NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The Company is also a partner in United Insurance Solutions, LLC. All significant inter-company balances and transactions have been eliminated in the consolidation.
The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
Tax Cuts and Jobs Act
Public law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 34% to 21% effective January 1, 2018. Also on December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Any adjustments during this measurement period will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined. Based on the information available and current interpretation of the rules, the Company estimated the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities. The provisional amount recorded in the fourth quarter of 2017 related to the remeasurement of the Company's deferred tax balance resulted in additional income tax expense of
$2.7 million
. Notwithstanding the foregoing, we are still analyzing certain aspects of the new law and refining our calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. Nonetheless, there has been no change to the provisional net tax benefit we recorded during the fourth quarter of 2017.
Newly Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 13
.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption on January 1, 2018, the Company made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of
$537,000
. The net effect was an
increase
to retained earnings.
The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis. These policies are presented on pages 40 through 50 of the Form 10-K for the year ended
December 31, 2017
.
In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.
Note 2. Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component shown net of tax and parenthesis indicating debits, as of
March 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
(In Thousands)
|
|
Net Unrealized Loss
on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
|
Net Unrealized Gain
(Loss) on Available
for Sale Securities
|
|
Defined
Benefit
Plan
|
|
Total
|
Beginning balance
|
|
$
|
(54
|
)
|
|
$
|
(4,920
|
)
|
|
$
|
(4,974
|
)
|
|
$
|
(639
|
)
|
|
$
|
(4,289
|
)
|
|
$
|
(4,928
|
)
|
Other comprehensive loss (gain) before reclassifications
|
|
(1,155
|
)
|
|
—
|
|
|
(1,155
|
)
|
|
488
|
|
|
—
|
|
|
488
|
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
6
|
|
|
34
|
|
|
40
|
|
|
(130
|
)
|
|
26
|
|
|
(104
|
)
|
Net current-period other comprehensive (loss) income
|
|
(1,149
|
)
|
|
34
|
|
|
(1,115
|
)
|
|
358
|
|
|
26
|
|
|
384
|
|
Reclassification from adoption of 2016-01
|
|
537
|
|
|
—
|
|
|
537
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
|
$
|
(666
|
)
|
|
$
|
(4,886
|
)
|
|
$
|
(5,552
|
)
|
|
$
|
(281
|
)
|
|
$
|
(4,263
|
)
|
|
$
|
(4,544
|
)
|
The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of
March 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Amount Reclassified from Accumulated Other Comprehensive Loss
|
|
Affected Line Item
in the Consolidated
Statement of Income
|
|
Three Months Ended March 31, 2018
|
|
Three Months Ended March 31, 2017
|
|
Net unrealized loss on available for sale securities
|
|
$
|
(9
|
)
|
|
$
|
197
|
|
|
Net securities (losses) gains, available for sale
|
Income tax effect
|
|
3
|
|
|
(67
|
)
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
(6
|
)
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
Net unrecognized pension costs
|
|
$
|
(42
|
)
|
|
$
|
(39
|
)
|
|
Salaries and employee benefits
|
Income tax effect
|
|
8
|
|
|
13
|
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
(34
|
)
|
|
$
|
(26
|
)
|
|
|
Note 3. Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning
after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a
1
percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In February 2017, the FASB issued ASU 2017-06
, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965)
.
This Update relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require a plan's interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in this Update remove the requirement to disclose the percentage interest in the master trust for plans with divided interests and require that all plans disclose the dollar amount of their interest in each of those general types of investments, which supplements the existing requirement to disclose the master trusts balances in each general type of investments. There are also increased disclosure requirements for investments in master trusts. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitte
d. This Update is not expected to have a significant impact on the Company’s financial statements.
In March 2017, the FASB issued ASU 2017-08,
Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20).
The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company’s financial statements.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815)
. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20,
Debt-Debt with Conversion and Other Options
), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 850)
, the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2018, the FASB issued ASU 2018-01,
Leases (Topic 842)
, which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Company’s financial statements.
In February 2018, the FASB issued ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10)
, to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820,
Fair Value Measurement
, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement
alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10-45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15,
Derivatives and Hedging-Embedded Derivatives
, or 825-10,
Financial Instruments-Overall
. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944,
Financial Services- Insurance
, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
Note 4. Per Share Data
There are
no
convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of
118,500
stock options, with an average exercise price of
$43.91
, outstanding on
March 31, 2018
. These options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares of $
41.93
being less than the exercise price of the options. There were a total of
96,500
stock options outstanding for the same period end in 2017 that had an average exercise price of
$43.61
and were included, on a weighted average basis, in the computation of diluted earnings per share because the average market price of common shares was
$46.94
for the period. 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 March 31,
|
|
|
2018
|
|
2017
|
Weighted average common shares issued
|
|
5,009,526
|
|
|
5,007,257
|
|
Weighted average treasury stock shares
|
|
(320,150
|
)
|
|
(272,452
|
)
|
Dilutive effect of outstanding stock options
|
|
—
|
|
|
26,500
|
|
Weighted average common shares outstanding - diluted
|
|
4,689,376
|
|
|
4,761,305
|
|
Note 5. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at
March 31, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
6,097
|
|
|
$
|
37
|
|
|
$
|
(193
|
)
|
|
$
|
5,941
|
|
State and political securities
|
|
63,866
|
|
|
154
|
|
|
(585
|
)
|
|
63,435
|
|
Other debt securities
|
|
48,680
|
|
|
50
|
|
|
(1,662
|
)
|
|
47,068
|
|
Total debt securities
|
|
$
|
118,643
|
|
|
$
|
241
|
|
|
$
|
(2,440
|
)
|
|
$
|
116,444
|
|
|
|
|
|
|
|
|
|
|
Investment equity securities:
|
|
|
|
|
|
|
|
|
Financial institution equity securities
|
|
$
|
537
|
|
|
$
|
714
|
|
|
$
|
—
|
|
|
$
|
1,251
|
|
Other equity securities
|
|
1,300
|
|
|
—
|
|
|
(69
|
)
|
|
1,231
|
|
Investment equity securities
|
|
$
|
1,837
|
|
|
$
|
714
|
|
|
$
|
(69
|
)
|
|
$
|
2,482
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
Financial institution equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other equity securities
|
|
164
|
|
|
—
|
|
|
(5
|
)
|
|
159
|
|
Trading investment equity securities
|
|
$
|
164
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
4,273
|
|
|
$
|
51
|
|
|
$
|
(111
|
)
|
|
$
|
4,213
|
|
State and political securities
|
|
56,295
|
|
|
411
|
|
|
(198
|
)
|
|
56,508
|
|
Other debt securities
|
|
48,806
|
|
|
180
|
|
|
(1,080
|
)
|
|
47,906
|
|
Total debt securities
|
|
$
|
109,374
|
|
|
$
|
642
|
|
|
$
|
(1,389
|
)
|
|
$
|
108,627
|
|
|
|
|
|
|
|
|
|
|
Investment equity securities:
|
|
|
|
|
|
|
|
|
Financial institution equity securities
|
|
$
|
537
|
|
|
$
|
728
|
|
|
$
|
—
|
|
|
$
|
1,265
|
|
Other equity securities
|
|
1,300
|
|
|
—
|
|
|
(49
|
)
|
|
1,251
|
|
Investment equity securities
|
|
$
|
1,837
|
|
|
$
|
728
|
|
|
$
|
(49
|
)
|
|
$
|
2,516
|
|
|
|
|
|
|
|
|
|
—
|
|
Trading:
|
|
|
|
|
|
|
|
|
Financial institution equity securities
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20
|
|
Other equity securities
|
|
192
|
|
|
2
|
|
|
(24
|
)
|
|
170
|
|
Trading investment equity securities
|
|
$
|
212
|
|
|
$
|
2
|
|
|
$
|
(24
|
)
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
Total net trading losses of $
3,000
for the
three months ended March 31, 2018
compared to net trading gains of $
2,000
for the three month period ended March 31, 2017 were included in the Consolidated Statement of Income.
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual debt securities have been in a continuous unrealized loss position, at
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(In Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
2,839
|
|
|
$
|
(39
|
)
|
|
$
|
2,206
|
|
|
$
|
(154
|
)
|
|
$
|
5,045
|
|
|
$
|
(193
|
)
|
State and political securities
|
|
36,353
|
|
|
(421
|
)
|
|
2,945
|
|
|
(164
|
)
|
|
39,298
|
|
|
(585
|
)
|
Other debt securities
|
|
11,662
|
|
|
(260
|
)
|
|
29,317
|
|
|
(1,402
|
)
|
|
40,979
|
|
|
(1,662
|
)
|
Total debt securities
|
|
$
|
50,854
|
|
|
$
|
(720
|
)
|
|
$
|
34,468
|
|
|
$
|
(1,720
|
)
|
|
$
|
85,322
|
|
|
$
|
(2,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(In Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
Available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
981
|
|
|
$
|
(12
|
)
|
|
$
|
2,276
|
|
|
$
|
(99
|
)
|
|
$
|
3,257
|
|
|
$
|
(111
|
)
|
State and political securities
|
|
15,691
|
|
|
(104
|
)
|
|
3,018
|
|
|
(94
|
)
|
|
18,709
|
|
|
(198
|
)
|
Other debt securities
|
|
7,512
|
|
|
(148
|
)
|
|
28,517
|
|
|
(932
|
)
|
|
36,029
|
|
|
(1,080
|
)
|
Total debt securities
|
|
$
|
24,184
|
|
|
$
|
(264
|
)
|
|
$
|
33,811
|
|
|
$
|
(1,125
|
)
|
|
$
|
57,995
|
|
|
$
|
(1,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
1,251
|
|
|
$
|
(49
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,251
|
|
|
$
|
(49
|
)
|
At
March 31, 2018
, there were a total of
67
securities in a continuous unrealized loss position for less than twelve months and
25
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
March 31, 2018
, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at
March 31, 2018
, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
5,544
|
|
|
$
|
5,528
|
|
Due after one year to five years
|
|
42,747
|
|
|
42,126
|
|
Due after five years to ten years
|
|
58,491
|
|
|
57,029
|
|
Due after ten years
|
|
11,861
|
|
|
11,761
|
|
Total
|
|
$
|
118,643
|
|
|
$
|
116,444
|
|
Total gross proceeds from sales of debt securities available for sale for the
three months ended March 31, 2018
was
$3,363,000
, an
increase
from the
2017
totals of $
2,652,000
.
The following table represents gross realized gains and losses within the available for sale portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2018
|
|
2017
|
Available for sale (AFS):
|
|
|
|
|
Gross realized gains:
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
45
|
|
Asset-backed securities
|
|
—
|
|
|
—
|
|
State and political securities
|
|
—
|
|
|
14
|
|
Other debt securities
|
|
—
|
|
|
—
|
|
Total gross realized gains
|
|
$
|
—
|
|
|
$
|
59
|
|
|
|
|
|
|
Gross realized losses:
|
|
|
|
|
|
|
State and political securities
|
|
$
|
9
|
|
|
$
|
—
|
|
|
|
|
|
|
Investment equity securities:
|
|
|
|
|
Gross realized gains:
|
|
|
|
|
Financial institution equity securities
|
|
$
|
—
|
|
|
$
|
288
|
|
|
|
|
|
|
Gross realized losses:
|
|
|
|
|
Other equity securities
|
|
$
|
—
|
|
|
$
|
150
|
|
|
|
|
|
|
There were
no
impairment charges included in gross realized losses for the
three
months ended
March 31, 2018
and
2017
, respectively.
Investment securities with a carrying value of approximately
$70,120,000
and
$95,199,000
at
March 31, 2018
and
December 31, 2017
, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
Note 6.
Loans
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, financial, 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
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
Past Due
|
|
Past Due 90
|
|
|
|
|
|
|
|
|
30 To 89
|
|
Days Or More
|
|
Non-
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
& Still Accruing
|
|
Accrual
|
|
Total
|
Commercial, financial, and agricultural
|
|
$
|
181,692
|
|
|
$
|
196
|
|
|
$
|
22
|
|
|
$
|
112
|
|
|
$
|
182,022
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
596,577
|
|
|
5,027
|
|
|
424
|
|
|
2,183
|
|
|
604,211
|
|
Commercial
|
|
330,024
|
|
|
1,497
|
|
|
—
|
|
|
4,894
|
|
|
336,415
|
|
Construction
|
|
32,043
|
|
|
162
|
|
|
—
|
|
|
—
|
|
|
32,205
|
|
Consumer automobile loans
|
|
99,327
|
|
|
207
|
|
|
—
|
|
|
—
|
|
|
99,534
|
|
Other consumer installment loans
|
|
25,324
|
|
|
521
|
|
|
—
|
|
|
6
|
|
|
25,851
|
|
|
|
1,264,987
|
|
|
$
|
7,610
|
|
|
$
|
446
|
|
|
$
|
7,195
|
|
|
1,280,238
|
|
Net deferred loan fees and discounts
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
510
|
|
Allowance for loan losses
|
|
(12,836
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,836
|
)
|
Loans, net
|
|
$
|
1,252,661
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,267,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Past Due
|
|
Past Due 90
|
|
|
|
|
|
|
|
|
30 To 89
|
|
Days Or More
|
|
Non-
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
& Still Accruing
|
|
Accrual
|
|
Total
|
Commercial, financial, and agricultural
|
|
$
|
178,022
|
|
|
$
|
663
|
|
|
$
|
86
|
|
|
$
|
114
|
|
|
$
|
178,885
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
588,278
|
|
|
6,853
|
|
|
318
|
|
|
1,628
|
|
|
597,077
|
|
Commercial
|
|
325,148
|
|
|
1,823
|
|
|
80
|
|
|
4,968
|
|
|
332,019
|
|
Construction
|
|
31,547
|
|
|
116
|
|
|
20
|
|
|
—
|
|
|
31,683
|
|
Consumer automobile loans
|
|
79,595
|
|
|
87
|
|
|
—
|
|
|
32
|
|
|
79,714
|
|
Other consumer installment loans
|
|
26,740
|
|
|
202
|
|
|
5
|
|
|
17
|
|
|
26,964
|
|
|
|
1,229,330
|
|
|
$
|
9,744
|
|
|
$
|
509
|
|
|
$
|
6,759
|
|
|
1,246,342
|
|
Net deferred loan fees and discounts
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
Allowance for loan losses
|
|
(12,858
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,858
|
)
|
Loans, net
|
|
$
|
1,216,744
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,233,756
|
|
The following table presents interest income the Banks 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
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
(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, financial, and agricultural
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
31
|
|
|
11
|
|
|
151
|
|
|
101
|
|
Commercial
|
|
61
|
|
|
17
|
|
|
496
|
|
|
105
|
|
|
|
$
|
93
|
|
|
$
|
28
|
|
|
$
|
653
|
|
|
$
|
206
|
|
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 evaluate such loans for impairment individually 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 with 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
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Recorded
|
|
Unpaid Principal
|
|
Related
|
(In Thousands)
|
|
Investment
|
|
Balance
|
|
Allowance
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
1,027
|
|
|
$
|
1,027
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
2,001
|
|
|
2,001
|
|
|
—
|
|
Commercial
|
|
1,500
|
|
|
1,500
|
|
|
—
|
|
|
|
4,528
|
|
|
4,528
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
222
|
|
|
222
|
|
|
86
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
2,463
|
|
|
2,511
|
|
|
367
|
|
Commercial
|
|
8,068
|
|
|
8,118
|
|
|
1,636
|
|
|
|
10,753
|
|
|
10,851
|
|
|
2,089
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
1,249
|
|
|
1,249
|
|
|
86
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
4,464
|
|
|
4,512
|
|
|
367
|
|
Commercial
|
|
9,568
|
|
|
9,618
|
|
|
1,636
|
|
|
|
$
|
15,281
|
|
|
$
|
15,379
|
|
|
$
|
2,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Recorded
|
|
Unpaid Principal
|
|
Related
|
(In Thousands)
|
|
Investment
|
|
Balance
|
|
Allowance
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
1,033
|
|
|
$
|
1,033
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
1,428
|
|
|
1,428
|
|
|
—
|
|
Commercial
|
|
1,465
|
|
|
1,465
|
|
|
—
|
|
|
|
3,926
|
|
|
3,926
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
235
|
|
|
235
|
|
|
96
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
2,304
|
|
|
2,353
|
|
|
367
|
|
Commercial
|
|
7,981
|
|
|
8,031
|
|
|
1,721
|
|
|
|
10,520
|
|
|
10,619
|
|
|
2,184
|
|
Total:
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
1,268
|
|
|
1,268
|
|
|
96
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
3,732
|
|
|
3,781
|
|
|
367
|
|
Commercial
|
|
9,446
|
|
|
9,496
|
|
|
1,721
|
|
|
|
$
|
14,446
|
|
|
$
|
14,545
|
|
|
$
|
2,184
|
|
The following table presents the average recorded investment in impaired loans and related interest income recognized for the
three
months ended for
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
(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, financial, and agricultural
|
|
$
|
1,259
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
212
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
4,098
|
|
|
51
|
|
|
11
|
|
|
3,258
|
|
|
22
|
|
|
16
|
|
Commercial
|
|
9,430
|
|
|
97
|
|
|
17
|
|
|
11,946
|
|
|
33
|
|
|
10
|
|
Construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer automobile
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other consumer installment loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
$
|
14,787
|
|
|
$
|
165
|
|
|
$
|
28
|
|
|
$
|
15,418
|
|
|
$
|
59
|
|
|
$
|
26
|
|
Currently, there is
$35,000
committed to be advanced in connection with impaired loans.
Troubled Debt Restructurings
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
three
loan modifications considered TDR's completed during the three months ended March 31, 2017. Loan modifications that are considered TDR's completed during the three months ended March 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
(In Thousands, Except Number of Contracts)
|
|
Number
of
Contracts
|
|
Pre-Modification Outstanding Recorded Investment
|
|
Post-Modification Outstanding Recorded Investment
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
2
|
|
|
$
|
102
|
|
|
$
|
102
|
|
Commercial
|
|
1
|
|
|
106
|
|
|
106
|
|
|
|
3
|
|
|
$
|
208
|
|
|
$
|
208
|
|
There were no loan modifications considered TDRs made during the twelve months previous to
March 31, 2018
that defaulted during the
three months ended
March 31, 2018
. There were no loan modifications considered TDRs made during the twelve months previous to March 31, 2017 that defaulted during the three months ended March 31, 2017.
Troubled debt restructurings amounted to $
9,114,677
and
$9,048,000
as of
March 31, 2018
and
December 31, 2017
.
The amount of foreclosed residential real estate held at
March 31, 2018
and
December 31, 2017
, totaled
$558,000
and
$422,000
, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at
March 31, 2018
and
December 31, 2017
, totaled
$386,000
and
$378,000
, respectively.
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 evaluated for substandard classification. 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 large commercial relationships 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
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment loans
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Totals
|
Pass
|
|
$
|
178,793
|
|
|
$
|
600,696
|
|
|
$
|
315,762
|
|
|
$
|
32,060
|
|
|
$
|
99,534
|
|
|
$
|
25,851
|
|
|
$
|
1,252,696
|
|
Special Mention
|
|
762
|
|
|
765
|
|
|
7,788
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,315
|
|
Substandard
|
|
2,467
|
|
|
2,750
|
|
|
12,865
|
|
|
145
|
|
|
—
|
|
|
—
|
|
|
18,227
|
|
|
|
$
|
182,022
|
|
|
$
|
604,211
|
|
|
$
|
336,415
|
|
|
$
|
32,205
|
|
|
$
|
99,534
|
|
|
$
|
25,851
|
|
|
$
|
1,280,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment loans
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Totals
|
Pass
|
|
$
|
175,603
|
|
|
$
|
593,828
|
|
|
$
|
311,209
|
|
|
$
|
31,535
|
|
|
$
|
79,714
|
|
|
$
|
26,964
|
|
|
$
|
1,218,853
|
|
Special Mention
|
|
738
|
|
|
1,043
|
|
|
7,337
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,118
|
|
Substandard
|
|
2,544
|
|
|
2,206
|
|
|
13,473
|
|
|
148
|
|
|
—
|
|
|
—
|
|
|
18,371
|
|
|
|
$
|
178,885
|
|
|
$
|
597,077
|
|
|
$
|
332,019
|
|
|
$
|
31,683
|
|
|
$
|
79,714
|
|
|
$
|
26,964
|
|
|
$
|
1,246,342
|
|
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. However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the economic cycle. 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
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment
|
|
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
1,177
|
|
|
$
|
5,679
|
|
|
$
|
4,277
|
|
|
$
|
155
|
|
|
$
|
804
|
|
|
$
|
271
|
|
|
$
|
495
|
|
|
$
|
12,858
|
|
Charge-offs
|
|
(33
|
)
|
|
(51
|
)
|
|
(55
|
)
|
|
—
|
|
|
(30
|
)
|
|
(71
|
)
|
|
—
|
|
|
(240
|
)
|
Recoveries
|
|
7
|
|
|
24
|
|
|
—
|
|
|
2
|
|
|
1
|
|
|
24
|
|
|
—
|
|
|
58
|
|
Provision
|
|
221
|
|
|
4
|
|
|
(219
|
)
|
|
(1
|
)
|
|
241
|
|
|
81
|
|
|
(167
|
)
|
|
160
|
|
Ending Balance
|
|
$
|
1,372
|
|
|
$
|
5,656
|
|
|
$
|
4,003
|
|
|
$
|
156
|
|
|
$
|
1,016
|
|
|
$
|
305
|
|
|
$
|
328
|
|
|
$
|
12,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer automobile
|
|
Other consumer installment
|
|
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
Unallocated
|
|
Totals
|
Beginning Balance
|
|
$
|
1,554
|
|
|
$
|
5,383
|
|
|
$
|
4,975
|
|
|
$
|
178
|
|
|
$
|
143
|
|
|
$
|
273
|
|
|
$
|
390
|
|
|
$
|
12,896
|
|
Charge-offs
|
|
(213
|
)
|
|
(98
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(74
|
)
|
|
—
|
|
|
(388
|
)
|
Recoveries
|
|
6
|
|
|
30
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
67
|
|
Provision
|
|
94
|
|
|
256
|
|
|
(509
|
)
|
|
6
|
|
|
62
|
|
|
119
|
|
|
302
|
|
|
330
|
|
Ending Balance
|
|
$
|
1,441
|
|
|
$
|
5,571
|
|
|
$
|
4,466
|
|
|
$
|
187
|
|
|
$
|
202
|
|
|
$
|
346
|
|
|
$
|
692
|
|
|
$
|
12,905
|
|
The shift in allocation of the loan provision is primarily due to portfolio growth in the consumer automobile residential and improved credit metrics within the real estate mortgage portfolio.
The Company grants commercial, industrial, residential, and installment loans to customers primarily throughout north-east and central Pennsylvania. Although the Company has a diversified loan portfolio, 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 the following to gross loans at
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
Owners of residential rental properties
|
|
15.00
|
%
|
|
16.29
|
%
|
Owners of commercial rental properties
|
|
13.16
|
%
|
|
14.66
|
%
|
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
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer Automobile
|
|
Other consumer installment
|
|
Unallocated
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
|
Totals
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
86
|
|
|
$
|
367
|
|
|
$
|
1,636
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,089
|
|
Collectively evaluated for impairment
|
|
1,286
|
|
|
5,289
|
|
|
2,367
|
|
|
156
|
|
|
1,016
|
|
|
305
|
|
|
328
|
|
|
10,747
|
|
Total ending allowance balance
|
|
$
|
1,372
|
|
|
$
|
5,656
|
|
|
$
|
4,003
|
|
|
$
|
156
|
|
|
$
|
1,016
|
|
|
$
|
305
|
|
|
$
|
328
|
|
|
$
|
12,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,249
|
|
|
$
|
4,464
|
|
|
$
|
9,568
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
$
|
15,281
|
|
Collectively evaluated for impairment
|
|
180,773
|
|
|
599,747
|
|
|
326,847
|
|
|
32,205
|
|
|
99,534
|
|
|
25,851
|
|
|
|
|
|
1,264,957
|
|
Total ending loans balance
|
|
$
|
182,022
|
|
|
$
|
604,211
|
|
|
$
|
336,415
|
|
|
$
|
32,205
|
|
|
$
|
99,534
|
|
|
$
|
25,851
|
|
|
|
|
|
$
|
1,280,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Commercial, Financial, and Agricultural
|
|
Real Estate Mortgages
|
|
Consumer Automobile
|
|
Other consumer installment
|
|
Unallocated
|
|
|
(In Thousands)
|
|
|
Residential
|
|
Commercial
|
|
Construction
|
|
|
|
|
Totals
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
96
|
|
|
$
|
367
|
|
|
$
|
1,721
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
$
|
—
|
|
|
$
|
2,184
|
|
Collectively evaluated for impairment
|
|
1,081
|
|
|
5,312
|
|
|
2,556
|
|
|
155
|
|
|
804
|
|
|
271
|
|
|
495
|
|
|
10,674
|
|
Total ending allowance balance
|
|
$
|
1,177
|
|
|
$
|
5,679
|
|
|
$
|
4,277
|
|
|
$
|
155
|
|
|
$
|
804
|
|
|
$
|
271
|
|
|
$
|
495
|
|
|
$
|
12,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,268
|
|
|
$
|
3,732
|
|
|
$
|
9,446
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
$
|
14,446
|
|
Collectively evaluated for impairment
|
|
177,617
|
|
|
593,345
|
|
|
322,573
|
|
|
31,683
|
|
|
79,714
|
|
|
26,964
|
|
|
|
|
|
1,231,896
|
|
Total ending loans balance
|
|
$
|
178,885
|
|
|
$
|
597,077
|
|
|
$
|
332,019
|
|
|
$
|
31,683
|
|
|
$
|
79,714
|
|
|
$
|
26,964
|
|
|
|
|
|
$
|
1,246,342
|
|
Note 7. Net Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended
December 31, 2017
.
The following sets forth the components of the net periodic benefit/cost of the domestic non-contributory defined benefit plan for the
three
months ended
March 31, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
—
|
|
|
$
|
41
|
|
Interest cost
|
|
176
|
|
|
189
|
|
Expected return on plan assets
|
|
(274
|
)
|
|
(262
|
)
|
Amortization of net loss
|
|
42
|
|
|
39
|
|
Net periodic (benefit) cost
|
|
$
|
(56
|
)
|
|
$
|
7
|
|
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, 2017
, that it expected to contribute a minimum of
$500,000
to its defined benefit plan in
2018
. As of
March 31, 2018
, there were contributions of
$250,000
made to the plan with additional contributions of at least
$250,000
anticipated during the remainder of
2018
.
Note 8. 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
three months ended March 31, 2018
and
2017
, there were
419
and
460
shares issued under the plan, respectively.
Note 9. 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, standby letters of credit, and credit exposure from the sale of assets with recourse. 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
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Commitments to extend credit
|
|
$
|
267,856
|
|
|
$
|
264,982
|
|
Standby letters of credit
|
|
11,730
|
|
|
10,406
|
|
Credit exposure from the sale of assets with recourse
|
|
5,038
|
|
|
4,893
|
|
|
|
$
|
284,624
|
|
|
$
|
280,281
|
|
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 10. 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 Consolidated Balance Sheet at their fair value on a recurring basis as of
March 31, 2018
and
December 31, 2017
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
5,941
|
|
|
$
|
—
|
|
|
$
|
5,941
|
|
State and political securities
|
|
—
|
|
|
63,435
|
|
|
—
|
|
|
63,435
|
|
Other debt securities
|
|
—
|
|
|
47,068
|
|
|
—
|
|
|
47,068
|
|
Investment equity securities:
|
|
|
|
|
|
|
|
|
Financial institution equity securities
|
|
1,251
|
|
|
—
|
|
|
—
|
|
|
1,251
|
|
Other equity securities
|
|
1,231
|
|
|
—
|
|
|
—
|
|
|
1,231
|
|
Investment securities, trading:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
159
|
|
|
—
|
|
|
—
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
|
$
|
4,213
|
|
|
$
|
—
|
|
|
$
|
4,213
|
|
State and political securities
|
|
—
|
|
|
56,508
|
|
|
—
|
|
|
56,508
|
|
Other debt securities
|
|
—
|
|
|
47,907
|
|
|
—
|
|
|
47,907
|
|
Financial institution equity securities
|
|
1,264
|
|
|
—
|
|
|
—
|
|
|
1,264
|
|
Other equity securities
|
|
1,251
|
|
|
—
|
|
|
—
|
|
|
1,251
|
|
Investment securities, trading:
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
190
|
|
|
—
|
|
|
—
|
|
|
190
|
|
The following table presents the assets reported on the Consolidated Balance Sheet at their fair value on a non-recurring basis as of
March 31, 2018
and
December 31, 2017
, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,192
|
|
|
$
|
13,192
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
191
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,262
|
|
|
$
|
12,262
|
|
Other real estate owned
|
|
—
|
|
|
—
|
|
|
143
|
|
|
143
|
|
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
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Quantitative Information About Level III Fair Value Measurements
|
(In Thousands)
|
|
Fair Value
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
Impaired loans
|
|
$
|
6,582
|
|
|
Discounted cash flow
|
|
Temporary reduction in payment amount
|
|
0 to (70)%
|
|
(4)%
|
|
|
6,610
|
|
|
Appraisal of collateral
(1)
|
|
Appraisal adjustments
(1)
|
|
0 to (20)%
|
|
(20)%
|
Other real estate owned
|
|
$
|
191
|
|
|
Appraisal of collateral
(1)
|
|
Appraisal adjustments
(1)
|
|
(20)%
|
|
(20)%
|
(1)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Quantitative Information About Level III Fair Value Measurements
|
(In Thousands)
|
|
Fair Value
|
|
Valuation Technique(s)
|
|
Unobservable Inputs
|
|
Range
|
|
Weighted Average
|
Impaired loans
|
|
$
|
6,583
|
|
|
Discounted cash flow
|
|
Temporary reduction in payment amount
|
|
3 to (70)%
|
|
(4)%
|
|
|
5,679
|
|
|
Appraisal of collateral
(1)
|
|
Appraisal adjustments
(1)
|
|
0 to (20)%
|
|
(17)%
|
Other real estate owned
|
|
$
|
143
|
|
|
Appraisal of collateral
(1)
|
|
Appraisal adjustments
(1)
|
|
(20)%
|
|
(20)%
|
(1)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
The discounted cash flow valuation technique is utilized to determine the fair value of performing impaired loans, while non-performing impaired loans utilize the appraisal of collateral method.
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 11. 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 not recorded at fair value on a recurring or nonrecurring basis are as follows at
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Fair Value Measurements at March 31, 2018
|
(In Thousands)
|
|
Value
|
|
Value
|
|
Level I
|
|
Level II
|
|
Level III
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1)
|
|
$
|
37,392
|
|
|
$
|
37,392
|
|
|
$
|
37,392
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted investment in bank stock
|
|
13,483
|
|
|
13,483
|
|
|
—
|
|
|
13,483
|
|
|
—
|
|
Loans held for sale (1)
|
|
748
|
|
|
748
|
|
|
748
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
1,267,912
|
|
|
1,265,870
|
|
|
—
|
|
|
—
|
|
|
1,265,870
|
|
Bank-owned life insurance (1)
|
|
28,169
|
|
|
28,169
|
|
|
28,169
|
|
|
—
|
|
|
—
|
|
Accrued interest receivable (1)
|
|
4,456
|
|
|
4,456
|
|
|
4,456
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
888,193
|
|
|
$
|
845,103
|
|
|
$
|
637,841
|
|
|
$
|
—
|
|
|
$
|
207,262
|
|
Noninterest-bearing deposits (1)
|
|
304,261
|
|
|
304,261
|
|
|
304,261
|
|
|
—
|
|
|
—
|
|
Short-term borrowings (1)
|
|
59,305
|
|
|
59,305
|
|
|
59,305
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
|
123,970
|
|
|
122,530
|
|
|
—
|
|
|
—
|
|
|
122,530
|
|
Accrued interest payable (1)
|
|
793
|
|
|
793
|
|
|
793
|
|
|
—
|
|
|
—
|
|
(1) The financial instrument is carried at cost at March 31, 2018, which approximate the fair value of the instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair
|
|
Fair Value Measurements at December 31, 2017
|
(In Thousands)
|
|
Value
|
|
Value
|
|
Level I
|
|
Level II
|
|
Level III
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,243
|
|
|
$
|
27,243
|
|
|
$
|
27,243
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
111,143
|
|
|
111,143
|
|
|
2,515
|
|
|
108,628
|
|
|
—
|
|
Trading
|
|
190
|
|
|
190
|
|
|
190
|
|
|
—
|
|
|
—
|
|
Restricted investment in bank stock
|
|
13,332
|
|
|
13,332
|
|
|
—
|
|
|
13,332
|
|
|
—
|
|
Loans held for sale
|
|
1,196
|
|
|
1,196
|
|
|
1,196
|
|
|
—
|
|
|
—
|
|
Loans, net
|
|
1,233,756
|
|
|
1,264,584
|
|
|
—
|
|
|
—
|
|
|
1,264,584
|
|
Bank-owned life insurance
|
|
27,982
|
|
|
27,982
|
|
|
27,982
|
|
|
—
|
|
|
—
|
|
Accrued interest receivable
|
|
4,321
|
|
|
4,321
|
|
|
4,321
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
843,004
|
|
|
$
|
838,441
|
|
|
$
|
611,187
|
|
|
$
|
—
|
|
|
$
|
227,254
|
|
Noninterest-bearing deposits
|
|
303,316
|
|
|
303,316
|
|
|
303,316
|
|
|
—
|
|
|
—
|
|
Short-term borrowings
|
|
100,748
|
|
|
100,748
|
|
|
100,748
|
|
|
—
|
|
|
—
|
|
Long-term borrowings
|
|
70,970
|
|
|
70,280
|
|
|
—
|
|
|
—
|
|
|
70,280
|
|
Accrued interest payable
|
|
502
|
|
|
502
|
|
|
502
|
|
|
—
|
|
|
—
|
|
The methods and assumptions used by the Company in estimating fair values of financial instruments at March 31, 2018 is in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit pricing in the calculation of the above tables. Prior period fair value calculations were ran on the assumption of entry pricing and therefore the comparability between the periods above are diminished.
Restricted Stock:
The carrying value of restricted securities such as stock in the Federal Home Loan Bank ("FHLB") and other bankers' bank stock approximates fair value.
Loans:
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial, 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 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.
Deposits:
The fair value of deposits with no stated maturity, such as 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.
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 9 (Off-Balance Sheet Risk).
Note 12. Stock Options
In 2014, the Company adopted the 2014 Equity Incentive Plan designed to help the Company attract, retain, and motivate employees and non-employee directors. Incentive stock options, non-qualified stock options, and restricted stock may be granted as part of the plan.
As of January 1, 2018, the Company had a total of
93,500
stock options outstanding. During the period ended March 31, 2018, the Company issued
25,000
stock options in total, to a group of employees, that have a strike price of
$45.11
. The options granted in 2018 all expire ten years from the grant date however; of the
25,000
grants awarded,
12,500
of the options have a
three
year vesting period while the remaining
12,500
options vest in
five
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Granted
|
Date
|
|
Shares
|
|
Forfeited
|
|
Outstanding
|
|
Strike Price
|
|
Vesting Period
|
|
Expiration
|
January 5, 2018
|
|
12,500
|
|
|
—
|
|
|
12,500
|
|
|
$
|
45.11
|
|
|
3 years
|
|
10 years
|
January 5, 2018
|
|
12,500
|
|
|
—
|
|
|
12,500
|
|
|
45.11
|
|
|
5 years
|
|
10 years
|
March 24, 2017
|
|
46,250
|
|
|
(3,000
|
)
|
|
43,250
|
|
|
44.21
|
|
|
3 years
|
|
10 years
|
March 24, 2017
|
|
23,750
|
|
|
—
|
|
|
23,750
|
|
|
44.21
|
|
|
5 years
|
|
10 years
|
August 27, 2015
|
|
38,750
|
|
|
(12,250
|
)
|
|
26,500
|
|
|
42.03
|
|
|
5 years
|
|
10 years
|
A summary of stock option activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
Outstanding, beginning of year
|
|
93,500
|
|
|
$
|
43.59
|
|
|
26,500
|
|
|
$
|
42.03
|
|
Granted
|
|
25,000
|
|
|
45.11
|
|
|
70,000
|
|
|
44.21
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding, end of year
|
|
118,500
|
|
|
$
|
43.91
|
|
|
96,500
|
|
|
$
|
43.61
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straightline basis over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the value of the vested portion of the award at that date. The Company determines the fair value of options granted using the Black-Scholes option-pricing model. The risk-free interest rate is based on the United States Treasury bond with a similar term to the expected life of the options at the grant date. Expected volatility was estimated based on the adjusted historic volatility of the Company’s shares. The expected life was estimated to equal the contractual life of the options. The dividend yield rate was based upon recent historical dividends paid on shares.
Compensation expense for stock options is recognized using the fair value when the stock options are granted and is amortized over the options' vesting period. Compensation expense, related to stock options was
$7,000
for the
three months ended March 31, 2018
compared to
$5,000
for the same period of
2017
. As of
March 31, 2018
,
no
stock options were exercisable and the weighted average years to expiration were
9
years. The fair value of options granted during the
three months ended March 31, 2018
was approximately
$1,077,000
or
$43.08
per award. Total unrecognized compensation cost for non-vested options was
$106,000
and will be recognized over their weighted average remaining vesting period of
2
years.
Note 13. Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 using the modified retrospective method, and applied the guidance to all contracts in scope that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
The core principle of Topic 606,
Revenue from Contracts with Customers
, is that an entity recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. Topic 606 requires entities to exercise more judgment when considering the terms of a contract than under Topic 605,
Revenue Recognition
. Topic 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope.
Topic 606 does not apply to revenue associated with interest income on financial instruments, including loans and securities. Additionally, certain noninterest income streams such as certain credit and debit card fees, income from bank owned life insurance, and gain and losses on sales of investment securities are out of scope of Topic 606.
Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, merchant income, wire transfer income, check cashing fees, check printing fees, safe deposit box rental fees, life insurance and brokerage commissions. These revenue streams are largely transactional based and revenue is recognized upon completion of transaction.
Principal versus Agent Considerations
When more than one party is involved in providing goods or services to a customer, Topic 606 requires the Company to determine whether it is the principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is a principal and therefore records revenue on a gross basis if it controls a promised good or service before transferring that good or service to the customer. An entity is an agent and records as revenue the net amount it retains for its agency services if its role is to arrange for another entity to provide the goods or services. The Company most commonly acts as a principal and records revenue on a gross basis, except in certain circumstances. As an example, revenues earned from interchange fees, in which the Company acts as an agent, are recorded as non-interest income, net of the related expenses paid to the principal. Brokerage and insurance commissions are recognized when the M Group's services to the broker dealer and investment representative are complete.
Debit Card Fees
Interchange fees are one source of debit and credit card income that is comprised of an amount merchants pay card-issuing banks for the processing of their electronic transactions as a form of payment. ATM service charges, check card usage, and POS debit card transactions generate interchange and debit card income. Per Topic 606 interchange and debit card transaction fees are reported net of related network costs. See Note 1 - Newly Adopted Accounting Standards. Antecedently, non-interest expense included network costs. Interchange and debit card transaction fees for the three months ended March 31, 2018 reported on a net basis totaled
$333,000
; for the three months ended March 31, 2017 such amount was
$271,000
. The below table compares gross interchange and debit card transaction fees net network costs for 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2018
|
|
2017
|
Debit card transaction fees
|
|
$
|
519
|
|
|
$
|
434
|
|
Other processing service fees
|
|
61
|
|
|
59
|
|
Gross interchange and card based transaction fees
|
|
580
|
|
|
493
|
|
Network costs
|
|
247
|
|
|
222
|
|
Net interchange and card based transaction fees
|
|
$
|
333
|
|
|
$
|
271
|
|
Note 14. 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.
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) the Risk Factors identified in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31,
2017
and in other filings made by the Company under the Securities Exchange Act of 1934.
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.