NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly owned subsidiaries, Jersey Shore State Bank (“JSSB”), Luzerne Bank ("Luzerne" collectively with JSSB "Banks"), Woods Real Estate Development Co., Inc., Woods Investment Company, Inc., and The M Group Inc. D/B/A The Comprehensive Financial Group (“The M Group”), a wholly owned subsidiary of the Bank (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.
Nature of Business
The Banks engage in a full-service commercial banking business, making available to the community a wide range of financial services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction financing, farm loans, community development loans, loans to non-profit entities and local government, and various types of time and demand deposits including, but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit, and IRAs. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law.
The financial services are provided by the Banks to individuals, partnerships, non-profit organizations, and corporations through their twenty-one offices located in Clinton, Lycoming, Centre, Montour, and Luzerne Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Banks.
Woods Investment Company, Inc., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and financial planning services, which include the sale of life insurance products, annuities, and estate planning services.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial service operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of net deferred tax assets, impairment of goodwill, other than temporary impairment of debt and equity securities, fair value of financial instruments, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Cash and Cash Equivalents
Cash equivalents include cash on hand and in banks. Interest-earning deposits mature within 90 days and are carried at cost. Net cash flows are reported for loan, deposit, and short-term borrowing transactions.
Restrictions on Cash and Cash Equivalents
Based on deposit levels, the Banks must maintain cash and other reserves with the Federal Reserve Bank of Philadelphia (FRB).
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available for sale securities are reported as a separate component of shareholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method for debt securities and the average cost method for marketable equity securities. Interest and dividends on investment securities are recognized as income when earned.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its fair value, whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in fair value, and a review of the Company’s capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, and management’s intent and ability requires considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statement of Income.
Investment securities fair values are based on observed market prices. Certain investment securities do not have observed bid prices and their fair value is based on instruments with similar risk elements. Since regulatory stock is redeemable at par, the Company carries it at cost.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are stated at the principal amount outstanding, net of deferred fees and discounts, unamortized loan fees and costs, and the allowance for loan losses. Interest on loans is recognized as income when earned on the accrual method. The Company’s general policy has been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectability of additional interest. Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in payment and, in management’s judgment, the borrower has the ability and intent to make future principal payments. Otherwise, payments are applied to the unpaid principal balance of the loan. Loans are restored to accrual status if certain conditions are met, including but not limited to, the repayment of all unpaid interest and scheduled principal due, ongoing performance consistent with the contractual agreement, and the future expectation of continued, timely payments.
Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and amortized as an adjustment to the related loan’s yield over the contractual lives of the related loans.
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio, as of the Consolidated Balance Sheet date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, historical loan loss experience, and general economic conditions. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at December 31, 2013, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, rising
unemployment, or negative performance trends in financial information from borrowers could be indicators of subsequent increased levels of nonperforming assets and possible charge-offs, which would normally require increased loan loss provisions. An integral part of the periodic regulatory examination process is the review of the adequacy of the Banks' loan loss allowance. The regulatory agencies could require the Banks, based on their evaluation of information available at the time of their examination, to provide additional loan loss provisions to further supplement the allowance.
Impaired loans are commercial and commercial real estate loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Banks may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Loan Charge-off Policies
Loans are generally fully or partially charged down to the fair value of collateral securing the asset when:
|
|
•
|
management judges the asset to be uncollectible;
|
|
|
•
|
repayment is deemed to be protracted beyond reasonable time frames;
|
|
|
•
|
the asset has been classified as a loss by either the internal loan review process or external examiners;
|
|
|
•
|
the borrower has filed bankruptcy and the loss becomes evident due to a lack of assets; or
|
|
|
•
|
the loan is
180
days past due unless both well secured and in the process of collection.
|
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.
In addition to the allowance for the pooled portfolios, management has developed a separate allowance for loans that are identified as impaired through a TDR. These loans are excluded from pooled loss forecasts and a separate reserve is provided under the accounting guidance for loan impairment. Consumer loans whose terms have been modified in a TDR are also individually analyzed for estimated impairment.
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Banks are held for sale and are carried at cost due to their short holding period, which can range from less than two weeks to a maximum of thirty days. Sold loans are not serviced by the Banks. Proceeds from the sale of loans in excess of the carrying value are accounted for as a gain. Total gains on the sale of loans are shown as a component of non-interest income within the Consolidated Statement of Income.
Foreclosed Assets
Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Net operating expenses and gains and losses realized from disposition are included in non-interest expense and income, respectively, within the Consolidated Statement of Income.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets, which range from
five
to
ten
years for furniture, fixtures, and equipment and
fifteen
to
forty
years for buildings and improvements. Costs incurred for routine maintenance and repairs are charged to operations as incurred. Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain officers and directors. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as a component of non-interest income within the Consolidated Statement of Income.
Goodwill
The Company performs an annual impairment analysis of goodwill for its purchased subsidiaries, Luzerne and The M Group. Based on the fair value of these reporting units, estimated using the expected present value of future cash flows, no impairment of goodwill was recognized in 2013, 2012, or 2011.
Intangible Assets
At December 31, 2013, the Company had intangible assets of
$1,801,000
as a result of the acquisition of Luzerne National Bank Corporation, which is net of accumulated amortization of
$213,000
. These intangible assets will continue to be amortized using the sum-of-the-years digits method of amortization over
ten
years.
Investments in Limited Partnerships
The Company is a limited partner in
four
partnerships at December 31, 2013 that provide low income elderly housing in the Company’s geographic market area. The carrying value of the Company’s investments in limited partnerships was $
2,221,000
at December 31, 2013 and
$2,883,000
at December 31, 2012.
One
investment is fully amortized, while the other
three
are being amortized over the
ten
-year tax credit receipt period utilizing the straight-line method. The partnerships are amortized once the projects reach the level of occupancy needed to begin the ten year tax credit recognition period. Amortization of limited partnership investments amounted to
$661,000
in 2013, 2012, and 2011.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments. Those instruments consist of commitments to extend credit and standby letters of credit. When those instruments are funded or become payable, the Company reports the amounts in its financial statements.
Advertising Cost
Advertising costs are generally expensed as incurred.
Income Taxes
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The Company analyzed its deferred tax asset position and determined that there was not a need for a valuation allowance due to the Company’s ability to generate future ordinary and capital taxable income.
The Company when applicable recognizes interest and penalties on income taxes as a component of income tax provision.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported in the numerator and weighted average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator.
Employee Benefits
Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the eligible employees of JSSB. The plan is funded on a current basis to the extent that it is deductible under existing federal tax regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees. Contributions matching those made by eligible employees are funded throughout the year. In addition, an elective contribution is made annually at the discretion of the board of directors for the employees of JSSB.
The M Group Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from life insurance sales are commission only, as The M Group does not underwrite the policies. Life insurance sales include permanent and term policies with the majority of the policies written being permanent. Term life insurance policies are written for
10
,
15
,
20
, and
30
year terms with the majority of the policies being written for
20
years. None of these products are offered as an integral part of lending activities.
Commissions from the sale of annuities are recognized at the time notice is received from the third party broker/dealer or an insurance company that the transaction has been accepted and approved, which is also the time when commission income is received.
Life insurance commissions are recognized at varying points based on the payment option chosen by the customer. Commissions from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete. For example, semi-annual payments on the first of January and July would result in commission income recognition on the first of January and July, while payments on the first of January, April, July, and October would result in commission income recognition on those dates. The potential for chargebacks only exists for those policies on a monthly payment plan since income is recognized at the beginning of the annual coverage period versus at the time of each monthly payment. No liability is maintained for chargebacks as these are removed from income at the time of the occurrence.
Accumulated Other Comprehensive Income
The Company is required to present accumulated other comprehensive income in a full set of general-purpose financial statements for all periods presented. Accumulated other comprehensive income is comprised of unrealized holding gains (losses) on the available for sale securities portfolio and the unrecognized components of net periodic benefit costs of the defined benefit pension plan.
Segment Reporting
The Company has determined that its only reportable segment is Community Banking.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect net income or shareholders’ equity.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. The amendments in this update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The Company has provided the necessary disclosures in Note 2 - Accumulated Other Comprehensive Income.
In July 2013, the FASB issued ASU 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
In January 2014, FASB issued ASU 2014-01,
Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.
The amendments in this update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial statements.
In January 2014, the FASB issued ASU 2014-04,
Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.
The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction
.
The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial statements.
NOTE 2 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income by component as of December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2013
|
(In Thousands)
|
|
Net Unrealized Gain (Loss) on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
Balance, December 31, 2012
|
|
$
|
10,164
|
|
|
$
|
(4,807
|
)
|
|
$
|
5,357
|
|
Other comprehensive (loss) income before reclassifications
|
|
(10,738
|
)
|
|
1,749
|
|
|
(8,989
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
(1,595
|
)
|
|
333
|
|
|
(1,262
|
)
|
Net current-period other comprehensive (loss) income
|
|
(12,333
|
)
|
|
2,082
|
|
|
(10,251
|
)
|
Balance, December 31, 2013
|
|
$
|
(2,169
|
)
|
|
$
|
(2,725
|
)
|
|
$
|
(4,894
|
)
|
The reclassifications out of accumulated other comprehensive income as of December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Details about Accumulated Other Comprehensive Income Components
|
|
Amount Reclassified from Accumulated
Other Comprehensive Income
|
|
Affected Line Item
in the Consolidated
Statement of Income
|
|
Twelve Months Ended December 31, 2013
|
|
Net unrealized loss on available for sale securities
|
|
$
|
(2,417
|
)
|
|
Securities gains, net
|
|
|
822
|
|
|
Income tax provision
|
Net unrecognized pension costs
|
|
504
|
|
|
Salaries and employee benefits
|
|
|
(171
|
)
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
(1,262
|
)
|
|
Net of tax
|
NOTE 3 - PER SHARE DATA
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share; therefore, net income as presented on the consolidated statement of income will be used as the numerator. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
Weighted average common shares issued
|
|
4,591,222
|
|
|
4,018,347
|
|
|
4,016,632
|
|
Average treasury stock shares
|
|
(180,596
|
)
|
|
(180,596
|
)
|
|
(180,596
|
)
|
Weighted average common shares used to calculate basic and diluted earnings per share
|
|
4,410,626
|
|
|
3,837,751
|
|
|
3,836,036
|
|
No stock options were outstanding during
2013
,
2012
, or
2011
.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at
December 31, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Available for sale (AFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
9,989
|
|
|
$
|
17
|
|
|
$
|
(83
|
)
|
|
$
|
9,923
|
|
Mortgage-backed securities
|
|
9,966
|
|
|
694
|
|
|
(68
|
)
|
|
10,592
|
|
Asset-backed securities
|
|
6,700
|
|
|
43
|
|
|
(179
|
)
|
|
6,564
|
|
State and political securities
|
|
145,121
|
|
|
2,120
|
|
|
(5,446
|
)
|
|
141,795
|
|
Other debt securities
|
|
108,939
|
|
|
879
|
|
|
(3,045
|
)
|
|
106,773
|
|
Total debt securities
|
|
280,715
|
|
|
3,753
|
|
|
(8,821
|
)
|
|
275,647
|
|
Financial institution equity securities
|
|
8,842
|
|
|
1,820
|
|
|
—
|
|
|
10,662
|
|
Other equity securities
|
|
2,342
|
|
|
28
|
|
|
(67
|
)
|
|
2,303
|
|
Total equity securities
|
|
11,184
|
|
|
1,848
|
|
|
(67
|
)
|
|
12,965
|
|
Total investment securities AFS
|
|
$
|
291,899
|
|
|
$
|
5,601
|
|
|
$
|
(8,888
|
)
|
|
$
|
288,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(In Thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Available for sale (AFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
3,312
|
|
|
$
|
183
|
|
|
$
|
—
|
|
|
$
|
3,495
|
|
Mortgage-backed securities
|
|
15,753
|
|
|
1,142
|
|
|
—
|
|
|
16,895
|
|
Asset-backed securities
|
|
5,410
|
|
|
59
|
|
|
(19
|
)
|
|
5,450
|
|
State and political securities
|
|
168,843
|
|
|
12,805
|
|
|
(1,424
|
)
|
|
180,224
|
|
Other debt securities
|
|
70,108
|
|
|
1,750
|
|
|
(259
|
)
|
|
71,599
|
|
Total debt securities
|
|
263,426
|
|
|
15,939
|
|
|
(1,702
|
)
|
|
277,663
|
|
Financial institution equity securities
|
|
8,422
|
|
|
1,140
|
|
|
(14
|
)
|
|
9,548
|
|
Other equity securities
|
|
2,068
|
|
|
74
|
|
|
(37
|
)
|
|
2,105
|
|
Total equity securities
|
|
10,490
|
|
|
1,214
|
|
|
(51
|
)
|
|
11,653
|
|
Total investment securities AFS
|
|
$
|
273,916
|
|
|
$
|
17,153
|
|
|
$
|
(1,753
|
)
|
|
$
|
289,316
|
|
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at
December 31, 2013
and
2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
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
|
U.S. Government and agency securities
|
|
$
|
7,740
|
|
|
$
|
(83
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,740
|
|
|
$
|
(83
|
)
|
Mortgage-backed securities
|
|
2,483
|
|
|
(68
|
)
|
|
—
|
|
|
—
|
|
|
2,483
|
|
|
(68
|
)
|
Asset-backed securities
|
|
3,847
|
|
|
(177
|
)
|
|
712
|
|
|
(2
|
)
|
|
4,559
|
|
|
(179
|
)
|
State and political securities
|
|
42,577
|
|
|
(2,558
|
)
|
|
8,233
|
|
|
(2,888
|
)
|
|
50,810
|
|
|
(5,446
|
)
|
Other debt securities
|
|
73,254
|
|
|
(3,045
|
)
|
|
—
|
|
|
—
|
|
|
73,254
|
|
|
(3,045
|
)
|
Total debt securities
|
|
129,901
|
|
|
(5,931
|
)
|
|
8,945
|
|
|
(2,890
|
)
|
|
138,846
|
|
|
(8,821
|
)
|
Other equity securities
|
|
274
|
|
|
(22
|
)
|
|
655
|
|
|
(45
|
)
|
|
929
|
|
|
(67
|
)
|
Total
|
|
$
|
130,175
|
|
|
$
|
(5,953
|
)
|
|
$
|
9,600
|
|
|
$
|
(2,935
|
)
|
|
$
|
139,775
|
|
|
$
|
(8,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
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
|
Asset-backed securities
|
|
$
|
910
|
|
|
$
|
(19
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
910
|
|
|
$
|
(19
|
)
|
State and political securities
|
|
8,882
|
|
|
(316
|
)
|
|
5,647
|
|
|
(1,108
|
)
|
|
14,529
|
|
|
(1,424
|
)
|
Other debt securities
|
|
11,250
|
|
|
(189
|
)
|
|
3,727
|
|
|
(70
|
)
|
|
14,977
|
|
|
(259
|
)
|
Total debt securities
|
|
21,042
|
|
|
(524
|
)
|
|
9,374
|
|
|
(1,178
|
)
|
|
30,416
|
|
|
(1,702
|
)
|
Financial institution equity securities
|
|
66
|
|
|
(1
|
)
|
|
205
|
|
|
(13
|
)
|
|
271
|
|
|
(14
|
)
|
Other equity securities
|
|
701
|
|
|
(28
|
)
|
|
63
|
|
|
(9
|
)
|
|
764
|
|
|
(37
|
)
|
Total equity securities
|
|
767
|
|
|
(29
|
)
|
|
268
|
|
|
(22
|
)
|
|
1,035
|
|
|
(51
|
)
|
Total
|
|
$
|
21,809
|
|
|
$
|
(553
|
)
|
|
$
|
9,642
|
|
|
$
|
(1,200
|
)
|
|
$
|
31,451
|
|
|
$
|
(1,753
|
)
|
At
December 31, 2013
there were
152
individual securities in a continuous unrealized loss position for less than twelve months and
24
individual securities in a continuous unrealized loss position for greater than twelve months.
The Company reviews its position quarterly and has asserted that at
December 31, 2013
and
2012
, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe they will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate 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
December 31, 2013
, 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
|
|
$
|
3,456
|
|
|
$
|
3,467
|
|
Due after one year to five years
|
|
41,411
|
|
|
41,757
|
|
Due after five years to ten years
|
|
102,516
|
|
|
100,183
|
|
Due after ten years
|
|
133,332
|
|
|
130,240
|
|
Total
|
|
$
|
280,715
|
|
|
$
|
275,647
|
|
Total gross proceeds from sales of securities available for sale were
$79,114,000
,
$48,460,000
, and
$13,454,000
for
2013
,
2012
, and
2011
, respectively. The following table represents gross realized gains and losses on those transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In Thousands)
|
|
2013
|
|
2012
|
|
2011
|
Gross realized gains:
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Mortgage-backed securities
|
|
—
|
|
|
136
|
|
|
4
|
|
State and political securities
|
|
2,076
|
|
|
327
|
|
|
114
|
|
Other debt securities
|
|
490
|
|
|
426
|
|
|
8
|
|
Financial institution equity securities
|
|
241
|
|
|
609
|
|
|
316
|
|
Other equity securities
|
|
340
|
|
|
587
|
|
|
294
|
|
Total gross realized gains
|
|
$
|
3,147
|
|
|
$
|
2,087
|
|
|
$
|
736
|
|
Gross realized losses:
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
92
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State and political securities
|
|
611
|
|
|
440
|
|
|
100
|
|
Other debt securities
|
|
27
|
|
|
53
|
|
|
15
|
|
Financial institution equity securities
|
|
—
|
|
|
67
|
|
|
—
|
|
Other equity securities
|
|
—
|
|
|
242
|
|
|
—
|
|
Total gross realized losses
|
|
$
|
730
|
|
|
$
|
802
|
|
|
$
|
115
|
|
There were no impairment charges included in gross realized losses for the years ended
December 31, 2013
,
2012
, and
2011
.
Investment securities with a carrying value of approximately
$141,876,000
and
$137,870,000
at
December 31, 2013
and
2012
, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
There is no concentration of investments that exceed ten percent of shareholders’ equity for any individual issuer, excluding those guaranteed by the U.S. Government.
NOTE 5 - FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its
$100
par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment as necessary. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.
Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears adequate, new shares of FHLB stock continue to change hands at the
$100
par value, and the payment of dividends.
NOTE 6 - LOAN CREDIT QUALITY AND RELATED ALLOWANCE FOR LOAN LOSSES
Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial and agricultural, real estate, and installment loans to individuals. Real estate loans are further segmented into
three
categories: residential, commercial, and construction.
The following table presents the related aging categories of loans, by segment, as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Current
|
|
Past Due
30 To 89
Days
|
|
Past Due 90
Days Or More
& Still Accruing
|
|
Non-Accrual
|
|
Total
|
Commercial and agricultural
|
|
$
|
104,419
|
|
|
$
|
502
|
|
|
$
|
—
|
|
|
$
|
108
|
|
|
$
|
105,029
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
392,300
|
|
|
6,424
|
|
|
531
|
|
|
526
|
|
|
399,781
|
|
Commercial
|
|
272,745
|
|
|
2,533
|
|
|
—
|
|
|
7,198
|
|
|
282,476
|
|
Construction
|
|
15,967
|
|
|
—
|
|
|
73
|
|
|
1,242
|
|
|
17,282
|
|
Installment loans to individuals
|
|
14,170
|
|
|
477
|
|
|
—
|
|
|
—
|
|
|
14,647
|
|
|
|
799,601
|
|
|
$
|
9,936
|
|
|
$
|
604
|
|
|
$
|
9,074
|
|
|
819,215
|
|
Net deferred loan fees and discounts
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
(871
|
)
|
Allowance for loan losses
|
|
(10,144
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,144
|
)
|
Loans, net
|
|
$
|
788,586
|
|
|
|
|
|
|
|
|
|
|
|
$
|
808,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(In Thousands)
|
|
Current
|
|
Past Due
30 To 89
Days
|
|
Past Due 90
Days Or More
& Still Accruing
|
|
Non-Accrual
|
|
Total
|
Commercial and agricultural
|
|
$
|
48,322
|
|
|
$
|
133
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,455
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
245,674
|
|
|
4,888
|
|
|
351
|
|
|
1,229
|
|
|
252,142
|
|
Commercial
|
|
177,539
|
|
|
443
|
|
|
—
|
|
|
4,049
|
|
|
182,031
|
|
Construction
|
|
13,813
|
|
|
177
|
|
|
—
|
|
|
6,077
|
|
|
20,067
|
|
Installment loans to individuals
|
|
10,550
|
|
|
109
|
|
|
—
|
|
|
—
|
|
|
10,659
|
|
|
|
495,898
|
|
|
$
|
5,750
|
|
|
$
|
351
|
|
|
$
|
11,355
|
|
|
513,354
|
|
Net deferred loan fees and discounts
|
|
(1,122
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,122
|
)
|
Allowance for loan losses
|
|
(7,617
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,617
|
)
|
Loans, net
|
|
$
|
487,159
|
|
|
|
|
|
|
|
|
|
|
|
$
|
504,615
|
|
Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.
Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired 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. There were
no
material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and December 31, 2013. The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral. The carrying value of purchased loans acquired with deteriorated credit quality was
$868,000
at December 31, 2013.
On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne acquisition was
$1,211,000
and the estimated fair value of the loans was
$878,000
. Total contractually required payments on these loans, including interest, at the acquisition date was
$1,783,000
. However, the Company’s preliminary estimate of expected cash flows was
$941,000
. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of
$842,000
relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of
$63,000
on the acquisition date relating to these impaired loans.
The carrying value of the loans acquired and accounted for in accordance with ASC 310-30, was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Luzerne acquisition as of June 1, 2013:
|
|
|
|
|
|
(In Thousands)
|
|
June 1, 2013
|
Unpaid principal balance
|
|
$
|
1,211
|
|
Interest
|
|
572
|
|
Contractual cash flows
|
|
1,783
|
|
Non-accretable discount
|
|
(842
|
)
|
Expected cash flows
|
|
941
|
|
Accretable discount
|
|
(63
|
)
|
Estimated fair value
|
|
$
|
878
|
|
Changes in the amortizable yield for purchased credit-impaired loans were as follows for the seven months ended December 31, 2013:
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2013
|
Balance at beginning of period
|
|
$
|
63
|
|
Accretion
|
|
(28
|
)
|
Balance at end of period
|
|
$
|
35
|
|
The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
June 1, 2013
|
|
December 31, 2013
|
Outstanding balance
|
|
$
|
1,211
|
|
|
$
|
1,224
|
|
Carrying amount
|
|
878
|
|
|
868
|
|
The following table presents the interest income if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans as of
December 31, 2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
(In Thousands)
|
|
Interest Income That Would Have Been Recorded Based on
Original Term and Rate
|
|
Interest
Income
Recorded on
a Cash Basis
|
|
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
|
|
Interest
Income
Recorded on
a Cash Basis
|
|
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
|
|
Interest
Income
Recorded on
a Cash Basis
|
Commercial and agricultural
|
|
$
|
7
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
41
|
|
|
20
|
|
|
67
|
|
|
37
|
|
|
42
|
|
|
25
|
|
Commercial
|
|
447
|
|
|
251
|
|
|
281
|
|
|
172
|
|
|
87
|
|
|
9
|
|
Construction
|
|
88
|
|
|
56
|
|
|
377
|
|
|
74
|
|
|
439
|
|
|
37
|
|
|
|
$
|
583
|
|
|
$
|
330
|
|
|
$
|
725
|
|
|
$
|
283
|
|
|
$
|
568
|
|
|
$
|
71
|
|
Impaired Loans
Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than
$100,000
and if the loan is either on non-accrual status or has a risk rating of substandard. Management may also elect to measure an individual loan for impairment if less than
$100,000
on a case by case basis.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as
90
days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Interest income for impaired loans is recorded consistent to the Banks' policy on non-accrual loans.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Recorded Investment
|
|
Unpaid Principal Balance
|
|
Related Allowance
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
Residential
|
|
916
|
|
|
1,173
|
|
|
—
|
|
Commercial
|
|
623
|
|
|
879
|
|
|
—
|
|
Construction
|
|
528
|
|
|
528
|
|
|
—
|
|
|
|
2,067
|
|
|
2,580
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
532
|
|
|
532
|
|
|
224
|
|
Real estate mortgage:
|
|
|
|
|
|
|
Residential
|
|
319
|
|
|
342
|
|
|
65
|
|
Commercial
|
|
7,598
|
|
|
7,742
|
|
|
2,153
|
|
Construction
|
|
512
|
|
|
1,367
|
|
|
113
|
|
|
|
8,961
|
|
|
9,983
|
|
|
2,555
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
532
|
|
|
532
|
|
|
224
|
|
Real estate mortgage:
|
|
|
|
|
|
|
Residential
|
|
1,235
|
|
|
1,515
|
|
|
65
|
|
Commercial
|
|
8,221
|
|
|
8,621
|
|
|
2,153
|
|
Construction
|
|
1,040
|
|
|
1,895
|
|
|
113
|
|
|
|
$
|
11,028
|
|
|
$
|
12,563
|
|
|
$
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(In Thousands)
|
|
Recorded
Investment
|
|
Unpaid Principal
Balance
|
|
Related
Allowance
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate mortgages - residential
|
|
410
|
|
|
487
|
|
|
—
|
|
Real estate mortgages - commercial
|
|
324
|
|
|
324
|
|
|
—
|
|
Real estate mortgages - construction
|
|
2,894
|
|
|
4,599
|
|
|
—
|
|
|
|
3,628
|
|
|
5,410
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
485
|
|
|
485
|
|
|
46
|
|
Real estate mortgages - residential
|
|
1,146
|
|
|
1,255
|
|
|
237
|
|
Real estate mortgages - commercial
|
|
8,515
|
|
|
8,611
|
|
|
2,018
|
|
Real estate mortgages - construction
|
|
3,196
|
|
|
4,696
|
|
|
234
|
|
|
|
13,342
|
|
|
15,047
|
|
|
2,535
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
485
|
|
|
485
|
|
|
46
|
|
Real estate mortgages - residential
|
|
1,556
|
|
|
1,742
|
|
|
237
|
|
Real estate mortgages - commercial
|
|
8,839
|
|
|
8,935
|
|
|
2,018
|
|
Real estate mortgages - construction
|
|
6,090
|
|
|
9,295
|
|
|
234
|
|
|
|
$
|
16,970
|
|
|
$
|
20,457
|
|
|
$
|
2,535
|
|
The following table presents the average recorded investment in impaired loans and related interest income recognized for
December 31, 2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Average
Investment in
Impaired Loans
|
|
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
|
|
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
|
Commercial and agricultural
|
|
$
|
538
|
|
|
$
|
26
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,581
|
|
|
62
|
|
|
25
|
|
Commercial
|
|
8,605
|
|
|
183
|
|
|
95
|
|
Construction
|
|
2,651
|
|
|
1
|
|
|
569
|
|
|
|
$
|
13,375
|
|
|
$
|
272
|
|
|
$
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(In Thousands)
|
|
Average
Investment in
Impaired Loans
|
|
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
|
|
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
|
Commercial and agricultural
|
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,417
|
|
|
44
|
|
|
49
|
|
Commercial
|
|
7,001
|
|
|
290
|
|
|
146
|
|
Construction
|
|
7,831
|
|
|
1
|
|
|
74
|
|
|
|
$
|
16,346
|
|
|
$
|
335
|
|
|
$
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
(In Thousands)
|
|
Average
Investment in
Impaired Loans
|
|
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
|
|
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
|
Commercial and agricultural
|
|
$
|
100
|
|
|
$
|
5
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,502
|
|
|
54
|
|
|
28
|
|
Commercial
|
|
5,032
|
|
|
180
|
|
|
9
|
|
Construction
|
|
9,590
|
|
|
77
|
|
|
37
|
|
|
|
$
|
16,224
|
|
|
$
|
316
|
|
|
$
|
74
|
|
Additional funds totaling
$289,000
are committed to be advanced in connection with impaired loans.
Modifications
The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally
six
months.
Loan modifications that are considered TDRs completed during the twelve months ended
December 31, 2013
and
2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
(In Thousands, Except Number of Contracts)
|
|
Number
of
Contracts
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Number
of
Contracts
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
Commercial and agricultural
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
498
|
|
|
$
|
498
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
2
|
|
|
61
|
|
|
61
|
|
|
3
|
|
|
254
|
|
|
254
|
|
Commercial
|
|
4
|
|
|
1,898
|
|
|
1,898
|
|
|
2
|
|
|
2,403
|
|
|
2,403
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
26
|
|
|
26
|
|
Total
|
|
6
|
|
|
$
|
1,959
|
|
|
$
|
1,959
|
|
|
8
|
|
|
$
|
3,181
|
|
|
$
|
3,181
|
|
There were four commercial real estate loan modifications considered troubled debt restructurings with a recorded investment of $1,884,000 made during the twelve months previous to
December 31, 2013
that defaulted during the twelve month period ending
December 31, 2013
. There were no loan modifications considered troubled debt restructurings made during the twelve months previous to
December 31, 2012
that defaulted during the twelve month period ending
December 31, 2012
.
Internal Risk Ratings
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first
six
categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than
90
days past due are considered Substandard. Loans in the Doubtful category exhibit the same weaknesses found in the Substandard loans, however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified Loss are considered uncollectible and charge-off is imminent.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. An external annual loan review of all commercial relationships
$800,000
or greater is performed, as well as a sample of smaller transactions. Confirmation of the appropriate risk category is included in the review. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard, Doubtful, or Loss on a quarterly basis.
The following table presents the credit quality categories identified above as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Totals
|
Pass
|
|
$
|
99,256
|
|
|
$
|
398,327
|
|
|
$
|
259,505
|
|
|
$
|
13,608
|
|
|
$
|
14,647
|
|
|
$
|
785,343
|
|
Special Mention
|
|
4,529
|
|
|
598
|
|
|
10,181
|
|
|
214
|
|
|
—
|
|
|
15,522
|
|
Substandard
|
|
1,244
|
|
|
856
|
|
|
12,790
|
|
|
3,460
|
|
|
—
|
|
|
18,350
|
|
Total
|
|
$
|
105,029
|
|
|
$
|
399,781
|
|
|
$
|
282,476
|
|
|
$
|
17,282
|
|
|
$
|
14,647
|
|
|
$
|
819,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Totals
|
Pass
|
|
$
|
46,805
|
|
|
$
|
250,161
|
|
|
$
|
167,463
|
|
|
$
|
13,944
|
|
|
$
|
10,659
|
|
|
$
|
489,032
|
|
Special Mention
|
|
1,480
|
|
|
—
|
|
|
1,630
|
|
|
—
|
|
|
—
|
|
|
3,110
|
|
Substandard
|
|
170
|
|
|
1,981
|
|
|
12,938
|
|
|
6,123
|
|
|
—
|
|
|
21,212
|
|
Total
|
|
$
|
48,455
|
|
|
$
|
252,142
|
|
|
$
|
182,031
|
|
|
$
|
20,067
|
|
|
$
|
10,659
|
|
|
$
|
513,354
|
|
Allowance for Loan Losses
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.
The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the
two
components represents the Banks' ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that are collectively evaluated for impairment are grouped into
two
classes for evaluation. A general allowance is determined for “Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for impairment.
For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a
twelve
quarter moving average. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry, and/or geographic standpoint.
Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors. Management also monitors industry loss factors by loan segment for applicable adjustments to actual loss experience.
Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
Activity in the allowance is presented for the twelve months ended
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
Commercial and Agricultural
|
|
Real Estate Mortgages
|
|
Installment Loans to Individual
|
|
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
361
|
|
|
$
|
1,954
|
|
|
$
|
3,831
|
|
|
$
|
950
|
|
|
$
|
144
|
|
|
$
|
377
|
|
|
$
|
7,617
|
|
Charge-offs
|
|
(4
|
)
|
|
(250
|
)
|
|
(297
|
)
|
|
(100
|
)
|
|
(116
|
)
|
|
—
|
|
|
(767
|
)
|
Recoveries
|
|
7
|
|
|
13
|
|
|
88
|
|
|
850
|
|
|
61
|
|
|
—
|
|
|
1,019
|
|
Provision
|
|
110
|
|
|
2,200
|
|
|
457
|
|
|
(959
|
)
|
|
50
|
|
|
417
|
|
|
2,275
|
|
Ending Balance
|
|
$
|
474
|
|
|
$
|
3,917
|
|
|
$
|
4,079
|
|
|
$
|
741
|
|
|
$
|
139
|
|
|
$
|
794
|
|
|
$
|
10,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Commercial and Agricultural
|
|
Real Estate Mortgages
|
|
Installment Loans to Individuals
|
|
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
418
|
|
|
$
|
939
|
|
|
$
|
2,651
|
|
|
$
|
2,775
|
|
|
$
|
190
|
|
|
$
|
181
|
|
|
$
|
7,154
|
|
Charge-offs
|
|
—
|
|
|
(193
|
)
|
|
(95
|
)
|
|
(1,747
|
)
|
|
(114
|
)
|
|
—
|
|
|
(2,149
|
)
|
Recoveries
|
|
8
|
|
|
7
|
|
|
5
|
|
|
24
|
|
|
43
|
|
|
—
|
|
|
87
|
|
Provision
|
|
(65
|
)
|
|
1,201
|
|
|
1,270
|
|
|
(102
|
)
|
|
25
|
|
|
196
|
|
|
2,525
|
|
Ending Balance
|
|
$
|
361
|
|
|
$
|
1,954
|
|
|
$
|
3,831
|
|
|
$
|
950
|
|
|
$
|
144
|
|
|
$
|
377
|
|
|
$
|
7,617
|
|
The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central Pennsylvania. Although the Company has a diversified loan portfolio at
December 31, 2013
and
2012
, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.
The Company has a concentration of loans at
December 31, 2013
and
2012
as follows:
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
Owners of residential rental properties
|
|
15.67
|
%
|
|
18.54
|
%
|
Owners of commercial rental properties
|
|
12.99
|
%
|
|
13.80
|
%
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
Commercial
and Agricultural
|
|
Real Estate Mortgages
|
|
Installment
Loans to Individuals
|
|
Unallocated
|
|
Totals
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
224
|
|
|
$
|
65
|
|
|
$
|
2,153
|
|
|
$
|
113
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,555
|
|
Collectively evaluated for impairment
|
|
250
|
|
|
3,852
|
|
|
1,926
|
|
|
628
|
|
|
139
|
|
|
794
|
|
|
7,589
|
|
Total ending allowance balance
|
|
$
|
474
|
|
|
$
|
3,917
|
|
|
$
|
4,079
|
|
|
$
|
741
|
|
|
$
|
139
|
|
|
$
|
794
|
|
|
$
|
10,144
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
532
|
|
|
$
|
881
|
|
|
$
|
7,707
|
|
|
$
|
1,040
|
|
|
$
|
—
|
|
|
|
|
|
$
|
10,160
|
|
Loans acquired with deteriorated credit quality
|
|
—
|
|
|
354
|
|
|
514
|
|
|
—
|
|
|
—
|
|
|
|
|
868
|
|
Collectively evaluated for impairment
|
|
104,497
|
|
|
398,546
|
|
|
274,255
|
|
|
16,242
|
|
|
14,647
|
|
|
|
|
|
808,187
|
|
Total ending loans balance
|
|
$
|
105,029
|
|
|
$
|
399,781
|
|
|
$
|
282,476
|
|
|
$
|
17,282
|
|
|
$
|
14,647
|
|
|
|
|
|
$
|
819,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Commercial and Agricultural
|
|
Real Estate Mortgages
|
|
Installment Loans to
Individuals
|
|
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
Unallocated
|
|
Totals
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
46
|
|
|
$
|
237
|
|
|
$
|
2,018
|
|
|
$
|
234
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,535
|
|
Collectively evaluated for impairment
|
|
315
|
|
|
1,717
|
|
|
1,813
|
|
|
716
|
|
|
144
|
|
|
377
|
|
|
5,082
|
|
Total ending allowance balance
|
|
$
|
361
|
|
|
1,954
|
|
|
$
|
3,831
|
|
|
$
|
950
|
|
|
$
|
144
|
|
|
$
|
377
|
|
|
$
|
7,617
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
485
|
|
|
$
|
1,556
|
|
|
$
|
8,839
|
|
|
$
|
6,090
|
|
|
$
|
—
|
|
|
|
|
|
$
|
16,970
|
|
Collectively evaluated for impairment
|
|
47,970
|
|
|
250,586
|
|
|
173,192
|
|
|
13,977
|
|
|
10,659
|
|
|
|
|
|
496,384
|
|
Total ending loans balance
|
|
$
|
48,455
|
|
|
252,142
|
|
|
$
|
182,031
|
|
|
$
|
20,067
|
|
|
$
|
10,659
|
|
|
|
|
|
$
|
513,354
|
|
NOTE 7 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
Land
|
|
$
|
5,823
|
|
|
$
|
1,505
|
|
Premises
|
|
13,114
|
|
|
7,574
|
|
Furniture and equipment
|
|
7,320
|
|
|
7,073
|
|
Leasehold improvements
|
|
1,347
|
|
|
1,061
|
|
Total
|
|
27,604
|
|
|
17,213
|
|
Less accumulated depreciation and amortization
|
|
7,420
|
|
|
8,865
|
|
Net premises and equipment
|
|
$
|
20,184
|
|
|
$
|
8,348
|
|
Depreciation and amortization charged to operations for the years ended
2013
,
2012
, and
2011
w
as
$1,054,000
,
$762,000
, and
$701,000
, respectively.
NOTE 8 - GOODWILL
As of
December 31, 2013
and
2012
goodwill had a gross carrying value of
$17,380,000
and
$3,308,000
and accumulated amortization of
$276,000
resulting in a net carrying amount of
$17,104,000
and
$3,032,000
.
The gross carrying amount of goodwill is tested for impairment in the third quarter of each fiscal year. Based on the fair value of the reporting unit, estimated using the expected present value of future cash flows, there was no evidence of impairment of the carrying amount at
December 31, 2013
or
2012
.
NOTE 9 - TIME DEPOSITS
Time deposits of $100,000 or more totaled approximately
$99,665,000
on
December 31, 2013
and
$70,119,000
on
December 31, 2012
. Interest expense related to such deposits was approximately
$841,000
,
$874,000
, and
$965,000
, for the years ended
December 31, 2013
,
2012
, and
2011
, respectively.
At
December 31, 2013
, the scheduled maturities on time deposits of $100,000 or more are as follows:
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
Three months or less
|
|
15,659
|
|
Three months to six months
|
|
11,124
|
|
Six months to twelve months
|
|
16,835
|
|
Over twelve months
|
|
56,047
|
|
Total
|
|
$
|
99,665
|
|
Total time deposit maturities are as follows at
December 31, 2013
:
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
2014
|
|
$
|
118,232
|
|
2015
|
|
50,643
|
|
2016
|
|
25,267
|
|
2017
|
|
25,996
|
|
2018
|
|
11,345
|
|
Thereafter
|
|
3,739
|
|
Total
|
|
$
|
235,222
|
|
NOTE 10 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase and primarily FHLB advances, which generally represent overnight or less than six month borrowings. In addition to the outstanding balances noted below, the Banks also have additional lines of credit totaling
$38,337,000
available from correspondent banks other than the FHLB. The outstanding balances and related information for short-term borrowings are summarized as follows at
December 31, 2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
|
2011
|
Repurchase Agreements:
|
|
|
|
|
|
|
|
|
|
Balance at year end
|
|
$
|
12,391
|
|
|
$
|
16,968
|
|
|
$
|
13,153
|
|
Maximum amount outstanding at any month end
|
|
16,632
|
|
|
21,609
|
|
|
17,920
|
|
Average balance outstanding during the year
|
|
16,839
|
|
|
16,951
|
|
|
15,555
|
|
Weighted-average interest rate:
|
|
|
|
|
|
|
|
|
|
At year end
|
|
0.28
|
%
|
|
0.65
|
%
|
|
1.02
|
%
|
Paid during the year
|
|
0.40
|
%
|
|
0.73
|
%
|
|
1.21
|
%
|
Open Repo Plus:
|
|
|
|
|
|
|
|
|
|
Balance at year end
|
|
$
|
14,325
|
|
|
$
|
16,236
|
|
|
$
|
16,445
|
|
Maximum amount outstanding at any month end
|
|
21,350
|
|
|
20,175
|
|
|
16,445
|
|
Average balance outstanding during the year
|
|
5,508
|
|
|
4,009
|
|
|
2,480
|
|
Weighted-average interest rate:
|
|
|
|
|
|
|
|
|
|
At year end
|
|
0.25
|
%
|
|
0.25
|
%
|
|
0.34
|
%
|
Paid during the year
|
|
0.31
|
%
|
|
0.31
|
%
|
|
0.57
|
%
|
Short-Term FHLB:
|
|
|
|
|
|
|
|
|
|
Balance at year end
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Maximum amount outstanding at any month end
|
|
—
|
|
|
—
|
|
|
1,000
|
|
Average balance outstanding during the year
|
|
—
|
|
|
—
|
|
|
82
|
|
Weighted-average interest rate:
|
|
|
|
|
|
|
|
|
|
At year end
|
|
—
|
|
|
—
|
|
|
—
|
|
Paid during the year
|
|
—
|
|
|
—
|
|
|
0.17
|
%
|
NOTE 11 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
Weighted Average Interest Rate
|
|
Stated Interest Rate Range
|
|
|
|
|
Description
|
|
Maturity
|
|
2013
|
|
2012
|
|
From
|
|
To
|
|
2013
|
|
2012
|
Variable
|
|
2013
|
|
—
|
%
|
|
3.74
|
%
|
|
3.74
|
%
|
|
3.74
|
%
|
|
—
|
|
|
5,000
|
|
Variable
|
|
2015
|
|
3.97
|
%
|
|
3.97
|
%
|
|
3.97
|
%
|
|
3.97
|
%
|
|
10,000
|
|
|
10,000
|
|
Variable
|
|
2017
|
|
4.22
|
%
|
|
4.22
|
%
|
|
4.15
|
%
|
|
4.28
|
%
|
|
20,000
|
|
|
20,000
|
|
Variable
|
|
2018
|
|
3.18
|
%
|
|
3.18
|
%
|
|
3.18
|
%
|
|
3.18
|
%
|
|
10,000
|
|
|
10,000
|
|
Total Variable
|
|
|
|
3.90
|
%
|
|
3.88
|
%
|
|
|
|
|
|
|
|
40,000
|
|
|
45,000
|
|
Fixed
|
|
2013
|
|
—
|
%
|
|
5.87
|
%
|
|
5.87
|
%
|
|
5.87
|
%
|
|
—
|
|
|
528
|
|
Fixed
|
|
2015
|
|
6.92
|
%
|
|
6.92
|
%
|
|
6.92
|
%
|
|
6.92
|
%
|
|
750
|
|
|
750
|
|
Fixed
|
|
2016
|
|
0.75
|
%
|
|
0.75
|
%
|
|
0.75
|
%
|
|
0.75
|
%
|
|
5,000
|
|
|
5,000
|
|
Fixed
|
|
2017
|
|
0.91
|
%
|
|
0.91
|
%
|
|
0.90
|
%
|
|
0.97
|
%
|
|
25,000
|
|
|
25,000
|
|
Total Fixed
|
|
|
|
1.03
|
%
|
|
1.11
|
%
|
|
|
|
|
|
|
|
30,750
|
|
|
31,278
|
|
Total
|
|
|
|
2.65
|
%
|
|
2.74
|
%
|
|
|
|
|
|
|
|
$
|
70,750
|
|
|
$
|
76,278
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
Year Ending December 31,
|
|
Amount
|
|
Weighted-Average Rate
|
2015
|
|
10,750
|
|
|
4.18
|
%
|
2016
|
|
5,000
|
|
|
0.75
|
%
|
2017
|
|
45,000
|
|
|
2.38
|
%
|
2018
|
|
10,000
|
|
|
3.18
|
%
|
Thereafter
|
|
—
|
|
|
—
|
%
|
|
|
$
|
70,750
|
|
|
2.65
|
%
|
The terms of the convertible borrowings allow the FHLB to convert the interest rate to an adjustable rate based on the
three month London Interbank Offered Rate
(“LIBOR”) at a predetermined anniversary date of the borrowing’s origination, ranging from
three
months to
five
years. If the FHLB converts the interest rate on one of the predetermined dates, the Bank has the ability to pay off the debt on the conversion date and quarterly thereafter without incurring the customary pre-payment penalty.
The Banks maintain a credit arrangement which includes a revolving line of credit with the FHLB. Under this credit arrangement, at December 31, 2013 JSSB has a remaining borrowing capacity of
$221,498,000
and Luzerne has a remaining capacity of
$138,757,000
, which are subject to annual renewal and typically incur no service charges. Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by certain qualifying assets of each Bank which consist principally of first mortgage loans and mortgage-backed securities.
NOTE 12 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset position at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
3,167
|
|
|
$
|
2,590
|
|
Deferred compensation
|
|
1,459
|
|
|
484
|
|
Pension
|
|
1,336
|
|
|
2,384
|
|
Loan fees and discounts
|
|
—
|
|
|
153
|
|
Investment securities allowance
|
|
689
|
|
|
782
|
|
Unrealized loss on available for sale securities
|
|
1,117
|
|
|
—
|
|
Low income housing credit carryforward
|
|
2,803
|
|
|
3,528
|
|
Capital loss carryforward
|
|
103
|
|
|
230
|
|
Other
|
|
1,215
|
|
|
1,182
|
|
Total
|
|
11,889
|
|
|
11,333
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Unrealized gain on available for sale securities
|
|
—
|
|
|
5,236
|
|
Bond accretion
|
|
207
|
|
|
170
|
|
Loan fees and discounts
|
|
49
|
|
|
—
|
|
Depreciation
|
|
842
|
|
|
369
|
|
Amortization
|
|
902
|
|
|
827
|
|
Total
|
|
2,000
|
|
|
6,602
|
|
Deferred tax asset, net
|
|
$
|
9,889
|
|
|
$
|
4,731
|
|
The current low income housing credit carryforward will expire in thirteen years. The current capital loss carryforward will expire in four years. The Company fully anticipates being able to use the carryforwards.
No valuation allowance was established at
December 31, 2013
and
2012
, because of the Company’s ability to carry back capital losses to recover taxes paid in previous years and certain tax strategies, together with the anticipated future taxable income as evidenced by the Company’s earning potential.
The provision or benefit for income taxes is comprised of the following for the year ended
December 31, 2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
|
2011
|
Currently payable
|
|
$
|
3,328
|
|
|
$
|
2,726
|
|
|
$
|
2,370
|
|
Deferred benefit (provision)
|
|
123
|
|
|
(128
|
)
|
|
(457
|
)
|
Total provision
|
|
$
|
3,451
|
|
|
$
|
2,598
|
|
|
$
|
1,913
|
|
A reconciliation between the expected income tax or benefit and the effective income tax rate on income before income tax provision or benefit follows for the year ended
December 31, 2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
(In Thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Provision at expected rate
|
|
$
|
5,962
|
|
|
34.00
|
%
|
|
$
|
5,592
|
|
|
34.00
|
%
|
|
$
|
4,854
|
|
|
34.00
|
%
|
(Decrease) increase in tax resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
|
(1,933
|
)
|
|
(11.02
|
)%
|
|
(2,235
|
)
|
|
(13.59
|
)%
|
|
(2,141
|
)
|
|
(15.00
|
)%
|
Tax credits
|
|
(737
|
)
|
|
(4.20
|
)%
|
|
(737
|
)
|
|
(4.48
|
)%
|
|
(737
|
)
|
|
(5.16
|
)%
|
Other, net
|
|
159
|
|
|
0.90
|
%
|
|
(22
|
)
|
|
(0.13
|
)%
|
|
(63
|
)
|
|
(0.44
|
)%
|
Effective income tax provision and rate
|
|
$
|
3,451
|
|
|
19.68
|
%
|
|
$
|
2,598
|
|
|
15.80
|
%
|
|
$
|
1,913
|
|
|
13.40
|
%
|
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age and length of service requirements that were hired prior to January 1, 2004, at which time entrance into the Plan was frozen. Benefits are based primarily on years of service and the average annual compensation during the highest
five
consecutive years within the final
ten
years of employment.
The following table sets forth the obligation and funded status as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
Change in benefit obligation:
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
19,073
|
|
|
$
|
16,165
|
|
Service cost
|
|
574
|
|
|
542
|
|
Interest cost
|
|
770
|
|
|
746
|
|
Actuarial loss
|
|
449
|
|
|
726
|
|
Benefits paid
|
|
(535
|
)
|
|
(562
|
)
|
Other, change in actuarial assumptions
|
|
(2,145
|
)
|
|
1,456
|
|
Benefit obligation at end of year
|
|
18,186
|
|
|
19,073
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
12,078
|
|
|
9,525
|
|
Actual return on plan assets
|
|
1,934
|
|
|
1,503
|
|
Employer contribution
|
|
840
|
|
|
1,675
|
|
Benefits paid
|
|
(599
|
)
|
|
(644
|
)
|
Adjustment to fair value of plan assets
|
|
5
|
|
|
19
|
|
Fair value of plan assets at end of year
|
|
14,258
|
|
|
12,078
|
|
Funded status
|
|
$
|
(3,928
|
)
|
|
$
|
(6,995
|
)
|
|
|
|
|
|
Accounts recognized on balance sheet as:
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
(3,928
|
)
|
|
$
|
(6,995
|
)
|
|
|
|
|
|
Amounts not yet recognized as a component of net periodic pension cost:
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income consist of:
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
—
|
|
|
$
|
26
|
|
Net loss
|
|
4,128
|
|
|
7,257
|
|
Total
|
|
$
|
4,128
|
|
|
$
|
7,283
|
|
The accumulated benefit obligation for the Plan was
$15,866,000
and
$16,642,000
at
December 31, 2013
and
2012
, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in Other Comprehensive Income as of
December 31, 2013
,
2012
, and
2011
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
|
2011
|
Net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
638
|
|
|
$
|
624
|
|
|
$
|
424
|
|
Interest cost
|
|
770
|
|
|
746
|
|
|
712
|
|
Expected return on plan assets
|
|
(985
|
)
|
|
(820
|
)
|
|
(742
|
)
|
Amortization of transition asset
|
|
—
|
|
|
(2
|
)
|
|
(3
|
)
|
Amortization of prior service cost
|
|
25
|
|
|
25
|
|
|
26
|
|
Amortization of unrecognized net loss
|
|
479
|
|
|
436
|
|
|
164
|
|
Net periodic benefit cost
|
|
$
|
927
|
|
|
$
|
1,009
|
|
|
$
|
581
|
|
The estimated prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is
$25,000
.
Assumptions
Weighted-average assumptions used to determine benefit obligations at
December 31, 2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Discount rate
|
4.75
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Weighted-average assumptions used to determine net periodic cost for years ended
December 31, 2013
,
2012
, and
2011
:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Discount rate
|
4.00
|
%
|
|
4.50
|
%
|
|
5.50
|
%
|
Expected long-term return on plan assets
|
8.00
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower future returns on similar investments compared to past periods.
Plan Assets
The Plan’s weighted-average asset allocations at
December 31, 2013
and
2012
by asset category are as follows:
|
|
|
|
|
|
|
|
Asset Category
|
|
2013
|
|
2012
|
Cash
|
|
1.48
|
%
|
|
2.27
|
%
|
Fixed income securities
|
|
19.78
|
%
|
|
30.24
|
%
|
Equity
|
|
78.74
|
%
|
|
67.49
|
%
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
The investment objective for the Plan is to maximize total return with tolerance for slightly above average risk, meaning the fund is able to tolerate short-term volatility to achieve above-average returns over the long term.
Asset allocation favors equities, with target allocation of approximately
60%
equity securities,
37.5%
fixed income securities and
2.5%
cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between the acceptable ranges. The equity portfolio’s exposure is primarily in mid and large capitalization domestic equities with limited exposure to small capitalization and international stocks.
It is management’s intent to give the investment managers flexibility, within the overall guidelines, with respect to investment decisions and their timing. However, certain investments require specific review and approval by management. Management is also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to execute investment strategies.
The following table sets forth by level, within the fair value hierarchy detailed in Note 20 - Fair Value Measurements, the Plan’s assets at fair value as of
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
211
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
211
|
|
Mutual funds - taxable fixed income
|
|
2,820
|
|
|
—
|
|
|
—
|
|
|
2,820
|
|
Mutual funds - domestic equity
|
|
7,471
|
|
|
—
|
|
|
—
|
|
|
7,471
|
|
Mutual funds - international equity
|
|
3,756
|
|
|
—
|
|
|
—
|
|
|
3,756
|
|
Total assets at fair value
|
|
$
|
14,258
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
274
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
274
|
|
Mutual funds - taxable fixed income
|
|
3,653
|
|
|
—
|
|
|
—
|
|
|
3,653
|
|
Mutual funds - domestic equity
|
|
5,321
|
|
|
—
|
|
|
—
|
|
|
5,321
|
|
Mutual funds - international equity
|
|
2,830
|
|
|
—
|
|
|
—
|
|
|
2,830
|
|
Total assets at fair value
|
|
$
|
12,078
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,078
|
|
The following future benefit payments that reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
(In Thousands)
|
|
2014
|
$
|
637
|
|
2015
|
647
|
|
2016
|
676
|
|
2017
|
706
|
|
2018
|
740
|
|
2019 - 2027
|
5,053
|
|
|
$
|
8,459
|
|
The company expects to contribute a minimum of
$600,000
to its Pension Plan in
2014
.
401(k) Savings Plan
The Company also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The Company may make matching contributions equal to a discretionary percentage that is determined by the Board of Directors. Participants are at all times fully vested in their contributions and vest over a period of
five
years regarding the employer contribution. Contribution expense was approximately
$132,000
,
$118,000
, and
$101,000
for the years ended
December 31, 2013
,
2012
, and
2011
, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan whereby participating directors elect to forego directors’ fees paid in cash. Under this plan, the Company will make payments for a
ten
-year period beginning at the later of age
65
or ceasing to be a director in most cases or at death, if earlier, at which time payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Company has acquired bank-owned life insurance policies on the lives of the participating directors for which insurance benefits are payable to the Company. The Company incurred expenses related to the plan of
$169,000
,
$84,000
, and
$114,000
for the years ended
December 31, 2013
,
2012
, and
2011
, respectively. Benefits paid under the plan were approximately
$57,000
,
$140,000
, and
$160,000
in
2013
,
2012
, and
2011
, respectively.
NOTE 14 - EMPLOYEE STOCK PURCHASE PLAN
The Company maintained the Penns Woods Bancorp, Inc. 2006 Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to
1,000,000
shares to be purchased by employees. The purchase price of the shares is
95%
of market value with an employee eligible to purchase up to the lesser of
15%
of base compensation or
$12,000
in market value annually. There were
1,840
and
1,435
shares issued under the plan for the years ended
December 31, 2013
and
2012
, respectively.
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which they are principal owners (more than
ten
percent), are indebted to the Company. Such indebtedness was incurred in the ordinary course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below for the years ended
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Beginning Balance
|
|
New Loans
|
|
Repayments
|
|
Ending Balance
|
2013
|
|
$
|
3,183
|
|
|
$
|
10,765
|
|
|
$
|
(2,993
|
)
|
|
$
|
10,955
|
|
Deposits from related parties held by the Banks amounted to
$9,295,000
at
December 31, 2013
and
$3,525,000
at
December 31, 2012
.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES
The following schedule shows future minimum rental payments under operating leases with noncancellable terms in excess of one year as of
December 31, 2013
:
|
|
|
|
|
(In Thousands)
|
|
2014
|
$
|
546
|
|
2015
|
551
|
|
2016
|
469
|
|
2017
|
415
|
|
2018
|
350
|
|
Thereafter
|
1,273
|
|
Total
|
$
|
3,604
|
|
The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities and equipment. Total rental expense for all operating leases for the years ended
December 31, 2013
,
2012
, and
2011
were
$493,000
,
$425,000
and
$399,000
.
The Company is subject to lawsuits and claims arising out of its business. There are no such legal proceedings or claims currently pending or threatened other than those encountered during the normal course of business.
NOTE 17 - OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
Commitments to extend credit
|
|
$
|
185,415
|
|
|
$
|
90,503
|
|
Standby letters of credit
|
|
4,379
|
|
|
3,768
|
|
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, on an extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a
one
year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
NOTE 18 - CAPITAL REQUIREMENTS
Federal regulations require the Company and the Banks to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established
five
capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.
As of
December 31, 2013
and
2012
, the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 leverage capital ratios must be at least
10%
,
6%
, and
5%
, respectively.
The Company’s and the Banks' actual capital ratios are presented in the following tables, which shows that the Company both Banks met all regulatory capital requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Company
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
(In Thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Total Capital (to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
117,123
|
|
|
13.16
|
%
|
|
$
|
85,377
|
|
|
14.97
|
%
|
For Capital Adequacy Purposes
|
|
71,200
|
|
|
8.00
|
%
|
|
45,641
|
|
|
8.00
|
%
|
To Be Well Capitalized
|
|
89,000
|
|
|
10.00
|
%
|
|
57,051
|
|
|
10.00
|
%
|
Tier I Capital (to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
106,178
|
|
|
11.93
|
%
|
|
$
|
77,717
|
|
|
13.62
|
%
|
For Capital Adequacy Purposes
|
|
35,600
|
|
|
4.00
|
%
|
|
22,820
|
|
|
4.00
|
%
|
To Be Well Capitalized
|
|
53,400
|
|
|
6.00
|
%
|
|
34,231
|
|
|
6.00
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
106,178
|
|
|
9.02
|
%
|
|
$
|
77,717
|
|
|
9.47
|
%
|
For Capital Adequacy Purposes
|
|
47,111
|
|
|
4.00
|
%
|
|
32,818
|
|
|
4.00
|
%
|
To Be Well Capitalized
|
|
58,889
|
|
|
5.00
|
%
|
|
41,022
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jersey Shore State Bank
|
|
|
|
|
|
|
|
2013
|
|
2012
|
(In Thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
Total Capital (to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
77,999
|
|
|
12.30
|
%
|
|
$
|
72,379
|
|
|
12.84
|
%
|
For Capital Adequacy Purposes
|
|
50,743
|
|
|
8.00
|
%
|
|
45,113
|
|
|
8.00
|
%
|
To Be Well Capitalized
|
|
63,428
|
|
|
10.00
|
%
|
|
56,392
|
|
|
10.00
|
%
|
Tier I Capital (to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
70,046
|
|
|
11.04
|
%
|
|
$
|
65,323
|
|
|
11.58
|
%
|
For Capital Adequacy Purposes
|
|
25,371
|
|
|
4.00
|
%
|
|
22,557
|
|
|
4.00
|
%
|
To Be Well Capitalized
|
|
38,057
|
|
|
6.00
|
%
|
|
33,835
|
|
|
6.00
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
70,046
|
|
|
8.01
|
%
|
|
$
|
65,323
|
|
|
8.02
|
%
|
For Capital Adequacy Purposes
|
|
34,991
|
|
|
4.00
|
%
|
|
32,570
|
|
|
4.00
|
%
|
To Be Well Capitalized
|
|
43,739
|
|
|
5.00
|
%
|
|
40,713
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
Luzerne Bank
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Amount
|
|
Ratio
|
Total Capital (to Risk-weighted Assets)
|
|
|
|
|
|
|
Actual
|
|
$
|
28,150
|
|
|
10.94
|
%
|
For Capital Adequacy Purposes
|
|
20,577
|
|
|
8.00
|
%
|
To Be Well Capitalized
|
|
25,721
|
|
|
10.00
|
%
|
Tier I Capital (to Risk-weighted Assets)
|
|
|
|
|
|
|
Actual
|
|
$
|
27,884
|
|
|
10.84
|
%
|
For Capital Adequacy Purposes
|
|
10,289
|
|
|
4.00
|
%
|
To Be Well Capitalized
|
|
15,433
|
|
|
6.00
|
%
|
Tier I Capital (to Average Assets)
|
|
|
|
|
|
|
Actual
|
|
$
|
27,884
|
|
|
8.72
|
%
|
For Capital Adequacy Purposes
|
|
12,794
|
|
|
4.00
|
%
|
To Be Well Capitalized
|
|
15,992
|
|
|
5.00
|
%
|
NOTE 19 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks. Accordingly, at
December 31, 2013
, the balance in the additional paid in capital account totaling
$11,657,000
for JSSB and
$42,214,000
for Luzerne Bank is unavailable for dividends.
The Banks are subject to regulatory restrictions, which limit the ability to loan funds to Penns Woods Bancorp, Inc. At
December 31, 2013
, the regulatory lending limit amounted to approximately
$16,211,000
.
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district Federal Reserve Bank for JSSB of
$0
and
$1,131,000
at
December 31, 2013
and
2012
, respectively. Luzerne Bank had no reserves required by the district Federal Reserve Bank at December 31, 2013. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve Bank.
NOTE 20 - FAIR VALUE MEASUREMENTS
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows:
|
|
|
|
Level I:
|
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
|
|
Level II:
|
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
|
Level III:
|
|
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of
December 31, 2013
and
2012
, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
—
|
|
|
$
|
9,923
|
|
|
$
|
—
|
|
|
$
|
9,923
|
|
Mortgage-backed securities
|
|
—
|
|
|
10,592
|
|
|
—
|
|
|
10,592
|
|
Asset-backed securities
|
|
—
|
|
|
6,564
|
|
|
—
|
|
|
6,564
|
|
State and political securities
|
|
—
|
|
|
141,795
|
|
|
—
|
|
|
141,795
|
|
Other debt securities
|
|
—
|
|
|
106,773
|
|
|
—
|
|
|
106,773
|
|
Financial institution equity securities
|
|
10,662
|
|
|
—
|
|
|
—
|
|
|
10,662
|
|
Other equity securities
|
|
2,303
|
|
|
—
|
|
|
—
|
|
|
2,303
|
|
Total assets measured on a recurring basis
|
|
$
|
12,965
|
|
|
$
|
275,647
|
|
|
$
|
—
|
|
|
$
|
288,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
—
|
|
|
$
|
3,495
|
|
|
$
|
—
|
|
|
$
|
3,495
|
|
Mortgage-backed securities
|
|
—
|
|
|
16,895
|
|
|
—
|
|
|
16,895
|
|
Asset-backed securities
|
|
—
|
|
|
5,450
|
|
|
—
|
|
|
5,450
|
|
State and political securities
|
|
—
|
|
|
180,224
|
|
|
—
|
|
|
180,224
|
|
Other debt securities
|
|
—
|
|
|
71,599
|
|
|
—
|
|
|
71,599
|
|
Financial institution equity securities
|
|
9,548
|
|
|
—
|
|
|
—
|
|
|
9,548
|
|
Other equity securities
|
|
2,105
|
|
|
—
|
|
|
—
|
|
|
2,105
|
|
Total assets measured on a recurring basis
|
|
$
|
11,653
|
|
|
$
|
277,663
|
|
|
$
|
—
|
|
|
$
|
289,316
|
|
The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of
December 31, 2013
and
2012
, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,473
|
|
|
$
|
8,473
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
1,898
|
|
|
1,898
|
|
Total assets measured on a non-recurring basis
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,371
|
|
|
$
|
10,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,435
|
|
|
$
|
14,435
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
1,449
|
|
|
1,449
|
|
Total assets measured on a non-recurring basis
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,884
|
|
|
$
|
15,884
|
|
The following table provides a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of
December 31, 2013
and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
Quantitative Information About Level III Fair Value Measurements
|
(In Thousands)
|
|
Fair Value
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
Impaired loans
|
|
$
|
8,473
|
|
|
Discounted cash flow
|
|
Temporary reduction in payment amount
|
|
0 to (91)%
|
|
(18
|
)%
|
|
|
|
|
|
|
|
Probability of default
|
|
—%
|
|
|
|
|
|
|
|
|
Appraisal of collateral
|
|
Appraisal adjustments (1)
|
|
0 to (44)%
|
|
(21
|
)%
|
Other real estate owned
|
|
$
|
1,898
|
|
|
Appraisal of collateral (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Quantitative Information About Level III Fair Value Measurements
|
(In Thousands)
|
|
Fair Value
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
Impaired loans
|
|
14,435
|
|
|
Discounted cash flow
|
|
Temporary reduction in payment amount
|
|
0 to (55)%
|
|
(27
|
)%
|
|
|
|
|
|
|
Probability of default
|
|
—
|
|
|
|
|
|
|
|
Appraisal of collateral
|
|
Appraisal adjustments (1)
|
|
0 to (20)%
|
|
(11
|
)%
|
Other real estate owned
|
|
1,449
|
|
|
Appraisal of collateral (1)
|
|
|
|
|
|
|
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
The significant unobservable inputs used in the fair value measurement of the Company’s impaired loans using the discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default. Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements. The probability of default is
0%
for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using the appraisal of collateral valuation technique.
The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique.
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. These fair values do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair values are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair values.
Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments. The Company’s fair values, methods, and assumptions are set forth below for the Company’s other financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, the fair value of financial instruments would not represent the full market value of the Company.
The fair values of the Company’s financial instruments are as follows at
December 31, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2013
|
(In Thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level I)
|
|
Significant Other Observable Inputs (Level II)
|
|
Significant Unobservable Inputs
(Level III)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,606
|
|
|
$
|
24,606
|
|
|
$
|
24,606
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
288,612
|
|
|
288,612
|
|
|
12,965
|
|
|
275,647
|
|
|
—
|
|
Loans held for sale
|
|
1,626
|
|
|
1,626
|
|
|
1,626
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
808,200
|
|
|
808,985
|
|
|
—
|
|
|
—
|
|
|
808,985
|
|
Bank-owned life insurance
|
|
25,410
|
|
|
25,410
|
|
|
25,410
|
|
|
—
|
|
|
—
|
|
Accrued interest receivable
|
|
4,696
|
|
|
4,696
|
|
|
4,696
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
755,625
|
|
|
$
|
724,456
|
|
|
$
|
488,818
|
|
|
$
|
—
|
|
|
$
|
235,638
|
|
Noninterest-bearing deposits
|
|
217,377
|
|
|
217,377
|
|
|
217,377
|
|
|
—
|
|
|
—
|
|
Short-term borrowings
|
|
26,716
|
|
|
26,716
|
|
|
26,716
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
|
71,202
|
|
|
73,248
|
|
|
—
|
|
|
—
|
|
|
73,248
|
|
Accrued interest payable
|
|
405
|
|
|
405
|
|
|
405
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2012
|
(In Thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level I)
|
|
Significant Other Observable Inputs (Level II)
|
|
Significant Unobservable Inputs (Level III)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,142
|
|
|
$
|
15,142
|
|
|
$
|
15,142
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
289,316
|
|
|
289,316
|
|
|
11,653
|
|
|
277,663
|
|
|
—
|
|
Loans held for sale
|
|
3,774
|
|
|
3,774
|
|
|
3,774
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
504,615
|
|
|
506,406
|
|
|
—
|
|
|
—
|
|
|
506,406
|
|
Bank-owned life insurance
|
|
16,362
|
|
|
16,362
|
|
|
16,362
|
|
|
—
|
|
|
—
|
|
Accrued interest receivable
|
|
4,099
|
|
|
4,099
|
|
|
4,099
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
527,073
|
|
|
$
|
530,485
|
|
|
$
|
359,979
|
|
|
$
|
—
|
|
|
$
|
170,506
|
|
Noninterest-bearing deposits
|
|
114,953
|
|
|
114,953
|
|
|
114,953
|
|
|
—
|
|
|
—
|
|
Short-term borrowings
|
|
33,204
|
|
|
33,204
|
|
|
33,204
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
|
76,278
|
|
|
80,772
|
|
|
—
|
|
|
—
|
|
|
80,772
|
|
Accrued interest payable
|
|
366
|
|
|
366
|
|
|
366
|
|
|
—
|
|
|
—
|
|
Cash and Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and Accrued Interest Payable:
The fair value is equal to the carrying value.
Investment Securities:
The fair value of investment securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is determined by using the quoted market price for similar securities. Regulatory stocks’ fair value is equal to the carrying value.
Loans:
Fair values are determined for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential real estate, construction real estate, and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.
Bank-Owned Life Insurance:
The fair value is equal to the cash surrender value of the life insurance policies.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market accounts, is equal to the amount payable on demand as of
December 31, 2013
and
2012
. The fair value of certificates of deposit is based on the discounted value of contractual cash flows.
The fair values above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
Long Term Borrowings:
The fair value of long term borrowings is based on the discounted value of contractual cash flows.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the notional amount and the fair value of off-balance sheet items at
December 31, 2013
and
2012
. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.
NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp, Inc. follows:
CONDENSED BALANCE SHEET, DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
1,686
|
|
|
$
|
207
|
|
Investment in subsidiaries:
|
|
|
|
|
|
|
Bank
|
|
117,556
|
|
|
79,653
|
|
Non-bank
|
|
8,380
|
|
|
13,575
|
|
Other assets
|
|
351
|
|
|
388
|
|
Total Assets
|
|
$
|
127,973
|
|
|
$
|
93,823
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
158
|
|
|
$
|
97
|
|
Shareholders’ equity
|
|
127,815
|
|
|
93,726
|
|
Total liability and shareholders’ equity
|
|
$
|
127,973
|
|
|
$
|
93,823
|
|
CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
|
2011
|
Operating income:
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$
|
14,836
|
|
|
$
|
8,034
|
|
|
$
|
7,266
|
|
Security gains
|
|
—
|
|
|
4
|
|
|
—
|
|
Equity in undistributed earnings of subsidiaries
|
|
346
|
|
|
6,407
|
|
|
5,414
|
|
Operating expenses
|
|
(1,098
|
)
|
|
(595
|
)
|
|
(318
|
)
|
Net income
|
|
$
|
14,084
|
|
|
$
|
13,850
|
|
|
$
|
12,362
|
|
Comprehensive income
|
|
$
|
3,833
|
|
|
$
|
20,426
|
|
|
$
|
20,832
|
|
CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
2013
|
|
2012
|
|
2011
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,084
|
|
|
$
|
13,850
|
|
|
$
|
12,362
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiaries
|
|
(346
|
)
|
|
(6,407
|
)
|
|
(5,414
|
)
|
Other, net
|
|
97
|
|
|
(145
|
)
|
|
23
|
|
Net cash provided by operating activities
|
|
13,835
|
|
|
7,298
|
|
|
6,971
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Outlays for business acquisitions
|
|
(2,876
|
)
|
|
—
|
|
|
—
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
(9,560
|
)
|
|
(7,214
|
)
|
|
(7,059
|
)
|
Issuance of common stock
|
|
80
|
|
|
54
|
|
|
67
|
|
Net cash used for financing activities
|
|
(9,480
|
)
|
|
(7,160
|
)
|
|
(6,992
|
)
|
NET INCREASE (DECREASE) IN CASH
|
|
1,479
|
|
|
138
|
|
|
(21
|
)
|
CASH, BEGINNING OF YEAR
|
|
207
|
|
|
69
|
|
|
90
|
|
CASH, END OF YEAR
|
|
$
|
1,686
|
|
|
$
|
207
|
|
|
$
|
69
|
|
NOTE 23 - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data)
|
|
For the Three Months Ended
|
2013
|
|
March 31,
|
|
June 30,
|
|
Sept. 30,
|
|
Dec. 31,
|
Interest income
|
|
$
|
9,540
|
|
|
$
|
10,018
|
|
|
$
|
11,979
|
|
|
$
|
11,762
|
|
Interest expense
|
|
1,335
|
|
|
1,264
|
|
|
1,350
|
|
|
1,315
|
|
Net interest income
|
|
8,205
|
|
|
8,754
|
|
|
10,629
|
|
|
10,447
|
|
Provision for loan losses
|
|
500
|
|
|
575
|
|
|
600
|
|
|
600
|
|
Non-interest income, excluding securities gains
|
|
1,747
|
|
|
2,261
|
|
|
2,845
|
|
|
2,772
|
|
Securities gains (losses), net
|
|
986
|
|
|
1,274
|
|
|
(3
|
)
|
|
160
|
|
Non-interest expense
|
|
5,851
|
|
|
6,965
|
|
|
8,975
|
|
|
8,476
|
|
Income before income tax provision
|
|
4,587
|
|
|
4,749
|
|
|
3,896
|
|
|
4,303
|
|
Income tax provision
|
|
903
|
|
|
1,090
|
|
|
650
|
|
|
808
|
|
Net income
|
|
$
|
3,684
|
|
|
$
|
3,659
|
|
|
$
|
3,246
|
|
|
$
|
3,495
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.96
|
|
|
$
|
0.88
|
|
|
$
|
0.67
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted
|
|
$
|
0.96
|
|
|
$
|
0.88
|
|
|
$
|
0.67
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data)
|
|
For the Three Months Ended
|
2012
|
|
March 31,
|
|
June 30,
|
|
Sept. 30,
|
|
Dec. 31,
|
Interest income
|
|
$
|
9,285
|
|
|
$
|
9,280
|
|
|
$
|
9,267
|
|
|
$
|
9,275
|
|
Interest expense
|
|
1,615
|
|
|
1,582
|
|
|
1,577
|
|
|
1,437
|
|
Net interest income
|
|
7,670
|
|
|
7,698
|
|
|
7,690
|
|
|
7,838
|
|
Provision for loan losses
|
|
600
|
|
|
600
|
|
|
600
|
|
|
725
|
|
Non-interest income, excluding securities gains
|
|
2,174
|
|
|
2,111
|
|
|
2,324
|
|
|
2,206
|
|
Securities gains, net
|
|
589
|
|
|
170
|
|
|
447
|
|
|
79
|
|
Non-interest expense
|
|
5,464
|
|
|
5,343
|
|
|
5,458
|
|
|
5,758
|
|
Income before income tax provision
|
|
4,369
|
|
|
4,036
|
|
|
4,403
|
|
|
3,640
|
|
Income tax provision
|
|
680
|
|
|
638
|
|
|
736
|
|
|
544
|
|
Net income
|
|
$
|
3,689
|
|
|
$
|
3,398
|
|
|
$
|
3,667
|
|
|
$
|
3,096
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.96
|
|
|
$
|
0.89
|
|
|
$
|
0.95
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted
|
|
$
|
0.96
|
|
|
$
|
0.89
|
|
|
$
|
0.95
|
|
|
$
|
0.81
|
|
NOTE 24 - ACQUISITION OF LUZERNE NATIONAL BANK CORPORATION
On June 1, 2013, the Company closed on a merger transaction pursuant to which Penns Woods Bancorp, Inc. acquired Luzerne National Bank Corporation in a stock and cash transaction. The acquisition extended the Company’s footprint into Luzerne and Lackawanna Counties, Pennsylvania.
Luzerne National Bank Corporation was the holding company for Luzerne Bank, a Pennsylvania bank that conducted its business from a main office in Luzerne, Pennsylvania with
eight
branch offices in Luzerne County and
one
loan production office in Lackawanna County, all in northeastern Pennsylvania. Since June 1, 2013, the loan production office in Lackawanna County has been closed.
Under the terms of the merger agreement, the Company acquired all of the outstanding shares of Luzerne National Bank Corporation for a total purchase price of approximately
$42,612,000
. As a result of the acquisition, the Company issued
978,977
common shares, or
20.31%
of the total shares outstanding as of December 31, 2013, to former shareholders of Luzerne National Bank Corporation. Luzerne Bank is operating as an independent bank under the Penns Woods Bancorp, Inc. umbrella.
The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of Luzerne Bank. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset representing the core deposit base of Luzerne Bank based on management’s evaluation of the cost of such deposits relative to alternative funding sources. The Company also recorded an identifiable intangible asset representing the trade name of Luzerne Bank based on management’s evaluation of the value of the name in the market. Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products. Management used market quotations to determine the fair value of investment securities.
The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. Luzerne Bank’s loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded
$1,211,000
of purchased credit-impaired loans subject to a non-accretable difference of
$842,000
. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.
Luzerne’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, Luzerne’s loan portfolio without evidence of deterioration totaled
$249,789,000
and was recorded at a fair value of
$249,500,000
.
The following table summarizes the purchase of Luzerne National Bank Corporation as of June 1, 2013:
|
|
|
|
|
|
|
|
|
|
(In Thousands, Except Per Share Data)
|
|
|
|
|
Purchase Price Consideration in Common Stock
|
|
|
|
|
|
|
Luzerne National Bank Corporation common shares settled for stock
|
|
630,216
|
|
|
|
|
Exchange Ratio
|
|
1.5534
|
|
|
|
|
Penns Woods Bancorp, Inc. shares issued
|
|
978,977
|
|
|
|
|
Value assigned to Penns Woods Bancorp, Inc. common share
|
|
$
|
40.59
|
|
|
|
|
Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for Penns Woods Bancorp, Inc.
|
|
|
|
|
$
|
39,736
|
|
Purchase Price Consideration - Cash for Common Stock
|
|
|
|
|
|
|
Luzerne National Bank Corporation shares exchanged for cash
|
|
46,480
|
|
|
|
|
Purchase price paid to each Luzerne National Bank Corporation common share exchanged for cash
|
|
$
|
61.86
|
|
|
|
|
Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for cash
|
|
|
|
|
2,876
|
|
Total Purchase Price
|
|
|
|
|
42,612
|
|
Net Assets Acquired:
|
|
|
|
|
|
|
Luzerne National Bank Corporation shareholders’ equity
|
|
$
|
27,371
|
|
|
|
|
Adjustments to reflect assets acquired at fair value:
|
|
|
|
|
|
|
Investments
|
|
33
|
|
|
|
|
Loans
|
|
|
|
|
|
|
Interest rate
|
|
2,680
|
|
|
|
|
General credit
|
|
(3,206
|
)
|
|
|
|
Specific credit - non-amortizing
|
|
(58
|
)
|
|
|
|
Specific credit - amortizing
|
|
(40
|
)
|
|
|
|
Core deposit intangible
|
|
1,882
|
|
|
|
|
Trade name intangible
|
|
133
|
|
|
|
|
Owned premises
|
|
1,138
|
|
|
|
|
Leased premises contracts
|
|
122
|
|
|
|
|
Deferred tax assets
|
|
(603
|
)
|
|
|
|
Adjustments to reflect liabilities acquired at fair value:
|
|
|
|
|
|
|
Time deposits
|
|
(912
|
)
|
|
|
|
|
|
|
|
|
28,540
|
|
Goodwill resulting from merger
|
|
|
|
|
$
|
14,072
|
|
The following condensed statement reflects the values assigned to Luzerne National Bank Corporation’s net assets as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Total purchase price
|
|
|
|
|
$
|
42,612
|
|
Net assets acquired:
|
|
|
|
|
|
|
Cash
|
|
$
|
20,296
|
|
|
|
|
Federal funds sold
|
|
67
|
|
|
|
|
Securities available for sale
|
|
21,783
|
|
|
|
|
Loans
|
|
250,377
|
|
|
|
|
Premises and equipment, net
|
|
8,014
|
|
|
|
|
Accrued interest receivable
|
|
726
|
|
|
|
|
Bank-owned life insurance
|
|
7,419
|
|
|
|
|
Intangibles
|
|
2,015
|
|
|
|
|
Deferred tax liability
|
|
(76
|
)
|
|
|
|
Other assets
|
|
2,636
|
|
|
|
|
Time deposits
|
|
(79,223
|
)
|
|
|
|
Deposits other than time deposits
|
|
(197,733
|
)
|
|
|
|
Borrowings
|
|
(2,766
|
)
|
|
|
|
Accrued interest payable
|
|
(103
|
)
|
|
|
|
Other liabilities
|
|
(4,892
|
)
|
|
|
|
|
|
|
|
|
28,540
|
|
Goodwill resulting from Luzerne National Bank Corporation Merger
|
|
|
|
|
$
|
14,072
|
|
The Company recorded goodwill and other intangibles associated with the purchase of Luzerne National Bank Corporation totaling
$16,086,000
. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment during the seven months ended December 31, 2013. The carrying amount of the goodwill at December 31, 2013 related to the Luzerne acquisition was
$14,072,000
.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the seven months ended December 31, 2013, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible and trade name intangible which are being amortized on an accelerated basis over the useful life of such assets. The gross carrying amount of the core deposit intangible and trade name intangible at December 31, 2013 was
$1,682,000
and
$119,000
, respectively, with
$200,000
and
$13,000
accumulated amortization as of that date.
As of December 31, 2013, the current year and estimated future amortization expense for the core deposit and trade name intangible was:
|
|
|
|
|
|
(In Thousands)
|
|
|
2014
|
|
$
|
345
|
|
2015
|
|
308
|
|
2016
|
|
272
|
|
2017
|
|
235
|
|
2018
|
|
198
|
|
2019
|
|
162
|
|
2020
|
|
125
|
|
2021
|
|
89
|
|
2022
|
|
52
|
|
2023
|
|
15
|
|
|
|
$
|
1,801
|
|
Results of operations for Luzerne National Bank Corporation prior to the acquisition date are not included in the Consolidated Statement of Income for the three and twelve month periods ended December 31, 2013. Due to the significant amount of fair
value adjustments, historical results of Luzerne National Bank Corporation are not relevant to the Company’s results of operations. Therefore, no pro forma information is presented.
The following table presents financial information regarding the former Luzerne National Bank Corporation operations included in our Consolidated Statement of Income from the date of acquisition through December 31, 2013 under the column “Actual from acquisition date through December 31, 2013”. In addition, the following table presents unaudited pro forma information as if the acquisition of Luzerne National Bank Corporation had occurred on January 1, 2012 under the “Pro Forma” columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited proforma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments are included in the numbers below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Formas
|
|
|
Actual from Acquisition Date
|
|
Twelve Months Ended December 31,
|
(In Thousands, Except Per Share Data)
|
|
Through December 31, 2013
|
|
2013
|
|
2012
|
Net interest income
|
|
$
|
6,777
|
|
|
$
|
42,622
|
|
|
$
|
41,898
|
|
Non-interest income
|
|
1,359
|
|
|
12,864
|
|
|
12,017
|
|
Net income
|
|
1,144
|
|
|
12,953
|
|
|
16,150
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
2.77
|
|
|
$
|
3.35
|
|
Diluted
|
|
|
|
|
2.77
|
|
|
3.35
|
|