NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Bank”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). All significant inter-company balances and transactions have been eliminated in the consolidation.
The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2013
.
The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis. These policies are presented on pages 38 through 43 of the Annual Report on Form 10-K for the year ended
December 31, 2013
.
In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.
Note 2. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income by component as of
June 30, 2014
and 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2014
|
|
Three Months Ended June 30, 2013
|
(In Thousands)
|
|
Net Unrealized Gain (Loss) on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
|
Net Unrealized
Gain on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
Balance, March 31,
|
|
$
|
1,088
|
|
|
$
|
(2,725
|
)
|
|
$
|
(1,637
|
)
|
|
$
|
8,516
|
|
|
$
|
(4,807
|
)
|
|
$
|
3,709
|
|
Other comprehensive income (loss) before reclassifications
|
|
2,593
|
|
|
—
|
|
|
2,593
|
|
|
(7,389
|
)
|
|
—
|
|
|
(7,389
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
(321
|
)
|
|
—
|
|
|
(321
|
)
|
|
(841
|
)
|
|
—
|
|
|
(841
|
)
|
Net current-period other comprehensive income (loss)
|
|
2,272
|
|
|
—
|
|
|
2,272
|
|
|
(8,230
|
)
|
|
—
|
|
|
(8,230
|
)
|
Balance, June 30
|
|
$
|
3,360
|
|
|
$
|
(2,725
|
)
|
|
$
|
635
|
|
|
$
|
286
|
|
|
$
|
(4,807
|
)
|
|
$
|
(4,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014
|
|
Six Months Ended June 30, 2013
|
(In Thousands)
|
|
Net Unrealized Gain (Loss) on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
|
Net Unrealized
Gain on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
Balance, December 31
|
|
$
|
(2,169
|
)
|
|
$
|
(2,725
|
)
|
|
$
|
(4,894
|
)
|
|
$
|
10,164
|
|
|
$
|
(4,807
|
)
|
|
$
|
5,357
|
|
Other comprehensive (loss) income before reclassifications
|
|
6,110
|
|
|
—
|
|
|
6,110
|
|
|
(8,386
|
)
|
|
—
|
|
|
(8,386
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
(581
|
)
|
|
—
|
|
|
(581
|
)
|
|
(1,492
|
)
|
|
—
|
|
|
(1,492
|
)
|
Net current-period other comprehensive (loss) income
|
|
5,529
|
|
|
—
|
|
|
5,529
|
|
|
(9,878
|
)
|
|
—
|
|
|
(9,878
|
)
|
Balance, June 30
|
|
$
|
3,360
|
|
|
$
|
(2,725
|
)
|
|
$
|
635
|
|
|
$
|
286
|
|
|
$
|
(4,807
|
)
|
|
$
|
(4,521
|
)
|
The reclassifications out of accumulated other comprehensive income as of
June 30, 2014
and
2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
|
Affected Line Item
in the Consolidated
Statement of Income
|
|
Three Months Ended June 30, 2014
|
|
Three Months Ended June 30, 2013
|
|
Net unrealized gain on available for sale securities
|
|
$
|
487
|
|
|
$
|
1,274
|
|
|
Securities gains, net
|
Income tax effect
|
|
166
|
|
|
433
|
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
321
|
|
|
$
|
841
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Income Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Income
|
|
Affected Line Item
in the Consolidated
Statement of Income
|
|
Six Months Ended June 30, 2014
|
|
Six Months Ended June 30, 2013
|
|
Net unrealized gain on available for sale securities
|
|
$
|
880
|
|
|
$
|
2,260
|
|
|
Securities gains, net
|
Income tax effect
|
|
299
|
|
|
768
|
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
581
|
|
|
$
|
1,492
|
|
|
Net of tax
|
Note 3. Recent Accounting Pronouncements
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 Join 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 position or results of operations.
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 position or results of operations.
In June 2014, the FASB issued ASU 2014-11,
Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
. The amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In June 2014, the FASB issued ASU 2014-12,
Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period
. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.
The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be
recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
Note 4. Per Share Data
There are
no
convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. 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 earnings per share computation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Weighted average common shares issued
|
|
5,000,789
|
|
|
4,331,631
|
|
|
5,000,482
|
|
|
4,176,312
|
|
Average treasury stock shares
|
|
(180,596
|
)
|
|
(180,596
|
)
|
|
(180,596
|
)
|
|
(180,596
|
)
|
Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share
|
|
4,820,193
|
|
|
4,151,035
|
|
|
4,819,886
|
|
|
3,995,716
|
|
Note 5. Investment Securities
The amortized cost and fair values of investment securities at
June 30, 2014
and
December 31, 2013
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Available for sale (AFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
5,975
|
|
|
$
|
14
|
|
|
$
|
(127
|
)
|
|
$
|
5,862
|
|
Mortgage-backed securities
|
|
11,420
|
|
|
593
|
|
|
(9
|
)
|
|
12,004
|
|
Asset-backed securities
|
|
2,580
|
|
|
40
|
|
|
(3
|
)
|
|
2,617
|
|
State and political securities
|
|
126,518
|
|
|
4,089
|
|
|
(1,411
|
)
|
|
129,196
|
|
Other debt securities
|
|
99,197
|
|
|
1,202
|
|
|
(962
|
)
|
|
99,437
|
|
Total debt securities
|
|
245,690
|
|
|
5,938
|
|
|
(2,512
|
)
|
|
249,116
|
|
Financial institution equity securities
|
|
8,588
|
|
|
1,637
|
|
|
(3
|
)
|
|
10,222
|
|
Other equity securities
|
|
3,657
|
|
|
122
|
|
|
(91
|
)
|
|
3,688
|
|
Total equity securities
|
|
12,245
|
|
|
1,759
|
|
|
(94
|
)
|
|
13,910
|
|
Total investment securities AFS
|
|
$
|
257,935
|
|
|
$
|
7,697
|
|
|
$
|
(2,606
|
)
|
|
$
|
263,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
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
|
|
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
June 30, 2014
and
December 31, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
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
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,869
|
|
|
$
|
(127
|
)
|
|
$
|
3,869
|
|
|
$
|
(127
|
)
|
Mortgage-backed securities
|
|
3,965
|
|
|
(6
|
)
|
|
926
|
|
|
(3
|
)
|
|
4,891
|
|
|
(9
|
)
|
Asset-backed securities
|
|
—
|
|
|
—
|
|
|
612
|
|
|
(3
|
)
|
|
612
|
|
|
(3
|
)
|
State and political securities
|
|
8,989
|
|
|
(99
|
)
|
|
11,530
|
|
|
(1,312
|
)
|
|
20,519
|
|
|
(1,411
|
)
|
Other debt securities
|
|
11,631
|
|
|
(237
|
)
|
|
29,471
|
|
|
(725
|
)
|
|
41,102
|
|
|
(962
|
)
|
Total debt securities
|
|
24,585
|
|
|
(342
|
)
|
|
46,408
|
|
|
(2,170
|
)
|
|
70,993
|
|
|
(2,512
|
)
|
Financial institution equity securities
|
|
132
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
132
|
|
|
(3
|
)
|
Other equity securities
|
|
668
|
|
|
(59
|
)
|
|
768
|
|
|
(32
|
)
|
|
1,436
|
|
|
(91
|
)
|
Total equity securities
|
|
800
|
|
|
(62
|
)
|
|
768
|
|
|
(32
|
)
|
|
1,568
|
|
|
(94
|
)
|
Total
|
|
$
|
25,385
|
|
|
$
|
(404
|
)
|
|
$
|
47,176
|
|
|
$
|
(2,202
|
)
|
|
$
|
72,561
|
|
|
$
|
(2,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
)
|
Financial institution equity securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other equity securities
|
|
274
|
|
|
(22
|
)
|
|
655
|
|
|
(45
|
)
|
|
929
|
|
|
(67
|
)
|
Total equity securities
|
|
274
|
|
|
(22
|
)
|
|
655
|
|
|
(45
|
)
|
|
929
|
|
|
(67
|
)
|
Total
|
|
$
|
130,175
|
|
|
$
|
(5,953
|
)
|
|
$
|
9,600
|
|
|
$
|
(2,935
|
)
|
|
$
|
139,775
|
|
|
$
|
(8,888
|
)
|
At
June 30, 2014
there were a total of
20
securities in a continuous unrealized loss position for less than twelve months and
48
individual securities that were in a continuous unrealized loss position for twelve months or greater.
The Company reviews its position quarterly and has determined that, at
June 30, 2014
, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at
June 30, 2014
, 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
|
|
$
|
3,760
|
|
|
$
|
3,795
|
|
Due after one year to five years
|
|
38,383
|
|
|
38,921
|
|
Due after five years to ten years
|
|
107,423
|
|
|
107,642
|
|
Due after ten years
|
|
96,124
|
|
|
98,758
|
|
Total
|
|
$
|
245,690
|
|
|
$
|
249,116
|
|
Total gross proceeds from sales of securities available for sale were
$70,431
,000 and
$42,910
,000 for the
six months ended June 30, 2014
and
2013
, respectively. The following table represents gross realized gains and losses on those transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
(In Thousands)
|
2014
|
|
2013
|
2014
|
|
2013
|
Gross realized gains:
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
$
|
49
|
|
|
$
|
—
|
|
$
|
49
|
|
|
$
|
—
|
|
Mortgage-backed securities
|
76
|
|
|
—
|
|
76
|
|
|
—
|
|
State and political securities
|
387
|
|
|
1,062
|
|
732
|
|
|
1,641
|
|
Other debt securities
|
155
|
|
|
178
|
|
462
|
|
|
299
|
|
Financial institution equity securities
|
16
|
|
|
—
|
|
128
|
|
|
130
|
|
Other equity securities
|
64
|
|
|
34
|
|
119
|
|
|
250
|
|
Total gross realized gains
|
$
|
747
|
|
|
$
|
1,274
|
|
$
|
1,566
|
|
|
$
|
2,320
|
|
|
|
|
|
|
|
|
Gross realized losses:
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
$
|
14
|
|
|
$
|
—
|
|
$
|
45
|
|
|
$
|
—
|
|
State and political securities
|
83
|
|
|
—
|
|
403
|
|
|
60
|
|
Other debt securities
|
97
|
|
|
—
|
|
172
|
|
|
—
|
|
Other equity securities
|
66
|
|
|
—
|
|
66
|
|
|
—
|
|
Total gross realized losses
|
$
|
260
|
|
|
$
|
—
|
|
$
|
686
|
|
|
$
|
60
|
|
There were no impairment charges included in gross realized losses for the
three and six
months ended
June 30, 2014
and
2013
, respectively.
Note 6. Federal Home Loan Bank Stock
Jersey Shore State Bank and Luzerne Bank are both members of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and as such, are 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 7.
Credit Quality and Related Allowance for Loan Losses
Management segments the Bank’s 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
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
Past Due
|
|
Past Due 90
|
|
|
|
|
|
|
|
|
30 To 89
|
|
Days Or More
|
|
Non-
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
& Still Accruing
|
|
Accrual
|
|
Total
|
Commercial and agricultural
|
|
$
|
118,326
|
|
|
$
|
645
|
|
|
$
|
—
|
|
|
$
|
156
|
|
|
$
|
119,127
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
413,513
|
|
|
3,261
|
|
|
397
|
|
|
444
|
|
|
417,615
|
|
Commercial
|
|
269,481
|
|
|
1,839
|
|
|
—
|
|
|
9,984
|
|
|
281,304
|
|
Construction
|
|
19,345
|
|
|
—
|
|
|
—
|
|
|
998
|
|
|
20,343
|
|
Installment loans to individuals
|
|
19,123
|
|
|
96
|
|
|
—
|
|
|
—
|
|
|
19,219
|
|
|
|
839,788
|
|
|
$
|
5,841
|
|
|
$
|
397
|
|
|
$
|
11,582
|
|
|
857,608
|
|
Net deferred loan fees and discounts
|
|
(1,276
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,276
|
)
|
Allowance for loan losses
|
|
(8,811
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,811
|
)
|
Loans, net
|
|
$
|
829,701
|
|
|
|
|
|
|
|
|
|
|
|
$
|
847,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
Past Due
|
|
Past Due 90
|
|
|
|
|
|
|
|
|
30 To 89
|
|
Days Or More
|
|
Non-
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
& Still Accruing
|
|
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
|
|
Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.
Upon the acquisition of Luzerne Bank on June 1, 2013, 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
June 30, 2014
. 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
$866,000
at
June 30, 2014
.
On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne Bank 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 either the customer or 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 in the Luzerne Bank transaction with specific evidence of deterioration in credit quality 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 Bank acquisition as of June 1, 2013:
Changes in the amortizable yield for purchased credit-impaired loans were as follows for the six months ended
June 30, 2014
and 2013:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
June 30, 2014
|
|
June 30, 2013
|
Balance at beginning of period or at acquisition
|
|
$
|
35
|
|
|
$
|
63
|
|
Accretion
|
|
(12
|
)
|
|
(4
|
)
|
Balance at end of period
|
|
$
|
23
|
|
|
$
|
59
|
|
The following table presents additional information regarding loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
June 30, 2014
|
|
December 31, 2013
|
Outstanding balance
|
|
$
|
1,222
|
|
|
$
|
1,224
|
|
Carrying amount
|
|
866
|
|
|
868
|
|
There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and June 30, 2014. There has been no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of June 30, 2014.
The following table presents interest income the Bank would have recorded 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 for the
three and six
months ended
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2014
|
|
2013
|
(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
|
Commercial and agricultural
|
|
$
|
15
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
5
|
|
|
5
|
|
|
22
|
|
|
3
|
|
Commercial
|
|
147
|
|
|
53
|
|
|
31
|
|
|
34
|
|
Construction
|
|
24
|
|
|
—
|
|
|
40
|
|
|
14
|
|
|
|
$
|
191
|
|
|
$
|
59
|
|
|
$
|
97
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
(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
|
Commercial and agricultural
|
|
$
|
17
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
7
|
|
|
9
|
|
|
54
|
|
|
12
|
|
Commercial
|
|
275
|
|
|
86
|
|
|
116
|
|
|
84
|
|
Construction
|
|
35
|
|
|
—
|
|
|
81
|
|
|
25
|
|
|
|
$
|
334
|
|
|
$
|
96
|
|
|
$
|
255
|
|
|
$
|
121
|
|
Impaired Loans
Impaired loans are loans for which it is probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Bank evaluates such loans for impairment individually and does 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 Bank may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. 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 with the Bank’s policy on nonaccrual loans.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
Recorded
|
|
Unpaid Principal
|
|
Related
|
(In Thousands)
|
|
Investment
|
|
Balance
|
|
Allowance
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
454
|
|
|
563
|
|
|
—
|
|
Commercial
|
|
2,250
|
|
|
2,506
|
|
|
—
|
|
Construction
|
|
516
|
|
|
516
|
|
|
—
|
|
|
|
3,220
|
|
|
3,585
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
512
|
|
|
512
|
|
|
147
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
630
|
|
|
653
|
|
|
56
|
|
Commercial
|
|
8,617
|
|
|
9,116
|
|
|
2,042
|
|
Construction
|
|
506
|
|
|
1,361
|
|
|
108
|
|
|
|
10,265
|
|
|
11,642
|
|
|
2,353
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
512
|
|
|
512
|
|
|
147
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,084
|
|
|
1,216
|
|
|
56
|
|
Commercial
|
|
10,867
|
|
|
11,622
|
|
|
2,042
|
|
Construction
|
|
1,022
|
|
|
1,877
|
|
|
108
|
|
|
|
$
|
13,485
|
|
|
$
|
15,227
|
|
|
$
|
2,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Recorded
|
|
Unpaid Principal
|
|
Related
|
(In Thousands)
|
|
Investment
|
|
Balance
|
|
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
|
|
The following table presents the average recorded investment in impaired loans and related interest income recognized for the
three and six
months ended for
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2014
|
|
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
|
|
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
|
|
$
|
517
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
718
|
|
|
$
|
7
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,117
|
|
|
3
|
|
|
3
|
|
|
1,679
|
|
|
9
|
|
|
6
|
|
Commercial
|
|
10,901
|
|
|
19
|
|
|
2
|
|
|
8,491
|
|
|
46
|
|
|
38
|
|
Construction
|
|
1,025
|
|
|
—
|
|
|
—
|
|
|
2,532
|
|
|
—
|
|
|
14
|
|
|
|
$
|
13,560
|
|
|
$
|
29
|
|
|
$
|
5
|
|
|
$
|
13,420
|
|
|
$
|
62
|
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
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
|
|
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
|
|
$
|
522
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
615
|
|
|
$
|
13
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,142
|
|
|
14
|
|
|
7
|
|
|
1,618
|
|
|
17
|
|
|
11
|
|
Commercial
|
|
10,008
|
|
|
61
|
|
|
14
|
|
|
8,598
|
|
|
93
|
|
|
84
|
|
Construction
|
|
1,030
|
|
|
2
|
|
|
8
|
|
|
3,718
|
|
|
553
|
|
|
553
|
|
|
|
$
|
12,702
|
|
|
$
|
90
|
|
|
$
|
29
|
|
|
$
|
14,549
|
|
|
$
|
676
|
|
|
$
|
648
|
|
There is approximately
$299,000
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
.
There were no loan modifications that are considered TDRs completed during the
three and six
months ended
June 30, 2014
. Loan modifications that are considered TDRs completed during the
three and six
months ended
June 30, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2013
|
(In Thousands, Except Number of Contracts)
|
|
Number
of
Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
Real estate mortgage:
|
|
|
|
|
|
|
Residential
|
|
2
|
|
|
$
|
61
|
|
|
$
|
61
|
|
|
|
2
|
|
|
$
|
61
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2013
|
(In Thousands, Except Number of Contracts)
|
|
Number
of
Contracts
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
Post-Modification
Outstanding
Recorded
Investment
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
2
|
|
|
$
|
61
|
|
|
$
|
61
|
|
Commercial
|
|
2
|
|
|
264
|
|
|
264
|
|
|
|
4
|
|
|
$
|
325
|
|
|
$
|
325
|
|
There were
two
loan modifications considered troubled debt restructurings made during the twelve months previous to
June 30, 2014
that defaulted during the
six months ended June 30, 2014
. The loans that defaulted are commercial real estate loans that are currently in litigation with a recorded investment of
$1,629,000
at
June 30, 2014
.
Troubled debt restructurings amounted to
$11,281,000
and
$11,472,000
as of
June 30, 2014
and
December 31, 2013
.
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 Bank has 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
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Totals
|
Pass
|
|
$
|
112,634
|
|
|
$
|
415,617
|
|
|
$
|
259,533
|
|
|
$
|
19,645
|
|
|
$
|
19,219
|
|
|
$
|
826,648
|
|
Special Mention
|
|
5,173
|
|
|
1,569
|
|
|
9,438
|
|
|
202
|
|
|
—
|
|
|
16,382
|
|
Substandard
|
|
1,320
|
|
|
429
|
|
|
12,333
|
|
|
496
|
|
|
—
|
|
|
14,578
|
|
|
|
$
|
119,127
|
|
|
$
|
417,615
|
|
|
$
|
281,304
|
|
|
$
|
20,343
|
|
|
$
|
19,219
|
|
|
$
|
857,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
|
|
$
|
105,029
|
|
|
$
|
399,781
|
|
|
$
|
282,476
|
|
|
$
|
17,282
|
|
|
$
|
14,647
|
|
|
$
|
819,215
|
|
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 Bank’s 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 Bank’s 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.
There has been
no
allowance for loan losses recorded for loans acquired in the Luzerne Bank transaction with or without specific evidence of deterioration in credit quality as of June 1, 2013 as well as those acquired without specific evidence of deterioration in credit quality as of
June 30, 2014
.
Activity in the allowance is presented for the
three and six
months ended
June 30, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2014
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
537
|
|
|
$
|
3,062
|
|
|
$
|
3,324
|
|
|
$
|
795
|
|
|
$
|
161
|
|
|
$
|
641
|
|
|
$
|
8,520
|
|
Charge-offs
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
(35
|
)
|
Recoveries
|
|
8
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
26
|
|
Provision
|
|
149
|
|
|
206
|
|
|
70
|
|
|
(77
|
)
|
|
48
|
|
|
(96
|
)
|
|
300
|
|
Ending Balance
|
|
$
|
694
|
|
|
$
|
3,262
|
|
|
$
|
3,394
|
|
|
$
|
718
|
|
|
$
|
198
|
|
|
$
|
545
|
|
|
$
|
8,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2013
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
568
|
|
|
$
|
2,772
|
|
|
$
|
3,759
|
|
|
$
|
814
|
|
|
$
|
144
|
|
|
$
|
773
|
|
|
$
|
8,830
|
|
Charge-offs
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(25
|
)
|
|
—
|
|
|
(31
|
)
|
Recoveries
|
|
11
|
|
|
4
|
|
|
5
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
30
|
|
Provision
|
|
(39
|
)
|
|
269
|
|
|
230
|
|
|
29
|
|
|
12
|
|
|
74
|
|
|
575
|
|
Ending Balance
|
|
$
|
540
|
|
|
$
|
3,045
|
|
|
$
|
3,988
|
|
|
$
|
843
|
|
|
$
|
141
|
|
|
$
|
847
|
|
|
$
|
9,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
474
|
|
|
$
|
3,917
|
|
|
$
|
4,079
|
|
|
$
|
741
|
|
|
$
|
139
|
|
|
$
|
794
|
|
|
$
|
10,144
|
|
Charge-offs
|
|
—
|
|
|
(63
|
)
|
|
(2,038
|
)
|
|
—
|
|
|
(68
|
)
|
|
—
|
|
|
(2,169
|
)
|
Recoveries
|
|
11
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
37
|
|
|
—
|
|
|
51
|
|
Provision
|
|
209
|
|
|
(595
|
)
|
|
1,353
|
|
|
(23
|
)
|
|
90
|
|
|
(249
|
)
|
|
785
|
|
Ending Balance
|
|
$
|
694
|
|
|
$
|
3,262
|
|
|
$
|
3,394
|
|
|
$
|
718
|
|
|
$
|
198
|
|
|
$
|
545
|
|
|
$
|
8,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2013
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
361
|
|
|
$
|
1,954
|
|
|
$
|
3,831
|
|
|
$
|
950
|
|
|
$
|
144
|
|
|
$
|
377
|
|
|
$
|
7,617
|
|
Charge-offs
|
|
—
|
|
|
(134
|
)
|
|
(6
|
)
|
|
—
|
|
|
(50
|
)
|
|
—
|
|
|
(190
|
)
|
Recoveries
|
|
13
|
|
|
5
|
|
|
6
|
|
|
850
|
|
|
28
|
|
|
—
|
|
|
902
|
|
Provision
|
|
166
|
|
|
1,220
|
|
|
157
|
|
|
(957
|
)
|
|
19
|
|
|
470
|
|
|
1,075
|
|
Ending Balance
|
|
$
|
540
|
|
|
$
|
3,045
|
|
|
$
|
3,988
|
|
|
$
|
843
|
|
|
$
|
141
|
|
|
$
|
847
|
|
|
$
|
9,404
|
|
The Company grants commercial, industrial, residential, and installment loans to customers throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio at
June 30, 2014
, 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
June 30, 2014
and
2013
as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2014
|
|
2013
|
Owners of residential rental properties
|
|
15.69
|
%
|
|
14.71
|
%
|
Owners of commercial rental properties
|
|
14.12
|
%
|
|
14.15
|
%
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Unallocated
|
|
Totals
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
147
|
|
|
$
|
56
|
|
|
$
|
2,042
|
|
|
$
|
108
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,353
|
|
Collectively evaluated for impairment
|
|
547
|
|
|
3,206
|
|
|
1,352
|
|
|
610
|
|
|
198
|
|
|
545
|
|
|
6,458
|
|
Total ending allowance balance
|
|
$
|
694
|
|
|
$
|
3,262
|
|
|
$
|
3,394
|
|
|
$
|
718
|
|
|
$
|
198
|
|
|
$
|
545
|
|
|
$
|
8,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
512
|
|
|
$
|
732
|
|
|
$
|
10,353
|
|
|
$
|
1,022
|
|
|
$
|
—
|
|
|
|
|
|
$
|
12,619
|
|
Loans acquired with deteriorated credit quality
|
|
—
|
|
|
352
|
|
|
514
|
|
|
—
|
|
|
—
|
|
|
|
|
|
866
|
|
Collectively evaluated for impairment
|
|
118,615
|
|
|
416,531
|
|
|
270,437
|
|
|
19,321
|
|
|
19,219
|
|
|
|
|
|
844,123
|
|
Total ending loans balance
|
|
$
|
119,127
|
|
|
$
|
417,615
|
|
|
$
|
281,304
|
|
|
$
|
20,343
|
|
|
$
|
19,219
|
|
|
|
|
|
$
|
857,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Commercial and
|
|
Real Estate Mortgages
|
|
Installment Loans
|
|
|
|
|
(In Thousands)
|
|
Agricultural
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
to Individuals
|
|
Unallocated
|
|
Totals
|
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
|
|
Note 8. Net Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 12 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended
December 31, 2013
.
The following sets forth the components of the net periodic benefit cost of the domestic non-contributory defined benefit plan for the
three and six
months ended
June 30, 2014
and
2013
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
(In Thousands)
|
|
2014
|
|
2013
|
2014
|
|
2013
|
Service cost
|
|
$
|
140
|
|
|
$
|
159
|
|
$
|
280
|
|
|
$
|
318
|
|
Interest cost
|
|
214
|
|
|
193
|
|
429
|
|
|
386
|
|
Expected return on plan assets
|
|
(289
|
)
|
|
(246
|
)
|
(577
|
)
|
|
(492
|
)
|
Amortization of prior service cost
|
|
—
|
|
|
6
|
|
—
|
|
|
13
|
|
Amortization of net loss
|
|
53
|
|
|
120
|
|
105
|
|
|
239
|
|
Net periodic cost
|
|
$
|
118
|
|
|
$
|
232
|
|
$
|
237
|
|
|
$
|
464
|
|
Employer Contributions
The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended
December 31, 2013
, that it expected to contribute a minimum of
$600,000
to its defined benefit plan in
2014
. As of
June 30, 2014
, there were contributions of
$420,000
made to the plan with additional contributions of at least
$180,000
anticipated during the remainder of
2014
.
Note 9. Employee Stock Purchase Plan
The Company maintains an 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. During the
six months ended June 30, 2014
and
2013
, there were
1,293
and
792
shares issued under the plan, respectively.
Note 10. 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 are primarily comprised of 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
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
June 30, 2014
|
|
December 31, 2013
|
Commitments to extend credit
|
|
$
|
252,693
|
|
|
$
|
185,415
|
|
Standby letters of credit
|
|
3,955
|
|
|
4,379
|
|
|
|
$
|
256,648
|
|
|
$
|
189,794
|
|
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 11. 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.
|
|
|
|
Level I:
|
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
|
|
Level II:
|
|
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
|
Level III:
|
|
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
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
June 30, 2014
and
December 31, 2013
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
(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
|
|
$
|
—
|
|
|
$
|
5,862
|
|
|
$
|
—
|
|
|
$
|
5,862
|
|
Mortgage-backed securities
|
|
|
|
12,004
|
|
|
—
|
|
|
12,004
|
|
Asset-backed securities
|
|
|
|
2,617
|
|
|
—
|
|
|
2,617
|
|
State and political securities
|
|
—
|
|
|
129,196
|
|
|
—
|
|
|
129,196
|
|
Other debt securities
|
|
—
|
|
|
99,437
|
|
|
—
|
|
|
99,437
|
|
Financial institution equity securities
|
|
10,222
|
|
|
—
|
|
|
—
|
|
|
10,222
|
|
Other equity securities
|
|
3,688
|
|
|
—
|
|
|
—
|
|
|
3,688
|
|
Total assets measured on a recurring basis
|
|
$
|
13,910
|
|
|
$
|
249,116
|
|
|
$
|
—
|
|
|
$
|
263,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
The following table presents the assets reported on the consolidated balance sheet at their fair value on a non-recurring basis as of
June 30, 2014
and
December 31, 2013
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,132
|
|
|
$
|
11,132
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
1,552
|
|
|
1,552
|
|
Total assets measured on a non-recurring basis
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,684
|
|
|
$
|
12,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
The following tables present a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
Quantitative Information About Level III Fair Value Measurements
|
(In Thousands)
|
|
Fair Value
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
Impaired loans
|
|
$
|
11,132
|
|
|
Discounted cash flow
|
|
Temporary reduction in payment amount
|
|
0 to -91%
|
|
12%
|
|
|
|
|
|
|
|
Probability of default
|
|
—%
|
|
—%
|
|
|
|
|
|
Appraisal of collateral
|
|
Appraisal adjustments (1)
|
|
0 to -44%
|
|
16%
|
Other real estate owned
|
|
$
|
1,552
|
|
|
Appraisal of collateral (1)
|
|
|
|
|
|
|
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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)
|
|
|
|
|
|
|
(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 12. 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 estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. 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 value estimates 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, this 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
June 30, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Fair Value Measurements at June 30, 2014
|
(In Thousands)
|
|
Value
|
|
Value
|
|
Level I
|
|
Level II
|
|
Level III
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,867
|
|
|
$
|
24,867
|
|
|
$
|
24,867
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
263,026
|
|
|
263,026
|
|
|
13,910
|
|
|
249,116
|
|
|
—
|
|
Loans held for sale
|
|
1,827
|
|
|
1,827
|
|
|
1,827
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
847,521
|
|
|
848,480
|
|
|
—
|
|
|
—
|
|
|
848,480
|
|
Bank-owned life insurance
|
|
25,601
|
|
|
25,601
|
|
|
25,601
|
|
|
—
|
|
|
—
|
|
Accrued interest receivable
|
|
4,235
|
|
|
4,235
|
|
|
4,235
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
753,068
|
|
|
$
|
733,414
|
|
|
$
|
510,673
|
|
|
$
|
—
|
|
|
$
|
222,741
|
|
Noninterest-bearing deposits
|
|
228,758
|
|
|
228,758
|
|
|
228,758
|
|
|
—
|
|
|
—
|
|
Short-term borrowings
|
|
21,926
|
|
|
21,926
|
|
|
21,926
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
|
71,202
|
|
|
73,614
|
|
|
—
|
|
|
—
|
|
|
73,614
|
|
Accrued interest payable
|
|
399
|
|
|
399
|
|
|
399
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Fair Value Measurements at December 31, 2013
|
(In Thousands)
|
|
Value
|
|
Value
|
|
Level I
|
|
Level II
|
|
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
|
|
|
808,895
|
|
|
—
|
|
|
—
|
|
|
808,895
|
|
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
|
|
|
—
|
|
|
—
|
|
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 and held to maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Regulatory stocks’ fair value is equal to the carrying value.
Loans:
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial and agricultural, commercial real estate, residential real estate, construction real estate, and installment loans to individuals. 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 estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cashflows 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. The fair value of certificates of deposit is based on the discounted value of contractual cash flows.
The fair value estimates 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 estimated fair value of off-balance sheet items. The contractual amounts of unfunded commitments and letters of credit are presented in Note 10 (Off Balance Sheet Risk).
Note 13. Reclassification of Comparative Amounts
Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had
no
effect on net income or shareholders’ equity.
Note 14. 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
June 30, 2014
, 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 Bank’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 Bank’s loan portfolio without evidence of deterioration totaled
$249,789,000
and was recorded at a fair value of
$249,500,000
.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including
federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; (v) the effect of changes in the business cycle and downturns in the local, regional or national economies; and (vi) our ability to successfully integrate the business of Luzerne Bank.
You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise. The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.