10-Q/A

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 30, 2019

Or

[ ] 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)

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

Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered

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 every Interactive Data File required to be submitted 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 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_X__

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, 2019, was 3,525,196.

Citizens Financial Services, Inc.

Form 10-Q

INDEX

		PAGE
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheet as of September 30,2019 and December 31, 2018	1
	Consolidated Statement of Income for the Three and Nine months Ended September 30, 2019 and 2018	2
	Consolidated Statement of Comprehensive Income for the Three and Nine months ended September 30, 2019 and 2018	3
	Consolidated Statement of Changes in Stockholders’ Equity for the Three and Nine months ended September 30, 2019 and 2018	4
	Consolidated Statement of Cash Flows for the Nine months ended September 30, 2019 and 2018	5
	Notes to Consolidated Financial Statements	6-32
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33-56
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56-57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57-58
	Signatures	59

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
	September 30,			December 31,
(in thousands except share data)	2019			2018
ASSETS:
Cash and due from banks:
Noninterest-bearing	$	19,005		$	15,327
Interest-bearing		1,081			1,470
Total cash and cash equivalents		20,086			16,797
Interest bearing time deposits with other banks		14,256			15,498
Equity securities		650			516
Available-for-sale securities		247,027			241,010
Loans held for sale		1,430			1,127
Loans (net of allowance for loan losses:
2019, $13,679 and 2018, $12,884)		1,101,355			1,068,999
Premises and equipment		15,881			16,273
Accrued interest receivable		4,476			4,452
Goodwill		23,296			23,296
Bank owned life insurance		27,968			27,505
Other intangibles		1,400			1,623
Other assets		17,180			13,616
TOTAL ASSETS	$	1,475,005		$	1,430,712
LIABILITIES:
Deposits:
Noninterest-bearing	$	199,046		$	179,971
Interest-bearing		1,000,258			1,005,185
Total deposits		1,199,304			1,185,156
Borrowed funds		109,840			91,194
Accrued interest payable		1,052			1,076
Other liabilities		13,131			14,057
TOTAL LIABILITIES		1,323,327			1,291,483
STOCKHOLDERS' EQUITY:
Preferred Stock
$1.00 par value; authorized 3,000,000 shares at September 30, 2019 and
December 31, 2018; none issued in 2019 or 2018		-			-
Common stock
$1.00 par value; authorized 25,000,000 shares at September 30, 2019 and December 31, 2018;
issued 3,938,668 at September 30, 2019 and 3,904,212, at December 31, 2018		3,939			3,904
Additional paid-in capital		55,096			53,099
Retained earnings		107,342			99,727
Accumulated other comprehensive loss		(289	)		(3,921	)
Treasury stock, at cost:  413,353 shares at September 30, 2019
and 399,616 shares at December 31, 2018		(14,410	)		(13,580	)
TOTAL STOCKHOLDERS' EQUITY		151,678			139,229
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	1,475,005		$	1,430,712
The accompanying notes are an integral part of these unaudited consolidated financial statements.

1

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)	2019			2018			2019		2018
INTEREST INCOME:
Interest and fees on loans	$	13,915		$	12,666		$	41,005	$	36,988
Interest-bearing deposits with banks		103			94			311		218
Investment securities:
Taxable		1,361			967			3,597		2,683
Nontaxable		378			425			1,109		1,426
Dividends		117			107			371		355
TOTAL INTEREST INCOME		15,874			14,259			46,393		41,670
INTEREST EXPENSE:
Deposits		2,315			1,794			7,027		4,695
Borrowed funds		660			695			2,216		2,034
TOTAL INTEREST EXPENSE		2,975			2,489			9,243		6,729
NET INTEREST INCOME		12,899			11,770			37,150		34,941
Provision for loan losses		400			475			1,150		1,300
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		12,499			11,295			36,000		33,641
NON-INTEREST INCOME:
Service charges		1,225			1,181			3,498		3,455
Trust		148			147			589		548
Brokerage and insurance		289			222			843		571
Gains on loans sold		176			170			339		302
Equity security gains (losses), net		29			(4	)		70		9
Available for sale security gains (losses), net		8			(8	)		8		(8	)
Earnings on bank owned life insurance		158			161			463		467
Other		144			141			427		414
TOTAL NON-INTEREST INCOME		2,177			2,010			6,237		5,758
NON-INTEREST EXPENSES:
Salaries and employee benefits		5,096			4,679			15,129		14,251
Occupancy		530			500			1,639		1,606
Furniture and equipment		165			130			501		394
Professional fees		343			507			1,101		1,273
FDIC insurance fees (credit)		(20	)		120			196		327
Pennsylvania shares tax		275			250			825		850
Amortization of intangibles		66			74			198		224
Merger and acquisition		275			-			275		-
ORE expenses		92			6			308		92
Other		1,592			1,522			4,801		4,305
TOTAL NON-INTEREST EXPENSES		8,414			7,788			24,973		23,322
Income before provision for income taxes		6,262			5,517			17,264		16,077
Provision for income taxes		1,066			936			2,817		2,558
NET INCOME	$	5,196		$	4,581		$	14,447	$	13,519
PER COMMON SHARE DATA:
Net Income - Basic	$	1.48		$	1.30		$	4.10	$	3.82
Net Income - Diluted	$	1.48		$	1.30		$	4.10	$	3.81
Cash Dividends Paid	$	0.450		$	0.436		$	1.331	$	1.289
Number of shares used in computation - basic		3,515,678			3,537,315			3,522,377		3,541,971
Number of shares used in computation - diluted		3,515,678			3,537,476			3,524,657		3,544,132
The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
	Three Months Ended										Nine Months Ended
	September 30,										September 30,
(in thousands)				2019				2018						2019				2018
Net income				$	5,196			$	4,581					$	14,447			$	13,519
Other comprehensive income (loss):
Change in unrealized gains (losses) on available
for sale securities		9				(971	)					4,425				(3,544	)
Income tax effect		(2	)			205						(930	)			744
Change in unrecognized pension cost		60				47						181				140
Income tax effect		(13	)			(11	)					(38	)			(30	)
Less:  Reclassification adjustment for investment security
gains included in net income		(8	)			8						(8	)			8
Income tax effect		2				(2	)					2				(2	)
Other comprehensive income (loss), net of tax					48				(724	)					3,632				(2,684	)
Comprehensive income				$	5,244			$	3,857					$	18,079			$	10,835
The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
											Accumulated
					Additional						Other
	Common Stock				Paid-in			Retained			Comprehensive			Treasury
(in thousands, except share data)	Shares		Amount		Capital			Earnings			Income (Loss)			Stock			Total
Balance, June 30, 2019		3,938,668		3,939		55,096			103,733			(337	)		(14,410	)		148,021
Comprehensive income:
Net income									5,196									5,196
Net other comprehensive income												48						48
Cash dividends, $0.450 per share									(1,587	)								(1,587	)
Balance, September 30, 2019		3,938,668	$	3,939	$	55,096		$	107,342		$	(289	)	$	(14,410	)	$	151,678
Balance, December 31, 2018		3,904,212		3,904		53,099			99,727			(3,921	)		(13,580	)		139,229
Comprehensive income:
Net income									14,447									14,447
Net other comprehensive income												3,632						3,632
Stock dividend		34,456		35		2,067			(2,102	)								-
Purchase of treasury stock (20,620 shares)															(1,236	)		(1,236	)
Restricted stock, executive  and Board of Director awards						(300	)								415			115
Restricted stock vesting						221												221
Forfeited restricted stock						9									(9	)		-
Cash dividends, $1.331 per share									(4,730	)								(4,730	)
Balance, September 30, 2019		3,938,668	$	3,939	$	55,096		$	107,342		$	(289	)	$	(14,410	)	$	151,678
Balance, June 30, 2018		3,904,212	$	3,904	$	53,098		$	93,717		$	(5,357	)	$	(13,081	)	$	132,281
Comprehensive income:
Net income									4,581									4,581
Net other comprehensive loss												(724	)					(724	)
Purchase of treasury stock (3,382 shares)															(248	)		(248	)
Restricted stock vesting						24												24
Cash dividend reinvestment paid from treasury stock						-			(30	)					30			-
Cash dividends, $0.436 per share									(1,514	)								(1,514	)
Balance, September 30, 2018		3,904,212	$	3,904	$	53,122		$	96,754		$	(6,081	)	$	(13,299	)	$	134,400
Balance, December 31, 2017		3,869,939	$	3,870	$	51,108		$	89,982		$	(3,398	)	$	(12,551	)	$	129,011
Comprehensive income:
Net income									13,519									13,519
Net other comprehensive loss												(2,684	)					(2,684	)
Stock dividend		34,272		34		2,108			(2,142	)								-
Issuance of Common stock		1																-
Purchase of treasury stock (8,711 shares)															(791	)		(791	)
Restricted stock, executive  and Board of Director awards						(306	)								13			(293	)
Restricted stock vesting						212												212
Change in Accounting policy for equity securities									(1	)		1						-
Cash dividend reinvestment paid from treasury stock						-			(30	)					30			-
Cash dividends, $1.289 per share									(4,574	)								(4,574	)
Balance, September 30, 2018		3,904,212	$	3,904	$	53,122		$	96,754		$	(6,081	)	$	(13,299	)	$	134,400
The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

CITIZENS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)	Nine Months Ended
	September 30,
(in thousands)	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,447		$	13,519
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses		1,150			1,300
Depreciation and amortization		357			301
Amortization and accretion of investment securities		129			813
Deferred income taxes		420			(260	)
Investment securities (gains) losses, net		(78	)		1
Earnings on bank owned life insurance		(463	)		(467	)
Originations of loans held for sale		(15,261	)		(14,709	)
Proceeds from sales of loans held for sale		15,183			15,374
Realized gains on loans sold		(339	)		(302	)
Increase in accrued interest receivable		(24	)		(284	)
Increase (decrease) in accrued interest payable		(24	)		82
Other, net		439			(435	)
Net cash provided by operating activities		15,936			14,933
CASH FLOWS FROM INVESTING ACTIVITIES:
Available-for-sale securities:
Proceeds from sales		5,508			25,168
Proceeds from maturity and principal repayments		51,028			41,027
Purchase of securities		(59,788	)		(56,289	)
Purchase of equity securities		(64	)		(191	)
Purchase of interest bearing time deposits with other banks		(248	)		(5,713	)
Proceeds from sale of interest bearing time deposits with other banks		-			1,239
Proceeds from matured interest bearing time deposits with other banks		1,490			-
Proceeds from redemption of regulatory stock		7,784			7,874
Purchase of regulatory stock		(9,127	)		(6,751	)
Net increase in loans		(36,653	)		(59,646	)
Purchase of premises and equipment		(225	)		(228	)
Proceeds from sale of premises and equipment		7			-
Proceeds from sale of foreclosed assets held for sale		813			899
Net cash used in investing activities		(39,475	)		(52,611	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		14,148			69,900
Proceeds from long-term borrowings		10,000			7
Repayments of long-term borrowings		(3,123	)		(1,000	)
Net (decrease) increase in short-term borrowed funds		11,769			(27,574	)
Purchase of treasury and restricted stock		(1,236	)		(1,098	)
Dividends paid		(4,730	)		(4,574	)
Net cash provided by financing activities		26,828			35,661
Net (decrease) increase in cash and cash equivalents		3,289			(2,017	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		16,797			18,517
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	20,086		$	16,500
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	9,267		$	6,647
Income taxes paid	$	2,450		$	1,900
Loans transferred to foreclosed property	$	3,728		$	381
Right of use asset and liability	$	1,454		$	-
The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

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 subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1^st Realty of PA LLC (“Realty”). Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer.

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 30, 2019 and for the periods ended September 30, 2019 and 2018 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. 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 of revenues and expenses for the period covered by the Consolidated Income Statement. The financial performance reported for the Company for the nine month period ended September 30, 2019 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, 2018.

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. ASU 2016-02 was effective for the Company on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, we recognized a right-of-use asset and a related lease liability totaling $1,454,000 each. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also elected not to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We account for lease and non-lease components separately because such amounts are readily determinable under our lease contracts. We utilized the modified-retrospective transition approach prescribed by ASU 2018-11. Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease as of January 1, 2019. We have included additional disclosures in note 7.

6

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 90.4% and 90.0% of the total revenue of the Company for the three months ended September 30, 2019 and 2018, respectively and 90.1% and 90.0% of the total revenue of the Company for the nine months ended September 30, 2019 and 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 and 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.

7

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 nine months ended September 30, 2019 and 2018 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

	Three Months Ended				Nine Months Ended
	September 30				September 30
Revenue stream	2019		2018		2019		2018
Service charges on deposit accounts
Overdraft fees	$	405		395	$	1,132	$	1,143
Statement fees		52		50		153		155
Interchange revenue		589		566		1,724		1,671
ATM income		108		104		300		301
Other service charges		71		66		189		185
Total Service Charges		1,225		1,181		3,498		3,455
Trust		148		147		589		548
Brokerage and insurance		289		222		843		571
Other		80		84		267		245
Total	$	1,742	$	1,634	$	5,197	$	4,819

Note 3 - 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
	September 30,				September 30,
	2019		2018		2019		2018
Net income applicable to common stock	$	5,196,000	$	4,581,000	$	14,447,000	$	13,519,000
Basic earnings per share computation
Weighted average common shares outstanding		3,515,678		3,537,315		3,522,377		3,541,971
Earnings per share - basic	$	1.48	$	1.30	$	4.10	$	3.82
Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		3,515,678		3,537,315		3,522,377		3,541,971
Add: Dilutive effects of restricted stock		-		161		2,280		2,161
Weighted average common shares outstanding for dilutive earnings per share		3,515,678		3,537,476		3,524,657		3,544,132
Earnings per share - diluted	$	1.48	$	1.30	$	4.10	$	3.81

For the three months ended September 30, 2019 and 2018, there were 9,013 and 4,696 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 $50.65-$62.93 for the three month period ended September 30, 2019 and per share prices ranging from $46.69-$62.93 for the three month period ended September 30, 2018. For the nine months ended September 30, 2019 and 2018, 4,453 and 4,033 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 $50.65-$62.93 for the nine month period ended September 30, 2019 and prices ranging from $46.69-$61.04 for the nine month period ended September 30, 2018.

8

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at September 30, 2019 and December 31, 2018 were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
September 30, 2019	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	86,514	$	1,622	$	(97	)	$	88,039
U.S. treasury securities		32,347		266		(1	)		32,612
Obligations of state and
political subdivisions		60,149		984		(17	)		61,116
Corporate obligations		3,000		76		-			3,076
Mortgage-backed securities in
government sponsored entities		61,832		498		(146	)		62,184
Total available-for-sale securities	$	243,842	$	3,446	$	(261	)	$	247,027
December 31, 2018
Available-for-sale securities:
U.S. agency securities	$	106,516	$	509	$	(640	)	$	106,385
U.S. treasury securities		33,813		-		(455	)		33,358
Obligations of state and
political subdivisions		52,074		150		(177	)		52,047
Corporate obligations		3,000		34		-			3,034
Mortgage-backed securities in
government sponsored entities		46,839		59		(712	)		46,186
Total available-for-sale securities	$	242,242	$	752	$	(1,984	)	$	241,010

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 30, 2019 and December 31, 2018 (in thousands). As of September 30, 2019, the Company owned 48 securities whose fair value was less than their cost basis.

September 30, 2019	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	$	13,096	$	(44	)	$	26,192	$	(53	)	$	39,288	$	(97	)
U.S. treasury securities		1,989		(1	)		-		-			1,989		(1	)
Obligations of state and
political subdivisions		2,185		(15	)		1,519		(2	)		3,704		(17	)
Mortgage-backed securities in
government sponsored entities		20,279		(68	)		12,599		(78	)		32,878		(146	)
Total securities	$	37,549	$	(128	)	$	40,310	$	(133	)	$	77,859	$	(261	)
December 31, 2018
U.S. agency securities	$	5,981	$	(5	)	$	52,673	$	(635	)	$	58,654	$	(640	)
U.S. treasury securities		4,948		(31	)		28,410		(424	)		33,358		(455	)
Obligations of states and
political subdivisions		8,979		(22	)		12,441		(155	)		21,420		(177	)
Mortgage-backed securities in
government sponsored entities		5,272		(18	)		32,570		(694	)		37,842		(712	)
Total securities	$	25,180	$	(76	)	$	126,094	$	(1,908	)	$	151,274	$	(1,984	)

9

As of September 30, 2019 and December 31, 2018, 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. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or issuer-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Proceeds from sales of securities available-for-sale for the three and nine months ended September 30, 2019 and 2018 were $5,508,000 and $25,168,000, respectively. The gross gains and losses were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Gross gains on available for sale securities	$	9		$	161		$	9		$	161
Gross losses on available for sale securities		(1	)		(169	)	$	(1	)	$	(169	)
Net gains	$	8		$	(8	)	$	8		$	(8	)

The following table presents the net gains on the Company’s equity investments recognized in earnings during the three month and nine month periods ended September 30, 2019 and 2018, and the portion of unrealized gains for the period that relates to equity investments held at September 30, 2019 and 2018 (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
Equity securities	2019		2018			2019		2018
Net gains (losses) recognized in equity securities during the period	$	29	$	(4	)	$	70	$	9
Less: Net gains realized on the sale of equity securities during the period		-		-			-		-
Net unrealized  gains (losses)	$	29	$	(4	)	$	70	$	9

Investment securities with an approximate carrying value of $220.8 million and $221.2 million at September 30, 2019 and December 31, 2018, 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 30, 2019, by contractual maturity, are shown below (in thousands):

10

	Amortized
	Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	22,771	$	22,742
Due after one year through five years		92,295		94,069
Due after five years through ten years		40,656		41,115
Due after ten years		88,120		89,101
Total	$	243,842	$	247,027

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 30, 2019 and December 31, 2018, 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 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	215,717	$	1,195	$	24	$	214,498
Commercial		349,269		11,921		1,213		336,135
Agricultural		305,948		4,781		-		301,167
Construction		11,448		-		-		11,448
Consumer		9,709		6		-		9,703
Other commercial loans		76,785		2,042		91		74,652
Other agricultural loans		50,334		1,407		-		48,927
State and political subdivision loans		95,824		-		-		95,824
Total		1,115,034		21,352		1,328		1,092,354
Allowance for loan losses		13,679		810		-		12,869
Net loans	$	1,101,355	$	20,542	$	1,328	$	1,079,485
December 31, 2018	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	215,305	$	890	$	28	$	214,387
Commercial		319,265		13,327		1,321		304,617
Agricultural		284,520		5,592		-		278,928
Construction		33,913		-		-		33,913
Consumer		9,858		-		-		9,858
Other commercial loans		74,118		2,206		510		71,402
Other agricultural loans		42,186		1,435		-		40,751
State and political subdivision loans		102,718		-		-		102,718
Total		1,081,883		23,450		1,859		1,056,574
Allowance for loan losses		12,884		676		-		12,208
Net loans	$	1,068,999	$	22,774	$	1,859	$	1,044,366

Purchased loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. Upon acquisition, the Company evaluates 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 decreases in the expected cash flows of these loans between the acquisition date and September 30, 2019. 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 $1,328,000 and $1,859,000 at September 30, 2019 and December 31, 2018, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows and collateral valuations.

11

Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2019			2018			2019			2018
Balance at beginning of period	$	100		$	59		$	104		$	106
Accretion		(10	)		(24	)		(14	)		(71	)
Reclassification of non-accretable discount		-			93			-			93
Balance at end of period	$	90		$	128		$	90		$	128

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, 2019		December 31, 2018
Outstanding balance	$	4,076	$	4,529
Carrying amount		1,328		1,859

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):

12

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
September 30, 2019	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	1,220	$	814	$	227	$	1,041	$	10
Home Equity		174		85		69		154		12
Commercial		12,466		10,469		1,452		11,921		342
Agricultural		4,811		1,617		3,164		4,781		145
Consumer		6		6		-		6		-
Other commercial loans		2,621		1,715		327		2,042		144
Other agricultural loans		1,464		98		1,309		1,407		157
Total	$	22,762	$	14,804	$	6,548	$	21,352	$	810

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
December 31, 2018	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	932	$	515	$	288	$	803	$	10
Home Equity		106		12		75		87		14
Commercial		16,326		11,933		1,394		13,327		216
Agricultural		5,598		2,386		3,206		5,592		84
Consumer		-		-		-		-		-
Other commercial loans		2,711		1,836		370		2,206		193
Other agricultural loans		1,487		120		1,315		1,435		159
Total	$	27,160	$	16,802	$	6,648	$	23,450	$	676

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 month periods ended September 30, 2019 and 2018(in thousands):

	For the Nine Months Ended
	September 30, 2019						September 30, 2018
					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	$	1,075	$	12	$	-	$	988	$	10	$	-
Home Equity		108		4		-		98		4		-
Commercial		11,768		342		11		13,915		372		14
Agricultural		5,068		61		-		4,472		124		-
Consumer		2		-		-		2		-		-
Other commercial loans		2,088		1		-		3,906		73		-
Other agricultural loans		1,419		4		-		1,388		21		-
Total	$	21,528	$	424	$	11	$	24,769	$	604	$	14

13

	For the Three Months Ended
	September 30, 2019						September 30, 2018
					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	$	1,048	$	3	$	-	$	896	$	3	$	-
Home Equity		143		2		-		92		2		-
Commercial		11,906		112		-		14,116		130		6
Agricultural		4,795		5		-		5,146		24		-
Consumer		4		-		-		-		-		-
Other commercial loans		2,073		-		-		3,495		21		-
Other agricultural loans		1,408		-		-		1,453		2		-
Total	$	21,377	$	122	$	-	$	25,198	$	182	$	6

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 and assess 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 state and political relationships over $500,000 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, 2) review a sample of new loans originated for over $1.0 million in the last year, 3) review a sample 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.

14

The following tables represent credit exposures by internally assigned grades as of September 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	331,075	$	9,945	$	8,210	$	39	$	-	$	349,269
Agricultural		283,074		14,987		7,887		-		-		305,948
Construction		11,448		-		-		-		-		11,448
Other commercial loans		73,502		964		2,253		66		-		76,785
Other agricultural loans		47,026		1,710		1,598		-		-		50,334
State and political subdivision loans		95,349		-		475		-		-		95,824
Total	$	841,474	$	27,606	$	20,423	$	105	$	-	$	889,608

December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	297,690	$	10,792	$	10,743	$	40	$	-	$	319,265
Agricultural		264,732		10,017		9,771		-		-		284,520
Construction		33,913		-		-		-		-		33,913
Other commercial loans		70,425		777		2,800		116		-		74,118
Other agricultural loans		38,628		1,724		1,834		-		-		42,186
State and political subdivision loans		92,666		9,481		571		-		-		102,718
Total	$	798,054	$	32,791	$	25,719	$	156	$	-	$	856,720

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 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	154,924	$	935	$	24	$	155,883
Home Equity		59,742		92		-		59,834
Consumer		9,687		22		-		9,709
Total	$	224,353	$	1,049	$	24	$	225,426
December 31, 2018	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	155,360	$	1,099	$	28	$	156,487
Home Equity		58,736		82		-	$	58,818
Consumer		9,832		26		-	$	9,858
Total	$	223,928	$	1,207	$	28	$	225,163

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 30, 2019 and December 31, 2018 (in thousands):

15

													Total		90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and
September 30, 2019	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	155	$	205	$	334	$	694	$	155,165	$	24	$	155,883	$	19
Home Equity		224		86		88		398		59,436		-		59,834		-
Commercial		957		263		3,394		4,614		343,442		1,213		349,269		21
Agricultural		1,113		-		3,164		4,277		301,671		-		305,948		-
Construction		-		-		-		-		11,448		-		11,448		-
Consumer		64		14		22		100		9,609		-		9,709		22
Other commercial loans		15		4		1,941		1,960		74,734		91		76,785		41
Other agricultural loans		60		-		1,196		1,256		49,078		-		50,334		-
State and political
subdivision loans		-		-		-		-		95,824		-		95,824		-
Total	$	2,588	$	572	$	10,139	$	13,299	$	1,100,407	$	1,328	$	1,115,034	$	103
Loans considered non-accrual	$	258	$	230	$	10,036	$	10,524	$	2,699	$	-	$	13,223
Loans still accruing		2,330		342		103		2,775		1,097,708		1,328		1,101,811
Total	$	2,588	$	572	$	10,139	$	13,299	$	1,100,407	$	1,328	$	1,115,034

													Total		90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and
December 31, 2018	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	483	$	789	$	686	$	1,958	$	154,501	$	28	$	156,487	$	20
Home Equity		257		108		63		428		58,390		-		58,818		-
Commercial		999		631		4,706		6,336		311,608		1,321		319,265		36
Agricultural		121		-		3,184		3,305		281,215		-		284,520		-
Construction		-		-		-		-		33,913		-		33,913		-
Consumer		37		14		12		63		9,795		-		9,858		12
Other commercial loans		141		53		2,061		2,255		71,353		510		74,118		-
Other agricultural loans		-		-		1,201		1,201		40,985		-		42,186		-
State and political
subdivision loans		-		-		-		-		102,718		-		102,718		-
Total	$	2,038	$	1,595	$	11,913	$	15,546	$	1,064,478	$	1,859	$	1,081,883	$	68
Loans considered non-accrual	$	72	$	253	$	11,845	$	12,170	$	1,554	$	-	$	13,724
Loans still accruing		1,966		1,342		68		3,376		1,062,924		1,859		1,068,159
Total	$	2,038	$	1,595	$	11,913	$	15,546	$	1,064,478	$	1,859	$	1,081,883

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 30, 2019 and December 31, 2018, respectively. The balances are presented by class of financing receivable (in thousands):

16

	September 30, 2019		December 31, 2018
Real estate loans:
Mortgages	$	916	$	1,079
Home Equity		92		82
Commercial		5,413		5,957
Agricultural		3,549		3,206
Consumer		-		14
Other commercial loans		2,009		2,185
Other agricultural loans		1,244		1,201
	$	13,223	$	13,724

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 30, 2019 and December 31, 2018, included within the allowance for loan losses are reserves of $351,000 and $255,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2019 and 2018 were as follows (dollars in thousands):

	For the Three Months Ended September 30, 2019
	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	$	-	$	118	$	-	$	118
Consumer		-		1		-		3		-		3
Total		-		2	$	-	$	121	$	-	$	121

	For the Nine Months Ended September 30, 2019
	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	$	-	$	4	$	-	$	4
Home Equity		-		1		-		40		-		40
Commercial		-		5		-		918		-		918
Consumer		-		1		-		3		-		3
Total		-		8	$	-	$	965	$	-	$	965

17

	For the Three Months Ended September 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:
Commercial		-		1	$	-	$	106	$	-	$	106
Agricultural		-		2		-		1,302		-		1,302
Total		-		3	$	-	$	1,408	$	-	$	1,408

	For the Nine Months Ended September 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		-		2		-		683		-		683
Agricultural		-		3		-		2,825		-		2,825
Other agricultural loans		-		4		-		176		-		176
Total		-		11	$	-	$	3,692	$	-	$	3,692

 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. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2019 and 2018 (9 month periods) and July 1, 2019 and 2018 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	For the Three Months Ended								For the Nine Months Ended
	September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		-	$	-		-	$	-	$	1	$	542		-	$	-
Agricultural		-		-		2		1,302		1		1,439		2		1,302
Other agricultural loans		-		-		1		124		4		261		1		124
Total recidivism		-	$	-		3	$	1,426		6	$	2,242		3	$	1,426

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 30, 2019 and December 31, 2018, respectively (in thousands):

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	September 30, 2019						December 31, 2018
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	22	$	1,069	$	1,091	$	24	$	1,081	$	1,105
Commercial		342		4,299		4,641		216		3,899		4,115
Agricultural		145		4,567		4,712		84		4,180		4,264
Construction		-		19		19		-		58		58
Consumer		-		119		119		-		120		120
Other commercial loans		144		1,205		1,349		193		1,161		1,354
Other agricultural loans		157		712		869		159		593		752
State and political
subdivision loans		-		536		536		-		762		762
Unallocated		-		343		343		-		354		354
Total	$	810	$	12,869	$	13,679	$	676	$	12,208	$	12,884

The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):

	For the three months ended September 30, 2019
	Balance at June 30, 2019		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2019
Real estate loans:
Residential	$	1,066	$	(24	)	$	-	$	49		$	1,091
Commercial		4,400		-			-		241			4,641
Agricultural		4,532		-			-		180			4,712
Construction		36		-			-		(17	)		19
Consumer		118		(10	)		6		5			119
Other commercial loans		1,328		-			3		18			1,349
Other agricultural loans		741		-			-		128			869
State and political				-			-
subdivision loans		539		-			-		(3	)		536
Unallocated		544		-			-		(201	)		343
Total	$	13,304	$	(34	)	$	9	$	400		$	13,679
	For the nine months ended September 30, 2019
	Balance at December 31, 2018		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2019
Real estate loans:
Residential	$	1,105	$	(24	)	$	-	$	10		$	1,091
Commercial		4,115		(293	)		-		819			4,641
Agricultural		4,264		-			-		448			4,712
Construction		58		-			-		(39	)		19
Consumer		120		(32	)		24		7			119
Other commercial loans		1,354		(38	)		8		25			1,349
Other agricultural loans		752		-			-		117			869
State and political
subdivision loans		762		-			-		(226	)		536
Unallocated		354		-			-		(11	)		343
Total	$	12,884	$	(387	)	$	32	$	1,150		$	13,679

19

	For the three months ended September 30, 2018
	Balance at June 30, 2018		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2018
Real estate loans:
Residential	$	1,045	$	(10	)	$	1	$	16		$	1,052
Commercial		3,794		(25	)		-		156			3,925
Agricultural		3,673							256			3,929
Construction		44		-			-		5			49
Consumer		115		(13	)		9		12			123
Other commercial loans		1,266		-			5		(52	)		1,219
Other agricultural loans		589		-			-		110			699
State and political
subdivision loans		767		-			-		(16	)		751
Unallocated		648		-			-		(12	)		636
Total	$	11,941	$	(48	)	$	15	$	475		$	12,383
	For the nine months ended September 30, 2018
	Balance at December 31, 2017		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2018
Real estate loans:
Residential	$	1,049	$	(27	)	$	70	$	(40	)	$	1,052
Commercial		3,867		(25	)		3		80			3,925
Agricultural		3,143		-					786			3,929
Construction		23		-			-		26			49
Consumer		124		(32	)		26		5			123
Other commercial loans		1,272		(91	)		19		19			1,219
Other agricultural loans		492		(50	)		-		257			699
State and political
subdivision loans		816		-			-		(65	)		751
Unallocated		404		-			-		232			636
Total	$	11,190	$	(225	)	$	118	$	1,300		$	12,383

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;

20

• 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 at least 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 30, 2019, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of overall growth in the portfolio. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision.

For the nine months ended September 30, 2019, the allowance for commercial real estate was increased in general reserves due to general increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. There also was an increase in specific reserves for commercial real estate, which was partially offset by the decrease in substandard loans. The total change was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. Additionally, there was an increase in specific reserves. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision. These resulted in an increase in the provision. The allowance for state and political subdivision was decreased as a result a decrease in the volume of classified loans. The result of this change was represented as a decrease in the provision.

For the three months ended September 30, 2018, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio as well as an increase in specific reserves. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances, an increase in the amount of loans classified as non-accrual and an increase in specific reserves. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of an increase in specific reserves, which offset the decrease due to the decrease in the portfolio size. The result of these changes was represented as an increase in the provision.

For the nine months ended September 30, 2018, 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. There was an increase in specific reserves for commercial real estate. The total change was represented as an increase 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 nonaccrual. Additionally, there was an increase in specific reserves. These resulted in an increase in the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances, loans past due and an increase in non-accrual loans. Additionally, specific reserves also increased. The result of these changes was represented as an increase in the provision.

21

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 30, 2019 and December 31, 2018, included within other assets are $3,497,000 and $601,000, respectively, of foreclosed assets. As of September 30, 2019, included within the foreclosed assets are $337,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2019, the Company had initiated formal foreclosure proceedings on $1,885,000 of consumer residential mortgages, which had 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 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019							December 31, 2018
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	1,838	$	(1,204	)	$	634	$	1,725	$	(1,066	)	$	659
Core deposit intangibles		1,786		(1,025	)		761		1,786		(851	)		935
Covenant not to compete		125		(120	)		5		125		(96	)		29
Total amortized intangible assets	$	3,749	$	(2,349	)	$	1,400	$	3,636	$	(2,013	)	$	1,623
Unamortized intangible assets:
Goodwill	$	23,296						$	23,296
(1) Excludes fully amortized intangible assets

The following table provides the current year and estimated future amortization expense for amortized intangible assets for the next five years (in thousands). We based our projections of amortization expense shown below on existing asset balances at September 30, 2019. Future amortization expense may vary from these projections:

	MSRs		Core deposit intangibles		Covenant not to compete		Total
Three months ended September 30, 2019 (actual)	$	44	$	58	$	8	$	110
Nine months ended September 30, 2019 (actual)		138		174		24		336
Three months ended September 30, 2018 (actual)		46		66		8		120
Nine months ended September 30, 2018 (actual)		143		200		24		367
Estimate for year ending December 31,
Remaining 2019		48		56		5		109
2020		167		197		-		364
2021		131		165		-		296
2022		100		133		-		233
2023		73		100		-		173

Note 7 – Leases

The following table details the Company’s right of use asset and the corresponding lease liability for the Company’s operating leases as of September 30, 2019 and the affected line item on the Consolidated Balance Sheet(in thousands):

Lease Type	Balance at September 30, 2019		Affected line item on the Consolidated Balance Sheet
Right of Use Assets
Operating	$	1,237	Other Assets
Lease Liabilities:
Operating	$	1,237	Other Liabilities

22

The following table provides information related to the Company’s lease costs for the three and nine months ended September 30, 2019 (in thousands):

	September 30, 2019
Lease Cost	Three months Ended		Nine Months Ended
Operating lease cost	$	85	$	255
Variable lease cost		20		64
Total lease cost	$	105	$	319

The following table displays the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases outstanding as of September 30, 2019:

	Operating
Weighted average term (years)	6.16
Weighted average discount rate	3.14%

The following table provides the undiscounted cashflows related to operating leases as of September 30, 2019 along with a reconciliation to the discounted amount recorded on the September 30, 2019 Consolidated Balance Sheet (in thousands):

Undiscounted cash flows due within	Operating
Remaining 2019	$	84
2020		279
2021		238
2022		230
2023		142
2024		105
2025 and thereafter		291
Total undiscounted cash flows		1,369
Impact of present value discount		132
Amount reported on balance sheet	$	1,237

Note 8 - 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 2018 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 the First National Bank of Fredericksburg (FNB) when FNB was acquired. The FNB plan was frozen prior to the acquisition and therefore, no additional benefits will accrue for employees covered under that plan. The Bank has begun proceedings to terminate the FNB plan, which included distributing assets to plan participants and expects to finalize the plan termination in the fourth quarter. 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.

23

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 30, 2019 and 2018, respectively (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Affected line item on the Consolidated
	2019			2018			2019			2018			Statement of income
Service cost	$	78		$	90		$	256		$	269		Salary and Employee Benefits
Interest cost		123			164			401			489		Other Expenses
Expected return on plan assets		(187	)		(230	)		(595	)		(919	)	Other Expenses
Net amortization and deferral		60			47			181			140		Other Expenses
Net periodic benefit cost	$	74		$	71		$	243		$	(21	)

The Bank does not expect to contribute to the Pension Plans during 2019.

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 30, 2019, 130,452 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 months ended September 30, 2019:

	Three months				Nine months
			Weighted					Weighted
	Unvested		Average		Unvested			Average
	Shares		Market Price		Shares			Market Price
Outstanding, beginning of period		10,764	$	60.16		9,764		$	58.21
Granted		-		-		5,130			60.21
Forfeited		-		-		(152	)		60.00
Vested		-		-		(3,978	)		(55.46	)
Outstanding, end of period		10,764	$	60.16		10,764		$	60.16

Compensation expense 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 $219,000 and $187,000 for the nine months ended September 30, 2019 and 2018, respectively. For the three months ended September 30, 2019 and 2018, compensation expense totaled $78,000 and $68,000, respectively. At September 30, 2019, the total compensation cost related to nonvested awards that had not yet been recognized was $648,000, which is expected to be recognized over the next three years.

Note 9 – Accumulated Comprehensive Loss

The following tables present the changes in accumulated other comprehensive loss by component net of tax for the three and nine months ended September 30, 2019 and 2018 (in thousands):

24

	Nine months ended September 30, 2019
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2018	$	(973	)	$	(2,948	)	$	(3,921	)
Other comprehensive income (loss) before reclassifications (net of tax)		3,495			-			3,495
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(6	)		143			137
Net current period other comprehensive income (loss)		3,489			143			3,632
Balance as of September 30, 2019	$	2,516		$	(2,805	)	$	(289	)
	Nine months ended September 30, 2018
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2017	$	(269	)	$	(3,129	)	$	(3,398	)
Change in Accounting policy for equity securities		1			-			1
Other comprehensive income (loss) before reclassifications (net of tax)		(2,800	)		-			(2,800	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		6			110			116
Net current period other comprehensive income (loss)		(2,794	)		110			(2,684	)
Balance as of September 30, 2018	$	(3,062	)	$	(3,019	)	$	(6,081	)
	Three months ended September 30, 2019
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2019	$	2,515		$	(2,852	)	$	(337	)
Other comprehensive income (loss) before reclassifications (net of tax)		7			-			7
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(6	)		47			41
Net current period other comprehensive income (loss)		1			47			48
Balance as of September 30, 2019	$	2,516		$	(2,805	)	$	(289	)
	Three months ended September 30, 2018
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2018	$	(2,302	)	$	(3,055	)	$	(5,357	)
Other comprehensive income (loss) before reclassifications (net of tax)		(766	)		-			(766	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		6			36			42
Net current period other comprehensive income (loss)		(760	)		36			(724	)
Balance as of September 30, 2018	$	(3,062	)	$	(3,019	)	$	(6,081	)
(a) Amounts in parentheses indicate debits on the Consolidated Balance Sheet.

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive income for the three and nine months ended September 30, 2019 and 2018 (in thousands):

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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 September 30,
	2019			2018
Unrealized gains and losses on available for sale securities
	$	8		$	(8	)	Available for sale securities gains, net
		(2	)		2		Provision for income taxes
	$	6		$	(6	)	Net of tax
Defined benefit pension items
	$	(60	)	$	(47	)	Other expenses
		13			11		Provision for income taxes
	$	(47	)	$	(36	)	Net of tax
Total reclassifications	$	(41	)	$	(42	)
	Nine Months Ended September 30
		2019			2018
Unrealized gains and losses on available for sale securities
	$	8		$	(8	)	Available for sale securities gains, net
		(2	)		2		Provision for income taxes
	$	6		$	(6	)	Net of tax
Defined benefit pension items
	$	(181	)	$	(140	)	Other expenses
		38			30		Provision for income taxes
	$	(143	)	$	(110	)	Net of tax
Total reclassifications	$	(137	)	$	(116	)
(a) Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income

Note 10 – 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.

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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.

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 30, 2019 and December 31, 2018 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.

September 30, 2019	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	650	$	-	$	-	$	650
Available for sale securities:
U.S. Agency securities		-		88,039		-		88,039
U.S. Treasury securities		32,612		-		-		32,612
Obligations of state and
political subdivisions		-		61,116		-		61,116
Corporate obligations		-		3,076		-		3,076
Mortgage-backed securities in
government sponsored entities		-		62,184		-		62,184
December 31, 2018	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	516	$	-	$	-	$	516
Available for sale securities:
U.S. Agency securities		-		106,385		-		106,385
U.S. Treasuries securities		33,358		-		-		33,358
Obligations of state and
political subdivisions		-		52,047		-		52,047
Corporate obligations		-		3,034		-		3,034
Mortgage-backed securities in
government sponsored entities		-		46,186		-		46,186

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Assets and Liabilities Required to be Measured and Reported at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 are included in the table below (in thousands):

September 30, 2019	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	5,637	$	5,637
Other real estate owned		-		-		3,386		3,386
December 31, 2018	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	5,815	$	5,815
Other real estate owned		-		-		532		532

• 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 $572,000 and $563,000 at September 30, 2019 and December 31, 2018, 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, 2019	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Impaired Loans	$	5,637	Appraised Collateral Values	Discount for time since appraisal		0-100	%		20.17	%
				Selling costs		5%-12	%		8.90	%
				Holding period	0 - 12 months			11.68 months
Other real estate owned		3,386	Appraised Collateral Values	Discount for time since appraisal		6-67	%		15.58	%

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December 31, 2018	Fair Value	Valuation Technique(s)	Unobservable input	Range
Impaired Loans	5,815	Appraised Collateral Values	Discount for time since appraisal	0-100%	19.22%
			Selling costs	5%-12%	8.70%
			Holding period	6 - 12 months	11.61 months
Other real estate owned	532	Appraised Collateral Values	Discount for time since appraisal	20-65%	31.44%

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

The carrying amount and fair 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
September 30, 2019	Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	14,256	$	14,628	$	-	$	-	$	14,628
Loans held for sale		1,430		1,429		-		-		1,429
Net loans		1,101,355		1,090,978		-		-		1,090,978
Financial liabilities:
Deposits		1,199,304		1,199,276		925,138		-		274,138
Borrowed funds		109,840		109,626		-		-		109,626
	Carrying
December 31, 2018	Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	15,498	$	15,422	$	-	$	-	$	15,422
Loans held for sale		1,127		1,126		-		-		1,126
Net loans		1,068,999		1,062,645		-		-		1,062,645
Financial liabilities:
Deposits		1,185,156		1,180,694		886,686		-		294,008
Borrowed funds		91,194		90,427		-		-		90,427

The carrying amounts for cash and due from banks, bank owned life insurance, regulatory stock, accrued interest receivable and payable approximate fair value and are considered Level I measurements.

Note 11 – Proposed Acquisition of MidCoast Community Bancorp, Inc.

On September 18, 2019, the Citizens Financial Services, Inc. (Company) and its wholly owned subsidiary, Firt Citizens Community Bank (Bank), and MidCoast Community Bancorp, Inc. (MidCoast), and its wholly owned subsidiary, MidCoast Community Bank (“MC Bank”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which MidCoast will merge with and into a to-be-formed, wholly-owned acquisition subsidiary of the Company, with the acquisition subsidiary as the surviving corporation. Concurrent with the merger, it is expected that MC Bank will merge with and into the Bank, with the Bank as the surviving institution.

Under the terms of the Merger Agreement, each outstanding share of MidCoast common stock will be converted into either the right to receive $6.50 in cash or 0.1065 shares of the Company’s common stock.  Not more than 25% of the outstanding shares of MidCoast common stock (including for this purpose, dissenters’ shares) may be paid in cash and the remainder will be paid in the Company’s common stock.   In the event of a greater than 20% decline in market value of the Company’s common stock, MidCoast may, in certain circumstances, be able to terminate the Merger Agreement unless the Company increases the number of shares into which MidCoast Bancshares common stock may be converted or increases in the cash component of the merger consideration.

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The senior management of the Company and the Bank will remain the same following the merger.  A majority of the directors of MidCoast will be invited to join newly formed corporate advisory board.  

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of MidCoast.  The merger is currently expected to be completed in the second quarter of 2020.

Each of the directors of MidCoast have agreed to vote their shares in favor of the approval of the Merger Agreement at the shareholders’ meeting to be held to vote on the proposed transaction. If the merger is not consummated under certain circumstances, MidCoast has agreed to pay the Company a termination fee of $1,200,000.

The Merger Agreement also contains usual and customary representations and warranties that the Company and MidCoast made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between the Company and MidCoast, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders, and the representations and warranties may have been used to allocate risk between the Company and MidCoast rather than establishing matters as facts.

Note 12 – Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

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

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

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendmentsare effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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

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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., 1^st Realty of PA LLC 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 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 some of our customers.

• Agricultural customers could be affected by factors outside of their control including adverse weather conditions, loss of crops or livestock due to diseases or other factors, and government policies, regulations and tariffs.

• 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 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.

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Additional factors that may affect our results are discussed under “Part II – Item 1A – Risk Factors” in this report and in the Company’s 2018 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 months ended September 30, 2019 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 Centre counties in north central Pennsylvania, Lebanon, Berks, Schuylkill and Lancaster counties in south central Pennsylvania and Allegany County in southern New York. We also have a limited branch office in Union county, Pennsylvania, which primarily serves agricultural and commercial customers in the central Pennsylvania market. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 29 banking facilities, 28 of which operate as bank branches.  In Pennsylvania, the Company has full service offices 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, Fivepointville, State College and three branches near the city of Lebanon, Pennsylvania. The Fivepointville branch was opened in the first quarter of 2019. The limited branch office is located in Winfield, Pennsylvania. In New York, our office is in Wellsville.

In the third quarter of 2019, the Company entered into a definitive agreement to acquire MidCoast Community Bancorp, Inc. (MidCoast). The transaction is expected to close in the first half of 2020, subject to the satisfaction of customary closing conditions.

In the third quarter of 2019, the Company notified its regulators of its intention to close one of its branches in the city of Lebanon, Pennsylvania.

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 market 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.

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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, 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 other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds, insurance companies, credit unions, agricultural cooperatives and internet entities for loans and deposits. 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. 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, deposits 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.  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. 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 30, 2019 and December 31, 2018, the Trust Department had $130.4 million and $117.6 million of assets under management, respectively.

Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank’s market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc.  The assets associated with these products are not included in the Consolidated 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 $178.5 million at December 31, 2018 to $209.0 million at September 30, 2019. 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.

Results of Operations

35

Overview of the Income Statement

The Company had net income of $14,447,000 for the first nine months of 2019 compared to $13,519,000 for last year’s comparable period, an increase of $928,000, or 6.9%. Basic earnings per share for the first nine months of 2019 were $4.10, compared to $3.82 last year, representing a 7.3% increase.  Annualized return on assets and return on equity for the nine months of 2019 were 1.33% and 12.99%, respectively, compared with 1.30% and 13.13% for last year’s comparable period.

Net income for the three months ended September 30, 2019 was $5,196,000 compared to $4,581,000 in the comparable 2018 period, an increase of $615,000 or 13.4%. Basic earnings per share for the three months ended September 30, 2019 were $1.48, compared to $1.30 last year, representing a 13.9% increase. Annualized return on assets and return on equity for the quarter ended September 30, 2019 was 1.43% and 13.74%, respectively, compared with 1.30% and 13.08% for the same 2018 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 paid on interest-bearing liabilities.

Net interest income for the first nine months of 2019 was $37,150,000, an increase of $2,209,000, or 6.3%, compared to the same period in 2018.  For the first nine months of 2019, the provision for loan losses totaled $1,150,000, a decrease of $150,000 over the comparable period in 2018.  Consequently, net interest income after the provision for loan losses was $36,000,000 compared to $33,641,000 during the first nine months of 2018.

For the three months ended September 30, 2019, net interest income was $12,899,000 compared to $11,770,000, an increase of $1,129,000, or 9.6% over the comparable period in 2018. The provision for loan losses this quarter was $400,000 compared to $475,000 for last year’s second quarter.  Consequently, net interest income after the provision for loan losses was $12,499,000 for the quarter ended September 30, 2019 compared to $11,295,000 in 2018.

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 and three months ended September 30, 2019 and 2018 on a tax equivalent basis (dollars in thousands):

36

	Analysis of Average Balances and Interest Rates
	Nine Months Ended
	September 30, 2019							September 30, 2018
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)	$				$	%		$				$	%
ASSETS
Short-term investments:
Interest-bearing deposits at banks		9,546		19		0.27			8,806		14		0.21
Total short-term investments		9,546		19		0.27			8,806		14		0.21
Interest bearing time deposits at banks		15,364		292		2.54			11,972		204		2.28
Investment securities:
Taxable		189,157		3,968		2.80			189,220		3,038		2.14
Tax-exempt (3)		58,150		1,404		3.22			68,975		1,805		3.49
Total investment securities		247,307		5,372		2.90			258,195		4,843		2.50
Loans (2)(3)(4):
Residential mortgage loans		215,325		8,584		5.33			214,134		8,347		5.21
Construction		20,576		796		5.17			23,441		829		4.73
Commercial Loans		415,287		17,064		5.49			387,482		15,273		5.27
Agricultural Loans		338,266		11,657		4.61			298,875		9,812		4.39
Loans to state & political subdivisions		98,680		2,910		3.94			101,189		2,693		3.56
Other loans		9,680		562		7.76			9,540		553		7.75
Loans, net of discount		1,097,814		41,573		5.06			1,034,661		37,507		4.85
Total interest-earning assets		1,370,031		47,256		4.61			1,313,634		42,568		4.33
Cash and due from banks		6,243							6,826
Bank premises and equipment		16,120							16,367
Other assets		56,978							54,849
Total non-interest earning assets		79,341							78,042
Total assets		1,449,372							1,391,676
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		331,084		1,756		0.71			325,667		1,127		0.46
Savings accounts		216,858		608		0.37			189,635		185		0.13
Money market accounts		163,443		1,520		1.24			162,816		1,091		0.90
Certificates of deposit		282,754		3,143		1.49			268,737		2,292		1.14
Total interest-bearing deposits		994,139		7,027		0.95			946,855		4,695		0.66
Other borrowed funds		108,975		2,216		2.72			126,158		2,034		2.16
Total interest-bearing liabilities		1,103,114		9,243		1.12			1,073,013		6,729		0.84
Demand deposits		184,159							168,951
Other liabilities		13,817							12,392
Total non-interest-bearing liabilities		197,976							181,343
Stockholders' equity		148,282							137,320
Total liabilities & stockholders' equity		1,449,372							1,391,676
Net interest income				38,013							35,839
Net interest spread (5)						3.49	%						3.49	%
Net interest income as a percentage
of average interest-earning assets						3.71	%						3.65	%
Ratio of interest-earning assets
to interest-bearing liabilities						124	%						122	%
(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
a statutory federal income tax rate of 21%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
and the average rate paid on interest-bearing liabilities.

37

	Analysis of Average Balances and Interest Rates
	Three Months Ended
	September 30, 2019							September 30, 2018
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)	$				$	%		$				$	%
ASSETS
Short-term investments:
Interest-bearing deposits at banks		10,047		6		0.24			9,195		5		0.22
Total short-term investments		10,047		6		0.24			9,195		5		0.22
Interest bearing time deposits at banks		15,100		97		2.55			14,369		89		2.47
Investment securities:
Taxable		182,113		1,478		3.25			177,937		1,074		2.41
Tax-exempt (3)		59,464		477		3.22			63,467		538		3.49
Total investment securities		241,577		1,955		3.24			241,404		1,612		2.67
Loans (2)(3)(4):
Residential mortgage loans		215,748		2,892		5.32			212,891		2,808		5.23
Construction		13,149		176		5.31			29,184		355		4.82
Commercial Loans		424,662		5,863		5.48			382,417		5,098		5.29
Agricultural Loans		344,897		4,018		4.62			314,307		3,489		4.40
Loans to state & political subdivisions		96,192		958		3.95			99,807		906		3.60
Other loans		9,566		196		8.13			9,618		185		7.65
Loans, net of discount		1,104,214		14,103		5.07			1,048,224		12,841		4.86
Total interest-earning assets		1,370,938		16,161		4.68			1,313,192		14,547		4.39
Cash and due from banks		5,944							7,039
Bank premises and equipment		15,967							16,266
Other assets		58,869							69,708
Total non-interest earning assets		80,780							93,013
Total assets		1,451,718							1,406,205
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		335,279		590		0.70			320,574		394		0.49
Savings accounts		221,771		218		0.39			194,110		84		0.17
Money market accounts		167,229		505		1.20			181,449		480		1.05
Certificates of deposit		266,385		1,002		1.49			271,355		836		1.22
Total interest-bearing deposits		990,664		2,315		0.93			967,488		1,794		0.74
Other borrowed funds		102,622		660		2.56			114,314		695		2.41
Total interest-bearing liabilities		1,093,286		2,975		1.08			1,081,802		2,489		0.91
Demand deposits		194,024							172,288
Other liabilities		13,139							12,022
Total non-interest-bearing liabilities		207,163							184,310
Stockholders' equity		151,269							140,093
Total liabilities & stockholders' equity		1,451,718							1,406,205
Net interest income				13,186							12,058
Net interest spread (5)						3.60	%						3.48	%
Net interest income as a percentage
of average interest-earning assets						3.82	%						3.64	%
Ratio of interest-earning assets
to interest-bearing liabilities						125	%						121	%
(1) Averages are based on daily averages.
(2) Includes loan origination and commitment fees.
(3) Tax exempt interest revenue is shown on a tax equivalent basis for proper comparison using
a statutory federal income tax rate of 21%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
and the average rate paid on interest-bearing liabilities.

Tax exempt revenue is shown on a tax-equivalent basis (non-gaap) for proper comparison using a federal statutory income tax rate of 21% for the nine and three months ended September 30, 2019 and 2018.  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 Federal statutory 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 30, 2019 and 2018 (in thousands):

38

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2019		2018		2019		2018
Interest and dividend income from investment securities
and interest bearing deposits at banks (non-tax adjusted)	$	1,959	$	1,593	$	5,388	$	4,682
Tax equivalent adjustment		99		113		295		379
Interest and dividend income from investment securities
and interest bearing deposits at banks (tax equivalent basis)	$	2,058	$	1,706	$	5,683	$	5,061
Interest and fees on loans (non-tax adjusted)	$	13,915	$	12,666	$	41,005	$	36,988
Tax equivalent adjustment		188		175		568		519
Interest and fees on loans (tax equivalent basis)	$	14,103	$	12,841	$	41,573	$	37,507
Total interest income	$	15,874	$	14,259	$	46,393	$	41,670
Total interest expense		2,975		2,489		9,243		6,729
Net interest income		12,899		11,770		37,150		34,941
Total tax equivalent adjustment		287		288		863		898
Net interest income (tax equivalent basis) (non-gaap)	$	13,186	$	12,058	$	38,013	$	35,839

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, 2019 vs 2018 (1)									Nine months ended September 30, 2019 vs 2018 (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	$	-		$	1		$	1		$	5		$	-		$	5
Interest bearing time deposits at banks		5			3			8			63			25			88
Investment securities:
Taxable		26			378			404			(2	)		932			930
Tax-exempt		(34	)		(27	)		(61	)		(269	)		(132	)		(401	)
Total investments		(8	)		351			343			(271	)		800			529
Loans:
Residential mortgage loans		38			46			84			47			190			237
Construction		(220	)		41			(179	)		(143	)		110			(33	)
Commercial Loans		578			187			765			1,125			666			1,791
Agricultural Loans		351			178			529			1,340			505			1,845
Loans to state & political subdivisions		(31	)		83			52			(64	)		281			217
Other loans		(1	)		12			11			8			1			9
Total loans, net of discount		715			547			1,262			2,313			1,753			4,066
Total Interest Income		712			902			1,614			2,110			2,578			4,688
Interest Expense:
Interest-bearing deposits:
NOW accounts		19			177			196			19			610			629
Savings accounts		14			120			134			30			393			423
Money Market accounts		(31	)		56			25			4			425			429
Certificates of deposit		(15	)		181			166			126			725			851
Total interest-bearing deposits		(13	)		534			521			179			2,153			2,332
Other borrowed funds		(82	)		47			(35	)		(199	)		381			182
Total interest expense		(95	)		581			486			(20	)		2,534			2,514
Net interest income	$	807		$	321		$	1,128		$	2,130		$	44		$	2,174
(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 $35,839,000 for the nine month period ended September 30, 2018 to $38,013,000 for the nine month period ended September 30, 2019, an increase of $2,174,000. The tax equivalent net interest margin increased from 3.65% for the first nine months of 2019 to 3.71% for the comparable period in 2019. The increase is primarily caused by the increase in the yield on interest-earning assets.

Total tax equivalent interest income for the 2019 nine month period increased $4,688,000 as compared to the 2018 nine month period. This increase was a result of an increase of $2,110,000 due to a change in volume as average interest-bearing assets increased $56.4 million and due to an increase in the yield on interest-earning assets of 28 basis points, which corresponds to an increase of $2,578,000. As a result of converting investment assets to loans and higher reinvestment rates, the yield on average interest earning assets increased 28 basis points from 4.33% to 4.61%.

39

Tax equivalent investment income for the nine months ended September 30, 2019 increased $529,000 over the same period last year. The primary cause of the increase was an increase in the average yield on investment securities of 40 basis points.

• The yield on taxable securities increased 66 basis points from 2.14% to 2.80% as a result of the rise in short term rates due to the increase in the Fed Funds rate and the calls and maturities of lower yielding investments and calls of investments that were purchased at a discount. This resulted in an increase in investment income of $932,000.

• The average balance of tax-exempt securities decreased by $10.8 million, which resulted in a decrease in investment income of $269,000. The yield on tax-exempt securities decreased 27 basis points from 3.49% to 3.22%, which corresponds to a decrease in interest income of $132,000. The yield decrease was attributable to higher yielding securities being called and maturing. For a discussion of the Company’s current investment strategy, see the “Financial Condition – Investments”.

Total loan interest income increased $4,066,000 for the nine months ended September 30, 2019 compared to the same period last year, as a result of loan growth achieved in 2018 and the first nine months of 2019 that occurred primarily in our central and south central Pennsylvania markets and an increase in loan yields when comparing 2019 to 2018.

• The average balance of commercial loans increased $27.8 million from a year ago. The growth was attributable to organic growth in our central and south central Pennsylvania markets. This had a positive impact of $1,125,000 on total interest income due to volume. The yield increased 22 basis points to 5.49%, which increased loan interest income $666,000.

• Interest income on agricultural loans increased $1,845,000 from 2018 to 2019. The increase in the average balance of agricultural loans of $39.4 million is primarily attributable to loan growth in our 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 $1,340,000. The yield on agricultural loans increased 22 basis points to 4.61%, which increased loan interest income $505,000.

• The average balance of construction loans decreased $2.9 million from a year ago as a result of several large commercial and agricultural construction projects completing in the first part of 2019. This resulted in a decrease of $143,000 on total interest income due to volume. The yield earned on construction loans increased 44 basis points to 5.17% resulting in an increase of $110,000.

• The average balance of state and political subdivision loans decreased $2.5 million from a year ago as the market was not as attractive due to the reduction in the Federal corporate income tax rate. This resulted in a decrease of $64,000 on total interest income due to volume. The tax effected yield increased 38 basis points to 3.94%, which increased loan interest income $281,000.

• Interest income on residential mortgage loans increased $237,000. The average yield on residential loans increased 12 basis points from a year ago, which resulted in an increase in loan interest income of $190,000.

Total interest expense increased $2,514,000 for the nine months ended September 30, 2019 compared with the comparative period last year primarily as a result of an increase in the cost of interest-bearing liabilities. Interest expense increased $2,534,000 due to rate as a result of an increase in the average rate paid on interest-bearing liabilities from 0.84% to 1.12%.

• The average balance of interest bearing deposits increased $47.3 million from September 30, 2018 to September 30, 2019. Increases were experienced in NOW accounts of $5.4 million, savings accounts of $27.2 million, money market accounts of $627,000 and certificates of deposit of $14.0 million. The cumulative effect of these volume changes was an increase in interest expense of $179,000.  (see also “Financial Condition – Deposits”). The rate paid on interest bearing deposits was 0.95% for the first nine months of 2019 and 0.66% for the comparable period in 2018. This resulted in an increase in interest expense of $2,153,000. The increase was due to the Federal Reserve raising interest rates during 2018 and competitive pressures for municipal deposits.

40

• The average balance of other borrowed funds decreased $17.2 million from a year ago. This resulted in a decrease in interest expense of $199,000. There was an increase in the average rate on other borrowed funds from 2.16% to 2.72% due to an increase in the overnight borrowing rate as a result of the Federal Reserve interest rate increases in 2018 resulting in an increase in interest expense of $381,000.

Tax equivalent net interest income for the three months ended September 30, 2019 was $13,186,000 which compares to $12,058,000 for the same period last year.  This represents an increase of $1,128,000 or 9.4%.

Total tax equivalent interest income was $16,161,000 for the three month period ended September 30, 2019, compared to $14,547,000 for the comparable period last year, an increase of $1,614,000. As with the nine month period, the increase was driven by an increase in volume of $712,000 due to average interest earning assets increasing $57.7 million and an increase of $902,000 as a result of the average yield on interest-earning assets increasing 29 basis points from 4.39% to 4.68% for the comparable periods.

• Total investment income increased by $343,000 compared to same period last year.  The primary cause of the increase was in the yield on taxable securities of 84 basis points, which corresponds to an increase in investment income of $378,000. The yield increase was impacted by securities purchased at a discount in prior years being called in the third quarter of 2019 resulting in additional accretion. Offsetting this increase, there was a $61,000 decrease in investment income from tax-exempt securities due to a decrease in average tax-exempt securities of $4.0 million and a decrease of 27 basis points on the yield of tax-exempt securities.

• Total loan interest income increased $1,262,000 compared to the same period last year, with the change corresponding to the year to date changes. As a result of growth, which occurred primarily in the south central and central Pennsylvania markets, loan interest income increased $715,000. Loan interest income increased $547,000 due to the higher interest rate environment, which increased loan yields 21 basis points to 5.07%.

Total interest expense increased $486,000 for the three months ended September 30, 2019 compared with last year as a result of the average rate on interest-bearing liabilities increasing 17 basis points from 0.91% to 1.08%, which increased interest expense $581,000.

• The rate paid on interest bearing deposits was 0.93% for the three months ended September 30, 2019 and 0.74% for the comparable period in 2018. This results in an increase in interest expense of $534,000.

• The average balance of other borrowed funds decreased $11.7 million from a year ago. This resulted in a decrease in interest expense of $82,000. There was an increase in the average rate on other borrowed fund from 2.41% to 2.56% due to an increase in the overnight borrowing rate as a result of the Federal Reserve interest rate moves in 2018 and 2019 resulting in an increase in interest expense of $47,000.

Provision for Loan Losses

For the nine month period ended September 30, 2019, we recorded a provision for loan losses of $1,150,000, which represents a decrease of $150,000 from the $1,300,000 provision recorded in the corresponding nine months of last year. The provision was lower in 2019 than 2018 primarily due to the higher loan growth that occurred in 2018 compared to the loan growth in 2019. (see “Financial Condition – Allowance for Loan Losses and Credit Quality Risk”).

For the three months ended September 30, 2019, we recorded a provision of $400,000 compared to $475,000 in 2018 with the decrease for the three month period being due to a lower level of loan growth in 2019 compared to the same period in 2018.

41

Non-interest Income

The following table shows the breakdown of non-interest income for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

	Nine months ended September 30,					Change
	2019		2018			Amount			%
Service charges	$	3,498	$	3,455		$	43			1.2
Trust		589		548			41			7.5
Brokerage and insurance		843		571			272			47.6
Gains on loans sold		339		302			37			12.3
Equity security gains, net		70		9			61			677.8
Available for sale security gains, net		8		(8	)		16			(200.0	)
Earnings on bank owned life insurance		463		467			(4	)		(0.9	)
Other		427		414			13			3.1
Total	$	6,237	$	5,758		$	479			8.3
	Three months ended September 30,					Change
		2019		2018		Amount			%
Service charges	$	1,225	$	1,181		$	44			3.7
Trust		148		147			1			0.7
Brokerage and insurance		289		222			67			30.2
Gains on loans sold		176		170			6			3.5
Equity security gains, net		29		(4	)		33			(825.0	)
Available for sale security gains, net		8		(8	)		16			(200.0	)
Earnings on bank owned life insurance		158		161			(3	)		(1.9	)
Other		144		141			3			2.1
Total	$	2,177	$	2,010		$	167			8.3

Non-interest income for the nine months ended September 30, 2019 totaled $6,237,000, an increase of $479,000 when compared to the same period in 2018. During the first nine months of 2019, there were $8,000 of gains from the sale of available for sale securities in 2019 compared to a $8,000 loss in 2018. We sold $4.0 million of US agency securities and $1.5 million of US treasury securities for a gain of $8,000. In 2018, we sold $11.4 million of US agency securities for a loss of $169,000 and $13.8 million of state and political securities for a gain of $161,000. We recognized a $70,000 increase in the market value of our equity portfolio in 2019 compared to a $9,000 gain in 2018.

The increase in brokerage and insurance revenues for the first nine months of 2019 is attributable to growth in our south central market. The increase in Trust revenues is due to estate settlement fees being higher in 2019 than 2018.

For the three month period ended September 30, 2019, the changes experienced from the prior year related to brokerage and insurance correspond to the changes experienced for the nine month period.

Non-interest Expense

The following tables reflect the breakdown of non-interest expense for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

42

	Nine months ended
	September 30,				Change
	2019		2018		Amount			%
Salaries and employee benefits	$	15,129	$	14,251	$	878			6.2
Occupancy		1,639		1,606		33			2.1
Furniture and equipment		501		394		107			27.2
Professional fees		1,101		1,273		(172	)		(13.5	)
FDIC insurance		196		327		(131	)		(40.1	)
Pennsylvania shares tax		825		850		(25	)		(2.9	)
Amortization of intangibles		198		224		(26	)		(11.6	)
Merger and acquisition		275		-		275		NA
ORE expenses		308		92		216			234.8
Other		4,801		4,305		496			11.5
Total	$	24,973	$	23,322	$	1,651			7.1

	Three months ended
	September 30,					Change
	2019			2018		Amount			%
Salaries and employee benefits	$	5,096		$	4,679	$	417			8.9
Occupancy		530			500		30			6.0
Furniture and equipment		165			130		35			26.9
Professional fees		343			507		(164	)		(32.3	)
FDIC insurance		(20	)		120		(140	)		(116.7	)
Pennsylvania shares tax		275			250		25			10.0
Amortization of intangibles		66			74		(8	)		(10.8	)
Merger and acquisition		275			-		275		NA
ORE expenses (recovery)		92			6		86			1,433.3
Other		1,592			1,522		70			4.6
Total	$	8,414		$	7,788	$	626			8.0

Non-interest expenses increased $1,651,000 for the nine months ended September 30, 2019 compared to the same period in 2018. Salaries and employee benefits increased $878,000 or 6.2%. The increase was due to merit increases effective at the beginning of 2019, higher commissions due to higher brokerage and insurances commissions, an increase in profit sharing as a result of improved financial results and an increase in health care expenses.

The increase in furniture and fixture is due to replacing a significant number of computers in 2019. The increase in OREO expenses is due to the increase in the number of OREO properties that occurred in 2019 as a result of obtaining over 80 properties as settlement for a loan. The increase in other expenses is primarily attributable to the increase in other periodic pension costs of $269,000 as a result of the decision to terminate the FNB pension plan and an increase in fraudulent charges on customers deposit accounts of $97,000. The increase in merger and acquisition costs was due to costs associated with the MidCoast acquisition expected to close in the first half of 2020. The decrease in professional fees was due to legal fees occurred in 2018 for a customer in bankruptcy court that was settled in the first quarter of 2019. The decrease in FDIC insurance was due to credit received from the FDIC as the Deposit Insurance Fund exceeded 1.38%

For the three months ended, September 30, 2019, non-interest expenses increased $626,000 when compared to the same period in 2018. The changes in salaries and employee benefits, ORE expenses, professional fees, FDIC insurance, merger and acquisition and other expenses for the quarter are consistent with the changes for the nine month period.

Provision for Income Taxes

The provision for income taxes was $2,817,000 for the nine month period ended September 30, 2019 compared to $2,558,000 for the same period in 2018. The increase is primarily attributable to the increase in income before the provision for income taxes of $1,187,000 for the comparable periods.  Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate.  Our effective tax rate was 16.3% and 15.9% for the first nine months of 2019 and 2018, respectively, compared to the statutory rate of 21% for 2019 and 2018.

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For the three months ended September 30, 2019, the provision for income taxes was $1,066,000 compared to $936,000 for the same period in 2018. The increase is attributable to the increase in income before the provision for income taxes of $745,000 for the comparable periods. Our effective tax rate was 17.0% for the three months ended September 30, 2019 and 2018.

We are invested in four limited partnerships that have established low-income housing projects in our market areas. We anticipate recognizing an aggregate of $458,000 of tax credits over the next 3.25 years, with an additional $35,000 anticipated to be recognized during 2019.

Financial Condition

Total assets were $1.48 billion at September 30, 2019, an increase of $44.3 million from $1.43 billion at December 31, 2018.  Cash and cash equivalents increased $3.3 million to $20.1 million. Investment securities increased $6.0 million and net loans increased $32.4 million to $1.10 billion at September 30, 2019.  Total deposits increased $14.1 million to $1.20 billion since year-end 2018, while borrowed funds increased $18.6 million to $109.8 million.

Cash and Cash Equivalents

Cash and cash equivalents totaled $20.1 million at September 30, 2019 compared to $16.8 million at December 31, 2018, an increase of $3.3 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 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30, 2019				December 31, 2018
	Amount		%		Amount		%
Debt securities:
U. S. Agency securities	$	88,039		35.5	$	106,385		44.0
U. S. Treasury notes		32,612		13.2		33,358		13.8
Obligations of state & political subdivisions		61,116		24.7		52,047		21.5
Corporate obligations		3,076		1.2		3,034		1.3
Mortgage-backed securities in
government sponsored entities		62,184		25.1		46,186		19.1
Equity securities		650		0.3		516		0.3
Total	$	247,677		100.0	$	241,526		100.0

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	September 30, 2019/
	December 31, 2018
	Change
	Amount			%
Debt securities:
U. S. Agency securities	$	(18,346	)		(17.2	)
U. S. Treasury notes		(746	)		(2.2	)
Obligations of state & political subdivisions		9,069			17.4
Corporate obligations		42			1.4
Mortgage-backed securities in
government sponsored entities		15,998			34.6
Equity securities		134			26.0
Total	$	6,151			2.5

Our investment portfolio increased by $6.2 million, or 2.5%, from December 31, 2018 to September 30, 2019. During 2019, we purchased $12.0 million of U.S. agency obligations, $24.3 million state and political securities, $21.9 million of mortgage backed securities and $65,000 of equity securities, which partially offset the $5.5 million of principal repayments and $51.0 million of calls and maturities that occurred during the first nine months of 2019. Additionally, as part of restructuring our investment portfolio, we sold $4.0 million of U.S. agency securities and $1.5 million of US Treasury securities for a gain of $8,000. This restructuring was performed to increase the overall yield of the investment portfolio. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the nine month period ended September 30, 2019 yielded 2.90%, compared to 2.50% in the comparable period in 2018 on a tax equivalent basis. As noted earlier, the increase in yield is due to replacing lower yielding securities that were called or matured with higher yielding securities due to the higher interest rate environment.

The investment strategy for 2019 has been to utilize cashflows from the investment portfolio to purchase agency and state and political securities to maintain a consistent level of investmetns. Investment purchases have been focused on securities with short fixed maturities for agency securities, high coupon callable municipal securities that are highly likely to be called and mortgage backed securities with consistent cashflows. 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 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 withdrawal requirements and various credit needs of its customers.

Loans

The following table shows the composition of the loan portfolio as of September 30, 2019 and December 31, 2018 (dollars in thousands):

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	September 30,						December 31,
	2019						2018
	Amount			%			Amount		%
Real estate:
Residential	$	215,717			19.4		$	215,305		19.9
Commercial		349,269			31.3			319,265		29.5
Agricultural		305,948			27.4			284,520		26.3
Construction		11,448			1.0			33,913		3.1
Consumer		9,709			0.9			9,858		0.9
Other commercial loans		76,785			6.9			74,118		6.9
Other agricultural loans		50,334			4.5			42,186		3.9
State & political subdivision loans		95,824			8.6			102,718		9.5
Total loans		1,115,034			100.0			1,081,883		100.0
Less allowance for loan losses		13,679						12,884
Net loans	$	1,101,355					$	1,068,999
	September 30, 2019/
	December 31, 2018
	Change
	Amount			%
Real estate:
Residential	$	412			0.2
Commercial		30,004			9.4
Agricultural		21,428			7.5
Construction		(22,465	)		(66.2	)
Consumer		(149	)		(1.5	)
Other commercial loans		2,667			3.6
Other agricultural loans		8,148			19.3
State & political subdivision loans		(6,894	)		(6.7	)
Total loans	$	33,151			3.1

The Bank’s lending efforts have historically been focused in north central Pennsylvania and southern New York. The acquisition of FNB in 2015 expanded the focus into Lebanon, Lancaster and Schuylkill County markets in south central Pennsylvania. The opening of the Winfield office in 2016 and the acquisition of the State College branch in 2017 has increased our presence in the central Pennsylvania market. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships our lending teams have with their customers and our lenders expertise in certain areas, 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 30, 2019, the Company had one industry specific loan concentration to the dairy industry, totaling $156.1 million or 14.0% of total loans.

During the first nine months of 2019, the primary driver of growth in the loan portfolio continued to be commercial and agricultural real estate loans in both the central and south central Pennsylvania markets. During the first quarter, we completed a settlement with a customer in bankruptcy that resulted in $3.1 million of loans being transferred to OREO. Commercial and agricultural loan demand is subject to significant competitive pressures, the yield curve, and overall national, regional and local economic conditions.

While the Bank lends to companies that service the exploration 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 Bank are to service industry customers which include trucking companies, stone quarries and other support businesses, favoring customers that had a relationship with the Bank prior to supporting the exploration for natural gas. 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.

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Residential real estate loans increased slightly during the first nine months of 2019. Loan demand for conforming mortgages, which the Company typically sells on the secondary market has increased slightly in 2019 when compared to 2018. 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 at the balance sheet date.  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 months ended September 30, 2019 and for the years ended December 31, 2018, 2017, 2016 and 2015 (dollars in thousands):

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	September 30,			December 31,
	2019			2018			2017			2016			2015
Balance
at beginning of period	$	12,884		$	11,190		$	8,886		$	7,106		$	6,815
Charge-offs:
Real estate:
Residential		24			118			107			85			66
Commercial		293			66			41			100			84
Agricultural		-			-			30			-			-
Consumer		32			40			130			100			47
Other commercial loans		38			91			-			55			41
Other agricultural loans		-			50			5			-			-
Total loans charged-off		387			365			313			340			238
Recoveries:
Real estate:
Residential		-			69			-			-			-
Commercial		-			3			11			479			14
Agricultural		-			-			-			-			-
Consumer		24			31			49			88			33
Other commercial loans		8			30			16			33			2
Other agricultural loans		-			1			1			-			-
Total loans recovered		32			134			77			600			49
Net loans (recovered) charged-off		355			231			236			(260	)		189
Provision charged to expense		1,150			1,925			2,540			1,520			480
Balance at end of year	$	13,679		$	12,884		$	11,190		$	8,886		$	7,106
Loans outstanding at end of period	$	1,115,034		$	1,081,883		$	1,000,525		$	799,611		$	695,031
Average loans outstanding, net	$	1,097,814		$	1,044,250		$	883,355		$	725,881		$	577,992
Non-performing assets:
Non-accruing loans	$	13,223		$	13,724		$	10,171		$	11,454		$	6,531
Accrual loans - 90 days or more past due		103			68			555			405			623
Total non-performing loans	$	13,326		$	13,792		$	10,726		$	11,859		$	7,154
Foreclosed assets held for sale		3,497			601			1,119			1,036			1,354
Total non-performing assets	$	16,823		$	14,393		$	11,845		$	12,895		$	8,508
Annualized net charge-offs to average loans		0.04	%		0.02	%		0.03	%		-0.04	%		0.03	%
Allowance to total loans		1.23	%		1.19	%		1.12	%		1.11	%		1.02	%
Allowance to total non-performing loans		102.65	%		93.42	%		104.33	%		74.93	%		99.33	%
Non-performing loans as a percent of loans
net of unearned income		1.20	%		1.27	%		1.07	%		1.48	%		1.03	%
Non-performing assets as a percent of loans
net of unearned income		1.51	%		1.33	%		1.18	%		1.61	%		1.22	%

Management believes it uses the best information available when establishing the allowance for loan losses and that the allowance for loan losses is adequate as of September 30, 2019.  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.

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The allowance for loan losses was $13,679,000 or 1.23% of total loans as of September 30, 2019 as compared to $12,884,000 or 1.19% of loans as of December 31, 2018. The $795,000 increase in the allowance during the first nine months of 2019 is the result of a $1,150,000 provision and net charge-offs of $355,000. 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 30, 2019 and December 31, 2018, 2017, 2016 and 2015 (dollars in thousands):

	September 30,				December 31
	2019				2018				2017				2016				2015
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Real estate loans:
Residential	$	1,091		19.4	$	1,105		19.9	$	1,049		21.4	$	1,064		25.9	$	905		29.3
Commercial		4,641		31.3		4,115		29.5		3,867		30.8		3,589		31.6		3,376		34.2
Agricultural		4,712		27.4		4,264		26.3		3,143		24.0		1,494		15.5		409		8.3
Construction		19		1.0		58		3.1		23		1.3		47		3.2		24		2.2
Consumer		119		0.9		120		0.9		124		1.0		122		1.4		102		1.7
Other commercial loans		1,349		6.9		1,354		6.9		1,272		7.2		1,327		7.3		1,183		8.2
Other agricultural loans		869		4.5		752		3.9		492		3.8		312		2.9		122		2.0
State & political subdivision loans		536		8.6		762		9.5		816		10.5		833		12.2		593		14.1
Unallocated		343		N/A		354		N/A		404		N/A		98		N/A		392		N/A
Total allowance for loan losses	$	13,679		100.0	$	12,884		100.0	$	11,190		100.0	$	8,886		100.0	$	7,106		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 58.7% of the loan portfolio, 68.4% of the allowance is assigned to this segment of the loan portfolio as these loans have more inherent 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, 2018 to September 30, 2019 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.

	September 30, 2019								December 31, 2018
			Non-Performing Loans								Non-Performing Loans
	30 - 89 Days		90 Days						30 - 89 Days		90 Days
	Past Due		Past Due		Non-		Total Non-		Past Due		Past Due		Non-		Total Non-
(in thousands)	Accruing		Accruing		accrual		Performing		Accruing		Accruing		accrual		Performing
Real estate:
Residential	$	512	$	19	$	1,008	$	1,027	$	1,624	$	20	$	1,161	$	1,181
Commercial		905		21		5,413		5,434		1,444		36		5,957		5,993
Agricultural		1,113		-		3,549		3,549		121		-		3,206		3,206
Consumer		77		22		-		22		37		12		14		26
Other commercial loans		5		41		2,009		2,050		73		-		2,185		2,185
Other agricultural loans		60		-		1,244		1,244		9		-		1,201		1,201
Total nonperforming loans	$	2,672	$	103	$	13,223	$	13,326	$	3,308	$	68	$	13,724	$	13,792

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	Change in Non-Performing Loans
	September 30, 2019 /December 31, 2018
(in thousands)	Amount			%
Real estate:
Residential	$	(154	)		(13.0	)
Commercial		(559	)		(9.3	)
Agricultural		343			10.7
Consumer		(4	)		(15.4	)
Other commercial loans		(135	)		(6.2	)
Other agricultural loans		43			3.6
Total nonperforming loans	$	(466	)		(3.4	)

For the nine months ended September 30, 2019, we recorded a provision for loan losses of $1,150,000, which compares to $1,300,000 for the same period in 2018. The decrease was primarily attributable to the loan growth experienced during 2019 being lower than the growth experienced during the comparable period of 2018. Non-performing loans decreased $466,000 or 3.4%, from December 31, 2018 to September 30, 2019, primarily due to two customer relationships, one of which was settled in the first quarter of 2019 and resulted in a $3.1 million increase in OREO and the other was a $1.7 million relationship being placed on non-accrual status. Approximately 65.5% of the Bank’s non-performing loans at September 30, 2019 are associated with the following four customer relationships:

• A commercial customer with a total loan relationship of $2.7 million, secured by undeveloped land, stone quarries and equipment, was on non-accrual status as of September 30, 2019. 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 2019, the Company had the underlying equipment collateral appraised. The 2019 appraisal indicated a decrease in collateral values compared to the appraisal ordered for the loan origination and an appraisal performed in 2017, however, the loan is still considered well secured on a loan to value basis. Management determined that no specific reserve was required as of September 30, 2019.

• An agricultural customer with a total loan relationship of $2.8 million, secured by real estate, equipment and cattle, was on non-accrual status as of September 30, 2019. The customer declared bankruptcy during the fourth quarter of 2018 and has developed a workout plan that will be approved in the fourth quarter of 2019. Included within these loans to this customer are $1,151,000 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 sustained increase in milk prices, which is not assured, we will need to rely upon the collateral for repayment of interest and principal. As of September 30, 2019, there was a specific reserve of $302,000 for this relationship.

• An agricultural customer with a total loan relationship of $1.6 million, secured by real estate, equipment and cattle, was on non-accrual status as of September 30, 2019. The customer has scheduled a liquidation auction that will be completed in the fourth quarter of 2019. Included within these loans to this customer are $137,000 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 sustained increase in milk prices, which is not assured, we expect we will need to rely upon the collateral for repayment of interest and principal. As of September 30, 2019, there was a specific reserve of $1,000 for this relationship.

• A commercial customer with a loan relationship of $1.7 million, secured by commercial real estate, business assets and vehicles, was on non-accrual status as of September 30, 2019. The business expanded into a new market, which has not grown as originally expected and has created cashflow issues. Management reviewed the collateral and determined that no specific reserve was required as of September 30, 2019.

Management of the Bank believes that the allowance for loan losses as of September 30, 2019 is adequate, which is based on the following factors:

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• Four loan relationships comprised 65.5% of the non-performing loan balance, which had approximately $303,000 of specific reserves, as of September 30, 2019.

• The Company has a history of low charge-offs, which while higher in the first half of 2019 are still insignificant at an annualized basis of 0.04%, with net charge-offs totaling $355,000 that were primarily related to two relationships. In 2018 as the net charge-offs were .02% of average loans and only $231,000, while 2017’s net charge-offs were $236,000.

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 30, 2019 and December 31, 2018, the cash surrender value of the life insurance was $28.0 million and $27.5 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 $158,000 and $161,000 for the three month periods ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, $463,000 and $467,000, 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 30, 2019 and December 31, 2018, included in other liabilities on the Consolidated Balance Sheet was a liability of $675,000 and $648,000, respectively, for the obligation under the split-dollar benefit agreements.

Premises and Equipment

Premises and equipment decreased $392,000 to $15.9 million as of September 30, 2019 from December 31, 2018. This occurred primarily as a result of normal depreciation expense recorded in the first nine months of 2019.

Deposits

The following table shows the composition of deposits as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	September 30,				December 31,
	2019				2018
	Amount		%		Amount		%
Non-interest-bearing deposits	$	199,046		16.6	$	179,971		15.2
NOW accounts		333,828		27.8		336,756		28.4
Savings deposits		221,244		18.4		205,334		17.3
Money market deposit accounts		171,020		14.3		164,625		13.9
Certificates of deposit		274,166		22.9		298,470		25.2
Total	$	1,199,304		100.0	$	1,185,156		100.0

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	September 30, 2019/
	December 31, 2018
	Change
	Amount			%
Non-interest-bearing deposits	$	19,075			10.6
NOW accounts		(2,928	)		(0.9	)
Savings deposits		15,910			7.7
Money market deposit accounts		6,395			3.9
Certificates of deposit		(24,304	)		(8.1	)
Total	$	14,148			1.2

Deposits increased $14.1 million since December 31, 2018. The increase in deposits is primarily due to tax collections in the third quarter for municipal customers and new business relationships in the south central market. The decrease in certificates of deposit is due to a large municipal construction project in the central Pennsylvania market that is being funded by the municipalities’ certificates of deposits, two estates settling during 2019 and a decrease in brokered certificate of deposits of $5.0 million. As of September 30, 2019, the Bank had $15.0 million of brokered certificates of deposit outstanding compared to $20.0 million as of December 31, 2018. We continue to enhance our cash management services to improve our customer services and to grow deposits through our current customers.

Borrowed Funds

      Borrowed funds increased $18.6 million during the first nine months of 2019. The increase was the result of borrowing $15.9 million of overnight advances from the FHLB and $10.0 million of long-term advances from the FHLB. We also repaid a $2.0 million long-term advance from the FHLB and experienced a decrease in repurchase agreements of $5.2 million. The Bank’s current strategy for borrowings is to consider terms and structures to manage interest rate risk and liquidity in a flat to inverted 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.

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 to the Company. 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 $151.7 million at September 30, 2019 compared to $139.2 million at December 31, 2018, an increase of $12,449,000, or 8.9%.  Excluding accumulated other comprehensive loss, stockholders’ equity increased $8.8 million, or 6.2%. The Company purchased 20,620 shares of treasury stock at a weighted average cost of $59.94 per share. The Company reissued 105 shares to certain Board members and employees as a reward for years of services at a weighted average cost of $58.88 per share. The Company awarded employees 5,130 shares of restricted stock at a weighted average cost of $60.21 per share during the first nine months of 2019. During the first nine months of 2019, 152 shares of restricted stock were forfeited by employees at a weighted average cost of $60.00 per share. For the first nine months of 2019, the Company had net income of $14.4 million and declared cash dividends of $4.7 million, or $1.33 per share, representing a cash dividend payout ratio of 32.7%.

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 loss decreased approximately $3.6 million from December 31, 2018.

The Bank is 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

52

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 30, 2019 and December 31, 2018, that the Bank meets all capital adequacy requirements to which it was subject at such dates.

As of September 30, 2019 and December 31, 2018, the Bank were 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
September 30, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets):
Company	$	151,026		13.84	%	$	87,268		8.00	%	$	109,085		10.00	%
Bank	$	143,728		13.19	%	$	87,205		8.00	%	$	109,006		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Company	$	137,388		12.59	%	$	65,451		6.00	%	$	87,268		8.00	%
Bank	$	130,099		11.94	%	$	65,404		6.00	%	$	87,205		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Company	$	129,888		11.91	%	$	49,088		4.50	%	$	70,905		6.50	%
Bank	$	130,099		11.94	%	$	49,053		4.50	%	$	70,854		6.50	%
Tier 1 Capital (to Average Assets):
Company	$	137,388		9.63	%	$	57,063		4.00	%	$	71,329		5.00	%
Bank	$	130,099		9.12	%	$	57,037		4.00	%	$	71,297		5.00	%

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
December 31, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets):
Company	$	141,272		13.42	%	$	84,227		8.00	%	$	105,284		10.00	%
Bank	$	134,841		12.82	%	$	84,141		8.00	%	$	105,176		10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Company	$	128,224		12.18	%	$	63,171		6.00	%	$	84,227		8.00	%
Bank	$	121,792		11.58	%	$	63,106		6.00	%	$	84,141		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Company	$	120,724		11.47	%	$	47,378		4.50	%	$	68,435		6.50	%
Bank	$	121,792		11.58	%	$	47,329		4.50	%	$	68,364		6.50	%
Tier 1 Capital (to Average Assets):
Company	$	128,224		9.15	%	$	56,041		4.00	%	$	70,051		5.00	%
Bank	$	121,792		8.70	%	$	56,018		4.00	%	$	70,023		5.00	%

53

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 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
Commitments to extend credit	$	197,931	$	199,183
Standby letters of credit		16,298		16,311
	$	214,229	$	215,494

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 30, 2019 and December 31, 2018 was $11,908,000 and $11,855,000, 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 months of 2019 were $225,000 compared to $228,000 during the same time period in 2018.

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 had a maximum borrowing capacity at the FHLB of approximately $536.3 million, of which $137.9 million was outstanding, at September 30, 2019. The Bank also had two federal funds lines with third party providers in the total amount of $34.0 million as of September 30, 2019, which are unsecured and undrawn upon. We also have a borrower in custody line with the Federal Reserve Bank of approximately $7.5 million, which also is not drawn upon as of September 30, 2019. 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 30, 2019, Citizens Financial Services, Inc. (on an unconsolidated basis) had liquid assets of $6.9 million.

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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 0.04% of its 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 30, 2019 (dollars in thousands):

		Change In	% Change In
	Prospective One-Year	Prospective	Prospective
Changes in Rates	Net Interest Income	Net Interest Income	Net Interest Income
-100 Shock	50,392	197	0.39
Base	50,195	-	-
+100 Shock	49,115	(1,080)	(2.15)
+200 Shock	47,817	(2,378)	(4.74)
+300 Shock	46,461	(3,734)	(7.44)
+400 Shock	45,001	(5,194)	(10.35)

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.

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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 30, 2019 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, 2018, which could materially affect our business, financial condition or future results. At September 30, 2019, 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.

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

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)
7/1/19 to 7/31/19		-	$	0.00		-		49,909
8/1/19 to 8/31/19		-	$	0.00		-		49,909
9/1/19 to 9/30/19		-	$	0.00		-		49,909
Total		-	$	0.00		-		49,909

(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:

2.1	Agreement and Plan of Merger by and between Citizens Financial Services, Inc. and MidCoast Community Bancorp, Inc. (1)
3.1	Articles of Incorporation of Citizens Financial Services, Inc., as amended (2)
3.2	Bylaws of Citizens Financial Services, Inc. (3)
4.1	Form of Common Stock Certificate. (4)
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 30, 2019, 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 Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows (unaudited) and (vi) related notes (unaudited).

_________________________________________________________________________________

57

⁽¹⁾ Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, as filed with the Commission on September 18, 2019

⁽²⁾ Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, as filed with the Commission on August 9, 2018.

⁽³⁾Incorporated by reference to Exhibit 9.01 to the Company’s Current Report on Form 8-K, as filed with the Commission on December 24, 2009.

⁽⁴⁾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.

58

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.
November 7, 2019	By:	/s/ Randall E. Black
		Randall E. Black
		President and Chief Executive Officer (Principal Executive Officer)

November 7, 2019	By:	/s/ Mickey L. Jones
		Mickey L. Jones
		Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

I, Randall E. Black, certify that:

1.    I have reviewed this Form 10-Q of Citizens Financial Services, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 7, 2019	By:	/s/ Randall E. Black
		Randall E. Black
		President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

I, Mickey L. Jones, certify that:

1.    I have reviewed this Form 10-Q of Citizens Financial Services, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 7, 2019	By:	/s/ Mickey L. Jones
		Mickey L. Jones
		Chief Financial Officer (Principal Accounting Officer)

EX-32.1

Exhibit 32.1

Section 1350 Certification

of Chief Financial Officer and Chief Financial Officer

In connection with the Quarterly Report of Citizens Financial Services, Inc. (the "Company") on Form 10-Q (the "Report") for the period ending September 30, 2109 as filed with the Securities and Exchange Commission, the undersigned certify, pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.   The Report fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered in the Report.

November 7, 2019	By:	/s/ Randall E. Black
		Randall E. Black
		President and Chief Exeuctive Officer (Principal Executive Officer)

November 7, 2019	By:	/s/ Mickey L. Jones
		Mickey L. Jones
		Chief Financial Officer (Principal Financial and Accounting Officer)

XML

Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Right of Use Assets and Lease Liabilities

The following table details the Company’s right of use asset and the corresponding lease liability for the Company’s operating leases as of September 30, 2019 and the affected line item on the Consolidated Balance Sheet(in thousands):

Lease Type	Balance at September 30, 2019		Affected line item on the Consolidated Balance Sheet
Right of Use Assets
Operating	$	1,237	Other Assets
Lease Liabilities:
Operating	$	1,237	Other Liabilities

Lease Cost

The following table provides information related to the Company’s lease costs for the three and nine months ended September 30, 2019 (in thousands):

	September 30, 2019
Lease Cost	Three months Ended		Nine Months Ended
Operating lease cost	$	85	$	255
Variable lease cost		20		64
Total lease cost	$	105	$	319

Weighted Average Remaining Lease Term and Discount Rate

The following table displays the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases outstanding as of September 30, 2019:

	Operating
Weighted average term (years)	6.16
Weighted average discount rate	3.14%

Undiscounted Cashflows Due Related to Operating Leases

The following table provides the undiscounted cashflows related to operating leases as of September 30, 2019 along with a reconciliation to the discounted amount recorded on the September 30, 2019 Consolidated Balance Sheet (in thousands):

Undiscounted cash flows due within	Operating
Remaining 2019	$	84
2020		279
2021		238
2022		230
2023		142
2024		105
2025 and thereafter		291
Total undiscounted cash flows		1,369
Impact of present value discount		132
Amount reported on balance sheet	$	1,237

XML

Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2019

Basis of Presentation [Abstract]

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 subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1^st Realty of PA LLC (“Realty”). Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer.

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 30, 2019 and for the periods ended September 30, 2019 and 2018 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. 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 of revenues and expenses for the period covered by the Consolidated Income Statement. The financial performance reported for the Company for the nine month period ended September 30, 2019 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, 2018.

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. ASU 2016-02 was effective for the Company on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, we recognized a right-of-use asset and a related lease liability totaling $1,454,000 each. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also elected not to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We account for lease and non-lease components separately because such amounts are readily determinable under our lease contracts. We utilized the modified-retrospective transition approach prescribed by ASU 2018-11. Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease as of January 1, 2019. We have included additional disclosures in note 7.

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Earnings per Share (Tables)

9 Months Ended

Sep. 30, 2019

Earnings per Share [Abstract]

Computation of 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
	September 30,				September 30,
	2019		2018		2019		2018
Net income applicable to common stock	$	5,196,000	$	4,581,000	$	14,447,000	$	13,519,000
Basic earnings per share computation
Weighted average common shares outstanding		3,515,678		3,537,315		3,522,377		3,541,971
Earnings per share - basic	$	1.48	$	1.30	$	4.10	$	3.82
Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		3,515,678		3,537,315		3,522,377		3,541,971
Add: Dilutive effects of restricted stock		-		161		2,280		2,161
Weighted average common shares outstanding for dilutive earnings per share		3,515,678		3,537,476		3,524,657		3,544,132
Earnings per share - diluted	$	1.48	$	1.30	$	4.10	$	3.81

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Loans, Trouble Debt Restructuring (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($) Contract	Sep. 30, 2018 USD ($) Contract	Sep. 30, 2019 USD ($) Contract	Sep. 30, 2018 USD ($) Contract	Dec. 31, 2018 USD ($)
Loans [Abstract]
Reserves of allowance for loan losses	$ 351		$ 351		$ 255
Recidivism receivables [Abstract]
Number of contract, subsequently defaults | Contract	0	3	6	3
Total recidivism, Recorded investment	$ 0	$ 1,426	$ 2,242	$ 1,426
Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract	0	0	0	0
Pre-modification outstanding recorded investment	$ 0	$ 0	$ 0	$ 0
Post-modification outstanding recorded investment	$ 0	$ 0	$ 0	$ 0
Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract	2	3	8	11
Pre-modification outstanding recorded investment	$ 121	$ 1,408	$ 965	$ 3,692
Post-modification outstanding recorded investment	$ 121	$ 1,408	$ 965	$ 3,692
Real Estate Loans [Member] | Home Equity [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract			0	0
Pre-modification outstanding recorded investment			$ 0	$ 0
Post-modification outstanding recorded investment			$ 0	$ 0
Real Estate Loans [Member] | Home Equity [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract			1	1
Pre-modification outstanding recorded investment			$ 40	$ 1
Post-modification outstanding recorded investment			$ 40	$ 1
Real Estate Loans [Member] | Mortgages [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract			0	0
Pre-modification outstanding recorded investment			$ 0	$ 0
Post-modification outstanding recorded investment			$ 0	$ 0
Real Estate Loans [Member] | Mortgages [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract			1	1
Pre-modification outstanding recorded investment			$ 4	$ 7
Post-modification outstanding recorded investment			$ 4	$ 7
Real Estate Loans [Member] | Commercial [Member]
Recidivism receivables [Abstract]
Number of contract, subsequently defaults | Contract	0	0	1	0
Total recidivism, Recorded investment	$ 0	$ 0	$ 542	$ 0
Real Estate Loans [Member] | Commercial [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract	0	0	0	0
Pre-modification outstanding recorded investment	$ 0	$ 0	$ 0	$ 0
Post-modification outstanding recorded investment	$ 0	$ 0	$ 0	$ 0
Real Estate Loans [Member] | Commercial [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract	1	1	5	2
Pre-modification outstanding recorded investment	$ 118	$ 106	$ 918	$ 683
Post-modification outstanding recorded investment	$ 118	$ 106	$ 918	$ 683
Real Estate Loans [Member] | Agricultural [Member]
Recidivism receivables [Abstract]
Number of contract, subsequently defaults | Contract	0	2	1	2
Total recidivism, Recorded investment	$ 0	$ 1,302	$ 1,439	$ 1,302
Real Estate Loans [Member] | Agricultural [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract		0		0
Pre-modification outstanding recorded investment		$ 0		$ 0
Post-modification outstanding recorded investment		$ 0		$ 0
Real Estate Loans [Member] | Agricultural [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract		2		3
Pre-modification outstanding recorded investment		$ 1,302		$ 2,825
Post-modification outstanding recorded investment		$ 1,302		$ 2,825
Consumer [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract	0		0
Pre-modification outstanding recorded investment	$ 0		$ 0
Post-modification outstanding recorded investment	$ 0		$ 0
Consumer [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract	1		1
Pre-modification outstanding recorded investment	$ 3		$ 3
Post-modification outstanding recorded investment	$ 3		$ 3
Other Agricultural Loans [Member]
Recidivism receivables [Abstract]
Number of contract, subsequently defaults | Contract	0	1	4	1
Total recidivism, Recorded investment	$ 0	$ 124	$ 261	$ 124
Other Agricultural Loans [Member] | Interest Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract				0
Pre-modification outstanding recorded investment				$ 0
Post-modification outstanding recorded investment				$ 0
Other Agricultural Loans [Member] | Term Modification [Member]
Financing receivable modifications [Abstract]
Number of contracts | Contract				4
Pre-modification outstanding recorded investment				$ 176
Post-modification outstanding recorded investment				$ 176

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Loans, Primary Segments Portfolio and Accretable Yield for PCI Loans (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	$ 1,115,034		$ 1,115,034		$ 1,081,883
Individually evaluated for impairment	21,352		21,352		23,450
Loans acquired with deteriorated credit quality	1,328		1,328		1,859
Collectively evaluated for impairment	1,092,354		1,092,354		1,056,574
Allowance for loan losses	13,679		13,679		12,884
Individually evaluated for impairment	810		810		676
Allowance for loan losses related to loans acquired with deteriorated credit quality	0		0		0
Collectively evaluated for impairment	12,869		12,869		12,208
Net loans	1,101,355		1,101,355		1,068,999
Net loans, individually evaluated for impairment	20,542		20,542		22,774
Net loans, loans acquired with deteriorated credit quality	1,328		1,328		1,859
Net loans, collectively evaluated for impairment	1,079,485		$ 1,079,485		1,044,366
Minimum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Number of days past for loan to be considered impaired, Minimum			90 days
First Mortgage [Member] | Minimum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Period of mortgage on real estate			15 years
First Mortgage [Member] | Maximum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Period of mortgage on real estate			30 years
Second Mortgage [Member] | Maximum [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Period of mortgage on real estate			15 years
Real Estate Loans [Member] | Residential [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	215,717		$ 215,717		215,305
Individually evaluated for impairment	1,195		1,195		890
Loans acquired with deteriorated credit quality	24		24		28
Collectively evaluated for impairment	214,498		214,498		214,387
Individually evaluated for impairment	22		22		24
Collectively evaluated for impairment	1,069		1,069		1,081
Real Estate Loans [Member] | Commercial [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	349,269		349,269		319,265
Individually evaluated for impairment	11,921		11,921		13,327
Loans acquired with deteriorated credit quality	1,213		1,213		1,321
Collectively evaluated for impairment	336,135		336,135		304,617
Individually evaluated for impairment	342		342		216
Collectively evaluated for impairment	4,299		4,299		3,899
Real Estate Loans [Member] | Agricultural [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	305,948		305,948		284,520
Individually evaluated for impairment	4,781		4,781		5,592
Loans acquired with deteriorated credit quality	0		0		0
Collectively evaluated for impairment	301,167		301,167		278,928
Individually evaluated for impairment	145		145		84
Collectively evaluated for impairment	4,567		4,567		4,180
Real Estate Loans [Member] | Construction [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	11,448		11,448		33,913
Individually evaluated for impairment	0		0		0
Loans acquired with deteriorated credit quality	0		0		0
Collectively evaluated for impairment	11,448		11,448		33,913
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	19		19		58
Consumer [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	9,709		9,709		9,858
Individually evaluated for impairment	6		6		0
Loans acquired with deteriorated credit quality	0		0		0
Collectively evaluated for impairment	9,703		9,703		9,858
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	119		119		120
Other Commercial Loans [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	76,785		76,785		74,118
Individually evaluated for impairment	2,042		2,042		2,206
Loans acquired with deteriorated credit quality	91		91		510
Collectively evaluated for impairment	74,652		74,652		71,402
Individually evaluated for impairment	144		144		193
Collectively evaluated for impairment	1,205		1,205		1,161
Other Agricultural Loans [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	50,334		50,334		42,186
Individually evaluated for impairment	1,407		1,407		1,435
Loans acquired with deteriorated credit quality	0		0		0
Collectively evaluated for impairment	48,927		48,927		40,751
Individually evaluated for impairment	157		157		159
Collectively evaluated for impairment	712		712		593
State and Political Subdivision Loans [Member]
Segments of loan portfolio and allowance for loan losses [Abstract]
Total financing receivables	95,824		95,824		102,718
Individually evaluated for impairment	0		0		0
Loans acquired with deteriorated credit quality	0		0		0
Collectively evaluated for impairment	95,824		95,824		102,718
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	536		536		762
First National Bank of Fredericksburg [Member]
Changes in the accretable yield for purchased credit-impaired loans [Roll Forward]
Balance at beginning of period	100	$ 59	104	$ 106
Accretion	(10)	(24)	(14)	(71)
Reclassification of non-accretable discount	0	93	0	93
Balance at end of period	90	$ 128	90	$ 128
Loans acquired with specific evidence of deterioration in credit quality [Abstract]
Outstanding balance	4,076		4,076		4,529
Carrying amount	$ 1,328		$ 1,328		$ 1,859

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Goodwill and Other Intangible Assets (Details) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Amortized intangible assets [Abstract]
Gross carrying value	[1]	$ 3,749		$ 3,749		$ 3,636
Accumulated amortization	[1]	(2,349)		(2,349)		(2,013)
Net carrying value	[1]	1,400		1,400		1,623
Unamortized intangible assets [Abstract]
Goodwill		23,296		23,296		23,296
Actual and Estimated Future Amortization Expense [Abstract]
Amortization expense		110	$ 120	336	$ 367
Estimated Amortization Expense [Abstract]
Remaining 2019		109		109
2020		364		364
2021		296		296
2022		233		233
2023		173		173
MSRs [Member]
Amortized intangible assets [Abstract]
Gross carrying value	[1]	1,838		1,838		1,725
Accumulated amortization	[1]	(1,204)		(1,204)		(1,066)
Net carrying value	[1]	634		634		659
Actual and Estimated Future Amortization Expense [Abstract]
Amortization expense		44	46	138	143
Estimated Amortization Expense [Abstract]
Remaining 2019		48		48
2020		167		167
2021		131		131
2022		100		100
2023		73		73
Core Deposit Intangibles [Member]
Amortized intangible assets [Abstract]
Gross carrying value	[1]	1,786		1,786		1,786
Accumulated amortization	[1]	(1,025)		(1,025)		(851)
Net carrying value	[1]	761		761		935
Actual and Estimated Future Amortization Expense [Abstract]
Amortization expense		58	66	174	200
Estimated Amortization Expense [Abstract]
Remaining 2019		56		56
2020		197		197
2021		165		165
2022		133		133
2023		100		100
Covenant not to Compete [Member]
Amortized intangible assets [Abstract]
Gross carrying value	[1]	125		125		125
Accumulated amortization	[1]	(120)		(120)		(96)
Net carrying value	[1]	5		5		$ 29
Actual and Estimated Future Amortization Expense [Abstract]
Amortization expense		8	$ 8	24	$ 24
Estimated Amortization Expense [Abstract]
Remaining 2019		5		5
2020		0		0
2021		0		0
2022		0		0
2023		$ 0		$ 0

[1] Excludes fully amortized intangible assets.

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Employee Benefit Plans, Noncontributory Defined Benefit Pension Plan (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) Plan	Sep. 30, 2018 USD ($)
Employee Benefit Plans [Abstract]
Number of plans | Plan			2
Pension Plan [Member]
Components of net periodic benefit cost [Abstract]
Net periodic benefit cost	$ 74	$ 71	$ 243	$ (21)
Expected employer contribution to pension plan	0		0
Pension Plan [Member] | Salary and Employee Benefits [Member]
Components of net periodic benefit cost [Abstract]
Service cost	78	90	256	269
Pension Plan [Member] | Other Expenses [Member]
Components of net periodic benefit cost [Abstract]
Interest cost	123	164	401	489
Expected return on plan assets	(187)	(230)	(595)	(919)
Net amortization and deferral	$ 60	$ 47	$ 181	$ 140

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Fair Value Measurements, Measured On A Recurring And Nonrecurring Basis (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired loans, estimated selling cost	$ 572	$ 563
Recurring [Member]
Fair Value, Net Asset (Liability) [Abstract]
Equity securities	650	516
Available for sale securities [Abstract]
U.S. Agency Securities	88,039	106,385
U.S. Treasury securities	32,612	33,358
Obligations of state and political subdivisions	61,116	52,047
Corporate obligations	3,076	3,034
Mortgage-backed securities in government sponsored entities	62,184	46,186
Recurring [Member] | Level I [Member]
Fair Value, Net Asset (Liability) [Abstract]
Equity securities	650	516
Available for sale securities [Abstract]
U.S. Agency Securities	0	0
U.S. Treasury securities	32,612	33,358
Obligations of state and political subdivisions	0	0
Corporate obligations	0	0
Mortgage-backed securities in government sponsored entities	0	0
Recurring [Member] | Level II [Member]
Fair Value, Net Asset (Liability) [Abstract]
Equity securities	0	0
Available for sale securities [Abstract]
U.S. Agency Securities	88,039	106,385
U.S. Treasury securities	0	0
Obligations of state and political subdivisions	61,116	52,047
Corporate obligations	3,076	3,034
Mortgage-backed securities in government sponsored entities	62,184	46,186
Recurring [Member] | Level III [Member]
Fair Value, Net Asset (Liability) [Abstract]
Equity securities	0	0
Available for sale securities [Abstract]
U.S. Agency Securities	0	0
U.S. Treasury securities	0	0
Obligations of state and political subdivisions	0	0
Corporate obligations	0	0
Mortgage-backed securities in government sponsored entities	0	0
Nonrecurring [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	5,637	5,815
Other real estate owned	3,386	532
Nonrecurring [Member] | Level I [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	0	0
Other real estate owned	0	0
Nonrecurring [Member] | Level II [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	0	0
Other real estate owned	0	0
Nonrecurring [Member] | Level III [Member]
Fair value assets and liabilities measured on non-recurring basis [Abstract]
Impaired Loans	5,637	5,815
Other real estate owned	$ 3,386	$ 532

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Revenue Recognition (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue from Customers [Abstract]
Revenue from customers	$ 1,742	$ 1,634	$ 5,197	$ 4,819
Service Charges [Member]
Revenue from Customers [Abstract]
Revenue from customers	1,225	1,181	3,498	3,455
Overdraft Fees [Member]
Revenue from Customers [Abstract]
Revenue from customers	405	395	1,132	1,143
Statement Fees [Member]
Revenue from Customers [Abstract]
Revenue from customers	52	50	153	155
Interchange Revenue [Member]
Revenue from Customers [Abstract]
Revenue from customers	589	566	1,724	1,671
ATM Income [Member]
Revenue from Customers [Abstract]
Revenue from customers	108	104	300	301
Other Service Charges [Member]
Revenue from Customers [Abstract]
Revenue from customers	71	66	189	185
Trust [Member]
Revenue from Customers [Abstract]
Revenue from customers	148	147	589	548
Brokerage and Insurance [Member]
Revenue from Customers [Abstract]
Revenue from customers	289	222	843	571
Other [Member]
Revenue from Customers [Abstract]
Revenue from customers	$ 80	$ 84	$ 267	$ 245
Revenue [Member] | Product Concentration Risk [Member] | Products and Services Not within the Scope of ASC 606 [Member]
Concentration Risk [Abstract]
Concentration risk percentage	90.40%	90.00%	90.10%	90.00%

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Employee Benefit Plans (Tables)

9 Months Ended

Sep. 30, 2019

Employee Benefit Plans [Abstract]

Components of Net Periodic Benefit Costs

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 30, 2019 and 2018, respectively (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Affected line item on the Consolidated
	2019			2018			2019			2018			Statement of income
Service cost	$	78		$	90		$	256		$	269		Salary and Employee Benefits
Interest cost		123			164			401			489		Other Expenses
Expected return on plan assets		(187	)		(230	)		(595	)		(919	)	Other Expenses
Net amortization and deferral		60			47			181			140		Other Expenses
Net periodic benefit cost	$	74		$	71		$	243		$	(21	)

Restricted Stock Activity

The following table details the vesting, awarding and forfeiting of restricted shares during the three and nine months ended September 30, 2019:

	Three months				Nine months
			Weighted					Weighted
	Unvested		Average		Unvested			Average
	Shares		Market Price		Shares			Market Price
Outstanding, beginning of period		10,764	$	60.16		9,764		$	58.21
Granted		-		-		5,130			60.21
Forfeited		-		-		(152	)		60.00
Vested		-		-		(3,978	)		(55.46	)
Outstanding, end of period		10,764	$	60.16		10,764		$	60.16

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (Parenthetical) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) [Abstract]
Purchase of treasury stock (in shares)		3,382	20,620	8,711
Cash dividends (in dollars per share)	$ 0.450	$ 0.436	$ 1.331	$ 1.289

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Investments, Gross Unrealized Losses and Fair Value and Net Unrealized Gains (Losses) (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($) Security	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) Security	Sep. 30, 2018 USD ($)	Dec. 31, 2018 USD ($)
Available-for-sale, Debt Securities, Fair Value and Gross Unrealized Losses [Abstract]
Less than twelve months, Fair value	$ 37,549		$ 37,549		$ 25,180
Twelve months or greater, Fair value	40,310		40,310		126,094
Total, Fair value	77,859		77,859		151,274
Less than twelve months, Gross unrealized losses	(128)		(128)		(76)
Twelve months or greater, Gross unrealized losses	(133)		(133)		(1,908)
Total, Gross Unrealized Losses	$ (261)		$ (261)		(1,984)
Number of securities owned with fair value less than cost | Security	48		48
Equity securities [Abstract]
Net gains (losses) recognized in equity securities during the period	$ 29	$ (4)	$ 70	$ 9
Less: Net gains realized on the sale of equity securities during the period	0	0	0	0
Net unrealized gains (losses)	29	$ (4)	70	$ 9
Investment securities pledged as collateral	220,800		220,800		221,200
U.S. Agency Securities [Member]
Available-for-sale, Debt Securities, Fair Value and Gross Unrealized Losses [Abstract]
Less than twelve months, Fair value	13,096		13,096		5,981
Twelve months or greater, Fair value	26,192		26,192		52,673
Total, Fair value	39,288		39,288		58,654
Less than twelve months, Gross unrealized losses	(44)		(44)		(5)
Twelve months or greater, Gross unrealized losses	(53)		(53)		(635)
Total, Gross Unrealized Losses	(97)		(97)		(640)
U.S. Treasury Securities [Member]
Available-for-sale, Debt Securities, Fair Value and Gross Unrealized Losses [Abstract]
Less than twelve months, Fair value	1,989		1,989		4,948
Twelve months or greater, Fair value	0		0		28,410
Total, Fair value	1,989		1,989		33,358
Less than twelve months, Gross unrealized losses	(1)		(1)		(31)
Twelve months or greater, Gross unrealized losses	0		0		(424)
Total, Gross Unrealized Losses	(1)		(1)		(455)
Obligations of State and Political Subdivisions [Member]
Available-for-sale, Debt Securities, Fair Value and Gross Unrealized Losses [Abstract]
Less than twelve months, Fair value	2,185		2,185		8,979
Twelve months or greater, Fair value	1,519		1,519		12,441
Total, Fair value	3,704		3,704		21,420
Less than twelve months, Gross unrealized losses	(15)		(15)		(22)
Twelve months or greater, Gross unrealized losses	(2)		(2)		(155)
Total, Gross Unrealized Losses	(17)		(17)		(177)
Mortgage-backed Securities in Government Sponsored Entities [Member]
Available-for-sale, Debt Securities, Fair Value and Gross Unrealized Losses [Abstract]
Less than twelve months, Fair value	20,279		20,279		5,272
Twelve months or greater, Fair value	12,599		12,599		32,570
Total, Fair value	32,878		32,878		37,842
Less than twelve months, Gross unrealized losses	(68)		(68)		(18)
Twelve months or greater, Gross unrealized losses	(78)		(78)		(694)
Total, Gross Unrealized Losses	$ (146)		$ (146)		$ (712)

XML

CONSOLIDATED BALANCE SHEET (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
ASSETS:
Loans, allowance for loan losses	$ 13,679	$ 12,884
STOCKHOLDERS' EQUITY:
Preferred Stock, par value (in dollars per share)	$ 1.00	$ 1.00
Preferred Stock, authorized (in shares)	3,000,000	3,000,000
Preferred Stock, issued (in shares)	0	0
Common Stock, par value (in dollars per share)	$ 1.00	$ 1.00
Common Stock, authorized (in shares)	25,000,000	25,000,000
Common Stock, issued (in shares)	3,938,668	3,904,212
Treasury stock, shares (in shares)	413,353	399,616

XML

Loans

9 Months Ended

Sep. 30, 2019

Loans [Abstract]

Loans

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 30, 2019 and December 31, 2018, 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 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	215,717	$	1,195	$	24	$	214,498
Commercial		349,269		11,921		1,213		336,135
Agricultural		305,948		4,781		-		301,167
Construction		11,448		-		-		11,448
Consumer		9,709		6		-		9,703
Other commercial loans		76,785		2,042		91		74,652
Other agricultural loans		50,334		1,407		-		48,927
State and political subdivision loans		95,824		-		-		95,824
Total		1,115,034		21,352		1,328		1,092,354
Allowance for loan losses		13,679		810		-		12,869
Net loans	$	1,101,355	$	20,542	$	1,328	$	1,079,485
December 31, 2018	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	215,305	$	890	$	28	$	214,387
Commercial		319,265		13,327		1,321		304,617
Agricultural		284,520		5,592		-		278,928
Construction		33,913		-		-		33,913
Consumer		9,858		-		-		9,858
Other commercial loans		74,118		2,206		510		71,402
Other agricultural loans		42,186		1,435		-		40,751
State and political subdivision loans		102,718		-		-		102,718
Total		1,081,883		23,450		1,859		1,056,574
Allowance for loan losses		12,884		676		-		12,208
Net loans	$	1,068,999	$	22,774	$	1,859	$	1,044,366

Purchased loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. Upon acquisition, the Company evaluates 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 decreases in the expected cash flows of these loans between the acquisition date and September 30, 2019. 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 $1,328,000 and $1,859,000 at September 30, 2019 and December 31, 2018, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows and collateral valuations.

Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2019			2018			2019			2018
Balance at beginning of period	$	100		$	59		$	104		$	106
Accretion		(10	)		(24	)		(14	)		(71	)
Reclassification of non-accretable discount		-			93			-			93
Balance at end of period	$	90		$	128		$	90		$	128

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, 2019		December 31, 2018
Outstanding balance	$	4,076	$	4,529
Carrying amount		1,328		1,859

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
September 30, 2019	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	1,220	$	814	$	227	$	1,041	$	10
Home Equity		174		85		69		154		12
Commercial		12,466		10,469		1,452		11,921		342
Agricultural		4,811		1,617		3,164		4,781		145
Consumer		6		6		-		6		-
Other commercial loans		2,621		1,715		327		2,042		144
Other agricultural loans		1,464		98		1,309		1,407		157
Total	$	22,762	$	14,804	$	6,548	$	21,352	$	810

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
December 31, 2018	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	932	$	515	$	288	$	803	$	10
Home Equity		106		12		75		87		14
Commercial		16,326		11,933		1,394		13,327		216
Agricultural		5,598		2,386		3,206		5,592		84
Consumer		-		-		-		-		-
Other commercial loans		2,711		1,836		370		2,206		193
Other agricultural loans		1,487		120		1,315		1,435		159
Total	$	27,160	$	16,802	$	6,648	$	23,450	$	676

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 month periods ended September 30, 2019 and 2018(in thousands):

	For the Nine Months Ended
	September 30, 2019						September 30, 2018
					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	$	1,075	$	12	$	-	$	988	$	10	$	-
Home Equity		108		4		-		98		4		-
Commercial		11,768		342		11		13,915		372		14
Agricultural		5,068		61		-		4,472		124		-
Consumer		2		-		-		2		-		-
Other commercial loans		2,088		1		-		3,906		73		-
Other agricultural loans		1,419		4		-		1,388		21		-
Total	$	21,528	$	424	$	11	$	24,769	$	604	$	14

	For the Three Months Ended
	September 30, 2019						September 30, 2018
					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	$	1,048	$	3	$	-	$	896	$	3	$	-
Home Equity		143		2		-		92		2		-
Commercial		11,906		112		-		14,116		130		6
Agricultural		4,795		5		-		5,146		24		-
Consumer		4		-		-		-		-		-
Other commercial loans		2,073		-		-		3,495		21		-
Other agricultural loans		1,408		-		-		1,453		2		-
Total	$	21,377	$	122	$	-	$	25,198	$	182	$	6

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 and assess 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 state and political relationships over $500,000 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, 2) review a sample of new loans originated for over $1.0 million in the last year, 3) review a sample 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 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	331,075	$	9,945	$	8,210	$	39	$	-	$	349,269
Agricultural		283,074		14,987		7,887		-		-		305,948
Construction		11,448		-		-		-		-		11,448
Other commercial loans		73,502		964		2,253		66		-		76,785
Other agricultural loans		47,026		1,710		1,598		-		-		50,334
State and political subdivision loans		95,349		-		475		-		-		95,824
Total	$	841,474	$	27,606	$	20,423	$	105	$	-	$	889,608

December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	297,690	$	10,792	$	10,743	$	40	$	-	$	319,265
Agricultural		264,732		10,017		9,771		-		-		284,520
Construction		33,913		-		-		-		-		33,913
Other commercial loans		70,425		777		2,800		116		-		74,118
Other agricultural loans		38,628		1,724		1,834		-		-		42,186
State and political subdivision loans		92,666		9,481		571		-		-		102,718
Total	$	798,054	$	32,791	$	25,719	$	156	$	-	$	856,720

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 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	154,924	$	935	$	24	$	155,883
Home Equity		59,742		92		-		59,834
Consumer		9,687		22		-		9,709
Total	$	224,353	$	1,049	$	24	$	225,426
December 31, 2018	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	155,360	$	1,099	$	28	$	156,487
Home Equity		58,736		82		-	$	58,818
Consumer		9,832		26		-	$	9,858
Total	$	223,928	$	1,207	$	28	$	225,163

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 30, 2019 and December 31, 2018 (in thousands):

													Total		90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and
September 30, 2019	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	155	$	205	$	334	$	694	$	155,165	$	24	$	155,883	$	19
Home Equity		224		86		88		398		59,436		-		59,834		-
Commercial		957		263		3,394		4,614		343,442		1,213		349,269		21
Agricultural		1,113		-		3,164		4,277		301,671		-		305,948		-
Construction		-		-		-		-		11,448		-		11,448		-
Consumer		64		14		22		100		9,609		-		9,709		22
Other commercial loans		15		4		1,941		1,960		74,734		91		76,785		41
Other agricultural loans		60		-		1,196		1,256		49,078		-		50,334		-
State and political
subdivision loans		-		-		-		-		95,824		-		95,824		-
Total	$	2,588	$	572	$	10,139	$	13,299	$	1,100,407	$	1,328	$	1,115,034	$	103
Loans considered non-accrual	$	258	$	230	$	10,036	$	10,524	$	2,699	$	-	$	13,223
Loans still accruing		2,330		342		103		2,775		1,097,708		1,328		1,101,811
Total	$	2,588	$	572	$	10,139	$	13,299	$	1,100,407	$	1,328	$	1,115,034

													Total		90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and
December 31, 2018	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	483	$	789	$	686	$	1,958	$	154,501	$	28	$	156,487	$	20
Home Equity		257		108		63		428		58,390		-		58,818		-
Commercial		999		631		4,706		6,336		311,608		1,321		319,265		36
Agricultural		121		-		3,184		3,305		281,215		-		284,520		-
Construction		-		-		-		-		33,913		-		33,913		-
Consumer		37		14		12		63		9,795		-		9,858		12
Other commercial loans		141		53		2,061		2,255		71,353		510		74,118		-
Other agricultural loans		-		-		1,201		1,201		40,985		-		42,186		-
State and political
subdivision loans		-		-		-		-		102,718		-		102,718		-
Total	$	2,038	$	1,595	$	11,913	$	15,546	$	1,064,478	$	1,859	$	1,081,883	$	68
Loans considered non-accrual	$	72	$	253	$	11,845	$	12,170	$	1,554	$	-	$	13,724
Loans still accruing		1,966		1,342		68		3,376		1,062,924		1,859		1,068,159
Total	$	2,038	$	1,595	$	11,913	$	15,546	$	1,064,478	$	1,859	$	1,081,883

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 30, 2019 and December 31, 2018, respectively. The balances are presented by class of financing receivable (in thousands):

	September 30, 2019		December 31, 2018
Real estate loans:
Mortgages	$	916	$	1,079
Home Equity		92		82
Commercial		5,413		5,957
Agricultural		3,549		3,206
Consumer		-		14
Other commercial loans		2,009		2,185
Other agricultural loans		1,244		1,201
	$	13,223	$	13,724

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 30, 2019 and December 31, 2018, included within the allowance for loan losses are reserves of $351,000 and $255,000 respectively, that are associated with loans modified as TDRs.

Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2019 and 2018 were as follows (dollars in thousands):

	For the Three Months Ended September 30, 2019
	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	$	-	$	118	$	-	$	118
Consumer		-		1		-		3		-		3
Total		-		2	$	-	$	121	$	-	$	121

	For the Nine Months Ended September 30, 2019
	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	$	-	$	4	$	-	$	4
Home Equity		-		1		-		40		-		40
Commercial		-		5		-		918		-		918
Consumer		-		1		-		3		-		3
Total		-		8	$	-	$	965	$	-	$	965

	For the Three Months Ended September 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:
Commercial		-		1	$	-	$	106	$	-	$	106
Agricultural		-		2		-		1,302		-		1,302
Total		-		3	$	-	$	1,408	$	-	$	1,408

	For the Nine Months Ended September 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		-		2		-		683		-		683
Agricultural		-		3		-		2,825		-		2,825
Other agricultural loans		-		4		-		176		-		176
Total		-		11	$	-	$	3,692	$	-	$	3,692

 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. The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2019 and 2018 (9 month periods) and July 1, 2019 and 2018 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	For the Three Months Ended								For the Nine Months Ended
	September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		-	$	-		-	$	-	$	1	$	542		-	$	-
Agricultural		-		-		2		1,302		1		1,439		2		1,302
Other agricultural loans		-		-		1		124		4		261		1		124
Total recidivism		-	$	-		3	$	1,426		6	$	2,242		3	$	1,426

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 30, 2019 and December 31, 2018, respectively (in thousands):

	September 30, 2019						December 31, 2018
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	22	$	1,069	$	1,091	$	24	$	1,081	$	1,105
Commercial		342		4,299		4,641		216		3,899		4,115
Agricultural		145		4,567		4,712		84		4,180		4,264
Construction		-		19		19		-		58		58
Consumer		-		119		119		-		120		120
Other commercial loans		144		1,205		1,349		193		1,161		1,354
Other agricultural loans		157		712		869		159		593		752
State and political
subdivision loans		-		536		536		-		762		762
Unallocated		-		343		343		-		354		354
Total	$	810	$	12,869	$	13,679	$	676	$	12,208	$	12,884

The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):

	For the three months ended September 30, 2019
	Balance at June 30, 2019		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2019
Real estate loans:
Residential	$	1,066	$	(24	)	$	-	$	49		$	1,091
Commercial		4,400		-			-		241			4,641
Agricultural		4,532		-			-		180			4,712
Construction		36		-			-		(17	)		19
Consumer		118		(10	)		6		5			119
Other commercial loans		1,328		-			3		18			1,349
Other agricultural loans		741		-			-		128			869
State and political				-			-
subdivision loans		539		-			-		(3	)		536
Unallocated		544		-			-		(201	)		343
Total	$	13,304	$	(34	)	$	9	$	400		$	13,679
	For the nine months ended September 30, 2019
	Balance at December 31, 2018		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2019
Real estate loans:
Residential	$	1,105	$	(24	)	$	-	$	10		$	1,091
Commercial		4,115		(293	)		-		819			4,641
Agricultural		4,264		-			-		448			4,712
Construction		58		-			-		(39	)		19
Consumer		120		(32	)		24		7			119
Other commercial loans		1,354		(38	)		8		25			1,349
Other agricultural loans		752		-			-		117			869
State and political
subdivision loans		762		-			-		(226	)		536
Unallocated		354		-			-		(11	)		343
Total	$	12,884	$	(387	)	$	32	$	1,150		$	13,679

	For the three months ended September 30, 2018
	Balance at June 30, 2018		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2018
Real estate loans:
Residential	$	1,045	$	(10	)	$	1	$	16		$	1,052
Commercial		3,794		(25	)		-		156			3,925
Agricultural		3,673							256			3,929
Construction		44		-			-		5			49
Consumer		115		(13	)		9		12			123
Other commercial loans		1,266		-			5		(52	)		1,219
Other agricultural loans		589		-			-		110			699
State and political
subdivision loans		767		-			-		(16	)		751
Unallocated		648		-			-		(12	)		636
Total	$	11,941	$	(48	)	$	15	$	475		$	12,383
	For the nine months ended September 30, 2018
	Balance at December 31, 2017		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2018
Real estate loans:
Residential	$	1,049	$	(27	)	$	70	$	(40	)	$	1,052
Commercial		3,867		(25	)		3		80			3,925
Agricultural		3,143		-					786			3,929
Construction		23		-			-		26			49
Consumer		124		(32	)		26		5			123
Other commercial loans		1,272		(91	)		19		19			1,219
Other agricultural loans		492		(50	)		-		257			699
State and political
subdivision loans		816		-			-		(65	)		751
Unallocated		404		-			-		232			636
Total	$	11,190	$	(225	)	$	118	$	1,300		$	12,383

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 at least 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 30, 2019, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of overall growth in the portfolio. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision.

For the nine months ended September 30, 2019, the allowance for commercial real estate was increased in general reserves due to general increase in the size of the portfolio and an increase in the historical loss percentage of the portfolio. There also was an increase in specific reserves for commercial real estate, which was partially offset by the decrease in substandard loans. The total change was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. Additionally, there was an increase in specific reserves. The allowance for other agricultural loans was increased as a result of a general increase in the size of the portfolio. The result of these changes was represented as an increase in the provision. These resulted in an increase in the provision. The allowance for state and political subdivision was decreased as a result a decrease in the volume of classified loans. The result of this change was represented as a decrease in the provision.

For the three months ended September 30, 2018, the allowance for commercial real estate was increased in general reserves due to an increase in the size of the portfolio as well as an increase in specific reserves. This was represented as an increase in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances, an increase in the amount of loans classified as non-accrual and an increase in specific reserves. The result of this was represented as an increase in the provision. The allowance for other agricultural loans was increased as a result of an increase in specific reserves, which offset the decrease due to the decrease in the portfolio size. The result of these changes was represented as an increase in the provision.

For the nine months ended September 30, 2018, 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. There was an increase in specific reserves for commercial real estate. The total change was represented as an increase 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 nonaccrual. Additionally, there was an increase in specific reserves. These resulted in an increase in the provision. The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances, loans past due and an increase in non-accrual loans. Additionally, specific reserves also increased. The result of these changes was represented as an increase in the provision.

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of September 30, 2019 and December 31, 2018, included within other assets are $3,497,000 and $601,000, respectively, of foreclosed assets. As of September 30, 2019, included within the foreclosed assets are $337,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2019, the Company had initiated formal foreclosure proceedings on $1,885,000 of consumer residential mortgages, which had not yet been transferred into foreclosed assets.

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Accumulated Comprehensive Loss

9 Months Ended

Sep. 30, 2019

Accumulated Comprehensive Loss [Abstract]

Accumulated Comprehensive Loss

Note 9 – Accumulated Comprehensive Loss

The following tables present the changes in accumulated other comprehensive loss by component net of tax for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Nine months ended September 30, 2019
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2018	$	(973	)	$	(2,948	)	$	(3,921	)
Other comprehensive income (loss) before reclassifications (net of tax)		3,495			-			3,495
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(6	)		143			137
Net current period other comprehensive income (loss)		3,489			143			3,632
Balance as of September 30, 2019	$	2,516		$	(2,805	)	$	(289	)
	Nine months ended September 30, 2018
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2017	$	(269	)	$	(3,129	)	$	(3,398	)
Change in Accounting policy for equity securities		1			-			1
Other comprehensive income (loss) before reclassifications (net of tax)		(2,800	)		-			(2,800	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		6			110			116
Net current period other comprehensive income (loss)		(2,794	)		110			(2,684	)
Balance as of September 30, 2018	$	(3,062	)	$	(3,019	)	$	(6,081	)
	Three months ended September 30, 2019
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2019	$	2,515		$	(2,852	)	$	(337	)
Other comprehensive income (loss) before reclassifications (net of tax)		7			-			7
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(6	)		47			41
Net current period other comprehensive income (loss)		1			47			48
Balance as of September 30, 2019	$	2,516		$	(2,805	)	$	(289	)
	Three months ended September 30, 2018
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2018	$	(2,302	)	$	(3,055	)	$	(5,357	)
Other comprehensive income (loss) before reclassifications (net of tax)		(766	)		-			(766	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		6			36			42
Net current period other comprehensive income (loss)		(760	)		36			(724	)
Balance as of September 30, 2018	$	(3,062	)	$	(3,019	)	$	(6,081	)
(a) Amounts in parentheses indicate debits on the Consolidated Balance Sheet.

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive income for the three and nine months ended September 30, 2019 and 2018 (in thousands):

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 September 30,
	2019			2018
Unrealized gains and losses on available for sale securities
	$	8		$	(8	)	Available for sale securities gains, net
		(2	)		2		Provision for income taxes
	$	6		$	(6	)	Net of tax
Defined benefit pension items
	$	(60	)	$	(47	)	Other expenses
		13			11		Provision for income taxes
	$	(47	)	$	(36	)	Net of tax
Total reclassifications	$	(41	)	$	(42	)
	Nine Months Ended September 30
		2019			2018
Unrealized gains and losses on available for sale securities
	$	8		$	(8	)	Available for sale securities gains, net
		(2	)		2		Provision for income taxes
	$	6		$	(6	)	Net of tax
Defined benefit pension items
	$	(181	)	$	(140	)	Other expenses
		38			30		Provision for income taxes
	$	(143	)	$	(110	)	Net of tax
Total reclassifications	$	(137	)	$	(116	)
(a) Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income

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Leases, Undiscounted Cash Flows - Operating Leases (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Undiscounted Cash Flows Due Within Operating [Abstract]
Remaining 2019	$ 84
2020	279
2021	238
2022	230
2023	142
2024	105
2025 and thereafter	291
Total undiscounted cash flows	1,369
Impact of present value discount	132
Amount reported on balance sheet	$ 1,237

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Accumulated Comprehensive Loss, Reclassification (Details) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
AOCI Attributable to Parent [Abstract]
Available for sale security gains, net				$ 78	$ (1)
Provision for income taxes		$ (1,066)	$ (936)	(2,817)	(2,558)
NET INCOME		5,196	4,581	14,447	13,519
Amount Reclassified from Accumulated Comprehensive Income (Loss) [Member]
AOCI Attributable to Parent [Abstract]
NET INCOME	[1]	(41)	(42)	(137)	(116)
Unrealized Gain Loss on Available for Sale Securities [Member] | Amount Reclassified from Accumulated Comprehensive Income (Loss) [Member]
AOCI Attributable to Parent [Abstract]
Available for sale security gains, net	[1]	8	(8)	8	(8)
Provision for income taxes	[1]	(2)	2	(2)	2
NET INCOME	[1]	6	(6)	6	(6)
Defined Benefit Pension Items [Member] | Amount Reclassified from Accumulated Comprehensive Income (Loss) [Member]
AOCI Attributable to Parent [Abstract]
Other expenses	[1]	(60)	(47)	(181)	(140)
Provision for income taxes	[1]	13	11	38	30
NET INCOME	[1]	$ (47)	$ (36)	$ (143)	$ (110)

[1] Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income.

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Proposed Acquisition of MidCoast Community Bancorp, Inc (Details) - MidCoast Community Bancorp, Inc [Member]	Sep. 18, 2019 USD ($) $ / shares shares
Proposed Acquisition [Abstract]
Right to receive cash for each share of common stock (in dollars per share) | $ / shares	$ 6.50
Right to receive share for each share of common stock (in share) | shares	0.1065
Threshold decline percentage of market value to terminate merger	20.00%
Merger termination fee | $	$ 1,200,000
Maximum [Member]
Proposed Acquisition [Abstract]
Percentages of common shares outstanding to be converted to cash	25.00%

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Treasury Stock [Member]	Total
Comprehensive income:
Change in Accounting policy for equity securities			$ (1)	$ 1		$ 0
Balance at Dec. 31, 2017	$ 3,870	$ 51,108	89,982	(3,398)	$ (12,551)	129,011
Balance (in shares) at Dec. 31, 2017	3,869,939
Comprehensive income:
Net income			13,519			13,519
Net other comprehensive income (loss)				(2,684)		(2,684)
Stock dividend	$ 34	2,108				0
Stock dividend			(2,142)
Stock dividend (in shares)	34,272
Issuance of Common stock						0
Issuance of Common stock (in shares)	1
Purchase of treasury stock					(791)	(791)
Restricted stock, executive and Board of Director awards		(306)			13	(293)
Restricted stock vesting		212				212
Cash dividend reinvestment paid from treasury stock		0	(30)		30	0
Cash dividends			(4,574)			(4,574)
Balance at Sep. 30, 2018	$ 3,904	53,122	96,754	(6,081)	(13,299)	134,400
Balance (in shares) at Sep. 30, 2018	3,904,212
Balance at Jun. 30, 2018	$ 3,904	53,098	93,717	(5,357)	(13,081)	132,281
Balance (in shares) at Jun. 30, 2018	3,904,212
Comprehensive income:
Net income			4,581			4,581
Net other comprehensive income (loss)				(724)		(724)
Purchase of treasury stock					(248)	(248)
Restricted stock vesting		24				24
Cash dividend reinvestment paid from treasury stock		0	(30)		30	0
Cash dividends			(1,514)			(1,514)
Balance at Sep. 30, 2018	$ 3,904	53,122	96,754	(6,081)	(13,299)	134,400
Balance (in shares) at Sep. 30, 2018	3,904,212
Balance at Dec. 31, 2018	$ 3,904	53,099	99,727	(3,921)	(13,580)	139,229
Balance (in shares) at Dec. 31, 2018	3,904,212
Comprehensive income:
Net income			14,447			14,447
Net other comprehensive income (loss)				3,632		3,632
Stock dividend	$ 35	2,067				0
Stock dividend			(2,102)
Stock dividend (in shares)	34,456
Purchase of treasury stock					(1,236)	(1,236)
Restricted stock, executive and Board of Director awards		(300)			415	115
Restricted stock vesting		221				221
Forfeited restricted stock		9			(9)	0
Cash dividends			(4,730)			(4,730)
Balance at Sep. 30, 2019	$ 3,939	55,096	107,342	(289)	(14,410)	151,678
Balance (in shares) at Sep. 30, 2019	3,938,668
Balance at Jun. 30, 2019	$ 3,939	55,096	103,733	(337)	(14,410)	148,021
Balance (in shares) at Jun. 30, 2019	3,938,668
Comprehensive income:
Net income			5,196			5,196
Net other comprehensive income (loss)				48		48
Cash dividends			(1,587)			(1,587)
Balance at Sep. 30, 2019	$ 3,939	$ 55,096	$ 107,342	$ (289)	$ (14,410)	$ 151,678
Balance (in shares) at Sep. 30, 2019	3,938,668

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Investments, Debt Securities, Amortized Cost and Fair Value by Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Available-for-Sale Debt Securities, Amortized Cost [Abstract]
Due in one year or less	$ 22,771
Due after one year through five years	92,295
Due after five years through ten years	40,656
Due after ten years	88,120
Amortized cost	243,842	$ 242,242
Available-for-Sale Debt Securities, Fair Value [Abstract]
Due in one year or less	22,742
Due after one year through five years	94,069
Due after five years through ten years	41,115
Due after ten years	89,101
Fair value	$ 247,027	$ 241,010

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CONSOLIDATED BALANCE SHEET (UNAUDITED) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Cash and due from banks:
Noninterest-bearing	$ 19,005	$ 15,327
Interest-bearing	1,081	1,470
Total cash and cash equivalents	20,086	16,797
Interest bearing time deposits with other banks	14,256	15,498
Equity securities	650	516
Available-for-sale securities	247,027	241,010
Loans held for sale	1,430	1,127
Loans (net of allowance for loan losses: 2019, $13,679 and 2018, $12,884)	1,101,355	1,068,999
Premises and equipment	15,881	16,273
Accrued interest receivable	4,476	4,452
Goodwill	23,296	23,296
Bank owned life insurance	27,968	27,505
Other intangibles	1,400	1,623
Other assets	17,180	13,616
TOTAL ASSETS	1,475,005	1,430,712
Deposits:
Noninterest-bearing	199,046	179,971
Interest-bearing	1,000,258	1,005,185
Total deposits	1,199,304	1,185,156
Borrowed funds	109,840	91,194
Accrued interest payable	1,052	1,076
Other liabilities	13,131	14,057
TOTAL LIABILITIES	1,323,327	1,291,483
STOCKHOLDERS' EQUITY:
Preferred Stock $1.00 par value; authorized 3,000,000 shares at September 30, 2019 and December 31, 2018; none issued in 2019 or 2018	0	0
Common stock $1.00 par value; authorized 25,000,000 shares at September 30, 2019 and December 31, 2018; issued 3,938,668 at September 30, 2019 and 3,904,212, at December 31, 2018	3,939	3,904
Additional paid-in capital	55,096	53,099
Retained earnings	107,342	99,727
Accumulated other comprehensive loss	(289)	(3,921)
Treasury stock, at cost: 413,353 shares at September 30, 2019 and 399,616 shares at December 31, 2018	(14,410)	(13,580)
TOTAL STOCKHOLDERS' EQUITY	151,678	139,229
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 1,475,005	$ 1,430,712

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Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings per share basic and diluted [Abstract]
Net income applicable to common stock	$ 5,196	$ 4,581	$ 14,447	$ 13,519
Basic earnings per share computation [Abstract]
Weighted average common shares outstanding (in shares)	3,515,678	3,537,315	3,522,377	3,541,971
Earnings per share - basic (in dollars per share)	$ 1.48	$ 1.30	$ 4.10	$ 3.82
Diluted earnings per share computation [Abstract]
Weighted average common shares outstanding for basic earnings per share (in shares)	3,515,678	3,537,315	3,522,377	3,541,971
Add: Dilutive effects of restricted stock (in shares)	0	161	2,280	2,161
Weighted average common shares outstanding for dilutive earnings per share (in shares)	3,515,678	3,537,476	3,524,657	3,544,132
Earnings per share - diluted (in dollars per share)	$ 1.48	$ 1.30	$ 4.10	$ 3.81
Restricted Stock [Member]
Antidilutive Securities [Abstract]
Antidilutive restricted stock excluded from net income per share calculations (in shares)	9,013	4,696	4,453	4,033
Restricted Stock [Member] | Minimum [Member]
Antidilutive Securities [Abstract]
Antidilutive stock share price range (in dollars per share)	$ 50.65	$ 46.69	$ 50.65	$ 46.69
Restricted Stock [Member] | Maximum [Member]
Antidilutive Securities [Abstract]
Antidilutive stock share price range (in dollars per share)	$ 62.93	$ 62.93	$ 62.93	$ 61.04

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Accumulated Comprehensive Loss (Tables)

9 Months Ended

Sep. 30, 2019

Accumulated Comprehensive Loss [Abstract]

Changes in Accumulated Other Comprehensive Loss by Component, Net of Tax

The following tables present the changes in accumulated other comprehensive loss by component net of tax for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Nine months ended September 30, 2019
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2018	$	(973	)	$	(2,948	)	$	(3,921	)
Other comprehensive income (loss) before reclassifications (net of tax)		3,495			-			3,495
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(6	)		143			137
Net current period other comprehensive income (loss)		3,489			143			3,632
Balance as of September 30, 2019	$	2,516		$	(2,805	)	$	(289	)
	Nine months ended September 30, 2018
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of December 31, 2017	$	(269	)	$	(3,129	)	$	(3,398	)
Change in Accounting policy for equity securities		1			-			1
Other comprehensive income (loss) before reclassifications (net of tax)		(2,800	)		-			(2,800	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		6			110			116
Net current period other comprehensive income (loss)		(2,794	)		110			(2,684	)
Balance as of September 30, 2018	$	(3,062	)	$	(3,019	)	$	(6,081	)
	Three months ended September 30, 2019
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2019	$	2,515		$	(2,852	)	$	(337	)
Other comprehensive income (loss) before reclassifications (net of tax)		7			-			7
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		(6	)		47			41
Net current period other comprehensive income (loss)		1			47			48
Balance as of September 30, 2019	$	2,516		$	(2,805	)	$	(289	)
	Three months ended September 30, 2018
	Unrealized gain (loss) on available for sale securities (a)			Defined Benefit Pension Items (a)			Total
Balance as of June 30, 2018	$	(2,302	)	$	(3,055	)	$	(5,357	)
Other comprehensive income (loss) before reclassifications (net of tax)		(766	)		-			(766	)
Amounts reclassified from accumulated other
comprehensive income (loss) (net of tax)		6			36			42
Net current period other comprehensive income (loss)		(760	)		36			(724	)
Balance as of September 30, 2018	$	(3,062	)	$	(3,019	)	$	(6,081	)
(a) Amounts in parentheses indicate debits on the Consolidated Balance Sheet.

Significant Amounts Reclassified Out of Each Component of Accumulated Other Comprehensive Income

The following table presents the significant amounts reclassified out of each component of accumulated other comprehensive income for the three and nine months ended September 30, 2019 and 2018 (in thousands):

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 September 30,
	2019			2018
Unrealized gains and losses on available for sale securities
	$	8		$	(8	)	Available for sale securities gains, net
		(2	)		2		Provision for income taxes
	$	6		$	(6	)	Net of tax
Defined benefit pension items
	$	(60	)	$	(47	)	Other expenses
		13			11		Provision for income taxes
	$	(47	)	$	(36	)	Net of tax
Total reclassifications	$	(41	)	$	(42	)
	Nine Months Ended September 30
		2019			2018
Unrealized gains and losses on available for sale securities
	$	8		$	(8	)	Available for sale securities gains, net
		(2	)		2		Provision for income taxes
	$	6		$	(6	)	Net of tax
Defined benefit pension items
	$	(181	)	$	(140	)	Other expenses
		38			30		Provision for income taxes
	$	(143	)	$	(110	)	Net of tax
Total reclassifications	$	(137	)	$	(116	)
(a) Amounts in parentheses indicate expenses and other amounts indicate income on the Consolidated Statement of Income

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Investments

9 Months Ended

Sep. 30, 2019

Investments [Abstract]

Investments

Note 4 – Investments

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at September 30, 2019 and December 31, 2018 were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
September 30, 2019	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	86,514	$	1,622	$	(97	)	$	88,039
U.S. treasury securities		32,347		266		(1	)		32,612
Obligations of state and
political subdivisions		60,149		984		(17	)		61,116
Corporate obligations		3,000		76		-			3,076
Mortgage-backed securities in
government sponsored entities		61,832		498		(146	)		62,184
Total available-for-sale securities	$	243,842	$	3,446	$	(261	)	$	247,027
December 31, 2018
Available-for-sale securities:
U.S. agency securities	$	106,516	$	509	$	(640	)	$	106,385
U.S. treasury securities		33,813		-		(455	)		33,358
Obligations of state and
political subdivisions		52,074		150		(177	)		52,047
Corporate obligations		3,000		34		-			3,034
Mortgage-backed securities in
government sponsored entities		46,839		59		(712	)		46,186
Total available-for-sale securities	$	242,242	$	752	$	(1,984	)	$	241,010

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 30, 2019 and December 31, 2018 (in thousands). As of September 30, 2019, the Company owned 48 securities whose fair value was less than their cost basis.

September 30, 2019	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	$	13,096	$	(44	)	$	26,192	$	(53	)	$	39,288	$	(97	)
U.S. treasury securities		1,989		(1	)		-		-			1,989		(1	)
Obligations of state and
political subdivisions		2,185		(15	)		1,519		(2	)		3,704		(17	)
Mortgage-backed securities in
government sponsored entities		20,279		(68	)		12,599		(78	)		32,878		(146	)
Total securities	$	37,549	$	(128	)	$	40,310	$	(133	)	$	77,859	$	(261	)
December 31, 2018
U.S. agency securities	$	5,981	$	(5	)	$	52,673	$	(635	)	$	58,654	$	(640	)
U.S. treasury securities		4,948		(31	)		28,410		(424	)		33,358		(455	)
Obligations of states and
political subdivisions		8,979		(22	)		12,441		(155	)		21,420		(177	)
Mortgage-backed securities in
government sponsored entities		5,272		(18	)		32,570		(694	)		37,842		(712	)
Total securities	$	25,180	$	(76	)	$	126,094	$	(1,908	)	$	151,274	$	(1,984	)

As of September 30, 2019 and December 31, 2018, 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. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector credit rating changes, or issuer-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

Proceeds from sales of securities available-for-sale for the three and nine months ended September 30, 2019 and 2018 were $5,508,000 and $25,168,000, respectively. The gross gains and losses were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Gross gains on available for sale securities	$	9		$	161		$	9		$	161
Gross losses on available for sale securities		(1	)		(169	)	$	(1	)	$	(169	)
Net gains	$	8		$	(8	)	$	8		$	(8	)

The following table presents the net gains on the Company’s equity investments recognized in earnings during the three month and nine month periods ended September 30, 2019 and 2018, and the portion of unrealized gains for the period that relates to equity investments held at September 30, 2019 and 2018 (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
Equity securities	2019		2018			2019		2018
Net gains (losses) recognized in equity securities during the period	$	29	$	(4	)	$	70	$	9
Less: Net gains realized on the sale of equity securities during the period		-		-			-		-
Net unrealized  gains (losses)	$	29	$	(4	)	$	70	$	9

Investment securities with an approximate carrying value of $220.8 million and $221.2 million at September 30, 2019 and December 31, 2018, 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 30, 2019, by contractual maturity, are shown below (in thousands):

	Amortized
	Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	22,771	$	22,742
Due after one year through five years		92,295		94,069
Due after five years through ten years		40,656		41,115
Due after ten years		88,120		89,101
Total	$	243,842	$	247,027

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Employee Benefit Plans

9 Months Ended

Sep. 30, 2019

Employee Benefit Plans [Abstract]

Employee Benefit Plans

Note 8 - 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 2018 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 the First National Bank of Fredericksburg (FNB) when FNB was acquired. The FNB plan was frozen prior to the acquisition and therefore, no additional benefits will accrue for employees covered under that plan. The Bank has begun proceedings to terminate the FNB plan, which included distributing assets to plan participants and expects to finalize the plan termination in the fourth quarter. 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 30, 2019 and 2018, respectively (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Affected line item on the Consolidated
	2019			2018			2019			2018			Statement of income
Service cost	$	78		$	90		$	256		$	269		Salary and Employee Benefits
Interest cost		123			164			401			489		Other Expenses
Expected return on plan assets		(187	)		(230	)		(595	)		(919	)	Other Expenses
Net amortization and deferral		60			47			181			140		Other Expenses
Net periodic benefit cost	$	74		$	71		$	243		$	(21	)

The Bank does not expect to contribute to the Pension Plans during 2019.

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 30, 2019, 130,452 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 months ended September 30, 2019:

	Three months				Nine months
			Weighted					Weighted
	Unvested		Average		Unvested			Average
	Shares		Market Price		Shares			Market Price
Outstanding, beginning of period		10,764	$	60.16		9,764		$	58.21
Granted		-		-		5,130			60.21
Forfeited		-		-		(152	)		60.00
Vested		-		-		(3,978	)		(55.46	)
Outstanding, end of period		10,764	$	60.16		10,764		$	60.16

Compensation expense 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 $219,000 and $187,000 for the nine months ended September 30, 2019 and 2018, respectively. For the three months ended September 30, 2019 and 2018, compensation expense totaled $78,000 and $68,000, respectively. At September 30, 2019, the total compensation cost related to nonvested awards that had not yet been recognized was $648,000, which is expected to be recognized over the next three years.

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2019

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

Note 12 – Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

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

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

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendmentsare effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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

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Revenue Recognition (Tables)

9 Months Ended

Sep. 30, 2019

Revenue Recognition [Abstract]

Disaggregation of Revenue Derived from Contracts with Customers

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 nine months ended September 30, 2019 and 2018 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

	Three Months Ended				Nine Months Ended
	September 30				September 30
Revenue stream	2019		2018		2019		2018
Service charges on deposit accounts
Overdraft fees	$	405		395	$	1,132	$	1,143
Statement fees		52		50		153		155
Interchange revenue		589		566		1,724		1,671
ATM income		108		104		300		301
Other service charges		71		66		189		185
Total Service Charges		1,225		1,181		3,498		3,455
Trust		148		147		589		548
Brokerage and insurance		289		222		843		571
Other		80		84		267		245
Total	$	1,742	$	1,634	$	5,197	$	4,819

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangible Assets [Abstract]

Gross Carrying Value and Accumulated Amortization of Intangible Assets

The following table provides the gross carrying value and accumulated amortization of intangible assets as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019							December 31, 2018
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	1,838	$	(1,204	)	$	634	$	1,725	$	(1,066	)	$	659
Core deposit intangibles		1,786		(1,025	)		761		1,786		(851	)		935
Covenant not to compete		125		(120	)		5		125		(96	)		29
Total amortized intangible assets	$	3,749	$	(2,349	)	$	1,400	$	3,636	$	(2,013	)	$	1,623
Unamortized intangible assets:
Goodwill	$	23,296						$	23,296
(1) Excludes fully amortized intangible assets

Future Amortization Expense for Amortized Intangible Assets

The following table provides the current year and estimated future amortization expense for amortized intangible assets for the next five years (in thousands). We based our projections of amortization expense shown below on existing asset balances at September 30, 2019. Future amortization expense may vary from these projections:

	MSRs		Core deposit intangibles		Covenant not to compete		Total
Three months ended September 30, 2019 (actual)	$	44	$	58	$	8	$	110
Nine months ended September 30, 2019 (actual)		138		174		24		336
Three months ended September 30, 2018 (actual)		46		66		8		120
Nine months ended September 30, 2018 (actual)		143		200		24		367
Estimate for year ending December 31,
Remaining 2019		48		56		5		109
2020		167		197		-		364
2021		131		165		-		296
2022		100		133		-		233
2023		73		100		-		173

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Leases, Right-of-Use Assets, Lease Liability, Lease Costs and Weighted Average Term and Discount Rate (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)
Lease Liabilities [Abstract]
Operating lease liabilities	$ 1,237	$ 1,237
Lease Cost [Abstract]
Operating lease cost	85	255
Variable lease cost	20	64
Total lease cost	$ 105	$ 319
Remaining Lease Term and Discount Rate [Abstract]
Weighted average term (years)	6 years 1 month 28 days	6 years 1 month 28 days
Weighted average discount rate	3.14%	3.14%
Other Assets [Member]
Right of Use Assets [Abstract]
Operating lease right-of-use-assets	$ 1,237	$ 1,237
Other Liabilities [Member]
Lease Liabilities [Abstract]
Operating lease liabilities	$ 1,237	$ 1,237

XML

Loans, Allowance for Loan Losses (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	$ 810		$ 676
Collectively evaluated for impairment	12,869		12,208
Total	13,679	$ 13,304	12,884	$ 12,383	$ 11,941	$ 11,190
Real Estate Loans [Member] | Residential [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	22		24
Collectively evaluated for impairment	1,069		1,081
Total	1,091	1,066	1,105	1,052	1,045	1,049
Real Estate Loans [Member] | Commercial [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	342		216
Collectively evaluated for impairment	4,299		3,899
Total	4,641	4,400	4,115	3,925	3,794	3,867
Real Estate Loans [Member] | Agricultural [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	145		84
Collectively evaluated for impairment	4,567		4,180
Total	4,712	4,532	4,264	3,929	3,673	3,143
Real Estate Loans [Member] | Construction [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0
Collectively evaluated for impairment	19		58
Total	19	36	58	49	44	23
Consumer [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0
Collectively evaluated for impairment	119		120
Total	119	118	120	123	115	124
Other Commercial Loans [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	144		193
Collectively evaluated for impairment	1,205		1,161
Total	1,349	1,328	1,354	1,219	1,266	1,272
Other Agricultural Loans [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	157		159
Collectively evaluated for impairment	712		593
Total	869	741	752	699	589	492
State and Political Subdivision Loans [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0
Collectively evaluated for impairment	536		762
Total	536	539	762	751	767	816
Unallocated [Member]
Summary of allowance for loan losses into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment [Abstract]
Individually evaluated for impairment	0		0
Collectively evaluated for impairment	343		354
Total	$ 343	$ 544	$ 354	$ 636	$ 648	$ 404

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Loans, Impaired Financing Receivable (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	$ 22,762		$ 22,762		$ 27,160
Recorded Investment With No Allowance	14,804		14,804		16,802
Recorded Investment With Allowance	6,548		6,548		6,648
Total Recorded Investment	21,352		21,352		23,450
Related Allowance	810		810		676
Average Recorded Investment	21,377	$ 25,198	21,528	$ 24,769
Interest Income Recognized	122	182	424	604
Interest Income Recognized Cash Basis	0	6	11	14
Real Estate Loans [Member] | Mortgages [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	1,220		1,220		932
Recorded Investment With No Allowance	814		814		515
Recorded Investment With Allowance	227		227		288
Total Recorded Investment	1,041		1,041		803
Related Allowance	10		10		10
Average Recorded Investment	1,048	896	1,075	988
Interest Income Recognized	3	3	12	10
Interest Income Recognized Cash Basis	0	0	0	0
Real Estate Loans [Member] | Home Equity [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	174		174		106
Recorded Investment With No Allowance	85		85		12
Recorded Investment With Allowance	69		69		75
Total Recorded Investment	154		154		87
Related Allowance	12		12		14
Average Recorded Investment	143	92	108	98
Interest Income Recognized	2	2	4	4
Interest Income Recognized Cash Basis	0	0	0	0
Real Estate Loans [Member] | Commercial [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	12,466		12,466		16,326
Recorded Investment With No Allowance	10,469		10,469		11,933
Recorded Investment With Allowance	1,452		1,452		1,394
Total Recorded Investment	11,921		11,921		13,327
Related Allowance	342		342		216
Average Recorded Investment	11,906	14,116	11,768	13,915
Interest Income Recognized	112	130	342	372
Interest Income Recognized Cash Basis	0	6	11	14
Real Estate Loans [Member] | Agricultural [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	4,811		4,811		5,598
Recorded Investment With No Allowance	1,617		1,617		2,386
Recorded Investment With Allowance	3,164		3,164		3,206
Total Recorded Investment	4,781		4,781		5,592
Related Allowance	145		145		84
Average Recorded Investment	4,795	5,146	5,068	4,472
Interest Income Recognized	5	24	61	124
Interest Income Recognized Cash Basis	0	0	0	0
Consumer [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	6		6		0
Recorded Investment With No Allowance	6		6		0
Recorded Investment With Allowance	0		0		0
Total Recorded Investment	6		6		0
Related Allowance	0		0		0
Average Recorded Investment	4	0	2	2
Interest Income Recognized	0	0	0	0
Interest Income Recognized Cash Basis	0	0	0	0
Other Commercial Loans [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	2,621		2,621		2,711
Recorded Investment With No Allowance	1,715		1,715		1,836
Recorded Investment With Allowance	327		327		370
Total Recorded Investment	2,042		2,042		2,206
Related Allowance	144		144		193
Average Recorded Investment	2,073	3,495	2,088	3,906
Interest Income Recognized	0	21	1	73
Interest Income Recognized Cash Basis	0	0	0	0
Other Agricultural Loans [Member]
Impaired Financing Receivable [Abstract]
Unpaid Principal Balance	1,464		1,464		1,487
Recorded Investment With No Allowance	98		98		120
Recorded Investment With Allowance	1,309		1,309		1,315
Total Recorded Investment	1,407		1,407		1,435
Related Allowance	157		157		$ 159
Average Recorded Investment	1,408	1,453	1,419	1,388
Interest Income Recognized	0	2	4	21
Interest Income Recognized Cash Basis	$ 0	$ 0	$ 0	$ 0

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Employee Benefit Plans, Restricted Stock Plan (Details) - Restricted Stock [Member] - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Deferred Compensation Arrangements [Abstract]
Number of shares authorized (in shares)	150,000		150,000
Number of shares available for grant (in shares)	130,452		130,452
Unvested Shares [Roll Forward]
Outstanding, beginning of period (in shares)	10,764		9,764
Granted (in shares)	0		5,130
Forfeited (in shares)	0		(152)
Vested (in shares)	0		(3,978)
Outstanding, end of period (in shares)	10,764		10,764
Weighted Average Market Price [Roll Forward]
Outstanding, beginning of period (in dollars per share)	$ 60.16		$ 58.21
Granted (in dollars per share)	0		60.21
Forfeited (in dollars per share)	0		60.00
Vested (in dollars per share)	0		(55.46)
Outstanding, end of period (in dollars per share)	$ 60.16		$ 60.16
Additional General Disclosures [Abstract]
Share-based compensation expense	$ 78	$ 68	$ 219	$ 187
Compensation cost related to nonvested awards that has not yet been recognized	$ 648		$ 648
Period over which compensation cost is expected to be recognized			3 years

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Fair Value Measurements, Quantitative Information (Details) - Appraised Collateral Values [Member] $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019 USD ($)	Dec. 31, 2018 USD ($)
Impaired Loans [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired Loans	$ 5,637	$ 5,815
Impaired Loans [Member] | Minimum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Holding period	0 months	6 months
Impaired Loans [Member] | Maximum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Holding period	12 months	12 months
Impaired Loans [Member] | Weighted Average [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Holding period	11 months 20 days	11 months 18 days
Impaired Loans [Member] | Discount for Time Since Appraisal [Member] | Minimum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired loans, Measurement input	0	0
Impaired Loans [Member] | Discount for Time Since Appraisal [Member] | Maximum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired loans, Measurement input	1	1
Impaired Loans [Member] | Discount for Time Since Appraisal [Member] | Weighted Average [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired loans, Measurement input	0.2017	0.1922
Impaired Loans [Member] | Selling Costs [Member] | Minimum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired loans, Measurement input	0.05	0.05
Impaired Loans [Member] | Selling Costs [Member] | Maximum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired loans, Measurement input	0.12	0.12
Impaired Loans [Member] | Selling Costs [Member] | Weighted Average [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired loans, Measurement input	0.0890	0.0870
Other Real Estate Owned [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Impaired Loans	$ 3,386	$ 532
Other Real Estate Owned [Member] | Discount for Time Since Appraisal [Member] | Minimum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Other real estate owned, Measurement input	0.06	0.2
Other Real Estate Owned [Member] | Discount for Time Since Appraisal [Member] | Maximum [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Other real estate owned, Measurement input	0.67	0.65
Other Real Estate Owned [Member] | Discount for Time Since Appraisal [Member] | Weighted Average [Member]
Fair Value Measurement Inputs and Valuation Techniques [Abstract]
Other real estate owned, Measurement input	0.1558	0.3144

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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 10 – 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.

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 30, 2019 and December 31, 2018 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.

September 30, 2019	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	650	$	-	$	-	$	650
Available for sale securities:
U.S. Agency securities		-		88,039		-		88,039
U.S. Treasury securities		32,612		-		-		32,612
Obligations of state and
political subdivisions		-		61,116		-		61,116
Corporate obligations		-		3,076		-		3,076
Mortgage-backed securities in
government sponsored entities		-		62,184		-		62,184
December 31, 2018	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	516	$	-	$	-	$	516
Available for sale securities:
U.S. Agency securities		-		106,385		-		106,385
U.S. Treasuries securities		33,358		-		-		33,358
Obligations of state and
political subdivisions		-		52,047		-		52,047
Corporate obligations		-		3,034		-		3,034
Mortgage-backed securities in
government sponsored entities		-		46,186		-		46,186

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Nonrecurring Basis

Assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 are included in the table below (in thousands):

September 30, 2019	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	5,637	$	5,637
Other real estate owned		-		-		3,386		3,386
December 31, 2018	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	5,815	$	5,815
Other real estate owned		-		-		532		532

• 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 $572,000 and $563,000 at September 30, 2019 and December 31, 2018, 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, 2019	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Impaired Loans	$	5,637	Appraised Collateral Values	Discount for time since appraisal		0-100	%		20.17	%
				Selling costs		5%-12	%		8.90	%
				Holding period	0 - 12 months			11.68 months
Other real estate owned		3,386	Appraised Collateral Values	Discount for time since appraisal		6-67	%		15.58	%

December 31, 2018	Fair Value	Valuation Technique(s)	Unobservable input	Range
Impaired Loans	5,815	Appraised Collateral Values	Discount for time since appraisal	0-100%	19.22%
			Selling costs	5%-12%	8.70%
			Holding period	6 - 12 months	11.61 months
Other real estate owned	532	Appraised Collateral Values	Discount for time since appraisal	20-65%	31.44%

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

The carrying amount and fair 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
September 30, 2019	Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	14,256	$	14,628	$	-	$	-	$	14,628
Loans held for sale		1,430		1,429		-		-		1,429
Net loans		1,101,355		1,090,978		-		-		1,090,978
Financial liabilities:
Deposits		1,199,304		1,199,276		925,138		-		274,138
Borrowed funds		109,840		109,626		-		-		109,626
	Carrying
December 31, 2018	Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	15,498	$	15,422	$	-	$	-	$	15,422
Loans held for sale		1,127		1,126		-		-		1,126
Net loans		1,068,999		1,062,645		-		-		1,062,645
Financial liabilities:
Deposits		1,185,156		1,180,694		886,686		-		294,008
Borrowed funds		91,194		90,427		-		-		90,427

The carrying amounts for cash and due from banks, bank owned life insurance, regulatory stock, accrued interest receivable and payable approximate fair value and are considered Level I measurements.

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Revenue Recognition

9 Months Ended

Sep. 30, 2019

Revenue Recognition [Abstract]

Revenue Recognition

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 90.4% and 90.0% of the total revenue of the Company for the three months ended September 30, 2019 and 2018, respectively and 90.1% and 90.0% of the total revenue of the Company for the nine months ended September 30, 2019 and 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 and 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 nine months ended September 30, 2019 and 2018 (in thousands). All revenue in the table below relates to goods and services transferred at a point in time.

	Three Months Ended				Nine Months Ended
	September 30				September 30
Revenue stream	2019		2018		2019		2018
Service charges on deposit accounts
Overdraft fees	$	405		395	$	1,132	$	1,143
Statement fees		52		50		153		155
Interchange revenue		589		566		1,724		1,671
ATM income		108		104		300		301
Other service charges		71		66		189		185
Total Service Charges		1,225		1,181		3,498		3,455
Trust		148		147		589		548
Brokerage and insurance		289		222		843		571
Other		80		84		267		245
Total	$	1,742	$	1,634	$	5,197	$	4,819

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangible Assets [Abstract]

Goodwill and Other Intangible 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 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019							December 31, 2018
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	1,838	$	(1,204	)	$	634	$	1,725	$	(1,066	)	$	659
Core deposit intangibles		1,786		(1,025	)		761		1,786		(851	)		935
Covenant not to compete		125		(120	)		5		125		(96	)		29
Total amortized intangible assets	$	3,749	$	(2,349	)	$	1,400	$	3,636	$	(2,013	)	$	1,623
Unamortized intangible assets:
Goodwill	$	23,296						$	23,296
(1) Excludes fully amortized intangible assets

The following table provides the current year and estimated future amortization expense for amortized intangible assets for the next five years (in thousands). We based our projections of amortization expense shown below on existing asset balances at September 30, 2019. Future amortization expense may vary from these projections:

	MSRs		Core deposit intangibles		Covenant not to compete		Total
Three months ended September 30, 2019 (actual)	$	44	$	58	$	8	$	110
Nine months ended September 30, 2019 (actual)		138		174		24		336
Three months ended September 30, 2018 (actual)		46		66		8		120
Nine months ended September 30, 2018 (actual)		143		200		24		367
Estimate for year ending December 31,
Remaining 2019		48		56		5		109
2020		167		197		-		364
2021		131		165		-		296
2022		100		133		-		233
2023		73		100		-		173

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CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
INTEREST INCOME:
Interest and fees on loans	$ 13,915	$ 12,666	$ 41,005	$ 36,988
Interest-bearing deposits with banks	103	94	311	218
Investment securities:
Taxable	1,361	967	3,597	2,683
Nontaxable	378	425	1,109	1,426
Dividends	117	107	371	355
TOTAL INTEREST INCOME	15,874	14,259	46,393	41,670
INTEREST EXPENSE:
Deposits	2,315	1,794	7,027	4,695
Borrowed funds	660	695	2,216	2,034
TOTAL INTEREST EXPENSE	2,975	2,489	9,243	6,729
NET INTEREST INCOME	12,899	11,770	37,150	34,941
Provision for loan losses	400	475	1,150	1,300
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	12,499	11,295	36,000	33,641
NON-INTEREST INCOME:
Revenue from customers	1,742	1,634	5,197	4,819
Gains on loans sold	176	170	339	302
Equity security gains (losses), net	29	(4)	70	9
Available for sale security gains (losses), net	8	(8)	8	(8)
Earnings on bank owned life insurance	158	161	463	467
Other	144	141	427	414
TOTAL NON-INTEREST INCOME	2,177	2,010	6,237	5,758
NON-INTEREST EXPENSES:
Salaries and employee benefits	5,096	4,679	15,129	14,251
Occupancy	530	500	1,639	1,606
Furniture and equipment	165	130	501	394
Professional fees	343	507	1,101	1,273
FDIC insurance (credit)	(20)
FDIC insurance fee		120	196	327
Pennsylvania shares tax	275	250	825	850
Amortization of intangibles	66	74	198	224
Merger and acquisition	275	0	275	0
ORE expenses	92	6	308	92
Other	1,592	1,522	4,801	4,305
TOTAL NON-INTEREST EXPENSES	8,414	7,788	24,973	23,322
Income before provision for income taxes	6,262	5,517	17,264	16,077
Provision for income taxes	1,066	936	2,817	2,558
NET INCOME	$ 5,196	$ 4,581	$ 14,447	$ 13,519
PER COMMON SHARE DATA:
Net Income - Basic (in dollars per share)	$ 1.48	$ 1.30	$ 4.10	$ 3.82
Net Income - Diluted (in dollars per share)	1.48	1.30	4.10	3.81
Cash Dividends Paid (in dollars per share)	$ 0.450	$ 0.436	$ 1.331	$ 1.289
Number of shares used in computation - basic (in shares)	3,515,678	3,537,315	3,522,377	3,541,971
Number of shares used in computation - diluted (in shares)	3,515,678	3,537,476	3,524,657	3,544,132
Service Charges [Member]
NON-INTEREST INCOME:
Revenue from customers	$ 1,225	$ 1,181	$ 3,498	$ 3,455
Trust [Member]
NON-INTEREST INCOME:
Revenue from customers	148	147	589	548
Brokerage and Insurance [Member]
NON-INTEREST INCOME:
Revenue from customers	$ 289	$ 222	$ 843	$ 571

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CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 14,447	$ 13,519
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,150	1,300
Depreciation and amortization	357	301
Amortization and accretion on investment securities	129	813
Deferred income taxes	420	(260)
Investments securities (gains) losses, net	(78)	1
Earnings on bank owned life insurance	(463)	(467)
Originations of loans held for sale	(15,261)	(14,709)
Proceeds from sales of loans held for sale	15,183	15,374
Realized gains on loans sold	(339)	(302)
Increase in accrued interest receivable	(24)	(284)
Increase (decrease) in accrued interest payable	(24)	82
Other, net	439	(435)
Net cash provided by operating activities	15,936	14,933
Available-for-sale securities:
Proceeds from sales	5,508	25,168
Proceeds from maturity and principal repayments	51,028	41,027
Purchase of securities	(59,788)	(56,289)
Purchase of equity securities	(64)	(191)
Purchase of interest bearing time deposits with other banks	(248)	(5,713)
Proceeds from sale of interest bearing time deposits with other banks	0	1,239
Proceeds from matured interest bearing time deposits with other banks	1,490	0
Proceeds from redemption of regulatory stock	7,784	7,874
Purchase of regulatory stock	(9,127)	(6,751)
Net increase in loans	(36,653)	(59,646)
Purchase of premises and equipment	(225)	(228)
Proceeds from sale of premises and equipment	7	0
Proceeds from sale of foreclosed assets held for sale	813	899
Net cash used in investing activities	(39,475)	(52,611)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	14,148	69,900
Proceeds from long-term borrowings	10,000	7
Repayments of long-term borrowings	(3,123)	(1,000)
Net (decrease) increase in short-term borrowed funds	11,769	(27,574)
Purchase of treasury and restricted stock	(1,236)	(1,098)
Dividends paid	(4,730)	(4,574)
Net cash provided by financing activities	26,828	35,661
Net (decrease) increase in cash and cash equivalents	3,289	(2,017)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	16,797	18,517
CASH AND CASH EQUIVALENTS AT END OF PERIOD	20,086	16,500
Supplemental Disclosures of Cash Flow Information:
Interest paid	9,267	6,647
Income taxes paid	2,450	1,900
Non-cash Transactions [Abstract]
Loans transferred to foreclosed property	3,728	381
Right of use asset and liability	$ 1,454	$ 0

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Investments, Gross Gains and Losses, Available for Sale Securities (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Investments [Abstract]
Proceeds from sale of securities available-for-sale	$ 5,508	$ 25,168	$ 5,508	$ 25,168
Gross gains and losses on available-for-sale securities [Abstract]
Gross gains on available for sale securities	9	161	9	161
Gross losses on available for sale securities	(1)	(169)	(1)	(169)
Net gains	$ 8	$ (8)	$ 8	$ (8)

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Basis of Presentation (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]
Operating lease liabilities	$ 1,237
ASU 2016-02 [Member]
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]
Operating lease right-of-use-assets		$ 1,454
Operating lease liabilities		$ 1,454

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Revenue Recognition (Policies)

9 Months Ended

Sep. 30, 2019

Revenue Recognition [Abstract]

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 90.4% and 90.0% of the total revenue of the Company for the three months ended September 30, 2019 and 2018, respectively and 90.1% and 90.0% of the total revenue of the Company for the nine months ended September 30, 2019 and 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 and 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.

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Investments (Tables)

9 Months Ended

Sep. 30, 2019

Investments [Abstract]

Amortized Cost and Fair Value of Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of investment securities at September 30, 2019 and December 31, 2018 were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
September 30, 2019	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	86,514	$	1,622	$	(97	)	$	88,039
U.S. treasury securities		32,347		266		(1	)		32,612
Obligations of state and
political subdivisions		60,149		984		(17	)		61,116
Corporate obligations		3,000		76		-			3,076
Mortgage-backed securities in
government sponsored entities		61,832		498		(146	)		62,184
Total available-for-sale securities	$	243,842	$	3,446	$	(261	)	$	247,027
December 31, 2018
Available-for-sale securities:
U.S. agency securities	$	106,516	$	509	$	(640	)	$	106,385
U.S. treasury securities		33,813		-		(455	)		33,358
Obligations of state and
political subdivisions		52,074		150		(177	)		52,047
Corporate obligations		3,000		34		-			3,034
Mortgage-backed securities in
government sponsored entities		46,839		59		(712	)		46,186
Total available-for-sale securities	$	242,242	$	752	$	(1,984	)	$	241,010

Unrealized Losses and Fair Value of Investments

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 30, 2019 and December 31, 2018 (in thousands). As of September 30, 2019, the Company owned 48 securities whose fair value was less than their cost basis.

September 30, 2019	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	$	13,096	$	(44	)	$	26,192	$	(53	)	$	39,288	$	(97	)
U.S. treasury securities		1,989		(1	)		-		-			1,989		(1	)
Obligations of state and
political subdivisions		2,185		(15	)		1,519		(2	)		3,704		(17	)
Mortgage-backed securities in
government sponsored entities		20,279		(68	)		12,599		(78	)		32,878		(146	)
Total securities	$	37,549	$	(128	)	$	40,310	$	(133	)	$	77,859	$	(261	)
December 31, 2018
U.S. agency securities	$	5,981	$	(5	)	$	52,673	$	(635	)	$	58,654	$	(640	)
U.S. treasury securities		4,948		(31	)		28,410		(424	)		33,358		(455	)
Obligations of states and
political subdivisions		8,979		(22	)		12,441		(155	)		21,420		(177	)
Mortgage-backed securities in
government sponsored entities		5,272		(18	)		32,570		(694	)		37,842		(712	)
Total securities	$	25,180	$	(76	)	$	126,094	$	(1,908	)	$	151,274	$	(1,984	)

Gross Gains and Losses on Available-for-sale Securities

The gross gains and losses were as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Gross gains on available for sale securities	$	9		$	161		$	9		$	161
Gross losses on available for sale securities		(1	)		(169	)	$	(1	)	$	(169	)
Net gains	$	8		$	(8	)	$	8		$	(8	)

Unrealized Gains (Losses) Related to Equity Securities

The following table presents the net gains on the Company’s equity investments recognized in earnings during the three month and nine month periods ended September 30, 2019 and 2018, and the portion of unrealized gains for the period that relates to equity investments held at September 30, 2019 and 2018 (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
Equity securities	2019		2018			2019		2018
Net gains (losses) recognized in equity securities during the period	$	29	$	(4	)	$	70	$	9
Less: Net gains realized on the sale of equity securities during the period		-		-			-		-
Net unrealized  gains (losses)	$	29	$	(4	)	$	70	$	9

Amortized Cost and Fair Value of Debt Securities by Contractual Maturity

The amortized cost and fair value of debt securities (excludes equity securities) at September 30, 2019, by contractual maturity, are shown below (in thousands):

	Amortized
	Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	22,771	$	22,742
Due after one year through five years		92,295		94,069
Due after five years through ten years		40,656		41,115
Due after ten years		88,120		89,101
Total	$	243,842	$	247,027

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Loans, Foreclosed Assets Held for Sale (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Foreclosed assets held for sale [Abstract]
Foreclosed assets held for sale	$ 3,497	$ 601
Consumer Residential Mortgages [Member]
Foreclosed assets held for sale [Abstract]
Foreclosed assets held for sale	337
Formal foreclosure proceedings on potential foreclosure assets	$ 1,885

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Loans, Past Due (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Recorded investment of past due [Abstract]
Total past due	$ 13,299	$ 15,546
Current	1,100,407	1,064,478
PCI	1,328	1,859
Total financing receivables	1,115,034	1,081,883
90 Days or greater and accruing	103	68
Financing receivables on nonaccrual status [Abstract]
Total past due and non-accrual	10,524	12,170
Current and non-accrual	2,699	1,554
PCI Loans considered non accrual	0	0
Financing receivable nonaccrual status	13,223	13,724
Financing receivables on accrual status [Abstract]
Total past due and still accruing	2,775	3,376
Current and still accruing	1,097,708	1,062,924
PCI Loans still accruing	1,328	1,859
Total financing receivables and still accruing	$ 1,101,811	1,068,159
Minimum [Member]
Financing receivables on nonaccrual status [Abstract]
Period of past due after which loans considered as non accrual	90 days
30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	$ 2,588	2,038
Financing receivables on nonaccrual status [Abstract]
Total past due and non-accrual	258	72
Financing receivables on accrual status [Abstract]
Total past due and still accruing	2,330	1,966
60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	572	1,595
Financing receivables on nonaccrual status [Abstract]
Total past due and non-accrual	230	253
Financing receivables on accrual status [Abstract]
Total past due and still accruing	342	1,342
90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	10,139	11,913
Financing receivables on nonaccrual status [Abstract]
Total past due and non-accrual	10,036	11,845
Financing receivables on accrual status [Abstract]
Total past due and still accruing	103	68
Real Estate Loans [Member] | Mortgages [Member]
Recorded investment of past due [Abstract]
Total past due	694	1,958
Current	155,165	154,501
PCI	24	28
Total financing receivables	155,883	156,487
90 Days or greater and accruing	19	20
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	916	1,079
Real Estate Loans [Member] | Mortgages [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	155	483
Real Estate Loans [Member] | Mortgages [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	205	789
Real Estate Loans [Member] | Mortgages [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	334	686
Real Estate Loans [Member] | Home Equity [Member]
Recorded investment of past due [Abstract]
Total past due	398	428
Current	59,436	58,390
PCI	0	0
Total financing receivables	59,834	58,818
90 Days or greater and accruing	0	0
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	92	82
Real Estate Loans [Member] | Home Equity [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	224	257
Real Estate Loans [Member] | Home Equity [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	86	108
Real Estate Loans [Member] | Home Equity [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	88	63
Real Estate Loans [Member] | Commercial [Member]
Recorded investment of past due [Abstract]
Total past due	4,614	6,336
Current	343,442	311,608
PCI	1,213	1,321
Total financing receivables	349,269	319,265
90 Days or greater and accruing	21	36
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	5,413	5,957
Real Estate Loans [Member] | Commercial [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	957	999
Real Estate Loans [Member] | Commercial [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	263	631
Real Estate Loans [Member] | Commercial [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	3,394	4,706
Real Estate Loans [Member] | Agricultural [Member]
Recorded investment of past due [Abstract]
Total past due	4,277	3,305
Current	301,671	281,215
PCI	0	0
Total financing receivables	305,948	284,520
90 Days or greater and accruing	0	0
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	3,549	3,206
Real Estate Loans [Member] | Agricultural [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	1,113	121
Real Estate Loans [Member] | Agricultural [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
Real Estate Loans [Member] | Agricultural [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	3,164	3,184
Real Estate Loans [Member] | Construction [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
Current	11,448	33,913
PCI	0	0
Total financing receivables	11,448	33,913
90 Days or greater and accruing	0	0
Real Estate Loans [Member] | Construction [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
Real Estate Loans [Member] | Construction [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
Real Estate Loans [Member] | Construction [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
Consumer [Member]
Recorded investment of past due [Abstract]
Total past due	100	63
Current	9,609	9,795
PCI	0	0
Total financing receivables	9,709	9,858
90 Days or greater and accruing	22	12
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	0	14
Consumer [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	64	37
Consumer [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	14	14
Consumer [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	22	12
Other Commercial Loans [Member]
Recorded investment of past due [Abstract]
Total past due	1,960	2,255
Current	74,734	71,353
PCI	91	510
Total financing receivables	76,785	74,118
90 Days or greater and accruing	41	0
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	2,009	2,185
Other Commercial Loans [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	15	141
Other Commercial Loans [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	4	53
Other Commercial Loans [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	1,941	2,061
Other Agricultural Loans [Member]
Recorded investment of past due [Abstract]
Total past due	1,256	1,201
Current	49,078	40,985
PCI	0	0
Total financing receivables	50,334	42,186
90 Days or greater and accruing	0	0
Financing receivables on nonaccrual status [Abstract]
Financing receivable nonaccrual status	1,244	1,201
Other Agricultural Loans [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	60	0
Other Agricultural Loans [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
Other Agricultural Loans [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	1,196	1,201
State and Political Subdivision Loans [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
Current	95,824	102,718
PCI	0	0
Total financing receivables	95,824	102,718
90 Days or greater and accruing	0	0
State and Political Subdivision Loans [Member] | 30 to 59 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
State and Political Subdivision Loans [Member] | 60 to 89 Days Past Due [Member]
Recorded investment of past due [Abstract]
Total past due	0	0
State and Political Subdivision Loans [Member] | 90 Days Or Greater [Member]
Recorded investment of past due [Abstract]
Total past due	$ 0	$ 0

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Recent Accounting Pronouncements (Policies)

9 Months Ended

Sep. 30, 2019

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Company’s consolidated financial statements.

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

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

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendmentsare effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November.  The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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

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Loans (Tables)

9 Months Ended

Sep. 30, 2019

Loans [Abstract]

Loan Portfolio and Allowance for Loan Losses

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 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	215,717	$	1,195	$	24	$	214,498
Commercial		349,269		11,921		1,213		336,135
Agricultural		305,948		4,781		-		301,167
Construction		11,448		-		-		11,448
Consumer		9,709		6		-		9,703
Other commercial loans		76,785		2,042		91		74,652
Other agricultural loans		50,334		1,407		-		48,927
State and political subdivision loans		95,824		-		-		95,824
Total		1,115,034		21,352		1,328		1,092,354
Allowance for loan losses		13,679		810		-		12,869
Net loans	$	1,101,355	$	20,542	$	1,328	$	1,079,485
December 31, 2018	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	215,305	$	890	$	28	$	214,387
Commercial		319,265		13,327		1,321		304,617
Agricultural		284,520		5,592		-		278,928
Construction		33,913		-		-		33,913
Consumer		9,858		-		-		9,858
Other commercial loans		74,118		2,206		510		71,402
Other agricultural loans		42,186		1,435		-		40,751
State and political subdivision loans		102,718		-		-		102,718
Total		1,081,883		23,450		1,859		1,056,574
Allowance for loan losses		12,884		676		-		12,208
Net loans	$	1,068,999	$	22,774	$	1,859	$	1,044,366

Accretable Yield for Purchased Credit Impaired Loans

Changes in the accretable yield for PCI loans were as follows for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2019			2018			2019			2018
Balance at beginning of period	$	100		$	59		$	104		$	106
Accretion		(10	)		(24	)		(14	)		(71	)
Reclassification of non-accretable discount		-			93			-			93
Balance at end of period	$	90		$	128		$	90		$	128

Loans Acquired with Specific Evidence of Deterioration in Credit Quality

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, 2019		December 31, 2018
Outstanding balance	$	4,076	$	4,529
Carrying amount		1,328		1,859

Impaired Financing Receivables with Associated Allowance Amount

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
September 30, 2019	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	1,220	$	814	$	227	$	1,041	$	10
Home Equity		174		85		69		154		12
Commercial		12,466		10,469		1,452		11,921		342
Agricultural		4,811		1,617		3,164		4,781		145
Consumer		6		6		-		6		-
Other commercial loans		2,621		1,715		327		2,042		144
Other agricultural loans		1,464		98		1,309		1,407		157
Total	$	22,762	$	14,804	$	6,548	$	21,352	$	810

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
December 31, 2018	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	932	$	515	$	288	$	803	$	10
Home Equity		106		12		75		87		14
Commercial		16,326		11,933		1,394		13,327		216
Agricultural		5,598		2,386		3,206		5,592		84
Consumer		-		-		-		-		-
Other commercial loans		2,711		1,836		370		2,206		193
Other agricultural loans		1,487		120		1,315		1,435		159
Total	$	27,160	$	16,802	$	6,648	$	23,450	$	676

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 month periods ended September 30, 2019 and 2018(in thousands):

	For the Nine Months Ended
	September 30, 2019						September 30, 2018
					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	$	1,075	$	12	$	-	$	988	$	10	$	-
Home Equity		108		4		-		98		4		-
Commercial		11,768		342		11		13,915		372		14
Agricultural		5,068		61		-		4,472		124		-
Consumer		2		-		-		2		-		-
Other commercial loans		2,088		1		-		3,906		73		-
Other agricultural loans		1,419		4		-		1,388		21		-
Total	$	21,528	$	424	$	11	$	24,769	$	604	$	14

	For the Three Months Ended
	September 30, 2019						September 30, 2018
					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	$	1,048	$	3	$	-	$	896	$	3	$	-
Home Equity		143		2		-		92		2		-
Commercial		11,906		112		-		14,116		130		6
Agricultural		4,795		5		-		5,146		24		-
Consumer		4		-		-		-		-		-
Other commercial loans		2,073		-		-		3,495		21		-
Other agricultural loans		1,408		-		-		1,453		2		-
Total	$	21,377	$	122	$	-	$	25,198	$	182	$	6

Financing Receivable Credit Exposures by Internally Assigned Grades

The following tables represent credit exposures by internally assigned grades as of September 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	331,075	$	9,945	$	8,210	$	39	$	-	$	349,269
Agricultural		283,074		14,987		7,887		-		-		305,948
Construction		11,448		-		-		-		-		11,448
Other commercial loans		73,502		964		2,253		66		-		76,785
Other agricultural loans		47,026		1,710		1,598		-		-		50,334
State and political subdivision loans		95,349		-		475		-		-		95,824
Total	$	841,474	$	27,606	$	20,423	$	105	$	-	$	889,608

December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	297,690	$	10,792	$	10,743	$	40	$	-	$	319,265
Agricultural		264,732		10,017		9,771		-		-		284,520
Construction		33,913		-		-		-		-		33,913
Other commercial loans		70,425		777		2,800		116		-		74,118
Other agricultural loans		38,628		1,724		1,834		-		-		42,186
State and political subdivision loans		92,666		9,481		571		-		-		102,718
Total	$	798,054	$	32,791	$	25,719	$	156	$	-	$	856,720

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 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	154,924	$	935	$	24	$	155,883
Home Equity		59,742		92		-		59,834
Consumer		9,687		22		-		9,709
Total	$	224,353	$	1,049	$	24	$	225,426
December 31, 2018	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	155,360	$	1,099	$	28	$	156,487
Home Equity		58,736		82		-	$	58,818
Consumer		9,832		26		-	$	9,858
Total	$	223,928	$	1,207	$	28	$	225,163

Aging Analysis of Past Due Financing Receivables

The following table includes an aging analysis of the recorded investment of past due financing receivables as of September 30, 2019 and December 31, 2018

													Total		90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and
September 30, 2019	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	155	$	205	$	334	$	694	$	155,165	$	24	$	155,883	$	19
Home Equity		224		86		88		398		59,436		-		59,834		-
Commercial		957		263		3,394		4,614		343,442		1,213		349,269		21
Agricultural		1,113		-		3,164		4,277		301,671		-		305,948		-
Construction		-		-		-		-		11,448		-		11,448		-
Consumer		64		14		22		100		9,609		-		9,709		22
Other commercial loans		15		4		1,941		1,960		74,734		91		76,785		41
Other agricultural loans		60		-		1,196		1,256		49,078		-		50,334		-
State and political
subdivision loans		-		-		-		-		95,824		-		95,824		-
Total	$	2,588	$	572	$	10,139	$	13,299	$	1,100,407	$	1,328	$	1,115,034	$	103
Loans considered non-accrual	$	258	$	230	$	10,036	$	10,524	$	2,699	$	-	$	13,223
Loans still accruing		2,330		342		103		2,775		1,097,708		1,328		1,101,811
Total	$	2,588	$	572	$	10,139	$	13,299	$	1,100,407	$	1,328	$	1,115,034

													Total		90 Days or
	30-59 Days		60-89 Days		90 Days		Total Past						Financing		Greater and
December 31, 2018	Past Due		Past Due		Or Greater		Due		Current		PCI		Receivables		Accruing
Real estate loans:
Mortgages	$	483	$	789	$	686	$	1,958	$	154,501	$	28	$	156,487	$	20
Home Equity		257		108		63		428		58,390		-		58,818		-
Commercial		999		631		4,706		6,336		311,608		1,321		319,265		36
Agricultural		121		-		3,184		3,305		281,215		-		284,520		-
Construction		-		-		-		-		33,913		-		33,913		-
Consumer		37		14		12		63		9,795		-		9,858		12
Other commercial loans		141		53		2,061		2,255		71,353		510		74,118		-
Other agricultural loans		-		-		1,201		1,201		40,985		-		42,186		-
State and political
subdivision loans		-		-		-		-		102,718		-		102,718		-
Total	$	2,038	$	1,595	$	11,913	$	15,546	$	1,064,478	$	1,859	$	1,081,883	$	68
Loans considered non-accrual	$	72	$	253	$	11,845	$	12,170	$	1,554	$	-	$	13,724
Loans still accruing		1,966		1,342		68		3,376		1,062,924		1,859		1,068,159
Total	$	2,038	$	1,595	$	11,913	$	15,546	$	1,064,478	$	1,859	$	1,081,883

Financing Receivables on Nonaccrual Status

The following table reflects the financing receivables, excluding PCI loans, on non-accrual status as of September 30, 2019 and December 31, 2018, respectively. The balances are presented by class of financing receivable (in thousands):

	September 30, 2019		December 31, 2018
Real estate loans:
Mortgages	$	916	$	1,079
Home Equity		92		82
Commercial		5,413		5,957
Agricultural		3,549		3,206
Consumer		-		14
Other commercial loans		2,009		2,185
Other agricultural loans		1,244		1,201
	$	13,223	$	13,724

Troubled Debt Restructurings on Financing Receivables

Loan modifications that are considered TDRs completed during the three and nine months ended September 30, 2019 and 2018 were as follows (dollars in thousands):

	For the Three Months Ended September 30, 2019
	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	$	-	$	118	$	-	$	118
Consumer		-		1		-		3		-		3
Total		-		2	$	-	$	121	$	-	$	121

	For the Nine Months Ended September 30, 2019
	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	$	-	$	4	$	-	$	4
Home Equity		-		1		-		40		-		40
Commercial		-		5		-		918		-		918
Consumer		-		1		-		3		-		3
Total		-		8	$	-	$	965	$	-	$	965

	For the Three Months Ended September 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:
Commercial		-		1	$	-	$	106	$	-	$	106
Agricultural		-		2		-		1,302		-		1,302
Total		-		3	$	-	$	1,408	$	-	$	1,408

	For the Nine Months Ended September 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		-		2		-		683		-		683
Agricultural		-		3		-		2,825		-		2,825
Other agricultural loans		-		4		-		176		-		176
Total		-		11	$	-	$	3,692	$	-	$	3,692

Subsequent Default Recorded Investment

The following table presents the recorded investment in loans that were modified as TDRs during each 12-month period prior to the current reporting periods, which began January 1, 2019 and 2018 (9 month periods) and July 1, 2019 and 2018 (3 month periods), respectively, and that subsequently defaulted during these reporting periods (dollars in thousands):

	For the Three Months Ended								For the Nine Months Ended
	September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
	Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment		Number of contracts		Recorded investment
Real estate loans:
Commercial		-	$	-		-	$	-	$	1	$	542		-	$	-
Agricultural		-		-		2		1,302		1		1,439		2		1,302
Other agricultural loans		-		-		1		124		4		261		1		124
Total recidivism		-	$	-		3	$	1,426		6	$	2,242		3	$	1,426

Allowance for Loan Losses by Impairment Method

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 30, 2019 and December 31, 2018, respectively (in thousands):

	September 30, 2019						December 31, 2018
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	22	$	1,069	$	1,091	$	24	$	1,081	$	1,105
Commercial		342		4,299		4,641		216		3,899		4,115
Agricultural		145		4,567		4,712		84		4,180		4,264
Construction		-		19		19		-		58		58
Consumer		-		119		119		-		120		120
Other commercial loans		144		1,205		1,349		193		1,161		1,354
Other agricultural loans		157		712		869		159		593		752
State and political
subdivision loans		-		536		536		-		762		762
Unallocated		-		343		343		-		354		354
Total	$	810	$	12,869	$	13,679	$	676	$	12,208	$	12,884

Roll forward of Allowance for Loan Losses by Portfolio Segment

The following tables roll forward the balance of the ALLL by portfolio segment for the three and nine months ended September 30, 2019 and 2018, respectively (in thousands):

	For the three months ended September 30, 2019
	Balance at June 30, 2019		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2019
Real estate loans:
Residential	$	1,066	$	(24	)	$	-	$	49		$	1,091
Commercial		4,400		-			-		241			4,641
Agricultural		4,532		-			-		180			4,712
Construction		36		-			-		(17	)		19
Consumer		118		(10	)		6		5			119
Other commercial loans		1,328		-			3		18			1,349
Other agricultural loans		741		-			-		128			869
State and political				-			-
subdivision loans		539		-			-		(3	)		536
Unallocated		544		-			-		(201	)		343
Total	$	13,304	$	(34	)	$	9	$	400		$	13,679
	For the nine months ended September 30, 2019
	Balance at December 31, 2018		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2019
Real estate loans:
Residential	$	1,105	$	(24	)	$	-	$	10		$	1,091
Commercial		4,115		(293	)		-		819			4,641
Agricultural		4,264		-			-		448			4,712
Construction		58		-			-		(39	)		19
Consumer		120		(32	)		24		7			119
Other commercial loans		1,354		(38	)		8		25			1,349
Other agricultural loans		752		-			-		117			869
State and political
subdivision loans		762		-			-		(226	)		536
Unallocated		354		-			-		(11	)		343
Total	$	12,884	$	(387	)	$	32	$	1,150		$	13,679

	For the three months ended September 30, 2018
	Balance at June 30, 2018		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2018
Real estate loans:
Residential	$	1,045	$	(10	)	$	1	$	16		$	1,052
Commercial		3,794		(25	)		-		156			3,925
Agricultural		3,673							256			3,929
Construction		44		-			-		5			49
Consumer		115		(13	)		9		12			123
Other commercial loans		1,266		-			5		(52	)		1,219
Other agricultural loans		589		-			-		110			699
State and political
subdivision loans		767		-			-		(16	)		751
Unallocated		648		-			-		(12	)		636
Total	$	11,941	$	(48	)	$	15	$	475		$	12,383
	For the nine months ended September 30, 2018
	Balance at December 31, 2017		Charge-offs			Recoveries		Provision (Credit)			Balance at September 30, 2018
Real estate loans:
Residential	$	1,049	$	(27	)	$	70	$	(40	)	$	1,052
Commercial		3,867		(25	)		3		80			3,925
Agricultural		3,143		-					786			3,929
Construction		23		-			-		26			49
Consumer		124		(32	)		26		5			123
Other commercial loans		1,272		(91	)		19		19			1,219
Other agricultural loans		492		(50	)		-		257			699
State and political
subdivision loans		816		-			-		(65	)		751
Unallocated		404		-			-		232			636
Total	$	11,190	$	(225	)	$	118	$	1,300		$	12,383

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Loans, Allowance for Loan Losses by Portfolio Segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	$ 13,304	$ 11,941	$ 12,884	$ 11,190
Charge-offs	(34)	(48)	(387)	(225)
Recoveries	9	15	32	118
Provision (Credit)	400	475	1,150	1,300
Balance at end of period	13,679	12,383	13,679	12,383
Real Estate Loans [Member] | Residential [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	1,066	1,045	1,105	1,049
Charge-offs	(24)	(10)	(24)	(27)
Recoveries	0	1	0	70
Provision (Credit)	49	16	10	(40)
Balance at end of period	1,091	1,052	1,091	1,052
Real Estate Loans [Member] | Commercial [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	4,400	3,794	4,115	3,867
Charge-offs	0	(25)	(293)	(25)
Recoveries	0	0	0	3
Provision (Credit)	241	156	819	80
Balance at end of period	4,641	3,925	4,641	3,925
Real Estate Loans [Member] | Agricultural [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	4,532	3,673	4,264	3,143
Charge-offs	0		0	0
Recoveries	0		0
Provision (Credit)	180	256	448	786
Balance at end of period	4,712	3,929	4,712	3,929
Real Estate Loans [Member] | Construction [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	36	44	58	23
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision (Credit)	(17)	5	(39)	26
Balance at end of period	19	49	19	49
Consumer [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	118	115	120	124
Charge-offs	(10)	(13)	(32)	(32)
Recoveries	6	9	24	26
Provision (Credit)	5	12	7	5
Balance at end of period	119	123	119	123
Other Commercial Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	1,328	1,266	1,354	1,272
Charge-offs	0	0	(38)	(91)
Recoveries	3	5	8	19
Provision (Credit)	18	(52)	25	19
Balance at end of period	1,349	1,219	1,349	1,219
Other Agricultural Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	741	589	752	492
Charge-offs	0	0	0	(50)
Recoveries	0	0	0	0
Provision (Credit)	128	110	117	257
Balance at end of period	869	699	869	699
State and Political Subdivision Loans [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	539	767	762	816
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision (Credit)	(3)	(16)	(226)	(65)
Balance at end of period	536	751	536	751
Unallocated [Member]
Financing Receivable, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	544	648	354	404
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision (Credit)	(201)	(12)	(11)	232
Balance at end of period	$ 343	$ 636	$ 343	$ 636

XML

Loans, Credit Quality Indicator (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable by credit exposure [Abstract]
Total	$ 225,426	$ 225,163
Minimum [Member]
Financing Receivable [Abstract]
Percentage of dollar volume of commercial loan portfolio to be reviewed	50.00%
Amount over which all relationships to be reviewed, minimum	$ 500
Amount over which all new loans to be reviewed	1,000
Amount over which all relationships to be reviewed	1,000
Amount which is 30 days past due to be reviewed for all aggregate loan relationships	750
Real Estate Loans [Member] | Commercial [Member]
Financing Receivable by credit exposure [Abstract]
Total	349,269	319,265
Real Estate Loans [Member] | Agricultural [Member]
Financing Receivable by credit exposure [Abstract]
Total	305,948	284,520
Real Estate Loans [Member] | Construction [Member]
Financing Receivable by credit exposure [Abstract]
Total	11,448	33,913
Real Estate Loans [Member] | Mortgages [Member]
Financing Receivable by credit exposure [Abstract]
Total	155,883	156,487
Real Estate Loans [Member] | Home Equity [Member]
Financing Receivable by credit exposure [Abstract]
Total	59,834	58,818
Consumer [Member]
Financing Receivable by credit exposure [Abstract]
Total	9,709	9,858
Other Commercial Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	76,785	74,118
Other Agricultural Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	50,334	42,186
State and Political Subdivision Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	95,824	102,718
Pass [Member]
Financing Receivable by credit exposure [Abstract]
Total	841,474	798,054
Pass [Member] | Real Estate Loans [Member] | Commercial [Member]
Financing Receivable by credit exposure [Abstract]
Total	331,075	297,690
Pass [Member] | Real Estate Loans [Member] | Agricultural [Member]
Financing Receivable by credit exposure [Abstract]
Total	283,074	264,732
Pass [Member] | Real Estate Loans [Member] | Construction [Member]
Financing Receivable by credit exposure [Abstract]
Total	11,448	33,913
Pass [Member] | Other Commercial Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	73,502	70,425
Pass [Member] | Other Agricultural Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	47,026	38,628
Pass [Member] | State and Political Subdivision Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	95,349	92,666
Special Mention [Member]
Financing Receivable by credit exposure [Abstract]
Total	27,606	32,791
Special Mention [Member] | Real Estate Loans [Member] | Commercial [Member]
Financing Receivable by credit exposure [Abstract]
Total	9,945	10,792
Special Mention [Member] | Real Estate Loans [Member] | Agricultural [Member]
Financing Receivable by credit exposure [Abstract]
Total	14,987	10,017
Special Mention [Member] | Real Estate Loans [Member] | Construction [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Special Mention [Member] | Other Commercial Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	964	777
Special Mention [Member] | Other Agricultural Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	1,710	1,724
Special Mention [Member] | State and Political Subdivision Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	9,481
Substandard [Member]
Financing Receivable by credit exposure [Abstract]
Total	20,423	25,719
Substandard [Member] | Real Estate Loans [Member] | Commercial [Member]
Financing Receivable by credit exposure [Abstract]
Total	8,210	10,743
Substandard [Member] | Real Estate Loans [Member] | Agricultural [Member]
Financing Receivable by credit exposure [Abstract]
Total	7,887	9,771
Substandard [Member] | Real Estate Loans [Member] | Construction [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Substandard [Member] | Other Commercial Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	2,253	2,800
Substandard [Member] | Other Agricultural Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	1,598	1,834
Substandard [Member] | State and Political Subdivision Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	475	571
Doubtful [Member]
Financing Receivable by credit exposure [Abstract]
Total	105	156
Doubtful [Member] | Real Estate Loans [Member] | Commercial [Member]
Financing Receivable by credit exposure [Abstract]
Total	39	40
Doubtful [Member] | Real Estate Loans [Member] | Agricultural [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Doubtful [Member] | Real Estate Loans [Member] | Construction [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Doubtful [Member] | Other Commercial Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	66	116
Doubtful [Member] | Other Agricultural Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Doubtful [Member] | State and Political Subdivision Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Loss [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Loss [Member] | Real Estate Loans [Member] | Commercial [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Loss [Member] | Real Estate Loans [Member] | Agricultural [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Loss [Member] | Real Estate Loans [Member] | Construction [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Loss [Member] | Other Commercial Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Loss [Member] | Other Agricultural Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Loss [Member] | State and Political Subdivision Loans [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
Internally Assigned Grade [Member]
Financing Receivable by credit exposure [Abstract]
Total	889,608	856,720
Performing [Member]
Financing Receivable by credit exposure [Abstract]
Total	224,353	223,928
Performing [Member] | Real Estate Loans [Member] | Mortgages [Member]
Financing Receivable by credit exposure [Abstract]
Total	154,924	155,360
Performing [Member] | Real Estate Loans [Member] | Home Equity [Member]
Financing Receivable by credit exposure [Abstract]
Total	59,742	58,736
Performing [Member] | Consumer [Member]
Financing Receivable by credit exposure [Abstract]
Total	9,687	9,832
Nonperforming [Member]
Financing Receivable by credit exposure [Abstract]
Total	1,049	1,207
Nonperforming [Member] | Real Estate Loans [Member] | Mortgages [Member]
Financing Receivable by credit exposure [Abstract]
Total	935	1,099
Nonperforming [Member] | Real Estate Loans [Member] | Home Equity [Member]
Financing Receivable by credit exposure [Abstract]
Total	92	82
Nonperforming [Member] | Consumer [Member]
Financing Receivable by credit exposure [Abstract]
Total	22	26
PCI [Member]
Financing Receivable by credit exposure [Abstract]
Total	24	28
PCI [Member] | Real Estate Loans [Member] | Mortgages [Member]
Financing Receivable by credit exposure [Abstract]
Total	24	28
PCI [Member] | Real Estate Loans [Member] | Home Equity [Member]
Financing Receivable by credit exposure [Abstract]
Total	0	0
PCI [Member] | Consumer [Member]
Financing Receivable by credit exposure [Abstract]
Total	$ 0	$ 0

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Accumulated Comprehensive Loss, By Component (Details) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2017
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Balance		$ 148,021	$ 132,281	$ 139,229	$ 129,011
Change in Accounting policy for equity securities						$ 0
Other comprehensive income (loss) before reclassifications (net of tax)		7	(766)	3,495	(2,800)
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)		41	42	137	116
Other comprehensive income (loss), net of tax		48	(724)	3,632	(2,684)
Balance		151,678	134,400	151,678	134,400
Accumulated Other Comprehensive Loss [Member]
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Balance		(337)	(5,357)	(3,921)	(3,398)
Change in Accounting policy for equity securities						1
Other comprehensive income (loss), net of tax		48	(724)	3,632	(2,684)
Balance		(289)	(6,081)	(289)	(6,081)
Unrealized Gain (Loss) on Available for Sale Securities [Member]
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Balance	[1]	2,515	(2,302)	(973)	(269)
Change in Accounting policy for equity securities						1
Other comprehensive income (loss) before reclassifications (net of tax)	[1]	7	(766)	3,495	(2,800)
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)	[1]	(6)	6	(6)	6
Other comprehensive income (loss), net of tax	[1]	1	(760)	3,489	(2,794)
Balance	[1]	2,516	(3,062)	2,516	(3,062)
Defined Benefit Pension Items [Member]
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Balance	[1]	(2,852)	(3,055)	(2,948)	(3,129)
Change in Accounting policy for equity securities						$ 0
Other comprehensive income (loss) before reclassifications (net of tax)	[1]	0	0	0	0
Amounts reclassified from accumulated other comprehensive income (loss) (net of tax)	[1]	47	36	143	110
Other comprehensive income (loss), net of tax	[1]	47	36	143	110
Balance	[1]	$ (2,805)	$ (3,019)	$ (2,805)	$ (3,019)

[1] Amounts in parentheses indicate debits on the Consolidated Balance Sheet.

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Fair Value Measurements, By Balance Sheet Grouping (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financial assets [Abstract]
Interest bearing time deposits with other banks	$ 14,256	$ 15,498
Level I [Member] | Recurring [Member]
Financial assets [Abstract]
Interest bearing time deposits with other banks	0	0
Loans held for sale	0	0
Net loans	0	0
Financial liabilities [Abstract]
Deposits	925,138	886,686
Borrowed funds	0	0
Level II [Member] | Recurring [Member]
Financial assets [Abstract]
Interest bearing time deposits with other banks	0	0
Loans held for sale	0	0
Net loans	0	0
Financial liabilities [Abstract]
Deposits	0	0
Borrowed funds	0	0
Level III [Member] | Recurring [Member]
Financial assets [Abstract]
Interest bearing time deposits with other banks	14,628	15,422
Loans held for sale	1,429	1,126
Net loans	1,090,978	1,062,645
Financial liabilities [Abstract]
Deposits	274,138	294,008
Borrowed funds	109,626	90,427
Carrying Amount [Member] | Recurring [Member]
Financial assets [Abstract]
Interest bearing time deposits with other banks	14,256	15,498
Loans held for sale	1,430	1,127
Net loans	1,101,355	1,068,999
Financial liabilities [Abstract]
Deposits	1,199,304	1,185,156
Borrowed funds	109,840	91,194
Fair Value [Member] | Recurring [Member]
Financial assets [Abstract]
Interest bearing time deposits with other banks	14,628	15,422
Loans held for sale	1,429	1,126
Net loans	1,090,978	1,062,645
Financial liabilities [Abstract]
Deposits	1,199,276	1,180,694
Borrowed funds	$ 109,626	$ 90,427

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Earnings per Share

9 Months Ended

Sep. 30, 2019

Earnings per Share [Abstract]

Earnings per Share

Note 3 - 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
	September 30,				September 30,
	2019		2018		2019		2018
Net income applicable to common stock	$	5,196,000	$	4,581,000	$	14,447,000	$	13,519,000
Basic earnings per share computation
Weighted average common shares outstanding		3,515,678		3,537,315		3,522,377		3,541,971
Earnings per share - basic	$	1.48	$	1.30	$	4.10	$	3.82
Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		3,515,678		3,537,315		3,522,377		3,541,971
Add: Dilutive effects of restricted stock		-		161		2,280		2,161
Weighted average common shares outstanding for dilutive earnings per share		3,515,678		3,537,476		3,524,657		3,544,132
Earnings per share - diluted	$	1.48	$	1.30	$	4.10	$	3.81

For the three months ended September 30, 2019 and 2018, there were 9,013 and 4,696 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 $50.65-$62.93 for the three month period ended September 30, 2019 and per share prices ranging from $46.69-$62.93 for the three month period ended September 30, 2018. For the nine months ended September 30, 2019 and 2018, 4,453 and 4,033 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 $50.65-$62.93 for the nine month period ended September 30, 2019 and prices ranging from $46.69-$61.04 for the nine month period ended September 30, 2018.

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Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

Note 7 – Leases

The following table details the Company’s right of use asset and the corresponding lease liability for the Company’s operating leases as of September 30, 2019 and the affected line item on the Consolidated Balance Sheet(in thousands):

Lease Type	Balance at September 30, 2019		Affected line item on the Consolidated Balance Sheet
Right of Use Assets
Operating	$	1,237	Other Assets
Lease Liabilities:
Operating	$	1,237	Other Liabilities

The following table provides information related to the Company’s lease costs for the three and nine months ended September 30, 2019 (in thousands):

	September 30, 2019
Lease Cost	Three months Ended		Nine Months Ended
Operating lease cost	$	85	$	255
Variable lease cost		20		64
Total lease cost	$	105	$	319

The following table displays the weighted average remaining lease term and the weighted average discount rate for the Company’s operating leases outstanding as of September 30, 2019:

	Operating
Weighted average term (years)	6.16
Weighted average discount rate	3.14%

The following table provides the undiscounted cashflows related to operating leases as of September 30, 2019 along with a reconciliation to the discounted amount recorded on the September 30, 2019 Consolidated Balance Sheet (in thousands):

Undiscounted cash flows due within	Operating
Remaining 2019	$	84
2020		279
2021		238
2022		230
2023		142
2024		105
2025 and thereafter		291
Total undiscounted cash flows		1,369
Impact of present value discount		132
Amount reported on balance sheet	$	1,237

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Proposed Acquisition of MidCoast Community Bancorp, Inc

9 Months Ended

Sep. 30, 2019

Proposed Acquisition of MidCoast Community Bancorp, Inc [Abstract]

Proposed Acquisition of MidCoast Community Bancorp, Inc

Note 11 – Proposed Acquisition of MidCoast Community Bancorp, Inc.

On September 18, 2019, the Citizens Financial Services, Inc. (Company) and its wholly owned subsidiary, Firt Citizens Community Bank (Bank), and MidCoast Community Bancorp, Inc. (MidCoast), and its wholly owned subsidiary, MidCoast Community Bank (“MC Bank”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which MidCoast will merge with and into a to-be-formed, wholly-owned acquisition subsidiary of the Company, with the acquisition subsidiary as the surviving corporation. Concurrent with the merger, it is expected that MC Bank will merge with and into the Bank, with the Bank as the surviving institution.

Under the terms of the Merger Agreement, each outstanding share of MidCoast common stock will be converted into either the right to receive $6.50 in cash or 0.1065 shares of the Company’s common stock.  Not more than 25% of the outstanding shares of MidCoast common stock (including for this purpose, dissenters’ shares) may be paid in cash and the remainder will be paid in the Company’s common stock.   In the event of a greater than 20% decline in market value of the Company’s common stock, MidCoast may, in certain circumstances, be able to terminate the Merger Agreement unless the Company increases the number of shares into which MidCoast Bancshares common stock may be converted or increases in the cash component of the merger consideration.

The senior management of the Company and the Bank will remain the same following the merger.  A majority of the directors of MidCoast will be invited to join newly formed corporate advisory board.  

The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of MidCoast.  The merger is currently expected to be completed in the second quarter of 2020.

Each of the directors of MidCoast have agreed to vote their shares in favor of the approval of the Merger Agreement at the shareholders’ meeting to be held to vote on the proposed transaction. If the merger is not consummated under certain circumstances, MidCoast has agreed to pay the Company a termination fee of $1,200,000.

The Merger Agreement also contains usual and customary representations and warranties that the Company and MidCoast made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the contract between the Company and MidCoast, and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders, and the representations and warranties may have been used to allocate risk between the Company and MidCoast rather than establishing matters as facts.

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Basis of Presentation

9 Months Ended

Sep. 30, 2019

Basis of Presentation [Abstract]

Basis of Presentation

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 subsidiaries, First Citizens Insurance Agency, Inc. (“First Citizens Insurance”) and 1^st Realty of PA LLC (“Realty”). Realty was formed in March of 2019 to manage and sell properties acquired by the Bank in the settlement of a bankruptcy filing with a commercial customer.

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 30, 2019 and for the periods ended September 30, 2019 and 2018 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. 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 of revenues and expenses for the period covered by the Consolidated Income Statement. The financial performance reported for the Company for the nine month period ended September 30, 2019 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, 2018.

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. ASU 2016-02 was effective for the Company on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, we recognized a right-of-use asset and a related lease liability totaling $1,454,000 each. We elected to apply certain practical expedients provided under ASU 2016-02 whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also elected not to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We account for lease and non-lease components separately because such amounts are readily determinable under our lease contracts. We utilized the modified-retrospective transition approach prescribed by ASU 2018-11. Certain of the Company’s leases contain options to renew the lease after the initial term. Management considers the Company’s historical pattern of exercising renewal options on leases and the positive performance of the leased locations, when determining whether it is reasonably certain that the leases will be renewed. If management concludes that there is reasonable certainty about the renewal it is included in the calculation of the remaining term of each applicable lease. The discount rate utilized in calculating the present value of the remaining lease payments for each lease was the Federal Home Loan Bank of Pittsburgh advance rate corresponding to the remaining maturity of the lease as of January 1, 2019. We have included additional disclosures in note 7.

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Investments, Amortized Cost, Gross Unrealized Gains and Losses and Fair Value of Investment (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Debt Securities [Abstract]
Amortized cost	$ 243,842	$ 242,242
Gross unrealized gains	3,446	752
Gross unrealized losses	(261)	(1,984)
Fair value	247,027	241,010
U.S. Agency Securities [Member]
Debt Securities [Abstract]
Amortized cost	86,514	106,516
Gross unrealized gains	1,622	509
Gross unrealized losses	(97)	(640)
Fair value	88,039	106,385
U.S. Treasury Securities [Member]
Debt Securities [Abstract]
Amortized cost	32,347	33,813
Gross unrealized gains	266	0
Gross unrealized losses	(1)	(455)
Fair value	32,612	33,358
Obligations of State and Political Subdivisions [Member]
Debt Securities [Abstract]
Amortized cost	60,149	52,074
Gross unrealized gains	984	150
Gross unrealized losses	(17)	(177)
Fair value	61,116	52,047
Corporate Obligations [Member]
Debt Securities [Abstract]
Amortized cost	3,000	3,000
Gross unrealized gains	76	34
Gross unrealized losses	0	0
Fair value	3,076	3,034
Mortgage-backed Securities in Government Sponsored Entities [Member]
Debt Securities [Abstract]
Amortized cost	61,832	46,839
Gross unrealized gains	498	59
Gross unrealized losses	(146)	(712)
Fair value	$ 62,184	$ 46,186

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Measurements [Abstract]

Assets Measured at Fair Value on a Recurring Basis

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 30, 2019 and December 31, 2018 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.

September 30, 2019	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	650	$	-	$	-	$	650
Available for sale securities:
U.S. Agency securities		-		88,039		-		88,039
U.S. Treasury securities		32,612		-		-		32,612
Obligations of state and
political subdivisions		-		61,116		-		61,116
Corporate obligations		-		3,076		-		3,076
Mortgage-backed securities in
government sponsored entities		-		62,184		-		62,184
December 31, 2018	Level I		Level II		Level III		Total
Fair value measurements on a recurring basis:
Assets
Equity securities	$	516	$	-	$	-	$	516
Available for sale securities:
U.S. Agency securities		-		106,385		-		106,385
U.S. Treasuries securities		33,358		-		-		33,358
Obligations of state and
political subdivisions		-		52,047		-		52,047
Corporate obligations		-		3,034		-		3,034
Mortgage-backed securities in
government sponsored entities		-		46,186		-		46,186

Assets Measured at Fair Value on Non-recurring Basis

Assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 are included in the table below (in thousands):

September 30, 2019	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	5,637	$	5,637
Other real estate owned		-		-		3,386		3,386
December 31, 2018	Level I		Level II		Level III		Total
Impaired Loans	$	-	$	-	$	5,815	$	5,815
Other real estate owned		-		-		532		532

Significant Unobservable Inputs Used in Fair Value Measurement Process

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, 2019	Fair Value		Valuation Technique(s)	Unobservable input	Range			Weighted average
Impaired Loans	$	5,637	Appraised Collateral Values	Discount for time since appraisal		0-100	%		20.17	%
				Selling costs		5%-12	%		8.90	%
				Holding period	0 - 12 months			11.68 months
Other real estate owned		3,386	Appraised Collateral Values	Discount for time since appraisal		6-67	%		15.58	%

December 31, 2018	Fair Value	Valuation Technique(s)	Unobservable input	Range
Impaired Loans	5,815	Appraised Collateral Values	Discount for time since appraisal	0-100%	19.22%
			Selling costs	5%-12%	8.70%
			Holding period	6 - 12 months	11.61 months
Other real estate owned	532	Appraised Collateral Values	Discount for time since appraisal	20-65%	31.44%

Carrying Amount and Fair Value of Financial Instruments

The carrying amount and fair 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
September 30, 2019	Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	14,256	$	14,628	$	-	$	-	$	14,628
Loans held for sale		1,430		1,429		-		-		1,429
Net loans		1,101,355		1,090,978		-		-		1,090,978
Financial liabilities:
Deposits		1,199,304		1,199,276		925,138		-		274,138
Borrowed funds		109,840		109,626		-		-		109,626
	Carrying
December 31, 2018	Amount		Fair Value		Level I		Level II		Level III
Financial assets:
Interest bearing time deposits with other banks	$	15,498	$	15,422	$	-	$	-	$	15,422
Loans held for sale		1,127		1,126		-		-		1,126
Net loans		1,068,999		1,062,645		-		-		1,062,645
Financial liabilities:
Deposits		1,185,156		1,180,694		886,686		-		294,008
Borrowed funds		91,194		90,427		-		-		90,427

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) [Abstract]
Net income	$ 5,196	$ 4,581	$ 14,447	$ 13,519
Other comprehensive income (loss):
Change in unrealized gains (losses) on available for sale securities	9	(971)	4,425	(3,544)
Income tax effect	(2)	205	(930)	744
Change in unrecognized pension cost	60	47	181	140
Income tax effect	(13)	(11)	(38)	(30)
Less: Reclassification adjustment for investment security gains included in net income	(8)	8	(8)	8
Income tax effect	2	(2)	2	(2)
Other comprehensive income (loss), net of tax	48	(724)	3,632	(2,684)
Comprehensive income	$ 5,244	$ 3,857	$ 18,079	$ 10,835

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 01, 2019
Document and Entity Information [Abstract]
Entity Registrant Name	CITIZENS FINANCIAL SERVICES INC
Entity Central Index Key	0000739421
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Shell Company	false
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		3,525,196
Document Type	10-Q/A
Amendment Flag	false
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Address, State or Province	PA