3,818 688,500
Total $ 2,509 $ 773 $ 6,006 $ 9,288 $ 681,925 $ 3,818 $ 695,031

1312

													Total		90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and
June 30, 2017	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	223	$	165	$	879	$	1,267	$	146,978	$	35	$	148,280	$	-
Home Equity		280		8		96		384		57,061		-		57,445		43
Commercial		1,219		302		4,389		5,910		263,443		1,989		271,342		553
Agricultural		454		100		1,163		1,717		186,096		734		188,547		159
Construction		-		-		-		-		25,569		-		25,569		-
Consumer		91		-		144		235		10,368		-		10,603		57
Other commercial loans		45		-		2,620		2,665		53,419		868		56,952		-
Other agricultural loans		283		-		739		1,022		31,952		-		32,974		-
State and political
subdivision loans		-		-		-		-		96,337		-		96,337		-
Total	$	2,595	$	575	$	10,030	$	13,200	$	871,223	$	3,626	$	888,049	$	812

Loans considered non-accrual	$	144	$	99	$	9,218	$	9,461	$	2,050	$	-	$	11,511
Loans still accruing		2,451		476		812		3,739		869,173		3,626		876,538
Total	$	2,595	$	575	$	10,030	$	13,200	$	871,223	$	3,626	$	888,049

December 31, 2016
Real estate loans:
Mortgages	$	630	$	36	$	1,109	$	1,775	$	146,920	$	35	$	148,730	$	173
Home Equity		384		49		209		642		58,051		-		58,693		160
Commercial		1,757		58		4,302		6,117		244,491		1,969		252,577		-
Agricultural		-		-		1,145		1,145		121,741		738		123,624		-
Construction		-		-		-		-		25,441		-		25,441		-
Consumer		115		40		83		238		10,763		4		11,005		67
Other commercial loans		95		35		4,004		4,134		53,884		621		58,639		-
Other agricultural loans		43		34		5		82		23,306		-		23,388		5
State and political
subdivision loans		-		-		-		-		97,514		-		97,514		-
Total	$	3,024	$	252	$	10,857	$	14,133	$	782,111	$	3,367	$	799,611	$	405

Loans considered non-accrual	$	172	$	105	$	10,452	$	10,729	$	725	$	-	$	11,454
Loans still accruing		2,852		147		405		3,404		781,386		3,367		788,157
Total	$	3,024	$	252	$	10,857	$	14,133	$	782,111	$	3,367	$	799,611

Nonaccrual Loans

Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the financing receivables, excluding PCI loans, on non-accrual status as of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. The balances are presented by class of financing receivable (in thousands):

June 30, 2016 December 31, 2015
Real estate loans:
     Mortgages $ 1,279 $ 949
     Home Equity 106 59
     Commercial 4,711 4,422
     Agricultural 29 34
Consumer 39 55
Other commercial loans 4,042 1,012
$ 10,206 $ 6,531

	June 30, 2017		December 31, 2016
Real estate loans:
Mortgages	$	1,509	$	1,475
Home Equity		146		95
Commercial		4,588		4,445
Agricultural		1,314		1,340
Construction		-		-
Consumer		87		42
Other commercial loans		3,128		4,057
Other agricultural loans		739		-
State and political subdivision		-		-
	$	11,511	$	11,454

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to structure more affordable terms before their loan reaches nonaccrual status. These restructured terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest or principal, or both, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company's investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower's ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. Based on this evaluation management would no longer consider a loan to be a TDR when the relevant facts support such a conclusion. As of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, included within the allowance for loan losses are reserves of ~~$33,000~~$26,000 and ~~$37,000~~$29,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three and six months ended June 30, ~~2016~~2017 and ~~2015~~2016 were as follows (dollars in thousands):

	For the Three Months Ended June 30, 2016												For the Three Months Ended June 30, 2017
	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
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		3	$	-	$	438	$	-	$	438		-		5	$	-	$	6,093	$	-	$	6,093
Total		-		3	$	-	$	438	$	-	$	438		-		5	$	-	$	6,093	$	-	$	6,093

	For the Six Months Ended June 30, 2017
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		7	$	-	$	6,797	$	-	$	6,797
Total		-		7	$	-	$	6,797	$	-	$	6,797

For the Six Months Ended June 30, 2016
Number of contracts
Pre-modification Outstanding
Recorded Investment

Post-Modification Outstanding
Recorded Investment

Interest
Modification

Term
Modification

Interest
Modification

Term
Modification

Interest
Modification

Term
Modification

Real estate loans:
Commercial - 3 $ - $ 438 $ - $ 438
Total - 3 $ - $ 438 $ - $ 438

	For the Three Months Ended June 30, 2015												For the Three Months Ended June 30, 2016
	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
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		-		1	$	-	$	19	$	-	$	19
Commercial														-		3	$	-	$	438	$	-	$	438
Total		-		1	$	-	$	19	$	-	$	19		-		3	$	-	$	438	$	-	$	438

	For the Six Months Ended June 30, 2015												For the Six Months Ended June 30, 2016
	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
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Mortgages		1		1	$	71	$	19	$	71	$	19
Commercial														-		3	$	-		438	$	-		438
Total		1		1	$	71	$	19	$	71	$	19		-		3	$	-	$	438	$	-	$	438

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism on modified loans occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. There were no loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which ~~begin~~began January 1, ~~2016~~2017 and ~~2015~~2016 (six month periods) and April 1, ~~2016~~2017 and ~~2015~~2016 (3 month periods), respectively, that subsequently defaulted during these reporting periods.

Allowance for Loan Losses

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively (in thousands):

	June 30, 2016						December 31, 2015						June 30, 2017						December 31, 2016
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	46	$	944	$	990	$	37	$	868	$	905	$	77	$	1,027	$	1,104	$	32	$	1,032	$	1,064
Commercial and agricultural		126		3,793		3,919		62		3,723		3,785
Commercial														58		3,483		3,541		45		3,544		3,589
Agricultural														95		2,357		2,452		54		1,440		1,494
Construction		-		18		18		-		24		24		-		45		45		-		47		47
Consumer		-		104		104		-		102		102		2		123		125		-		122		122
Other commercial and agricultural loans		415		1,149		1,564		256		1,049		1,305
Other commercial loans														207		924		1,131		326		1,001		1,327
Other agricultural loans														18		413		431		30		282		312
State and political
subdivision loans		-		764		764		-		593		593		-		838		838		-		833		833
Unallocated		-		-		-		-		392		392		-		312		312		-		98		98
Total	$	587	$	6,772	$	7,359	$	355	$	6,751	$	7,106	$	457	$	9,522	$	9,979	$	487	$	8,399	$	8,886

The following tables roll forward the balance of the ALLL by portfolio segment for the three and six month periods ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively (in thousands):

Balance at
March 31, 2016
Charge-offs Recoveries Provision
Balance at
June 30, 2016

Real estate loans:
     Residential $ 966 $ (43 ) $ - $ 67 $ 990
     Commercial and agricultural 3,938 - 4 (23 ) 3,919
     Construction 14 - - 4 18
Consumer 96 (23 ) 29 2 104
Other commercial and agricultural loans 1,347 (18 ) - 235 1,564
State and political -
  subdivision loans 666 - - 98 764
Unallocated 248 - - (248 ) -
Total $ 7,275 $ (84 ) $ 33 $ 135 $ 7,359

Balance at
December 31, 2015
Charge-offs Recoveries Provision
Balance at
June 30, 2016

Real estate loans:
     Residential $ 905 $ (43 ) $ - $ 128 $ 990
     Commercial and agricultural 3,785 - 8 126 3,919
     Construction 24 - - (6 ) 18
Consumer 102 (38 ) 68 (28 ) 104
Other commercial and agricultural loans 1,305 (18 ) 6 271 1,564
State and political -
  subdivision loans 593 - - 171 764
Unallocated 392 - - (392 ) -
Total $ 7,106 $ (99 ) $ 82 $ 270 $ 7,359

Balance at
March 31, 2015
Charge-offs Recoveries Provision
Balance at
June 30, 2015

Real estate loans:
     Residential $ 923 $ (17 ) $ - $ 25 $ 931
     Commercial and agricultural 3,699 (56 ) 3 33 3,679
     Construction 11 - - 3 14
Consumer 82 (17 ) 4 20 89
Other commercial and agricultural loans 1,286 - - 216 1,502
State and political -
  subdivision loans 572 - - (4 ) 568
Unallocated 349 - - (173 ) 176
Total $ 6,922 $ (90 ) $ 7 $ 120 $ 6,959

Balance at
December 31, 2014
Charge-offs Recoveries Provision
Balance at
June 30, 2015

Real estate loans:
     Residential $ 878 $ (34 ) $ - $ 87 $ 931
     Commercial and agricultural 3,870 (56 ) 7 (142 ) 3,679
     Construction 26 - - (12 ) 14
Consumer 84 (24 ) 12 17 89
Other commercial and agricultural loans 1,224 (1 ) - 279 1,502
State and political -
  subdivision loans 545 - - 23 568
Unallocated 188 - - (12 ) 176
Total $ 6,815 $ (115 ) $ 19 $ 240 $ 6,959

	Balance at March 31, 2017		Charge-offs			Recoveries		Provision			Balance at June 30, 2017
Real estate loans:
Residential	$	1,042	$	(48	)	$	-	$	110		$	1,104
Commercial		3,665		-			2		(126	)		3,541
Agricultural		1,952		-			-		500			2,452
Construction		46		-			-		(1	)		45
Consumer		123		(17	)		12		7			125
Other commercial loans		1,215		-			-		(84	)		1,131
Other agricultural loans		306		-			-		125			431
State and political subdivision loans		824		-			-		14			838
Unallocated		232		-			-		80			312
Total	$	9,405	$	(65	)	$	14	$	625		$	9,979

	Balance at December 31, 2016		Charge-offs			Recoveries		Provision			Balance at June 30, 2017
Real estate loans:
Residential	$	1,064	$	(93	)	$	-	$	133		$	1,104
Commercial		3,589		(41	)		6		(13	)		3,541
Agricultural		1,494		-			-		958			2,452
Construction		47		-			-		(2	)		45
Consumer		122		(45	)		22		26			125
Other commercial loans		1,327		-			9		(205	)		1,131
Other agricultural loans		312		(5	)				124			431
State and political subdivision loans		833		-			-		5			838
Unallocated		98		-			-		214			312
Total	$	8,886	$	(184	)	$	37	$	1,240		$	9,979

	Balance at March 31, 2016		Charge-offs			Recoveries		Provision			Balance at June 30, 2016
Real estate loans:
Residential	$	966	$	(43	)	$	-	$	67		$	990
Commercial		3,533		-			4		(199	)		3,338
Agricultural		405							176			581
Construction		14		-			-		4			18
Consumer		96		(23	)		29		2			104
Other commercial loans		1,222		(18	)		-		112			1,316
Other agricultural loans		125							123			248
State and political subdivision loans		666		-			-		98			764
Unallocated		248		-			-		(248	)		-
Total	$	7,275	$	(84	)	$	33	$	135		$	7,359

	Balance at December 31, 2016		Charge-offs			Recoveries		Provision			Balance at June 30, 2016
Real estate loans:
Residential	$	905	$	(43	)	$	-	$	128		$	990
Commercial		3,376		-			8		(46	)		3,338
Agricultural		409		-					172			581
Construction		24		-			-		(6	)		18
Consumer		102		(38	)		68		(28	)		104
Other commercial loans		1,183		(18	)		6		145			1,316
Other agricultural loans		122							126			248
State and political subdivision loans		593		-			-		171			764
Unallocated		392		-			-		(392	)		-
Total	$	7,106	$	(99	)	$	82	$	270		$	7,359

The Company allocates the ALLL based on the factors described below, which conform to the Company's loan classification policy and credit quality measurements. In reviewing risk within the Company's loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed:

·	Level of and trends in delinquencies and impaired/classified loans

§	Change in volume and severity of past due loans

§	Volume of non-accrual loans

§	Volume and severity of classified, adversely or graded loans;

·	Level of and trends in charge-offs and recoveries;

·	Trends in volume, terms and nature of the loan portfolio;

·	Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices;

·	Changes in the quality of the Company's loan review system;

·	Experience, ability and depth of lending management and other relevant staff;

·	National, state, regional and local economic trends and business conditions

§	General economic conditions

§	Unemployment rates

§	Inflation rate/ Consumer Price Index

§	Changes in values of underlying collateral for collateral-dependent loans;

·	Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses;

·	Existence and effect of any credit concentrations, and changes in the level of such concentrations; and

·	Any change in the level of board oversight.

The Company analyzes its loan portfolio each quarter to determine the adequacy of its ALLL.

Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL.

~~We continually review the model utilized in calculating the required ALLL. The following qualitative factors experienced changes during the first six months of 2016:~~

·	The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for residential, consumer and agricultural related loans due to an increase in past due, non-accrual and classified loans.

The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses was increased for agricultural related loans due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2016, which negatively affected customer earnings.

·	The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all loan categories due to an increase in the unemployment rates in the local economy during the first six months of 2016.

~~The following qualitative factors experienced changes during~~For the three months ended June 30, ~~2016:~~

·	The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all loan categories due to an increase in the unemployment rates in the local economy during the quarter.

·	The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for agricultural related loans due to an increase in past due, non-accrual and classified loans.

2017, the allowance for residential real estate increased in general reserves for pooled loans as a result of increased loss rates reflected in the charge-offs for the three month period, as well as higher loan balances, and an increase in the specific reserve for individually evaluated loans. This was represented as an increase to the provision. The allowance for commercial real estate was decreased in general reserves due to the improvement in classified loans, which was represented as a decrease in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of lower loan balances, an improvement in the amount of classified loans and a reduction in the specific reserves. This was represented by a decrease to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision.

~~The following qualitative factors experienced changes during~~For the ~~first~~ six months ended June 30, 2017, the allowance for residential real estate increased in general reserves as a result of ~~2015:~~increased loss rates reflected in the charge-offs for the six month period and an increase in the specific reserve. This was represented as an increase to the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances as well as an increase in specific reserves. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of lower loan balances, an improvement in the amount of classified loans and a reduction in the specific reserves. This was represented by a decrease to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision.

·	The qualitative factor for national, state, regional and local economic trends and business conditions was increased for all loan categories due to an increase in the unemployment rates in the local economy during the first six months of 2015.

·	The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for commercial and agricultural real estate due to the decrease in the amount of loans classified as substandard.

·	The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other commercial and agricultural loans due to an increase in the amount of loans classified as substandard.

The qualitative factor for levels of and trends in charge-offs and recoveries was decreased for commercial and agricultural real estate and other commercial and agricultural loans due to the decrease in charge-offs compared to the prior year as charge-offs returned to historical levels for the Bank.

The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for commercial real estate, agricultural real estate, other commercial and other agricultural loans due to the length of time employees involved throughout the loan process have been in their positions.

The qualitative factor for industry conditions, including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses was increased for commercial and agricultural related loans due to the decrease in the price received for product sold and the increase in feed costs that has occurred in 2015, which negatively affected customer earnings.

·	The qualitative factor for levels of and trends in charge-offs and recoveries was increased for residential real estate loans due to the increase in charge-offs compared to historical norms for the Company.

·	~~The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans was increased for residential mortgages due to increases in the amount of delinquent loans.~~

~~The following qualitative factors experienced changes during~~For the three months ended June 30, ~~2015:~~

·	The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were decreased for commercial and agricultural real estate due to the decrease in the amount of loans classified as substandard.

~~The qualitative factors for changes in levels of and trends in delinquencies, impaired/classified loans were increased for other commercial and agricultural loans~~2016, the allowance for commercial real estate was decreased in general reserves due to the improvement in classified loans, which was represented as a decrease in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was increased as a result of higher loan balances, an increase ~~in the amount of loans classified as substandard.~~

The qualitative factor for experience, ability and depth of lending management and other relevant staff was decreased for all commercial real estate, agricultural real estate, other commercial and other agricultural loans due to the length of time employees involved throughout the loan process have been in their positions.

~~The primary factor that resulted in negative provision for commercial and agricultural loans for the six month period ended June 30, 2015 was the reduction~~ in the amount of classified loans and an increase in the specific reserves. This was represented by an increase to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision.

For the six months ended June 30, 2016, the allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was increased as a result an increase in the amount of classified loans and an increase in the specific reserves. This was represented by an increase to the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision. The allowance for state and political loans was increased for general reserves due to an increase in special mention ~~and substandard~~ loans ~~since December 31, 2014.~~

during the period. This was represented as an increase in the provision.

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of June 30, ~~2016~~2017 and December 31, ~~2015~~2016, included with other assets are ~~$1,558,000~~$1,194,000 and ~~$1,354,000,~~$1,036,000, respectively, of foreclosed assets. As of June 30, ~~2016,~~2017, included within the foreclosed assets ~~is $453,000~~are $268,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of June 30, ~~2016,~~2017, the Company has initiated formal foreclosure proceedings on ~~$1,424,000~~$936,000 of consumer residential mortgages, which have not yet been transferred into foreclosed assets.

Note 6 – Goodwill and Other Intangible Assets

The following table provides the gross carrying value and accumulated amortization of intangible assets as of June 30, ~~2016~~2017 and December 31, ~~2015~~2016 (in thousands):

	June 30, 2016								December 31, 2015								June 30, 2017							December 31, 2016
	Gross carrying value		Accumulated amortization			Net carrying value			Gross carrying value		Accumulated amortization			Net carrying value			Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	1,336	$	(728	)	$	608		$	1,336	$	(638	)	$	698		$	1,560	$	(878	)	$	682	$	1,471	$	(787	)	$	684
Core deposit intangibles		1,641		(173	)		1,468	��		1,641		(25	)		1,616			1,641		(454	)		1,187		1,641		(320	)		1,321
Covenant not to compete		125		(18	)		107			125		(2	)		123			125		(49	)		76		125		(34	)		91
Total amortized intangible assets	$	3,102	$	(919	)	$	2,183		$	3,102	$	(665	)	$	2,437		$	3,326	$	(1,381	)	$	1,945	$	3,237	$	(1,141	)	$	2,096
Unamortized intangible assets:
Goodwill	$	21,089							$	21,089							$	21,089						$	21,089
(1) Excludes fully amortized intangible assets																(1) Excludes fully amortized intangible assets

The following table provides the current year and estimated future amortization expense for amortized intangible assets. We based our projections of amortization expense shown below on existing asset balances at June 30, ~~2016.~~2017. Future amortization expense may vary from these projections (in thousands):

	MSRs		Core deposit intangibles		Covenant not to compete		Total		MSRs		Core deposit intangibles		Covenant not to compete		Total
Six months ended June 30, 2016 (actual)	$	90	$	148	$	16	$	254
Three months ended June 30, 2016 (actual)	$	44	$	74	$	8	$	126
Three months ended June 30, 2017 (actual)									$	45	$	66	$	7	$	118
Six months ended June 30, 2017 (actual)									$	91	$	134	$	15	$	240
Three months June 30, 2016 (actual)									$	44	$	74	$	8	$	126
Six months June 30, 2016 (actual)									$	90	$	148	$	16	$	254
Estimate for year ended December 31,
Remaining 2016		83		148		15		246
2017		142		266		31		439
Remaining 2017										95		132		16		243
2018		113		236		31		380		160		236		30		426
2019		88		206		30		324		127		206		30		363
2020		66		177		-		243		98		177		-		275
2021										73		147		-		220

Note 7 – Federal Home Loan Bank Stock

The Bank is a member of the FHLB of Pittsburgh and, as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. As of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Bank's investment in FHLB stock was ~~$2,643,000~~$3,725,800 and ~~$2,800,000,~~$4,542,000, respectively. The stock does not have a readily determinable fair value and, as such, is classified as restricted stock, carried at cost and evaluated by ~~management.~~management for impairment. The stock's value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) a significant decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management considered that the FHLB's regulatory capital ratios ~~have improved,~~are sufficient, liquidity appears adequate, new shares of FHLB stock continue to exchange hands at the $100 par value and the FHLB has repurchased shares of excess capital stock from its members and has paid a quarterly cash dividend.

Note 8 – Repurchase Agreements

We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

The value of the collateral segmented by the remaining contractual maturity of the repurchase agreements in the Consolidated Balance Sheets as of June 30 ~~2016~~2017 and December 31, ~~2015~~2016 is presented in the following tables (in thousands):

Remaining Contractual Maturity of the Agreements
Overnight and Up to Greater than
June 30, 2016 Continuous 30 Days 30 - 90 Days 90 days Total
Repurchase Agreements:
U.S. agency securities $ 18,024 $ - $ - $ 2,129 $ 20,153
Total carrying value of collateral pledged $ 18,024 $ - $ - $ 2,129 $ 20,153
Total liability recognized for repurchase agreements $ 14,761

Remaining Contractual Maturity of the Agreements
Overnight and Up to Greater than
December 31, 2015 Continuous 30 Days 30 - 90 Days 90 days Total
Repurchase Agreements:
U.S. agency securities $ 18,144 $ - $ - $ 2,049 $ 20,193
Total carrying value of collateral pledged $ 18,144 $ - $ - $ 2,049 $ 20,193

Total liability recognized for repurchase agreements $ 16,008

	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to				Greater than
June 30, 2017	Continuous		30 Days		30 - 90 Days		90 days		Total
Repurchase Agreements:
U.S. agency securities	$	18,161	$	-	$	-	$	2,069	$	20,230
Total carrying value of collateral pledged	$	18,161	$	-	$	-	$	2,069	$	20,230
Total liability recognized for repurchase agreements									$	15,577

	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to				Greater than
December 31, 2016	Continuous		30 Days		30 - 90 Days		90 days		Total
Repurchase Agreements:
U.S. agency securities	$	16,118	$	-	$	-	$	2,059	$	18,177
Total carrying value of collateral pledged	$	16,118	$	-	$	-	$	2,059	$	18,177
Total liability recognized for repurchase agreements									$	14,307

Note 9 - Employee Benefit Plans

For additional detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 11 of the Company's Consolidated Financial Statements included in the ~~2015~~2016 Annual Report on Form 10-K.

Noncontributory Defined Benefit Pension Plan

The Bank sponsors a trusteed noncontributory defined benefit pension plan ("Pension Plan") covering substantially all employees and officers ~~that were~~ hired prior to January 1, 2007. Additionally, the Bank assumed the noncontributory defined benefit pension plan of FNB when it was ~~acquired during 2015.~~acquired. The FNB plan was frozen prior to the acquisition and therefore, no additional benefits will accrue for employees covered under that plan. These two plans are collectively referred to herein as "the Plans." The Bank's funding policy is to make annual contributions, if needed, based upon the funding formula developed by the plans' actuary. Any employee with a hire date of January 1, 2007 or later is not eligible to participate in the Pension Plan.

In lieu of the Pension Plan, employees with a hire date of January 1, 2007 or later are eligible to receive, after meeting certain length of service requirements, an annual discretionary 401(k) plan contribution from the Bank equal to a percentage of an employee's base compensation. The contribution amount, if any, is placed in a separate account within the 401(k) plan and is subject to a vesting requirement.

For employees who are eligible to participate in the Pension Plan, the Pension Plan requires benefits to be paid to eligible employees based primarily upon age and compensation rates during employment. Upon retirement or other termination of employment, employees can elect either an annuity benefit or a lump sum distribution of vested benefits in the Pension Plan.

The following sets forth the components of net periodic benefit costs of the Pension Plan for the three and six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively (in thousands):

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30,						June 30,						June 30,						June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Service cost	$	89		$	78		$	179		$	132		$	84		$	89		$	175		$	179
Interest cost		173			90			345			153			168			173			335			345
Expected return on plan assets		(260	)		(172	)		(520	)		(290	)		(273	)		(260	)		(547	)		(520	)
Net amortization and deferral		60			45			121			76			52			60			112			121
Net periodic benefit cost	$	62		$	41		$	125		$	71		$	31		$	62		$	75		$	125

The ~~Company~~Bank expects to contribute ~~$700,000~~$400,000 to the Pension Plans in ~~2016.~~2017.

Defined Contribution Plan

The Company sponsors a voluntary 401(k) savings plan which eligible employees can elect to contribute up to the maximum amount allowable not to exceed the limits of IRS Code Sections 401(k). Under the plan, the Company also makes required contributions on behalf of the eligible employees. ~~The Company's contributions vest immediately.~~ Contributions by the Company totaled ~~$180,000~~$207,000 and ~~$155,000~~$180,000 for the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. For the three months ended June 30, ~~2016~~2017 and ~~2015,~~2016, contributions by the Company totaled ~~$97,000~~$108,000 and ~~$93,000,~~$97,000, respectively.

Directors' Deferred Compensation Plan

The Company's directors may elect to defer all or portions of their fees until their retirement or termination from service. Amounts deferred under the plan earn interest based upon the highest current rate offered to certificate of deposit customers. Amounts deferred under the plan are not guaranteed and represent a general liability of the Company. At June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, an obligation of ~~$929,000~~$914,000 and ~~$958,000,~~$940,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Amounts included in interest expense on the deferred amounts totaled $4,000 ~~and $5,000~~ for each of the three months ended June 30, ~~2016~~2017 and ~~2015, respectively.~~2016. For the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, amounts included in interest expense on the deferred amounts totaled ~~$8,000~~$9,000 and ~~$12,000,~~$8,000, respectively.

Restricted Stock Plan

The Company maintains a Restricted Stock Plan (the "Plan") whereby employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance related requirements. Awards granted under the Plan are in the form of the Company's common stock and are subject to certain vesting requirements including continuous employment or service with the Company. AIn April of 2016, the Company's shareholders authorized a total of 150,000 shares of the Company's common stock ~~have been authorized~~to be made available under the Plan. As of June 30, ~~2016, 146,350~~2017, 141,678 shares remain available to be issued under the Plan. The Plan assists the Company in attracting, retaining and motivating employees to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation.

The following table details the vesting, awarding and forfeiting of restricted shares during the three and six month periods ended June 30, ~~2016:~~2017:

	Three months					Six months						Three months						Six months
				Weighted					Weighted						Weighted						Weighted
	Unvested			Average		Unvested			Average			Unvested			Average			Unvested			Average
	Shares			Market Price		Shares			Market Price			Shares			Market Price			Shares			Market Price
Outstanding, beginning of period		8,111		$	49.96		8,269		$	49.98			8,459		$	49.10			8,471		$	49.10
Granted		3,650			47.81		3,650			47.81			4,062			53.46			4,212			53.38
Forfeited		-			-		-			-			(43	)		(48.56	)		(43	)		(48.56	)
Vested		(3,158	)		50.41		(3,316	)		(50.45	)		(3,309	)		(50.14	)		(3,471	)		(50.19	)
Outstanding, end of period		8,603		$	48.88		8,603		$	48.88			9,169		$	50.66			9,169		$	50.66

Compensation cost related to restricted stock is recognized, based on the market price of the stock at the grant date, over the vesting period. Compensation expense related to restricted stock was ~~$92,000~~$104,000 and ~~$85,000~~$92,000 for the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. For the three months ended June 30, ~~2016~~2017 and ~~2015,~~2016, compensation expense totaled ~~$45,000~~$54,000 and ~~$43,000,~~$45,000, respectively. At June 30, ~~2016~~2017, the total compensation cost related to nonvested awards that has not yet been recognized was ~~$421,000,~~$464,000, which is expected to be recognized over the next ~~2.75~~three years.

Supplemental Executive Retirement Plan

The Company maintains a non-qualified supplemental executive retirement plan ("SERP") for certain executives to compensate those executive participants in the Company's noncontributory defined benefit pension plan whose benefits are limited by compensation limitations under current tax law. At June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, an obligation of ~~$1,400,000~~$1,516,000 and ~~$1,339,000,~~$1,460,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to this plan totaled ~~$61,000~~$56,000 and ~~$71,000~~$61,000 for the six months ended June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. For the three months ended June 30, ~~2016~~2017 and ~~2015,~~2016, expenses totaled ~~$31,000~~$28,000 and ~~$36,000,~~$31,000, respectively.

Salary Continuation Plan

The Company maintains a salary continuation plan for certain employees ~~acquired~~retained through the acquisition of ~~the~~FNB or that were formerly employed by FNB. At June 30, ~~2016~~2017 and December 31 ~~2015,~~2016, an obligation of ~~$716,000 and $710,000~~$720,000 was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to this plan totaled $14,000 and $16,000 for the three months ended June 30, ~~2016.~~2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, expenses related to this plan totaled ~~$32,000.~~$27,000 and $32,000, respectively.

Continuation of Life Insurance Plan

The Company, as part of the acquisition of FNB, has promised a continuation of certain split-dollar life insurance policies that provide coverage to certain persons post-retirement. U.S. generally accepted accounting principles require the recording of post-retirement costs and a liability equal to the present value of the cost of post-retirement insurance during the person's term of service. The estimated present value of future benefits to be paid totaled $574,000 ~~at both~~and $569,000 as of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, which is included in other liabilities in the Consolidated Balance Sheet.

Note 910 – Accumulated Comprehensive Income (Loss)

The following tables present the changes in accumulated other comprehensive income (loss) by component net of tax for the three and six months ended June 30, ~~2016~~2017 and ~~2015~~2016 (in thousands):

Three months ended June 30, 2016

Unrealized gain
(loss) on available
for sale securities (a)
Defined Benefit Pension Items (a) Total
Balance as of March 31, 2016 $ 3,303 $ (2,400 ) $ 903
Other comprehensive income before reclassifications (net of tax) 1,184 - 1,184
Amounts reclassified from accumulated other
     comprehensive income (loss) (net of tax) (84 ) 39 (45 )
Net current period other comprehensive income 1,100 39 1,139
Balance as of June 30, 2016 $ 4,403 $ (2,361 ) $ 2,042

Six months ended June 30, 2016
Balance as of December 31, 2015 $ 2,204 $ (2,440 ) $ (236 )
Other comprehensive income before reclassifications (net of tax) 2,301 - 2,301
Amounts reclassified from accumulated other
     comprehensive income (loss) (net of tax) (102 ) 79 (23 )
Net current period other comprehensive income 2,199 79 2,278
Balance as of June 30, 2016 $ 4,403 $ (2,361 ) $ 2,042

Three months ended June 30, 2015
Balance as of March 31, 2015 $ 3,897 $ (2,294 ) $ 1,603
Other comprehensive income (loss) before reclassifications (net of tax) (1,351 ) - (1,351 )
Amounts reclassified from accumulated other
     comprehensive income (loss) (net of tax) (116 ) 35 (81 )
Net current period other comprehensive income (loss) (1,467 ) 35 (1,432 )
Balance as of June 30, 2015 $ 2,430 $ (2,259 ) $ 171

Six months ended June 30, 2015
Balance as of December 31, 2014 $ 3,093 $ (2,326 ) $ 767
Other comprehensive income (loss) before reclassifications (net of tax) (464 ) - (464 )
Amounts reclassified from accumulated other
     comprehensive income (loss) (net of tax) (199 ) 67 (132 )
Net current period other comprehensive income (loss) (663 ) 67 (596 )
Balance as of June 30, 2015 $ 2,430 $ (2,259 ) $ 171

(a) Amounts in parentheses indicate debits to the Consolidated Balance Sheet

	Three months ended June 30, 2017
	Unrealized gain (loss) on available for sale securities			Defined Benefit Pension Items			Total
Balance as of March 31, 2017	$	1,238		$	(2,659	)	$	(1,421	)
Other comprehensive income (loss) before reclassifications (net of tax)		432			-			432
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(15	)		35			20
Net current period other comprehensive income (loss)		417			35			452
Balance as of June 30, 2017	$	1,655		$	(2,624	)	$	(969	)

	Six months ended June 30, 2017
	Unrealized gain (loss) on available for sale securities			Defined Benefit Pension Items			Total
Balance as of December 31, 2016	$	1,306		$	(2,698	)	$	(1,392	)
Other comprehensive income (loss) before reclassifications (net of tax)		478			-			478
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(129	)		74			(55	)
Net current period other comprehensive income (loss)		349			74			423
Balance as of June 30, 2017	$	1,655		$	(2,624	)	$	(969	)

2322

	Three months ended June 30, 2016
	Unrealized gain (loss) on available for sale securities			Defined Benefit Pension Items			Total
Balance as of March 31, 2016	$	3,303		$	(2,400	)	$	903
Other comprehensive income (loss) before reclassifications (net of tax)		1,184			-			1,184
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(84	)		39			(45	)
Net current period other comprehensive income (loss)		1,100			39			1,139
Balance as of June 30, 2016	$	4,403		$	(2,361	)	$	2,042

	Six months ended June 30, 2016
	Unrealized gain (loss) on available for sale securities			Defined Benefit Pension Items			Total
Balance as of December 31, 2015	$	2,204		$	(2,440	)	$	(236	)
Other comprehensive income (loss) before reclassifications (net of tax)		2,301			-			2,301
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(102	)		79			(23	)
Net current period other comprehensive income (loss)		2,199			79			2,278
Balance as of June 30, 2016	$	4,403		$	(2,361	)	$	2,042

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive income for the three and six months ended June 30, ~~2016~~2017 and ~~2015~~2016 (in thousands):

Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated comprehensive income (loss)						Affected line item in the Consolidated Statement of Income
	Three Months Ended June 30,
	2017			2016
Unrealized gains and losses on available for sale securities
	$	23		$	128		Investment securities gains, net
		(8	)		(44	)	Provision for income taxes
	$	15		$	84

Defined benefit pension items
	$	(52	)	$	(60	)	Salaries and employee benefits
		17			21		Provision for income taxes
	$	(35	)	$	(39	)

Total reclassifications, net	$	(20	)	$	45

	Six Months Ended June 30,
		2017			2016
Unrealized gains and losses on available for sale securities
	$	195		$	155		Investment securities gains, net
		(66	)		(53	)	Provision for income taxes
	$	129		$	102

Defined benefit pension items
	$	(112	)	$	(121	)	Salaries and employee benefits
		38			42		Provision for income taxes
	$	(74	)	$	(79	)

Total reclassifications, net	$	55		$	23

Details about accumulated other comprehensive income (loss) Amount reclassified from accumulated comprehensive income (loss) (a) Affected line item in the statement where net Income is presented
Three Months Ended June 30,
2016 2015
Unrealized gains and losses on available for sale securities
$ 128 $ 175 Investment securities gains, net
(44 ) (59 ) Provision for income taxes
$ 84 $ 116 Net of tax

Defined benefit pension items
$ (60 ) $ (54 ) Salaries and employee benefits
21 19 Provision for income taxes
$ (39 ) $ (35 ) Net of tax

Total reclassifications $ 45 $ 81

Six Months Ended June 30,
2016 2015
Unrealized gains and losses on available for sale securities
$ 155 $ 301 Investment securities gains, net
(53 ) (102 ) Provision for income taxes
$ 102 $ 199 Net of tax

Defined benefit pension items
$ (121 ) $ (102 ) Salaries and employee benefits
42 35 Provision for income taxes
$ (79 ) $ (67 ) Net of tax

Total reclassifications $ 23 $ 132

(a) Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income

Note 1011 – Fair Value Measurements

The Company has established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are as follows:

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.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process.

Financial Instruments Recorded at Fair Value on a Recurring Basis

The fair values of securities available for sale are determined by quoted prices in active markets, when available, and classified as Level I. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level II. The fair values consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.

The following tables present the assets and liabilities reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of June 30, ~~2016~~2017 and December 31, ~~2015~~2016 by level within the fair value hierarchy (in thousands). Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

June 30, 2016 Level I Level II Level III Total
Fair value measurements on a recurring basis:
Assets
  Securities available for sale:
     U.S. Agency securities $ - $ 205,819 $ - $ 205,819
     U.S. Treasury securities 5,053 - - 5,053
     Obligations of state and
        political subdivisions - 104,472 - 104,472
     Corporate obligations - 11,480 - 11,480
     Mortgage-backed securities in
       government sponsored entities - 31,606 - 31,606
     Equity securities in financial institutions 2,514 - - 2,514

December 31, 2015
Fair value measurements on a recurring basis:
Securities available for sale:
     U.S. Agency securities $ - $ 199,591 $ - $ 199,591
     U.S. Treasuries securities 10,082 - - 10,082
     Obligations of state and
       political subdivisions - 102,863 - 102,863
     Corporate obligations - 14,565 - 14,565
     Mortgage-backed securities in
       government sponsored entities - 30,204 - 30,204
     Equity securities in financial institutions 2,432 - - 2,432

2524

June 30, 2017	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Securities available for sale:
U.S. agency securities	$	-	$	142,750	$	-	$	142,750
Obligations of state and
political subdivisions		-		86,216		-		86,216
Corporate obligations		-		3,111		-		3,111
Mortgage-backed securities in
government sponsored entities		-		41,460		-		41,460
Equity securities in financial institutions		1,671		-		-		1,671

December 31, 2016	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Securities available for sale:
U.S. agency securities	$	-	$	170,414	$	-	$	170,414
U.S. treasury securities		3,000		-		-		3,000
Obligations of state and
political subdivisions		-		96,926		-		96,926
Corporate obligations		-		3,050		-		3,050
Mortgage-backed securities in
government sponsored entities		-		37,728		-		37,728
Equity securities in financial institutions		2,899		-		-		2,899

Financial Instruments, Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets, financial liabilities, non-financial assets and non-financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. Non-financial assets measured at fair value on a non-recurring basis during ~~2016~~2017 and ~~2015~~2016 include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for possible loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense.

Assets measured at fair value on a nonrecurring basis as of June 30, ~~2016~~2017 and December 31, ~~2015~~2016 are included in the table below (in thousands):

June 30, 2016	Level I		Level II		Level III		Total
June 30, 2017									Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	989	$	989	$	-	$	-	$	2,756	$	2,756
Other real estate owned		-		-		1,007		1,007		-		-		1,102		1,102

December 31, 2015
December 31, 2016
Impaired Loans	$	-	$	-	$	894	$	894	$	-	$	-	$	2,033	$	2,033
Other real estate owned		-		-		1,197		1,197		-		-		839		839

Impaired Loans - The Company has measured impairment on impaired loans generally based on the fair value of the loan's collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not ~~current~~currently being carried at its fair value. The fair values above excluded estimated selling costs of ~~$126,000~~$185,000 and ~~$91,000~~$188,000 at June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

Other Real Estate ~~owned~~Owned (OREO) – OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The following table provides a listing of the significant unobservable inputs used in the fair value measurement process for items valued utilizing ~~level~~Level III techniques (dollars in thousands).

Quantitative Information about Level 3 Fair Value Measurements
June 30, 2016	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Quantitative Information about Level III Fair Value Measurements											Quantitative Information about Level III Fair Value Measurements
June 30, 2017												Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Impaired Loans	$	989	Appraised Collateral Values	Discount to appraised value		0-75	%		36.64	%		$	2,756	Appraised Collateral Values	Discount for time since appraisal		0-100	%		27.23	%
				Selling costs		5%-10	%		8.18	%					Selling costs		5%-9	%		7.59	%
				Holding period	0 - 12 months			10 months							Holding period	0 - 24 months			11.8 months

Other real estate owned		1,007	Appraised Collateral Values	Discount to appraised value		0-37	%		24.70	%			1,102	Appraised Collateral Values	Discount for time since appraisal		12-47	%		21.75	%

December 31, 2015	Fair Value		Valuation Technique(s)	Unobservable input	Range
Impaired Loans		894	Appraised Collateral Values	Discount to appraised value		0-70	%		46.50	%
				Selling costs		4%-10	%		7.75	%
				Holding period	0 - 12 months			10 months

Other real estate owned		1,197	Appraised Collateral Values	Discount to appraised value		0-75	%		25	%

December 31, 2016	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Impaired Loans		2,033	Appraised Collateral Values	Discount for time since appraisal		0-65	%		28.98	%
				Selling costs		5%-9	%		7.56	%
				Holding period	6 - 12 months			11 months

Other real estate owned		839	Appraised Collateral Values	Discount for time since appraisal		10-67	%		25.45	%

The fair values of the Company's financial instruments are as follows (in thousands):

Carrying
June 30, 2016 Amount Fair Value Level I Level II Level III
Financial assets:
Cash and due from banks $ 26,822 $ 26,822 $ 26,822 $ - $ -
Interest bearing time deposits with other banks 6,954 6,961 - - 6,961
Available-for-sale securities 360,944 360,944 7,567 353,377
Loans held for sale 1,304 1,304 1,304
Net loans 701,756 726,584 - - 726,584
Bank owned life insurance 25,877 25,877 25,877 - -
Regulatory stock 3,407 3,407 3,407 - -
Accrued interest receivable 4,176 4,176 4,176 - -

Financial liabilities:
Deposits $ 1,003,482 $ 1,005,158 $ 734,593 $ - $ 270,565
Borrowed funds 38,786 37,240 - - 37,240
Accrued interest payable 644 644 644 - -

Carrying
December 31, 2015 Amount Fair Value Level I Level II Level III
Financial assets:
Cash and due from banks $ 24,384 $ 24,384 $ 24,384 $ - $ -
Interest bearing time deposits with other banks 7,696 7,705 - - 7,705
Available-for-sale securities 359,737 359,737 12,514 347,223 -
Loans held for sale 603 603 603
Net loans 687,925 712,524 - - 712,524
Bank owned life insurance 25,535 25,535 25,535 - -
Regulatory stock 3,459 3,459 3,459 - -
Accrued interest receivable 4,211 4,211 4,211 - -

Financial liabilities:
Deposits $ 988,031 $ 987,542 $ 706,121 $ - $ 281,421
Borrowed funds 41,631 38,863 1,598 - 37,265
Accrued interest payable 734 734 734 -

	Carrying
June 30, 2017	Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Cash and due from banks	$	19,362	$	19,362	$	19,362	$	-	$	-
Interest bearing time deposits with other banks		8,791		8,791		-		-		8,791
Available-for-sale securities		275,208		275,208		1,671		273,537
Loans held for sale		393		393		393
Net loans		878,070		878,901		-		-		878,901
Bank owned life insurance		26,556		26,556		26,556		-		-
Regulatory stock		4,490		4,490		4,490		-		-
Accrued interest receivable		3,697		3,697		3,697		-		-

Financial liabilities:
Deposits	$	1,051,209	$	1,049,833	$	791,387	$	-	$	258,446
Borrowed funds		69,998		68,503		30,396		-		38,107
Accrued interest payable		628		628		628		-		-

December 31, 2016
Financial assets:
Cash and due from banks	$	17,754	$	17,754	$	17,754	$	-	$	-
Interest bearing time deposits with other banks		6,955		6,960		-		-		6,960
Available-for-sale securities		314,017		314,017		5,899		308,118		-
Loans held for sale		1,827		1,827		1,827
Net loans		790,725		797,184		-		-		797,184
Bank owned life insurance		26,223		26,223		26,223		-		-
Regulatory stock		5,306		5,306		5,306		-		-
Accrued interest receivable		4,089		4,089		4,089		-		-

Financial liabilities:
Deposits	$	1,005,503	$	1,004,072	$	740,889	$	-	$	263,183
Borrowed funds		79,662		77,425		41,330		-		36,095
Accrued interest payable		720		720		720		-

Fair value is determined 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. 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 estimates 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 estimates.

Fair values have been determined by the Company using historical data, as generally provided in the Company's regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company's fair value estimates, methods and assumptions are set forth below for the Company's other financial instruments.

Cash and Cash Equivalents:

The carrying amounts for cash and cash equivalents approximate fair value because they have original maturities of 90 days or less and do not present unanticipated credit concerns.

Accrued Interest Receivable and Payable:

The carrying amounts for accrued interest receivable and payable approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Interest bearing time deposits with other banks:

The fair value of interest bearing time deposits with other banks is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Available-For-Sale Securities:

Loans ~~held for sale:~~held-for-sale:

The carrying amount for loans held for sale approximates fair value as the loans are only held for less than a week from origination.

Loans:

Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans has been estimated by discounting expected future cash flows. The discount rate used in these calculations is derived from the Treasury yield curve adjusted for credit quality, operating expense and prepayment option price, and 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.

Bank Owned Life Insurance:

The carrying value of bank owned life insurance approximates fair value based on applicable redemption provisions.

Regulatory Stock:

The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, 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 discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

The deposits' fair value estimates 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.

Borrowed Funds:

Rates available to the Company for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

Note 1112 – 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~~Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. ~~The Company is evaluating~~Because the ~~effect~~guidance does not apply to revenue associated with financial instruments, including loans and securities,we do not expect the new standard, or any of ~~adopting this new~~the amendments, to result in a material change from our current accounting ~~Update.~~

~~In August 2014,~~for revenue because the ~~FASB issued ASU 2014-15,~~ ~~Presentation~~majority of ~~Financial Statements -Going Concern (Subtopic~~ 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company's financial ~~statements.~~

~~In February 2015, the FASB issued ASU 2015-02,~~ ~~Consolidation (Topic 810)~~. The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. ~~This Update is not expected to have a significant impact on the Company's financial statements.~~

~~In April 2015, the FASB issued ASU 2015-03,~~ ~~Interest-Imputation of Interest (Subtopic 835-30)~~, as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costsinstruments are not ~~affected by~~within the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheetscope of ~~each individual period~~ ~~presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company's financial statements.~~

~~In June 2015, the FASB issued ASU 2015-10,~~ ~~Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification~~Topic 606. However, we do expect that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. This Update is not expected to have a significant impact on the Company's financial statements.

~~In August 2015, the FASB issued ASU 2015-14,~~ ~~Revenue from Contract 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 Dece~~mber 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.~~

~~In September 2015, the FASB issued ASU 2015-16,~~ ~~Business Combinations (Topic 805).~~ The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December ~~15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of~~ the standard will ~~have on the Company's financial position or results of operations.~~result in new disclosure requirements, which are currently being evaluated.

~~In November 2015, the FASB issued ASU 2015-17,~~ ~~Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes~~. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. This Update is not expected to have a significant impact on the Company's financial statements.

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 an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) 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 ~~(h)~~(g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. 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 consolidated 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:~~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 ea~~rlier~~earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently ~~evaluating~~assessing the ~~impact the~~practical expedients it may elect at adoption, ~~of the standard will have on the Company's financial position or results of operations.~~

~~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,but does not anticipate 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 towill have a significant impact to the financial statements. Based on the Company's ~~financial statements.~~preliminary analysis of its current portfolio, the impact to the Company's balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

~~In March 2016, the FASB issued ASU 2016-05,~~ ~~Derivatives and Hedging (Topic 815)~~. The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a heading instrument under Topic 815. ~~The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under~~ ~~Topic 815~~ ~~does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met.~~ For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified ~~retrospective basis. Early adoption 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 2016-06,~~ ~~Derivatives and Hedging (Topic 815)~~. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. ~~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 March 2016, the FASB issued ASU 2016-07,~~ ~~Investments~~ – ~~Equity Method and Joint Ventures (Topic 323)~~. The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. 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 No. 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 March 2016, the FASB issued ASU 2016-09,~~ ~~Compensation – Stock Compensation (Topic 718)~~. The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), ~~Share-Based Payment~~. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. 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.~~

~~In May 2016, the FASB issued ASU 2016-11,~~ ~~Revenue Recognition (Topic 605) and Derivative and Hedging (Topic 815~~), which rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016, Emerging Issues Task Force meeting. This Update did not have a significant impact on the Company's financial statements

~~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~~

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

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), which requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of the standard will have on the Company's consolidated financial position or results of operations.

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 consolidated financial position or results of operations.

34In 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") 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.

In February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965). This Update relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require a plan's interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in this Update remove the requirement to disclose the percentage interest in the master trust for plans with divided interests and require that all plans disclose the dollar amount of their interest in each of those general types of investments, which supplements the existing requirement to disclose the master trusts balances in each general type of investments. There are also increased disclosure requirements for investments in master trusts. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.

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

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include information concerning possible or expected future results of operations of Citizens Financial Services, Inc., First Citizens Community Bank, First Citizens Insurance Agency, Inc. or the combined Company. When we use words such as "believes," "expects," "anticipates," or similar expressions, we are making forward-looking statements. For a variety of reasons, actual results could differ materially from those contained in or implied by forward-looking statements. The Company cautions readers that the following important factors, among others, 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:

·	Interest rates could change more rapidly or more significantly than we expect.

·	The economy could change significantly in an unexpected way, which would cause the demand for new loans and the ability of borrowers to repay outstanding loans to change in ways that our models do not anticipate.

·	The financial markets could suffer a significant disruption, which may have a negative effect on our financial condition and that of our borrowers, and on our ability to raise money by issuing new securities.

·	It could take us longer than we anticipate to implement strategic initiatives designed to increase revenues or manage expenses, or we may be unable to implement those initiatives at all.

·	We may not be able to successfully integrate businesses we acquire or be able to fully realize the expected financial and other benefits from acquisitions.

·	Acquisitions and dispositions of assets could affect us in ways that management has not anticipated.

·	We may become subject to new legal obligations or the resolution of litigation may have a negative effect on our financial condition or operating results.

·	We may become subject to new and unanticipated accounting, tax, or regulatory practices or requirements.

We could experience greater loan delinquencies than anticipated, adversely affecting our earnings and financial condition. We could also experience greater losses than expected due to the ever increasing volume of information theft and fraudulent scams impacting our customers and the banking industry.

·	We could lose the services of some or all of our key personnel, which would negatively impact our business because of their business development skills, financial expertise, lending experience, technical expertise and market area knowledge.

·	The agricultural economy is subject to extreme swings in both the costs of resources and the prices received from the sale of products, which could negatively impact our customers.

·	~~Delays~~A budget impasse in ~~passing a budget by~~ the Commonwealth of Pennsylvania could impact our asset values, liquidity and profitability.

Companies providing support services related to the exploration and drilling of the natural gas reserves in our market area may be affected by federal, state and local laws and regulations such as restrictions on production, permitting, changes in taxes and environmental protection, which could negatively impact our customers and, as a result, negatively impact our loan and deposit volume and loan quality. Additionally, the activities of the companies providing support services related to the exploration and drilling of the natural gas reserves may be dependent on the market price of natural gas. As a result, decreases in the market price of natural gas could also negatively impact these companies, our customers.

Additional factors that may affect our results are discussed under "Part II – Item 1A – Risk Factors" in this report and in the Company's ~~2015~~2016 Annual Report on Form 10-K under "Item 1.A/ Risk Factors." Except as required by applicable law and regulation, we assume no obligation to update or revise any forward-looking statements after the date on which they are made.

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Introduction

The following is management's discussion and analysis of the financial condition and results of operations at the dates and for the periods presented in the accompanying consolidated financial statements for the Company. Our consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of operations. Management's discussion and analysis should be read in conjunction with the preceding financial statements presented under Part I. The results of operations for the three and six months ended June 30, ~~2016~~2017 are not necessarily indicative of the results you may expect for the full year.

The Company currently engages in the general business of banking throughout our service area of Potter, Tioga, Clinton and Bradford counties in north central Pennsylvania, Union county in central Pennsylvania, Lebanon, Lancaster, Berks and Schuylkill counties in south central Pennsylvania and Allegany county in southern New York. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 2627 banking facilities, 2426 of which operate as bank branches. In Pennsylvania, these offices are located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy and three branches near the city of Lebanon, Pennsylvania. In New York, our office is in Wellsville. We have a ~~loan production~~limited branch office in Winfield, Pennsylvania, which primarily serves agricultural customers in the central Pennsylvania market. In

On July 27, 2017, we entered into a definitive agreement with S&T Bank to acquire its State College, Pennsylvania office, subject to the ~~third quarter~~receipt of ~~2016, we received~~ regulatory ~~approval to establish a branch to be located in Mount Joy, Pennsylvania, which we anticipate opening in September 2016.~~approval.

Risk Management

Risk identification and management are essential elements for the successful management of the Company. In the normal course of business, the Company is subject to various types of risk, including interest rate, credit, liquidity, reputational and regulatory risk.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk results from various re-pricing frequencies and the maturity structure of the financial instruments owned by the Company. The Company uses its asset/liability and funds management policy to control and manage interest rate risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans with customers and the purchasing of securities. The Company's primary credit risk is in the loan portfolio. The Company manages credit risk by adhering to an established credit policy and through a disciplined evaluation of the adequacy of the allowance for loan losses. Also, the investment policy limits the amount of credit risk that may be taken in the investment portfolio.

Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Company has established guidelines within its asset/liability and funds management policy to manage liquidity risk. These guidelines include, among other things, contingent funding alternatives.

Reputational risk, or the risk to our business, earnings, liquidity, and capital from negative public opinion, could result from our actual or alleged conduct in a variety of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, ethical issues, or inadequate protection of customer information. We expend significant resources to comply with regulatory requirements. Failure to comply could result in reputational harm or significant legal or remedial costs. Damage to our reputation could adversely affect our ability to retain and attract new customers, and adversely impact our earnings and liquidity.

Regulatory risk represents the possibility that a change in law, regulations or regulatory policy may have a material effect on the business of the Company. We cannot predict what legislation might be enacted or what regulations might be adopted, or if adopted, the effect thereof on our operations.

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Competition

The banking industry in the Bank's service areas continue to be extremely competitive, both among commercial banks and with financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, agricultural cooperatives and internet entities. ~~The increased competition has resulted from changes in the legal and regulatory guidelines as well as from economic conditions~~Competition in our north central Pennsylvania market has increased as a result of other financial institutions looking to expand into new markets. With larger population centers in our central and south central ~~Pennsylvania~~ markets, we experience more competition to gather deposits and ~~the limited loan growth opportunities~~to make loans than in ~~the~~our north central ~~market and surrounding areas.~~Pennsylvania market. Mortgage banking firms, financial companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms and even government agencies provide additional competition for loans and other financial services. The Bank is generally competitive with all competing financial institutions in its service ~~area~~areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.

Trust and Investment Services; Oil and Gas Services

Our Investment and Trust Services Division offers professional trust administration, investment management services, estate planning and administration, and custody of securities. Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the Consolidated ~~Financial Statements~~Balance Sheets since such items are not assets of the Company. Revenues and fees of the Trust Department are reflected in trust income in the Consolidated Statement of Income. As of June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Trust Department had ~~$110.8~~$114.7 million and ~~$110.2~~$110.6 million of assets under management, respectively.

Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank's market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc. The assets associated with these products are not included in the Consolidated ~~Financial Statements~~Balance Sheets since such items are not assets of the Company. Assets owned and invested by customers of the Bank through the Bank's Investment Representatives ~~increased~~decreased from ~~$119.7~~$137.4 million at December 31, ~~2015~~2016 to ~~$130.1~~$118.3 million at June 30, ~~2016.~~2017. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central and ~~as such, has added additional resources to support these opportunities.~~south central Pennsylvania markets.

In addition to ~~the~~traditional trust and investment services offered, we ~~have a mineral management division, which serves as a network of experts to~~ assist our customers through various oil and gas specific leasing matters from lease negotiations to establishing a successful approach to personal wealth management. As of June 30, ~~2016,~~2017, customers owning ~~5,955~~6,961 acres have signed agreements with the Bank that provide for the Bank to manage oil and gas matters related to the customers land, which may include negotiating lease payments and royalty percentages, resolving leasing issues, accounting for and ensuring the accuracy of royalty checks, distributing revenue to satisfy investment objectives and providing customized reports outlining payment and distribution information.

Results of Operations

Overview of the Income Statement

The Company had net income of ~~$6,314,000~~$6,771,000 for the first six months of ~~2016~~2017 compared to ~~$6,309,000~~$6,314,000 for last year's comparable period, an increase of ~~$5,000.~~$457,000, or 7.2%. Basic earnings per share for the first six months of ~~2016~~2017 were ~~$1.88,~~$1.95, compared to ~~$2.06~~$1.80 last year, representing an ~~8.7% decrease.~~8.3% increase. Annualized return on assets and return on equity for the six months of ~~2016~~2017 were ~~1.06%~~1.10% and ~~10.34%~~10.63%, respectively, compared with ~~1.36%~~1.06% and ~~12.41%~~10.34% for last year's comparable period.

Net income for the three months ended June 30, ~~2016~~2017 was ~~$3,031,000~~$3,468,000 compared to ~~$3,189,000~~$3,031,000 in the comparable ~~2015~~2016 period, ~~a decrease~~an increase of ~~$158,000~~$437,000 or ~~5.0%~~14.4%. Basic earnings per share for the three months ended June 30, ~~2016~~2017 were ~~$0.91,~~$1.00, compared to ~~$1.04~~$0.86 last year, representing a ~~12.5% decrease.~~16.3% increase. Annualized return on assets and return on equity for the quarter ended June 30, ~~2016~~2017 was ~~1.02%~~1.12% and ~~9.88%~~10.80%, respectively, compared with ~~1.36%~~1.02% and ~~12.45%~~9.88% for the same ~~2015~~2016 period.

3734

Net Interest Income

Net interest income, the most significant component of the Company's earnings, is the amount by which interest income generated from interest-earning assets exceeds interest expense on interest-bearing liabilities.

Net interest income for the first six months of ~~2016~~2017 was ~~$18,376,000,~~$20,401,000, an increase of ~~$3,228,000,~~$2,025,000, or ~~21.3%~~11.0%, compared to the same period in ~~2015.~~2016. For the first six months of ~~2016,~~2017, the provision for loan losses totaled ~~$270,000,~~$1,240,000, an increase of ~~$30,000~~$970,000 over the comparable period in ~~2015.~~2016. Consequently, net interest income after the provision for loan losses was ~~$18,106,000~~$19,161,000 compared to ~~$14,908,000~~$18,106,000 during the first six months of ~~2015.~~2016.

For the three months ended June 30, ~~2016,~~2017, net interest income was ~~$9,171,000~~$10,404,000 compared to ~~$7,561,000,~~$9,171,000, an increase of ~~$1,610,000,~~$1,233,000, or ~~21.3%~~13.4% over the comparable period in ~~2015.~~2016. The provision for loan losses this quarter was ~~$135,000~~$625,000 compared to ~~$120,000~~$135,000 for last year's second quarter. Consequently, net interest income after the provision for loan losses was ~~$9,036,000~~$9,779,000 for the quarter ended June 30, ~~2016~~2017 compared to ~~$7,441,000~~$9,036,000 in ~~2015.~~2016.

The following table sets forth the average balances of, and the interest earned or incurred on, for each principal category of assets, liabilities and stockholders' equity, the related rates, net interest income and interest rate spread created for the six months and three months ended June 30, ~~2016~~2017 and ~~2015~~2016 on a tax equivalent basis (dollars in thousands):

Analysis of Average Balances and Interest Rates (1)
Six Months Ended
June 30, 2016 June 30, 2015
Average Average Average Average
Balance (1) Interest Rate Balance (1) Interest Rate
(dollars in thousands) $ $ % $ $ %
ASSETS
Short-term investments:
   Interest-bearing deposits at banks 32,770 65 0.40 14,331 12 0.17
Total short-term investments 32,770 65 0.40 14,331 12 0.17
Interest bearing time deposits at banks 7,513 70 1.89 5,960 58 1.97
Investment securities:
  Taxable 263,302 2,044 1.55 195,079 1,652 1.69
  Tax-exempt (3) 100,766 2,313 4.59 99,925 2,498 5.00
  Total investment securities 364,068 4,357 2.39 295,004 4,150 2.81
Loans:
  Residential mortgage loans 202,813 5,337 5.29 183,827 5,057 5.55
  Construction 11,247 286 5.12 6,313 160 5.11
  Commercial & agricultural loans 371,026 9,627 5.22 280,823 7,377 5.30
  Loans to state & political subdivisions 103,707 2,201 4.27 83,055 1,853 4.50
  Other loans 11,103 449 8.13 8,120 322 8.00
  Loans, net of discount (2)(3)(4) 699,896 17,900 5.14 562,138 14,769 5.30
Total interest-earning assets 1,104,247 22,392 4.08 877,433 18,989 4.36
Cash and due from banks 7,352 3,933
Bank premises and equipment 17,264 12,579
Other assets 57,268 35,788
Total non-interest earning assets 81,884 52,300
Total assets 1,186,131 929,733
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
  NOW accounts 303,297 468 0.31 231,106 407 0.36
  Savings accounts 174,141 93 0.11 112,734 67 0.12
  Money market accounts 114,478 257 0.45 94,474 219 0.47
  Certificates of deposit 275,925 1,328 0.97 249,866 1,351 1.09
Total interest-bearing deposits 867,841 2,146 0.50 688,180 2,044 0.60
Other borrowed funds 39,500 366 1.86 33,603 347 2.08
Total interest-bearing liabilities 907,341 2,512 0.56 721,783 2,391 0.67
Demand deposits 144,198 97,498
Other liabilities 12,487 8,813
Total non-interest-bearing liabilities 156,685 106,311
Stockholders' equity 122,105 101,639
Total liabilities & stockholders' equity 1,186,131 929,733
Net interest income 19,880 16,598
Net interest spread (5) 3.52 % 3.69 %
Net interest income as a percentage
  of average interest-earning assets 3.62 % 3.81 %
Ratio of interest-earning assets
  to interest-bearing liabilities 122 % 122 %

(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
a statutory federal income tax rate of 34%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
and the average rate paid on interest-bearing liabilities.

3935

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME				`
(UNAUDITED)
	Three Months Ended										Six Months Ended
	June 30,										June 30,
(in thousands)				2016				2015						2016				2015
Net income				$	3,031			$	3,189					$	6,314			$	6,309
Other comprehensive income (loss):
Unrealized gains on available for sale securities		1,794				(2,049	)					3,489				(704	)
Income tax effect		(610	)			698						(1,188	)			240
Change in unrecognized pension cost		60				54						121				102
Income tax effect		(21	)			(19	)					(42	)			(35	)
Less: Reclassification adjustment for investment
security gains included in net income		(128	)			(175	)					(155	)			(301	)
Income tax effect		44				59						53				102
Other comprehensive income (loss), net of tax					1,139				(1,432	)					2,278				(596	)
Comprehensive income				$	4,170			$	1,757					$	8,592			$	5,713

The accompanying notes are an integral part of these unaudited consolidated financial statements.

	Balance at March 31, 2015		Charge-offs			Recoveries		Provision			Balance at June 30, 2015
Real estate loans:
Residential	$	923	$	(17	)	$	-	$	25		$	931
Commercial and agricultural		3,699		(56	)		3		33			3,679
Construction		11		-			-		3			14
Consumer		82		(17	)		4		20			89
Other commercial and agricultural loans		1,286		-			-		216			1,502
State and political									-
subdivision loans		572		-			-		(4	)		568
Unallocated		349		-			-		(173	)		176
Total	$	6,922	$	(90	)	$	7	$	120		$	6,959

	Balance at December 31, 2014		Charge-offs			Recoveries		Provision			Balance at June 30, 2015
Real estate loans:
Residential	$	878	$	(34	)	$	-	$	87		$	931
Commercial and agricultural		3,870		(56	)		7		(142	)		3,679
Construction		26		-			-		(12	)		14
Consumer		84		(24	)		12		17			89
Other commercial and agricultural loans		1,224		(1	)		-		279			1,502
State and political									-
subdivision loans		545		-			-		23			568
Unallocated		188		-			-		(12	)		176
Total	$	6,815	$	(115	)	$	19	$	240		$	6,959

	Three months ended June 30, 2016
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of March 31, 2016	$	3,303		$	(2,400	)	$	903
Other comprehensive income before reclassifications (net of tax)		1,184			-			1,184
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(84	)		39			(45	)
Net current period other comprehensive income		1,100			39			1,139
Balance as of June 30, 2016	$	4,403		$	(2,361	)	$	2,042

	Six months ended June 30, 2016
Balance as of December 31, 2015	$	2,204		$	(2,440	)	$	(236	)
Other comprehensive income before reclassifications (net of tax)		2,301			-			2,301
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(102	)		79			(23	)
Net current period other comprehensive income		2,199			79			2,278
Balance as of June 30, 2016	$	4,403		$	(2,361	)	$	2,042

	Three months ended June 30, 2015
Balance as of March 31, 2015	$	3,897		$	(2,294	)	$	1,603
Other comprehensive income (loss) before reclassifications (net of tax)		(1,351	)		-			(1,351	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(116	)		35			(81	)
Net current period other comprehensive income (loss)		(1,467	)		35			(1,432	)
Balance as of June 30, 2015	$	2,430		$	(2,259	)	$	171

	Six months ended June 30, 2015
Balance as of December 31, 2014	$	3,093		$	(2,326	)	$	767
Other comprehensive income (loss) before reclassifications (net of tax)		(464	)		-			(464	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(199	)		67			(132	)
Net current period other comprehensive income (loss)		(663	)		67			(596	)
Balance as of June 30, 2015	$	2,430		$	(2,259	)	$	171

(a) Amounts in parentheses indicate debits to the Consolidated Balance Sheet

Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated comprehensive income (loss) (a)						Affected line item in the statement where net Income is presented
	Three Months Ended June 30,
	2016			2015
Unrealized gains and losses on available for sale securities
	$	128		$	175		Investment securities gains, net
		(44	)		(59	)	Provision for income taxes
	$	84		$	116		Net of tax

Defined benefit pension items
	$	(60	)	$	(54	)	Salaries and employee benefits
		21			19		Provision for income taxes
	$	(39	)	$	(35	)	Net of tax

Total reclassifications	$	45		$	81

	Six Months Ended June 30,
		2016			2015
Unrealized gains and losses on available for sale securities
	$	155		$	301		Investment securities gains, net
		(53	)		(102	)	Provision for income taxes
	$	102		$	199		Net of tax

Defined benefit pension items
	$	(121	)	$	(102	)	Salaries and employee benefits
		42			35		Provision for income taxes
	$	(79	)	$	(67	)	Net of tax

Total reclassifications	$	23		$	132

(a) Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2016		2015		2016		2015
Interest and dividend income from investment securities
and interest bearing deposits at banks (non-tax adjusted)	$	1,839	$	1,639	$	3,705	$	3,371
Tax equivalent adjustment		389		411		787		849
Interest and dividend income from investment securities
and interest bearing deposits at banks (tax equivalent basis)	$	2,228	$	2,050	$	4,492	$	4,220

Interest and fees on loans (non-tax adjusted)	$	8,587	$	7,129	$	17,183	$	14,168
Tax equivalent adjustment		342		305		717		601
Interest and fees on loans (tax equivalent basis)	$	8,929	$	7,434	$	17,900	$	14,769

Total interest income	$	10,426	$	8,768	$	20,888	$	17,539
Total interest expense		1,255		1,207		2,512		2,391
Net interest income		9,171		7,561		18,376		15,148
Total tax equivalent adjustment		731		716		1,504		1,450
Net interest income (tax equivalent basis)	$	9,902	$	8,277	$	19,880	$	16,598

		Three months ended June 30, 2016 vs. 2015 (1)								Six months ended June 30, 2016 vs. 2015 (1)									Three months ended June 30, 2017 vs 2016 (1)									Six months ended June 30, 2017 vs. 2016 (1)
		Change in		Change			Total			Change in		Change			Total				Change in			Change			Total			Change in			Change			Total
		Volume		in Rate			Change			Volume		in Rate			Change				Volume			in Rate			Change			Volume			in Rate			Change
Interest Income:
Short-term investments:
Interest-bearing deposits at banks		$	7	$	13		$	20		$	26	$	27		$	53			$	(15	)	$	(8	)	$	(23	)	$	(33	)	$	(23	)	$	(56	)
Interest bearing time deposits at banks			7		(2	)		5			14		(2	)		12				1			3			4			(3	)		4			1
Investment securities:
Taxable			270		(49	)		221			515		(123	)		392				(343	)		151			(192	)		(540	)		204			(336	)
Tax-exempt			53		(121	)		(68	)		21		(206	)		(185	)			(187	)		(48	)		(235	)		(295	)		(96	)		(391	)
Total investments			323		(170	)		153			536		(329	)		207				(530	)		103			(427	)		(835	)		108			(727	)
Loans:
Residential mortgage loans			246		(100	)		146			494		(214	)		280				49			(57	)		(8	)		75			(121	)		(46	)
Construction			29		3			32			125		1			126				168			(20	)		148			327			(39	)		288
Commercial & agricultural loans			1,167		(32	)		1,135			2,360		(110	)		2,250				1,860			(246	)		1,614			3,252			(521	)		2,731
Loans to state & political subdivisions			167		(45	)		122			437		(89	)		348				(49	)		5			(44	)		(150	)		(25	)		(175	)
Other loans			57		3			60			121		6			127				(13	)		(1	)		(14	)		(29	)		(5	)		(34	)
Total loans, net of discount			1,666		(171	)		1,495			3,537		(406	)		3,131				2,015			(319	)		1,696			3,475			(711	)		2,764
Total Interest Income			2,003		(330	)		1,673			4,113		(710	)		3,403				1,471			(221	)		1,250			2,604			(622	)		1,982
Interest Expense:
Interest-bearing deposits:
NOW accounts			53		(19	)		34			102		(41	)		61				15			36			51			25			41			66
Savings accounts			15		(4	)		11			32		(6	)		26				2			(1	)		1			1			(2	)		(1	)
Money Market accounts			20		(3	)		17			45		(7	)		38				19			15			34			19			14			33
Certificates of deposit			86		(111	)		(25	)		350		(373	)		(23	)			(27	)		12			(15	)		(71	)		15			(56	)
Total interest-bearing deposits			174		(137	)		37			529		(427	)		102				9			62			71			(26	)		68			42
Other borrowed funds			28		(17	)		11			46		(27	)		19				33			15			48			149			(26	)		123
Total interest expense			202		(154	)		48			575		(454	)		121				42			77			119			123			42			165
Net interest income		$	1,801	$	(176	)	$	1,625		$	3,538	$	(256	)	$	3,282			$	1,429		$	(298	)	$	1,131		$	2,481		$	(664	)	$	1,817

(1) The portion of the total change attributable to both volume and rate changes, which can not be separated, has been allocated proportionally to the change due to volume and the change due to rate prior to allocation.	(1) The portion of the total change attributable to both volume and rate changes, which can not be separated, has been allocated proportionally to the change due to volume and the change due to rate prior to allocation.																	(1) The portion of the total change attributable to both volume and rate changes, which can not be separated, has been allocated proportionally to the change due to volume and the change due to rate prior to allocation.

Fair Market Value of Investment Portfolio											Fair Market Value of Investment Portfolio
	June 30, 2016						December 31, 2015					June 30, 2017				December 31, 2016
	Amount			%			Amount		%			Amount		%		Amount		%
Available-for-sale:
U. S. Agency securities	$	205,819			57.0		$	199,591		55.5		$	142,750		51.9	$	170,414		54.3
U. S. Treasury notes		5,053			1.4			10,082		2.8			-		-		3,000		0.9
Obligations of state & political
subdivisions		104,472			28.9			102,863		28.6
Obligations of state & political subdivisions													86,216		31.3		96,926		30.9
Corporate obligations		11,480			3.2			14,565		4.0			3,111		1.1		3,050		1.0
Mortgage-backed securities in
government sponsored entities		31,606			8.8			30,204		8.4			41,460		15.1		37,728		12.0
Equity securities in financial
institutions		2,514			0.7			2,432		0.7
Equity securities in financial institutions													1,671		0.6		2,899		0.9
Total	$	360,944			100.0		$	359,737		100.0		$	275,208		100.0	$	314,017		100.0

	June 30, 2016/
	December 31, 2015
	Change
	Amount			%
Available-for-sale:
U. S. Agency securities	$	6,228			3.1
U. S. Treasury notes		(5,029	)		(49.9	)
Obligations of state & political
subdivisions		1,609			1.6
Corporate obligations		(3,085	)		(21.2	)
Mortgage-backed securities in
government sponsored entities		1,402			4.6
Equity securities in financial
institutions		82			3.4
Total	$	1,207			0.3

	June 30, 2017/
	December 31, 2016
	Change
	Amount			%
Available-for-sale:
U. S. Agency securities	$	(27,664	)		(16.2	)
U. S. Treasury notes		(3,000	)		(100.0	)
Obligations of state & political subdivisions		(10,710	)		(11.0	)
Corporate obligations		61			2.0
Mortgage-backed securities in
government sponsored entities		3,732			9.9
Equity securities in financial institutions		(1,228	)		(42.4	)
Total	$	(38,809	)		(12.4	)

	June 30,						December 31,				June 30,				December 31,
	2016						2015				2017				2016
	Amount			%			Amount		%		Amount		%		Amount		%
Real estate:
Residential	$	203,980			28.8		$	203,407		29.3	$	205,725		23.2	$	207,423		25.9
Commercial		246,895			34.8			237,542		34.2		271,342		30.6		252,577		31.6
Agricultural		62,392			8.8			57,822		8.3		188,547		21.2		123,624		15.5
Construction		10,481			1.5			15,011		2.2		25,569		2.9		25,441		3.2
Consumer		11,439			1.6			11,543		1.7		10,603		1.2		11,005		1.4
Other commercial and agricultural loans		74,089			10.4			71,206		10.2
Other commercial loans												56,952		6.4		58,639		7.3
Other agricultural loans												32,974		3.7		23,388		2.9
State & political subdivision loans		99,839			14.1			98,500		14.1		96,337		10.8		97,514		12.2
Total loans		709,115			100.0			695,031		100.0		888,049		100.0		799,611		100.0
Less allowance for loan losses		7,359						7,106				9,979				8,886
Net loans	$	701,756					$	687,925			$	878,070			$	790,725

	June 30, 2016/
	December 31, 2015
	Change
	Amount			%
Real estate:
Residential	$	573			0.3
Commercial		9,353			3.9
Agricultural		4,570			7.9
Construction		(4,530	)		(30.2	)
Consumer		(104	)		(0.9	)
Other commercial and agricultural loans		2,883			4.0
State & political subdivision loans		1,339			1.4
Total loans	$	14,084			2.0

	June 30, 2016								December 31, 2015
			Non-Performing Loans								Non-Performing Loans
	30 - 89 Days								30 - 89 Days
	Past Due		90 Days Past		Non-		Total Non-		Past Due		90 Days Past		Non-		Total Non-
(in thousands)	Accruing		Due Accruing		accrual		Performing		Accruing		Due Accruing		accrual		Performing
Real estate:
Residential	$	1,817	$	219	$	1,385	$	1,604	$	1,273	$	394	$	1,008	$	1,402
Commercial		1,402		461		4,711		5,172		859		60		4,422		4,482
Agricultural		251		165		29		194		344		-		34		34
Construction		-		-		-		-		-		-		-		-
Consumer		243		9		39		48		262		9		55		64
Other commercial and
agricultural loans		218		250		4,042		4,292		319		160		1,012		1,172
Total nonperforming loans	$	3,931	$	1,104	$	10,206	$	11,310	$	3,057	$	623	$	6,531	$	7,154

	Change in Non-Performing Loans June 30, 2016/
	December 31, 2015
(in thousands)	Amount			%
Real estate:
Residential	$	202			14.4
Commercial		690			15.4
Agricultural		160			470.6
Construction		-			N/	A
Consumer		(16	)		(25.0	)
Other commercial and
agricultural loans		3,120			266.2
Total nonperforming loans	$	4,156			58.1


	Change in Non-Performing Loans
	June 30, 2017 / December 31, 2016
(in thousands)	Amount			%
Real estate:
Residential	$	(205	)		(10.8	)
Commercial		696			15.7
Agricultural		133			9.9
Construction		-			N/A
Consumer		36			33.0
Other commercial loans		(930	)		(22.9	)
Other agricultural loans		734			14,680.0
Total nonperforming loans	$	464			3.9

		Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions						Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
June 30, 2016		Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2017																		Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets):	Total Capital (to Risk Weighted Assets):																Total Capital (to Risk Weighted Assets):
Company		$	117,683		16.16	%	$	58,248		8.00	%	$	72,810		10.00	%		$	126,856		14.32	%	$	70,846		8.00	%	$	88,558		10.00	%
Bank		$	112,026		15.43	%	$	58,077		8.00	%	$	72,596		10.00	%		$	122,463		13.85	%	$	70,751		8.00	%	$	88,439		10.00	%

Tier 1 Capital (to Risk Weighted Assets):	Tier 1 Capital (to Risk Weighted Assets):																Tier 1 Capital (to Risk Weighted Assets):
Company		$	109,928		15.10	%	$	43,686		6.00	%	$	58,248		8.00	%		$	116,664		13.17	%	$	53,135		6.00	%	$	70,846		8.00	%
Bank		$	104,450		14.39	%	$	43,558		6.00	%	$	58,077		8.00	%		$	112,272		12.70	%	$	53,064		6.00	%	$	70,751		8.00	%

Common Equity Tier 1 Capital (to Risk Weighted Assets):	Common Equity Tier 1 Capital (to Risk Weighted Assets):																Common Equity Tier 1 Capital (to Risk Weighted Assets):
Company		$	102,428		14.07	%	$	32,765		4.50	%	$	47,327		6.50	%		$	109,164		12.33	%	$	39,851		4.50	%	$	57,563		6.50	%
Bank		$	104,450		14.39	%	$	32,668		4.50	%	$	47,188		6.50	%		$	112,272		12.70	%	$	39,798		4.50	%	$	57,486		6.50	%

Tier 1 Capital (to Average Assets):	Tier 1 Capital (to Average Assets):																Tier 1 Capital (to Average Assets):
Company		$	109,928		9.40	%	$	46,793		4.00	%	$	58,491		5.00	%		$	116,664		9.55	%	$	48,852		4.00	%	$	61,065		5.00	%
Bank		$	104,450		8.95	%	$	46,691		4.00	%	$	58,364		5.00	%		$	112,272		9.21	%	$	48,782		4.00	%	$	60,977		5.00	%

			Change In			% Change In
	Prospective One-Year		Prospective			Prospective
Changes in Rates	Net Interest Income		Net Interest Income			Net Interest Income

-100 Shock	$	35,090	$	(757	)		(2.11	)
Base		35,847		-			-
+100 Shock		35,293		(554	)		(1.55	)
+200 Shock		34,816		(1,031	)		(2.88	)
+300 Shock		34,157		(1,690	)		(4.71	)
+400 Shock		33,400		(2,447	)		(6.83	)

ISSUER PURCHASES OF EQUITY SECURITIES	ISSUER PURCHASES OF EQUITY SECURITIES									ISSUER PURCHASES OF EQUITY SECURITIES
Period											Total Number of Shares (or units Purchased)		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans of Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)

Period		Total Number of Shares (or units Purchased)		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans of Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
4/1/16 to 4/30/16			29	$	47.00		29		155,610
5/1/16 to 5/31/16			7,271	$	47.78		7,271		148,339
6/1/16 to 6/30/16			5,717	$	47.65		5,717		142,622
4/1/17 to 4/30/17												-	$	0.00		-		99,524
5/1/17 to 5/31/17												1,043	$	54.00		1,043		98,481
6/1/17 to 6/30/17												952	$	54.00		952		97,529
Total			13,017	$	47.72		13,017		142,622			1,995	$	54.00		1,995		97,529

	3.1		Articles of Incorporation of Citizens Financial Services, Inc., as amended ⁽¹⁾
	3.2		Bylaws of Citizens Financial Services, Inc.⁽²⁾
	4.1		Form of Common Stock Certificate.⁽³⁾
	31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

	32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
	101 **		The following materials from the Company's Quarterly Report on Form 10-Q for the period ended June 30, ~~2016,~~2017, formatted in XBRL (Extensible Business Reporting Language): (i) The Consolidated Balance Sheet (unaudited), (ii) the Consolidated Statement of Income (unaudited), (iii) the Consolidated Statement of Comprehensive Income (unaudited), (iv) the Consolidated Statement of Cash Flows (unaudited) and (v) related notes (unaudited).

	Citizens Financial Services, Inc.

August ~~4, 2016~~9, 2017	By:	/s/ Randall E. Black
		Randall E. Black
		President and Chief Executive Officer (Principal Executive Officer)



August ~~4, 2016~~9, 2017	By:	/s/ Mickey L. Jones
		Mickey L. Jones
		Chief Financial Officer (Principal Financial and Accounting Officer)