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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 
ý
Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2018. 
o
Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

For the Transition Period from                    to                   .

No. 0-17077
(Commission File Number)

PENNS WOODS BANCORP, INC.
(Exact name of Registrant as specified in its charter) 
PENNSYLVANIA
 
23-2226454
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
300 Market Street, P.O. Box 967 Williamsport, Pennsylvania
 
17703-0967
(Address of principal executive offices)
 
(Zip Code)
 

(570) 322-1111
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required 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 ý NO o

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 ý NO o

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 definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):

 
Large accelerated filer o
 
                 Accelerated filer x
  Non-accelerated filer o
 
   Small reporting company x
 
 
Emerging growth company o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO ý

On November 1, 2018 there were 4,691,102 shares of the Registrant’s common stock outstanding.

Table of Contents


PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents


Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
 
September 30,
 
December 31,
(In Thousands, Except Share Data)
 
2018
 
2017
ASSETS:
 
 

 
 

Noninterest-bearing balances
 
$
33,675

 
$
25,692

Interest-bearing balances in other financial institutions
 
38,672

 
1,551

Total cash and cash equivalents
 
72,347

 
27,243

 
 
 
 
 
Investment debt securities, available for sale, at fair value
 
128,905

 
108,627

Investment equity securities, at fair value
 
1,902


2,516

Investment securities, trading
 
45

 
190

Restricted investment in bank stock, at fair value
 
17,834

 
13,332

Loans held for sale
 
3,727

 
1,196

Loans
 
1,369,105

 
1,246,614

Allowance for loan losses
 
(13,343
)
 
(12,858
)
Loans, net
 
1,355,762

 
1,233,756

Premises and equipment, net
 
27,361

 
27,386

Accrued interest receivable
 
5,353

 
4,321

Bank-owned life insurance
 
28,472

 
27,982

Goodwill
 
17,104

 
17,104

Intangibles
 
1,233

 
1,462

Deferred tax asset
 
5,310

 
4,388

Other assets
 
4,993

 
4,989

TOTAL ASSETS
 
$
1,670,348

 
$
1,474,492

 
 
 
 
 
LIABILITIES:
 
 

 
 

Interest-bearing deposits
 
$
897,366

 
$
843,004

Noninterest-bearing deposits
 
313,111

 
303,316

Total deposits
 
1,210,477

 
1,146,320

 
 
 
 
 
Short-term borrowings
 
164,465

 
100,748

Long-term borrowings
 
138,970

 
70,970

Accrued interest payable
 
1,051

 
502

Other liabilities
 
14,846

 
17,758

TOTAL LIABILITIES
 
1,529,809

 
1,336,298

 
 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 

 
 

Preferred stock, no par value, 3,000,000 shares authorized; no shares issued
 
—

 
—

Common stock, par value $8.33, 15,000,000 shares authorized; 5,011,063 and 5,009,339 shares issued; 4,690,913 and 4,689,189 outstanding
 
41,757

 
41,744

Additional paid-in capital
 
50,577

 
50,173

Retained earnings
 
67,802

 
63,364

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized loss on available for sale securities
 
(2,663
)
 
(54
)
Defined benefit plan
 
(4,820
)
 
(4,920
)
Treasury stock at cost, 320,150
 
(12,115
)
 
(12,115
)
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS' EQUITY
 
140,538

 
138,192

Non-controlling interest
 
1

 
2

TOTAL SHAREHOLDERS' EQUITY
 
140,539

 
138,194

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,670,348

 
$
1,474,492


See accompanying notes to the unaudited consolidated financial statements.

3
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands, Except Per Share Data)
 
2018
 
2017
 
2018
 
2017
INTEREST AND DIVIDEND INCOME:
 
 

 
 

 
 

 
 

Loans, including fees
 
$
13,982

 
$
11,906

 
$
39,172

 
$
33,642

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
713

 
553

 
1,898

 
1,665

Tax-exempt
 
207

 
319

 
678

 
940

Dividend and other interest income
 
296

 
170

 
762

 
592

TOTAL INTEREST AND DIVIDEND INCOME
 
15,198

 
12,948

 
42,510

 
36,839

INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Deposits
 
1,659

 
1,058

 
4,371

 
2,968

Short-term borrowings
 
528

 
31

 
1,004

 
39

Long-term borrowings
 
756

 
407

 
2,024

 
1,220

TOTAL INTEREST EXPENSE
 
2,943

 
1,496

 
7,399

 
4,227

NET INTEREST INCOME
 
12,255

 
11,452

 
35,111

 
32,612

PROVISION FOR LOAN LOSSES
 
480

 
60

 
975

 
605

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
11,775

 
11,392

 
34,136

 
32,007

NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Service charges
 
645

 
550

 
1,788

 
1,637

Net debt securities (losses) gains, available for sale
 
(22
)
 
302

 
(17
)
 
487

Net equity securities (losses)
 
(16
)
 
—

 
(44
)
 
—

Net securities gains (losses), trading
 
14

 
(4
)
 
12

 
(2
)
Bank-owned life insurance
 
165

 
166

 
496

 
499

Gain on sale of loans
 
398

 
455

 
1,053

 
1,316

Insurance commissions
 
85

 
109

 
266

 
399

Brokerage commissions
 
340

 
352

 
1,013

 
1,044

Debit card fees
 
359

 
514

 
1,065

 
1,450

Other
 
621

 
296

 
1,400

 
1,325

TOTAL NON-INTEREST INCOME
 
2,589

 
2,740

 
7,032

 
8,155

NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
5,420

 
4,738

 
15,387

 
14,116

Occupancy
 
640

 
603

 
2,080

 
1,855

Furniture and equipment
 
780

 
816

 
2,328

 
2,129

Software amortization
 
208

 
235

 
504

 
750

Pennsylvania shares tax
 
278

 
228

 
833

 
696

Professional fees
 
459

 
560

 
1,674

 
1,816

Federal Deposit Insurance Corporation deposit insurance
 
237

 
194

 
639

 
514

Marketing
 
245

 
315

 
764

 
690

Intangible amortization
 
71

 
81

 
229

 
256

Other
 
1,343

 
1,796

 
4,037

 
4,792

TOTAL NON-INTEREST EXPENSE
 
9,681

 
9,566

 
28,475

 
27,614

INCOME BEFORE INCOME TAX PROVISION
 
4,683

 
4,566

 
12,693

 
12,548

INCOME TAX PROVISION
 
857

 
1,282

 
2,179

 
3,491

CONSOLIDATED NET INCOME
 
$
3,826

 
$
3,284

 
$
10,514

 
$
9,057

Less: Net loss attributable to noncontrolling interest
 
—

 
—

 
(1
)
 
—

NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC.
 
$
3,826

 
$
3,284

 
$
10,515

 
$
9,057

EARNINGS PER SHARE - BASIC
 
$
0.82

 
$
0.70

 
$
2.24

 
$
1.92

EARNINGS PER SHARE - DILUTED
 
$
0.82

 
$
0.70

 
$
2.24

 
$
1.92

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
 
4,690,560

 
4,688,222

 
4,689,960

 
4,711,282

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED
 
4,690,560

 
4,688,222

 
4,689,960

 
4,711,282

DIVIDENDS DECLARED PER SHARE
 
$
0.47

 
$
0.47

 
$
1.41

 
$
1.41

See accompanying notes to the unaudited consolidated financial statements.

4
Table of Contents




PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
3,826

 
$
3,284

 
$
10,515

 
$
9,057

Other comprehensive (loss) income:
 
 

 
 

 
 

 
 

Change in unrealized (loss) gain on available for sale securities
 
(789
)
 
437

 
(2,641
)
 
1,565

Tax effect
 
166

 
(150
)
 
556

 
(532
)
Net realized loss (gain) on available for sale securities included in net income
 
22

 
(302
)
 
17

 
(487
)
Tax effect
 
(5
)
 
104

 
(4
)
 
166

   Amortization of unrecognized pension gain
 
41

 
45

 
125

 
129

        Tax effect
 
(8
)
 
(15
)
 
(25
)
 
(43
)
Total other comprehensive (loss) income
 
(573
)
 
119

 
(1,972
)
 
798

Comprehensive income
 
$
3,253

 
$
3,403

 
$
8,543

 
$
9,855

 
See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)



 Three months ended:

 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 
TREASURY STOCK
 
NON-CONTROLLING INTEREST
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
 
Balance, June 30, 2018
 
5,010,535

 
$
41,753

 
$
50,225

 
$
66,181

 
$
(6,910
)
 
$
(12,115
)
 
$
1

 
$
139,135

Net income
 
 

 
 

 
 

 
3,826

 
 

 
 

 
 
 
3,826

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(573
)
 
 
 
 
 
(573
)
Stock-based compensation
 
 
 
 
 
333

 
 
 
 

 
 

 
 
 
333

Dividends declared ($0.47 per share)
 
 

 
 

 
 

 
(2,205
)
 
 

 
 

 
 
 
(2,205
)
Common shares issued for employee stock purchase plan
 
528

 
4

 
19

 
 

 
 
 
 
 
 
 
23

Balance, September 30, 2018
 
5,011,063

 
$
41,757

 
$
50,577

 
$
67,802

 
$
(7,483
)
 
$
(12,115
)
 
$
1

 
$
140,539



 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 
TREASURY STOCK
 
NON-CONTROLLING INTEREST
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
 
Balance, June 30, 2017
 
5,008,192

 
$
41,735

 
$
50,117

 
$
62,952

 
$
(4,249
)
 
$
(12,115
)
 
$
—

 
$
138,440

Net income
 
 

 
 

 
 

 
3,284

 
 

 
 

 
 
 
3,284

Other comprehensive income
 
 

 
 

 
 

 
 

 
119

 
 

 
 
 
119

Stock-based compensation
 
 
 
 
 
7

 
 
 
 
 
 
 
 
 
7

Dividends declared ($0.47 per share)
 
 

 
 

 
 

 
(2,203
)
 
 

 
 

 
 
 
(2,203
)
Common shares issued for employee stock purchase plan
 
528

 
4

 
18

 
 

 
 

 
 

 
 
 
22

Balance, September 30, 2017
 
5,008,720

 
$
41,739

 
$
50,142

 
$
64,033

 
$
(4,130
)
 
$
(12,115
)
 
$
—

 
$
139,669






See accompanying notes to the unaudited consolidated financial statements.





6
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)


Nine months ended:

 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 
TREASURY STOCK
 
NON-CONTROLLING INTEREST
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
 
Balance, December 31, 2017
 
5,009,339

 
$
41,744

 
$
50,173

 
$
63,364

 
$
(4,974
)
 
$
(12,115
)
 
$
2

 
$
138,194

Net income
 
 

 
 

 
 

 
10,515

 
 

 
 

 
(1
)
 
10,514

Adoption of ASU 2016-01
 
 
 
 
 
 
 
537

 
(537
)
 
 
 
 
 
—

Other comprehensive loss
 
 

 
 

 
 

 
 

 
(1,972
)
 
 

 
 
 
(1,972
)
Stock-based compensation
 
 
 
 
 
345

 
 
 
 
 
 
 
 
 
345

Dividends declared ($1.41 per share)
 
 

 
 

 
 

 
(6,614
)
 
 

 
 

 
 
 
(6,614
)
Common shares issued for employee stock purchase plan
 
1,724

 
13

 
59

 
 

 
 

 
 

 
 
 
72

Balance, September 30, 2018
 
5,011,063

 
$
41,757

 
$
50,577

 
$
67,802

 
$
(7,483
)
 
$
(12,115
)
 
$
1

 
$
140,539



 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE LOSS
 
TREASURY STOCK
 
NON-CONTROLLING INTEREST
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
 
Balance, December 31, 2016
 
5,007,109

 
$
41,726

 
$
50,075

 
$
61,610

 
$
(4,928
)
 
$
(10,234
)
 
$
—

 
$
138,249

Net income
 
 

 
 

 
 

 
9,057

 
 

 
 

 
 
 
9,057

Other comprehensive income
 
 

 
 

 
 

 
 
 
798

 
 

 
 
 
798

Stock-based compensation
 
 
 
 
 
14

 
 
 
 
 
 
 
 
 
14

Dividends declared ($1.41 per share)
 
 

 
 

 
 

 
(6,634
)
 
 

 
 

 
 
 
(6,634
)
Common shares issued for employee stock purchase plan
 
1,611

 
13

 
53

 
 

 
 

 
 

 
 
 
66

Purchase of treasury stock (47,698 shares)
 
 
 
 
 
 
 
 
 
 
 
(1,881
)
 
 
 
(1,881
)
Balance, September 30, 2017
 
5,008,720

 
$
41,739

 
$
50,142

 
$
64,033

 
$
(4,130
)
 
$
(12,115
)
 
$
—

 
$
139,669





See accompanying notes to the unaudited consolidated financial statements.

7
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
 
 
Nine Months Ended September 30,
(In Thousands)
 
2018
 
2017
OPERATING ACTIVITIES:
 
 

 
 

Net Income
 
$
10,515

 
$
9,057

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
1,907

 
1,979

Amortization of intangible assets
 
229

 
256

Provision for loan losses
 
975

 
605

Accretion and amortization of investment security discounts and premiums
 
591

 
688

Net securities losses (gains), available for sale
 
17

 
(487
)
Originations of loans held for sale
 
(39,979
)
 
(41,503
)
Proceeds of loans held for sale
 
38,501

 
43,038

Gain on sale of loans
 
(1,053
)
 
(1,316
)
Net equity securities losses
 
44

 
—

Net securities (gains) losses, trading
 
(12
)
 
2

Proceeds from the sale of trading securities
 
466

 
332

Purchases of trading securities
 
(309
)
 
(486
)
Earnings on bank-owned life insurance
 
(496
)
 
(499
)
(Decrease) increase in deferred tax asset
 
(370
)
 
46

Other, net
 
(953
)
 
(4,361
)
Net cash provided by operating activities
 
10,073

 
7,351

INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of available for sale securities
 
14,528

 
15,443

Proceeds from calls and maturities of available for sale securities
 
6,160

 
7,198

Purchases of available for sale securities
 
(45,473
)
 
(18,434
)
Net increase in loans
 
(123,857
)
 
(97,109
)
Acquisition of premises and equipment
 
(1,374
)
 
(2,849
)
Proceeds from the sale of foreclosed assets
 
253

 
958

Purchase of bank-owned life insurance
 
(36
)
 
(34
)
Proceeds from redemption of regulatory stock
 
12,073

 
4,844

Purchases of regulatory stock
 
(16,575
)
 
(6,994
)
Net cash used for investing activities
 
(154,301
)
 
(96,977
)
FINANCING ACTIVITIES:
 
 

 
 

Net increase in interest-bearing deposits
 
54,362

 
51,229

Net increase in noninterest-bearing deposits
 
9,795

 
7,553

Proceeds from long-term borrowings
 
80,000

 
30,000

Repayment of long-term borrowings
 
(12,000
)
 
(35,000
)
Net increase in short-term borrowings
 
63,717

 
28,355

Dividends paid
 
(6,614
)
 
(6,634
)
Issuance of common stock
 
72

 
80

Purchases of treasury stock
 
—

 
(1,881
)
Net cash provided by financing activities
 
189,332

 
73,702

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
45,104

 
(15,924
)
CASH AND CASH EQUIVALENTS, BEGINNING
 
27,243

 
43,671

CASH AND CASH EQUIVALENTS, ENDING
 
$
72,347

 
$
27,747

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
6,850

 
$
4,199

Income taxes paid
 
1,925

 
3,950

Transfer of loans to foreclosed real estate
 
876

 
508

Transfer due to adoption of ASU 2016-01, equity securities fair value adjust, reclassification from AOCI to Retained Earnings, net of tax
 
537

 
—

See accompanying notes to the unaudited consolidated financial statements.

8
Table of Contents


PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 

Note 1.  Basis of Presentation
 
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”).  The Company also owns a controlling interest in United Insurance Solutions, LLC. All significant inter-company balances and transactions have been eliminated in the consolidation.

The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Tax Cuts and Jobs Act

Public law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 34% to 21% effective January 1, 2018. Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the rules, the Company estimated the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities. The amount recorded in the fourth quarter of 2017 related to the remeasurement of the Company's deferred tax balance resulted in additional income tax expense of $2.7 million.

Newly Adopted Accounting Standards

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. Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 13.

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.

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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. Upon adoption on January 1, 2018, the Company made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $537,000. The net effect was an increase to retained earnings.

In August 2018, the Securities and Exchange Commission issued Final Rule Release No. 33-10532 - “Disclosure Update and Simplification.” The rule changes implemented by the Release amend, effective November 5, 2018, various SEC disclosure requirements that have been determined to be redundant, duplicative, overlapping, outdated, or superseded. The changes are generally expected to reduce or eliminate certain disclosures; however, the amendments did expand interim period disclosure requirements related to changes in shareholders' equity. The presentation of the Statement of Changes in Shareholders' Equity contained herein for the three and nine months ended September 30, 2018 includes the disclosures required by the Release.

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 40 through 50 of the Form 10-K for the year ended December 31, 2017.

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.
 
Note 2.  Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component shown net of tax and parenthesis indicating debits, as of September 30, 2018 and 2017 were as follows:
 
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
(In Thousands)
 
Net Unrealized Loss
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
 
Net Unrealized Gain
(Loss) on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
Beginning balance
 
$
(2,057
)
 
$
(4,853
)
 
$
(6,910
)
 
$
(16
)
 
$
(4,233
)
 
$
(4,249
)
Other comprehensive (loss) gain before reclassifications
 
(623
)
 
—

 
(623
)
 
287

 
—

 
287

Amounts reclassified from accumulated other comprehensive loss
 
17

 
33

 
50

 
(198
)
 
30

 
(168
)
Net current-period other comprehensive (loss) income
 
(606
)
 
33

 
(573
)
 
89

 
30

 
119

Ending balance
 
$
(2,663
)
 
$
(4,820
)
 
$
(7,483
)
 
$
73

 
$
(4,203
)
 
$
(4,130
)
 
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
(In Thousands)
 
Net Unrealized Loss
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
 
Net Unrealized Gain (Loss) on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
Beginning balance
 
$
(54
)
 
$
(4,920
)
 
$
(4,974
)
 
$
(639
)
 
$
(4,289
)
 
$
(4,928
)
Other comprehensive (loss) gain before reclassifications
 
(2,085
)
 
—

 
(2,085
)
 
1,033

 
—

 
1,033

Amounts reclassified from accumulated other comprehensive loss
 
13

 
100

 
113

 
(321
)
 
86

 
(235
)
Net current-period other comprehensive (loss) income
 
(2,072
)
 
100

 
(1,972
)
 
712

 
86

 
798

Reclassification from adoption of 2016-01
 
(537
)
 
—

 
(537
)
 
—

 
—

 
—

Ending balance
 
$
(2,663
)
 
$
(4,820
)
 
$
(7,483
)
 
$
73

 
$
(4,203
)
 
$
(4,130
)








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The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of September 30, 2018 and 2017 were as follows:
Details about Accumulated Other Comprehensive Loss Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Net unrealized (loss) gain on available for sale securities
 
$
(22
)
 
$
302

 
Net securities (losses) gains, available for sale
Income tax effect
 
5

 
(104
)
 
Income tax provision
Total reclassifications for the period
 
$
(17
)
 
$
198

 
 
 
 
 
 
 
 
 
Net unrecognized pension costs
 
$
(41
)
 
$
(45
)
 
Salaries and employee benefits
Income tax effect
 
8

 
15

 
Income tax provision
Total reclassifications for the period
 
$
(33
)
 
$
(30
)
 
 
Details about Accumulated Other Comprehensive Loss Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
 
Net unrealized (loss) gain on available for sale securities
 
$
(17
)
 
$
487

 
Net securities gains, available for sale
Income tax effect
 
4

 
(166
)
 
Income tax provision
Total reclassifications for the period
 
$
(13
)
 
$
321

 
 
 
 
 
 
 
 
 
Net unrecognized pension costs
 
$
(125
)
 
$
(129
)
 
Salaries and employee benefits
Income tax effect
 
25

 
43

 
Income tax provision
Total reclassifications for the period
 
$
(100
)
 
$
(86
)
 
 
 
Note 3.  Recent Accounting Pronouncements

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 on 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 percent 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 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

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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. This Update is not expected to have a significant impact on the Company’s financial statements.

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. This Update is not expected to have a significant impact on the Company’s financial statements.
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. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of 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 in Part I of this Update 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 for all entities, 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

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that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Company’s financial statements.

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10-45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging-Embedded Derivatives, or 825-10, Financial Instruments-Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services- Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.


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In March 2018, the FASB issued ASU 2018-04, Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU 2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This Update provides another transition method which allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods in accordance with ASC 840, Leases. In addition, this Update provides a practical expedient under which lessors may elect, by class of underlying assets, to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (b) the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC 606, Revenue from Contracts with Customers. Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. 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. This Update is not expected to have a significant impact on the Company’s financial statements.

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

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

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud

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computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.


Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 263,700 stock options, with an average exercise price of $45.11, outstanding on September 30, 2018. All options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares being $43.84 for the period. There were a total of 95,000 stock options outstanding for the same period end in 2017 that had an average exercise price of $43.64 and were excluded, on a weighted average basis, in the computation of diluted earnings per share because the quarterly average closing market price of common shares was $43.53 for the period. Net income as presented on the consolidated statement of income is used as the numerator.  The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive earnings per share computation.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Weighted average common shares issued
 
5,010,710

 
5,008,372

 
5,010,110

 
5,007,796

Weighted average treasury stock shares
 
(320,150
)
 
(320,150
)
 
(320,150
)
 
(296,514
)
Weighted average common shares outstanding - basic and diluted
 
4,690,560

 
4,688,222

 
4,689,960

 
4,711,282

 

Note 5. Investment Securities
 
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at September 30, 2018 and December 31, 2017 are as follows:
 
 
September 30, 2018
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS):
 
 

 
 

 
 

 
 

Mortgage-backed securities
 
$
6,475

 
$
7

 
$
(255
)
 
$
6,227

State and political securities
 
75,859

 
68

 
(1,264
)
 
74,663

Other debt securities
 
49,942

 
2

 
(1,929
)
 
48,015

Total debt securities
 
$
132,276

 
$
77

 
$
(3,448
)
 
$
128,905

 
 
 
 
 
 
 
 
 
Investment equity securities:
 
 
 
 
 
 
 
 
Financial institution equity securities
 
$
328

 
$
362

 
$
—

 
$
690

Other equity securities
 
1,300

 
—

 
(88
)
 
1,212

Investment equity securities
 
$
1,628

 
$
362

 
$
(88
)
 
$
1,902

 
 
 
 
 
 
 
 
 
Trading:
 
 
 
 
 
 
 
 
Other equity securities
 
$
49

 
$
—

 
$
(4
)
 
$
45

 
 
 
 
 
 
 
 
 

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December 31, 2017
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS):
 
 

 
 

 
 

 
 

Mortgage-backed securities
 
$
4,273

 
$
51

 
$
(111
)
 
$
4,213

State and political securities
 
56,295

 
411

 
(198
)
 
56,508

Other debt securities
 
48,806

 
180

 
(1,080
)
 
47,906

Total debt securities
 
$
109,374

 
$
642

 
$
(1,389
)
 
$
108,627

 
 
 
 
 
 
 
 
 
Investment equity securities:
 
 
 
 
 
 
 
 
Financial institution equity securities
 
$
537

 
$
728

 
$
—

 
$
1,265

Other equity securities
 
1,300

 
—

 
(49
)
 
1,251

Investment equity securities
 
$
1,837

 
$
728

 
$
(49
)
 
$
2,516

 
 
 
 
 
 
 
 


Trading:
 
 
 
 
 
 
 
 
Financial institution equity securities
 
$
20

 
$
—

 
$
—

 
$
20

Other equity securities
 
192

 
2

 
(24
)
 
170

Trading investment equity securities
 
$
212

 
$
2

 
$
(24
)
 
$
190

 
 
 
 
 
 
 
 
 

Total net trading gains of $14,000 and $12,000 for the three and nine months ended September 30, 2018 along with net trading losses of $4,000 and $2,000 for the three and nine months ended September 30, 2017 are included in the Consolidated Statement of Income.

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at September 30, 2018 and December 31, 2017.
 
 
September 30, 2018
 
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(In Thousands)
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Available for sale (AFS):
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
3,084

 
$
(42
)
 
$
2,943

 
$
(213
)
 
$
6,027

 
$
(255
)
State and political securities
 
47,314

 
(774
)
 
11,311

 
(490
)
 
58,625

 
(1,264
)
Other debt securities
 
18,225

 
(436
)
 
27,779

 
(1,493
)
 
46,004

 
(1,929
)
Total debt securities
 
$
68,623

 
$
(1,252
)
 
$
42,033

 
$
(2,196
)
 
$
110,656

 
$
(3,448
)
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
December 31, 2017
 
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(In Thousands)
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Available for sale (AFS):
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
981

 
$
(12
)
 
$
2,276

 
$
(99
)
 
$
3,257

 
$
(111
)
State and political securities
 
15,691

 
(104
)
 
3,018

 
(94
)
 
18,709

 
(198
)
Other debt securities
 
7,512

 
(148
)
 
28,517

 
(932
)
 
36,029

 
(1,080
)
Total debt securities
 
$
24,184

 
$
(264
)
 
$
33,811

 
$
(1,125
)
 
$
57,995

 
$
(1,389
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other equity securities
 
$
1,251

 
$
(49
)
 
$
—

 
$
—

 
$
1,251

 
$
(49
)
 

16
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At September 30, 2018, there were a total of 71 securities in a continuous unrealized loss position for less than twelve months and 42 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at September 30, 2018, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.  The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at September 30, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands)
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
3,972

 
$
3,967

Due after one year to five years
 
45,584

 
44,327

Due after five years to ten years
 
64,109

 
62,345

Due after ten years
 
18,611

 
18,266

Total
 
$
132,276

 
$
128,905


Total gross proceeds from sales of debt securities available for sale for the three and nine months ended September 30, 2018 were $10,450,000 and $14,528,000, a decrease from the 2017 totals of $6,478,000 and $15,443,000.

The following table represents gross realized gains and losses within the available for sale portfolio:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2018
 
2017
 
2018
 
2017
Available for sale (AFS):
 
 
 
 
 
 
 
 
Gross realized gains:
 
 

 
 

 
 

 
 

Mortgage-backed securities
 
$
22

 
$
—

 
$
27

 
$
69

State and political securities
 
—

 
313

 
19

 
343

Other debt securities
 
3

 
5

 
3

 
5

Total gross realized gains
 
$
25

 
$
318

 
$
49

 
$
417

 
 
 
 
 
 
 
 
 
Gross realized losses:
 
 

 
 

 
 

 
 

State and political securities
 
$
47

 
$
16

 
$
56

 
$
17

Other debt securities
 
—

 
—

 
10

 
51

Total gross realized losses
 
$
47

 
$
16

 
$
66

 
$
68

 
 
 
 
 
 
 
 
 
Investment equity securities:
 
 
 
 
 
 
 
 
Gross realized gains:
 
 
 
 
 
 
 
 
Financial institution equity securities
 
$
—

 
$
—

 
$
—

 
$
288

 
 
 
 
 
 
 
 
 
Gross realized losses:
 
 
 
 
 
 
 
 
Other equity securities
 
$
—

 
$
—

 
$
—

 
$
150

 
 
 
 
 
 
 
 
 
There were no impairment charges included in gross realized losses for the three and nine months ended September 30, 2018 and 2017, respectively.

Investment securities with a carrying value of approximately $80,035,000 and $90,286,000 at September 30, 2018 and December 31, 2017, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

At September 30, 2018 and December 31, 2017, we had $1,902,000 and $2,516,000, respectively, in equity securities recorded at fair value. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. At December 31, 2017, net unrealized gains of $679,000 had been recognized in AOCI. On January

17
Table of Contents


1, 2018, these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net equity securities gains (losses). The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and nine months ended September 30, 2018:
(In Thousands)
 
Three Months Ended September 30, 2018
 
Nine months ended September 30, 2018
Net gains (losses) recognized in equity securities during the period
 
$
(16
)
 
$
(44
)
Less: Net gains (losses) realized on the sale of equity securities during the period
 
5

 
13

Unrealized gains (losses) recognized in equity securities held at reporting date
 
$
(21
)
 
$
(57
)
 
 
 
 
 

Net gains and losses on trading account securities are as follows for the three and nine months ended September 30, 2018:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2018
 
2017
 
2018
 
2017
Net gains (losses) on sale transactions
 
$
9

 
$