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 ~~September~~June 30, ~~2017~~2018

[ ] 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "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 ~~November 1, 2017,~~August 2, 2018, was ~~3,491,511.~~3,512,653.

Citizens Financial Services, Inc.

Form 10-Q

INDEX

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheet as of ~~September 30,2017~~June 30,2018 and December 31, ~~2016~~2017	1
	Consolidated Statement of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	2
	Consolidated Statement of Comprehensive Income for the Three and ~~Nine~~Six Months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	3
	Consolidated Statement of Cash Flows for the ~~Nine~~Six Months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017	4
	Notes to Consolidated Financial Statements	~~5-31~~5-29
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	~~32-54~~30-51
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5451-52
Item 4.	Controls and Procedures	~~54-55~~52

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	5552
Item 1A.	Risk Factors	5552
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5552-53
Item 3.	Defaults Upon Senior Securities	5553
Item 4.	Mine Safety Disclosures	5653
Item 5.	Other Information	5653
Item 6.	Exhibits	5653
	Signatures	5754

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

		September 30			December 31				June 30,			December 31,
(in thousands except share data)		2017			2016				2018			2017
ASSETS:
Cash and due from banks:
Noninterest-bearing		$	12,887		$	16,854			$	14,521		$	16,347
Interest-bearing			928			900				1,092			2,170
Total cash and cash equivalents			13,815			17,754				15,613			18,517
Interest bearing time deposits with other banks			10,031			6,955				13,762			10,283
Equity securities										195			-
Available-for-sale securities			263,588			314,017				250,025			254,782
Loans held for sale			1,431			1,827				1,931			1,439

Loans (net of allowance for loan losses:
2017, $10,447 and 2016, $8,886)			896,715			790,725

2018, $11,941 and 2017, $11,190)										1,028,259			989,335
Premises and equipment			16,624			17,030				16,289			16,523
Accrued interest receivable			3,786			4,089				4,285			4,196
Goodwill			21,089			21,089				23,296			23,296
Bank owned life insurance			26,722			26,223				27,189			26,883
Other intangibles			1,872			2,096				1,756			1,953
Other investment sale receivable			-			7,759
Other assets			14,114			13,454				14,994			14,679

TOTAL ASSETS		$	1,269,787		$	1,223,018			$	1,397,594		$	1,361,886

LIABILITIES:
Deposits:
Noninterest-bearing		$	154,142		$	147,425			$	169,014		$	171,840
Interest-bearing			897,963			858,078				949,578			933,103
Total deposits			1,052,105			1,005,503				1,118,592			1,104,943
Borrowed funds			73,628			79,662				133,652			114,664
Accrued interest payable			731			720				903			897
Other liabilities			13,441			13,865				12,166			12,371
TOTAL LIABILITIES			1,139,905			1,099,750				1,265,313			1,232,875
STOCKHOLDERS' EQUITY:
Preferred Stock
$1.00 par value; authorized 3,000,000 shares at September 30, 2017 and
December 31, 2016; none issued in 2017 or 2016			-			-
$1.00 par value; authorized 3,000,000 shares at June 30, 2018 and
December 31, 2017; none issued in 2018 or 2017										-			-
Common stock
$1.00 par value; authorized 15,000,000 shares; issued 3,869,939
at September 30, 2017 and 3,704,375 at December 31, 2016			3,870			3,704
$1.00 par value; authorized 25,000,000 shares at June 30, 2018 and								$1.00 par value; authorized 25,000,000 shares at June 30, 2018 and
15,000,000 at December 31, 2017; issued 3,904,212 at June 30, 2018 and
3,869,939 at December 31, 2017										3,904			3,870
Additional paid-in capital			51,091			42,250				53,098			51,108
Retained earnings			88,318			91,278				93,717			89,982
Accumulated other comprehensive loss			(1,128	)		(1,392	)			(5,357	)		(3,398	)
Treasury stock, at cost: 378,428 shares at September 30, 2017
and 384,671 shares at December 31, 2016			(12,269	)		(12,572	)
Treasury stock, at cost: 391,559 shares at June 30, 2018
and 383,065 shares at December 31, 2017										(13,081	)		(12,551	)
TOTAL STOCKHOLDERS' EQUITY			129,882			123,268				132,281			129,011
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY		$	1,269,787		$	1,223,018			$	1,397,594		$	1,361,886

The accompanying notes are an integral part of these unaudited consolidated financial statements.	The accompanying notes are an integral part of these unaudited consolidated financial statements.							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)	2018		2017		2018			2017
INTEREST INCOME:
Interest and fees on loans	$	12,461	$	10,304	$	24,322		$	20,021
Interest-bearing deposits with banks		66		45		124	��		80
Investment securities:
Taxable		916		775		1,716			1,579
Nontaxable		474		601		1,001			1,269
Dividends		111		53		248			129
TOTAL INTEREST INCOME		14,028		11,778		27,411			23,078
INTEREST EXPENSE:
Deposits		1,585		1,143		2,901			2,188
Borrowed funds		692		231		1,339			489
TOTAL INTEREST EXPENSE		2,277		1,374		4,240			2,677
NET INTEREST INCOME		11,751		10,404		23,171			20,401
Provision for loan losses		325		625		825			1,240
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		11,426		9,779		22,346			19,161
NON-INTEREST INCOME:
Service charges		1,170		1,120		2,274			2,178
Trust		150		188		401			409
Brokerage and insurance		168		114		349			305
Gains on loans sold		60		148		132			249
Equity security gains, net		7		-		13			-
Available for sale security gains, net		-		23		-			195
Earnings on bank owned life insurance		154		167		306			333
Other		133		128		273			254
TOTAL NON-INTEREST INCOME		1,842		1,888		3,748			3,923
NON-INTEREST EXPENSES:
Salaries and employee benefits		4,737		4,377		9,572			8,743
Occupancy		514		477		1,106			1,004
Furniture and equipment		122		146		264			285
Professional fees		262		258		557			568
FDIC insurance		107		95		207			200
Pennsylvania shares tax		300		243		600			524
Amortization of intangibles		74		73		150			149
Other real estate owned expenses		157		82		295			172
Other		1,429		1,415		2,783			2,712
TOTAL NON-INTEREST EXPENSES		7,702		7,166		15,534			14,357
Income before provision for income taxes		5,566		4,501		10,560			8,727
Provision for income taxes		875		1,033		1,622			1,956
NET INCOME	$	4,691	$	3,468	$	8,938		$	6,771

PER COMMON SHARE DATA:
Net Income - Basic	$	1.34	$	0.99	$	2.55		$	1.93
Net Income - Diluted	$	1.34	$	0.99	$	2.55		$	1.93
Cash Dividends Paid	$	0.435	$	0.401	$	0.870		$	0.802

Number of shares used in computation - basic		3,507,242		3,514,394		3,509,882			3,513,925
Number of shares used in computation - diluted		3,508,709		3,515,582		3,510,513			3,514,535

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 Nine Months Ended
September 30, September 30,
(in thousands, except share and per share data) 2017 2016 2017 2016
INTEREST INCOME:
Interest and fees on loans $ 10,659 $ 9,204 $ 30,680 $ 26,387
Interest-bearing deposits with banks 49 50 129 185
Investment securities:
    Taxable 762 897 2,341 2,800
    Nontaxable 588 733 1,857 2,259
    Dividends 62 64 191 205
TOTAL INTEREST INCOME 12,120 10,948 35,198 31,836
INTEREST EXPENSE:
Deposits 1,210 1,048 3,398 3,194
Borrowed funds 293 188 782 554
TOTAL INTEREST EXPENSE 1,503 1,236 4,180 3,748
NET INTEREST INCOME 10,617 9,712 31,018 28,088
Provision for loan losses 500 500 1,740 770
NET INTEREST INCOME AFTER
    PROVISION FOR LOAN LOSSES 10,117 9,212 29,278 27,318
NON-INTEREST INCOME:
Service charges 1,145 1,115 3,323 3,345
Trust 187 161 596 539
Brokerage and insurance 154 211 459 578
Gains on loans sold 134 109 383 225
Investment securities gains, net 9 - 204 155
Earnings on bank owned life insurance 166 174 499 515
Other 126 138 380 450
TOTAL NON-INTEREST INCOME 1,921 1,908 5,844 5,807
NON-INTEREST EXPENSES:
Salaries and employee benefits 4,237 4,285 12,880 12,067
Occupancy 475 485 1,479 1,385
Furniture and equipment 159 164 444 492
Professional fees 286 283 854 836
FDIC insurance 95 175 295 492
Pennsylvania shares tax 243 240 767 630
Amortization of intangibles 74 82 223 246
ORE expenses (recoveries) 171 (71 ) 343 234
Other 1,507 1,557 4,319 5,031
TOTAL NON-INTEREST EXPENSES 7,247 7,200 21,604 21,413
Income before provision for income taxes 4,791 3,920 13,518 11,712
Provision for income taxes 1,141 767 3,097 2,245
NET INCOME $ 3,650 $ 3,153 $ 10,421 $ 9,467

PER COMMON SHARE DATA:
Net Income - Basic $ 1.05 $ 0.90 $ 2.99 $ 2.70
Net Income - Diluted $ 1.05 $ 0.90 $ 2.99 $ 2.69
Cash Dividends Paid $ 0.430 $ 0.400 $ 1.240 $ 1.183

Number of shares used in computation - basic 3,482,936 3,505,526 3,480,760 3,512,187
Number of shares used in computation - diluted 3,485,221 3,507,220 3,482,634 3,513,885

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

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME	CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
		Three Months Ended											Nine Months Ended										Three Months Ended										Six Months Ended
		September 30,											September 30,										June 30,										June 30,
(in thousands)					2017					2016						2017				2016						2018					2017					2018					2017
Net income					$	3,650				$	3,153					$	10,421			$	9,467					$	4,691				$	3,468				$	8,938				$	6,771
Other comprehensive income (loss):
Unrealized gains on available for sale securities			(288	)				(1,049	)					437				2,439
Change in unrealized gains on available for sale securities																								(529	)				654					(2,574	)				724
Income tax effect			98					357						(149	)			(830	)					112					(222	)				540					(246	)
Change in unrecognized pension cost			56					61						168				181						47					52					93					112
Income tax effect			(19	)				(21	)					(57	)			(62	)					(10	)				(17	)				(19	)				(38	)
Less: Reclassification adjustment for investment
security gains included in net income			(9	)				-						(204	)			(155	)					-					(23	)				-					(195	)
Income tax effect			3					-						69				53						-					8					-					66
Other comprehensive income (loss), net of tax						(159	)				(652	)					264				1,626						(380	)				452					(1,960	)				423
Comprehensive income					$	3,491				$	2,501					$	10,685			$	11,093					$	4,311				$	3,920				$	6,978				$	7,194

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

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) Nine Months Ended
September 30,
(in thousands) 2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income $ 10,421 $ 9,467
  Adjustments to reconcile net income to net
   cash provided by operating activities:
    Provision for loan losses 1,740 770
    Provision for off-balance sheet items - 30
    Depreciation and amortization 321 265
    Amortization and accretion of investment securities 1,089 1,750
    Deferred income taxes (381 ) 141
    Investment securities gains, net (204 ) (155 )
    Earnings on bank owned life insurance (499 ) (515 )
    Originations of loans held for sale (17,144 ) (15,698 )
    Proceeds from sales of loans held for sale 17,789 15,950
    Realized gains on loans sold (383 ) (225 )
    Increase in accrued interest receivable 303 223
    Increase (decrease) in accrued interest payable 11 (98 )
    Other, net (360 ) (1,137 )
      Net cash provided by operating activities 12,703 10,768
CASH FLOWS FROM INVESTING ACTIVITIES:
  Available-for-sale securities:
    Proceeds from sales 30,393 12,077
    Proceeds from maturity and principal repayments 47,677 43,759
    Purchase of securities (20,548 ) (44,567 )
  Purchase of interest bearing time deposits with other banks (6,301 ) -
  Proceeds from sale of interest bearing time deposits with other banks 2,741 -
  Proceeds from matured interest bearing time deposits with other banks 496 744
  Proceeds from redemption of regulatory stock 6,090 459
  Purchase of regulatory stock (5,668 ) (1,138 )
  Net increase in loans (107,864 ) (55,846 )
  Purchase of premises and equipment (179 ) (500 )
  Proceeds from sale of foreclosed assets held for sale 312 900
      Net cash used in investing activities (52,851 ) (44,112 )
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits 46,602 20,716
  Proceeds from long-term borrowings 7 541
  Repayments of long-term borrowings - (534 )
  Net (decrease) increase in short-term borrowed funds (6,041 ) 10,221
  Purchase of treasury and restricted stock (645 ) (1,713 )
  Dividends paid (3,714 ) (3,900 )
      Net cash provided by financing activities 36,209 25,331
          Net decrease in cash and cash equivalents (3,939 ) (8,013 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 17,754 24,384
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,815 $ 16,371

Supplemental Disclosures of Cash Flow Information:
    Interest paid $ 4,169 $ 3,846
    Income taxes paid $ 2,950 $ 1,700
    Loans transferred to foreclosed property $ 785 $ 633

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)	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,938		$	6,771
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		825			1,240
Depreciation and amortization		182			199
Amortization and accretion of investment securities		569			735
Deferred income taxes		42			(105	)
Equity and available for sale securities gains, net		(13	)		(195	)
Earnings on bank owned life insurance		(306	)		(333	)
Originations of loans held for sale		(7,260	)		(10,247	)
Proceeds from sales of loans held for sale		6,849			11,840
Realized gains on loans sold		(132	)		(249	)
(Increase) decrease in accrued interest receivable		(89	)		392
Increase (decrease) in accrued interest payable		6			(92	)
Other, net		23			(166	)
Net cash provided by operating activities		9,634			9,790
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales		-			25,407
Proceeds from maturity and principal repayments		31,351			36,510
Purchase of securities		(29,828	)		(13,829	)
Purchase of equity securities		(91	)		-
Purchase of interest bearing time deposits with other banks		(4,721	)		(4,069	)
Proceeds from sale of interest bearing time deposits with other banks		1,239			1,745
Proceeds from matured interest bearing time deposits with other banks		-			496
Proceeds from redemption of regulatory stock		5,138			4,303
Purchase of regulatory stock		(5,574	)		(3,487	)
Net increase in loans		(39,375	)		(88,468	)
Purchase of premises and equipment		(140	)		(131	)
Proceeds from sale of foreclosed assets held for sale		736			237
Net cash used in investing activities		(41,265	)		(41,286	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		13,649			45,706
Proceeds from long-term borrowings		4			5
Net short-term borrowed funds		18,984			(9,669	)
Purchase of treasury and restricted stock		(850	)		(509	)
Dividends paid		(3,060	)		(2,429	)
Net cash provided by financing activities		28,727			33,104
Net (decrease) increase in cash and cash equivalents		(2,904	)		1,608
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		18,517			17,754
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	15,613		$	19,362

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	4,234		$	2,769
Income taxes paid	$	1,200		$	2,075
Loans transferred to foreclosed property	$	78		$	335
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 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").

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 ~~September~~June 30, ~~2017~~2018 and for the periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 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 ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 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, ~~2016.~~2017.

In May 2014,the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company's consolidated financial statements other than additional disclosures in note 2 as the Company's primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09.

In January 2016, the FASB finalized ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This accounting standard (a) requires separate presentation of equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) on the balance sheet and measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

The adoption resulted in the Company recognizing a one-time cumulative effect adjustment of $1,000 between accumulated other comprehensive income and retained earnings on the consolidated balance sheet for the fair value of equity securities included in accumulated other comprehensive income as of the beginning of the period. The adjustment had no impact on net income on any prior periods presented.

The Company has adopted this standard during the reporting period. On a prospective basis, the Company implemented changes to the measurement of the fair value of financial instruments using an exit price notion for disclosure purposes included in Note 12 to the financial statements. The June 30, 2018 fair value of each class of financial instruments disclosure did utilize the exit price notion when measuring fair value and, therefore, may not be comparable to the December 3l, 2017 disclosure.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 71S). 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 are required to be presented in the income statement separately from the service cost component. The Company adopted the standard on January 1, 2018, which resulted in a reclassification of $(53)and ($100) from Salaries and employee benefits into Other noninterest expenses on the Consolidated Statement of Income for the three and six month periods ended June 30, 2017. See note 10 for additional information on the presentation of these pension cost components.

Note 2 – Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Update ASU 2014-09 Revenue from Contracts with Customers – Topic 606 and all subsequent ASUs that modified ASC 606. The Company has elected to apply the standard to all prior periods presented utilizing the full retrospective approach. The implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods. Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of ASC 606. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 90.13% and 89.8% of the total revenue of the Company for the three and six months ended June 30, 2018, respectively. The main types of noninterest income within the scope of the standard are as follows:

Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.

Trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly basis. Fees charged to customers' accounts are recognized as revenue over the period during which the Company fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Company is typically satisfied by holding and managing the customer's assets over time. Other fees related to specific customer requests are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, upon completion of the requested service/transaction.

Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.

Brokerage and insurance – Fees includes commissions from the sales of investments and insurance products recognized on a trade date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Additional fees are based on a percentage of the market value of customer accounts and billed on a monthly or quarterly basis. The Company's performance obligation under the contracts with certain customers is generally satisfied through the passage of time as the Company monitors and manages the assets in the customer's portfolio and is not dependent on certain return or performance level of the customer's portfolio. Fees for these services are billed monthly and are recorded as revenue at the end of the month for which the wealth management service has been performed. Other performance obligations (such as the delivery of account statements to customers) are generally considered immaterial to the overall transaction price.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three and six months ended June 30, 2018. All revenue in the table below relates to goods and services transferred at a point in time.

Revenue stream	June 30, 2018
Service charges on deposit accounts	Three Months Ended		Six Months Ended
Overdraft fees	$	381	$	748
Statement fees		51		105
Interchange revenue		574		1,105
ATM income		101		197
Other service charges		63		119
Total Service Charges		1,170		2,274
Trust		150		401
Brokerage and insurance		168		349
Other		78		163
Total	$	1,566	$	3,187

Note 23 - 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				Nine months ended				Three months ended				Six months ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Net income applicable to common stock	$	3,650,000	$	3,153,000	$	10,421,000	$	9,467,000	$	4,691,000	$	3,468,000	$	8,938,000	$	6,771,000

Basic earnings per share computation
Weighted average common shares outstanding		3,482,936		3,505,526		3,480,760		3,512,187		3,507,242		3,514,394		3,509,882		3,513,925
Earnings per share - basic	$	1.05	$	0.90	$	2.99	$	2.70	$	1.34	$	0.99	$	2.55	$	1.93

Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		3,482,936		3,505,526		3,480,760		3,512,187		3,507,242		3,514,394		3,509,882		3,513,925
Add: Dilutive effects of restricted stock		2,285		1,694		1,874		1,698		1,467		1,188		631		610
Weighted average common shares outstanding for dilutive earnings per share		3,485,221		3,507,220		3,482,634		3,513,885		3,508,709		3,515,582		3,510,513		3,514,535
Earnings per share - diluted	$	1.05	$	0.90	$	2.99	$	2.69	$	1.34	$	0.99	$	2.55	$	1.93

For the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, there were ~~1,107~~465 and ~~3,804~~1,562 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 $46.69-$61.04 for the three month period ended June 30, 2018 and per share prices ranging from $49.87-$53.15 for the three month period ended ~~September~~June 30, ~~2017 and per share prices ranging from $46.69-$53.15 for the three month period ended September 30, 2016.~~2017. For the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, 3,349 and ~~2016, 4,162 and 3,804~~4,921 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 $46.69-$~~53.15~~61.04 for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 and prices ranging from ~~$46.69-~~$47.81-$53.15 for the ~~nine~~six month period ended ~~September~~June 30, ~~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 the recognition of qualified affordable housing tax credits.

~~Investments in Qualified Affordable Housing Projects~~

As of September 30, 2017 and December 31, 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 $581,000 and $700,000 as of September 30, 2017 and December 31, 2016, respectively. Investments purchased prior to January 1, 2015, are accounted for utilizing the effective yield method. As of September 30, 2017, the Company had $740,000 of tax credits remaining that will be recognized over 5.25 years. Tax credits of $36,000 and $50,000 were recognized as a reduction of tax expense during the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, tax credits of $106,000 and $149,000, respectively, were recognized as a reduction of tax expense. Amortization of the investment included in other expenses on the Consolidated Statement of Income was $39,000 and $65,000 during the three months ended September 30, 2017 and 2016, respectively. Amortization of the investment included in other expenses on the Consolidated Statement of Income was $119,000 and $194,000 during the nine months ended September 30, 2017 and 2016, respectively.2017.

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows (in thousands):

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
September 30, 2017	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	132,555	$	191	$	(195	)	$	132,551
Obligations of state and
political subdivisions		80,439		1,382		(98	)		81,723
Corporate obligations		3,000		101		-			3,101
Mortgage-backed securities in
government sponsored entities		44,391		83		(197	)		44,277
Equity securities in financial
institutions		992		944		-			1,936
Total available-for-sale securities	$	261,377	$	2,701	$	(490	)	$	263,588

December 31, 2016
June 30, 2018										Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	170,276	$	407	$	(269	)	$	170,414	$	103,190	$	30	$	(1,232	)	$	101,988
U.S. treasury securities		2,999		1		-			3,000		33,783		-		(791	)		32,992
Obligations of state and
political subdivisions		95,956		1,463		(493	)		96,926		67,763		456		(347	)		67,872
Corporate obligations		3,000		50		-			3,050		3,000		23		-			3,023
Mortgage-backed securities in
government sponsored entities		37,987		88		(347	)		37,728		45,202		3		(1,055	)		44,150
Equity securities in financial institutions		1,821		1,078		-			2,899
Total available-for-sale securities	$	312,039	$	3,087	$	(1,109	)	$	314,017	$	252,938	$	512	$	(3,425	)	$	250,025

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2017	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	99,454	$	26	$	(593	)	$	98,887
U.S. treasury securities		28,782		-		(178	)		28,604
Obligations of state and
political subdivisions		78,409		820		(139	)		79,090
Corporate obligations		3,000		83		-			3,083
Mortgage-backed securities in
government sponsored entities		45,385		19		(377	)		45,027
Equity securities in financial institutions		92		-		(1	)		91
Total available-for-sale securities	$	255,122	$	948	$	(1,288	)	$	254,782

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands). As of ~~September~~June 30, ~~2017,~~2018, the Company owned 70201 securities whose fair value was less than their cost basis.

Less than Twelve Months Twelve Months or Greater Total
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
September 30, 2017 Value Losses Value Losses Value Losses
U.S. agency securities $ 55,048 $ (119 ) $ 7,922 $ (76 ) $ 62,970 $ (195 )
Obligations of state and
    political subdivisions 6,146 (21 ) 8,564 (77 ) 14,710 (98 )
Mortgage-backed securities in
   government sponsored entities 26,683 (166 ) 2,810 (31 ) 29,493 (197 )
    Total securities $ 87,877 $ (306 ) $ 19,296 $ (184 ) $ 107,173 $ (490 )

December 31, 2016
U.S. agency securities $ 50,947 $ (269 ) $ - $ - $ 50,947 $ (269 )
Obligations of states and
     political subdivisions 28,398 (472 ) 767 (21 ) 29,165 (493 )
Mortgage-backed securities in
   government sponsored entities 26,717 (330 ) 753 (17 ) 27,470 (347 )
    Total securities $ 106,062 $ (1,071 ) $ 1,520 $ (38 ) $ 107,582 $ (1,109 )

June 30, 2018	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. agency securities	$	76,159	$	(978	)	$	19,842	$	(254	)	$	96,001	$	(1,232	)
U.S. treasury securities		32,992		(791	)		-		-			32,992		(791	)
Obligations of state and
political subdivisions		22,564		(220	)		6,007		(127	)		28,571		(347	)
Mortgage-backed securities in
government sponsored entities		25,918		(399	)		17,677		(656	)		43,595		(1,055	)
Total securities	$	157,633	$	(2,388	)	$	43,526	$	(1,037	)	$	201,159	$	(3,425	)

December 31, 2017
U.S. agency securities	$	74,952	$	(421	)	$	16,928	$	(172	)	$	91,880	$	(593	)
U.S. treasury securities		28,604		(178	)		-		-			28,604		(178	)
Obligations of states and
political subdivisions		14,885		(85	)		5,958		(54	)		20,843		(139	)
Mortgage-backed securities in
government sponsored entities		27,154		(190	)		13,822		(187	)		40,976		(377	)
Equity securities in financial institutions		91		(1	)		-		-			91		(1	)
Total securities	$	145,686	$	(875	)	$	36,708	$	(413	)	$	182,394	$	(1,288	)

As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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, U.S treasury securities, obligations of states and political subdivisions and mortgage backed securities issued by government sponsored 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.

There were no sales of available for sale securities during the six months ended June 30, 2018. Proceeds from sales of securities available-for-sale for the ~~nine~~six months ended ~~September~~June 30, 2017 ~~and 2016~~ were ~~$30,393,000 and $12,077,000, respectively. For the three months ended September 30, 2017 there were sales of $4,986,000 of available-for-sale securities.~~$25,407,000. There were no sales of available for sale securities during the three months ended ~~September~~June 30, ~~2016.~~2018. Proceeds from sales of securities available-for-sale for the three months ended June 30, 2017 were $6,641,000. The gross gains and losses were as follows (in thousands):

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Gross gains $ 9 $ - $ 211 $ 155
Gross losses - - (7 ) -
Net gains $ 9 $ - $ 204 $ 155

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2018		2017			2018		2017
Gross gains on available for sale securities	$	-	$	30		$	-	$	202
Gross losses on available for sale securities		-		(7	)		-		(7	)
Net gains	$	-	$	23		$	-	$	195

The following table presents the net gains on the Company's equity investments recognized in earnings during the three month and six month periods ended June 30, 2018, and the portion of unrealized gains for the period that relates to equity investments held at June 30, 2018 (in thousands):

	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
Net gains recognized in equity securities during the period	$	7	$	13
Less: Net gains realized on the sale of equity securities during the period		-		-
Unrealized gains recognized in equity securities held at reporting date	$	7	$	13

Investment securities with an approximate carrying value of ~~$243.9~~$240.8 million and ~~$206.3~~$243.4 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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 ~~September~~June 30, ~~2017,~~2018, 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	$	52,243	$	52,375	$	47,012	$	47,121
Due after one year through five years		113,014		113,722		106,241		104,395
Due after five years through ten years		35,712		35,950		50,336		49,644
Due after ten years		59,416		59,605		49,349		48,865
Total	$	260,385	$	261,652	$	252,938	$	250,025

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

September 30, 2017	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
June 30, 2018									Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	206,389	$	864	$	34	$	205,491	$	213,242	$	1,131	$	30	$	212,081
Commercial		273,624		13,759		2,016		257,849		309,571		13,791		1,388		294,392
Agricultural		207,052		3,964		733		202,355		262,691		5,204		683		256,804
Construction		17,074		-		-		17,074		27,901		-		-		27,901
Consumer		10,784		4		-		10,780		9,740		-		-		9,740
Other commercial loans		56,222		4,228		538		51,456		75,002		3,934		425		70,643
Other agricultural loans		34,066		1,418		-		32,648		42,131		1,471		-		40,660
State and political subdivision loans		101,951		-		-		101,951		99,922		-		-		99,922
Total		907,162		24,237		3,321		879,604		1,040,200		25,531		2,526		1,012,143
Allowance for loan losses		10,447		442		-		10,005		11,941		405		-		11,536
Net loans	$	896,715	$	23,795	$	3,321	$	869,599	$	1,028,259	$	25,126	$	2,526	$	1,000,607

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

810

December 31, 2017	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	214,479	$	1,065	$	33	$	213,381
Commercial		308,084		13,864		1,460		292,760
Agricultural		239,957		3,901		702		235,354
Construction		13,502		-		-		13,502
Consumer		9,944		8		-		9,936
Other commercial loans		72,013		4,197		443		67,373
Other agricultural loans		37,809		1,363		-		36,446
State and political subdivision loans		104,737		-		-		104,737
Total		1,000,525		24,398		2,638		973,489
Allowance for loan losses		11,190		410		-		10,780
Net loans	$	989,335	$	23,988	$	2,638	$	962,709

Purchased loans ~~acquired in 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. 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")~~the acquisition date and ~~September~~June 30, ~~2017.~~2018. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans' collateral. The carrying value of PCI loans was ~~$3,321,000~~$2,526,000 and ~~$3,367,000~~$2,638,000 at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

The carrying value of the PCI loans was determined by projected discounted contractual cash ~~flows.~~flows and collateral valuations.

Changes in the accretable yield for PCI loans were as follows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively (in thousands):

	Three months ended						Nine months ended						Three months ended						Six months ended
	September 30,						September 30,						June 30,						June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Balance at beginning of period	$	167		$	464		$	389		$	637		$	82		$	275		$	106		$	389
Accretion		(90	)		(88	)		(312	)		(261	)		(23	)		(108	)		(47	)		(222	)
Balance at end of period	$	77		$	376		$	77		$	376		$	59		$	167		$	59		$	167

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

September 30, 2017 December 31, 2016
Outstanding balance $ 6,328 $ 6,487
Carrying amount 3,321 3,367

	June 30, 2018		December 31, 2017
Outstanding balance	$	5,262	$	5,295
Carrying amount		2,526		2,638

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 agricultural real estate used during the construction phase of residential, 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
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
June 30, 2018	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	1,138	$	261	$	776	$	1,037	$	15
Home Equity		111		14		80		94		15
Commercial		16,576		12,442		1,349		13,791		159
Agricultural		5,210		3,648		1,556		5,204		25
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		4,489		3,552		382		3,934		151
Other agricultural loans		1,514		1,295		176		1,471		40
State and political subdivision loans		-		-		-		-		-
Total	$	29,038	$	21,212	$	4,319	$	25,531	$	405

			Recorded		Recorded								Recorded		Recorded
	Unpaid		Investment		Investment		Total				Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related		Principal		With No		With		Recorded		Related
September 30, 2017	Balance		Allowance		Allowance		Investment		Allowance
December 31, 2017											Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	865	$	280	$	515	$	795	$	17	$	1,055	$	273	$	700	$	973	$	47
Home Equity		69		16		53		69		9		92		40		52		92		9
Commercial		16,240		13,329		430		13,759		67		16,363		13,154		710		13,864		94
Agricultural		3,983		1,933		2,031		3,964		99		5,231		3,283		618		3,901		3
Construction		-		-		-		-		-		-		-		-		-		-
Consumer		4		2		2		4		2		10		2		6		8		-
Other commercial loans		4,690		3,759		469		4,228		208		4,739		3,766		431		4,197		231
Other agricultural loans		1,442		1,309		109		1,418		40		1,397		1,238		125		1,363		26
State and political
subdivision loans		-		-		-		-		-
State and political subdivision loans												-		-		-		-		-
Total	$	27,293	$	20,628	$	3,609	$	24,237	$	442	$	28,887	$	21,756	$	2,642	$	24,398	$	410

December 31, 2016
Real estate loans:							$	-
Mortgages	$	953	$	570	$	330		900	$	22
Home Equity		57		-		57		57		10
Commercial		7,958		5,697		45		5,742		45
Agricultural		3,347		2,000		1,347		3,347		54
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		6,159		5,135		859		5,994		326
Other agricultural loans		1,653		1,629		24		1,653		30
State and political
subdivision loans		-		-		-		-		-
Total	$	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 these receivables for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2018 and ~~2016(~~2017(in thousands):

For the Three Months Ended
September 30, 2017 September 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 $ 741 $ 3 $ - $ 607 $ 1 $ -
     Home Equity 70 1 - 58 1 -
     Commercial 13,663 122 2 5,980 35 -
     Agricultural 3,799 27 - - 2 -
     Construction - - - - - -
Consumer 4 - - - - -
Other commercial loans 4,337 54 25 5,298 53 2
Other agricultural loans 1,443 10 - - - -
State and political
   subdivision loans - - - - - -
Total $ 24,057 $ 217 $ 27 $ 11,943 $ 92 $ 2

1012

For the Nine Months ended
September 30, 2017 September 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 $ 874 $ 9 $ - $ 486 $ 10 $ -
     Home Equity 62 3 - 59 3 -
     Commercial 10,812 280 5 6,088 87 -
     Agricultural 3,609 90 - 110 7 -
     Construction - - - - - -
Consumer 2 - - - - -
Other commercial loans 4,988 131 52 5,743 187 5
Other agricultural loans 1,528 55 - 70 3 -
State and political
   subdivision loans - - - - - -
Total $ 21,875 $ 568 $ 57 $ 12,556 $ 297 $ 5

	For the Three Months Ended
	June 30, 2018						June 30, 2017
					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	$	1,045	$	3	$	-	$	986	$	3	$	-
Home Equity		95		1		-		60		1		-
Commercial		13,833		120		3		12,980		134		-
Agricultural		4,185		49		-		3,641		32		-
Construction		-		-		-		-		-		-
Consumer		-		-		-		3		-		-
Other commercial loans		4,067		26		-		5,029		37		17
Other agricultural loans		1,342		9		-		1,515		22		-
State and political subdivision loans		-		-		-		-		-		-
Total	$	24,567	$	208	$	3	$	24,214	$	229	$	17

	For the Six Months ended
	June 30, 2018						June 30, 2017
					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	$	1,034	$	7	$	-	$	940	$	6	$	-
Home Equity		101		2		-		58		2		-
Commercial		13,814		242		8		9,387		158		3
Agricultural		4,135		100		-		3,513		63		-
Construction		-		-		-		-		-		-
Consumer		2		-		-		2		-		-
Other commercial loans		4,112		52		-		5,313		77		27
Other agricultural loans		1,356		19		-		1,571		45		-
State and political subdivision loans		-		-		-		-		-		-
Total	$	24,554	$	422	$	8	$	20,784	$	351	$	30

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, agricultural and ~~agricultural~~state and political 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 50% of the dollar volume of the commercial loan portfolio on an annual basis, ~~(60% for 2016),~~ 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

September 30, 2017	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
June 30, 2018													Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	246,405	$	15,069	$	12,150	$	-	$	-	$	273,624	$	284,415	$	13,347	$	11,690	$	119	$	-	$	309,571
Agricultural		195,469		4,824		6,759		-		-		207,052		244,605		12,427		5,659		-		-		262,691
Construction		17,074		-		-		-		-		17,074		27,901		-		-		-		-		27,901
Other commercial loans		51,341		635		4,165		81		-		56,222		71,036		870		2,975		121		-		75,002
Other agricultural loans		31,791		198		2,077		-		-		34,066		39,753		1,048		1,330		-		-		42,131
State and political
subdivision loans		88,251		2,891		10,809		-		-		101,951		89,602		-		10,320		-		-		99,922
Total	$	630,331	$	23,617	$	35,960	$	81	$	-	$	689,989	$	757,312	$	27,692	$	31,974	$	240	$	-	$	817,218

December 31, 2016	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
December 31, 2017													Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	225,185	$	14,045	$	13,347	$	-	$	-	$	252,577	$	281,742	$	15,029	$	11,271	$	42	$	-	$	308,084
Agricultural		110,785		8,231		4,608		-		-		123,624		222,198		11,538		6,221		-		-		239,957
Construction		25,441		-		-		-		-		25,441		13,364		-		138		-		-		13,502
Other commercial loans		51,396		2,049		5,105		89		-		58,639		67,706		615		3,567		125		-		72,013
Other agricultural loans		20,178		1,733		1,477		-		-		23,388		34,914		1,325		1,570		-		-		37,809
State and political
subdivision loans		83,620		13,066		828		-		-		97,514		94,125		-		10,612		-		-		104,737
Total	$	516,605	$	39,124	$	25,365	$	89	$	-	$	581,183	$	714,049	$	28,507	$	33,379	$	167	$	-	$	776,102

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

September 30, 2017	Performing		Non-performing		PCI		Total
June 30, 2018									Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	147,785	$	1,254	$	34	$	149,073	$	153,342	$	1,375	$	30	$	154,747
Home Equity		57,148		168		-		57,316		58,377		118		-		58,495
Consumer		10,683		101		-		10,784		9,683		57		-		9,740
Total	$	215,616	$	1,523	$	34	$	217,173	$	221,402	$	1,550	$	30	$	222,982

December 31, 2016	Performing		Non-performing		PCI		Total
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

December 31, 2017	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	152,820	$	1,492	$	33	$	154,345
Home Equity		60,022		112		-	$	60,134
Consumer		9,895		49		-	$	9,944
Total	$	222,737	$	1,653	$	33	$	224,423

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

															90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		Greater and
June 30, 2018	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	476	$	202	$	796	$	1,474	$	153,243	$	30	$	154,747	$	-
Home Equity		220		8		94		322		58,173		-		58,495		-
Commercial		1,649		2,019		4,201		7,869		300,314		1,388		309,571		38
Agricultural		8		1,105		702		1,815		260,193		683		262,691		543
Construction		-		-		-		-		27,901		-		27,901		-
Consumer		31		26		32		89		9,651		-		9,740		32
Other commercial loans		47		8		2,324		2,379		72,198		425		75,002		-
Other agricultural loans		182		569		433		1,184		40,947		-		42,131		433
State and political
subdivision loans		-		-		-		-		99,922		-		99,922		-

Total	$	2,613	$	3,937	$	8,582	$	15,132	$	1,022,542	$	2,526	$	1,040,200	$	1,046

Loans considered non-accrual	$	617	$	790	$	7,536	$	8,943	$	1,988	$	-	$	10,931
Loans still accruing		1,996		3,147		1,046		6,189		1,020,554		2,526		1,029,269
Total	$	2,613	$	3,937	$	8,582	$	15,132	$	1,022,542	$	2,526	$	1,040,200

													Total		90 Days or																90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and		30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		Greater and
September 30, 2017	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
December 31, 2017																	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	1,087	$	242	$	612	$	1,941	$	147,098	$	34	$	149,073	$	49	$	996	$	362	$	810	$	2,168	$	152,144	$	33	$	154,345	$	218
Home Equity		347		33		80		460		56,856		-		57,316		30		277		86		78		441		59,693		-		60,134		-
Commercial		1,184		211		3,814		5,209		266,399		2,016		273,624		80		1,353		1,010		3,865		6,228		300,396		1,460		308,084		162
Agricultural		-		17		1,165		1,182		205,137		733		207,052		-		242		-		205		447		238,808		702		239,957		30
Construction		-		-		-		-		17,074		-		17,074		-		-		-		133		133		13,369		-		13,502		-
Consumer		115		48		100		263		10,521		-		10,784		14		53		33		49		135		9,809		-		9,944		7
Other commercial loans		230		43		2,634		2,907		52,777		538		56,222		-		132		-		2,372		2,504		69,066		443		72,013		32
Other agricultural loans		187		-		-		187		33,879		-		34,066		-		-		42		106		148		37,661		-		37,809		106
State and political
subdivision loans		-		-		-		-		101,951		-		101,951		-		-		-		-		-		104,737		-		104,737		-
Total	$	3,150	$	594	$	8,405	$	12,149	$	891,692	$	3,321	$	907,162	$	173	$	3,053	$	1,533	$	7,618	$	12,204	$	985,683	$	2,638	$	1,000,525	$	555

Loans considered non-accrual	$	317	$	67	$	8,232	$	8,616	$	3,205	$	-	$	11,821			$	816	$	281	$	7,063	$	8,160	$	2,011	$	-	$	10,171
Loans still accruing		2,833		527		173		3,533		888,487		3,321		895,341				2,237		1,252		555		4,044		983,672		2,638		990,354
Total	$	3,150	$	594	$	8,405	$	12,149	$	891,692	$	3,321	$	907,162			$	3,053	$	1,533	$	7,618	$	12,204	$	985,683	$	2,638	$	1,000,525


															90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Total Financing		Greater and
December 31, 2016	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The balances are presented by class of financing receivable (in thousands):

	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Real estate loans:
Mortgages	$	1,205	$	1,475	$	1,375	$	1,274
Home Equity		138		95		118		112
Commercial		5,262		4,445		6,262		5,192
Agricultural		1,464		1,340		167		175
Construction		-		-		-		133
Consumer		88		42		25		42
Other commercial loans		3,008		4,057		2,415		2,637
Other agricultural loans		656		-		569		606
State and political subdivision		-		-		-		-
	$	11,821	$	11,454	$	10,931	$	10,171

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, included within the allowance for loan losses are reserves of ~~$85,000~~$87,000 and ~~$29,000~~$41,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 were as follows (dollars in thousands):

	For the Three Months Ended September 30, 2017												For the Three Months Ended June 30, 2018
	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:
Home Equity														-		1	$	-	$	1	$	-	$	1
Commercial														-		1		-		577		-		577
Agricultural		-		2	$	-	$	150	$	-	$	150		-		1		-		1,523				1,523
Other agricultural loans		-		1		-		161		-		161		-		4		-		176				176
Total		-		3	$	-	$	311	$	-	$	311		-		7	$	-	$	2,277	$	-	$	2,277

For the Nine Months Ended September 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
Agricultural - 2 - 150 - 150
Other agricultural loans - 1 - 161 - 161
Total - 10 $ - $ 7,108 $ - $ 7,108

1416

For the Three Months Ended September 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 - 1 $ - $ 750 $ - $ 750
Other commercial loans - 3 - 3,076 - 3,076
Total - 4 $ - $ 3,826 $ - $ 3,826

For the Nine Months Ended September 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 - 4 $ - $ 1,188 $ - $ 1,188
Other commercial loans - 3 - 3,076 - 3,076
Total - 7 $ - $ 4,264 $ - $ 4,264

	For the Six Months Ended June 30, 2018
	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:
Mortgages		-		1	$	-	$	7	$		$	7
Home Equity		-		1		-		1		-		1
Commercial		-		1		-		577		-		577
Agricultural		-		1		-		1,523				1,523
Other agricultural loans		-		4		-		176				176
Total		-		8	$	-	$	2,284	$	-	$	2,284

	For the Three 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		-		5	$	-	$	6,093	$	-	$	6,093
Total		-		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

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 began January 1, 2018 and 2017 ~~and 2016 (nine~~(6 month periods) and ~~June~~April 1, ~~2017~~2018 and ~~2016~~2017 (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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively (in thousands):

September 30, 2017 December 31, 2016

Individually
evaluated for impairment

Collectively
evaluated for impairment
Total
Individually
evaluated for
impairment

Collectively
evaluated for
impairment
Total
Real estate loans:
     Residential $ 26 $ 1,054 $ 1,080 $ 32 $ 1,032 $ 1,064
     Commercial 67 3,515 3,582 45 3,544 3,589
     Agricultural 99 2,595 2,694 54 1,440 1,494
     Construction - 31 31 - 47 47
Consumer 2 135 137 - 122 122
Other commercial loans 208 904 1,112 326 1,001 1,327
Other agricultural loans 40 422 462 30 282 312
State and political
  subdivision loans - 874 874 - 833 833
Unallocated - 475 475 - 98 98
Total $ 442 $ 10,005 $ 10,447 $ 487 $ 8,399 $ 8,886

1517

	June 30, 2018						December 31, 2017
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	30	$	1,015	$	1,045	$	56	$	993	$	1,049
Commercial		159		3,635		3,794		94		3,773		3,867
Agricultural		25		3,648		3,673		3		3,140		3,143
Construction		-		44		44		-		23		23
Consumer		-		115		115		-		124		124
Other commercial loans		151		1,115		1,266		231		1,041		1,272
Other agricultural loans		40		549		589		26		466		492
State and political
subdivision loans		-		767		767		-		816		816
Unallocated		-		648		648		-		404		404
Total	$	405	$	11,536	$	11,941	$	410	$	10,780	$	11,190

The following tables roll forward the balance of the ALLL by portfolio segment for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively (in thousands):

	Balance at June 30, 2017		Charge-offs			Recoveries		Provision			Balance at September 30, 2017
Real estate loans:
Residential	$	1,104	$	(11	)	$	-	$	(13	)	$	1,080
Commercial		3,541		-			5		36			3,582
Agricultural		2,452		-			-		242			2,694
Construction		45		-			-		(14	)		31
Consumer		125		(45	)		13		44			137
Other commercial loans		1,131		-			5		(24	)		1,112
Other agricultural loans		431		-			1		30			462
State and political subdivision loans		838		-			-		36			874
Unallocated		312		-			-		163			475
Total	$	9,979	$	(56	)	$	24	$	500		$	10,447
													For the three months ended June 30, 2018
	Balance at June 30, 2016		Charge-offs			Recoveries		Provision			Balance at September 30, 2016		Balance at March 31, 2018		Charge-offs			Recoveries		Provision			Balance at June 30, 2018
Real estate loans:
Residential	$	990	$	(9	)	$	-	$	32		$	1,013	$	1,077	$	(2	)	$	69	$	(99	)	$	1,045
Commercial		3,338		(100	)		467		(90	)		3,615		4,006		-			3		(215	)		3,794
Agricultural		581							410			991		3,340		-			-		333			3,673
Construction		18		-			-		16			34		39		-			-		5			44
Consumer		104		(27	)		16		16			109		123		(6	)		7		(9	)		115
Other commercial loans		1,316		(37	)		25		39			1,343		1,273		(46	)		11		28			1,266
Other agricultural loans		248							51			299		532		(7	)		-		64			589
State and political subdivision loans		764		-			-		7			771
State and political
subdivision loans														789		-			-		(22	)		767
Unallocated		-		-			-		19			19		408		-			-		240			648
Total	$	7,359	$	(173	)	$	508	$	500		$	8,194	$	11,587	$	(61	)	$	90	$	325		$	11,941

	Balance at December 31, 2016		Charge-offs			Recoveries		Provision			Balance at September 30, 2017
Real estate loans:
Residential	$	1,064	$	(104	)	$	-	$	120		$	1,080
Commercial		3,589		(41	)		11		23			3,582
Agricultural		1,494		-			-		1,200			2,694
Construction		47		-			-		(16	)		31
Consumer		122		(90	)		35		70			137
Other commercial loans		1,327		-			14		(229	)		1,112
Other agricultural loans		312		(5	)		1		154			462
State and political subdivision loans		833		-			-		41			874
Unallocated		98		-			-		377			475
Total	$	8,886	$	(240	)	$	61	$	1,740		$	10,447

	Balance at December 31, 2015		Charge-offs			Recoveries		Provision			Balance at September 30, 2016
Real estate loans:
Residential	$	905	$	(52	)	$	-	$	160		$	1,013
Commercial		3,376		(100	)		475		(136	)		3,615
Agricultural		409		-					582			991
Construction		24		-			-		10			34
Consumer		102		(65	)		84		(12	)		109
Other commercial loans		1,183		(55	)		31		184			1,343
Other agricultural loans		122							177			299
State and political subdivision loans		593		-			-		178			771
Unallocated		392		-			-		(373	)		19
Total	$	7,106	$	(272	)	$	590	$	770		$	8,194

	For the six months ended June 30, 2018
	Balance at December 31, 2017		Charge-offs			Recoveries		Provision			Balance at June 30, 2018
Real estate loans:
Residential	$	1,049	$	(17	)	$	69	$	(56	)	$	1,045
Commercial		3,867		-			3		(76	)		3,794
Agricultural		3,143		-			-		530			3,673
Construction		23		-			-		21			44
Consumer		124		(19	)		17		(7	)		115
Other commercial loans		1,272		(91	)		14		71			1,266
Other agricultural loans		492		(50	)		-		147			589
State and political
subdivision loans		816		-			-		(49	)		767
Unallocated		404		-			-		244			648
Total	$	11,190	$	(177	)	$	103	$	825		$	11,941

1618

	For the three months ended June 30, 2017
	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

	For the six months ended June 30, 2017
	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

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.

For the three months ended ~~September~~June 30, 2018, the allowance for residential real estate decreased in general reserves for pooled loans as a result of a decrease in the qualitative factor associated with unemployment rates. In addition, there was a decrease in total residential loans. This was represented as a decrease to the provision. The allowance for commercial real estate was decreased in general reserves due to a decrease in the qualitative factor associated with unemployment rates and an improvement in the number of loans classified as special mention. This 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 and an increase in the amount of loans classified as special mention and substandard. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. The result of these changes was represented as an increase in the provision.

For the six months ended June 30, 2018, the allowance for residential real estate decreased in general reserves for pooled loans as a result of a decrease in the qualitative factor associated with unemployment rates. In addition, there was a decrease in total residential loans. This was represented as a decrease to the provision. The allowance for commercial real estate was decreased in general reserves due to a decrease in the qualitative factor associated with unemployment rates and an improvement in the number of loans classified as special mention. This 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 and an increase in the amount of loans classified as special mention. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. The result of these changes was represented as an increase in the provision.

For the three months ended June 30, 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. The~~balances, and an increase ~~was offset by a decrease~~ in the specific reserve for individually evaluated ~~residential~~ loans. This was represented as ~~a decrease~~an increase to the provision. The allowance for commercial real estate was ~~increased~~decreased in general reserves due to ~~growth~~the improvement in ~~the commercial real estate loan portfolio,~~classified loans, which was represented as ~~an increase~~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 ~~this growth~~these changes was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of ~~a decrease~~lower loan balances, an improvement in the ~~historical loss factor~~amount of classified loans and a reduction in the ~~portfolio segment and decrease in~~ 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 ~~an increase~~the classified loan trend in ~~specific reserves during~~ the ~~quarter.~~other agricultural loan portfolio. The result of these changes was represented as an increase in the provision.

For the ~~nine~~six months ended ~~September~~June 30, 2017, the allowance for residential real estate increased in general reserves as a result of increased loss rates reflected in the charge-offs for the ~~nine~~six month ~~period.~~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 ~~historical loss factor.~~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.

For the three months ended September 30, 2016, the allowance for commercial real estate was increased in general reserves due to the increase in the amount of classified loans. Offsetting this increase was the recovery of a previously charged-off amount during the quarter. This resulted in 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 and an increase in the historical loss factor. 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 nine months ended September 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 and the general industry conditions. 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 the 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 and in the general industry conditions. 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 loans during the period. This was represented as an increase in the provision. The allowance for commercial real estate was increased due to a recovery that occurred in the third quarter of 2016. As a result of the recovery, a negative provision was recorded.

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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, included with other assets are ~~$1,570,000~~$471,000 and ~~$1,036,000,~~$1,119,000, respectively, of foreclosed assets. As of ~~September~~June 30, ~~2017,~~2018, included within the foreclosed assets are ~~$644,000~~$175,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of ~~September~~June 30 ~~2017,~~2018, the Company has initiated formal foreclosure proceedings on ~~$1,377,000~~$2,023,000 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

		September 30, 2017							December 31, 2016							June 30, 2018							December 31, 2017
		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		$	1,604	$	(921	)	$	683	$	1,471	$	(787	)	$	684	$	1,656	$	(1,009	)	$	647	$	1,605	$	(912	)	$	693
Core deposit intangibles			1,641		(520	)		1,121		1,641		(320	)		1,321		1,786		(721	)		1,065		1,786		(586	)		1,200
Covenant not to compete			125		(57	)		68		125		(34	)		91		125		(81	)		44		125		(65	)		60
Total amortized intangible assets		$	3,370	$	(1,498	)	$	1,872	$	3,237	$	(1,141	)	$	2,096	$	3,567	$	(1,811	)	$	1,756	$	3,516	$	(1,563	)	$	1,953
Unamortized intangible assets:
Goodwill		$	21,089						$	21,089						$	23,296						$	23,296
(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.~~assets for the next five years. We based our projections of amortization expense shown below on existing asset balances at ~~September~~June 30, ~~2017.~~2018. Future amortization expense may vary from these projections (in thousands):

MSRs Core deposit intangibles Covenant not to compete Total
Three months ended September 30, 2017 (actual) $ 44 $ 66 $ 8 $ 118
Nine months ended September 30, 2017 (actual) $ 134 $ 200 $ 23 $ 357
Three months September 30, 2016 (actual) $ 42 $ 74 $ 8 $ 124
Nine months September 30, 2016 (actual) $ 132 $ 222 $ 24 $ 378
Estimate for year ended December 31,
Remaining 2017 49 65 8 122
2018 138 236 30 404
2019 134 206 30 370
2020 103 177 - 280
2021 78 147 - 225

	MSRs		Core deposit intangibles		Covenant not to compete		Total
Three months ended June 30, 2018 (actual)	$	48	$	66	$	8	$	122
Six months ended June 30, 2018 (actual)		97		134		16		247
Three months ended June 30, 2017 (actual)		45		66		7		118
Six months June 30, 2017 (actual)		91		134		15		240
Estimate for year ended December 31,
Remaining 2018		88		130		15		233
2019		157		230		29		416
2020		123		197		-		320
2021		94		165		-		259
2022		69		133		-		202

Note 7 – Federal Home Loan Bank Stock

~~The Bank is~~As a member of the FHLB of Pittsburgh, ~~and, as such,~~the Bank 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Bank's investment in FHLB stock was ~~$4,120,200~~$6,456,000 and ~~$4,542,000,~~$6,021,000, 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 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 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 is presented in the following tables (in thousands):

	Remaining Contractual Maturity of the Agreements										Remaining Contractual Maturity of the Agreements
	Overnight and		Up to				Greater than				Overnight and		Up to				Greater than
September 30, 2017	Continuous		30 Days		30 - 90 Days		90 days		Total
June 30, 2018											Continuous		30 Days		30 - 90 Days		90 days		Total
Repurchase Agreements:
U.S. agency securities	$	18,153	$	-	$	-	$	2,061	$	20,214	$	18,909	$	-	$	-	$	1,998	$	20,907
Total carrying value of collateral pledged	$	18,153	$	-	$	-	$	2,061	$	20,214	$	18,909	$	-	$	-	$	1,998	$	20,907
Total liability recognized for repurchase agreements									$	16,643									$	15,061

	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to				Greater than
December 31, 2016	Continuous		30 Days		30 - 90 Days		90 days		Total
December 31, 2017
Repurchase Agreements:
U.S. agency securities	$	16,118	$	-	$	-	$	2,059	$	18,177	$	16,027	$	-	$	-	$	2,035	$	18,062
Total carrying value of collateral pledged	$	16,118	$	-	$	-	$	2,059	$	18,177	$	16,027	$	-	$	-	$	2,035	$	18,062
Total liability recognized for repurchase agreements									$	14,307									$	14,989

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 ~~2016~~2017 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 hired prior to January 1, 2007. Additionally, the Bank assumed the noncontributory defined benefit pension plan of FNB when it was 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 and the line item on the Consolidated Statement of Income where such amounts are included, for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively (in thousands):

	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,						Affected line item on the Consolidated
	2017			2016			2017			2016			2018			2017			2018			2017			Statement of income
Service cost	$	87		$	90		$	262		$	269		$	90		$	84		$	179		$	175		Salaries and Employee Benefits
Interest cost		168			172			503			517			162			168			325			335		Other Expenses
Expected return on plan assets		(274	)		(260	)		(821	)		(780	)		(345	)		(273	)		(689	)		(547	)	Other Expenses
Net amortization and deferral		56			61			168			182			47			52			93			112		Other Expenses

Net periodic benefit cost	$	37		$	63		$	112		$	188
Net periodic (benefit) cost													$	(46	)	$	31		$	(92	)	$	75

The Bank ~~expects~~does not expect to ~~contribute $400,000~~make any contributions to the Pension Plans ~~in 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. Contributions by the Company totaled $303,000 and $269,000 for the nine months ended September 30, 2017 and 2016, respectively. For the three months ended September 30, 2017 and 2016, contributions by the Company totaled $96,000 and $89,000, 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 September 30, 2017 and December 31, 2016, an obligation of $921,000 and $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 $5,000 and $3,000 for three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, amounts included in interest expense on the deferred amounts totaled $14,000 and $11,000, respectively.during 2018.

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. In April of 2016, the Company's shareholders authorized a total of 150,000 shares of the Company's common stock to be made available under the Plan. As of ~~September~~June 30, ~~2017, 141,678~~2018, 136,539 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 ~~nine month periods~~six months ended ~~September~~June 30, ~~2017:~~2018:

	Three months				Nine 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		9,169	$	50.66		8,471		$	49.10			8,691		$	51.19			8,783		$	51.20
Granted		-		-		4,212			53.38			4,869			62.91			4,869			62.91
Forfeited		-		-		(43	)		(48.56	)		-			-			-			-
Vested		-		-		(3,471	)		(50.19	)		(3,626	)		(50.54	)		(3,718	)		(50.58	)
Outstanding, end of period		9,169	$	50.66		9,169		$	50.66			9,934		$	57.18			9,934		$	57.18

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 ~~$158,000~~$119,000 and ~~$142,000~~$104,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. For the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, compensation expense totaled ~~$54,000~~$63,000 and ~~$50,000,~~$54,000, respectively. At ~~September~~June 30, ~~2017,~~2018, the total compensation cost related to nonvested awards that has not yet been recognized was ~~$464,000,~~$568,000, which is expected to be recognized over the next 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 September 30, 2017 and December 31, 2016, an obligation of $1,544,000 and $1,460,000, respectively, was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to this plan totaled $84,000 and $91,000 for the nine months ended September 30, 2017 and 2016, respectively. ~~For the three months ended September 30, 2017 and 2016, expenses totaled $28,000 and $30,000, respectively.~~

2123

~~Salary Continuation Plan~~

The Company maintains a salary continuation plan for certain employees retained through the acquisition of FNB or that were formerly employed by FNB. At September 30, 2017 and December 31 2016, an obligation of $720,000 was included in other liabilities for this plan in the Consolidated Balance Sheet. Expenses related to this plan totaled $13,000 and $17,000 for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, expenses related to this plan totaled $40,000 and $49,000, 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 $576,000 and $569,000 as of September 30, 2017 and December 31, 2016, respectively, which is included in other liabilities in the Consolidated Balance Sheet.

Note 10 – Accumulated Comprehensive ~~Income (Loss)~~Loss

The following tables present the changes in accumulated other comprehensive ~~income (loss)~~loss by component net of tax for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):

Three months ended September 30, 2017
Unrealized gain (loss) on available for sale securities (a)
Defined Benefit Pension Items
(a)
Total
Balance as of June 30, 2017 $ 1,655 $ (2,624 ) $ (969 )
Other comprehensive loss before reclassifications (net of tax) (190 ) - (190 )
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax) (6 ) 37 31
Net current period other comprehensive income (loss) (196 ) 37 (159 )
Balance as of September 30, 2017 $ 1,459 $ (2,587 ) $ (1,128 )

Nine months ended September 30, 2017
Unrealized gain (loss) on available for sale securities (a) Defined Benefit Pension Items (a) Total
Balance as of December 31, 2016 $ 1,306 $ (2,698 ) $ (1,392 )
Other comprehensive income before reclassifications (net of tax) 288 - 288
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax) (135 ) 111 (24 )
Net current period other comprehensive income 153 111 264
Balance as of September 30, 2017 $ 1,459 $ (2,587 ) $ (1,128 )

Three months ended September 30, 2016

Unrealized gain (loss)
on available for sale securities (a)

Defined Benefit
Pension Items
(a)
Total
Balance as of June 30, 2016 $ 4,403 $ (2,361 ) $ 2,042
Other comprehensive loss before reclassifications (net of tax) (692 ) - (692 )
Amounts reclassified from accumulated other
comprehensive income (net of tax) - 40 40
Net current period other comprehensive income (loss) (692 ) 40 (652 )
Balance as of September 30, 2016 $ 3,711 $ (2,321 ) $ 1,390

	Nine months ended September 30, 2016									Six months ended June 30, 2018
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total			Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2015	$	2,204		$	(2,440	)	$	(236	)
Balance as of December 31, 2017										$	(269	)	$	(3,129	)	$	(3,398	)
Change in Accounting policy for equity securities											1			-			1
Other comprehensive loss before reclassifications (net of tax)											(2,034	)		-			(2,034	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)											-			74			74
Net current period other comprehensive loss											(2,034	)		74			(1,960	)
Balance as of June 30, 2018										$	(2,302	)	$	(3,055	)	$	(5,357	)

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

										Three months ended June 30, 2018
										Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of March 31, 2018										$	(1,885	)	$	(3,092	)	$	(4,977	)
Other comprehensive loss before reclassifications (net of tax)											(417	)		-			(417	)
Amounts reclassified from accumulated other
comprehensive loss (net of tax)											-			37			37
Net current period other comprehensive income (loss)											(417	)		37			(380	)
Balance as of June 30, 2018										$	(2,302	)	$	(3,055	)	$	(5,357	)

										Three months ended June 30, 2017
										Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of March 31, 2017										$	1,238		$	(2,659	)	$	(1,421	)
Other comprehensive income before reclassifications (net of tax)		1,609			-			1,609			432			-			432
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(102	)		119			17			(15	)		35			20
Net current period other comprehensive income		1,507			119			1,626
Balance as of September 30, 2016	$	3,711		$	(2,321	)	$	1,390
Net current period other comprehensive income (loss)											417			35			452	��
Balance as of June 30, 2017										$	1,655		$	(2,624	)	$	(969	)

(a) Amounts in parentheses indicate debits on the Consolidated Balalance Sheet

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (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 September 30,
2017 2016
Unrealized gains and losses on available for sale securities
$ 9 $ - Investment securities gains, net
(3 ) - Provision for income taxes
$ 6 $ -

Defined benefit pension items
$ (56 ) $ (61 ) Salaries and employee benefits
19 21 Provision for income taxes
$ (37 ) $ (40 )

Total reclassifications $ (31 ) $ (40 )

Nine Months Ended September 30,
2017 2016
Unrealized gains and losses on available for sale securities
$ 204 $ 155 Investment securities gains, net
(69 ) (53 ) Provision for income taxes
$ 135 $ 102

Defined benefit pension items
$ (168 ) $ (181 ) Salaries and employee benefits
57 62 Provision for income taxes
$ (111 ) $ (119 )

Total reclassifications $ 24 $ (17 )

2324

Details about accumulated other comprehensive income (loss)	Amount reclassified from accumulated comprehensive income (loss) (a)						Affected line item in the Consolidated Statement of Income
	Three Months Ended June 30,
	2018			2017
Unrealized gains and losses on available for sale securities
	$	-		$	23		Available for sale securities gains, net
		-			(8	)	Provision for income taxes
	$	-		$	15		Net of tax

Defined benefit pension items
	$	(47	)	$	(52	)	Salaries and employee benefits
		10			17		Provision for income taxes
	$	(37	)	$	(35	)	Net of tax

Total reclassifications	$	(37	)	$	(20	)

	Six Months Ended June 30
		2018			2017
Unrealized gains and losses on available for sale securities
	$	-		$	195		Available for sale securities gains, net
		-			(66	)	Provision for income taxes
	$	-		$	129		Net of tax

Defined benefit pension items
	$	(93	)	$	(112	)	Salaries and employee benefits
		19			38		Provision for income taxes
	$	(74	)	$	(74	)	Net of tax

Total reclassifications	$	(74	)	$	55

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

Note 11 – 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~~Assets and Liabilities Required to be Measured at Fair Value on a Recurring Basis

The fair values of equity securities and 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 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, 2018	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities in financial institutions	$	195	$	-	$	-	$	195
Available for sale securities:
U.S. Agency securities		-		101,988		-		101,988
U.S. Treasury securities		32,992		-		-		32,992
Obligations of state and
political subdivisions		-		67,872		-		67,872
Corporate obligations		-		3,023		-		3,023
Mortgage-backed securities in
government sponsored entities		-		44,150		-		44,150

September 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 $ - $ 132,551 $ - $ 132,551
     Obligations of state and
        political subdivisions - 81,723 - 81,723
     Corporate obligations - 3,101 - 3,101
     Mortgage-backed securities in
       government sponsored entities - 44,277 - 44,277
     Equity securities in financial institutions 1,936 - - 1,936

December 31, 2016	Level I		Level II		Level III		Total
December 31, 2017									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
Available for sale securities:
U.S. Agency securities									$	-	$	98,887	$	-	$	98,887
U.S. Treasuries securities										28,604		-		-		28,604
Obligations of state and
political subdivisions		-		96,926		-		96,926		-		79,090		-		79,090
Corporate obligations		-		3,050		-		3,050		-		3,083		-		3,083
Mortgage-backed securities in
government sponsored entities		-		37,728		-		37,728		-		45,027		-		45,027
Equity securities in financial institutions		2,899		-		-		2,899		91		-		-		91

~~Financial Instruments, Non-Financial~~ Assets and ~~Non-Financial~~ Liabilities ~~Recorded~~Required to be Measured and Reported 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 2017 and 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 are included in the table below (in thousands):

September 30, 2017 Level I Level II Level III Total
Impaired Loans $ - $ - $ 3,024 $ 3,024
Other real estate owned - - 1,478 1,478

December 31, 2016
Impaired Loans $ - $ - $ 2,033 $ 2,033
Other real estate owned - - 839 839

2526

June 30, 2018	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	3,470	$	3,470
Other real estate owned		-		-		326		326

December 31, 2017
Impaired Loans	$	-	$	-	$	1,569	$	1,569
Other real estate owned		-		-		1,024		1,024

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 currently being carried at its fair value. The fair values above excluded estimated selling costs of ~~$246,000~~$304,000 and ~~$188,000~~$163,000 at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value less estimated costs to sell, 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 a 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 III techniques (dollars in thousands).

September 30, 2017 Fair Value Valuation Technique(s) Unobservable input Range Weighted average
Impaired Loans $ 3,024 Appraised Collateral Values Discount for time since appraisal 0-100% 21.22%
Selling costs 5%-9% 7.13%
Holding period 0 - 24 months 8.31 months

Other real estate owned 1,478 Appraised Collateral Values Discount for time since appraisal 12-47% 22.32%

December 31, 2016	Fair Value		Valuation Technique(s)	Unobservable input	Range		Weighted average
June 30, 2018									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%	$	3,470	Appraised Collateral Values	Discount for time since appraisal		0-100%		27.32	%
				Selling costs		5%-9%		7.56%				Selling costs		5%-11%		7.88	%
				Holding period	6 - 12 months		11 months					Holding period	0 - 12 months		11.4 months

Other real estate owned		839	Appraised Collateral Values	Discount for time since appraisal		10-67%		25.45%		326	Appraised Collateral Values	Discount for time since appraisal		25-35%		27.45	%

December 31, 2017									Fair Value		Valuation Technique(s)	Unobservable input	Range
Impaired Loans										1,569	Appraised Collateral Values	Discount for time since appraisal		0-100%		30.83	%
												Selling costs		5%-9%		8.35	%
												Holding period	6 - 12 months		11 months

Other real estate owned										1,024	Appraised Collateral Values	Discount for time since appraisal		15-65%		26.26	%

2627

Financial Instruments Not Required to be Measured or Reported at Fair Value

The carrying amount and fair ~~values~~value of the Company's financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows (in thousands):

	Carrying										Carrying
September 30, 2017	Amount		Fair Value		Level I		Level II		Level III
June 30, 2018											Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Cash and due from banks	$	13,815	$	13,815	$	13,815	$	-	$	-	$	15,613	$	15,613	$	15,613	$	-	$	-
Interest bearing time deposits with other banks		10,031		10,038		-		-		10,038		13,762		13,766		-		-		13,766
Available-for-sale securities		263,588		263,588		1,936		261,652		-
Loans held for sale		1,431		1,431		1,431		-		-		1,931		1,931		1,931		-		-
Net loans		896,715		894,706		-		-		894,706		1,028,259		1,021,166		-		-		1,021,166
Bank owned life insurance		26,722		26,722		26,722		-		-		27,189		27,189		27,189		-		-
Regulatory stock		4,884		4,884		4,884		-		-		7,220		7,220		7,220		-		-
Accrued interest receivable		3,786		3,786		3,786		-		-		4,285		4,285		4,285		-		-

Financial liabilities:
Deposits	$	1,052,105	$	1,050,362	$	792,133	$	-	$	258,229	$	1,118,592	$	1,113,001	$	847,151	$	-	$	265,850
Borrowed funds		73,628		71,965		32,960		-		39,005		133,652		132,322		96,566		-		35,756
Accrued interest payable		731		731		731		-		-		903		903		903		-		-

December 31, 2016
											Carrying
December 31, 2017											Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Cash and due from banks	$	17,754	$	17,754	$	17,754	$	-	$	-	$	18,517	$	18,517	$	18,517	$	-	$	-
Interest bearing time deposits with other banks		6,955		6,960		-		-		6,960		10,283		10,287		-		-		10,287
Available-for-sale securities		314,017		314,017		5,899		308,118		-
Loans held for sale		1,827		1,827		1,827		-		-		1,439		1,439		1,439
Net loans		790,725		797,184		-		-		797,184		989,335		981,238		-		-		981,238
Bank owned life insurance		26,223		26,223		26,223		-		-		26,883		26,883		26,883		-		-
Regulatory stock		5,306		5,306		5,306		-		-		6,784		6,784		6,784		-		-
Accrued interest receivable		4,089		4,089		4,089		-		-		4,196		4,196		4,196		-		-

Financial liabilities:
Deposits	$	1,005,503	$	1,004,072	$	740,889	$	-	$	263,183	$	1,104,943	$	1,101,583	$	838,490	$	-	$	263,093
Borrowed funds		79,662		77,425		41,330		-		36,095		114,664		113,452		77,650		-		35,802
Accrued interest payable		720		720		720		-		-		897		897		897		-		-

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:~~

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.

~~Loans 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 1213 – Recent Accounting Pronouncements

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ (a new revenue recognition standard). The Update's core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities,~~we do not expect the~~ new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and 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 (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after
December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact toon the financial statements. Based on the Company's preliminary analysis of its current portfolio, the impact to the Company's balance sheet is estimated to result in less than a 1%1 percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

2928

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

~~In 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 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.

3029

~~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 operati~~ons.~~

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.

·	Loan concentrations in certain industries could negatively impact financial results, if financial results or economic conditions deteriorate.

·	A budget impasse in the Commonwealth of Pennsylvania could impact our asset values, liquidity and ~~profitability.~~profitability as a result of either delayed or reduced funding to school districts and municipalities who are customers of the Bank.

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 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 ~~2016~~2017 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.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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, Bradford and ~~Bradford~~Centre counties in north central Pennsylvania, ~~Union county in central Pennsylvania,~~ Lebanon, ~~Lancaster,~~ Berks, Schuylkill and ~~Schuylkill~~Lancaster counties in south central Pennsylvania and Allegany ~~county~~County in southern New York. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural customers in the central Pennsylvania market. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 2829 banking facilities, 2628 of which operate as bank branches. In Pennsylvania, ~~these~~the Company has full service 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, State College and three branches near the city of Lebanon, Pennsylvania. We also have limited branch offices in Winfield and Narvon, Pennsylvania. In New York, our office is in Wellsville. We have a limited branch office in Winfield, Pennsylvania, which primarily serves agricultural customers in the central Pennsylvania market. We also have a limited branch office in Narvon, Pennsylvania to further serve customers in Lancaster County.

On ~~July 27,~~December 8, 2017, we ~~entered into a definitive agreement~~closed the transaction with S&T Bank to acquire its State College, Pennsylvania office. ~~Regulatory approval was received in the fourth quarter of 2017 and the deal is expected to close in the fourth quarter of 2017.~~

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.~~information, including fraudulent activity outside the Company's control. 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 and compliance 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.

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. 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 markets, we experience more competition to gather deposits and to make ~~loans than in our north central Pennsylvania market.~~loans. 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 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 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Trust Department had ~~$116.3~~$122.2 million and ~~$110.6~~$122.7 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 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 from ~~$137.4~~$156.0 million at December 31, ~~2016~~2017 to ~~$142.4~~$165.7 million at ~~September~~June 30, ~~2017.~~2018. 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 south central Pennsylvania markets.

In addition to traditional trust and investment services offered, we 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 ~~September~~June 30, ~~2017,~~2018, customers owning 7,012 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 ~~$10,421,000~~$8,938,000 for the first ~~nine~~six months of ~~2017~~2018 compared to ~~$9,467,000~~$6,771,000 for last year's comparable period, an increase of ~~$954,000,~~$2,167,000, or ~~10.1%~~32.0%. Basic earnings per share for the first ~~nine~~six months of ~~2017~~2018 were ~~$2.99,~~$2.55, compared to ~~$2.70~~$1.93 last year, representing a ~~10.7%~~32.1% increase. Annualized return on assets and return on equity for the ~~nine~~six months of ~~2017~~2018 were ~~1.12%~~1.29% and ~~10.81%~~13.15%, respectively, compared with ~~1.06%~~1.10% and ~~10.28%~~10.63% for last year's comparable period.

Net income for the three months ended ~~September~~June 30, ~~2017~~2018 was ~~$3,650,000~~$4,691,000 compared to ~~$3,153,000~~$3,468,000 in the comparable ~~2016~~2017 period, an increase of ~~$497,000~~$1,223,000 or ~~15.8%~~35.3%. Basic earnings per share for the three months ended ~~September~~June 30, ~~2017~~2018 were ~~$1.05,~~$1.34, compared to ~~$0.90~~$0.99 last year, representing a ~~16.7%~~35.4% increase. Annualized return on assets and return on equity for the quarter ended ~~September~~June 30, ~~2017~~2018 was ~~1.15%~~1.34% and ~~11.16%~~13.68%, respectively, compared with ~~1.06%~~1.12% and ~~10.18%~~10.80% for the same ~~2016~~2017 period.

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 ~~nine~~six months of ~~2017~~2018 was ~~$31,018,000,~~$23,171,000, an increase of ~~$2,930,000,~~$2,770,000, or ~~10.4%~~13.6%, compared to the same period in ~~2016.~~2017. For the first ~~nine~~six months of ~~2017,~~2018, the provision for loan losses totaled ~~$1,740,000, an increase~~$825,000, a decrease of ~~$970,000~~$415,000 over the comparable period in ~~2016.~~2017. Consequently, net interest income after the provision for loan losses was ~~$29,278,000~~$22,346,000 compared to ~~$27,318,000~~$19,161,000 during the first ~~nine~~six months of ~~2016.~~2017.

For the three months ended ~~September~~June 30, ~~2017,~~2018, net interest income was ~~$10,617,000~~$11,751,000 compared to ~~$9,712,000,~~$10,404,000, an increase of ~~$905,000,~~$1,347,000, or ~~9.3%~~13.0% over the comparable period in ~~2016.~~2017. The provision for loan losses this quarter was ~~$500,000~~$325,000 compared to $625,000 for ~~both the 2017 and 2016 quarters ended September 30.~~last year's second quarter. Consequently, net interest income after the provision for loan losses was ~~$10,117,000~~$11,426,000 for the quarter ended ~~September~~June 30, ~~2017~~2018 compared to ~~$9,212,000~~$9,779,000 in ~~2016.~~2017.

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 ~~nine months~~six and three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 on a tax equivalent basis (dollars in thousands):

3533

		Analysis of Average Balances and Interest Rates (1)															Analysis of Average Balances and Interest Rates (1)
		Nine Months Ended															Six Months Ended
		September 30, 2017							September 30, 2016								June 30, 2018							June 30, 2017
		Average				Average			Average				Average				Average				Average			Average				Average
		Balance (1)		Interest		Rate			Balance (1)		Interest		Rate				Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)		$				$	%		$				$	%			$				$	%		$				$	%
ASSETS
Short-term investments:
Interest-bearing deposits at banks			8,919		12		0.18			27,765		81		0.39				8,609		9		0.21			9,106		9		0.20
Total short-term investments			8,919		12		0.18			27,765		81		0.39				8,609		9		0.21			9,106		9		0.20
Interest bearing time deposits at banks			7,740		117		2.03			7,326		105		1.91				10,753		115		2.16			7,123		71		2.01
Investment securities:
Taxable			197,814		2,532		1.71			259,172		3,004		1.55				187,650		1,965		2.09			202,316		1,708		1.69
Tax-exempt (3)			86,033		2,813		4.36			100,594		3,423		4.54				71,775		1,267		3.53			87,491		1,922		4.39
Total investment securities			283,847		5,345		2.51			359,766		6,427		2.38				259,425		3,232		2.49			289,807		3,630		2.51
Loans:
Residential mortgage loans			205,860		7,967		5.17			203,387		8,038		5.28				214,766		5,538		5.20			206,018		5,291		5.18
Construction			26,804		851		4.25			12,304		471		5.11				20,523		474		4.66			27,198		574		4.25
Commercial & agricultural loans			524,088		19,155		4.89			380,190		15,004		5.27
Commercial Loans																		390,068		10,175		5.26			322,012		8,392		5.26
Agricultural Loans																		291,030		6,324		4.38			185,160		3,966		4.32
Loans to state & political subdivisions			97,139		3,055		4.21			102,583		3,250		4.23				101,891		1,788		3.54			96,818		2,026		4.22
Other loans			10,403		621		7.98			11,075		682		8.23				9,500		368		7.81			10,394		415		8.04
Loans, net of discount (2)(3)(4)			864,294		31,649		4.90			709,539		27,445		5.17				1,027,778		24,667		4.84			847,600		20,664		4.92
Total interest-earning assets			1,164,800		37,123		4.26			1,104,396		34,058		4.12				1,306,565		28,023		4.33			1,153,636		24,374		4.26
Cash and due from banks			6,650							7,431								6,717							6,604
Bank premises and equipment			16,871							17,249								16,418							16,947
Other assets			55,874							57,653								54,590							55,850
Total non-interest earning assets			79,395							82,333								77,725							79,401
Total assets			1,244,195							1,186,729								1,384,290							1,233,037
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY															LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts			322,084		829		0.34			301,885		687		0.30				328,256		733		0.45			319,387		534		0.34
Savings accounts			178,806		141		0.11			173,108		139		0.11				187,361		101		0.11			177,746		92		0.10
Money market accounts			126,874		469		0.49			118,252		392		0.44				153,345		610		0.80			122,943		290		0.48
Certificates of deposit			262,321		1,959		1.00			273,007		1,976		0.97				267,407		1,457		1.10			261,942		1,272		0.98
Total interest-bearing deposits			890,085		3,398		0.51			866,252		3,194		0.49				936,369		2,901		0.62			882,018		2,188		0.50
Other borrowed funds			58,651		782		1.78			39,801		554		1.86				132,179		1,339		2.04			57,348		489		1.72
Total interest-bearing liabilities			948,736		4,180		0.59			906,053		3,748		0.55				1,068,548		4,240		0.80			939,366		2,677		0.57
Demand deposits			152,188							145,663								167,255							151,396
Other liabilities			14,686							12,258								12,577							14,846
Total non-interest-bearing liabilities			166,874							157,921								179,832							166,242
Stockholders' equity			128,585							122,755								135,910							127,429
Total liabilities & stockholders' equity			1,244,195							1,186,729								1,384,290							1,233,037
Net interest income					32,943							30,310								23,783							21,697
Net interest spread (5)							3.67	%						3.57	%							3.53	%						3.69	%
Net interest income as a percentage
of average interest-earning assets							3.78	%						3.67	%							3.67	%						3.79	%
Ratio of interest-earning assets
to interest-bearing liabilities							123	%						122	%							122	%						123	%

(1) Averages are based on daily averages.	(1) Averages are based on daily averages.															(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees.	(2) Includes loan origination and commitment fees.															(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using	(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using															(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
a statutory federal income tax rate of 34%.
a statutory federal income tax rate of 21% for 2018 and 34% for 2017.																a statutory federal income tax rate of 21% for 2018 and 34% for 2017.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.	(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.															(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	(5) Interest rate spread represents the difference between the average rate earned on 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.	and the average rate paid on interest-bearing liabilities.															and the average rate paid on interest-bearing liabilities.

3634

		Analysis of Average Balances and Interest Rates (1)															Analysis of Average Balances and Interest Rates (1)
		Three Months Ended															Three Months Ended
		September 30, 2017							September 30, 2016								June 30, 2018							June 30, 2017
		Average				Average			Average				Average				Average				Average			Average				Average
		Balance (1)		Interest		Rate			Balance (1)		Interest		Rate				Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)		$				$	%		$				$	%			$				$	%		$				$	%
ASSETS
Short-term investments:
Interest-bearing deposits at banks			8,552		3		0.16			17,864		16		0.36				9,112		4		0.18			10,552		7		0.23
Total short-term investments			8,552		3		0.16			17,864		16		0.36				9,112		4		0.18			10,552		7		0.23
Interest bearing time deposits at banks			8,953		47		2.07			6,956		34		1.92				11,191		62		2.19			7,374		38		2.03
Investment securities:
Taxable			180,004		824		1.83			244,044		961		1.58				180,905		1,028		2.27			186,983		828		1.77
Tax-exempt (3)			83,164		891		4.29			100,255		1,110		4.43				68,301		600		3.51			84,235		909		4.32
Total investment securities			263,168		1,715		2.61			344,299		2,071		2.41				249,206		1,628		2.61			271,218		1,737		2.56
Loans:
Residential mortgage loans			205,548		2,677		5.17			204,522		2,702		5.26				214,932		2,814		5.25			206,057		2,657		5.17
Construction			26,028		278		4.23			14,396		185		5.11				23,349		273		4.69			26,258		269		4.12
Commercial & agricultural loans			557,393		6,797		4.84			398,318		5,377		5.37
Commercial Loans																		391,935		5,197		5.32			327,924		4,326		5.29
Agricultural Loans																		298,266		3,286		4.42			200,865		2,153		4.30
Loans to state & political subdivisions			97,771		1,029		4.18			100,359		1,048		4.16				99,301		873		3.53			96,461		1,014		4.22
Other loans			10,420		205		7.83			11,021		233		8.41				9,494		184		7.82			10,294		206		8.03
Loans, net of discount (2)(3)(4)			897,160		10,986		4.86			728,616		9,545		5.21				1,037,277		12,627		4.88			867,859		10,625		4.91
Total interest-earning assets			1,177,833		12,751		4.30			1,097,735		11,666		4.23				1,306,786		14,321		4.40			1,157,003		12,407		4.30
Cash and due from banks			6,739							7,587								6,529							6,538
Bank premises and equipment			16,722							17,220								16,356							16,888
Other assets			64,851							65,369								65,473							62,907
Total non-interest earning assets			88,312							90,176								88,358							86,333
Total assets			1,266,145							1,187,911								1,395,144							1,243,336
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY															LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts			327,391		295		0.36			299,091		219		0.29				330,550		404		0.49			328,055		294		0.36
Savings accounts			180,891		49		0.11			171,064		46		0.11				189,457		51		0.11			180,042		47		0.10
Money market accounts			134,610		178		0.53			125,718		136		0.43				160,719		365		0.91			128,931		160		0.50
Certificates of deposit			263,065		688		1.04			267,235		647		0.96				268,526		765		1.14			261,368		642		0.98
Total interest-bearing deposits			905,957		1,210		0.53			863,108		1,048		0.48				949,252		1,585		0.67			898,396		1,143		0.51
Other borrowed funds			61,215		293		1.90			40,397		188		1.85				125,815		692		2.21			45,969		231		2.02
Total interest-bearing liabilities			967,172		1,503		0.62			903,505		1,236		0.54				1,075,067		2,277		0.85			944,365		1,374		0.58
Demand deposits			153,747							148,563								170,287							155,724
Other liabilities			14,388							11,803								12,617							14,820
Total non-interest-bearing liabilities			168,135							160,366								182,904							170,544
Stockholders' equity			130,838							124,040								137,173							128,427
Total liabilities & stockholders' equity			1,266,145							1,187,911								1,395,144							1,243,336
Net interest income					11,248							10,430								12,044							11,033
Net interest spread (5)							3.68	%						3.69	%							3.55	%						3.72	%
Net interest income as a percentage
of average interest-earning assets							3.79	%						3.78	%							3.70	%						3.82	%
Ratio of interest-earning assets
to interest-bearing liabilities							122	%						121	%							122	%						123	%

(1) Averages are based on daily averages.	(1) Averages are based on daily averages.															(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees.	(2) Includes loan origination and commitment fees.															(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using	(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using															(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
a statutory federal income tax rate of 34%.
a statutory federal income tax rate of 21% for 2018 and 34% for 2017.																a statutory federal income tax rate of 21% for 2018 and 34% for 2017.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.	(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.															(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	(5) Interest rate spread represents the difference between the average rate earned on 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.	and the average rate paid on interest-bearing liabilities.															and the average rate paid on interest-bearing liabilities.

Tax exempt revenue is shown on a tax-equivalent basis for proper comparison using a statutory, federal income tax rate of 21% for the six and three months ended June 30, 2018 and 34%. for the six and three months ended June 30, 2017. For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company's ~~34%~~ Federal statutory ~~rate.~~rate during the corresponding period. The following table represents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended ~~September~~June 30, 2018 and 2017 ~~and 2016(in~~(in thousands):

3735

	For the Three Months				For the Nine Months				For the Three Months				For the Six Months
	Ended September 30,				Ended September 30,				Ended June 30,				Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Interest and dividend income from investment securities
and interest bearing deposits at banks (non-tax adjusted)	$	1,461	$	1,744	$	4,518	$	5,449	$	1,567	$	1,474	$	3,089	$	3,057
Tax equivalent adjustment		304		377		956		1,164		127		308		267		653
Interest and dividend income from investment securities
and interest bearing deposits at banks (tax equivalent basis)	$	1,765	$	2,121	$	5,474	$	6,613	$	1,694	$	1,782	$	3,356	$	3,710



Interest and fees on loans (non-tax adjusted)	$	10,659	$	9,204	$	30,680	$	26,387	$	12,461	$	10,304	$	24,322	$	20,021
Tax equivalent adjustment		327		341		969		1,058		166		321		345		643
Interest and fees on loans (tax equivalent basis)	$	10,986	$	9,545	$	31,649	$	27,445	$	12,627	$	10,625	$	24,667	$	20,664



Total interest income	$	12,120	$	10,948	$	35,198	$	31,836	$	14,028	$	11,778	$	27,411	$	23,078
Total interest expense		1,503		1,236		4,180		3,748		2,277		1,374		4,240		2,677
Net interest income		10,617		9,712		31,018		28,088		11,751		10,404		23,171		20,401
Total tax equivalent adjustment		631		718		1,925		2,222		293		629		612		1,296
Net interest income (tax equivalent basis)	$	11,248	$	10,430	$	32,943	$	30,310	$	12,044	$	11,033	$	23,783	$	21,697

The following table shows the tax-equivalent effect of changes in volume and rate on interest income and expense (in thousands):

Three months ended September 30, 2017 vs 2016 (1) Nine months ended September 30, 2017 vs. 2016 (1)
Change in Change Total Change in Change Total
Volume in Rate Change Volume in Rate Change
Interest Income:
Short-term investments:
  Interest-bearing deposits at banks $ (7 ) $ (6 ) $ (13 ) $ (39 ) $ (30 ) $ (69 )
Interest bearing time deposits at banks 10 3 13 6 6 12
Investment securities:
  Taxable (360 ) 223 (137 ) (844 ) 372 (472 )
  Tax-exempt (184 ) (35 ) (219 ) (480 ) (130 ) (610 )
Total investments (544 ) 188 (356 ) (1,324 ) 242 (1,082 )
Loans:
  Residential mortgage loans 21 (46 ) (25 ) 94 (165 ) (71 )
  Construction 118 (25 ) 93 444 (64 ) 380
  Commercial & agricultural loans 1,884 (464 ) 1,420 5,147 (996 ) 4,151
  Loans to state & political subdivisions (24 ) 5 (19 ) (174 ) (21 ) (195 )
  Other loans (11 ) (17 ) (28 ) (41 ) (20 ) (61 )
Total loans, net of discount 1,988 (547 ) 1,441 5,470 (1,266 ) 4,204
Total Interest Income 1,447 (362 ) 1,085 4,113 (1,048 ) 3,065
Interest Expense:
Interest-bearing deposits:
  NOW accounts 23 53 76 48 94 142
  Savings accounts 3 - 3 5 (3 ) 2
  Money Market accounts 11 31 42 30 47 77
  Certificates of deposit (8 ) 49 41 (94 ) 77 (17 )
Total interest-bearing deposits 29 133 162 (11 ) 215 204
Other borrowed funds 100 5 105 250 (22 ) 228
Total interest expense 129 138 267 239 193 432
Net interest income $ 1,318 $ (500 ) $ 818 $ 3,874 $ (1,241 ) $ 2,633

(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.

	Three months ended June 30, 2018 vs 2017 (1)									Six months ended June 30, 2018 vs. 2017 (1)
	Change in			Change			Total			Change in			Change			Total
	Volume			in Rate			Change			Volume			in Rate			Change
Interest Income:
Short-term investments:
Interest-bearing deposits at banks	$	(2	)	$	(1	)	$	(3	)	$	-		$	-		$	-
Interest bearing time deposits at banks		20			4			24			39			5			44
Investment securities:
Taxable		(26	)		226			200			(111	)		368			257
Tax-exempt		(156	)		(153	)		(309	)		(313	)		(342	)		(655	)
Total investments		(182	)		73			(109	)		(424	)		26			(398	)
Loans:
Residential mortgage loans		115			42			157			226			21			247
Construction		(12	)		16			4			(163	)		63			(100	)
Commercial Loans		848			23			871			1,775			8			1,783
Agricultural Loans		1,071			62			1,133			2,300			58			2,358
Loans to state & political subdivisions		31			(172	)		(141	)		115			(353	)		(238	)
Other loans		(16	)		(6	)		(22	)		(35	)		(12	)		(47	)
Total loans, net of discount		2,037			(35	)		2,002			4,218			(215	)		4,003
Total Interest Income		1,873			41			1,914			3,833			(184	)		3,649
Interest Expense:
Interest-bearing deposits:
NOW accounts		2			108			110			15			184			199
Savings accounts		3			1			4			5			4			9
Money Market accounts		47			158			205			85			235			320
Certificates of deposit		18			105			123			27			158			185
Total interest-bearing deposits		70			372			442			132			581			713
Other borrowed funds		437			24			461			743			107			850
Total interest expense		507			396			903			875			688			1,563
Net interest income	$	1,366		$	(355	)	$	1,011		$	2,958		$	(872	)	$	2,086

(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.

Tax equivalent net interest income increased from ~~$30,310,000~~$21,697,000 for the ~~nine~~six month period ended ~~September~~June 30, ~~2016~~2017 to ~~$32,943,000~~$23,783,000 for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2018, an increase of ~~$2,633,000.~~$2,086,000. The tax equivalent net interest margin ~~increased~~decreased from ~~3.67%~~3.79% for the first ~~nine~~six months of ~~2016~~2017 to ~~3.78%~~3.67% for the comparable period in 2017. A significant portion of the decrease is attributable to a change in the corporate tax rate from 34% to 21%, which resulted in the tax equivalent yield on our tax-exempt investments and loans to decrease.

3836

Total tax equivalent interest income for the ~~2017 nine~~2018 six month period increased ~~$3,065,000~~$3,649,000 as compared to the ~~2016 nine~~2017 six month period. This increase was primarily a result of an increase of ~~$4,113,000~~$3,833,000 due to a change in volume as average interest-bearing assets increased ~~$60.4~~$152.9 million. This increase was offset by a decrease of ~~$1,048,000~~$184,000 as a result of a decrease in the average yield on loans of 278 basis points from ~~5.17%~~4.92% to ~~4.90%~~4.84% for the comparable periods. As a result of converting investment assets to loans, the yield on average interest earning assets increased 147 basis points from ~~4.12%~~4.26% to ~~4.26%~~4.33%.

Tax equivalent investment income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 decreased ~~$1,082,000~~$398,000 over the same period last year. The primary cause of the decrease was a decrease in the average outstanding balance of investments.

The average balance of taxable securities decreased by ~~$61.4~~$14.7 million, which resulted in a decrease in investment income of ~~$844,000.~~$111,000. The decrease in the average balance of taxable securities was due to the Bank's strategy of funding loan growth through the cashflows of the investment portfolio. The yield on taxable securities increased 1640 basis points from ~~1.55%~~1.69% to ~~1.71%~~2.09% as a result of the recent rise in rates and the calls and maturities of lower yielding investments. This resulted in an increase in investment income of ~~$372,000.~~$368,000.

The average balance of tax-exempt securities decreased by ~~$14.6~~$15.7 million, which resulted in a decrease in investment income of ~~$480,000.~~$313,000. The yield on tax-exempt securities decreased 1886 basis points from ~~4.54%~~4.39% to ~~4.36%~~3.53%, which corresponds to a decrease in interest income of ~~$130,000.~~$342,000. The yield decrease was ~~due~~partially attributable to the decrease in the federal statutory income tax rate as well as higher yielding securities being called and maturing and either being replaced by lower yielding securities or not replaced and utilized to fund loan growth. For a discussion of the Company's current investment strategy, see the "Financial Condition – Investments".

Total loan interest income increased ~~$4,204,000~~$4,003,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to the same period last year, primarily as a result of loan growth achieved inthroughout 2017 and the ~~last~~first half of ~~2016 and throughout 2017~~2018 that was primarily due to the hiring of experienced lending teams in our central and south central Pennsylvania markets. It was also positively impacted by the acquisition of the State College branch in December of 2017.

The average balance of commercial ~~and agricultural~~ loans increased ~~$143.9~~$68.1 million from a year ago. The growth was attributable to the State College branch acquisition and organic growth in our central and south central Pennsylvania markets. This had a positive impact of ~~$5,147,000~~$1,775,000 on total interest income due to volume. ~~Offsetting this~~

Interest income on agricultural loans increased $2,358,000 from 2017 to 2018. The increase ~~there was a $996,000 decrease due~~in the average balance of agricultural loans of $105.9 million is primarily attributable to ~~rate, as~~ the ~~yield earned decreased from 5.27%~~additional agricultural lenders hired in 2016 to ~~4.89%. The lending teams were able to grow our agricultural and commercial loan portfolios by originating loans to new customers of the Bank in~~serve the central and south central ~~Pennsylvania~~ markets. The increase in the average balance of these loans resulted in an increase in interest income due to volume of $2,300,000.

The average balance of construction loans ~~increased $14.5~~decreased $6.7 million from a year ago. This ~~had~~resulted in a ~~positive impact~~decrease of ~~$444,000~~$163,000 on total interest income due to volume. Offsetting this ~~increase,~~decrease, there was a ~~$64,000 decrease~~$63,000 increase due to rate, as the yield earned ~~decreased~~increased from ~~5.11%~~4.25% to ~~4.25%~~4.66%.

The average balance of state and political subdivision loans ~~decreased $5.4~~increased $5.1 million from a year ago. This resulted in ~~decrease~~an increase of ~~$174,000~~$115,000 on total interest income due to volume. ~~In addition, the~~The yield decreased 268 basis points to ~~4.21%~~3.54%, which decreased loan interest income ~~$21,000.~~$353,000. The decrease in the yield on this portfolio iswas mostly due to ~~fewer opportunities~~the decrease in the Federal statutory income tax rate from 2017 to ~~loan to municipalities in 2017.~~2018.

·	Interest income on residential mortgage loans increased $247,000. The average balance of residential loans increased $8.7 million from a year ago, which resulted in an increase in loan interest income of $226,000.

Total interest expense increased ~~$432,000~~$1,563,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared with the comparative period last year primarily as a result of an increase in borrowings to fund loan growth in ~~the latter half of 2016~~2017 and ~~the first half of 2017~~2018 and higher rates paid on ~~deposits.~~deposits and overnight borrowings. Interest expense increased ~~$239,000~~$875,000 as a result of volume as the average balance of interest bearing liabilities increased ~~$42.7~~$129.2 million. In addition, there was an increase of ~~$193,000~~$688,000 due to rate as a result of an increase in the average rate paid on interest bearing liabilities from ~~0.55%~~0.57% to ~~0.59%~~0.80%. ~~A portion of the Bank's loan growth was funded through overnight borrowings, which resulted in the lowering of the rate paid on borrowed funds.~~

The average balance of interest bearing deposits increased ~~$23.8~~$54.4 million from ~~September~~June 30, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. Increases were experienced in NOW accounts of ~~$20.2~~$8.9 million, savings accounts of ~~$5.7~~$9.6 million, ~~and~~ money market accounts of ~~$8.6~~$30.4 million and certificates of deposit of $5.5 million. The cumulative effect of these volume changes was an increase in interest expense of ~~$83,000. The average balance of certificates of deposit decreased $10.7 million resulting in a decrease in interest expense of $94,000.~~$132,000. (see also "Financial Condition – Deposits"). The rate paid on interest bearing deposits ~~increased 2 basis points to 0.510%~~was 0.62% for the first ~~nine~~six months of ~~2017 compared to 2016. As a result of small variances~~2018 and 0.50% for the comparable period in 2017. This resulted in an increase in interest ~~rates paid on individual products, interest~~ expense ~~on deposits increased $215,000.~~of $581,000.

The average balance of other borrowed funds increased ~~$18.9~~$74.8 million from a year ago. This resulted in an increase in interest expense of ~~$250,000.~~$743,000. There was ~~a decrease~~also an increase in the average rate on other borrowed ~~fund~~funds from ~~1.86%~~1.72% to ~~1.78%~~2.04% due to an increase in the ~~amount~~overnight borrowing rate as a result of ~~funds borrowed overnight~~the Federal Reserve interest rate increases in 2017 resulting in ~~a decrease~~an increase in interest expense of ~~$22,000.~~$107,000.

Tax equivalent net interest income for the three months ended ~~September~~June 30, ~~2017~~2018 was ~~$11,248,000~~$12,044,000 which compares to ~~$10,430,000~~$11,033,000 for the same period last year. This represents an increase of ~~$818,000~~$1,011,000 or ~~7.8%~~9.2%. The tax equivalent net interest margin ~~increased~~decreased from ~~3.78%~~3.82% for the three months ended ~~September~~June 30, ~~2016~~2017 to ~~3.79%~~3.70% for the comparable period in ~~2017.~~2018 with the majority of the decrease attributable to the decrease in the statutory income tax rate from 34% in 2017 to 21% in 2018.

Total tax equivalent interest income was ~~$12,751,000~~$14,321,000 for the three ~~months~~month period ended ~~September~~June 30, ~~2017,~~2018, compared to ~~$11,666,000~~$12,407,000 for the comparable period last year, an increase of ~~$1,085,000.~~$1,914,000. The primary driver of this increase was an increase of ~~$1,447,000~~$1,873,000 due to a change in volume as ~~interest bearing~~interest-earning assets increased ~~$80.1~~$149.8 million ~~as a result loan growth attributable~~that was primarily due to the hiring of experienced ~~loan~~lending teams ~~hired~~ in ~~2016 and 2017 in the south~~our central and south central Pennsylvania markets. ~~This increase~~It was ~~offset~~also positively impacted by ~~a decrease~~the acquisition of ~~$362,000 as a result~~the State College branch in December of ~~a decrease in~~2017. In addition, the average yield on ~~loans of 35~~interest-earning assets increased 10 basis points from ~~5.21%~~4.30% to ~~4.86%~~4.40% for the comparable ~~periods.~~periods, resulting in an increase in tax equivalent interest income of $41,000.

Total investment income decreased by ~~$356,000~~$109,000 compared to same period last year. The primary cause of the decrease was a decrease of ~~$81.1~~$22.0 million in the average outstanding balance of investment securities, which equates to a decrease of ~~$544,000 in investment income.~~$182,000. Offsetting this increase, there was a 205 point increase in rate on investments securities from ~~2.41%~~2.56% to 2.61%, which equates to a ~~$188,000~~$73,000 increase in income.

Total loan interest income increased ~~$1,441,000~~$2,002,000 compared to the same period last year. This was primarily due to an increase in volume of ~~$168.5~~$169.4 million, which corresponds to a ~~$1,988,000~~$2,037,000 increase in interest income. This was offset by a decrease in rate of 353 points from ~~5.21%~~4.91% to ~~4.86%~~4.88%, which corresponds to a decrease in loan interest income of ~~$547,000. Loan interest income for the third quarter of 2016~~$35,000. The yield on commercial loans was impacted by ~~the payoff of~~ a ~~non-accrual loan that resulted~~prepayment penalty received in the ~~recognition of $232,000 of interest income.~~second quarter that was approximately $90,000. This corresponds to 0.09% increase in rate for three months ended June 30, 2018.

Total interest expense increased ~~$267,000~~$903,000 for the three months ended ~~September~~June 30, ~~2017~~2018 compared with last year as a result of the increase in the average balance of ~~interest bearing~~interest-bearing liabilities of ~~$63.7~~$130.7 million, accounting for a ~~$129,000~~$507,000 increase in interest expense. The average rate on interest-bearing liabilities increased 827 basis points from ~~0.54%~~0.58% to ~~0.62%~~0.85%, which increased interest expense ~~$138,000.~~$396,000.

The average balance of interest bearing deposits increased $50.9 million from June 30, 2017 to June 30, 2018. The cumulative effect of these volume changes was an increase in interest expense of $70,000. The rate paid on interest bearing deposits was 0.67% for the first six months of 2018 and 0.51% for the comparable period in 2017. This results in an increase in interest expense of $372,000.

The average balance of other borrowed funds increased $80.0 million from a year ago. This resulted in an increase in interest expense of $437,000. There was also an increase in the average rate on other borrowed fund from 2.02% to 2.21% due to an increase in the overnight borrowing rate as a result of the Federal Reserve interest rate moves in 2017 resulting in an increase in interest expense of $24,000.

Provision for Loan Losses

For the ~~nine~~six month period ending ~~September~~June 30, ~~2017,~~2018, we recorded a provision for loan losses of ~~$1,740,000,~~$825,000, which represents ~~an increase~~a decrease of ~~$970,000~~$415,000 from the ~~$770,000~~$1,240,000 provision recorded in the corresponding ~~nine~~six months of last year. The provision was ~~higher~~lower in ~~2017~~2018 than ~~2016~~2017 primarily due to the loan growth that occurred in 2017 compared to the loan growth in 2018. (see "Financial Condition – Allowance for Loan Losses and Credit Quality Risk").

For the three months ~~ended September~~ending June 30, ~~2017 and 2016,~~2018, we recorded a provision of ~~$500,000. The increased provision was~~$325,000 compared to $625,000 in 2017 with the decrease for the three month period being due to the lower level of loan growth ~~that occurred~~ in ~~both~~2018 compared to the ~~2017 and 2016 third quarters.~~same period in 2017.

Non-interest Income

The following table shows the breakdown of non-interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (dollars in thousands):

	Nine months ended September 30,				Change						Six months ended June 30,				Change
	2017		2016		Amount			%			2018		2017		Amount			%
Service charges	$	3,323	$	3,345	$	(22	)		(0.7	)	$	2,274	$	2,178	$	96			4.4
Trust		596		539		57			10.6			401		409		(8	)		(2.0	)
Brokerage and insurance		459		578		(119	)		(20.6	)		349		305		44			14.4
Gains on loans sold		383		225		158			70.2			132		249		(117	)		(47.0	)
Investment securities gains, net		204		155		49			31.6
Equity security gains, net												13		-		13		NA
Available for sale security gains, net												-		195		(195	)		(100.0	)
Earnings on bank owned life insurance		499		515		(16	)		(3.1	)		306		333		(27	)		(8.1	)
Other		380		450		(70	)		(15.6	)		273		254		19			7.5
Total	$	5,844	$	5,807	$	37			0.6		$	3,748	$	3,923	$	(175	)		(4.5	)

	Three months ended September 30,				Change						Three months ended June 30,				Change
		2017		2016	Amount			%				2018		2017	Amount			%
Service charges	$	1,145	$	1,115	$	30			2.7		$	1,170	$	1,120	$	50			4.5
Trust		187		161		26			16.1			150		188		(38	)		(20.2	)
Brokerage and insurance		154		211		(57	)		(27.0	)		168		114		54			47.4
Gains on loans sold		134		109		25			22.9			60		148		(88	)		(59.5	)
Investment securities gains, net		9		-		9			N/A
Equity security gains, net												7		-		7		NA
Available for sale security gains, net												-		23		(23	)		(100.0	)
Earnings on bank owned life insurance		166		174		(8	)		(4.6	)		154		167		(13	)		(7.8	)
Other		126		138		(12	)		(8.7	)		133		128		5			3.9
Total	$	1,921	$	1,908	$	13			0.7		$	1,842	$	1,888	$	(46	)		(2.4	)

Non-interest income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 totaled ~~$5,844,000, an increase~~$3,748,000, a decrease of ~~$37,000~~$175,000 when compared to the same period in ~~2016.~~2017. During the first ~~nine~~six months of ~~2017, net investment~~2018, there were no gains or losses from the sale of available for sale securities ~~gains amounted to $204,000~~as there were no sales in 2018 compared to ~~gains of $155,000 last year. We~~a $195,000 in 2017. In 2017, we sold ~~nine~~seven agency securities for gains totaling ~~$15,000,~~$10,000, two of our equity positions for a gain of $158,000 and a mortgage backed security for a gain of $20,000. We ~~also sold 11 investments~~recognized a $13,000 increase in ~~time deposits for a gain~~the market value of $11,000. In 2016, we sold two US treasury and one agency security for gains totaling $27,000 and $48,000, respectively, as a result of market conditions at the time of the sale. We also sold four municipal securities for gains totaling $80,000our equity portfolio in ~~2016.~~2018.

For the first ~~nine~~six months of ~~2017,~~2018, account service charges totaled ~~$3,323,000, a decrease~~$2,274,000, an increase of ~~$22,000~~$96,000 or ~~0.7%~~4.4%, when compared to the same period in ~~2016.~~2017. The ~~decrease~~increase was associated with ~~an $110,000~~a $69,000 increase in interchange revenue and a $38,000 increase in ATM income. The decrease ~~attributable to fees charged to customers for non-sufficient funds. The increase~~ in gains on loans sold is due to ~~an increase~~a decrease in the amount of loans sold in ~~2017~~2018 compared to ~~2016. The decrease in other income is attributable to a decrease in loan broker commissions and merchant card fees. Trust revenues have increased as the result of estate settlement fees increasing.~~2017.

For the three month period ended ~~September~~June 30, ~~2017,~~2018, the changes experienced from the prior year related to service charges and gains on loans sold ~~trust fee and other income~~ correspond to the changes experienced for the ~~nine~~six month period. ~~Service charge~~The increase in brokerage and insurance revenues ~~increased as~~for the current period versus last year was the hiring of a ~~result of increases~~broker in ~~interchange revenue and ATM income of $32,000 and $39,000, respectively. This was offset by a~~our south central market. The decrease ~~of $33,000 attributable~~in trust revenues is due to estate fees, ~~charged to customers for non-sufficient funds.~~which were higher in 2017.

Non-interest Expense

The following tables reflect the breakdown of non-interest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (dollars in thousands):

	Nine months ended											Six months ended
	September 30,					Change						June 30,				Change
	2017		2016			Amount			%			2018		2017		Amount			%
Salaries and employee benefits	$	12,880	$	12,067		$	813			6.7		$	9,572	$	8,743	$	829			9.5
Occupancy		1,479		1,385			94			6.8			1,106		1,004		102			10.2
Furniture and equipment		444		492			(48	)		(9.8	)		264		285		(21	)		(7.4	)
Professional fees		854		836			18			2.2			557		568		(11	)		(1.9	)
FDIC insurance		295		492			(197	)		(40.0	)		207		200		7			3.5
Pennsylvania shares tax		767		630			137			21.7			600		524		76			14.5
Amortization of intangibles		223		246			(23	)	NA				150		149		1		NA
ORE expenses		343		234			109			46.6			295		172		123			71.5
Other		4,319		5,031			(712	)		(14.2	)		2,783		2,712		71			2.6
Total	$	21,604	$	21,413		$	191			0.9		$	15,534	$	14,357	$	1,177			8.2

	Three months ended											Three months ended
	September 30,					Change						June 30,				Change
		2017		2016		Amount			%				2018		2017	Amount			%
Salaries and employee benefits	$	4,237	$	4,285		$	(48	)		(1.1	)	$	4,737	$	4,377	$	360			8.2
Occupancy		475		485			(10	)		(2.1	)		514		477		37			7.8
Furniture and equipment		159		164			(5	)		(3.0	)		122		146		(24	)		(16.4	)
Professional fees		286		283			3			1.1			262		258		4			1.6
FDIC insurance		95		175			(80	)		(45.7	)		107		95		12			12.6
Pennsylvania shares tax		243		240			3			1.3			300		243		57			23.5
Amortization of intangibles		74		82			(8	)		(9.8	)		74		73		1			1.4
ORE expenses (recovery)		171		(71	)		242			(340.8	)
ORE expenses													157		82		75			91.5
Other		1,507		1,557			(50	)		(3.2	)		1,429		1,415		14			1.0
Total	$	7,247	$	7,200		$	47			0.7		$	7,702	$	7,166	$	536			7.5

Non-interest expenses increased ~~$191,000~~$1,177,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to the same period in ~~2016.~~2017. Salaries and employee benefits increased ~~$813,000~~$829,000 or ~~6.7%~~10.7%. The increase was due to merit increases effective at the beginning of ~~2017 and~~2018, an increase in the number of full-time equivalent employees of 9.0 as a result of ~~the hiring~~staffing for additional branch locations, specifically State College, and an increase in profit sharing and retirement expenses as a result of ~~the~~ additional ~~lending teams in the last three quarters of 2016.~~headcount and financial results.

The primary cause of the ~~increases~~increase in occupancy expenses ~~are~~is due to the acquisition of the State College branch and the openings of the limited branch office in ~~Winfield, Pennsylvania and the full service branch in Mount Joy,~~Narvon, Pennsylvania. The Winfield location was opened in the second quarter of 2016, while the Mount Joy location was opened in the third quarter of 2016. The increase in the Pennsylvania shares tax is due to an increase in the tax rate, an increase in Bank capital and a credit incurred in the first quarter of 2016 as a result of charitable contribution made as part of the Pennsylvania EITC program.

The decrease in other expenses is due to a decrease in charitable contributions of $93,000, a decrease of $420,000 in charges as a result of customers' accounts being compromised and experiencing fraudulent charges and a decrease of $97,000 in ATM operating expenses as a result of a vendor's contract enhancement fee.

The increase in ORE expenses is the result of legal fees associated with a ~~non-accrual loan paying off~~customer that is in ~~the third quarter of 2016, which resulted in the reimbursement of $240,000 of previously paid real estate taxes and legal fees.~~foreclosure.

For the three months ended, ~~September~~June 30, ~~2017,~~2018, non-interest expenses increased ~~$47,000~~$536,000 when compared to the same period in ~~2016.~~2017. The ~~primary driver of~~changes in salaries and employee benefits, occupancy expenses and ORE expenses for the ~~increase was~~ quarter are consistent with the ~~result of a non-accrual loan paying off in~~changes for the ~~third quarter of 2016, which resulted in the reimbursement of $240,000 of previously paid real estate taxes and legal fees.~~six month period.

Provision for Income Taxes

The provision for income taxes was ~~$3,097,000~~$1,622,000 for the ~~nine months~~six month period ended ~~September~~June 30, ~~2017~~2018 compared to ~~$2,245,000~~$1,956,000 for the same period in ~~2016.~~2017. The ~~increase~~decrease is attributable to the ~~increase~~decrease in the Federal statutory income ~~before the provision for income taxes and the~~ tax ~~credit generation period ending for one of the investments~~rate from 35% in ~~low income housing.~~2017 to 21% in 2018. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate. Our effective tax rate was ~~22.9%~~15.4% and ~~19.2%~~22.4% for the first ~~nine~~six months of ~~2017~~2018 and ~~2016,~~2017, respectively, compared to the statutory rate of 21% for 2018 and 34%. for 2017.

4240

For the three months ended ~~September~~June 30, ~~2017,~~2018, the provision for income taxes was ~~$1,141,000~~$875,000 compared to ~~$767,000~~$1,033,000 for the same period in ~~2016.~~2017. The ~~increase~~decrease is attributable to the ~~increase~~decrease in the Federal statutory income ~~before the provision for income taxes and the~~ tax ~~credit generation period ending for one of the investments in low income housing.~~rate. Our effective tax rate was ~~23.8%~~15.7% and ~~19.6%~~23.0% for the three months ended ~~September~~June 30, 2018 and 2017, ~~and 2016, respectively, compared to the statutory rate of 34%.~~respectively.

We are invested in four limited partnership agreements that have established low-income housing projects in our market areas. We anticipate recognizing an aggregate of ~~$740,000~~$634,000 of tax credits over the next ~~5.25~~4.5 years, with an additional ~~$35,000~~$70,000 anticipated to be recognized during ~~2017.~~2018.

Financial Condition

Total assets were ~~$1.27~~$1.40 billion at ~~September~~June 30, ~~2017,~~2018, an increase of ~~$46.8~~$35.7 million from ~~$1.22~~$1.36 billion at December 31, ~~2016.~~2017. Cash and cash equivalents decreased ~~$3.9~~$2.9 million to ~~$13.8~~$15.6 million. Investment securities decreased ~~$50.4~~$4.8 million and net loans increased ~~$106.0~~$38.9 million to ~~$896.7 million~~$1.0 billion at ~~September~~June 30, ~~2017.~~2018. Total deposits increased ~~$46.6~~$13.6 million to ~~$1.05~~$1.12 billion since year-end ~~2016,~~2017, while borrowed funds ~~decreased $6.0~~increased $19.0 million to ~~$73.6~~$133.7 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled ~~$13.8~~$15.6 million at ~~September~~June 30, ~~2017~~2018 compared to ~~$17.8~~$18.5 million at December 31, ~~2016,~~2017, a decrease of ~~$3.9~~$2.9 million. Management actively measures and evaluates its liquidity position through our Asset–Liability Committee and believes its liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources including the Bank's core deposits, Federal Home Loan Bank financing, federal funds lines with correspondent banks, brokered certificates of deposit and the portion of the investment and loan portfolios that mature within one year. Management expects that these sources of funds will permit us to meet cash obligations and off-balance sheet commitments as they come due.

Investments

The following table shows the composition of the investment portfolio (including debt and equity securities as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

Fair Market Value of Investment Portfolio									Fair Market Value of Investment Portfolio
	September 30, 2017				December 31, 2016					June 30, 2018						December 31, 2017
	Amount		%		Amount		%			Amount			%			Amount		%
Available-for-sale:
Debt securities:
U. S. Agency securities	$	132,551		50.3	$	170,414		54.3		$	101,988			40.8		$	98,887		38.8
U. S. Treasury notes		-		-		3,000		0.9			32,992			13.2			28,604		11.2
Obligations of state & political subdivisions		81,723		31.0		96,926		30.9			67,872			27.1			79,090		31.0
Corporate obligations		3,101		1.2		3,050		1.0			3,023			1.2			3,083		1.2
Mortgage-backed securities in
government sponsored entities		44,277		16.8		37,728		12.0			44,150			17.6			45,027		17.7
Equity securities in financial institutions		1,936		0.7		2,899		0.9
Equity securities (a)											195			0.1			91		0.1
Total	$	263,588		100.0	$	314,017		100.0		$	250,220			100.0		$	254,782		100.0

										June 30, 2018/
										December 31, 2017
										Change
										Amount			%
Debt securities:
U. S. Agency securities										$	3,101			3.1
U. S. Treasury notes											4,388			15.3
Obligations of state & political subdivisions											(11,218	)		(14.2	)
Corporate obligations											(60	)		(1.9	)
Mortgage-backed securities in
government sponsored entities											(877	)		(1.9	)
Equity securities											104			114.3
Total										$	(4,562	)		(1.8	)

4341

a.	As of January 1, 2018, the Company adopted ASU 2016-01 resulting in the reclassification of equity securities from available for sale securities to equity securities in the Consolidated Balance Sheet.

September 30, 2017/
December 31, 2016
Change
Amount %
Available-for-sale:
  U. S. Agency securities $ (37,863 ) (22.2 )
  U. S. Treasury notes (3,000 ) (100.0 )
  Obligations of state & political subdivisions (15,203 ) (15.7 )
  Corporate obligations 51 1.7
  Mortgage-backed securities in
    government sponsored entities 6,549 17.4
  Equity securities in financial institutions (963 ) (33.2 )
Total $ (50,429 ) (16.1 )

Our investment portfolio decreased by ~~$50.4~~$4.6 million, or ~~16.1%~~1.8%, from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. During ~~2017,~~2018, we purchased ~~approximately $6.0~~$5.0 million of treasury securities, $20.8 million of U.S. agency obligations, ~~$12.7~~$4.1 million of mortgage-backed securities in government sponsored entities and ~~$1.8 million~~$91,000 of ~~municipal obligations,~~equity securities, which helped offset the ~~$5.6~~$4.1 million of principal repayments and ~~$42.1~~$27.2 million of calls and maturities that occurred during the ~~nine~~six month period. ~~We also sold $22.6 million of various securities at a gain of $193,000.~~ Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 yielded ~~2.51%~~2.49%, compared to ~~2.38%~~2.51% in the comparable period in ~~2016~~2017 on a tax equivalent basis.

The investment strategy for ~~2017~~2018 has been to utilize cashflows from the investment portfolio to ~~fund the strong loan growth the Company has experienced, while maintaining a portfolio sufficient~~purchase agency and treasury securities to ~~support~~pledge against our ~~various pledging requirements for deposits, borrowings and liquidity.~~public deposits. Investment purchases have been focused on securities with short fixed maturities for agency ~~securities~~ and ~~short repricing windows for asset backed~~treasury securities. ~~We have also focused our purchases on securities with lower risk weightings due to the loan growth experienced that carries a higher risk weight for capital adequacy purposes.~~ We continually monitor interest rate trading ranges and try to focus purchases to times when rates are in the top third of the trading range. The Bank believes its investment strategy has appropriately mitigated its interest rate risk exposure if rates continue to rise, while providing sufficient cashflows to ~~fund loan growth expected as a result of the loan growth initiatives.~~meet liquidity needs.

Management continues to monitor the earnings performance and the liquidity of the investment portfolio on a regular basis. Through active balance sheet management and analysis of the securities portfolio, the Company believes it maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers.

Loans

The following table shows the composition of the loan portfolio as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

	June 30,						December 31,
	2018						2017
	Amount			%			Amount		%
Real estate:
Residential	$	213,242			20.5		$	214,479		21.4
Commercial		309,571			29.8			308,084		30.8
Agricultural		262,691			25.3			239,957		24.0
Construction		27,901			2.7			13,502		1.3
Consumer		9,740			0.9			9,944		1.0
Other commercial loans		75,002			7.2			72,013		7.2
Other agricultural loans		42,131			4.1			37,809		3.8
State & political subdivision loans		99,922			9.5			104,737		10.5
Total loans		1,040,200			100.0			1,000,525		100.0
Less allowance for loan losses		11,941						11,190
Net loans	$	1,028,259					$	989,335

	June 30, 2018/
	December 31, 2017
	Change
	Amount			%
Real estate:
Residential	$	(1,237	)		(0.6	)
Commercial		1,487			0.5
Agricultural		22,734			9.5
Construction		14,399			106.6
Consumer		(204	)		(2.1	)
Other commercial loans		2,989			4.2
Other agricultural loans		4,322			11.4
State & political subdivision loans		(4,815	)		(4.6	)
Total loans	$	39,675			4.0

4442

September 30, December 31,
2017 2016
Amount % Amount %
Real estate:
  Residential $ 206,389 22.8 $ 207,423 25.9
  Commercial 273,624 30.2 252,577 31.6
  Agricultural 207,052 22.8 123,624 15.5
  Construction 17,074 1.9 25,441 3.2
Consumer 10,784 1.2 11,005 1.4
Other commercial loans 56,222 6.2 58,639 7.3
Other agricultural loans 34,066 3.8 23,388 2.9
State & political subdivision loans 101,951 11.1 97,514 12.2
Total loans 907,162 100.0 799,611 100.0
Less allowance for loan losses 10,447 8,886
Net loans $ 896,715 $ 790,725

September 30, 2017/
December 31, 2016
Change
Amount %
Real estate:
  Residential $ (1,034 ) (0.5 )
  Commercial 21,047 8.3
  Agricultural 83,427 67.5
  Construction (8,367 ) (32.9 )
Consumer (221 ) (2.0 )
Other commercial loans (2,417 ) (4.1 )
Other agricultural loans 10,678 45.7
State & political subdivision loans 4,437 4.6
Total loans $ 107,550 13.5

The Bank's lending efforts have historically focused on north central Pennsylvania and southern New York. ~~With the~~The acquisition of FNB ~~this~~in 2015 expanded the focus ~~now includes opportunities in the~~into Lebanon, Lancaster, Schuylkill and Berks County markets ofin south central Pennsylvania. ~~In addition,~~The opening of the Winfield office in 2016 ~~we opened an office~~and the acquisition of the State College branch in ~~Winfield,~~2017 has increased our presence in the central Pennsylvania which focuses on agricultural and commercial customers in central Pennsylvania. We also opened an office in Mount Joy, Pennsylvania to better serve Lancaster County customers. In 2017, we have opened a limited office in Narvon, Pennsylvania to increase the Lancaster County footprint.market. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships our new lending teams have with their customers, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank's website. The Bank offers a variety of loans although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans. All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors. As of ~~September~~June 30, ~~2017,~~2018, the Company had one industry specific loan concentration, within the dairy industry, totaling ~~$134.7~~$144.4 million or ~~15.0%~~13.9% of total loans.

During the first ~~nine~~six months of ~~2017,~~2018, the primary driver of growth in the loan portfolio ~~was in~~continued to be commercial and agricultural real estate loans in both the central and south central Pennsylvania markets. We experienced some significant pay-offs of purchased participation loans in the second quarter, which limited our growth. Commercial and agricultural loan demand is subject to significant competitive pressures, the yield curve, and the strengthening of the overall national, regional and local economies.

~~Activity associated with exploration for natural gas remains limited in 2017, but has increased slightly compared to 2016.~~ While the Bank has lent to companies that service the exploration ~~activities,~~for natural gas in our market area, the Bank has not originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Company are to service industry customers which include trucking companies, stone quarries and other support businesses. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the housing and living needs of the gas industry workers. Due to our understanding of the industry and its cyclical nature, the loans made for natural gas-related activities have been originated in accordance with specific policies and procedures for lending to these entities, which include more stringent loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.

Residential real estate loans decreased ~~$1.0 million~~slightly during the first ~~nine months~~half of ~~2017.~~2018. Loan demand for conforming mortgages, which the Company typically sells on the secondary market has ~~increased~~decreased in ~~2017~~2018 when compared to ~~2016.~~2017. For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which in management's judgment is adequate to absorb probable future loan losses inherent in the loan portfolio. The provision for loan losses is charged against current income. Loans deemed not collectable are charged-off against the allowance while subsequent recoveries increase the allowance. The following table presents an analysis of the allowance for loan losses and non-performing loans and assets as of and for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and for the years ended December 31, 2017, 2016, 2015 ~~2014~~ and ~~2013~~2014 (dollars in thousands):

September 30, December 31,
2017 2016 2015 2014 2013
Balance
  at beginning of period $ 8,886 $ 7,106 $ 6,815 $ 7,098 $ 6,784
Charge-offs:
  Real estate:
     Residential 104 85 66 97 17
     Commercial 41 100 84 516 62
     Agricultural - - - - -
  Consumer 90 100 47 47 54
  Other commercial loans - 55 41 250 1
  Other agricultural loans 5 - - - -
Total loans charged-off 240 340 238 910 134
Recoveries:
  Real estate:
     Residential - - - - 5
     Commercial 11 479 14 15 5
     Agricultural - - - - -
  Consumer 35 88 33 27 33
  Other commercial loans 14 33 2 - -
  Other agricultural loans 1 - - - -
Total loans recovered 61 600 49 42 43
Net loans (recovered) charged-off 179 (260 ) 189 868 91
Provision charged to expense 1,740 1,520 480 585 405
Balance at end of period $ 10,447 $ 8,886 $ 7,106 $ 6,815 $ 7,098

Loans outstanding at end of period $ 907,162 $ 799,611 $ 695,031 $ 554,105 $ 540,612
Average loans outstanding, net $ 864,294 $ 725,881 $ 577,992 $ 540,541 $ 516,748
Non-performing assets:
    Non-accruing loans $ 11,821 $ 11,454 $ 6,531 $ 6,599 $ 8,097
    Accrual loans - 90 days or more past due 173 405 623 836 697
      Total non-performing loans $ 11,994 $ 11,859 $ 7,154 $ 7,435 $ 8,794
   ��Foreclosed assets held for sale 1,570 1,036 1,354 1,792 1,360
      Total non-performing assets $ 13,564 $ 12,895 $ 8,508 $ 9,227 $ 10,154

Annualized net charge-offs to average loans 0.03 % -0.04 % 0.03 % 0.16 % 0.02 %
Allowance to total loans 1.15 % 1.11 % 1.02 % 1.23 % 1.31 %
Allowance to total non-performing loans 87.10 % 74.93 % 99.33 % 91.66 % 80.71 %
Non-performing loans as a percent of loans outstanding 1.32 % 1.48 % 1.03 % 1.34 % 1.63 %
Non-performing assets as a percent of loans outstanding 1.50 % 1.61 % 1.22 % 1.67 % 1.88 %

4643

	June 30,			December 31,
	2018			2017			2016			2015			2014
Balance
at beginning of period	$	11,190		$	8,886		$	7,106		$	6,815		$	7,098
Charge-offs:
Real estate:
Residential		17			107			85			66			97
Commercial		-			41			100			84			516
Agricultural		-			30			-			-			-
Consumer		19			130			100			47			47
Other commercial loans		91			-			55			41			250
Other agricultural loans		50			5			-			-			-
Total loans charged-off		177			313			340			238			910
Recoveries:
Real estate:
Residential		69			-			-			-			-
Commercial		3			11			479			14			15
Agricultural		-			-			-			-			-
Consumer		17			49			88			33			27
Other commercial loans		14			16			33			2			-
Other agricultural loans		-			1			-			-			-
Total loans recovered		103			77			600			49			42

Net loans (recovered) charged-off		74			236			(260	)		189			868
Provision charged to expense		825			2,540			1,520			480			585
Balance at end of period	$	11,941		$	11,190		$	8,886		$	7,106		$	6,815

Loans outstanding at end of period	$	1,040,200		$	1,000,525		$	799,611		$	695,031		$	554,105
Average loans outstanding, net	$	1,027,778		$	883,355		$	725,881		$	577,992		$	540,541
Non-performing assets:
Non-accruing loans	$	10,931		$	10,171		$	11,454		$	6,531		$	6,599
Accrual loans - 90 days or more past due		1,046			555			405			623			836
Total non-performing loans	$	11,977		$	10,726		$	11,859		$	7,154		$	7,435
Foreclosed assets held for sale		471			1,119			1,036			1,354			1,792
Total non-performing assets	$	12,448		$	11,845		$	12,895		$	8,508		$	9,227

Annualized net charge-offs to average loans		0.02	%		0.03	%		-0.04	%		0.03	%		0.16	%
Allowance to total loans		1.15	%		1.12	%		1.11	%		1.02	%		1.23	%
Allowance to total non-performing loans		99.70	%		104.33	%		74.93	%		99.33	%		91.66	%
Non-performing loans as a percent of loans
net of unearned income		1.15	%		1.07	%		1.48	%		1.03	%		1.34	%
Non-performing assets as a percent of loans
net of unearned income		1.20	%		1.18	%		1.61	%		1.22	%		1.67	%

Management believes it uses the best information available when estimating the allowance for loan losses and that the allowance for loan losses is adequate as of ~~September~~June 30, ~~2017.~~2018. However, future adjustments could be required if circumstances differ substantially from assumptions and estimates used in making the initial determination. A prolonged downturn in the economy, high unemployment rates, significant changes in the value of collateral and delays in receiving financial information from borrowers could result in increased levels of non-performing assets, charge-offs, loan loss provisions and reduction in income. Additionally, bank regulatory agencies periodically examine the Bank's allowance for loan losses. The banking agencies could require the recognition of additions to the allowance for loan losses based upon their judgment of information available to them at the time of their examination.

On a monthly basis, problem loans are identified and updated primarily using internally prepared past due reports. Based on data surrounding the collection process of each identified loan, the loan may be added or deleted from the monthly watch list. The watch list includes loans graded special mention, substandard, doubtful, and loss, as well as additional loans that management may choose to include. Watch list loans are continually monitored going forward until satisfactory conditions exist that allow management to upgrade and remove the loan. In certain cases, loans may be placed on non-accrual status or charged-off based upon management's evaluation of the borrower's ability to pay. All commercial loans, which include commercial real estate, agricultural real estate, state and political subdivision loans and other commercial and agricultural loans, on non-accrual are evaluated quarterly for impairment.

The allowance for loan losses was ~~$10,447,000~~$11,941,000 or 1.15% of total loans as of ~~September~~June 30, ~~2017~~2018 as compared to ~~$8,886,000~~$11,190,000 or ~~1.11%~~1.12% of loans as of December 31, ~~2016.~~2017. The decrease as a percent of loans in 2015 compared to year end 2014 and 2013 is attributable to the increase in loans as part of the acquisition of FNB and the associated purchase accounting adjustments that were applied to the FNB loan portfolio. The $1,561,000$751,000 increase in the allowance during the first ~~nine~~six months of ~~2017~~2018 is the result of a ~~$1,740,000~~$825,000 provision and net charge-offs of ~~$179,000.~~$74,000. The following table shows the distribution of the allowance for loan losses and the percentage of loans compared to total loans by loan category as of ~~September~~June 30, ~~2017~~2018 and December 31, 2017, 2016, 2015 ~~2014~~ and ~~2013~~2014 (dollars in thousands):

	September 30,				December 31																June 30,				December 31
	2017				2016				2015				2014				2013				2018				2017				2016				2015				2014
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Real estate loans:
Residential	$	1,080		22.8	$	1,064		25.9	$	905		29.3	$	878		33.5	$	946		34.6	$	1,045		20.5	$	1,049		21.4	$	1,064		25.9	$	905		29.3	$	878		33.5
Commercial		3,582		30.2		3,589		31.6		3,376		34.2		3,419		34.5		3,983		35.7		3,794		29.8		3,867		30.8		3,589		31.6		3,376		34.2		3,419		34.5
Agricultural		2,694		22.8		1,494		15.5		409		8.3		451		4.4		575		4.1		3,673		25.3		3,143		24.0		1,494		15.5		409		8.3		451		4.4
Construction		31		1.9		47		3.2		24		2.2		26		1.1		50		1.7		44		2.7		23		1.3		47		3.2		24		2.2		26		1.1
Consumer		137		1.2		122		1.4		102		1.7		84		1.5		105		1.7		115		0.9		124		1.0		122		1.4		102		1.7		84		1.5
Other commercial loans		1,112		6.2		1,327		7.3		1,183		8.2		1,007		8.6		686		8.2		1,266		7.2		1,272		7.2		1,327		7.3		1,183		8.2		1,007		8.6
Other agricultural loans		462		3.8		312		2.9		122		2.0		217		2.0		256		1.8		589		4.1		492		3.8		312		2.9		122		2.0		217		2.0
State & political subdivision loans		874		11.1		833		12.2		593		14.1		545		14.4		330		12.2		767		9.5		816		10.5		833		12.2		593		14.1		545		14.4
Unallocated		475		N/A		98		N/A		392		N/A		188		N/A		167		N/A		648		N/A		404		N/A		98		N/A		392		N/A		188		N/A
Total allowance for loan losses	$	10,447		100.0	$	8,886		100.0	$	7,106		100.0	$	6,815		100.0	$	7,098		100.0	$	11,941		100.0	$	11,190		100.0	$	8,886		100.0	$	7,106		100.0	$	6,815		100.0

As a result of previous loss experiences and other risk factors utilized in determining the allowance, the Bank's allocation of the allowance does not directly correspond to the actual balances of the loan portfolio. While commercial and agricultural real estate total ~~53.0%~~55.1% of the loan portfolio, ~~60.1%~~62.5% of the allowance is assigned to this segment of the loan portfolio as these loans have more inherent ~~risks~~credit risk than residential real estate or loans to state and political subdivisions.

The following table identifies amounts of loans contractually past due 30 to 89 days and non-performing loans by loan category, as well as the change from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017~~2018 in non-performing loans(dollars in thousands). Non-performing loans include accruing loans that are contractually past due 90 days or more and non-accrual loans. Interest does not accrue on non-accrual loans. Subsequent cash payments received are applied to the outstanding principal balance or recorded as interest income, depending upon management's assessment of its ultimate ability to collect principal and interest.

	June 30, 2018								December 31, 2017
			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	$	905	$	-	$	1,493	$	1,493	$	1,550	$	218	$	1,386	$	1,604
Commercial		2,864		38		6,262		6,300		1,519		162		5,192		5,354
Agricultural		1,105		543		167		710		242		30		175		205
Construction		-		-		-		-		-		-		133		133
Consumer		32		32		25		57		86		7		42		49
Other commercial loans		55		-		2,415		2,415		50		32		2,637		2,669
Other agricultural loans		182		433		569		1,002		42		106		606		712
Total nonperforming loans	$	5,143	$	1,046	$	10,931	$	11,977	$	3,489	$	555	$	10,171	$	10,726

4745

September 30, 2017 December 31, 2016
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 $ 1,596 $ 79 $ 1,343 $ 1,422 $ 1,010 $ 333 $ 1,570 $ 1,903
  Commercial 1,142 80 5,262 5,342 1,703 - 4,445 4,445
  Agricultural - - 1,464 1,464 - - 1,340 1,340
  Construction - - - - - - - -
Consumer 163 14 88 102 131 67 42 109
Other commercial loans 272 - 3,008 3,008 78 - 4,057 4,057
Other agricultural loans 187 - 656 656 77 5 - 5
Total nonperforming loans $ 3,360 $ 173 $ 11,821 $ 11,994 $ 2,999 $ 405 $ 11,454 $ 11,859

Change in Non-Performing Loans
September 30, 2017 /December 31, 2016
(in thousands) Amount %
Real estate:
  Residential $ (481 ) (25.3 )
  Commercial 897 20.2
  Agricultural 124 9.3
  Construction - N/A
Consumer (7 ) (6.4 )
Other commercial loans (1,049 ) (25.9 )
Other agricultural loans 651 13,020.0
Total nonperforming loans $ 135 1.1

	Change in Non-Performing Loans
	June 30, 2018 /December 31, 2017
(in thousands)	Amount			%
Real estate:
Residential	$	(111	)		(6.9	)
Commercial		946			17.7
Agricultural		505			246.3
Construction		(133	)		(100.0	)
Consumer		8			16.3
Other commercial loans		(254	)		(9.5	)
Other agricultural loans		290			40.7
Total nonperforming loans	$	1,251			11.7

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we recorded a provision for loan losses of ~~$1,740,000,~~$825,000, which compares to ~~$770,000~~$1,240,000 for the same period in ~~2016.~~2017. The ~~increase~~decrease was primarily attributable to the loan growth experienced during 2018 being lower than the growth experienced during the comparable period of 2017. Non-performing loans increased ~~$135,000~~$1.3 million or ~~1.1%~~11.7%, from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017,~~2018, primarily due to one ~~customer.~~customer relationship. Approximately ~~61.6%~~58.5% of the Bank's non-performing loans at ~~September~~June 30, ~~2017~~2018 are associated with the following three customer relationships:

A commercial customer with a total loan relationship of ~~$3.3~~$3.0 million, secured by undeveloped land, stone quarries ~~equipment~~ and ~~the owner's residence,~~equipment, was on non-accrual status as of ~~September~~June 30, ~~2017.~~2018. The slowdown in the exploration for natural gas has significantly impacted the cash flows of the customer, who provides excavation services and stone for pad construction related to these activities. During 2017, the Company had the underlying collateral appraised. The appraisals indicated a decrease in collateral ~~was appraised in~~values compared to the ~~first quarter of 2017.~~appraisals ordered for the loan origination, however, the loan is still considered well secured on a loan to value basis. Management ~~assessed the collateral value and~~ determined that no specific reserve was required as of ~~September~~June 30, ~~2017.~~

2018.

A commercial customer with a total loan relationship of ~~$2.7~~$2.5 million, secured by ~~approximately 160~~ residential rental properties, was on non-accrual status as of ~~September~~June 30, ~~2017.~~2018. In the first quarter of 2011, the Company and borrower entered into a forbearance agreement to restructure the debt. In July of 2013, the customer filed for bankruptcy under Chapter 11 and a Trustee was appointed in January of 2014. In 2015, the Trustee decreased the loan payments below what was agreed to in the forbearance agreement. This decrease is currently being litigated in bankruptcy court. As a result of the decrease, the relationship has become more than 90 days past due. During 2016, the Company appraised the underlying collateral. The appraisals indicated a slight decrease in collateral values compared to the appraisals ordered for the loan origination, however, the loan is still considered well secured on a loan to value basis. We continue to monitor the bankruptcy proceedings to identify potential changes in the customer's operations and the impact these would have on the loan payments for our loans to the customer and the underlying collateral that supports these loans. As of ~~September~~June 30, ~~2017,~~2018, there was no specific reserve for this relationship.

An agricultural customer with a total loan relationship of ~~approximately $1.3~~$2.9 million, secured by ~~land, agricultural buildings~~real estate, equipment and ~~equipment, was on non-accrual status~~cattle had $1.5 million in loans that were non-performing as of ~~September~~June 30, ~~2017.~~2018. The ~~customers transition~~remaining $1.4 million was considered performing as of June 30, 2018 as the loans were less than 90 days past due. Included within the non-performing portion of loans to ~~organic farming~~this customer are $1,001,000 of loans which are subject to Farm Service Agency guarantees. Depressed milk prices have created cash flow difficulties for this customer. Absent a sizable and ~~contractual issues with a supplier have significantly impacted the cash flows from the customer's activities. The customer has entered into a sales agreement and the sale~~sustained increase in milk prices, which is ~~expected~~not assured, we will need to ~~close in the fourth quarter of 2017. Management assessed~~rely upon the collateral ~~value~~for repayment of interest and ~~determined that a~~principal. As of June 30, 2018, there was no specific reserve ~~of $62,000 was required as of September 30, 2017.~~for this relationship.

Management of the Bank believes that the allowance for loan losses as of ~~September~~June 30, ~~2017~~2018 is adequate, which is based on the following factors:

·	~~Two~~ Three loan relationships comprise ~~50.6%~~58.5% of the non-performing loan balance, whose debt is considered well collateralized and has no specific reserves as of ~~September~~June 30 ~~2017.~~, 2018.

~~Net~~

The Company has a history of low charge-offs, which continued in 2018 as the net charge-offs were .02% of average loans and ~~gross charge-offs remain low in 2017 after~~only $74,000. In 2016, a net recovery was experienced as the result of recovering a loan that was partially charged off in ~~2016.~~

2014.

·	~~Real estate values in the Bank's primary market areas have only decreased slightly with the decrease in the market price for natural gas.~~

Bank Owned Life Insurance

The Company holds bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits. As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the cash surrender value of the life insurance was ~~$26.7~~$27.2 million and ~~$26.2~~$26.9 million, respectively. The change in cash surrender value, net of purchases and amounts acquired through acquisitions, is recognized in the results of operations. The amounts recorded as non-interest income totaled ~~$499,000~~$154,000 and ~~$515,000~~$167,000 for the ~~nine~~three month periods ended ~~September~~June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and ~~2016, respectively.~~2017, $306,000 and $333,000, respectively, was recorded in non-interest income. The Company evaluates annually the risks associated with the life insurance policies, including limits on the amount of coverage and an evaluation of the various carriers' credit ratings.

The Company agreements that were purchased directly from insurance companies are structured so that any death benefits received from a policy while the insured person is an active employee of the Bank will be split with the beneficiary of the policy. Under these agreements, the employee's beneficiary will be entitled to receive 50% of the net amount at risk from the proceeds. The net amount at risk is the total death benefit payable less the cash surrender value of the policy as of the date of death. The policies acquired as part of the acquisition of FNB provide a fixed split-dollar benefit for the beneficiaries estate, which is dependent on several factors including whether the covered individual was a Director of FNB or an employee of FNB and their salary level. As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, included in other liabilities on the Consolidated Balance Sheet was a liability of ~~$576,000~~$615,000 and ~~$569,000,~~$578,000, respectively, for the obligation under the split-dollar benefit agreements.

Premises and Equipment

Premises and equipment decreased ~~$406,000~~$234,000 to ~~$16.6~~$16.3 million as of ~~September~~June 30, ~~2017~~2018 from December 31, ~~2016.~~2017. This occurred primarily as a result of normal depreciation expense recorded in the first ~~nine~~six months of ~~2017.~~2018.

Deposits

The following table shows the composition of deposits as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (dollars in thousands):

	June 30,				December 31,
	2018				2017
	Amount		%		Amount		%
Non-interest-bearing deposits	$	169,014		15.1	$	171,840		15.6
NOW accounts		321,799		28.8		337,307		30.5
Savings deposits		190,557		17.0		184,057		16.7
Money market deposit accounts		165,781		14.8		145,287		13.1
Certificates of deposit		271,441		24.3		266,452		24.1
Total	$	1,118,592		100.0	$	1,104,943		100.0

4947

September 30, December 31,
2017 2016
Amount % Amount %
Non-interest-bearing deposits $ 154,142 14.7 $ 147,425 14.7
NOW accounts 326,612 31.0 305,862 30.4
Savings deposits 179,518 17.1 170,722 17.0
Money market deposit accounts 131,861 12.5 116,880 11.6
Certificates of deposit 259,972 24.7 264,614 26.3
Total $ 1,052,105 100.0 $ 1,005,503 100.0


	September 30, 2017/						June 30, 2018/
	December 31, 2016						December 31, 2017
	Change						Change
	Amount			%			Amount			%
Non-interest-bearing deposits	$	6,717			4.6		$	(2,826	)		(1.6	)
NOW accounts		20,750			6.8			(15,508	)		(4.6	)
Savings deposits		8,796			5.2			6,500			3.5
Money market deposit accounts		14,981			12.8			20,494			14.1
Certificates of deposit		(4,642	)		(1.8	)		4,989			1.9
Total	$	46,602			4.6		$	13,649			1.2

Deposits increased ~~$46.6~~$13.6 million since December 31, ~~2016.~~2017. Customers, including local municipalities transferred balances from NOW accounts to money market accounts, which accounts for the majority of the changes in those accounts. As a result of ~~timing~~strategic initiatives, we have increased our focus and new account acquisition, deposits from local municipalities increased across various categories including non-interest bearing, money markets and NOW accounts. We also experienced a general increase in business related deposits, which have ~~helped to support the loan growth the Bank has experienced. The deposit increases have been across both~~enhanced our ~~northern tier and south central Pennsylvania markets.~~cash management services.

Certificates of deposits ~~decreased $4.6~~increased $5.0 million in ~~2017.~~2018. The rates paid on certificates of deposits ~~remain near historic lows due~~have increased in the first part of 2018 making them more attractive to ~~the interest rate environment. Certain~~ customers who typically utilize certificate of deposits as a means of generating income or as a longer term investment ~~option, continued to move funds into money market and savings accounts that still pay interest in order to maintain flexibility for potentially rising interest rates.~~option. The rates paid on certificates of deposit by the Company remain competitive with rates paid by our competition. As of ~~September~~June 30, ~~2017,~~2018, the Bank did not have any outstanding brokered certificates of deposit.

Borrowed Funds

Borrowed funds ~~decreased $6.0~~increased $19.0 million during the first ~~nine~~six months of ~~2017.~~2018. The ~~decrease~~increase was the result of ~~repaying $8.4~~borrowing an additional $18.9 million of overnight advances from the FHLB as a result of the ~~deposit~~loan growth ~~and investment portfolio cashflows. Offsetting this, there was an increase of approximately $2.3 million~~experienced in the ~~balances outstanding under repurchase agreements.~~first half of 2018. The Bank's current strategy for borrowings is to consider terms and structures to manage interest rate risk and liquidity in a potential rising interest rate environment. The Company's daily cash requirements or short-term investments are primarily met by using the financial instruments available through the Federal Home Loan Bank of Pittsburgh.

In December 2003, the Company formed a special purpose entity, Citizens Financial Statutory Trust I ("the Entity"), to issue $7,500,000 of floating rate obligated mandatory redeemable securities as part of a pooled offering. The rate is determined quarterly based on the 3 month LIBOR, plus 2.80%. The Entity may redeem the securities, in whole or in part, at face value at any time. The Company borrowed the proceeds of the issuance from the Entity in December 2003 in the form of a $7,500,000 note payable, which is included within "Borrowed Funds" in the liabilities section of the Company's balance sheet. Under current accounting rules, the Company's minority interest in the Entity was recorded at the initial investment amount and is included in the other assets section of the balance sheet. The Entity is not consolidated as part of the Company's Consolidated Financial Statements.

Stockholders' Equity

We evaluate stockholders' equity in relation to total assets and the risks associated with those assets. The greater the capital resource, the more likely a corporation will meet its cash obligations and absorb unforeseen losses. For these reasons, capital adequacy has been, and will continue to be, of paramount importance. As such, the Company has implemented policies and procedures to ensure that it has adequate capital levels. As part of this process, we routinely stress test our capital levels and identify potential risk and alternative sources of additional capital should the need arise.

Total stockholders' equity was ~~$129.9~~$132.3 million at ~~September~~June 30, ~~2017~~2018 compared to ~~$123.3~~$129.0 million at December 31, ~~2016,~~2017, an increase of ~~$6.6 million~~$3,270,000, or ~~5.4%~~2.5%. Excluding accumulated other comprehensive income, stockholders' equity increased ~~$6.4~~$5.2 million, or ~~5.1%~~4.0%. The Company purchased ~~12,453~~8,711 shares of treasury stock at a weighted average cost of ~~$51.82~~$62.29 per share. The Company reissued ~~12,383~~217 shares to certain employees as ~~part~~a reward for years of ~~the dividend reinvestment program~~services at a weighted average cost of ~~$50.88~~$62.47 per ~~share and 4,212~~share. The Company awarded employees 4,869 shares ~~as part~~ of ~~the~~ restricted stock ~~program~~ at a weighted average cost of ~~$50.33~~$62.91 per ~~share. In~~share during the first ~~nine~~six months of ~~2017,~~2018. For the first six months of 2018, the Company had net income of ~~$10.4~~$8.9 million and declared cash dividends of ~~$4.4~~$3.1 million, or ~~$1.24~~$0.87 per share, representing a cash dividend payout ratio of ~~41.8%~~34.2%. ~~We also issued a five percent stock dividend to the Company's shareholders, which had a market value of $9.0 million at its issuance.~~

All of the Company's debt investment securities are classified as available-for-sale, making this portion of the Company's balance sheet more sensitive to the changing market value of investments. As a result of changes in the interest rate environment and the defined benefit plan obligations, accumulated other comprehensive income ~~increased $264,000~~decreased approximately $2.0 million from December 31, ~~2016.~~2017.

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company and Bank's assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The Company and Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, that the Company and Bank meet all capital adequacy requirements to which they ~~are subject.~~were subject at such dates.

As of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company and Bank are categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital, and Tier 1 leverage ratios as set forth in the table.There are no conditions or events since that notification that management believes have changed the institution's category.

The Company and Bank's computed risk‑based capital ratios are as follows (dollars in thousands):

		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
September 30, 2017		Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2018																		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		$	129,736		14.41	%	$	72,002		8.00	%	$	90,002		10.00	%		$	134,566		13.23	%	$	81,356		8.00	%	$	101,695		10.00	%
Bank		$	124,317		13.83	%	$	71,928		8.00	%	$	89,911		10.00	%		$	128,570		12.65	%	$	81,339		8.00	%	$	101,674		10.00	%

Tier 1 Capital (to Risk Weighted Assets):	Tier 1 Capital (to Risk Weighted Assets):																Tier 1 Capital (to Risk Weighted Assets):
Company		$	119,068		13.23	%	$	54,001		6.00	%	$	72,002		8.00	%		$	122,460		12.04	%	$	61,017		6.00	%	$	81,356		8.00	%
Bank		$	113,650		12.64	%	$	53,946		6.00	%	$	71,928		8.00	%		$	116,464		11.45	%	$	61,004		6.00	%	$	81,339		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		$	111,568		12.40	%	$	40,501		4.50	%	$	58,501		6.50	%		$	114,960		11.30	%	$	45,763		4.50	%	$	66,101		6.50	%
Bank		$	113,650		12.64	%	$	40,460		4.50	%	$	58,442		6.50	%		$	116,464		11.45	%	$	45,753		4.50	%	$	66,088		6.50	%

Tier 1 Capital (to Average Assets):	Tier 1 Capital (to Average Assets):																Tier 1 Capital (to Average Assets):
Company		$	119,068		9.57	%	$	49,780		4.00	%	$	62,225		5.00	%		$	122,460		8.94	%	$	54,767		4.00	%	$	68,459		5.00	%
Bank		$	113,650		9.15	%	$	49,690		4.00	%	$	62,113		5.00	%		$	116,464		8.51	%	$	54,748		4.00	%	$	68,435		5.00	%

		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
December 31, 2016		Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 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		$	121,717		14.93	%	$	65,217		8.00	%	$	81,522		10.00	%		$	128,578		13.20	%	$	77,906		8.00	%	$	97,383		10.00	%
Bank		$	117,537		14.46	%	$	65,020		8.00	%	$	81,275		10.00	%		$	122,469		12.58	%	$	77,852		8.00	%	$	97,315		10.00	%

Tier 1 Capital (to Risk Weighted Assets):	Tier 1 Capital (to Risk Weighted Assets):																Tier 1 Capital (to Risk Weighted Assets):
Company		$	112,599		13.81	%	$	48,913		6.00	%	$	65,217		8.00	%		$	117,224		12.04	%	$	58,430		6.00	%	$	77,906		8.00	%
Bank		$	108,419		13.34	%	$	48,765		6.00	%	$	65,020		8.00	%		$	111,114		11.42	%	$	58,389		6.00	%	$	77,852		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		$	105,099		12.89	%	$	36,685		4.50	%	$	52,989		6.50	%		$	109,724		11.27	%	$	43,822		4.50	%	$	63,299		6.50	%
Bank		$	108,419		13.34	%	$	36,574		4.50	%	$	52,829		6.50	%		$	111,114		11.42	%	$	43,792		4.50	%	$	63,255		6.50	%

Tier 1 Capital (to Average Assets):	Tier 1 Capital (to Average Assets):																Tier 1 Capital (to Average Assets):
Company		$	112,599		9.46	%	$	47,586		4.00	%	$	59,483		5.00	%		$	117,224		9.18	%	$	51,085		4.00	%	$	63,857		5.00	%
Bank		$	108,419		9.13	%	$	39,006		4.00	%	$	48,757		5.00	%		$	111,114		8.71	%	$	51,023		4.00	%	$	63,778		5.00	%

Off-Balance Sheet Activities

Some financial instruments, such as loan commitments, credit lines, and letters of credit, are issued to meet customer financing needs. The contractual amount of financial instruments with off-balance sheet risk was as follows at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 (in thousands):

	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Commitments to extend credit	$	221,492	$	206,505	$	209,549	$	188,482
Standby letters of credit		15,046		14,955		15,465		15,244
	$	236,538	$	221,460	$	225,014	$	203,726

We also offer limited overdraft protection as a non-contractual courtesy which is available to demand deposit accounts in good standing. Overdraft charges as a result of ATM withdrawals and one time point of sale (non-recurring) transactions require prior approval of the customer. The non-contractual amount of financial instruments with off-balance sheet risk at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~$9,244,000~~$9,418,000 and ~~$9,124,000,~~$9,335,000, respectively. The Company reserves the right to discontinue this service without prior notice.

Liquidity

Liquidity is a measure of the Company's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. To maintain proper liquidity, we use funds management policies, which include liquidity target ratios, along with our investment policies to assure we can meet our financial obligations to depositors, credit customers and stockholders. Liquidity is needed to meet depositors' withdrawal demands, extend credit to meet borrowers' needs, provide funds for normal operating expenses and cash dividends, and to fund other capital expenditures.

Cash generated by operating activities, investing activities and financing activities influences liquidity management. Our Company's historical activity in this area can be seen in the Consolidated Statement of Cash Flows. The most important source of funds is core deposits. Repayment of principal on outstanding loans and cash flows created from the investment portfolio are also factors in liquidity management. Other sources of funding include brokered certificates of deposit and the sale of loans or investments, if needed.

The Company's use of funds is shown in the investing activity section of the Consolidated Statement of Cash Flows, where the net loan activity is presented. Other uses of funds include purchasing stock from the Federal Home Loan Bank (FHLB) of Pittsburgh, as well as capital expenditures. Capital expenditures (including software purchases), during the first ~~nine~~six months of ~~2017~~2018 were ~~$179,000~~$140,000 compared to ~~$500,000~~$131,000 during the same time period in ~~2016.~~2017.

Short-term debt from the FHLB supplements the Bank's availability of funds. The Bank achieves liquidity primarily from temporary or short‑term investments in the Federal Reserve and the FHLB. The Bank has a maximum borrowing capacity at the FHLB of approximately ~~$432.5~~$494.4 million, of which ~~$49.5~~$151.1 million was outstanding via loans and letters of credits at ~~September~~June 30, ~~2017.~~2018. Additionally, we have a Federal funds line totaling $10.0 million from a third party bank at market rates. This line is not drawn upon. We also have a borrower in custody line with the Federal Reserve Bank of approximately ~~$4.5~~$4.4 million, which also is not drawn upon as of ~~September~~June 30, ~~2017.~~2018. The Company continues to evaluate its liquidity needs and as necessary finds additional sources.

Citizens Financial Services, Inc. is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Citizens Financial Services, Inc. is responsible for paying any dividends declared to its shareholders. Citizens Financial also has repurchased shares of its common stock. Citizens Financial Services, Inc.'s primary source of income is dividends received from the Bank. Both federal and state laws impose restrictions on the ability of the Bank to pay dividends. In particular, the Bank may not, as a state-chartered bank which is a member of the Federal Reserve System, declare a dividend without approval of the Federal Reserve, unless the dividend to be declared by the Bank's Board of Directors does not exceed the total of: (i) the Bank's net profits for the current year to date, plus (ii) its retained net profits for the preceding two current years, less any required transfers to surplus. The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. The Prompt Corrective Action Rules, described above, further limit the ability of banks to pay dividends, because banks which are not classified as well capitalized or adequately capitalized may not pay dividends and no dividend may be paid which would make the Bank undercapitalized after the dividend. At ~~September~~June 30, ~~2017,~~2018, Citizens Financial Services, Inc. (on an unconsolidated basis) had liquid assets of ~~$4.1~~$5.7 million.

Interest Rate and Market Risk Management

The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances and the market value risk of assets and liabilities.

Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, because we have no trading portfolio, we are not subject to trading risk. Currently, the Company has equity securities that represent only ~~0.7%~~0.08% of its ~~investment portfolio~~total assets and, therefore, equity risk is not significant.

The primary components of interest-sensitive assets include adjustable-rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of interest-sensitive liabilities include maturing certificates of deposit, IRA certificates of deposit and short-term borrowings. Savings deposits, NOW accounts and money market investor accounts are considered core deposits and are not short-term interest sensitive (except for the top-tier money market investor accounts, typically help by local governments, which are paid current market interest rates).

Gap analysis, one of the methods used by us to analyze interest rate risk, does not necessarily show the precise impact of specific interest rate movements on our Company's net interest income because the re-pricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. In addition, assets and liabilities within the same period may, in fact, be repaid at different times and at different rate levels. We have not experienced the kind of earnings volatility that might be indicated from gap analysis.

The Company currently uses a computer simulation model to better measure the impact of interest rate changes on net interest income. We use the model as part of our risk management and asset liability management processes that we believe will effectively identify, measure, and monitor the Company's risk exposure. In this analysis, the Company examines the results of movements in interest rates with additional assumptions made concerning prepayment speeds on mortgage loans and mortgage securities. Shock scenarios, which assume a parallel shift in interest rates and is instantaneous, typically have the greatest impact on net interest income. The following is a rate shock analysis and the impact on net interest income as of ~~September~~June 30, ~~2017~~2018 (dollars in thousands):

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

-100 Shock	$	41,024	$	(957	)		(2.28	)	$	46,316	$	(1,069	)		(2.26	)
Base		41,981		-			-			47,385		-			-
+100 Shock		41,014		(967	)		(2.30	)		46,074		(1,311	)		(2.77	)
+200 Shock		39,873		(2,108	)		(5.02	)		44,564		(2,821	)		(5.95	)
+300 Shock		38,708		(3,273	)		(7.80	)		43,090		(4,295	)		(9.06	)
+400 Shock		37,428		(4,553	)		(10.85	)		41,595		(5,790	)		(12.22	)

The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage backed securities, call activity of other investment securities, and deposit selection, re-pricing and maturity structure. Because of these assumptions, actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change on net interest income. Additionally, the changes above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. It should be noted that the changes in net interest income noted above are in line with Company policy for interest rate risk.

Item 3-Quantitative and Qualitative Disclosure about Market Risk

In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments and was discussed previously in this Form 10-Q. Management and a committee of the Board of Directors manage interest rate risk (see also "Interest Rate and Market Risk Management").

Item 4-Control and Procedures

(a) Disclosure Controls and Procedures

The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes to Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarter ended ~~September~~June 30, ~~2017~~2018 that have materially affected, or are reasonable likely to materially affect, the Company's internal control over financial reporting.

PART II ‑ OTHER INFORMATION

Item 1 ‑ Legal Proceedings

Management is not aware of any pending or threatened litigation that would have a material adverse effect on the consolidated financial position of the Company. Any pending proceedings are ordinary, routine litigation incidental to the business of the Company and its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company and its subsidiary by government authorities.

Item 1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1.A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, which could materially affect our business, financial condition or future results. At ~~September~~June 30, ~~2017,~~2018, the risk factors of the Company have not changed materially from those reported in our Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

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)			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)

7/1/17 to 7/31/17			-	$	0.00		-		97,529
8/1/17 to 8/31/17			2,233	$	53.51		2,233		95,296
9/30/17 to 9/30/17			320	$	53.99		320		94,976
4/1/18 to 4/30/18												75	$	61.00		75		84,068
5/1/18 to 5/31/18												-	$	0.00		-		84,068
6/1/18 to 6/30/18												3,307	$	62.66		3,307		80,761
Total			2,553	$	53.57		2,553		94,976			3,382	$	62.62		3,382		80,761

(1)

On October 20, 2015, the Company announced that the Board of Directors authorized the Company to repurchase up to an additional 150,000 shares. The repurchases will be conducted through open-market purchases or privately negotiated transactions and will be made from time to time depending on market conditions and other factors. No time limit was placed on the duration of the share repurchase program. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes.

Item 3 ‑ Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosure

Not applicable.

Item 5 ‑ Other Information

None

Item 6 ‑ Exhibits

(a) The following documents are filed as a part of this report:

	3.1		Articles of Incorporation of Citizens Financial Services, Inc., as amended⁽¹⁾
	3.2		Bylaws of Citizens Financial Services, Inc.^{(2) (1)}
	4.1		Form of Common Stock Certificate.⁽³⁾⁽²⁾
	31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
	31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial 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 ~~September~~June 30, ~~2017,~~2018, 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).

⁽¹⁾ ~~Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, as filed with the Commission on May 12, 2010.~~

⁽²⁾Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K, as filed with the Commission on December 24, 2009.

⁽³⁾⁽²⁾ Incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the Commission on March 14, 2006.

** Furnished, not filed.

5653

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Citizens Financial Services, Inc. (Registrant)

~~November~~August 9, ~~2017~~2018	By:	/s/ Randall E. Black
		Randall E. Black
		President ~~and~~& Chief Executive Officer (Principal Executive Officer)



~~November~~August 9, ~~2017~~2018	By:	/s/ Mickey L. Jones
		Mickey L. Jones
		Chief Financial Officer (Principal Financial and Accounting Officer)

5754

	For the Nine Months ended
	September 30, 2017						September 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	$	874	$	9	$	-	$	486	$	10	$	-
Home Equity		62		3		-		59		3		-
Commercial		10,812		280		5		6,088		87		-
Agricultural		3,609		90		-		110		7		-
Construction		-		-		-		-		-		-
Consumer		2		-		-		-		-		-
Other commercial loans		4,988		131		52		5,743		187		5
Other agricultural loans		1,528		55		-		70		3		-
State and political
subdivision loans		-		-		-		-		-		-
Total	$	21,875	$	568	$	57	$	12,556	$	297	$	5

	Three months ended September 30, 2017
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2017	$	1,655		$	(2,624	)	$	(969	)
Other comprehensive loss before reclassifications (net of tax)		(190	)		-			(190	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(6	)		37			31
Net current period other comprehensive income (loss)		(196	)		37			(159	)
Balance as of September 30, 2017	$	1,459		$	(2,587	)	$	(1,128	)

	Nine months ended September 30, 2017
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2016	$	1,306		$	(2,698	)	$	(1,392	)
Other comprehensive income before reclassifications (net of tax)		288			-			288
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(135	)		111			(24	)
Net current period other comprehensive income		153			111			264
Balance as of September 30, 2017	$	1,459		$	(2,587	)	$	(1,128	)

	Three months ended September 30, 2016
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2016	$	4,403		$	(2,361	)	$	2,042
Other comprehensive loss before reclassifications (net of tax)		(692	)		-			(692	)
Amounts reclassified from accumulated other
comprehensive income (net of tax)		-			40			40
Net current period other comprehensive income (loss)		(692	)		40			(652	)
Balance as of September 30, 2016	$	3,711		$	(2,321	)	$	1,390

	Three months ended September 30, 2017 vs 2016 (1)									Nine months ended September 30, 2017 vs. 2016 (1)
	Change in			Change			Total			Change in			Change			Total
	Volume			in Rate			Change			Volume			in Rate			Change
Interest Income:
Short-term investments:
Interest-bearing deposits at banks	$	(7	)	$	(6	)	$	(13	)	$	(39	)	$	(30	)	$	(69	)
Interest bearing time deposits at banks		10			3			13			6			6			12
Investment securities:
Taxable		(360	)		223			(137	)		(844	)		372			(472	)
Tax-exempt		(184	)		(35	)		(219	)		(480	)		(130	)		(610	)
Total investments		(544	)		188			(356	)		(1,324	)		242			(1,082	)
Loans:
Residential mortgage loans		21			(46	)		(25	)		94			(165	)		(71	)
Construction		118			(25	)		93			444			(64	)		380
Commercial & agricultural loans		1,884			(464	)		1,420			5,147			(996	)		4,151
Loans to state & political subdivisions		(24	)		5			(19	)		(174	)		(21	)		(195	)
Other loans		(11	)		(17	)		(28	)		(41	)		(20	)		(61	)
Total loans, net of discount		1,988			(547	)		1,441			5,470			(1,266	)		4,204
Total Interest Income		1,447			(362	)		1,085			4,113			(1,048	)		3,065
Interest Expense:
Interest-bearing deposits:
NOW accounts		23			53			76			48			94			142
Savings accounts		3			-			3			5			(3	)		2
Money Market accounts		11			31			42			30			47			77
Certificates of deposit		(8	)		49			41			(94	)		77			(17	)
Total interest-bearing deposits		29			133			162			(11	)		215			204
Other borrowed funds		100			5			105			250			(22	)		228
Total interest expense		129			138			267			239			193			432
Net interest income	$	1,318		$	(500	)	$	818		$	3,874		$	(1,241	)	$	2,633

(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.

	Change in Non-Performing Loans
	September 30, 2017 /December 31, 2016
(in thousands)	Amount			%
Real estate:
Residential	$	(481	)		(25.3	)
Commercial		897			20.2
Agricultural		124			9.3
Construction		-			N/A
Consumer		(7	)		(6.4	)
Other commercial loans		(1,049	)		(25.9	)
Other agricultural loans		651			13,020.0
Total nonperforming loans	$	135			1.1