Company Quick10K Filing
Quick10K
Citizens Financial Services
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-25 Earnings, Exhibits
8-K 2019-01-25 Earnings, Exhibits
8-K 2018-12-20 Officers, Other Events
8-K 2018-10-23 Earnings, Exhibits
8-K 2018-08-14 Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-04-19 Shareholder Vote, Regulation FD, Other Events, Exhibits
8-K 2018-02-26 Regulation FD, Exhibits
8-K 2018-01-30 Earnings, Exhibits
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CZFS 2018-09-30
Note 1 - Basis of Presentation
Note 2 - Revenue Recognition
Note 3 - Earnings per Share
Note 4 - Investments
Note 5 - Loans
Note 6 - Goodwill and Other Intangible Assets
Note 7 - Repurchase Agreements
Note 8 - Employee Benefit Plans
Note 9 - Accumulated Comprehensive Loss
Note 10 - Fair Value Measurements
Note 11 Legal and Regulatory Proceedings
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
Part II ‑ Other Information
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
EX-31.1 ceocert.htm
EX-31.2 cfocert.htm
EX-32.1 certification.htm

Citizens Financial Services Earnings 2018-09-30

CZFS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 thirdqtr2018.htm FORM 10-Q FOR THIRD QUARTER 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes __X__ No_____

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

Large accelerated filer                                                                                    ____                                                      Accelerated filer  _X__

Non-accelerated filer                                                                      ____                                                      Smaller reporting company                                                                                    ____

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 October 31, 2018, was 3,509,143.


Citizens Financial Services, Inc.
Form 10-Q

INDEX

   
PAGE
Part I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited):
 
 
Consolidated Balance Sheet as of September 30,2018 and December 31, 2017
1
 
Consolidated Statement of Income for the Three and Nine months Ended September 30, 2018 and 2017
2
 
Consolidated Statement of Comprehensive Income for the Three and Nine months ended September 30, 2018 and 2017
3
 
Consolidated Statement of Cash Flows for the Nine Months ended September 30, 2018 and 2017
4
 
Notes to Consolidated Financial Statements
5-29
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30-52
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
52
Item 4.
Controls and Procedures
52-53
     
Part II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
53
Item 1A.
Risk Factors
53
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
53
Item 3.
Defaults Upon Senior Securities
53
Item 4.
Mine Safety Disclosures
53
Item 5.
Other Information
53
Item 6.
Exhibits
54
 
Signatures
55

CITIZENS FINANCIAL SERVICES, INC.
           
CONSOLIDATED BALANCE SHEET
           
(UNAUDITED)
           
 
           
 
 
September 30,
   
December 31,
 
(in thousands except share data)
 
2018
   
2017
 
ASSETS:
           
Cash and due from banks:
           
  Noninterest-bearing
 
$
15,496
   
$
16,347
 
  Interest-bearing
   
1,004
     
2,170
 
Total cash and cash equivalents
   
16,500
     
18,517
 
Interest bearing time deposits with other banks
   
14,754
     
10,283
 
Equity Securities
   
291
     
-
 
Available-for-sale securities
   
240,426
     
254,782
 
Loans held for sale
   
960
     
1,439
 
                 
Loans (net of allowance for loan losses:
               
  2018, $12,383 and 2017, $11,190)
   
1,047,948
     
989,335
 
                 
Premises and equipment
   
16,189
     
16,523
 
Accrued interest receivable
   
4,480
     
4,196
 
Goodwill
   
23,296
     
23,296
 
Bank owned life insurance
   
27,350
     
26,883
 
Other intangibles
   
1,703
     
1,953
 
Other assets
   
13,983
     
14,679
 
 
               
TOTAL ASSETS
 
$
1,407,880
   
$
1,361,886
 
 
               
LIABILITIES:
               
Deposits:
               
  Noninterest-bearing
 
$
173,379
   
$
171,840
 
  Interest-bearing
   
1,001,464
     
933,103
 
Total deposits
   
1,174,843
     
1,104,943
 
Borrowed funds
   
86,097
     
114,664
 
Accrued interest payable
   
979
     
897
 
Other liabilities
   
11,561
     
12,371
 
TOTAL LIABILITIES
   
1,273,480
     
1,232,875
 
STOCKHOLDERS' EQUITY:
               
Preferred Stock
               
  $1.00 par value; authorized 3,000,000 shares at September 30, 2018 and
               
   December 31, 2017; none issued in 2018 or 2017
   
-
     
-
 
Common stock
               
  $1.00 par value; authorized 25,000,000 shares at September 30 2018 and 15,000,000
               
      at December 31, 2017; issued 3,904,212 at September 30, 2018 and 3,869,939
               
      at December 31, 2017
   
3,904
     
3,870
 
Additional paid-in capital
   
53,122
     
51,108
 
Retained earnings
   
96,754
     
89,982
 
Accumulated other comprehensive loss
   
(6,081
)
   
(3,398
)
Treasury stock, at cost:  395,070 shares at September 30, 2018
               
  and 383,065 shares at December 31, 2017
   
(13,299
)
   
(12,551
)
TOTAL STOCKHOLDERS' EQUITY
   
134,400
     
129,011
 
TOTAL LIABILITIES AND
               
   STOCKHOLDERS' EQUITY
 
$
1,407,880
   
$
1,361,886
 
 
               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
         

1




CITIZENS FINANCIAL SERVICES, INC.
                       
CONSOLIDATED STATEMENT OF INCOME
                       
(UNAUDITED)
                       
 
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands, except share and per share data)
 
2018
   
2017
   
2018
   
2017
 
INTEREST INCOME:
                       
Interest and fees on loans
 
$
12,666
   
$
10,659
   
$
36,988
   
$
30,680
 
Interest-bearing deposits with banks
   
94
     
49
     
218
     
129
 
Investment securities:
                               
    Taxable
   
967
     
762
     
2,683
     
2,341
 
    Nontaxable
   
425
     
588
     
1,426
     
1,857
 
    Dividends
   
107
     
62
     
355
     
191
 
TOTAL INTEREST INCOME
   
14,259
     
12,120
     
41,670
     
35,198
 
INTEREST EXPENSE:
                               
Deposits
   
1,794
     
1,210
     
4,695
     
3,398
 
Borrowed funds
   
695
     
293
     
2,034
     
782
 
TOTAL INTEREST EXPENSE
   
2,489
     
1,503
     
6,729
     
4,180
 
NET INTEREST INCOME
   
11,770
     
10,617
     
34,941
     
31,018
 
Provision for loan losses
   
475
     
500
     
1,300
     
1,740
 
NET INTEREST INCOME AFTER
                               
    PROVISION FOR LOAN LOSSES
   
11,295
     
10,117
     
33,641
     
29,278
 
NON-INTEREST INCOME:
                               
Service charges
   
1,181
     
1,145
     
3,455
     
3,323
 
Trust
   
147
     
187
     
548
     
596
 
Brokerage and insurance
   
222
     
154
     
571
     
459
 
Gains on loans sold
   
170
     
134
     
302
     
383
 
Equity security gains (losses), net
   
(4
)
   
-
     
9
     
-
 
Available for sale security gains (losses), net
   
(8
)
   
9
     
(8
)
   
204
 
Earnings on bank owned life insurance
   
161
     
166
     
467
     
499
 
Other
   
141
     
126
     
414
     
380
 
TOTAL NON-INTEREST INCOME
   
2,010
     
1,921
     
5,758
     
5,844
 
NON-INTEREST EXPENSES:
                               
Salaries and employee benefits
   
4,679
     
4,287
     
14,251
     
13,030
 
Occupancy
   
500
     
475
     
1,606
     
1,479
 
Furniture and equipment
   
130
     
159
     
394
     
444
 
Professional fees
   
507
     
318
     
1,273
     
942
 
FDIC insurance
   
120
     
95
     
327
     
295
 
Pennsylvania shares tax
   
250
     
243
     
850
     
767
 
Amortization of intangibles
   
74
     
74
     
224
     
223
 
OREO expenses
   
6
     
139
     
92
     
255
 
Other
   
1,522
     
1,457
     
4,305
     
4,169
 
TOTAL NON-INTEREST EXPENSES
   
7,788
     
7,247
     
23,322
     
21,604
 
Income before provision for income taxes
   
5,517
     
4,791
     
16,077
     
13,518
 
Provision for income taxes
   
936
     
1,141
     
2,558
     
3,097
 
NET INCOME
 
$
4,581
   
$
3,650
   
$
13,519
   
$
10,421
 
                                 
PER COMMON SHARE DATA:
                               
Net Income - Basic
 
$
1.31
   
$
1.04
   
$
3.85
   
$
2.96
 
Net Income - Diluted
 
$
1.31
   
$
1.04
   
$
3.85
   
$
2.96
 
Cash Dividends Paid
 
$
0.440
   
$
0.426
   
$
1.302
   
$
1.228
 
 
                               
Number of shares used in computation - basic
   
3,502,859
     
3,517,208
     
3,507,515
     
3,515,032
 
Number of shares used in computation - diluted
   
3,503,020
     
3,519,493
     
3,509,676
     
3,516,906
 
 
                               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
                 


2

 

CITIZENS FINANCIAL SERVICES, INC.
                                               
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                                           
(UNAUDITED)
                                               
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30,
   
September 30,
 
(in thousands)
       
2018
         
2017
         
2018
         
2017
 
Net income
       
$
4,581
         
$
3,650
         
$
13,519
         
$
10,421
 
Other comprehensive income (loss):
                                                       
      Change in unrealized gains (losses) on available
                                                       
              For sale securities
   
(971
)
           
(288
)
           
(3,544
)
           
437
         
      Income tax effect
   
205
             
98
             
744
             
(149
)
       
      Change in unrecognized pension cost
   
47
             
56
             
140
             
168
         
      Income tax effect
   
(11
)
           
(19
)
           
(30
)
           
(57
)
       
      Less:  Reclassification adjustment for investment
                                                               
               security (gains) losses included in net income
   
8
             
(9
)
           
8
             
(204
)
       
      Income tax effect
   
(2
)
           
3
             
(2
)
           
69
         
Other comprehensive income (loss), net of tax
           
(724
)
           
(159
)
           
(2,684
)
           
264
 
Comprehensive income
         
$
3,857
           
$
3,491
           
$
10,835
           
$
10,685
 
 
                                                               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
                         

3

 

CITIZENS FINANCIAL SERVICES, INC.
           
CONSOLIDATED STATEMENT OF CASH FLOWS
           
(UNAUDITED)
 
Nine Months Ended
 
 
 
September 30,
 
(in thousands)
 
2018
   
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
  Net income
 
$
13,519
   
$
10,421
 
  Adjustments to reconcile net income to net
               
   cash provided by operating activities:
               
    Provision for loan losses
   
1,300
     
1,740
 
    Depreciation and amortization
   
301
     
321
 
    Amortization and accretion of investment securities
   
813
     
1,089
 
    Deferred income taxes
   
(260
)
   
(381
)
    Investment securities (gains) losses, net
   
1
     
(204
)
    Earnings on bank owned life insurance
   
(467
)
   
(499
)
    Originations of loans held for sale
   
(14,709
)
   
(17,144
)
    Proceeds from sales of loans held for sale
   
15,374
     
17,789
 
    Realized gains on loans sold
   
(302
)
   
(383
)
    (Increase) decrease in accrued interest receivable
   
(284
)
   
303
 
    Increase in accrued interest payable
   
82
     
11
 
    Other, net
   
(435
)
   
(360
)
      Net cash provided by operating activities
   
14,933
     
12,703
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Available-for-sale securities:
               
    Proceeds from sales
   
25,168
     
30,393
 
    Proceeds from maturity and principal repayments
   
41,027
     
47,677
 
    Purchase of securities
   
(56,289
)
   
(20,548
)
  Purchase of equity securities
   
(191
)
   
-
 
  Purchase of interest bearing time deposits with other banks
   
(5,713
)
   
(6,301
)
  Proceeds from sale of interest bearing time deposits with other banks
   
1,239
     
2,741
 
  Proceeds from matured interest bearing time deposits with other banks
   
-
     
496
 
  Proceeds from redemption of regulatory stock
   
7,874
     
6,090
 
  Purchase of regulatory stock
   
(6,751
)
   
(5,668
)
  Net increase in loans
   
(59,646
)
   
(107,864
)
  Purchase of premises and equipment
   
(228
)
   
(179
)
  Proceeds from sale of foreclosed assets held for sale
   
899
     
312
 
      Net cash used in investing activities
   
(52,611
)
   
(52,851
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
  Net increase in deposits
   
69,900
     
46,602
 
  Proceeds from long-term borrowings
   
7
     
7
 
  Repayments of long-term borrowings
   
(1,000
)
   
-
 
  Net decrease in short-term borrowed funds
   
(27,574
)
   
(6,041
)
  Purchase of treasury and restricted stock
   
(1,098
)
   
(645
)
  Dividends paid
   
(4,574
)
   
(3,714
)
      Net cash provided by financing activities
   
35,661
     
36,209
 
          Net decrease in cash and cash equivalents
   
(2,017
)
   
(3,939
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
18,517
     
17,754
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
16,500
   
$
13,815
 
 
               
Supplemental Disclosures of Cash Flow Information:
               
    Interest paid
 
$
6,647
   
$
4,169
 
    Income taxes paid
 
$
1,900
   
$
2,950
 
    Loans transferred to foreclosed property
 
$
381
   
$
785
 
 
               
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 

4

CITIZENS FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation

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

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

In the opinion of management of the Company, the accompanying interim financial statements at September 30, 2018 and for the periods ended September 30, 2018 and 2017 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations at the dates and for the periods presented. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period covered by the Consolidated Income Statement. . The financial performance reported for the Company for the nine month period ended September 30, 2018 is not necessarily indicative of the results to be expected for the full year.  This information should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

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

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

5

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

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

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 71S). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. The Company adopted the standard on January 1, 2018, which resulted in a reclassification of $(50)and ($150) from Salaries and employee benefits into Other noninterest expenses on the Consolidated Statement of Income for the three and nine month periods ended September 30, 2017. See Note 9 for additional information on the presentation of these pension cost components.

Note 2 – Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Update ASU 2014-09 Revenue from Contracts with Customers – Topic 606 and all subsequent ASUs that modified ASC 606. The Company has elected to apply the standard to all prior periods presented utilizing the full retrospective approach. The implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods. Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, loan servicing, gains on loans sold and earnings on bank owned life insurances are not within the scope of ASC 606. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 90.0% and 89.8% of the total revenue of the Company for the three and nine months ended September 30, 2018, respectively. The main types of noninterest income within the scope of the standard are as follows:

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

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

·
Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.
 
6


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

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

  
 
September 30, 2018
 
Revenue stream
 
Three Months Ended
   
Nine Months Ended
 
Service charges on deposit accounts
           
Overdraft fees
 
$
395
   
$
1,143
 
Statement fees
   
50
     
155
 
Interchange revenue
   
566
     
1,671
 
ATM income
   
104
     
301
 
Other service charges
   
66
     
185
 
Total Service Charges
   
1,181
     
3,455
 
Trust
   
147
     
548
 
Brokerage and insurance
   
222
     
571
 
Other
   
84
     
245
 
Total
 
$
1,634
   
$
4,819
 

Note 3 - Earnings per Share

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

7

 

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Net income applicable to common stock
 
$
4,581,000
   
$
3,650,000
   
$
13,519,000
   
$
10,421,000
 
Basic earnings per share computation
                               
Weighted average common shares outstanding
   
3,502,859
     
3,517,208
     
3,507,515
     
3,515,032
 
Earnings per share - basic
 
$
1.31
   
$
1.04
   
$
3.85
   
$
2.96
 
Diluted earnings per share computation
                               
Weighted average common shares outstanding for basic earnings per share
   
3,502,859
     
3,517,208
     
3,507,515
     
3,515,032
 
Add: Dilutive effects of restricted stock
   
161
     
2,285
     
2,161
     
1,874
 
Weighted average common shares outstanding for dilutive earnings per share
   
3,503,020
     
3,519,493
     
3,509,676
     
3,516,906
 
Earnings per share - diluted
 
$
1.31
   
$
1.04
   
$
3.85
   
$
2.96
 
 
For the three months ended September 30, 2018 and 2017, there were 4,696 and 1,107 shares, respectively, related to the restricted stock plan that were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had per share prices ranging from $46.69-$62.93 for the three month period ended September 30, 2018 and per share prices ranging from $49.87-$53.15 for the three month period ended September 30, 2017. For the nine months ended September 30, 2018 and 2017, 4,033 and 4,162 shares, respectively, related to the restricted stock plan were excluded from the diluted earnings per share calculations since they were anti-dilutive. These anti-dilutive shares had prices ranging from $46.69-$61.04 for the nine month period ended September 30, 2018 and prices ranging from $46.69-$53.15 for the nine month period ended September 30, 2017.

Note 4 – Investments

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

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
September 30, 2018
 
Cost
   
Gains
   
Losses
   
Value
 
Available-for-sale securities:
                       
  U.S. agency securities
 
$
109,612
   
$
-
   
$
(1,343
)
 
$
108,269
 
  U.S. treasury securities
   
33,798
     
-
     
(961
)
   
32,837
 
  Obligations of state and
                               
    political subdivisions
   
51,941
     
116
     
(459
)
   
51,598
 
  Corporate obligations
   
3,000
     
-
     
-
     
3,000
 
  Mortgage-backed securities in
                               
    government sponsored entities
   
45,951
     
2
     
(1,231
)
   
44,722
 
Total available-for-sale securities
 
$
244,302
   
$
118
   
$
(3,994
)
 
$
240,426
 
                                 
December 31, 2017
                               
Available-for-sale securities:
                               
  U.S. agency securities
 
$
99,454
   
$
26
   
$
(593
)
 
$
98,887
 
  U.S. treasury securities
   
28,782
     
-
     
(178
)
   
28,604
 
  Obligations of state and
                               
    political subdivisions
   
78,409
     
820
     
(139
)
   
79,090
 
  Corporate obligations
   
3,000
     
83
     
-
     
3,083
 
  Mortgage-backed securities in
                               
    government sponsored entities
   
45,385
     
19
     
(377
)
   
45,027
 
  Equity securities in financial institutions
   
92
     
-
     
(1
)
   
91
 
Total available-for-sale securities
 
$
255,122
   
$
948
   
$
(1,288
)
 
$
254,782
 

The following table shows the Company's gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time, which individual securities have been in a continuous unrealized loss position, at September 30, 2018 and December 31, 2017 (in thousands). As of September 30, 2018, the Company owned 143 securities whose fair value was less than their cost basis.
 
8


September 30, 2018
 
Less than Twelve Months
   
Twelve Months or Greater
   
Total
 
         
Gross
         
Gross
         
Gross
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
U.S. agency securities
 
$
54,399
   
$
(656
)
 
$
40,554
   
$
(687
)
 
$
94,953
   
$
(1,343
)
U.S. treasury securities
   
32,837
     
(961
)
   
-
     
-
   
 
32,837
   
 
(961
)
Obligations of state and
                                               
    political subdivisions
   
26,648
     
(249
)
   
8,381
     
(210
)
   
35,029
     
(459
)
Mortgage-backed securities in
                                               
   government sponsored entities
   
17,167
     
(299
)
   
24,056
     
(932
)
   
41,223
     
(1,231
)
    Total securities
 
$
131,051
   
$
(2,165
)
 
$
72,991
   
$
(1,829
)
 
$
204,042
   
$
(3,994
)
                                                 
December 31, 2017
                                               
U.S. agency securities
 
$
74,952
   
$
(421
)
 
$
16,928
   
$
(172
)
 
$
91,880
   
$
(593
)
U.S. treasury securities
   
28,604
     
(178
)
   
-
     
-
     
28,604
     
(178
)
Obligations of states and
                                               
     political subdivisions
   
14,885
     
(85
)
   
5,958
     
(54
)
   
20,843
     
(139
)
Mortgage-backed securities in
                                               
   government sponsored entities
   
27,154
     
(190
)
   
13,822
     
(187
)
   
40,976
     
(377
)
Equity securities in financial institutions
   
91
     
(1
)
   
-
     
-
     
91
     
(1
)
    Total securities
 
$
145,686
   
$
(875
)
 
$
36,708
   
$
(413
)
 
$
182,394
   
$
(1,288
)

As of September 30, 2018 and December 31, 2017, the Company's investment securities portfolio contained unrealized losses on agency securities issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, U.S treasury securities, obligations of states and political subdivisions and mortgage backed securities issued by government sponsored entities. For fixed maturity investments management considers whether the present value of cash flows expected to be collected are less than the security's amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company's intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of the security's amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. 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 nine months ended September 30, 2018 and 2017 were $25,168,000 and $30,393,000, respectively. Proceeds from sales of securities available-for-sale for the three months ended September 30, 2018 were $25,168,000. There were no sales of available for sale securities during the three months ended September 30, 2017. The gross gains and losses were as follows (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
Sept. 30,
   
Sept. 30,
 
 
 
2018
   
2017
   
2018
   
2017
 
Gross gains on available for sale securities
 
$
161
   
$
9
   
$
161
   
$
211
 
Gross losses on available for sale securities
   
(169
)
   
-
     
(169
)
   
(7
)
Net gains
 
$
(8
)
 
$
9
   
$
(8
)
 
$
204
 

The following table presents the net gains on the Company's equity investments recognized in earnings during the three month and nine month periods ended September 30, 2018, and the portion of unrealized gains for the period that relates to equity investments held at September 30, 2018 (in thousands):
 
9


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

Investment securities with an approximate carrying value of $237.0 million and $243.4 million at September 30, 2018 and December 31, 2017, respectively, were pledged to secure public funds and certain other deposits.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.   The amortized cost and fair value of debt securities (excludes equity securities) at September 30, 2018, by contractual maturity, are shown below (in thousands):

   
Amortized
       
 
 
Cost
   
Fair Value
 
Available-for-sale debt securities:
           
  Due in one year or less
 
$
29,087
   
$
29,035
 
  Due after one year through five years
   
105,536
     
103,350
 
  Due after five years through ten years
   
59,609
     
58,574
 
  Due after ten years
   
50,070
     
49,467
 
Total
 
$
244,302
   
$
240,426
 

Note 5 – Loans

The Company grants loans primarily to customers throughout north central, central and south central Pennsylvania and the southern tier of New York.  Although the Company had a diversified loan portfolio at September 30, 2018 and December 31, 2017, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of September 30, 2018 and December 31, 2017 (in thousands):

September 30, 2018
 
Total Loans
   
Individually
evaluated for impairment
   
Loans acquired
with deteriorated
credit quality
   
Collectively
evaluated for impairment
 
Real estate loans:
                       
     Residential
 
$
213,255
   
$
915
   
$
30
   
$
212,310
 
     Commercial
   
312,982
     
14,148
     
1,345
     
297,489
 
     Agricultural
   
280,569
     
5,038
     
683
     
274,848
 
     Construction
   
30,262
     
-
     
-
     
30,262
 
Consumer
   
9,702
     
-
     
-
     
9,702
 
Other commercial loans
   
72,219
     
3,368
     
518
     
68,333
 
Other agricultural loans
   
39,917
     
1,448
     
-
     
38,469
 
State and political subdivision loans
   
101,425
     
-
     
-
     
101,425
 
Total
   
1,060,331
     
24,917
     
2,576
     
1,032,838
 
Allowance for loan losses
   
12,383
     
654
     
-
     
11,729
 
Net loans
 
$
1,047,948
   
$
24,263
   
$
2,576
   
$
1,021,109
 

10

 

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

Purchased loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses. Upon acquisition, the Company evaluates whether an acquired loan was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired ("PCI") loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Based upon management's review, there were no material decreases in the expected cash flows of these loans between the acquisition date and September 30, 2018. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of the loans' collateral. The carrying value of PCI loans was $2,576,000 and $2,638,000 at September 30, 2018 and December 31, 2017, respectively. The carrying value of the PCI loans was determined by projected discounted contractual cash flows and collateral valuations.

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

 
 
Three months ended
   
Nine months ended
 
 
 
September 30,
   
September 30,
 
 
 
2018
   
2017
   
2018
   
2017
 
Balance at beginning of period
 
$
59
   
$
167
   
$
106
   
$
389
 
Accretion
   
(24
)
   
(90
)
   
(71
)
   
(312
)
Reclassification of non-accretable discount
   
93
     
-
     
93
     
 
Balance at end of period
 
$
128
   
$
77
   
$
128
   
$
77
 

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

   
September 30, 2018
   
December 31, 2017
 
Outstanding balance
 
$
5,340
   
$
5,295
 
Carrying amount
   
2,576
     
2,638
 

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

11

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

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

 
       
Recorded
   
Recorded
             
 
 
Unpaid
   
Investment
   
Investment
   
Total
       
 
 
Principal
   
With No
   
With
   
Recorded
   
Related
 
September 30, 2018
 
Balance
   
Allowance
   
Allowance
   
Investment
   
Allowance
 
Real estate loans:
                             
     Mortgages
 
$
939
   
$
360
   
$
466
   
$
826
   
$
12
 
     Home Equity
   
108
     
12
     
77
     
89
     
15
 
     Commercial
   
17,043
     
12,595
     
1,553
     
14,148
     
224
 
     Agricultural
   
5,050
     
1,752
     
3,286
     
5,038
     
86
 
     Construction
   
-
     
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
-
     
-
 
Other commercial loans
   
3,956
     
2,990
     
378
     
3,368
     
152
 
Other agricultural loans
   
1,498
     
114
     
1,334
     
1,448
     
165
 
State and political subdivision loans
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
28,594
   
$
17,823
   
$
7,094
   
$
24,917
   
$
654
 

         
Recorded
   
Recorded
             
   
Unpaid
   
Investment
   
Investment
   
Total
       
 
 
Principal
   
With No
   
With
   
Recorded
   
Related
 
December 31, 2017
 
Balance
   
Allowance
   
Allowance
   
Investment
   
Allowance
 
Real estate loans:
                             
     Mortgages
 
$
1,055
   
$
273
   
$
700
   
$
973
   
$
47
 
     Home Equity
   
92
     
40
     
52
     
92
     
9
 
     Commercial
   
16,363
     
13,154
     
710
     
13,864
     
94
 
     Agricultural
   
5,231
     
3,283
     
618
     
3,901
     
3
 
     Construction
   
-
     
-
     
-
     
-
     
-
 
Consumer
   
10
     
2
     
6
     
8
     
-
 
Other commercial loans
   
4,739
     
3,766
     
431
     
4,197
     
231
 
Other agricultural loans
   
1,397
     
1,238
     
125
     
1,363
     
26
 
State and political subdivision loans
   
-
     
-
     
-
     
-
     
-
 
Total
 
$
28,887
   
$
21,756
   
$
2,642
   
$
24,398
   
$
410
 

The following tables includes the average balance of impaired financing receivables by class and the income recognized on these receivables for the three and nine month periods ended September 30, 2018 and 2017(in thousands):

12



 
 
For the Three Months Ended
 
 
 
September 30, 2018
   
September 30, 2017
 
 
             
Interest
               
Interest
 
 
 
Average
   
Interest
   
Income
   
Average
   
Interest
   
Income
 
 
 
Recorded
   
Income
   
Recognized
   
Recorded
   
Income
   
Recognized
 
 
 
Investment
   
Recognized
   
Cash Basis
   
Investment
   
Recognized
   
Cash Basis
 
Real estate loans:
                                   
     Mortgages
 
$
896
   
$
3
   
$
-
   
$
741
   
$
3
   
$
-
 
     Home Equity
   
92
     
2
     
-
     
70
     
1
     
-
 
     Commercial
   
14,116
     
130
     
6
     
13,663
     
122
     
2
 
     Agricultural
   
5,146
     
24
     
-
     
3,799
     
27
     
-
 
     Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Consumer
   
-
     
-
     
-
     
4
     
-
     
-
 
Other commercial loans
   
3,495
     
21
     
-
     
4,337
     
54
     
25
 
Other agricultural loans
   
1,453
     
2
     
-
     
1,443
     
10
     
-
 
State and political subdivision loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
25,198
   
$
182
   
$
6
   
$
24,057
   
$
217
   
$
27
 

 
 
For the Nine Months ended
 
 
 
September 30, 2018
   
September 30, 2017
 
 
             
Interest
               
Interest
 
 
 
Average
   
Interest
   
Income
   
Average
   
Interest
   
Income
 
 
 
Recorded
   
Income
   
Recognized
   
Recorded
   
Income
   
Recognized
 
 
 
Investment
   
Recognized
   
Cash Basis
   
Investment
   
Recognized
   
Cash Basis
 
Real estate loans:
                                   
     Mortgages
 
$
988
   
$
10
   
$
-
   
$
874
   
$
9
   
$
-
 
     Home Equity
   
98
     
4
     
-
     
62
     
3
     
-
 
     Commercial
   
13,915
     
372
     
14
     
10,812
     
280
     
5
 
     Agricultural
   
4,472
     
124
     
-
     
3,609
     
90
     
-
 
     Construction
   
-
     
-
     
-
     
-
     
-
     
-
 
Consumer
   
2
     
-
     
-
     
2
     
-
     
-
 
Other commercial loans
   
3,906
     
73
     
-
     
4,988
     
131
     
52
 
Other agricultural loans
   
1,388
     
21
     
-
     
1,528
     
55
     
-
 
State and political subdivision loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
24,769
   
$
604
   
$
14
   
$
21,875
   
$
568
   
$
57
 

Credit Quality Information

For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision loans, management uses a nine grade internal risk rating system to monitor and assess  credit quality. The first five categories are considered not criticized and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:
·
Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.
·
Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.
·
Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
·
Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.
 
13

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

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company's loan rating process includes several layers of internal and external oversight. The Company's loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management.  All commercial, agricultural and state and political loans are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) review new loans originated for over $1.0 million in the last year, 3) review a majority of borrowers with commitments greater than or equal to $1.0 million,  4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of September 30, 2018 and December 31, 2017 (in thousands):

September 30, 2018
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Ending Balance
 
Real estate loans:
                                   
     Commercial
 
$
289,909
   
$
12,540
   
$
10,415
   
$
118
   
$
-
   
$
312,982
 
     Agricultural
   
260,554
     
14,619
     
5,396
     
-
     
-
     
280,569
 
     Construction
   
30,262
     
-
     
-
     
-
     
-
     
30,262
 
Other commercial loans
   
68,449
     
732
     
2,918
     
120
     
-
     
72,219
 
Other agricultural loans
   
36,320
     
2,288
     
1,309
     
-
     
-
     
39,917
 
State and political
                                               
   subdivision loans
   
91,136
     
9,686
     
603
     
-
     
-
     
101,425
 
Total
 
$
776,630
   
$
39,865
   
$
20,641
   
$
238
   
$
-
   
$
837,374
 

December 31, 2017
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Ending Balance
 
Real estate loans:
                                   
     Commercial
 
$
281,742
   
$
15,029
   
$
11,271
   
$
42
   
$
-
   
$
308,084
 
     Agricultural
   
222,198
     
11,538
     
6,221
     
-
     
-
     
239,957
 
     Construction
   
13,364
     
-
     
138
     
-
     
-
     
13,502
 
Other commercial loans
   
67,706
     
615
     
3,567