CZFS 10-Q Quarterly Report June 30, 2017

CITIZENS FINANCIAL SERVICES INC

10-Ks and 10-Qs

10-Q	Quarter ended Sept. 30, 2025
10-Q	Quarter ended June 30, 2025
10-Q	Quarter ended March 31, 2025
10-K	Fiscal year ended Dec. 31, 2024
10-Q	Quarter ended Sept. 30, 2024
10-Q	Quarter ended June 30, 2024
10-Q	Quarter ended March 31, 2024
10-K	Fiscal year ended Dec. 31, 2023
10-Q	Quarter ended Sept. 30, 2023
10-Q	Quarter ended June 30, 2023
10-Q	Quarter ended March 31, 2023
10-K	Fiscal year ended Dec. 31, 2022
10-Q	Quarter ended Sept. 30, 2022
10-Q	Quarter ended June 30, 2022
10-Q	Quarter ended March 31, 2022
10-K	Fiscal year ended Dec. 31, 2021
10-Q	Quarter ended Sept. 30, 2021
10-Q	Quarter ended June 30, 2021
10-Q	Quarter ended March 31, 2021
10-K	Fiscal year ended Dec. 31, 2020
10-Q	Quarter ended Sept. 30, 2020
10-Q	Quarter ended June 30, 2020
10-Q	Quarter ended March 31, 2020
10-K	Fiscal year ended Dec. 31, 2019
10-Q	Quarter ended Oct. 31, 2019
10-Q	Quarter ended June 30, 2019
10-Q	Quarter ended March 31, 2019
10-K	Fiscal year ended Dec. 31, 2018
10-Q	Quarter ended Sept. 30, 2018
10-Q	Quarter ended June 30, 2018
10-Q	Quarter ended March 31, 2018
10-K	Fiscal year ended Dec. 31, 2017
10-Q	Quarter ended Sept. 30, 2017
10-Q	Quarter ended June 30, 2017
10-Q	Quarter ended March 31, 2017
10-K	Fiscal year ended Dec. 31, 2016
10-Q	Quarter ended Sept. 30, 2016
10-Q	Quarter ended June 30, 2016
10-Q	Quarter ended March 31, 2016
10-K	Fiscal year ended Dec. 31, 2015
10-Q	Quarter ended Sept. 30, 2015
10-Q	Quarter ended June 30, 2015
10-Q	Quarter ended March 31, 2015
10-K	Fiscal year ended Dec. 31, 2014
10-Q	Quarter ended Sept. 30, 2014
10-Q	Quarter ended June 30, 2014
10-Q	Quarter ended March 31, 2014
10-K	Fiscal year ended Dec. 31, 2013
10-Q	Quarter ended Sept. 30, 2013
10-Q	Quarter ended June 30, 2013
10-Q	Quarter ended May 9, 2013
10-K	Fiscal year ended March 7, 2013
10-Q	Quarter ended Nov. 8, 2012
10-Q	Quarter ended Aug. 9, 2012
10-Q	Quarter ended May 10, 2012
10-K	Fiscal year ended March 8, 2012
10-Q	Quarter ended Nov. 14, 2011
10-Q	Quarter ended Aug. 15, 2011
10-Q	Quarter ended May 12, 2011
10-K	Fiscal year ended March 10, 2011
10-Q	Quarter ended Nov. 12, 2010
10-Q	Quarter ended Aug. 12, 2010
10-Q	Quarter ended May 10, 2010
10-K	Fiscal year ended March 11, 2010

PROXIES

DEF 14A	Filed on April 15, 2025
DEF 14A	Filed on March 6, 2025
DEF 14A	Filed on April 16, 2024
DEF 14A	Filed on March 7, 2024
DEF 14A	Filed on April 18, 2023
DEF 14A	Filed on March 9, 2023
DEF 14A	Filed on April 19, 2022
DEF 14A	Filed on March 10, 2022
DEF 14A	Filed on March 11, 2021
DEF 14A	Filed on March 12, 2020
DEF 14A	Filed on March 7, 2019
DEF 14A	Filed on March 8, 2018
DEF 14A	Filed on March 9, 2017
DEF 14A	Filed on March 10, 2016
DEF 14A	Filed on March 12, 2015
DEF 14A	Filed on March 6, 2014
DEF 14A	Filed on March 7, 2013
DEF 14A	Filed on March 8, 2012
DEF 14A	Filed on March 10, 2011
DEF 14A	Filed on March 11, 2010

10-Q 1 secondqtr2017.htm FORM 10-Q FOR SECOND QUARTER 2017

          UNITED STATES
         

          SECURITIES AND EXCHANGE COMMISSION
         

          WASHINGTON, D.C. 20549
         

          FORM 10‑Q
         

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

          EXCHANGE ACT OF 1934
         

          For the quarterly period ended June 30, 2017
         

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)
         

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

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

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

Large accelerated filer ____ Accelerated filer _X__

Non-accelerated filer ____ Smaller reporting company ____

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

          If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
          
           ☐

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

          The number of outstanding shares of the Registrant's Common Stock, as of August 1, 2017, was 3,493,270.
         

          Citizens Financial Services, Inc.
         

          Form 10-Q
         

          INDEX
         

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

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	54-55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55-56
	Signatures	57

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          CITIZENS FINANCIAL SERVICES, INC.
         

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         

          (Unaudited)
         

          Note 1 - Basis of Presentation
         

          Citizens Financial Services, Inc. (individually and collectively with its direct and indirect subsidiaries, the "Company") is a Pennsylvania corporation and the holding company of its wholly owned subsidiary, First Citizens Community Bank (the "Bank"), and of the Bank's wholly owned subsidiary, First Citizens Insurance Agency, Inc. ("First Citizens Insurance").
         

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

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

          Note 2 - Earnings per Share
         

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

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

Basic earnings per share computation
Weighted average common shares outstanding		3,480,122		3,508,818		3,479,653		3,515,477
Earnings per share - basic	$	1.00	$	0.86	$	1.95	$	1.80

Diluted earnings per share computation
Weighted average common shares outstanding for basic earnings per share		3,480,122		3,508,818		3,479,653		3,515,477
Add: Dilutive effects of restricted stock		1,188		409		610		205
Weighted average common shares outstanding for dilutive earnings per share		3,481,310		3,509,227		3,480,263		3,515,682
Earnings per share - diluted	$	1.00	$	0.86	$	1.95	$	1.80

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

          Note 3 - Income Tax Expense
         

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

          Investments in Qualified Affordable Housing Projects
         

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

          Note 4 – Investments
         

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2017	Cost		Gains		Losses			Value
Available-for-sale securities:
U.S. agency securities	$	142,581	$	315	$	(146	)	$	142,750
Obligations of state and
political subdivisions		84,731		1,578		(93	)		86,216
Corporate obligations		3,000		111		-			3,111
Mortgage-backed securities in
government sponsored entities		41,489		147		(176	)		41,460
Equity securities in financial institutions		900		771		-			1,671
Total available-for-sale securities	$	272,701	$	2,922	$	(415	)	$	275,208

December 31, 2016
Available-for-sale securities:
U.S. agency securities	$	170,276	$	407	$	(269	)	$	170,414
U.S. treasury securities		2,999		1		-			3,000
Obligations of state and
political subdivisions		95,956		1,463		(493	)		96,926
Corporate obligations		3,000		50		-			3,050
Mortgage-backed securities in
government sponsored entities		37,987		88		(347	)		37,728
Equity securities in financial institutions		1,821		1,078		-			2,899
Total available-for-sale securities	$	312,039	$	3,087	$	(1,109	)	$	314,017

          The following table shows the Company's gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at June 30, 2017 and December 31, 2016 (in thousands). As of June 30, 2017, the Company owned 63 securities whose fair value was less than their cost basis.
         

	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2017	Value		Losses			Value		Losses			Value		Losses
U.S. agency securities	$	53,010	$	(142	)	$	995	$	(4	)	$	54,005	$	(146	)
Obligations of state and
political subdivisions		7,811		(40	)		5,171		(53	)		12,982		(93	)
Mortgage-backed securities in
government sponsored entities		18,873		(149	)		1,377		(27	)		20,250		(176	)
Total securities	$	79,694	$	(331	)	$	7,543	$	(84	)	$	87,237	$	(415	)

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

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

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

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

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

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

	Amortized
	Cost		Fair Value
Available-for-sale debt securities:
Due in one year or less	$	46,659	$	46,812
Due after one year through five years		130,797		131,827
Due after five years through ten years		37,314		37,598
Due after ten years		57,031		57,300
Total	$	271,801	$	273,537

          Note 5 – Loans
         

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

June 30, 2017	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	205,725	$	1,254	$	35	$	204,436
Commercial		271,342		13,680		1,989		255,673
Agricultural		188,547		3,728		734		184,085
Construction		25,569		-		-		25,569
Consumer		10,603		4		-		10,599
Other commercial loans		56,952		4,902		868		51,182
Other agricultural loans		32,974		1,466		-		31,508
State and political subdivision loans		96,337		-		-		96,337
Total		888,049		25,034		3,626		859,389
Allowance for loan losses		9,979		457		-		9,522
Net loans	$	878,070	$	24,577	$	3,626	$	849,867

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

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

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

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

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

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

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

	June 30, 2017		December 31, 2016
Outstanding balance	$	6,660	$	6,487
Carrying amount		3,626		3,367

          The segments of the Company's loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or 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, c
          
           ertain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired.
          
          Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation of the allowance for loan losses or a charge-off to the allowance for loan losses.

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

			Recorded		Recorded
	Unpaid		Investment		Investment		Total
	Principal		With No		With		Recorded		Related
June 30, 2017	Balance		Allowance		Allowance		Investment		Allowance
Real estate loans:
Mortgages	$	1,246	$	281	$	903	$	1,184	$	67
Home Equity		70		16		54		70		10
Commercial		16,037		13,093		587		13,680		58
Agricultural		3,744		2,405		1,323		3,728		95
Construction		-		-		-		-		-
Consumer		4		2		2		4		2
Other commercial loans		5,423		4,431		471		4,902		207
Other agricultural loans		1,466		1,448		18		1,466		18
State and political
subdivision loans		-		-		-		-		-
Total	$	27,990	$	21,676	$	3,358	$	25,034	$	457

December 31, 2016
Real estate loans:
Mortgages	$	953	$	570	$	330	$	900	$	22
Home Equity		57		-		57		57		10
Commercial		7,958		5,697		45		5,742		45
Agricultural		3,347		2,000		1,347		3,347		54
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		6,159		5,135		859		5,994		326
Other agricultural loans		1,653		1,629		24		1,653		30
State and political
subdivision loans		-		-		-		-		-
Total	$	20,127	$	15,031	$	2,662	$	17,693	$	487

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

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

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

          Credit Quality Information
         

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

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

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

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

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

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

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

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

June 30, 2017	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	244,957	$	13,913	$	12,472	$	-	$	-	$	271,342
Agricultural		176,551		5,457		6,539		-		-		188,547
Construction		25,569		-		-		-		-		25,569
Other commercial loans		51,577		608		4,684		83		-		56,952
Other agricultural loans		30,641		195		2,138		-		-		32,974
State and political
subdivision loans		82,665		2,926		10,746		-		-		96,337
Total	$	611,960	$	23,099	$	36,579	$	83	$	-	$	671,721

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

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

June 30, 2017	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	146,736	$	1,509	$	35	$	148,280
Home Equity		57,256		189		-		57,445
Consumer		10,459		144		-		10,603
Total	$	214,451	$	1,842	$	35	$	216,328

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

          Aging Analysis of Past Due Financing Receivables
         

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

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

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

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

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

          Nonaccrual Loans
         

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

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

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

          Troubled Debt Restructurings
         

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

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

	For the Three Months Ended June 30, 2017
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		5	$	-	$	6,093	$	-	$	6,093
Total		-		5	$	-	$	6,093	$	-	$	6,093

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

	For the Three Months Ended June 30, 2016
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		3	$	-	$	438	$	-	$	438
Total		-		3	$	-	$	438	$	-	$	438

	For the Six Months Ended June 30, 2016
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification
Real estate loans:
Commercial		-		3	$	-		438	$	-		438
Total		-		3	$	-	$	438	$	-	$	438

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

          Allowance for Loan Losses
         

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

	June 30, 2017						December 31, 2016
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	77	$	1,027	$	1,104	$	32	$	1,032	$	1,064
Commercial		58		3,483		3,541		45		3,544		3,589
Agricultural		95		2,357		2,452		54		1,440		1,494
Construction		-		45		45		-		47		47
Consumer		2		123		125		-		122		122
Other commercial loans		207		924		1,131		326		1,001		1,327
Other agricultural loans		18		413		431		30		282		312
State and political
subdivision loans		-		838		838		-		833		833
Unallocated		-		312		312		-		98		98
Total	$	457	$	9,522	$	9,979	$	487	$	8,399	$	8,886

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

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

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

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

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

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

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

§	Change in volume and severity of past due loans

§	Volume of non-accrual loans

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

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

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

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

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

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

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

§	General economic conditions

§	Unemployment rates

§	Inflation rate/ Consumer Price Index

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

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

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

·	Any change in the level of board oversight.

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

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

          For the three months ended June 30, 2017, the allowance for residential real estate increased in general reserves for pooled loans as a result of increased loss rates reflected in the charge-offs for the three month period, as well as higher loan balances, and an increase in the specific reserve for individually evaluated loans. This was represented as an increase to the provision.  The allowance for commercial real estate was decreased in general reserves due to the improvement in classified loans, which was represented as a decrease in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was reduced as a result of lower loan balances, an improvement in the amount of classified loans and a reduction in the specific reserves. This was represented by a decrease to the provision.  The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision.
         

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

          For the three months ended June 30, 2016, the allowance for commercial real estate was decreased in general reserves due to the improvement in classified loans, which was represented as a decrease in the provision. The allowance for agricultural real estate loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the agricultural real estate portfolio. The result of these changes was represented as an increase in the provision. The allowance for other commercial loans was increased as a result of higher loan balances, an increase in the amount of classified loans and an increase in the specific reserves. This was represented by an increase to the provision.  The allowance for other agricultural loans was increased in general reserves as a result of higher loan balances. It was also impacted by the classified loan trend in the other agricultural loan portfolio. The result of these changes was represented as an increase in the provision.
         

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

          Foreclosed Assets Held For Sale
         

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

          Note 6 – Goodwill and Other Intangible Assets
         

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

	June 30, 2017							December 31, 2016
	Gross carrying value		Accumulated amortization			Net carrying value		Gross carrying value		Accumulated amortization			Net carrying value
Amortized intangible assets (1):
MSRs	$	1,560	$	(878	)	$	682	$	1,471	$	(787	)	$	684
Core deposit intangibles		1,641		(454	)		1,187		1,641		(320	)		1,321
Covenant not to compete		125		(49	)		76		125		(34	)		91
Total amortized intangible assets	$	3,326	$	(1,381	)	$	1,945	$	3,237	$	(1,141	)	$	2,096
Unamortized intangible assets:
Goodwill	$	21,089						$	21,089
(1) Excludes fully amortized intangible assets

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

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

          Note 7 – Federal Home Loan Bank Stock
         

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

          Note 8 – Repurchase Agreements
         

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

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

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

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

          Note 9 - Employee Benefit Plans
         

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

          Noncontributory Defined Benefit Pension Plan
         

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

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

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

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

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

          The Bank expects to contribute $400,000 to the Pension Plans in 2017.
         

          Defined Contribution Plan
         

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

          Directors' Deferred Compensation Plan
         

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

          Restricted Stock Plan
         

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

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

	Three months						Six months
				Weighted						Weighted
	Unvested			Average			Unvested			Average
	Shares			Market Price			Shares			Market Price
Outstanding, beginning of period		8,459		$	49.10			8,471		$	49.10
Granted		4,062			53.46			4,212			53.38
Forfeited		(43	)		(48.56	)		(43	)		(48.56	)
Vested		(3,309	)		(50.14	)		(3,471	)		(50.19	)
Outstanding, end of period		9,169		$	50.66			9,169		$	50.66

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

          Supplemental Executive Retirement Plan
         

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

          Salary Continuation Plan
         

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

          Continuation of Life Insurance Plan
         

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

          Note 10 – Accumulated Comprehensive Income (Loss)
         

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

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

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

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

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

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

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

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

Total reclassifications, net	$	(20	)	$	45

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

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

Total reclassifications, net	$	55		$	23

          Note 11 – Fair Value Measurements
         

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

             Level I:
            

             Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
            

Level II:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

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

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

          Financial Instruments Recorded at Fair Value on a Recurring Basis
         

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

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

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

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

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

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

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

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

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

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

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

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

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

Other real estate owned		1,102	Appraised Collateral Values	Discount for time since appraisal		12-47	%		21.75	%

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

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

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

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

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

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

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

          Fair value is determined based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument.  Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
         

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

          Cash and Cash Equivalents:
         

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

          Accrued Interest Receivable and Payable:
         

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

          Interest bearing time deposits with other banks:
         

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

          Available-For-Sale Securities:
         

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

          Loans held-for-sale:
         

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

          Loans:
         

          Fair values are estimated for portfolios of loans with similar financial characteristics.  The fair value of performing loans has been estimated by discounting expected future cash flows. The discount rate used in these calculations is derived from the Treasury yield curve adjusted for credit quality, operating expense and prepayment option price, and is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions.
         

          Bank Owned Life Insurance:
         

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

          Regulatory Stock:
         

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

          Deposits:
         

          The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
         

          The deposits' fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
         

          Borrowed Funds:
         

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

          Note 12 – Recent Accounting Pronouncements
         

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

          In January 2016, the FASB issued ASU 2016-01,
          
           Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities
          
          .  This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments.  Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company's consolidated financial position or results of operations.

          In February 2016, the FASB issued ASU 2016-02,
          
           Leases (Topic 842)
          
          .  The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise.  For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years.  For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.  The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact to the financial statements. Based on the Company's preliminary analysis of its current portfolio, the impact to the Company's balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

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

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

          In December 2016, the FASB issued ASU 2016-20
          
           , Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
          
          .  This Update, among others things, clarifies that guarantee fees within the scope of Topic 460,
          
           Guarantees
          
          , (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020.
          
           The Company is currently evaluating the impact the adoption of the standard will have on the Company's consolidated financial position or results of operations.

          
           In January 2017, the FASB issued ASU 2017-04,
          
           Simplifying the Test for Goodwill Impairment
          
           .
          
           To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test.  In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.  Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  A public business entity that is a U.S. Securities and Exchange Commission ("SEC") filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.  All other entities, including not-for-profit entities that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.

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

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

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

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

          
           Forward-Looking Statements

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

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

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

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

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

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

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

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

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

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

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

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

·	A budget impasse in the Commonwealth of Pennsylvania could impact our asset values, liquidity and profitability.

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

          Additional factors that may affect our results are discussed under "Part II – Item 1A – Risk Factors" in this report and in the Company's 2016 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.
         

32

          
           Introduction

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

          The Company currently engages in the general business of banking throughout our service area of Potter, Tioga, Clinton and Bradford counties in north central Pennsylvania, Union county in central Pennsylvania, Lebanon, Lancaster, Berks and Schuylkill counties in south central Pennsylvania and Allegany county in southern New York. We maintain our central office in Mansfield, Pennsylvania. Presently we operate 27 banking facilities, 26 of which operate as bank branches.  In Pennsylvania, these offices are located in Mansfield, Blossburg, Ulysses, Genesee, Wellsboro, Troy, Sayre, Canton, Gillett, Millerton, LeRaysville, Towanda, Rome, the Mansfield Wal-Mart Super Center, Mill Hall, Schuylkill Haven, Friedensburg, Mt. Aetna, Fredericksburg, Mount Joy and three branches near the city of Lebanon, Pennsylvania. In New York, our office is in Wellsville. We have a limited branch office in Winfield, Pennsylvania, which primarily serves agricultural customers in the central Pennsylvania market.
         

          On July 27, 2017, we entered into a definitive agreement with S&T Bank to acquire its State College, Pennsylvania office, subject to the receipt of regulatory approval.
         

          
           Risk Management

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

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

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

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

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

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

33

          
           Competition

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

          
           Trust and Investment Services; Oil and Gas Services

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

          Our Investment Representatives offer full service brokerage services and financial planning throughout the Bank's market area. Products such as mutual funds, annuities, health and life insurance are made available through our insurance subsidiary, First Citizens Insurance Agency, Inc.  The assets associated with these products are not included in the Consolidated 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 decreased from $137.4 million at December 31, 2016 to $118.3 million at June 30, 2017. Fee income from the sale of these products is reflected in brokerage and insurance income in the Consolidated Statement of Income. Management believes that there are opportunities to increase non-interest income through these products and services, especially in our central and south central Pennsylvania markets.
         

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

          
           Results of Operations

          Overview of the Income Statement
         

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

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

34

Net Interest Income

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

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

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

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

35

	Analysis of Average Balances and Interest Rates (1)
	Six Months Ended
	June 30, 2017							June 30, 2016
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)		$	$			%			$	$			%
ASSETS
Short-term investments:
Interest-bearing deposits at banks		9,106		9		0.20			32,770		65		0.40
Total short-term investments		9,106		9		0.20			32,770		65		0.40
Interest bearing time deposits at banks		7,123		71		2.01			7,513		70		1.89
Investment securities:
Taxable		202,316		1,708		1.69			263,302		2,044		1.55
Tax-exempt (3)		87,491		1,922		4.39			100,766		2,313		4.59
Total investment securities		289,807		3,630		2.51			364,068		4,357		2.39
Loans:
Residential mortgage loans		206,018		5,291		5.18			202,813		5,337		5.29
Construction		27,198		574		4.25			11,247		286		5.12
Commercial & agricultural loans		507,172		12,358		4.91			371,026		9,627		5.22
Loans to state & political subdivisions		96,818		2,026		4.22			103,707		2,201		4.27
Other loans		10,394		415		8.04			11,103		449		8.13
Loans, net of discount (2)(3)(4)		847,600		20,664		4.92			699,896		17,900		5.14
Total interest-earning assets		1,153,636		24,374		4.26			1,104,247		22,392		4.08
Cash and due from banks		6,604							7,352
Bank premises and equipment		16,947							17,264
Other assets		55,850							57,268
Total non-interest earning assets		79,401							81,884
Total assets		1,233,037							1,186,131
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		319,387		534		0.34			303,297		468		0.31
Savings accounts		177,746		92		0.10			174,141		93		0.11
Money market accounts		122,943		290		0.48			114,478		257		0.45
Certificates of deposit		261,942		1,272		0.98			275,925		1,328		0.97
Total interest-bearing deposits		882,018		2,188		0.50			867,841		2,146		0.50
Other borrowed funds		57,348		489		1.72			39,500		366		1.86
Total interest-bearing liabilities		939,366		2,677		0.57			907,341		2,512		0.56
Demand deposits		151,396							144,198
Other liabilities		14,846							12,487
Total non-interest-bearing liabilities		166,242							156,685
Stockholders' equity		127,429							122,105
Total liabilities & stockholders' equity		1,233,037							1,186,131
Net interest income				21,697							19,880
Net interest spread (5)						3.69	%						3.52	%
Net interest income as a percentage
of average interest-earning assets						3.79	%						3.62	%
Ratio of interest-earning assets
to interest-bearing liabilities						123	%						122	%

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

36

	Analysis of Average Balances and Interest Rates (1)
	Three Months Ended
	June 30, 2017							June 30, 2016
	Average				Average			Average				Average
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate
(dollars in thousands)		$	$			%			$	$			%
ASSETS
Short-term investments:
Interest-bearing deposits at banks		10,552		7		0.23			31,880		30		0.38
Total short-term investments		10,552		7		0.23			31,880		30		0.38
Interest bearing time deposits at banks		7,374		38		2.03			7,332		34		1.85
Investment securities:
Taxable		186,983		828		1.77			258,197		1,020		1.58
Tax-exempt (3)		84,235		909		4.32			101,428		1,144		4.51
Total investment securities		271,218		1,737		2.56			359,625		2,164		2.41
Loans:
Residential mortgage loans		206,057		2,657		5.17			203,091		2,665		5.28
Construction		26,258		269		4.12			9,198		121		5.29
Commercial & agricultural loans		528,789		6,479		4.91			376,795		4,865		5.19
Loans to state & political subdivisions		96,461		1,014		4.22			101,348		1,058		4.20
Other loans		10,294		206		8.03			10,975		220		8.07
Loans, net of discount (2)(3)(4)		867,859		10,625		4.91			701,407		8,929		5.12
Total interest-earning assets		1,157,003		12,407		4.30			1,100,244		11,157		4.08
Cash and due from banks		6,538							7,530
Bank premises and equipment		16,888							17,236
Other assets		62,907							64,904
Total non-interest earning assets		86,333							89,670
Total assets		1,243,336							1,189,914
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts		328,055		294		0.36			310,640		243		0.31
Savings accounts		180,042		47		0.10			173,176		46		0.11
Money market accounts		128,931		160		0.50			113,373		126		0.45
Certificates of deposit		261,368		642		0.98			272,809		657		0.97
Total interest-bearing deposits		898,396		1,143		0.51			869,998		1,072		0.50
Other borrowed funds		45,969		231		2.02			39,369		183		1.87
Total interest-bearing liabilities		944,365		1,374		0.58			909,367		1,255		0.55
Demand deposits		155,724							145,164
Other liabilities		14,820							12,642
Total non-interest-bearing liabilities		170,544							157,806
Stockholders' equity		128,427							122,741
Total liabilities & stockholders' equity		1,243,336							1,189,914
Net interest income				11,033							9,902
Net interest spread (5)						3.72	%						3.53	%
Net interest income as a percentage
of average interest-earning assets						3.82	%						3.62	%
Ratio of interest-earning assets
to interest-bearing liabilities						123	%						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 34%.
(4) Income on non-accrual loans is accounted for on a cash basis, and the loan balances are included in interest-earning assets.
(5) Interest rate spread represents the difference between the average rate earned on interest-earning assets
and the average rate paid on interest-bearing liabilities.

          Tax exempt revenue is shown on a tax-equivalent basis for proper comparison using a statutory, federal income tax rate of 34%.  For purposes of the comparison, as well as the discussion that follows, this presentation facilitates performance comparisons between taxable and tax-free assets by increasing the tax-free income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company's 34% Federal statutory rate.  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 June 30, 2017 and 2016(in thousands):
         

37

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2017		2016		2017		2016
Interest and dividend income from investment securities
and interest bearing deposits at banks (non-tax adjusted)	$	1,474	$	1,839	$	3,057	$	3,705
Tax equivalent adjustment		308		389		653		787
Interest and dividend income from investment securities
and interest bearing deposits at banks (tax equivalent basis)	$	1,782	$	2,228	$	3,710	$	4,492



Interest and fees on loans (non-tax adjusted)	$	10,304	$	8,587	$	20,021	$	17,183
Tax equivalent adjustment		321		342		643		717
Interest and fees on loans (tax equivalent basis)	$	10,625	$	8,929	$	20,664	$	17,900



Total interest income	$	11,778	$	10,426	$	23,078	$	20,888
Total interest expense		1,374		1,255		2,677		2,512
Net interest income		10,404		9,171		20,401		18,376
Total tax equivalent adjustment		629		731		1,296		1,504
Net interest income (tax equivalent basis)	$	11,033	$	9,902	$	21,697	$	19,880

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

	Three months ended June 30, 2017 vs 2016 (1)									Six months ended June 30, 2017 vs. 2016 (1)
	Change in			Change			Total			Change in			Change			Total
	Volume			in Rate			Change			Volume			in Rate			Change
Interest Income:
Short-term investments:
Interest-bearing deposits at banks	$	(15	)	$	(8	)	$	(23	)	$	(33	)	$	(23	)	$	(56	)
Interest bearing time deposits at banks		1			3			4			(3	)		4			1
Investment securities:
Taxable		(343	)		151			(192	)		(540	)		204			(336	)
Tax-exempt		(187	)		(48	)		(235	)		(295	)		(96	)		(391	)
Total investments		(530	)		103			(427	)		(835	)		108			(727	)
Loans:
Residential mortgage loans		49			(57	)		(8	)		75			(121	)		(46	)
Construction		168			(20	)		148			327			(39	)		288
Commercial & agricultural loans		1,860			(246	)		1,614			3,252			(521	)		2,731
Loans to state & political subdivisions		(49	)		5			(44	)		(150	)		(25	)		(175	)
Other loans		(13	)		(1	)		(14	)		(29	)		(5	)		(34	)
Total loans, net of discount		2,015			(319	)		1,696			3,475			(711	)		2,764
Total Interest Income		1,471			(221	)		1,250			2,604			(622	)		1,982
Interest Expense:
Interest-bearing deposits:
NOW accounts		15			36			51			25			41			66
Savings accounts		2			(1	)		1			1			(2	)		(1	)
Money Market accounts		19			15			34			19			14			33
Certificates of deposit		(27	)		12			(15	)		(71	)		15			(56	)
Total interest-bearing deposits		9			62			71			(26	)		68			42
Other borrowed funds		33			15			48			149			(26	)		123
Total interest expense		42			77			119			123			42			165
Net interest income	$	1,429		$	(298	)	$	1,131		$	2,481		$	(664	)	$	1,817

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

38

          Tax equivalent net interest income increased from $19,880,000 for the six month period ended June 30, 2016 to $21,697,000 for the six month period ended June 30, 2017, an increase of $1,817,000. The tax equivalent net interest margin increased from 3.62% for the first six months of 2016 to 3.79% for the comparable period in 2017.
         

          Total tax equivalent interest income for the 2017 six month period increased $1,982,000 as compared to the 2016 six month period. This increase was primarily a result of an increase of $2,604,000 due to a change in volume as average interest-bearing assets increased $49.4 million. This increase was offset by a decrease of $622,000 as a result of a decrease in the average yield on loans of 22 basis points from 5.14% to 4.92% for the comparable periods. As a result of converting investment assets to loans, the yield on average interest earning assets increased 18 basis points from 4.08% to 4.26%.
         

          Tax equivalent investment income for the six months ended June 30, 2017 decreased $727,000 over the same period last year. The primary cause of the decrease was a decrease in the average outstanding balance of investments.
         

              The average balance of taxable securities decreased by $61.0 million, which resulted in a decrease in investment income of $540,000. The decrease in the average balance of taxable securities was due to the Bank's strategy of funding loan growth through the cashflows of the investment portfolio. The yield on taxable securities increased 14 basis points from 1.55% to 1.69% as a result of the recent rise in rates and the calls and maturities of lower yielding investments. This resulted in an increase in investment income of $204,000.
             

              The average balance of tax-exempt securities decreased by $13.3 million, which resulted in a decrease in investment income of $295,000. The yield on tax-exempt securities decreased 20 basis points from 4.59% to 4.39%, which corresponds to a decrease in interest income of $96,000. The yield decrease was due to higher yielding securities being called and maturing and either being replaced by lower yielding securities or not replaced and utilized to fund loan growth. For a discussion of the Company's current investment strategy, see the "Financial Condition – Investments".
             

          Total loan interest income increased $2,764,000 for the six months ended June 30, 2017 compared to the same period last year, primarily as a result of loan growth achieved in the last half of 2016 and the first half of 2017 that was primarily due to the hiring of experienced lending teams in our central and south central Pennsylvania markets.
         

              The average balance of commercial and agricultural loans increased $136.1 million from a year ago. This had a positive impact of $3,252,000 on total interest income due to volume. Offsetting this increase, there was a $521,000 decrease due to rate, as the yield earned decreased from 5.22% to 4.91%. The lending teams were able to grow our agricultural and commercial loan portfolios by originating loans to new customers of the Bank in the central and south central Pennsylvania markets.
             

·	The average balance of construction loans increased $16.0 million from a year ago. This had a positive impact of $327,000 on total interest income due to volume. Offsetting this increase, there was a $39,000 decrease due to rate, as the yield earned decreased from 5.12% to 4.25%.

              The average balance of state and political subdivision loans decreased $6.9 million from a year ago. This resulted in decrease of $150,000 on total interest income due to volume. In addition, the yield decreased 5 basis points to 4.22%, which decreased loan interest income $25,000. The decrease in this portfolio is due to fewer opportunities to loan to municipalities in the first half of 2017.
             

              Interest income on residential mortgage loans decreased $46,000. The average balance of residential loans increased $3.2 million from a year ago, which resulted in an increase in loan interest income of $75,000. Offsetting the increase, the yield earned on residential loans decreased 11 basis points compared to 2016, which corresponds to a decrease in interest income of $121,000.
             

          Total interest expense increased $165,000 for the six months ended June 30, 2017 compared with the comparative period last year primarily as a result of an increase in borrowings to fund loan growth experienced in the latter half of 2016 and the first half of 2017. Interest expense increased $123,000 as a result of volume as the average balance of interest bearing liabilities increased $32.0 million. In addition, there was an increase of $42,000 due to rate as a result of an increase in the average rate paid on interest bearing liabilities from 0.56% to 0.57%. A portion of the Bank's loan growth was funded through overnight borrowings, which resulted in the lowering of the rate paid on borrowed funds.
         

39

              The average balance of interest bearing deposits increased $14.2 million from June 30, 2016 to June 30, 2017. Increases were experienced in NOW accounts of $16.1 million, savings accounts of $3.6 million and money market accounts of $8.5 million. The average balance of certificates of deposit decreased $14.0 million. The cumulative effect of these volume changes was a decrease in interest expense of $26,000, which was primarily driven by the decrease in certificate of deposits.  (see also "Financial Condition – Deposits"). The rate paid on interest bearing deposits was 0.50% for the first six months of 2017 and 2016. As a result of small variances in interest rates paid on individual products, interest expense on deposits increased $68,000.
             

              The average balance of other borrowed funds increased $17.8 million from a year ago. This resulted in an increase in interest expense of $149,000. There was a decrease in the average rate on other borrowed fund from 1.86% to 1.72% due to an increase in the amount of funds borrowed overnight resulting in a decrease in interest expense of $26,000.
             

          Tax equivalent net interest income for the three months ended June 30, 2017 was $11,033,000 which compares to $9,902,000 for the same period last year.  This represents an increase of $1,131,000 or 11.4%. The tax equivalent net interest margin increased from 3.62% for the three months ended June 30, 2016 to 3.82% for the comparable period in 2017.
         

          Total tax equivalent interest income was $12,407,000 for the three month period ended June 30, 2017, compared to $11,157,000 for the comparable period last year, an increase of $1,250,000. The primary driver of this increase was an increase of $1,471,000 due to a change in volume as interest bearing assets increased $56.8 million as a result loan growth attributable to the experienced loan teams hired in 2016 in the south central and central Pennsylvania markets. This increase was offset by a decrease of $221,000 as a result of a decrease in the average yield on loans of 21 basis points from 5.12% to 4.91% for the comparable periods. As a result of converting investment assets to loans, the yield on average interest earning assets increased 22 basis points from 4.08% to 4.30%.
         

               Total investment income decreased by $427,000 compared to same period last year.  The primary cause of the decrease was a decrease of $88.4 million in the average outstanding balance of investment securities, which equates to a decrease of $530,000. Offsetting this increase, there was a 15 point increase in rate on investments securities from 2.41% to 2.56%, which equates to a $103,000 increase in income.
              

               Total loan interest income increased $1,696,000 compared to the same period last year. This was primarily due to an increase in volume of $166.5 million, which corresponds to a $2,015,000 increase in interest income. This was offset by a decrease in rate of 21 points from 5.12% to 4.91%, which corresponds to a decrease in loan interest income of $319,000.
              

          Total interest expense increased $119,000 for the three months ended June 30, 2017 compared with last year as a result of the increase in the average balance of interest bearing liabilities of $35.0 million, accounting for a $42,000 increase in interest expense. The average rate on interest-bearing liabilities increased 3 basis points from 0.55% to 0.58%, which increased interest expense $77,000.
         

          Provision for Loan Losses
         

          For the six month period ending June 30, 2017, we recorded a provision for loan losses of $1,240,000, which represents an increase of $970,000 from the $270,000 provision recorded in the corresponding six months of last year. The provision was higher in 2017 than 2016 primarily due to the loan growth that occurred in 2017 (see "Financial Condition – Allowance for Loan Losses and Credit Quality Risk").
         

40

          For the three months ending June 30, 2017, we recorded a provision of $625,000 compared to $135,000 in 2016 with the increase for the three month period being driven by loan growth, similar to the six mnonth period.
         

          Non-interest Income
         

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

	Six months ended June 30,				Change
	2017		2016		Amount			%
Service charges	$	2,178	$	2,230	$	(52	)		(2.3	)
Trust		409		378		31			8.2
Brokerage and insurance		305		367		(62	)		(16.9	)
Gains on loans sold		249		116		133			114.7
Investment securities gains, net		195		155		40			25.8
Earnings on bank owned life insurance		333		342		(9	)		(2.6	)
Other		254		311		(57	)		(18.3	)
Total	$	3,923	$	3,899	$	24			0.6

	Three months ended June 30,				Change
	2017		2016		Amount			%
Service charges	$	1,120	$	1,128	$	(8	)		(0.7	)
Trust		188		182		6			3.3
Brokerage and insurance		114		158		(44	)		(27.8	)
Gains on loans sold		148		70		78			111.4
Investment securities gains, net		23		128		(105	)		(82.0	)
Earnings on bank owned life insurance		167		172		(5	)		(2.9	)
Other		128		145		(17	)		(11.7	)
Total	$	1,888	$	1,983	$	(95	)		(4.8	)

          Non-interest income for the six months ended June 30, 2017 totaled $3,923,000, an increase of $24,000 when compared to the same period in 2016. During the first six months of 2017, net investment securities gains amounted to $195,000 compared to gains of $155,000 last year. We sold seven agency securities for gains totaling $10,000, two of our equity positions for a gain of $158,000 and a mortgage backed security for a gain of $20,000. In 2016, we sold two US treasury and one agency security for gains totaling $27,000 and $48,000, respectively, as a result of market conditions at the time of the sale. We also sold four municipal securities for gains totaling $80,000 in 2016.
         

          For the first six months of 2017, account service charges totaled $2,178,000, a decrease of $52,000 or 2.3%, when compared to the same period in 2016. The decrease was associated with a $77,000 decrease attributable to fees charged to customers for non-sufficient funds. The increase in gains on loans sold is due to an increase in the amount of loans sold in 2017 compared to 2016. The decrease in other income is attributable to a decrease in loan broker commissions and merchant card fees. Trust revenues have increased as the result of estate settlement fees increasing.
         

          For the three month period ended June 30, 2017, the changes experienced from the prior year related to service charges, gains on loans sold and other income correspond to the changes experienced for the six month period.
         

          Non-interest Expense
         

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

41

	Six months ended
	June 30,				Change
	2017		2016		Amount			%
Salaries and employee benefits	$	8,643	$	7,782	$	861			11.1
Occupancy		1,004		900		104			11.6
Furniture and equipment		285		328		(43	)		(13.1	)
Professional fees		568		553		15			2.7
FDIC insurance		200		317		(117	)		(36.9	)
Pennsylvania shares tax		524		390		134			34.4
Amortization of intangibles		149		164		(15	)	NA
ORE expenses		172		305		(133	)		(43.6	)
Other		2,812		3,474		(662	)		(19.1	)
Total	$	14,357	$	14,213	$	144			1.0

	Three months ended
	June 30,				Change
		2017		2016	Amount			%
Salaries and employee benefits	$	4,324	$	3,900	$	424			10.9
Occupancy		477		455		22			4.8
Furniture and equipment		146		171		(25	)		(14.6	)
Professional fees		258		266		(8	)		(3.0	)
FDIC insurance		95		160		(65	)		(40.6	)
Pennsylvania shares tax		243		240		3			1.3
Amortization of intangibles		73		82		(9	)		(11.0	)
ORE expenses (recovery)		82		212		(130	)		(61.3	)
Other		1,468		1,815		(347	)		(19.1	)
Total	$	7,166	$	7,301	$	(135	)		(1.8	)

          Non-interest expenses increased $144,000 for the six months ended June 30, 2017 compared to the same period in 2016. Salaries and employee benefits increased $861,000 or 11.1%. The increase was due to merit increases effective at the beginning of 2017 and an increase in the number of full-time equivalent employees of 6.3 as a result of the hiring of the additional lending teams in the last three quarters of 2016.
         

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

          
           The decrease in other expenses is due to a decrease in charitable contributions of $96,000, a decrease of $370,000 in charges as a result of customers' accounts being compromised and experiencing fraudulent charges and a decrease of $47,000 in ATM operating expenses as a result of a vendor's contract enhancement fee.

          The decrease in ORE expenses is due to taxes as a result of selling several properties and a decrease in appraisal fees due to appraisals paid in the second quarter of 2016 for a non-performing loan evaluation.
         

          For the three months ended, June 30, 2017, non-interest expenses decreased $135,000 when compared to the same period in 2016. The changes for the quarter are consistent with the changes for the six month period.
         

          Provision for Income Taxes
         

          The provision for income taxes was $1,956,000 for the six month period ended June 30, 2017 compared to $1,478,000 for the same period in 2016.  The increase is attributable to the increase in income before the provision for income taxes and the tax credit generation period ending for one of the investments in low income housing. Through management of our municipal loan and bond portfolios, management is focused on minimizing our effective tax rate.  Our effective tax rate was 22.4% and 19.0% for the first six months of 2017 and 2016, respectively, compared to the statutory rate of 34%.
         

42

          For the three months ended June 30, 2017, the provision for income taxes was $1,033,000 compared to $687,000 for the same period in 2016. The increase is attributable to the increase in income before the provision for income taxes and the tax credit generation period ending for one of the investments in low income housing. Our effective tax rate was 23.0% and 18.5% for the three months ended June 30, 2017 and 2016, respectively, compared to the statutory rate of 34%.
         

          We are invested in four limited partnership agreements that have established low-income housing projects in our market areas. We anticipate recognizing an aggregate of $775,000 of tax credits over the next 5.5 years, with an additional $71,000 anticipated to be recognized during 2017.
         

          
           Financial Condition

          Total assets were $1.27 billion at June 30, 2017, an increase of $41.8 million from $1.22 billion at December 31, 2016.  Cash and cash equivalents increased $1.6 million to $19.4 million. Investment securities decreased $38.8 million and net loans increased $87.3 million to $878.1 million at June 30, 2017.  Total deposits increased $45.7 million to $1.05 billion since year-end 2016, while borrowed funds decreased $9.7 million to $70.0 million.
         

          Cash and Cash Equivalents
         

          Cash and cash equivalents totaled $19.4 million at June 30, 2017 compared to $17.8 million at December 31, 2016, an increase of $1.6 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 as of June 30, 2017 and December 31, 2016 (dollars in thousands):
         

Fair Market Value of Investment Portfolio
	June 30, 2017				December 31, 2016
	Amount		%		Amount		%
Available-for-sale:
U. S. Agency securities	$	142,750		51.9	$	170,414		54.3
U. S. Treasury notes		-		-		3,000		0.9
Obligations of state & political subdivisions		86,216		31.3		96,926		30.9
Corporate obligations		3,111		1.1		3,050		1.0
Mortgage-backed securities in
government sponsored entities		41,460		15.1		37,728		12.0
Equity securities in financial institutions		1,671		0.6		2,899		0.9
Total	$	275,208		100.0	$	314,017		100.0

43

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

          Our investment portfolio decreased by $38.8 million, or 12.4%, from December 31, 2016 to June 30, 2017. During 2017, we purchased approximately $6.0 million of U.S. agency obligations, $7.6 million of mortgage backed securities in government sponsored entities and $1.8 million of municipal obligations, which helped offset the $3.4 million of principal repayments and $33.1 million of calls and maturities that occurred during the six month period. We also sold $17.7 million of various securities at a gain of $188,000. Excluding our short-term investments consisting of monies held primarily at the Federal Reserve for liquidity purposes, our investment portfolio for the six month period ended June 30, 2017 yielded 2.51%, compared to 2.39% in the comparable period in 2016 on a tax equivalent basis.
         

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

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

          Loans
         

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

	June 30,				December 31,
	2017				2016
	Amount		%		Amount		%
Real estate:
Residential	$	205,725		23.2	$	207,423		25.9
Commercial		271,342		30.6		252,577		31.6
Agricultural		188,547		21.2		123,624		15.5
Construction		25,569		2.9		25,441		3.2
Consumer		10,603		1.2		11,005		1.4
Other commercial loans		56,952		6.4		58,639		7.3
Other agricultural loans		32,974		3.7		23,388		2.9
State & political subdivision loans		96,337		10.8		97,514		12.2
Total loans		888,049		100.0		799,611		100.0
Less allowance for loan losses		9,979				8,886
Net loans	$	878,070			$	790,725

44

	June 30, 2017/
	December 31, 2016
	Change
	Amount			%
Real estate:
Residential	$	(1,698	)		(0.8	)
Commercial		18,765			7.4
Agricultural		64,923			52.5
Construction		128			0.5
Consumer		(402	)		(3.7	)
Other commercial loans		(1,687	)		(2.9	)
Other agricultural loans		9,586			41.0
State & political subdivision loans		(1,177	)		(1.2	)
Total loans	$	88,438			11.1

          The Bank's lending efforts have historically focused on north central Pennsylvania and southern New York. With the acquisition of FNB, this focus now includes opportunities in the Lebanon, Lancaster, Schuylkill and Berks County markets of south central Pennsylvania. In addition, in 2016, we opened an office in Winfield, Pennsylvania, which focuses on agricultural and commercial customers in central Pennsylvania. We also opened an office in Mount Joy, Pennsylvania to better serve Lancaster County customers. We originate loans primarily through direct loans to our existing customer base, with new customers generated through the strong relationships our new lending teams have with their customers, as well as by referrals from real estate brokers, building contractors, attorneys, accountants, corporate and advisory board members, existing customers and the Bank's website.  The Bank offers a variety of loans although historically most of our lending has focused on real estate loans including residential, commercial, agricultural, and construction loans.  All lending is governed by a lending policy that is developed and administered by management and approved by the Board of Directors. As of June 30, 2017, the Company had one loan concentration within the dairy industry totaling $130.0 million or 14.6% of total loans.
         

          During the first six months of 2017, the primary driver of growth in the loan portfolio was in commercial and agricultural real estate loans and was primarily driven by the lending teams hired in 2016 in both the central and south central Pennsylvania markets. Commercial loan demand is subject to significant competitive pressures, the yield curve, and the strength of the overall national, regional and local economies.
         

          Activity associated with exploration for natural gas remains limited in 2017, but has increased slightly compared to 2016. While the Bank has loaned to companies that service the exploration activities, the Bank has not originated any loans to companies performing the actual drilling and exploration activities. Loans made by the Company are to service industry customers which include trucking companies, stone quarries and other support businesses. We also have originated loans to businesses and individuals for restaurants, hotels and apartment rentals that have been developed and expanded to meet the housing and living needs of the gas 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 lower loan to value thresholds, shortened amortization periods, and expansion of our monitoring of loan concentrations associated with this activity.
         

          Residential real estate loans decreased $1.7 million during the first six months of 2017. Loan demand for conforming mortgages, which the Company typically sells on the secondary market has increased in 2017 when compared to 2016. For loans sold on the secondary market, the Company recognizes fee income for servicing these sold loans, which is included in non-interest income.
         

          Allowance for Loan Losses
         

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

45

	June 30,			December 31,
	2017			2016			2015			2014			2013
Balance
at beginning of period	$	8,886		$	7,106		$	6,815		$	7,098		$	6,784
Charge-offs:
Real estate:
Residential		93			85			66			97			17
Commercial		41			100			84			516			62
Agricultural		-			-			-			-			-
Consumer		45			100			47			47			54
Other commercial loans		-			55			41			250			1
Other agricultural loans		5			-			-			-			-
Total loans charged-off		184			340			238			910			134
Recoveries:
Real estate:
Residential		-			-			-			-			5
Commercial		6			479			14			15			5
Agricultural		-			-			-			-			-
Consumer		22			88			33			27			33
Other commercial loans		9			33			2			-			-
Other agricultural loans		-			-			-			-			-
Total loans recovered		37			600			49			42			43

Net loans (recovered) charged-off		147			(260	)		189			868			91
Provision charged to expense		1,240			1,520			480			585			405
Balance at end of year	$	9,979		$	8,886		$	7,106		$	6,815		$	7,098

Loans outstanding at end of period	$	888,049		$	799,611		$	695,031		$	554,105		$	540,612
Average loans outstanding, net	$	847,600		$	725,881		$	577,992		$	540,541		$	516,748
Non-performing assets:
Non-accruing loans	$	11,511		$	11,454		$	6,531		$	6,599		$	8,097
Accrual loans - 90 days or more past due		812			405			623			836			697
Total non-performing loans	$	12,323		$	11,859		$	7,154		$	7,435		$	8,794
Foreclosed assets held for sale		1,194			1,036			1,354			1,792			1,360
Total non-performing assets	$	13,517		$	12,895		$	8,508		$	9,227		$	10,154

Annualized net charge-offs to average loans		0.03	%		-0.04	%		0.03	%		0.16	%		0.02	%
Allowance to total loans		1.12	%		1.11	%		1.02	%		1.23	%		1.31	%
Allowance to total non-performing loans		80.98	%		74.93	%		99.33	%		91.66	%		80.71	%
Non-performing loans as a percent of loans outstanding		1.39	%		1.48	%		1.03	%		1.34	%		1.63	%
Non-performing assets as a percent of loans outstanding		1.52	%		1.61	%		1.22	%		1.67	%		1.88	%

          Management believes it uses the best information available when estimating the allowance for loan losses and that the allowance for loan losses is adequate as of June 30, 2017.  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.
         

46

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

          The allowance for loan losses was $9,979,000 or 1.12% of total loans as of June 30, 2017 as compared to $8,886,000 or 1.11% of loans as of December 31, 2016. The decrease as a percent of loans compared to year end 2014 and 2013 is attributable to the increase in loans as part of the acquisition of FNB and the associated purchase accounting adjustments that were applied to the FNB loan portfolio.  The $1,093,000 increase in the allowance during the first six months of 2017 is the result of a $1,240,000 provision and net charge-offs of $147,000. 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 June 30, 2017 and December 31, 2016, 2015, 2014 and 2013 (dollars in thousands):
         

	June 30,				December 31
	2017				2016				2015				2014				2013
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Real estate loans:
Residential	$	1,104		23.2	$	1,064		25.9	$	905		29.3	$	878		33.5	$	946		34.6
Commercial		3,541		30.6		3,589		31.6		3,376		34.2		3,419		34.5		3,983		35.7
Agricultural		2,452		21.2		1,494		15.5		409		8.3		451		4.4		575		4.1
Construction		45		2.9		47		3.2		24		2.2		26		1.1		50		1.7
Consumer		125		1.2		122		1.4		102		1.7		84		1.5		105		1.7
Other commercial loans		1,131		6.4		1,327		7.3		1,183		8.2		1,007		8.6		686		8.2
Other agricultural loans		431		3.7		312		2.9		122		2.0		217		2.0		256		1.8
State & political subdivision loans		838		10.8		833		12.2		593		14.1		545		14.4		330		12.2
Unallocated		312		N/A		98		N/A		392		N/A		188		N/A		167		N/A
Total allowance for loan losses	$	9,979		100.0	$	8,886		100.0	$	7,106		100.0	$	6,815		100.0	$	7,098		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 51.8% of the loan portfolio, 60.1% of the allowance is assigned to this segment of the loan portfolio as these loans have more inherent risks than residential real estate or loans to state and political subdivisions.
         

          The following table identifies amounts of loans contractually past due 30 to 89 days and non-performing loans by loan category, as well as the change from December 31, 2016 to June 30, 2017 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.
         

47

	June 30, 2017								December 31, 2016
			Non-Performing Loans								Non-Performing Loans
	30 - 89 Days		90 Days or						30 - 89 Days		90 Days or
	Past Due		More Past		Non-		Total Non-		Past Due		More Past		Non-		Total Non-
(in thousands)	Accruing		Due Accruing		accrual		Performing		Accruing		Due Accruing		accrual		Performing
Real estate:
Residential	$	588	$	43	$	1,655	$	1,698	$	1,010	$	333	$	1,570	$	1,903
Commercial		1,408		553		4,588		5,141		1,703		-		4,445		4,445
Agricultural		534		159		1,314		1,473		-		-		1,340		1,340
Construction		-		-		-		-		-		-		-		-
Consumer		92		57		87		144		131		67		42		109
Other commercial loans		22		-		3,128		3,128		78		-		4,057		4,057
Other agricultural loans		283		-		739		739		77		5		-		5
Total nonperforming loans	$	2,927	$	812	$	11,511	$	12,323	$	2,999	$	405	$	11,454	$	11,859


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

          For the six month period ended June 30, 2017, we recorded a provision for loan losses of $1,240,000, which compares to $270,000 for the same period in 2016. The increase was primarily driven by the loan growth experienced during 2017. Non-performing loans increased $464,000 or 3.9%, from December 31, 2016 to June 30, 2017, primarily due to one customer whose loans are being modified. Approximately 61.9% of the Bank's non-performing loans at June 30, 2017 are associated with the following three customer relationships:
         

              A commercial customer with a total loan relationship of $3.5 million secured by undeveloped land, stone quarries, equipment and the owner's residence was on non-accrual status as of June 30, 2017. 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. The collateral was appraised in the first quarter of 2017. Management assessed the collateral value and determined that no specific reserve was required as of June 30, 2017.
             

              A commercial customer with a total loan relationship of $2.8 million secured by approximately 160 residential properties was on non-accrual status as of June 30, 2017. In the first quarter of 2011, the Company and borrower entered into a forbearance agreement to restructure the debt. In July of 2013, the customer filed for bankruptcy under Chapter 11 and a Trustee was appointed in January of 2014. In 2015, the Trustee decreased the loan payments below what was agreed to in the forbearance agreement. This decrease is currently being litigated in bankruptcy court. As a result of the decrease, the relationship has become more than 90 days past due. During 2016, the Company appraised the underlying collateral. The appraisals indicated a slight decrease in collateral values compared to the appraisals ordered for the loan origination, however, the loan is still considered well secured on a loan to value basis. We continue to monitor the bankruptcy proceedings to identify potential changes in the customer's operations and the impact these would have on the loan payments for our loans to the customer and the underlying collateral that supports these loans. As of June 30, 2017, there was no specific reserve for this relationship.
             

              An agricultural customer with a relationship of approximately $1.3 million secured by land, agricultural buildings and equipment was on non-accrual status as of June 30, 2017. The customers transition to organic farming and contractual issues with a supplier have significantly impacted the cash flows from the customer's activities. The customer is currently marketing the real estate and buildings for sale. Management assessed the collateral value and determined that a specific reserve of $97,000 was required as of June 30, 2017.
             

48

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

·	Two loan relationships comprise 51.2% of the non-performing loan balance, whose debt is considered well collateralized and has no specific reserves as of June 30, 2017.

·	Net and gross charge-offs remain low in 2017 after a net recovery in 2016.

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

          Bank Owned Life Insurance
         

          The Company holds bank owned life insurance policies to offset future employee benefit costs. These policies provide the Bank with an asset that generates earnings to partially offset the current costs of benefits, and eventually (at the death of the insureds) provide partial recovery of cash outflows associated with the benefits.  As of June 30, 2017 and December 31, 2016, the cash surrender value of the life insurance was $26.5 million and $26.2 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 $333,000 and $342,000 for the six month periods ended June 30, 2017 and 2016, respectively. 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 June 30, 2017 and December 31, 2016, included in other liabilities on the Consolidated Balance Sheet was a liability of $574,000 and $569,000, respectively, for the obligation under the split-dollar benefit agreements.
         

          Premises and Equipment
         

          Premises and equipment decreased $259,000 to $16.8 million as of June 30, 2017 from December 31, 2016. This occurred primarily as a result of normal depreciation expense recorded in the first six months of 2017.
         

          Deposits
         

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

	June 30,				December 31,
	2017				2016
	Amount		%		Amount		%
Non-interest-bearing deposits	$	156,374		14.9	$	147,425		14.7
NOW accounts		322,663		30.7		305,862		30.4
Savings deposits		181,381		17.3		170,722		17.0
Money market deposit accounts		130,969		12.5		116,880		11.6
Certificates of deposit		259,822		24.6		264,614		26.3
Total	$	1,051,209		100.0	$	1,005,503		100.0

49

	June 30, 2017/
	December 31, 2016
	Change
	Amount			%
Non-interest-bearing deposits	$	8,949			6.1
NOW accounts		16,801			5.5
Savings deposits		10,659			6.2
Money market deposit accounts		14,089			12.1
Certificates of deposit		(4,792	)		(1.8	)
Total	$	45,706			4.5

          Deposits increased $45.7 million since December 31, 2016. As a result of timing and new account acquisition, deposits from local municipalities increased across various categories including non-interest bearing, money markets and NOW accounts. We also experienced a general increase in business related deposits, which have helped to support the loan growth the Bank has experienced. The deposit increases have been across both our northern tier and south central Pennsylvania markets.
         

          Certificates of deposits decreased $4.8 million in 2017. The rates paid on certificates of deposits remain near historic lows due to the interest rate environment. Certain customers who typically utilize certificate of deposits as a means of generating income or as a longer term investment option, continued to move funds into money market and savings accounts that still pay interest in order to maintain flexibility for potentially rising interest rates. The rates paid on certificates of deposit by the Company remain competitive with rates paid by our competition. As of June 30, 2017, the Bank did not have any outstanding brokered certificates of deposit.
         

          Borrowed Funds
         

          Borrowed funds decreased $9.7 million during the first six months of 2017. The decrease was the result of repaying $10.9 million of overnight advances from the FHLB as a result of the deposit growth and investment portfolio cashflows. Offsetting this, there was an increase of approximately $1.3 million in the balances outstanding under repurchase agreements. The Bank's current strategy for borrowings is to consider terms and structures to manage interest rate risk and liquidity in a potential rising interest rate environment. The Company's daily cash requirements or short-term investments are primarily met by using the financial instruments available through the Federal Home Loan Bank of Pittsburgh.
         

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

          Stockholders' Equity
         

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

          Total stockholders' equity was $127.8 million at June 30, 2017 compared to $123.3 million at December 31, 2016, an increase of $4.5 million or 3.7%.  Excluding accumulated other comprehensive income, stockholders' equity increased $4.1 million, or 3.3%. The Company purchased 9,900 shares of treasury stock at a weighted average cost of $51.37 per share. The Company reissued 8,277 shares as part of the dividend reinvestment program at a weighted average cost of $50.48 per share and 4,212 shares as part of the restricted stock program at a weighted average cost of $50.33 per share. In the first six months of 2017, the Company had net income of $6.8 million and declared cash dividends of $2.9 million, or $0.81 per share, representing a cash dividend payout ratio of 42.2%.  We also issued a five percent stock dividend to the Company's shareholders, which had a market value of $9.0 million at its issuance.
         

50

          All of the Company's 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, accumulated other comprehensive income associated with the change in investment securities increased $423,000 from December 31, 2016.
         

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

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

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

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

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
June 30, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets):
Company	$	126,856		14.32	%	$	70,846		8.00	%	$	88,558		10.00	%
Bank	$	122,463		13.85	%	$	70,751		8.00	%	$	88,439		10.00	%

Tier 1 Capital (to Risk Weighted Assets):
Company	$	116,664		13.17	%	$	53,135		6.00	%	$	70,846		8.00	%
Bank	$	112,272		12.70	%	$	53,064		6.00	%	$	70,751		8.00	%

Common Equity Tier 1 Capital (to Risk Weighted Assets):
Company	$	109,164		12.33	%	$	39,851		4.50	%	$	57,563		6.50	%
Bank	$	112,272		12.70	%	$	39,798		4.50	%	$	57,486		6.50	%

Tier 1 Capital (to Average Assets):
Company	$	116,664		9.55	%	$	48,852		4.00	%	$	61,065		5.00	%
Bank	$	112,272		9.21	%	$	48,782		4.00	%	$	60,977		5.00	%

51

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
December 31, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to Risk Weighted Assets):
Company	$	121,717		14.93	%	$	65,217		8.00	%	$	81,522		10.00	%
Bank	$	117,537		14.46	%	$	65,020		8.00	%	$	81,275		10.00	%

Tier 1 Capital (to Risk Weighted Assets):
Company	$	112,599		13.81	%	$	48,913		6.00	%	$	65,217		8.00	%
Bank	$	108,419		13.34	%	$	48,765		6.00	%	$	65,020		8.00	%

Common Equity Tier 1 Capital (to Risk Weighted Assets):
Company	$	105,099		12.89	%	$	36,685		4.50	%	$	52,989		6.50	%
Bank	$	108,419		13.34	%	$	36,574		4.50	%	$	52,829		6.50	%

Tier 1 Capital (to Average Assets):
Company	$	112,599		9.46	%	$	47,586		4.00	%	$	59,483		5.00	%
Bank	$	108,419		9.13	%	$	39,006		4.00	%	$	48,757		5.00	%

          Off-Balance Sheet Activities
         

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

	June 30, 2017		December 31, 2016
Commitments to extend credit	$	198,733	$	206,505
Standby letters of credit		15,516		14,955
	$	214,249	$	221,460

          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 June 30, 2017 and December 31, 2016 was $9,204,000 and $9,124,000, 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 six months of 2017 were $131,000 compared to $398,000 during the same time period in 2016.
         

52

          Short-term debt from the FHLB supplements the Bank's availability of funds.  The Bank achieves liquidity primarily from temporary or short‑term investments in the Federal Reserve and the FHLB.  The Bank has a maximum borrowing capacity at the FHLB of approximately $411.6 million, of which $46.9 million was outstanding at June 30, 2017. Additionally, we have a Federal funds line totaling $10.0 million from a third party bank at market rates.  This line is not drawn upon. We also have a borrower in custody line with the Federal Reserve Bank of approximately $4.4 million, which also is not drawn upon as of June 30, 2017. 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 June 30, 2017, Citizens Financial Services, Inc. (on an unconsolidated basis) had liquid assets of $3.6 million.
         

          Interest Rate and Market Risk Management
         

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

          Because of the nature of our operations, we are not subject to foreign currency exchange or commodity price risk and, because we have no trading portfolio, we are not subject to trading risk. Currently, the Company has equity securities that represent only 0.6% of its investment portfolio 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 June 30, 2017 (dollars in thousands):
         

53

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

-100 Shock	$	40,618	$	(1,054	)		(2.53	)
Base		41,672		-			-
+100 Shock		40,667		(1,005	)		(2.41	)
+200 Shock		39,510		(2,162	)		(5.19	)
+300 Shock		38,308		(3,364	)		(8.07	)
+400 Shock		36,999		(4,673	)		(11.21	)

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

          Item 3-Quantitative and Qualitative Disclosure about Market Risk
         

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

          Item 4-Control and Procedures
         

          (a) Disclosure Controls and Procedures
         

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

          (b) Changes to Internal Control over Financial Reporting
         

          There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2017 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.
         

54

          Item 1A – Risk Factors
         

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

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

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

4/1/17 to 4/30/17		-	$	0.00		-		99,524
5/1/17 to 5/31/17		1,043	$	54.00		1,043		98,481
6/1/17 to 6/30/17		952	$	54.00		952		97,529
Total		1,995	$	54.00		1,995		97,529

(1)

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

          Item 3 ‑ Defaults Upon Senior Securities
         

          Not applicable
          
           .

          Item 4 – Mine Safety Disclosure
         

          Not applicable
          
           .

          Item 5 ‑ Other Information
         

          None
         

          Item 6 ‑ Exhibits
         

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

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

55

	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 June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) The Consolidated Balance Sheet (unaudited), (ii) the Consolidated Statement of Income (unaudited), (iii) the Consolidated Statement of Comprehensive Income (unaudited), (iv) the Consolidated Statement of Cash Flows (unaudited) and (v) related notes (unaudited).

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

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

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

          ** Furnished, not filed.
         

56

          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.

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



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

57

TABLE OF CONTENTS

Part I Item 1. Financial Statements (unaudited):Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations 32-54 Item 3. Quantitative and Qualitative Disclosures About Market Risk 54 Item 4. Controls and Procedures 54 Part II Other Information Part II Item 1. Legal Proceedings 54-55 Item 1A. Risk Factors 55 Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds 55 Item 3. Defaults Upon Senior Securities 55 Item 4. Mine Safety Disclosures 55 Item 5. Other Information 55 Item 6. Exhibits 55-56 Note 1 - Basis Of Presentation Note 2 - Earnings Per Share Note 3 - Income Tax Expense Note 4 Investments Note 5 Loans Note 6 Goodwill and Other Intangible Assets Note 7 Federal Home Loan Bank Stock Note 8 Repurchase Agreements Note 9 - Employee Benefit Plans Note 10 Accumulated Comprehensive Income (loss)Note 11 Fair Value Measurements Note 12 Recent Accounting Pronouncements Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3-quantitative and Qualitative Disclosure About Market Risk Item 4-control and Procedures Item 1 Legal Proceedings Item 1A Risk Factors Item 2 Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Mine Safety Disclosure Item 5 Other Information Item 6 Exhibits

Exhibits

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

CZFS 10-Q Quarter ended June 30, 2017

Exhibits