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PENNS WOODS BANCORP INC - Quarter Report: 2013 June (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x

Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

for the Quarterly Period Ended June 30, 2013.

 

o

Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

 

For the Transition Period from                    to                   .

 

No. 0-17077

(Commission File Number)

 

PENNS WOODS BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA

 

23-2226454

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

300 Market Street, P.O. Box 967 Williamsport, Pennsylvania

 

17703-0967

(Address of principal executive offices)

 

(Zip Code)

 

(570) 322-1111

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Small reporting company o

 

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

 

On August 2, 2013 there were 4,818,483 shares of the Registrant’s common stock outstanding.

 

 

 



Table of Contents

 

PENNS WOODS BANCORP, INC.

 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

Page

 

 

Number

 

 

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

Consolidated Balance Sheet (Unaudited) as of June 30, 2013 and December 31, 2012

3

 

 

Consolidated Statement of Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012

4

 

 

Consolidated Statement of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012

5

 

 

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2013 and 2012

5

 

 

Consolidated Statement of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and 2012

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

Item 4.

Controls and Procedures

41

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

42

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

Item 3.

Defaults Upon Senior Securities

42

 

 

 

Item 4.

Mine Safety Disclosures

42

 

 

 

Item 5.

Other Information

42

 

 

 

Item 6.

Exhibits

42

 

 

 

Signatures

43

 

 

Exhibit Index and Exhibits

44

 

2



Table of Contents

 

Part I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

June 30,

 

December 31,

 

(In Thousands, Except Share Data)

 

2013

 

2012

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

Noninterest-bearing balances

 

$

26,888

 

$

12,695

 

Interest-bearing deposits in other financial institutions

 

1,417

 

2,447

 

Federal funds sold

 

134

 

 

Total cash and cash equivalents

 

28,439

 

15,142

 

 

 

 

 

 

 

Investment securities available for sale, at fair value

 

311,289

 

289,316

 

Loans held for sale

 

5,409

 

3,774

 

Loans

 

786,961

 

512,232

 

Allowance for loan losses

 

(9,404

)

(7,617

)

Loans, net

 

777,557

 

504,615

 

Premises and equipment, net

 

17,101

 

8,348

 

Accrued interest receivable

 

4,999

 

4,099

 

Bank-owned life insurance

 

25,022

 

16,362

 

Investment in limited partnerships

 

2,552

 

2,883

 

Goodwill

 

17,104

 

3,032

 

Intangibles

 

1,984

 

 

Deferred tax asset

 

9,906

 

4,731

 

Other assets

 

5,596

 

4,233

 

TOTAL ASSETS

 

$

1,206,958

 

$

856,535

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Interest-bearing deposits

 

$

744,265

 

$

527,073

 

Noninterest-bearing deposits

 

211,096

 

114,953

 

Total deposits

 

955,361

 

642,026

 

 

 

 

 

 

 

Short-term borrowings

 

39,000

 

33,204

 

Long-term borrowings, Federal Home Loan Bank (FHLB)

 

70,750

 

76,278

 

Accrued interest payable

 

442

 

366

 

Other liabilities

 

15,477

 

10,935

 

TOTAL LIABILITIES

 

1,081,030

 

762,809

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

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

 

 

 

Common stock, par value $8.33, 15,000,000 shares authorized; 4,998,881 and 4,019,112 shares issued

 

41,657

 

33,492

 

Additional paid-in capital

 

49,759

 

18,157

 

Retained earnings

 

45,343

 

43,030

 

Accumulated other comprehensive (loss) income:

 

 

 

 

 

Net unrealized gain on available for sale securities

 

286

 

10,164

 

Defined benefit plan

 

(4,807

)

(4,807

)

Treasury stock at cost, 180,596 shares

 

(6,310

)

(6,310

)

TOTAL SHAREHOLDERS’ EQUITY

 

125,928

 

93,726

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,206,958

 

$

856,535

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



Table of Contents

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands, Except Per Share Data)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,277

 

$

6,294

 

$

14,045

 

$

12,608

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

1,507

 

1,517

 

2,950

 

2,991

 

Tax-exempt

 

1,162

 

1,383

 

2,429

 

2,788

 

Dividend and other interest income

 

72

 

86

 

134

 

178

 

TOTAL INTEREST AND DIVIDEND INCOME

 

10,018

 

9,280

 

19,558

 

18,565

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Deposits

 

760

 

934

 

1,551

 

1,895

 

Short-term borrowings

 

22

 

28

 

47

 

62

 

Long-term borrowings, FHLB

 

482

 

620

 

1,001

 

1,240

 

TOTAL INTEREST EXPENSE

 

1,264

 

1,582

 

2,599

 

3,197

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

8,754

 

7,698

 

16,959

 

15,368

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

575

 

600

 

1,075

 

1,200

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

8,179

 

7,098

 

15,884

 

14,168

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Service charges

 

538

 

458

 

980

 

905

 

Securities gains, net

 

1,274

 

170

 

2,260

 

759

 

Bank-owned life insurance

 

144

 

133

 

282

 

401

 

Gain on sale of loans

 

302

 

343

 

653

 

526

 

Insurance commissions

 

247

 

316

 

511

 

758

 

Brokerage commissions

 

299

 

247

 

547

 

459

 

Other

 

731

 

614

 

1,035

 

1,236

 

TOTAL NON-INTEREST INCOME

 

3,535

 

2,281

 

6,268

 

5,044

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,442

 

2,850

 

6,510

 

5,867

 

Occupancy

 

397

 

318

 

748

 

646

 

Furniture and equipment

 

412

 

357

 

820

 

703

 

Pennsylvania shares tax

 

208

 

167

 

392

 

336

 

Amortization of investment in limited partnerships

 

166

 

166

 

331

 

331

 

Federal Deposit Insurance Corporation deposit insurance

 

119

 

115

 

248

 

238

 

Marketing

 

120

 

140

 

215

 

273

 

Intangible amortization

 

31

 

 

31

 

 

Other

 

2,070

 

1,230

 

3,521

 

2,413

 

TOTAL NON-INTEREST EXPENSE

 

6,965

 

5,343

 

12,816

 

10,807

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX PROVISION

 

4,749

 

4,036

 

9,336

 

8,405

 

INCOME TAX PROVISION

 

1,090

 

638

 

1,993

 

1,318

 

NET INCOME

 

$

3,659

 

$

3,398

 

$

7,343

 

$

7,087

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

 

$

0.88

 

$

0.89

 

$

1.84

 

$

1.85

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - DILUTED

 

$

0.88

 

$

0.89

 

$

1.84

 

$

1.85

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC

 

4,151,035

 

3,837,579

 

3,995,716

 

3,837,391

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED

 

4,151,035

 

3,837,579

 

3,995,716

 

3,837,391

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS DECLARED PER SHARE

 

$

0.47

 

$

0.47

 

$

1.19

 

$

0.94

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



Table of Contents

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In Thousands)

 

2013

 

2012

 

2013

 

2012

 

Net Income

 

$

3,659

 

$

3,398

 

$

7,343

 

$

7,087

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

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

 

(11,196

)

2,028

 

(12,707

)

7,038

 

Tax effect

 

3,807

 

(690

)

4,321

 

(2,393

)

Net realized gain included in net income

 

(1,274

)

(170

)

(2,260

)

(759

)

Tax effect

 

433

 

58

 

768

 

258

 

Total other comprehensive (loss) income

 

(8,230

)

1,226

 

(9,878

)

4,144

 

Comprehensive (loss) income

 

$

(4,571

)

$

4,624

 

$

(2,535

)

$

11,231

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

COMMON

 

ADDITIONAL

 

 

 

OTHER

 

 

 

TOTAL

 

 

 

STOCK

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

TREASURY

 

SHAREHOLDERS’

 

(In Thousands, Except Per Share Data)

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME (LOSS)

 

STOCK

 

EQUITY

 

Balance, December 31, 2011

 

4,017,677

 

$

33,480

 

$

18,115

 

$

36,394

 

$

(1,219

)

$

(6,310

)

$

80,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

7,087

 

 

 

 

 

7,087

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

4,144

 

 

 

4,144

 

Dividends declared, ($0.94 per share)

 

 

 

 

 

 

 

(3,607

)

 

 

 

 

(3,607

)

Common shares issued for employee stock purchase plan

 

709

 

6

 

21

 

 

 

 

 

 

 

27

 

Balance, June 30, 2012

 

4,018,386

 

$

33,486

 

$

18,136

 

$

39,874

 

$

2,925

 

$

(6,310

)

$

88,111

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

COMMON

 

ADDITIONAL

 

 

 

OTHER

 

 

 

TOTAL

 

 

 

STOCK

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

TREASURY

 

SHAREHOLDERS’

 

(In Thousands, Except Per Share Data)

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME (LOSS)

 

STOCK

 

EQUITY

 

Balance, December 31, 2012

 

4,019,112

 

$

33,492

 

$

18,157

 

$

43,030

 

$

5,357

 

$

(6,310

)

$

93,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

7,343

 

 

 

 

 

7,343

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(9,878

)

 

 

(9,878

)

Dividends declared, ($1.19 per share)

 

 

 

 

 

 

 

(5,030

)

 

 

 

 

(5,030

)

Common shares issued for employee stock purchase plan

 

792

 

7

 

24

 

 

 

 

 

 

 

31

 

Common shares issued for acqusition of Luzerne National Bank Corporation

 

978,977

 

8,158

 

31,578

 

 

 

 

 

 

 

39,736

 

Balance, June 30, 2013

 

4,998,881

 

$

41,657

 

$

49,759

 

$

45,343

 

$

(4,521

)

$

(6,310

)

$

125,928

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



Table of Contents

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

June 30,

 

(In Thousands)

 

2013

 

2012

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net Income

 

$

7,343

 

$

7,087

 

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

 

 

 

 

 

Depreciation and amortization

 

415

 

380

 

Amortization of intangible assets

 

31

 

 

Provision for loan losses

 

1,075

 

1,200

 

Accretion and amortization of investment security discounts and premiums

 

(117

)

(605

)

Securities gains, net

 

(2,260

)

(759

)

Originations of loans held for sale

 

(27,697

)

(15,872

)

Proceeds of loans held for sale

 

26,715

 

16,689

 

Gain on sale of loans

 

(653

)

(526

)

Earnings on bank-owned life insurance

 

(282

)

(401

)

(Increase) decrease in deferred tax asset

 

(162

)

216

 

Other, net

 

889

 

(1,937

)

Net cash provided by operating activities

 

5,297

 

5,472

 

INVESTING ACTIVITIES:

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

Proceeds from sales

 

42,910

 

18,014

 

Proceeds from calls and maturities

 

8,780

 

13,725

 

Purchases

 

(63,942

)

(49,670

)

Investment securities held to maturity:

 

 

 

 

 

Proceeds from calls and maturities

 

 

55

 

Net increase in loans

 

(23,666

)

(30,287

)

Acquisition of bank premises and equipment

 

(1,200

)

(902

)

Proceeds from the sale of foreclosed assets

 

 

698

 

Purchase of bank-owned life insurance

 

(977

)

(29

)

Proceeds from bank-owned life insurance death benefit

 

 

383

 

Proceeds from redemption of regulatory stock

 

548

 

549

 

Purchases of regulatory stock

 

(822

)

 

Acquisition, net of cash acquired

 

17,487

 

 

Net cash used for investing activities

 

(20,882

)

(47,464

)

FINANCING ACTIVITIES:

 

 

 

 

 

Net increase in interest-bearing deposits

 

22,754

 

53,095

 

Net increase in noninterest-bearing deposits

 

13,625

 

6,408

 

Repayment of long-term borrowings, FHLB

 

(5,528

)

 

Net increase (decrease) in short-term borrowings

 

3,030

 

(11,743

)

Dividends paid

 

(5,030

)

(3,607

)

Issuance of common stock

 

31

 

27

 

Net cash provided by financing activities

 

28,882

 

44,180

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

13,297

 

2,188

 

CASH AND CASH EQUIVALENTS, BEGINNING

 

15,142

 

13,885

 

CASH AND CASH EQUIVALENTS, ENDING

 

$

28,439

 

$

16,073

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



Table of Contents

 

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

 

 

 

Six Months Ended

 

 

 

June 30,

 

(In Thousands)

 

2013

 

2012

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Interest paid

 

$

2,523

 

$

3,243

 

Income taxes paid

 

1,795

 

1,950

 

Transfer of loans to foreclosed real estate

 

26

 

 

Acquisition of Luzerne National Bank Corporation

 

 

 

 

 

Noncash assets acquired:

 

 

 

 

 

Federal funds sold

 

$

67

 

 

 

Securities available for sale

 

21,783

 

 

 

Loans

 

250,377

 

 

 

Premises and equipment, net

 

8,014

 

 

 

Accrued interest receivable

 

726

 

 

 

Bank-owned life insurance

 

7,419

 

 

 

Intangibles

 

2,015

 

 

 

Other assets

 

2,636

 

 

 

Goodwill

 

14,072

 

 

 

 

 

307,109

 

 

 

Liabilities assumed:

 

 

 

 

 

Deferred tax liability

 

76

 

 

 

Interest-bearing deposits

 

194,438

 

 

 

Noninterest-bearing deposits

 

82,518

 

 

 

Short-term borrowings

 

2,766

 

 

 

Accrued interest payable

 

103

 

 

 

Other liabilities

 

4,892

 

 

 

 

 

284,793

 

 

 

Net noncash assets acquired

 

22,316

 

 

 

Cash acquired

 

$

20,296

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

7



Table of Contents

 

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Basis of Presentation

 

The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank (“Luzerne”) and Jersey Shore State Bank (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, 2012.

 

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 35 through 39 of the Annual Report on Form 10-K for the year ended December 31, 2012.

 

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, 2013 were as follows:

 

 

 

Three Months Ended June 30, 2013

 

Three Months Ended June 30, 2012

 

(In Thousands)

 

Net Unrealized
Gain on Available
for Sale Securities

 

Defined
Benefit Plan

 

Total

 

Net Unrealized
Gain on Available
for Sale Securities

 

Defined
Benefit Plan

 

Total

 

Balance, March 31

 

$

8,516

 

$

(4,807

)

$

3,709

 

$

5,832

 

$

(4,133

)

$

1,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income before reclassifications

 

(7,389

)

 

(7,389

)

1,338

 

 

1,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive (loss) income

 

(841

)

 

(841

)

(112

)

 

(112

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive (loss) income

 

(8,230

)

 

(8,230

)

1,226

 

 

1,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30

 

$

286

 

$

(4,807

)

$

(4,521

)

$

7,058

 

$

(4,133

)

$

2,925

 

 

 

 

Six Months Ended June 30, 2013

 

Six Months Ended June 30, 2012

 

(In Thousands)

 

Net Unrealized
Gain on Available
for Sale Securities

 

Defined
Benefit Plan

 

Total

 

Net Unrealized
Gain on Available
for Sale Securities

 

Defined
Benefit Plan

 

Total

 

Balance, December 31

 

$

10,164

 

$

(4,807

)

$

5,357

 

$

2,914

 

$

(4,133

)

$

(1,219

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income before reclassifications

 

(8,386

)

 

(8,386

)

4,645

 

 

4,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive (loss) income

 

(1,492

)

 

(1,492

)

(501

)

 

(501

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive (loss) income

 

(9,878

)

 

(9,878

)

4,144

 

 

4,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30

 

$

286

 

$

(4,807

)

$

(4,521

)

$

7,058

 

$

(4,133

)

$

2,925

 

 

The reclassifications out of accumulated other comprehensive income as of June 30, 2013 were as follows:

 

8



Table of Contents

 

(In Thousands)

 

Details about Accumulated Other

 

Amount Reclassified from Accumulated Other Comprehensive Income

 

Affected Line Item in the

 

Comprehensive Income Components

 

Three Months Ended June 30, 2013

 

Three Months Ended June 30, 2012

 

Consolidated Statement of Income

 

Net unrealized gain on available for

 

$

1,274

 

$

170

 

Securities gains, net

 

sale securities

 

433

 

58

 

Income tax provision

 

Total reclassifications for the period

 

$

841

 

$

112

 

Net of tax

 

 

(In Thousands)

 

Details about Accumulated Other

 

Amount Reclassified from Accumulated Other Comprehensive Income

 

Affected Line Item in the

 

Comprehensive Income Components

 

Six Months Ended June 30, 2013

 

Six Months Ended June 30, 2012

 

Consolidated Statement of Income

 

Net unrealized gain on available for

 

$

2,260

 

$

759

 

Securities gains, net

 

sale securities

 

768

 

258

 

Income tax provision

 

Total reclassifications for the period

 

$

1,492

 

$

501

 

Net of tax

 

 

Note 3.  Recent Accounting Pronouncements

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):  Disclosures about Offsetting Assets and Liabilities.  The amendments in this update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement.  The requirements amend the disclosure requirements on offsetting in Section 210-20-50.  This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this update.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  This ASU did not have a significant impact on the Company’s financial statements.

 

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.  The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.  An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented.  The effective date is the same as the effective date of Update 2011-11.  This ASU is not expected to have a significant impact on the Company’s financial statements.

 

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The amendments in this update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts.  For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012.  The Company has provided the necessary disclosures in Note 2 - Accumulated Other Comprehensive Income.

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Weighted average common shares issued

 

4,331,631

 

4,018,175

 

4,176,312

 

4,017,987

 

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

 

4,151,035

 

3,837,579

 

3,995,716

 

3,837,391

 

 

Note 5. Investment Securities

 

The amortized cost and fair values of investment securities at June 30, 2013 and December 31, 2012 are as follows:

 

9



Table of Contents

 

 

 

June 30, 2013

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

31,937

 

$

870

 

$

(293

)

$

32,514

 

State and political securities

 

164,477

 

4,611

 

(4,687

)

164,401

 

Other debt securities

 

103,860

 

933

 

(2,479

)

102,314

 

Total debt securities

 

300,274

 

6,414

 

(7,459

)

299,229

 

Financial institution equity securities

 

9,810

 

1,515

 

(4

)

11,321

 

Other equity securities

 

772

 

 

(33

)

739

 

Total equity securities

 

10,582

 

1,515

 

(37

)

12,060

 

Total investment securities AFS

 

$

310,856

 

$

7,929

 

$

(7,496

)

$

311,289

 

 

 

 

December 31, 2012

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

24,475

 

$

1,384

 

$

(19

)

$

25,840

 

State and political securities

 

168,843

 

12,805

 

(1,424

)

180,224

 

Other debt securities

 

70,108

 

1,750

 

(259

)

71,599

 

Total debt securities

 

263,426

 

15,939

 

(1,702

)

277,663

 

Financial institution equity securities

 

8,422

 

1,140

 

(14

)

9,548

 

Other equity securities

 

2,068

 

74

 

(37

)

2,105

 

Total equity securities

 

10,490

 

1,214

 

(51

)

11,653

 

Total investment securities AFS

 

$

273,916

 

$

17,153

 

$

(1,753

)

$

289,316

 

 

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at June 30, 2013 and December 31, 2012.

 

 

 

June 30, 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

 

$

15,150

 

$

(293

)

$

 

$

 

$

15,150

 

$

(293

)

State and political securities

 

41,588

 

(3,019

)

4,327

 

(1,668

)

45,915

 

(4,687

)

Other debt securities

 

60,578

 

(2,457

)

728

 

(22

)

61,306

 

(2,479

)

Total debt securities

 

117,316

 

(5,769

)

5,055

 

(1,690

)

122,371

 

(7,459

)

Financial institution equity securities

 

 

 

63

 

(4

)

63

 

(4

)

Other equity securities

 

739

 

(33

)

 

 

739

 

(33

)

Total equity securities

 

739

 

(33

)

63

 

(4

)

802

 

(37

)

Total

 

$

118,055

 

$

(5,802

)

$

5,118

 

$

(1,694

)

$

123,173

 

$

(7,496

)

 

10



Table of Contents

 

 

 

December 31, 2012

 

 

 

Less than Twelve Months

 

Twelve Months or Greater

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(In Thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

U.S. Government and agency securities

 

$

910

 

$

(19

)

$

 

$

 

$

910

 

$

(19

)

State and political securities

 

8,882

 

(316

)

5,647

 

(1,108

)

14,529

 

(1,424

)

Other debt securities

 

11,250

 

(189

)

3,727

 

(70

)

14,977

 

(259

)

Total debt securities

 

21,042

 

(524

)

9,374

 

(1,178

)

30,416

 

(1,702

)

Financial institution equity securities

 

66

 

(1

)

205

 

(13

)

271

 

(14

)

Other equity securities

 

701

 

(28

)

63

 

(9

)

764

 

(37

)

Total equity securities

 

767

 

(29

)

268

 

(22

)

1,035

 

(51

)

Total

 

$

21,809

 

$

(553

)

$

9,642

 

$

(1,200

)

$

31,451

 

$

(1,753

)

 

At June 30, 2013 there were a total of 182 and 13 individual securities that were in a continuous unrealized loss position for less than twelve months and twelve months or greater, respectively.

 

The Company reviews its position quarterly and has determined that, at June 30, 2013, 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, 2013, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(In Thousands)

 

Amortized Cost

 

Fair Value

 

Due in one year or less

 

$

6,180

 

$

6,197

 

Due after one year to five years

 

41,234

 

41,746

 

Due after five years to ten years

 

87,544

 

85,721

 

Due after ten years

 

165,316

 

165,565

 

Total

 

$

300,274

 

$

299,229

 

 

Total gross proceeds from sales of securities available for sale were $42,910,000 and $18,014,000, for the six months ended June 30, 2013 and 2012, 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)

 

2013

 

2012

 

2013

 

2012

 

Gross realized gains:

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

 

$

 

$

 

$

138

 

State and political securities

 

1,062

 

45

 

1,641

 

51

 

Other debt securities

 

178

 

22

 

299

 

77

 

Financial institution equity securities

 

 

106

 

130

 

461

 

Other equity securities

 

34

 

 

250

 

126

 

Total gross realized gains

 

$

1,274

 

$

173

 

$

2,320

 

$

853

 

 

 

 

 

 

 

 

 

 

 

Gross realized losses:

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

 

$

 

$

 

$

 

State and political securities

 

 

2

 

60

 

2

 

Other debt securities

 

 

 

 

 

Financial institution equity securities

 

 

1

 

 

67

 

Other equity securities

 

 

 

 

25

 

Total gross realized losses

 

$

 

$

3

 

$

60

 

$

94

 

 

There were no impairment charges included in gross realized losses for the three and six months ended June 30, 2013 and 2012, respectively.

 

11



Table of Contents

 

Note 6.  Federal Home Loan Bank Stock

 

Jersey Shore State Bank and Luzerne 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.  More consideration was given to the long-term prospects for the FHLB as opposed to the recent stress caused by the extreme economic conditions the world is facing.  Management also 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 resumption 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, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

 

 

 

 

Past Due

 

Past Due 90

 

 

 

 

 

 

 

 

 

30 To 89

 

Days Or More

 

Non-

 

 

 

(In Thousands)

 

Current

 

Days

 

& Still Accruing

 

Accrual

 

Total

 

Commercial and agricultural

 

$

118,303

 

$

78

 

$

 

$

572

 

$

118,953

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

338,083

 

1,779

 

8

 

1,106

 

340,976

 

Commercial

 

292,728

 

137

 

 

3,664

 

296,529

 

Construction

 

15,193

 

1

 

 

1,165

 

16,359

 

Installment loans to individuals

 

14,753

 

352

 

 

 

15,105

 

 

 

779,060

 

$

2,347

 

$

8

 

$

6,507

 

787,922

 

Net deferred loan fees and discounts

 

(961

)

 

 

 

 

 

 

(961

)

Allowance for loan losses

 

(9,404

)

 

 

 

 

 

 

(9,404

)

Loans, net

 

$

768,695

 

 

 

 

 

 

 

$

777,557

 

 

12



Table of Contents

 

 

 

December 31, 2012

 

 

 

 

 

Past Due

 

Past Due 90

 

 

 

 

 

 

 

 

 

30 To 89

 

Days Or More

 

Non-

 

 

 

(In Thousands)

 

Current

 

Days

 

& Still Accruing

 

Accrual

 

Total

 

Commercial and agricultural

 

$

48,322

 

$

133

 

$

 

$

 

$

48,455

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

245,674

 

4,888

 

351

 

1,229

 

252,142

 

Commercial

 

177,539

 

443

 

 

4,049

 

182,031

 

Construction

 

13,813

 

177

 

 

6,077

 

20,067

 

Installment loans to individuals

 

10,550

 

109

 

 

 

10,659

 

 

 

495,898

 

$

5,750

 

$

351

 

$

11,355

 

513,354

 

Net deferred loan fees and discounts

 

(1,122

)

 

 

 

 

 

 

(1,122

)

Allowance for loan losses

 

(7,617

)

 

 

 

 

 

 

(7,617

)

Loans, net

 

$

487,159

 

 

 

 

 

 

 

$

504,615

 

 

Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

 

Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.  Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and June 30, 2013.  The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral.  The carrying value of purchased loans acquired with deteriorated credit quality was $882,000 at June 30, 2013.

 

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne acquisition was $1,211,000 and the estimated fair value of the loans was $878,000. Total contractually required payments on these loans, including interest, at the acquisition date was $1,783,000. However, the Company’s preliminary estimate of expected cash flows was $941,000. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $842,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $63,000 on the acquisition date relating to these impaired loans.

 

The carrying value of the loans acquired and accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated 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 acquisition as of June 1, 2013:

 

(In Thousands)

 

 

 

Unpaid principal balance

 

$

1,211

 

Interest

 

572

 

Contractual cash flows

 

1,783

 

Non-accretable discount

 

(842

)

Expected cash flows

 

941

 

Accretable discount

 

(63

)

Estimated fair value

 

$

878

 

 

Changes in the amortizable yield for purchased credit-impaired loans were as follows for the month ended June 30, 2013:

 

(In Thousands)

 

 

 

Balance at beginning of period

 

$

63

 

Accretion

 

(4

)

Balance at end of period

 

$

59

 

 

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30:

 

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Table of Contents

 

 

 

June 1, 2013

 

June 30, 2013

 

(In Thousands)

 

Acquired Loans with
Specific Evidence of
Deterioration in Credit
Quality (ASC 310-30)

 

Acquired Loans with
Specific Evidence of
Deterioration in Credit
Quality (ASC 310-30)

 

Outstanding balance

 

$

1,211

 

$

1,211

 

Carrying amount

 

878

 

882

 

 

The following table presents the interest income if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months Ended June 30,

 

 

 

2013

 

2012

 

(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

 

$

4

 

$

 

$

 

$

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

Residential

 

22

 

3

 

4

 

7

 

Commercial

 

31

 

34

 

22

 

5

 

Construction

 

40

 

14

 

105

 

25

 

 

 

$

97

 

$

51

 

$

131

 

$

37

 

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

(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

 

$

4

 

$

 

$

 

$

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

Residential

 

54

 

12

 

12

 

13

 

Commercial

 

116

 

84

 

43

 

8

 

Construction

 

81

 

25

 

221

 

56

 

 

 

$

255

 

$

121

 

$

276

 

$

77

 

 

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,

 

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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, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

 

 

Recorded

 

Unpaid Principal

 

Related

 

(In Thousands)

 

Investment

 

Balance

 

Allowance

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

$

303

 

$

439

 

$

 

Real estate mortgage:

 

 

 

 

 

 

 

Residential

 

986

 

1,151

 

 

Commercial

 

1,436

 

1,436

 

 

Construction

 

539

 

539

 

 

 

 

3,264

 

3,565

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

556

 

556

 

319

 

Real estate mortgage:

 

 

 

 

 

 

 

Residential

 

892

 

1,021

 

302

 

Commercial

 

7,155

 

7,174

 

2,139

 

Construction

 

638

 

2,993

 

267

 

 

 

9,241

 

11,744

 

3,027

 

Total:

 

 

 

 

 

 

 

Commercial and agricultural

 

859

 

995

 

319

 

Real estate mortgage:

 

 

 

 

 

 

 

Residential

 

1,878

 

2,172

 

302

 

Commercial

 

8,591

 

8,610

 

2,139

 

Construction

 

1,177

 

3,532

 

267

 

 

 

$

12,505

 

$

15,309

 

$

3,027

 

 

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Table of Contents

 

 

 

December 31, 2012

 

 

 

Recorded

 

Unpaid Principal

 

Related

 

(In Thousands)

 

Investment

 

Balance

 

Allowance

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

$

 

$

 

$

 

Real estate mortgage:

 

 

 

 

 

 

 

Residential

 

410

 

487

 

 

Commercial

 

324

 

324

 

 

Construction

 

2,894

 

4,599

 

 

 

 

3,628

 

5,410

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

485

 

485

 

46

 

Real estate mortgage:

 

 

 

 

 

 

 

Residential

 

1,146

 

1,255

 

237

 

Commercial

 

8,515

 

8,611

 

2,018

 

Construction

 

3,196

 

4,696

 

234

 

 

 

13,342

 

15,047

 

2,535

 

Total:

 

 

 

 

 

 

 

Commercial and agricultural

 

485

 

485

 

46

 

Real estate mortgage:

 

 

 

 

 

 

 

Residential

 

1,556

 

1,742

 

237

 

Commercial

 

8,839

 

8,935

 

2,018

 

Construction

 

6,090

 

9,295

 

234

 

 

 

$

16,970

 

$

20,457

 

$

2,535

 

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three and six months ended for June 30, 2013 and 2012:

 

 

 

Three Months Ended June 30,

 

 

 

2013

 

2012

 

(In Thousands)

 

Average
Investment in
Impaired Loans

 

Interest Income
Recognized on an
Accrual Basis on
Impaired Loans

 

Interest Income
Recognized on a
Cash Basis on
Impaired Loans

 

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

 

$

718

 

$

7

 

$

 

$

 

$

 

$

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

1,679

 

9

 

6

 

1,277

 

12

 

6

 

Commercial

 

8,491

 

46

 

38

 

6,488

 

93

 

5

 

Construction

 

2,532

 

 

14

 

8,419

 

 

26

 

 

 

$

13,420

 

$

62

 

$

58

 

$

16,184

 

$

105

 

$

37

 

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

(In Thousands)

 

Average
Investment in
Impaired Loans

 

Interest Income
Recognized on an
Accrual Basis on
Impaired Loans

 

Interest Income
Recognized on a
Cash Basis on
Impaired Loans

 

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

 

$

615

 

$

13

 

$

 

$

 

$

 

$

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

1,618

 

17

 

11

 

1,386

 

25

 

29

 

Commercial

 

8,598

 

93

 

84

 

6,502

 

161

 

8

 

Construction

 

3,718

 

553

 

553

 

8,861

 

 

56

 

 

 

$

14,549

 

$

676

 

$

648

 

$

16,749

 

$

186

 

$

93

 

 

There is approximately $126,000 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

 

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concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

 

Loan modifications that are considered TDRs completed during the three and six months ended June 30, 2013 and 2012 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2013

 

2012

 

(In Thousands, Except Number of Contracts)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

2

 

$

61

 

$

61

 

1

 

$

49

 

$

49

 

Commercial

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

2

 

$

61

 

$

61

 

1

 

$

49

 

$

49

 

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

(In Thousands, Except Number of Contracts)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

2

 

$

61

 

$

61

 

2

 

$

154

 

$

154

 

Commercial

 

2

 

264

 

264

 

1

 

37

 

37

 

Construction

 

 

 

 

2

 

26

 

26

 

 

 

4

 

$

325

 

$

325

 

5

 

$

217

 

$

217

 

 

There were two loan modifications considered troubled debt restructurings made during the twelve months previous to June 30, 2013 that defaulted during the six months ended June 30, 2013.  The loans that defaulted are commercial real estate loans that are currently in litigation with a recorded investment of $259,000 at June 30, 2013.

 

Troubled debt restructurings amounted to $10,961,000 and $16,217,000 as of June 30, 2013 and December 31, 2012.

 

Internal Risk Ratings

 

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard.  Loans in the doubtful category exhibit the same weaknesses found in the substandard loans, however, the weaknesses are more pronounced.  Such loans are static and collection in full is improbable.  However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.  Loans classified loss are considered uncollectible and charge-off is imminent.

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the 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, 2013 and December 31, 2012:

 

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Table of Contents

 

 

 

June 30, 2013

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Pass

 

$

111,182

 

$

339,476

 

$

278,576

 

$

12,790

 

$

15,105

 

$

757,129

 

Special Mention

 

7,390

 

 

5,349

 

 

 

12,739

 

Substandard

 

381

 

1,500

 

12,604

 

3,569

 

 

18,054

 

 

 

$

118,953

 

$

340,976

 

$

296,529

 

$

16,359

 

$

15,105

 

$

787,922

 

 

 

 

December 31, 2012

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Pass

 

$

46,805

 

$

250,161

 

$

167,463

 

$

13,944

 

$

10,659

 

$

489,032

 

Special Mention

 

1,480

 

 

1,630

 

 

 

3,110

 

Substandard

 

170

 

1,981

 

12,938

 

6,123

 

 

21,212

 

 

 

$

48,455

 

$

252,142

 

$

182,031

 

$

20,067

 

$

10,659

 

$

513,354

 

 

Allowance for Loan Losses

 

An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio.  The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-performing loans.

 

The 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 acquired loans 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, 2013.

 

Activity in the allowance is presented for the three and six months ended June 30, 2013 and 2012:

 

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Table of Contents

 

 

 

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

 

 

 

 

Three Months Ended June 30, 2012

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Unallocated

 

Totals

 

Beginning Balance

 

$

396

 

$

882

 

$

3,276

 

$

2,719

 

$

175

 

$

297

 

$

7,745

 

Charge-offs

 

 

(11

)

(18

)

(877

)

(19

)

 

(925

)

Recoveries

 

5

 

1

 

1

 

1

 

10

 

 

18

 

Provision

 

(46

)

88

 

(95

)

296

 

3

 

354

 

600

 

Ending Balance

 

$

355

 

$

960

 

$

3,164

 

$

2,139

 

$

169

 

$

651

 

$

7,438

 

 

 

 

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

 

 

 

 

Six Months Ended June 30, 2012

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Unallocated

 

Totals

 

Beginning Balance

 

$

418

 

$

939

 

$

2,651

 

$

2,775

 

$

190

 

$

181

 

$

7,154

 

Charge-offs

 

 

(11

)

(18

)

(877

)

(51

)

 

(957

)

Recoveries

 

6

 

3

 

2

 

4

 

26

 

 

41

 

Provision

 

(69

)

29

 

529

 

237

 

4

 

470

 

1,200

 

Ending Balance

 

$

355

 

$

960

 

$

3,164

 

$

2,139

 

$

169

 

$

651

 

$

7,438

 

 

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, 2013, 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, 2013 and 2012 as follows:

 

 

 

June 30,

 

 

 

2013

 

2012

 

Owners of residential rental properties

 

14.71

%

13.52

%

Owners of commercial rental properties

 

14.15

%

15.25

%

 

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, 2013 and December 31, 2012:

 

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Table of Contents

 

 

 

June 30, 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

 

$

319

 

$

302

 

$

2,139

 

$

267

 

$

 

$

 

$

3,027

 

Collectively evaluated for impairment

 

221

 

2,743

 

1,849

 

576

 

141

 

847

 

6,377

 

Total ending allowance balance

 

$

540

 

$

3,045

 

$

3,988

 

$

843

 

$

141

 

$

847

 

$

9,404

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

556

 

$

1,558

 

$

8,332

 

$

1,177

 

$

 

 

 

$

11,623

 

Loans acquired with deteriorated credit quality

 

303

 

320

 

259

 

 

 

 

 

882

 

Collectively evaluated for impairment

 

118,094

 

339,098

 

287,938

 

15,182

 

15,105

 

 

 

775,417

 

Total ending loans balance

 

$

118,953

 

$

340,976

 

$

296,529

 

$

16,359

 

$

15,105

 

 

 

$

787,922

 

 

 

 

December 31, 2012

 

 

 

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

 

$

46

 

$

237

 

$

2,018

 

$

234

 

$

 

$

 

$

2,535

 

Collectively evaluated for impairment

 

315

 

1,717

 

1,813

 

716

 

144

 

377

 

5,082

 

Total ending allowance balance

 

$

361

 

$

1,954

 

$

3,831

 

$

950

 

$

144

 

$

377

 

$

7,617

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

485

 

$

1,556

 

$

8,839

 

$

6,090

 

$

 

 

 

$

16,970

 

Collectively evaluated for impairment

 

47,970

 

250,586

 

173,192

 

13,977

 

10,659

 

 

 

496,384

 

Total ending loans balance

 

$

48,455

 

$

252,142

 

$

182,031

 

$

20,067

 

$

10,659

 

 

 

$

513,354

 

 

Note 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, 2012.

 

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 June 30, 2013 and 2012, respectively:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands)

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$

159

 

$

156

 

$

318

 

$

313

 

Interest cost

 

193

 

186

 

386

 

372

 

Expected return on plan assets

 

(246

)

(195

)

(492

)

(391

)

Amortization of transition obligation

 

 

 

 

(1

)

Amortization of prior service cost

 

6

 

6

 

13

 

13

 

Amortization of net loss

 

120

 

109

 

239

 

218

 

Net periodic cost

 

$

232

 

$

262

 

$

464

 

$

524

 

 

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, 2012, that it expected to contribute a minimum of $400,000 to its defined benefit plan in 2013.  As of June 30, 2013, there were contributions of $430,000 made to the plan with additional contributions of at least $175,000 anticipated during the remainder of 2013.

 

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, 2013 and 2012, there were 792 and 709 shares issued under the plan, respectively.

 

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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, 2013 and December 31, 2012:

 

(In Thousands)

 

June 30, 2013

 

December 31, 2012

 

Commitments to extend credit

 

$

169,959

 

$

90,503

 

Standby letters of credit

 

4,935

 

3,768

 

 

Commitments to extend credit are legally binding agreements to lend to customers.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements.  The Company evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company, on an extension of credit is based on management’s credit assessment of the counterparty.

 

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  These instruments are issued primarily to support bid or performance related contracts.  The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management.  Fees earned from the issuance of these letters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

 

Note 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, 2013 and December 31, 2012, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

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June 30, 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

 

$

 

$

32,514

 

$

 

$

32,514

 

State and political securities

 

 

164,401

 

 

164,401

 

Other debt securities

 

 

102,314

 

 

102,314

 

Financial institution equity securities

 

11,321

 

 

 

11,321

 

Other equity securities

 

739

 

 

 

739

 

Total assets measured on a recurring basis

 

$

12,060

 

$

299,229

 

$

 

$

311,289

 

 

 

 

December 31, 2012

 

(In Thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets measured on a recurring basis:

 

 

 

 

 

 

 

 

 

Investment securities, available for sale:

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

 

$

25,840

 

$

 

$

25,840

 

State and political securities

 

 

180,224

 

 

180,224

 

Other debt securities

 

 

71,599

 

 

71,599

 

Financial institution equity securities

 

9,548

 

 

 

9,548

 

Other equity securities

 

2,105

 

 

 

2,105

 

Total assets measured on a recurring basis

 

$

11,653

 

$

277,663

 

$

 

$

289,316

 

 

The following table presents the assets reported on the consolidated balance sheet at their fair value on a non-recurring basis as of June 30, 2013 and December 31, 2012, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

June 30, 2013

 

(In Thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

9,478

 

$

9,478

 

Other real estate owned

 

 

 

1,560

 

1,560

 

Total assets measured on a non-recurring basis

 

$

 

$

 

$

11,038

 

$

11,038

 

 

 

 

December 31, 2012

 

(In Thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

14,435

 

$

14,435

 

Other real estate owned

 

 

 

1,449

 

1,449

 

Total assets measured on a non-recurring basis

 

$

 

$

 

$

15,884

 

$

15,884

 

 

The following table provides a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing level III techniques as of June 30, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

 

 

Quantitative Information About Level III Fair Value Measurements

 

 (In Thousands)

 

Fair Value

 

Valuation Technique(s)

 

Unobservable Inputs

 

Range

 

Weighted Average

 

Impaired loans

 

$

9,478

 

Discounted cash flow

 

Temporary reduction in payment amount

 

0 to -100%

 

-27%

 

 

 

 

 

 

 

Probability of default

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appraisal of collateral

 

Appraisal adjustments (1)

 

0 to -44%

 

-15%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

1,560

 

Appraisal of collateral (1)

 

 

 

 

 

 

 

 


(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

 

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December 31, 2012

 

 

 

Quantitative Information About Level III Fair Value Measurements

 

(In Thousands)

 

Fair Value

 

Valuation Technique(s)

 

Unobservable Inputs

 

Range

 

Weighted Average

 

Impaired loans

 

$

 14,435

 

Discounted cash flow

 

Temporary reduction in payment amount

 

0 to -55%

 

-27%

 

 

 

 

 

 

 

Probability of default

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appraisal of collateral

 

Appraisal adjustments (1)

 

0 to -20%

 

-11%

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

 1,449

 

Appraisal of collateral (1)

 

 

 

 

 

 

 

 


(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

 

The significant unobservable inputs used in the fair value measurement of the Company’s impaired loans using the discounted cash flow valuation technique include temporary changes in payment amounts and the probability of default.  Significant increases (decreases) in payment amounts would result in significantly higher (lower) fair value measurements.  The probability of default is 0% for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using the appraisal of collateral valuation technique.

 

The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The significant unobservable input used in the fair value measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of collateral valuation technique.

 

Note 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, 2013 and December 31, 2012:

 

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Fair Value Measurements at June 30, 2013

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

Carrying

 

Fair

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

(In Thousands)

 

Value

 

Value

 

(Level I)

 

(Level II)

 

(Level III)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,439

 

$

28,439

 

$

28,439

 

$

 

$

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

311,289

 

311,289

 

12,060

 

299,229

 

 

Loans held for sale

 

5,409

 

5,409

 

5,409

 

 

 

Loans, net

 

777,557

 

774,344

 

 

 

774,344

 

Bank-owned life insurance

 

25,022

 

25,022

 

25,022

 

 

 

Accrued interest receivable

 

4,999

 

4,999

 

4,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

744,265

 

$

723,925

 

$

484,783

 

$

 

$

239,142

 

Noninterest-bearing deposits

 

211,096

 

211,096

 

211,096

 

 

 

Short-term borrowings

 

39,000

 

39,000

 

39,000

 

 

 

Long-term borrowings, FHLB

 

70,750

 

73,067

 

 

 

73,067

 

Accrued interest payable

 

442

 

442

 

442

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2012

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

Carrying

 

Fair

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

(In Thousands)

 

Value

 

Value

 

(Level I)

 

(Level II)

 

(Level III)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,142

 

$

15,142

 

$

15,142

 

$

 

$

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

289,316

 

289,316

 

11,653

 

277,663

 

 

Loans held for sale

 

3,774

 

3,774

 

3,774

 

 

 

Loans, net

 

504,615

 

506,406

 

 

 

506,406

 

Bank-owned life insurance

 

16,362

 

16,362

 

16,362

 

 

 

Accrued interest receivable

 

4,099

 

4,099

 

4,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

527,073

 

$

530,485

 

$

359,979

 

$

 

$

170,506

 

Noninterest-bearing deposits

 

114,953

 

114,953

 

114,953

 

 

 

Short-term borrowings

 

33,204

 

33,204

 

33,204

 

 

 

Long-term borrowings, FHLB

 

76,278

 

80,772

 

 

 

80,772

 

Accrued interest payable

 

366

 

366

 

366

 

 

 

 

Cash and Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and Accrued Interest Payable:

 

The fair value is equal to the carrying value.

 

Investment Securities:

 

The fair value of investment securities available for sale 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 cash

 

24



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flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.

 

Bank-Owned Life Insurance:

 

The fair value is equal to the cash surrender value of the life insurance policies.

 

Deposits:

 

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market accounts, is equal to the amount payable on demand.  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.

 

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, 2013, to former shareholders of Luzerne National Bank Corporation.  Luzerne Bank is operating as an independent bank under the Penns Woods Bancorp, Inc. umbrella.

 

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition.  Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of Luzerne Bank.  Real estate acquired through foreclosure was primarily valued based on appraised collateral values.  The Company also recorded an identifiable intangible asset representing the core deposit base of Luzerne Bank based on management’s evaluation of the cost of such deposits relative to alternative funding sources.  The Company also recorded an identifiable intangible asset representing the trade name of Luzerne Bank based on management’s evaluation of the value of the name in the market.  Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products. Management used market quotations to determine the fair value of investment securities.

 

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. Luzerne Bank’s loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality.  Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $1,211,000 of purchased credit-impaired loans subject to a non-accretable difference of $842,000. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

 

Luzerne’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value.  Additionally, consideration was given to management’s best estimates of default rates and payment speeds.  At acquisition, Luzerne’s loan portfolio without evidence of deterioration totaled $249,789,000 and was recorded at a fair value of $249,500,000.

 

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Table of Contents

 

The following table summarizes the purchase of Luzerne National Bank Corporation as of June 1, 2013:

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

Purchase Price Consideration in Common Stock

 

 

 

 

 

Luzerne National Bank Corporation common shares settled for stock

 

630,216

 

 

 

Exchange Ratio

 

1.5534

 

 

 

Penns Woods Bancorp, Inc. shares issued

 

978,977

 

 

 

Value assigned to Penns Woods Bancorp, Inc. common share

 

$

40.59

 

 

 

Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for Penns Woods Bancorp, Inc.

 

 

 

$

39,736

 

 

 

 

 

 

 

Purchase Price Consideration - Cash for Common Stock

 

 

 

 

 

Luzerne National Bank Corporation shares exchanged for cash

 

46,480

 

 

 

Purchase price paid to each Luzerne National Bank Corporation common share exchanged for cash

 

$

61.86

 

 

 

Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for cash

 

 

 

2,876

 

 

 

 

 

 

 

Total Purchase Price

 

 

 

42,612

 

 

 

 

 

 

 

Net Assets Acquired:

 

 

 

 

 

 

 

 

 

 

 

Luzerne National Bank Corporation shareholders’ equity

 

$

27,371

 

 

 

 

 

 

 

 

 

Adjustments to reflect assets acquired at fair value:

 

 

 

 

 

Investments

 

33

 

 

 

Loans

 

 

 

 

 

Interest rate

 

2,680

 

 

 

General credit

 

(3,206

)

 

 

Specific credit - non-amortizing

 

(58

)

 

 

Specific credit - amortizing

 

(40

)

 

 

Core deposit intangible

 

1,882

 

 

 

Trade name intangible

 

133

 

 

 

Owned premises

 

1,138

 

 

 

Leased premises contracts

 

122

 

 

 

Deferred tax assets

 

(603

)

 

 

 

 

 

 

 

 

Adjustments to reflect liabilities acquired at fair value:

 

 

 

 

 

Time deposits

 

(912

)

 

 

 

 

 

 

28,540

 

Goodwill resulting from merger

 

 

 

$

14,072

 

 

The following condensed statement reflects the values assigned to Luzerne National Bank Corporation’s net assets as of the acquisition date:

 

26



Table of Contents

 

(In Thousands)

 

 

 

 

 

Total purchase price

 

 

 

$

42,612

 

 

 

 

 

 

 

Net assets acquired:

 

 

 

 

 

Cash

 

$

20,296

 

 

 

Federal funds sold

 

67

 

 

 

Securities available for sale

 

21,783

 

 

 

Loans

 

250,377

 

 

 

Premises and equipment, net

 

8,014

 

 

 

Accrued interest receivable

 

726

 

 

 

Bank-owned life insurance

 

7,419

 

 

 

Intangibles

 

2,015

 

 

 

Deferred tax liability

 

(76

)

 

 

Other assets

 

2,636

 

 

 

Time deposits

 

(79,223

)

 

 

Deposits other than time deposits

 

(197,733

)

 

 

Borrowings

 

(2,766

)

 

 

Accrued interest payable

 

(103

)

 

 

Other liabilities

 

(4,892

)

 

 

 

 

 

 

28,540

 

Goodwill resulting from Luzerne National Bank Corporation Merger

 

 

 

$

14,072

 

 

The Company recorded goodwill and other intangibles associated with the purchase of Luzerne National Bank Corporation totaling $16,086,000.  Goodwill is not amortized, but is periodically evaluated for impairment.  The Company did not recognize any impairment during the six months ended June 30, 2013.  The carrying amount of the goodwill at June 30, 2013 related to the Luzerne acquisition was $14,072,000.

 

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required.  During the six months ended June 30, 2013, no such adjustments were recorded.  The identifiable intangible assets consist of a core deposit intangible and trade name intangible which are being amortized on an accelerated basis over the useful life of such assets.  The gross carrying amount of the core deposit intangible and trade name intangible at June 30, 2013 was $1,882,000 and $132,000, respectively, with $29,000 and $2,000 accumulated amortization as of that date.

 

As of June 30, 2013, the current year and estimated future amortization expense for the core deposit and trade name intangible was:

 

(In Thousands)

 

 

 

2013

 

$

214

 

2014

 

345

 

2015

 

308

 

2016

 

272

 

2017

 

235

 

2018

 

198

 

2019

 

162

 

2020

 

125

 

2021

 

89

 

2022

 

52

 

2023

 

15

 

 

 

$

2,015

 

 

Results of operations for Luzerne National Bank Corporation prior to the acquisition date are not included in the Consolidated Statement of Income for the three and six month periods ended June 30, 2013.  Due to the significant amount of fair value adjustments, historical results of Luzerne National Bank Corporation are not relevant to the Company’s results of operations.  Therefore, no pro forma information is presented.

 

The following table presents financial information regarding the former Luzerne National Bank Corporation operations included in our Consolidated Statement of Income from the date of acquisition through June 30, 2013 under the column “Actual from acquisition date through June 30, 2013”.  In addition, the following table presents unaudited pro forma information as if the acquisition of

 

27



Table of Contents

 

Luzerne National Bank Corporation had occurred on January 1, 2012 under the “Pro Forma” columns.  The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited proforma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition.  Merger and acquisition integration costs and amortization of fair value adjustments are included in the numbers below.

 

 

 

 

 

Pro Formas

 

 

 

Actual from Acquisition Date

 

Six Months Ended June 30,

 

(In Thousands, Except Per Share Data)

 

Through June 30, 2013

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net interest income

 

$

1,049

 

$

21,546

 

$

20,771

 

Non-interest income

 

137

 

7,090

 

5,995

 

Net income

 

299

 

6,212

 

8,292

 

Pro forma earnings per share:

 

 

 

 

 

 

 

Basic

 

 

 

$

1.29

 

$

1.72

 

Diluted

 

 

 

1.29

 

1.72

 

 

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.

 

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.

 

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Table of Contents

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

EARNINGS SUMMARY

 

Comparison of the Three and Six Months Ended June 30, 2013 and 2012

 

Summary Results

 

Net income for the three months ended June 30, 2013 was $3,659,000 compared to $3,398,000 for the same period of 2012 as after-tax securities gains increased $729,000 (from a gain of $112,000 to a gain of $841,000).  The results for the three months ended June 30, 2013 were negatively impacted by $535,000 in expenses related to the acquisition of Luzerne.  Basic and diluted earnings per share for the three months ended June 30, 2013 and 2012 were $0.88 and $0.89, respectively.  Return on average assets and return on average equity were 1.48% and 13.54% for the three months ended June 30, 2013 compared to 1.67% and 15.48% for the corresponding period of 2012.  Net income from core operations (“operating earnings”) decreased to $2,818,000 for the three months ended June 30, 2013 compared to $3,286,000 for the same period of 2012.  Operating earnings per share for the three months ended June 30, 2013 were $0.68 basic and dilutive compared to $0.86 basic and dilutive for the three months ended June 30, 2012.

 

The six months ended June 30, 2013 generated net income of $7,343,000 compared to $7,087,000 for the same period of 2012.  Comparable results were impacted by an increase in after-tax securities gains of $991,000 (from a gain of $501,000 to a gain of $1,492,000).  In addition, a gain of $109,000 on death benefit related to bank owned life insurance was recorded during the six months ended June 30, 2012.  The results for the six months ended June 30, 2013 were negatively impacted by $623,000 in expenses related to the acquisition of Luzerne.   Earnings per share, basic and dilutive, for the six months ended June 30, 2013 were $1.84 compared to $1.85 for the comparable period of 2012.  Return on average assets and return on average equity were 1.59% and 14.45% for the six months ended June 30, 2013 compared to 1.78% and 16.42% for the corresponding period of 2012.  Operating earnings decreased to $5,851,000 for the six months ended June 30, 2013 compared to $6,477,000 for the comparable period of 2012.  Operating earnings per share for the six months ended June 30, 2013 were $1.46 basic and dilutive compared to $1.69 basic and dilutive for the six months ended June 30, 2012.

 

Management uses the non-GAAP measure of net income from core operations, or operating earnings, in its analysis of the Company’s performance.  This measure, as used by the Company, adjusts net income by excluding significant gains or losses that are unusual in nature.  Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses.  For purposes of this Quarterly Report on Form 10-Q, net income from core operations, or operating earnings, means net income adjusted to exclude after-tax net securities gains or losses and bank-owned life insurance gains on death benefit.  These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

 

Reconciliation of GAAP and Non-GAAP Financial Measures

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(Dollars in Thousands, Except Per Share Data)

 

2013

 

2012

 

2013

 

2012

 

GAAP net income

 

$

3,659

 

$

3,398

 

$

7,343

 

$

7,087

 

Less: net securities and bank-owned life insurance gains, net of tax

 

841

 

112

 

1,492

 

610

 

Non-GAAP operating earnings

 

$

2,818

 

$

3,286

 

$

5,851

 

$

6,477

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Return on average assets (ROA)

 

1.48

%

1.67

%

1.59

%

1.78

%

Less: net securities and bank-owned life insurance gains, net of tax

 

0.34

%

0.06

%

0.33

%

0.15

%

Non-GAAP operating ROA

 

1.14

%

1.61

%

1.26

%

1.63

%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Return on average equity (ROE)

 

13.54

%

15.48

%

14.45

%

16.42

%

Less: net securities and bank-owned life insurance gains, net of tax

 

3.11

%

0.51

%

2.93

%

1.42

%

Non-GAAP operating ROE

 

10.43

%

14.97

%

11.52

%

15.00

%

 

29



Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Basic earnings per share (EPS)

 

$

0.88

 

$

0.89

 

$

1.84

 

$

1.85

 

Less: net securities and bank-owned life insurance gains, net of tax

 

0.20

 

0.03

 

0.38

 

0.16

 

Non-GAAP basic operating EPS

 

$

0.68

 

$

0.86

 

$

1.46

 

$

1.69

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Dilutive EPS

 

$

0.88

 

$

0.89

 

$

1.84

 

$

1.85

 

Less: net securities and bank-owned life insurance gains, net of tax

 

0.20

 

0.03

 

0.38

 

0.16

 

Non-GAAP dilutive operating EPS

 

$

0.68

 

$

0.86

 

$

1.46

 

$

1.69

 

 

Interest and Dividend Income

 

Interest and dividend income for the three months ended June 30, 2013 increased to $10,018,000 compared to $9,280,000 for the same period of 2012.  The increase was due to loan portfolio income increasing as the impact of portfolio growth offset a reduction in yield of 84 basis points (“bp”) due to the competitive landscape and the continued low rate environment that is impacting new loan rates as well as the variable rate segment of the loan portfolio.  The loan portfolio income increase was partially offset by a decrease in investment portfolio interest due to a decline in the average taxable equivalent yield of 57 bp.

 

During the six months ended June 30, 2013, interest and dividend income was $19,558,000, an increase of $993,000 over the same period in 2012.  Interest income on the loan portfolio increased as the growth in the portfolio was countered by a 67 bp decline in average yield.  The investment portfolio interest income decreased as the increase in portfolio size was more than offset by the decline in yield.

 

Interest and dividend income composition for the three and six months ended June 30, 2013 and 2012 was as follows:

 

 

 

For The Three Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Loans including fees

 

$

7,277

 

72.64

%

$

6,294

 

67.82

%

$

983

 

15.62

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,507

 

15.04

 

1,517

 

16.35

 

(10

)

(0.66

)

Tax-exempt

 

1,162

 

11.60

 

1,383

 

14.90

 

(221

)

(15.98

)

Dividend and other interest income

 

72

 

0.72

 

86

 

0.93

 

(14

)

(16.28

)

Total interest and dividend income

 

$

10,018

 

100.00

%

$

9,280

 

100.00

%

$

738

 

7.95

%

 

 

 

For The Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Loans including fees

 

$

14,045

 

71.81

%

$

12,608

 

67.91

%

$

1,437

 

11.40

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

2,950

 

15.08

 

2,991

 

16.11

 

(41

)

(1.37

)

Tax-exempt

 

2,429

 

12.42

 

2,788

 

15.02

 

(359

)

(12.88

)

Dividend and other interest income

 

134

 

0.69

 

178

 

0.96

 

(44

)

(24.72

)

Total interest and dividend income

 

$

19,558

 

100.00

%

$

18,565

 

100.00

%

$

993

 

5.35

%

 

Interest Expense

 

Interest expense for the three months ended June 30, 2013 decreased $318,000 to $1,264,000 compared to $1,582,000 for the same period of 2012.  The substantial decrease associated with deposits is primarily the result of a reduction of 40 and 23 bps in the rate paid on time deposits and money markets, respectively, and a continued shift from higher cost time deposits to core deposits, with emphasis on money market and NOW accounts.  Factors that led to the rate decreases include, but are not limited to, Federal Open Market Committee (“FOMC”) actions to maintain low interest rates and campaigns conducted by the Company to focus on core deposit (non-time deposit) growth as the building block to solid customer relationships.  In addition, during the past two years the time deposit portfolio has been shortened in order to increase repricing frequency.  The time deposit portfolio is now slowly being lengthened to build protection when interest rates begin to increase.  In addition, the Marcellus Shale natural gas exploration in north

 

30



Table of Contents

 

central Pennsylvania is creating opportunities to gather new and build upon existing deposit relationships.  Borrowing interest expense decreased as FHLB long-term borrowings have matured and have been replaced at rates less than 1% with maturities ranging from four to five years.

 

Interest expense for the six months ended June 30, 2013 decreased 18.71% from the same period of 2012.  The reasons noted for the decline in interest expense for the three month period comparison also apply to the six month period.

 

Interest expense composition for the three and six months ended June 30, 2013 and 2012 was as follows:

 

 

 

For the Three Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposits

 

$

760

 

60.13

%

$

934

 

59.04

%

$

(174

)

(18.63

)%

Short-term borrowings

 

22

 

1.74

 

28

 

1.77

 

(6

)

(21.43

)

Long-term borrowings, FHLB

 

482

 

38.13

 

620

 

39.19

 

(138

)

(22.26

)

Total interest expense

 

$

1,264

 

100.00

%

$

1,582

 

100.00

%

$

(318

)

(20.10

)%

 

 

 

For the Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposits

 

$

1,551

 

59.68

%

$

1,895

 

59.27

%

$

(344

)

(18.15

)%

Short-term borrowings

 

47

 

1.81

 

62

 

1.94

 

(15

)

(24.19

)

Long-term borrowings, FHLB

 

1,001

 

38.51

 

1,240

 

38.79

 

(239

)

(19.27

)

Total interest expense

 

$

2,599

 

100.00

%

$

3,197

 

100.00

%

$

(598

)

(18.71

)%

 

Net Interest Margin

 

The net interest margin (“NIM”) for the three months ended June 30, 2013 was 4.09% compared to 4.47% for the corresponding period of 2012.  The NIM declined as a 34 bp decline in the rate paid on interest bearing liabilities was countered by a 66 bp decline in the yield on interest earning assets.  The decrease in earning asset yield is due to the impact of the current low rate environment on the loan and investment portfolios.  In addition, the duration of the investment portfolio has been shortened by utilizing variable rate and intermediate term corporate bonds to offset the relatively longer duration of the municipal bonds within the portfolio.  This shortening of the investment portfolio limits current earnings due to the low rates on the short end of the interest rate curve, but it also limits interest rate risk and will provide cash flow over the next few years as we anticipate a period of increasing rates.  The decrease in the cost of interest bearing liabilities from 1.05% to 0.71% was driven by a reduction in the rate paid on time deposits of 40 bp.  The reduction in the rate paid on time deposits was the result of shortening the time deposit portfolio, which has resulted in an increasing repricing frequency during this period of low rates.  In addition, a focus on increasing core deposits has resulted in significant growth in lower cost core deposits.  The duration of the time deposit portfolio has slowly started to be lengthened due to the apparent bottoming or near bottoming of deposit rates.  The average rate on long-term borrowings declined due to the maturity of FHLB borrowings during 2012 and 2013 coupled with the addition of $30,000,000 in borrowings with terms ranging from four to five years at rates less than 1% during the second half of 2012.

 

The NIM for the six months ended June 30, 2013 was 4.26% compared to 4.59% for the same period of 2012.  The impact of the items mentioned in the three month discussion also applies to the six month period.  A 35 bp decline in the rate paid on time deposits served as the foundation for a 21 bp decline in the rate paid on deposits, while the FOMC and general market actions affected the yield on earning assets and cost of borrowings.

 

The following is a schedule of average balances and associated yields for the three and six months ended June 30, 2013 and 2012:

 

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Table of Contents

 

 

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

(In Thousands)

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

21,480

 

$

249

 

4.65

%

$

21,621

 

$

298

 

5.54

%

All other loans

 

596,206

 

7,113

 

4.79

%

435,918

 

6,097

 

5.63

%

Total loans

 

617,686

 

7,362

 

4.78

%

457,539

 

6,395

 

5.62

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fed funds sold

 

98

 

 

0.00

%

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

178,827

 

1,573

 

3.52

%

163,294

 

1,601

 

3.92

%

Tax-exempt securities

 

119,655

 

1,761

 

5.89

%

130,313

 

2,095

 

6.43

%

Total securities

 

298,482

 

3,334

 

4.47

%

293,607

 

3,696

 

5.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

8,339

 

6

 

0.29

%

13,285

 

2

 

0.06

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

924,605

 

10,702

 

4.64

%

764,431

 

10,093

 

5.30

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

65,956

 

 

 

 

 

50,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

990,561

 

 

 

 

 

$

814,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

107,027

 

27

 

0.10

%

$

79,465

 

16

 

0.08

%

Super Now deposits

 

149,635

 

171

 

0.46

%

120,066

 

153

 

0.51

%

Money market deposits

 

172,228

 

129

 

0.30

%

152,858

 

202

 

0.53

%

Time deposits

 

191,046

 

433

 

0.91

%

172,431

 

563

 

1.31

%

Total interest-bearing deposits

 

619,936

 

760

 

0.49

%

524,820

 

934

 

0.72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

21,777

 

22

 

0.40

%

17,222

 

28

 

0.65

%

Long-term borrowings, FHLB

 

71,237

 

482

 

2.68

%

61,278

 

620

 

4.00

%

Total borrowings

 

93,014

 

504

 

2.14

%

78,500

 

648

 

3.27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

712,950

 

1,264

 

0.71

%

603,320

 

1,582

 

1.05

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

153,840

 

 

 

 

 

112,683

 

 

 

 

 

Other liabilities

 

15,652

 

 

 

 

 

10,889

 

 

 

 

 

Shareholders’ equity

 

108,120

 

 

 

 

 

87,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

990,562

 

 

 

 

 

$

814,682

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.93

%

 

 

 

 

4.25

%

Net interest income/margin

 

 

 

$

9,438

 

4.09

%

 

 

$

8,511

 

4.47

%

 

1.              Information on this table has been calculated using average daily balance sheets to obtain average balances.

2.              Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

3.              Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.

 

32



Table of Contents

 

 

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

(In Thousands)

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

21,860

 

$

498

 

4.59

%

$

21,574

 

$

607

 

5.66

%

All other loans

 

546,033

 

13,716

 

5.07

%

429,040

 

12,207

 

5.72

%

Total loans

 

567,893

 

14,214

 

5.05

%

450,614

 

12,814

 

5.72

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fed funds sold

 

49

 

 

0.00

%

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

170,226

 

3,076

 

3.61

%

155,247

 

3,167

 

4.08

%

Tax-exempt securities

 

123,543

 

3,680

 

5.96

%

130,452

 

4,224

 

6.48

%

Total securities

 

293,769

 

6,756

 

4.60

%

285,699

 

7,391

 

5.17

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

6,024

 

8

 

0.27

%

7,660

 

2

 

0.05

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

867,735

 

20,978

 

4.86

%

743,973

 

20,207

 

5.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

57,369

 

 

 

 

 

50,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

925,104

 

 

 

 

 

$

794,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

95,848

 

52

 

0.11

%

$

76,546

 

27

 

0.07

%

Super Now deposits

 

143,509

 

344

 

0.48

%

114,218

 

295

 

0.52

%

Money market deposits

 

158,374

 

264

 

0.34

%

140,122

 

407

 

0.58

%

Time deposits

 

181,443

 

891

 

0.99

%

174,754

 

1,166

 

1.34

%

Total interest-bearing deposits

 

579,174

 

1,551

 

0.54

%

505,640

 

1,895

 

0.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

21,574

 

47

 

0.44

%

19,640

 

62

 

0.63

%

Long-term borrowings, FHLB

 

73,550

 

1,001

 

2.71

%

61,278

 

1,240

 

4.00

%

Total borrowings

 

95,124

 

1,048

 

2.19

%

80,918

 

1,302

 

3.18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

674,298

 

2,599

 

0.77

%

586,558

 

3,197

 

1.09

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

135,035

 

 

 

 

 

110,382

 

 

 

 

 

Other liabilities

 

14,164

 

 

 

 

 

11,216

 

 

 

 

 

Shareholders’ equity

 

101,607

 

 

 

 

 

86,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

925,104

 

 

 

 

 

$

794,490

 

 

 

 

 

Interest rate spread

 

 

 

 

 

4.09

%

 

 

 

 

4.36

%

Net interest income/margin

 

 

 

$

18,379

 

4.26

%

 

 

$

17,010

 

4.59

%

 

1.              Information on this table has been calculated using average daily balance sheets to obtain average balances.

2.              Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

3.              Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.

 

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and six months ended June 30, 2013 and 2012.

 

33



Table of Contents

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands)

 

2013

 

2012

 

2013

 

2012

 

Total interest income

 

$

10,018

 

$

9,280

 

$

19,558

 

$

18,565

 

Total interest expense

 

1,264

 

1,582

 

2,599

 

3,197

 

Net interest income

 

8,754

 

7,698

 

16,959

 

15,368

 

Tax equivalent adjustment

 

684

 

813

 

1,420

 

1,642

 

Net interest income (fully taxable equivalent)

 

$

9,438

 

$

8,511

 

$

18,379

 

$

17,010

 

 

The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013 vs. 2012

 

2013 vs. 2012

 

 

 

Increase (Decrease) Due to

 

Increase (Decrease) Due to

 

(In Thousands)

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

(2

)

$

(47

)

$

(49

)

$

8

 

$

(117

)

$

(109

)

All other loans

 

2,032

 

(1,016

)

1,016

 

3,017

 

(1,508

)

1,509

 

Fed funds sold

 

 

 

 

 

 

 

Taxable investment securities

 

145

 

(173

)

(28

)

287

 

(378

)

(91

)

Tax-exempt investment securities

 

(164

)

(170

)

(334

)

(218

)

(326

)

(544

)

Interest bearing deposits

 

(1

)

5

 

4

 

 

6

 

6

 

Total interest-earning assets

 

2,010

 

(1,401

)

609

 

3,094

 

(2,323

)

771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

7

 

4

 

11

 

8

 

17

 

25

 

Super Now deposits

 

35

 

(17

)

18

 

70

 

(21

)

49

 

Money market deposits

 

74

 

(147

)

(73

)

148

 

(291

)

(143

)

Time deposits

 

57

 

(187

)

(130

)

44

 

(319

)

(275

)

Short-term borrowings

 

6

 

(12

)

(6

)

3

 

(18

)

(15

)

Long-term borrowings, FHLB

 

89

 

(227

)

(138

)

301

 

(540

)

(239

)

Total interest-bearing liabilities

 

268

 

(586

)

(318

)

574

 

(1,172

)

(598

)

Change in net interest income

 

$

1,742

 

$

(815

)

$

927

 

$

2,520

 

$

(1,151

)

$

1,369

 

 

Provision for Loan Losses

 

The provision for loan losses is based upon management’s quarterly review of the loan portfolio.  The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served.  An external independent loan review is also performed annually for the Bank.  Management remains committed to an aggressive program of problem loan identification and resolution.

 

The allowance for loan losses is determined by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined.  Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience.  In addition, management considers industry standards and trends with respect to non-performing loans and its knowledge and experience with specific lending segments.

 

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at June 30, 2013, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations.  A downturn in the local economy, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

 

When determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

 

34



Table of Contents

 

The allowance for loan losses increased from $7,617,000 at December 31, 2012 to $9,404,000 at June 30, 2013.  The increase in the allowance for loan losses was augmented by net loan recoveries of $712,000 for the six month period ended June 30, 2013.  The primary driver of the loan recoveries for the period was one large recovery of a construction real-estate loan that supplemented the provision for loan losses during the six months ended June 30, 2013.  At June 30, 2013 and December 31, 2012, the allowance for loan losses to total loans was 1.19% and 1.49%, respectively.  The ratio was impacted by the growth in the loan portfolio due to the acquisition of Luzerne and the related purchase accounting adjustments.

 

The provision for loan losses totaled $575,000 and $600,000 for the three months ended June 30, 2013 and 2012 and $1,075,000 and $1,200,000 for the six months ended June 30, 2013 and 2012.  The amount of the provision for loan losses was the result of several factors, including but not limited to, a ratio of nonperforming loans to total loans of 0.83% at June 30, 2013 and a ratio of the allowance for loan losses to nonperforming loans of 144.34% at June 30, 2013.  The large increase in the provision for residential real estate loans was due to the growth of the home equity portfolio while the large decrease in the provision for construction real estate loans was due to a large recovery.

 

Nonperforming loans decreased to $6,515,000 at June 30, 2013 from $8,725,000 at June 30, 2012 due to several partial charge-offs and the payoff of a large construction loan that was on nonaccrual.  Internal loan review and analysis and the continued uncertainty surrounding the economy, coupled with the ratios noted previously, dictated that the provision for loan losses was at a level of $1,075,000 for the six months ended June 30, 2013.  The change in level of provision for loan losses did not equate to the change in nonperforming loans due to the economic situation and substantial growth in the loan portfolio.

 

The following is a table showing total nonperforming loans as of:

 

 

 

Total Nonperforming Loans

 

(In Thousands)

 

90 Days Past Due

 

Nonaccrual

 

Total

 

June 30, 2013

 

$

8

 

$

6,507

 

$

6,515

 

March 31, 2013

 

37

 

9,022

 

9,059

 

December 31, 2012

 

351

 

11,355

 

11,706

 

September 30, 2012

 

654

 

11,387

 

12,041

 

June 30, 2012

 

 

8,725

 

8,725

 

 

Non-interest Income

 

Total non-interest income for the three months ended June 30, 2013 compared to the same period in 2012 increased $1,254,000 to $3,535,000.  Excluding net securities gains, non-interest income for the three months ended June 30, 2013 increased $150,000 compared to the 2012 period.  Gain on sale of loans decreased due to the timing of the transactions which has delayed the recognition of income until the third quarter of 2013.  Insurance commissions declined as a shift in product mix towards managed money is occurring and the length of time of the sales cycle related to investment products typically takes to complete.  Other income increased as debit and credit card related income continues to build as debit cards continue to gain in popularity, while an increasing number of merchants utilize our merchant card services.

 

Total non-interest income for the six months ended June 30, 2013 compared to the same period in 2012 increased $1,224,000.  Excluding net securities gains, non-interest income decreased $277,000 compared to the 2012 period.   Gain on sale of loans increased as the level of real estate transactions processed has increased over the past year.  The increase in number of transactions processed is a direct result of our strategy to increase the number of mortgage originators within our market area, while also hiring additional mortgage originators to expand our market area.  Insurance commissions decreased due to several large bonuses that were received during the first quarter of 2012.  Other income decreased due to a partial write down of other real estate owned.

 

Non-interest income composition for the three and six months ended June 30, 2013 and 2012 was as follows:

 

 

 

For the Three Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposit service charges

 

$

538

 

15.22

%

$

458

 

20.08

%

$

80

 

17.47

%

Securities gains, net

 

1,274

 

36.04

 

170

 

7.45

 

1,104

 

649.41

 

Bank owned life insurance

 

144

 

4.07

 

133

 

5.83

 

11

 

8.27

 

Gain on sale of loans

 

302

 

8.54

 

343

 

15.04

 

(41

)

(11.95

)

Insurance commissions

 

247

 

6.99

 

316

 

13.85

 

(69

)

(21.84

)

Brokerage commissions

 

299

 

8.46

 

247

 

10.83

 

52

 

21.05

 

Other

 

731

 

20.68

 

614

 

26.92

 

117

 

19.06

 

Total non-interest income

 

$

3,535

 

100.00

%

$

2,281

 

100.00

%

$

1,254

 

54.98

%

 

35



Table of Contents

 

 

 

For the Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Service charges

 

$

980

 

15.63

%

$

905

 

17.94

%

$

75

 

8.29

%

Securities gains, net

 

2,260

 

36.06

 

759

 

15.05

 

1,501

 

197.76

 

Bank owned life insurance

 

282

 

4.50

 

401

 

7.95

 

(119

)

(29.68

)

Gain on sale of loans

 

653

 

10.42

 

526

 

10.43

 

127

 

24.14

 

Insurance commissions

 

511

 

8.15

 

758

 

15.03

 

(247

)

(32.59

)

Brokerage commissions

 

547

 

8.73

 

459

 

9.10

 

88

 

19.17

 

Other

 

1,035

 

16.51

 

1,236

 

24.50

 

(201

)

(16.26

)

Total non-interest income

 

$

6,268

 

100.00

%

$

5,044

 

100.00

%

$

1,224

 

24.27

%

 

Non-interest Expense

 

Total non-interest expense increased $1,622,000 for the three months ended June 30, 2013 compared to the same period of 2012.  The increase in salaries and employee benefits was attributable to increases in salaries and pension expense.  Other expenses increased primarily due to increased fees related to providing debit card services and expenses of $535,000 related to the acquisition of Luzerne.

 

Total non-interest expense increased $2,009,000 for the six months ended June 30, 2013 compared to the same period of 2012.  The increase in non-interest expense for the six month period is primarily the result of the same items noted in the three month discussion.

 

Non-interest expense composition for the three and six months ended June 30, 2013 and 2012 was as follows:

 

 

 

For the Three Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Salaries and employee benefits

 

$

3,442

 

49.42

%

$

2,850

 

53.34

%

$

592

 

20.77

%

Occupancy

 

397

 

5.70

 

318

 

5.95

 

79

 

24.84

 

Furniture and equipment

 

412

 

5.92

 

357

 

6.68

 

55

 

15.41

 

Pennsylvania shares tax

 

208

 

2.99

 

167

 

3.13

 

41

 

24.55

 

Amortization of investment in limited partnerships

 

166

 

2.38

 

166

 

3.11

 

 

 

Federal Deposit Insurance Corporation deposit insurance

 

119

 

1.71

 

115

 

2.15

 

4

 

3.48

 

Marketing

 

120

 

1.72

 

140

 

2.62

 

(20

)

(14.29

)

Intangible amortization

 

31

 

0.45

 

 

 

31

 

 

Other

 

2,070

 

29.71

 

1,230

 

23.02

 

840

 

68.29

 

Total non-interest expense

 

$

6,965

 

100.00

%

$

5,343

 

100.00

%

$

1,622

 

30.36

%

 

 

 

For the Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Salaries and employee benefits

 

$

6,510

 

50.80

%

$

5,867

 

54.29

%

$

643

 

10.96

%

Occupancy

 

748

 

5.84

 

646

 

5.98

 

102

 

15.79

 

Furniture and equipment

 

820

 

6.40

 

703

 

6.51

 

117

 

16.64

 

Pennsylvania shares tax

 

392

 

3.06

 

336

 

3.11

 

56

 

16.67

 

Amortization of investment in limited partnerships

 

331

 

2.58

 

331

 

3.06

 

 

 

Federal Deposit Insurance Corporation deposit insurance

 

248

 

1.94

 

238

 

2.20

 

10

 

4.20

 

Marketing

 

215

 

1.68

 

273

 

2.53

 

(58

)

(21.25

)

Intangible amortization

 

31

 

0.24

 

 

 

31

 

 

Other

 

3,521

 

27.46

 

2,413

 

22.32

 

1,108

 

45.92

 

Total non-interest expense

 

$

12,816

 

100.00

%

$

10,807

 

100.00

%

$

2,009

 

18.59

%

 

Provision for Income Taxes

 

Income taxes increased $452,000 and $675,000 for the three and six months ended June 30, 2013 compared to the same periods of 2012.  The primary cause of the increase in tax expense for the three and six months ended June 30, 2013 compared to 2012 is primarily the impact of increased security gains.  Excluding the impact of the net securities gains, the effective tax rate for the three and six months ended June 30, 2013 was 18.91% and 17.31% compared to 15.00% and 13.86% for the same periods of 2012.  The Company currently is in a deferred tax asset position due to the low income housing tax credits earned both currently and previously.  Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate carry forward period and therefore does not require a valuation allowance.

 

36



Table of Contents

 

ASSET/LIABILITY MANAGEMENT

 

Cash and Cash Equivalents

 

Cash and cash equivalents increased $13,163,000 from $15,142,000 at December 31, 2012 to $28,305,000 at June 30, 2013 primarily as a result of the following activities during the six months ended June 30, 2013:

 

Loans Held for Sale

 

Activity regarding loans held for sale resulted in loan originations exceeding sale proceeds, less $653,000 in realized gains, by $1,635,000 for the six months ended June 30, 2013.

 

Loans

 

Gross loans increased $274,729,000 since December 31, 2012 as Luzerne provided approximately $254,000,000 of the increase concentrated in the commercial real estate and commercial and agricultural segments of the portfolio.  The increase in residential real estate was due primarily to an emphasis on home equity products.

 

The allocation of the loan portfolio, by category, as of June 30, 2013 and December 31, 2012 is presented below:

 

 

 

June 30, 2013

 

December 31, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Commercial and agricultural

 

$

118,953

 

15.12

%

$

48,455

 

9.46

%

$

70,498

 

145.49

%

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

340,976

 

43.32

 

252,142

 

49.22

 

88,834

 

35.23

 

Commercial

 

296,529

 

37.68

 

182,031

 

35.54

 

114,498

 

62.90

 

Construction

 

16,359

 

2.08

 

20,067

 

3.92

 

(3,708

)

(18.48

)

Installment loans to individuals

 

15,105

 

1.92

 

10,659

 

2.08

 

4,446

 

41.71

 

Net deferred loan fees and discounts

 

(961

)

(0.12

)

(1,122

)

(0.22

)

161

 

14.35

 

Gross loans

 

$

786,961

 

100.00

%

$

512,232

 

100.00

%

$

274,729

 

53.63

%

 

The following table shows the amount of accrual and nonaccrual TDRs at June 30, 2013 and December 31, 2012:

 

 

 

June 30, 2013

 

December 31, 2012

 

(In Thousands)

 

Accrual

 

Nonaccrual

 

Total

 

Accrual

 

Nonaccrual

 

Total

 

Commercial and agricultural

 

$

459

 

$

 

$

459

 

$

485

 

$

 

$

485

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

614

 

435

 

1,049

 

710

 

321

 

1,031

 

Commercial

 

4,825

 

3,442

 

8,267

 

5,172

 

3,424

 

8,596

 

Construction

 

12

 

1,165

 

1,177

 

13

 

6,077

 

6,090

 

Installment loans to individuals

 

9

 

 

9

 

15

 

 

15

 

 

 

$

5,919

 

$

5,042

 

$

10,961

 

$

6,395

 

$

9,822

 

$

16,217

 

 

Investments

 

The fair value of the investment securities portfolio at June 30, 2013 increased $21,973,000 since December 31, 2012 due to the acquisition of Luzerne.  The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 95% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

 

The Company considers various factors, which include examples from applicable accounting guidance, when analyzing the available for sale portfolio for possible other than temporary impairment.  The Company primarily considers the following factors in its analysis: length of time and severity of the market value being less than carrying value; reduction of dividend paid (equities); continued payment of dividend/interest, credit rating, and financial condition of an issuer; intent and ability to hold until anticipated recovery (which may be maturity); and general outlook for the economy, specific industry, and entity in question.

 

The bond portion of the portfolio review is conducted with emphases on several factors.  Continued payment of principal and interest is given primary importance with credit rating and financial condition of the issuer following as the next most important.  Credit ratings were reviewed with the ratings of the bonds being satisfactory.  Bonds that were not currently rated were discussed with a third party and/or underwent an internal financial review.  The Company also monitors whether each of the investments incurred a decline in market value from carrying value of at least 20% for twelve consecutive months or a similar decline of at least 50% for three consecutive months.  Each bond is reviewed to determine whether it is a general obligation bond, which is backed by the credit and taxing power of the issuing jurisdiction, or revenue bond, which is only payable from specified revenues.  Based on the review undertaken by the Company, the Company determined that the decline in value of the various bond holdings were temporary and were the result of the general market downturns and interest rate/yield curve changes, not credit issues.  The fact that almost all of such

 

37



Table of Contents

 

bonds are general obligation bonds further solidified the Company’s determination that the decline in the value of these bond holdings is temporary.

 

The fair value of the equity portfolio continues to fluctuate as the economic turbulence continues to impact financial sector stock pricing.  The amortized cost of the equity securities portfolio has increased $92,000 to $10,582,000 at June 30, 2013 from $10,490,000 at December 31, 2012 while the fair value increased $407,000 over the same time period.

 

The equity portion of the portfolio is reviewed for possible other than temporary impairment in a similar manner to the bond portfolio with greater emphasis placed on the length of time the market value has been less than the carrying value and financial sector outlook.  The Company also reviews dividend payment activities and, in the case of financial institutions, whether or not such issuer was participating in the TARP Capital Purchase Program.  The starting point for the equity analysis is the length and severity of a market price decline.  The Company monitors two primary measures: 20% decline in market value from carrying value for twelve consecutive months and 50% decline for three consecutive months.

 

The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at June 30, 2013 follows:

 

 

 

A- to AAA

 

B- to BBB+

 

C to CCC+

 

Not Rated

 

Total

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In Thousands)

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

27,874

 

$

28,605

 

$

 

$

 

$

 

$

 

$

4,063

 

$

3,909

 

$

31,937

 

$

32,514

 

State and political securities

 

157,668

 

157,823

 

901

 

919

 

 

 

5,908

 

5,659

 

164,477

 

164,401

 

Other debt securities

 

98,983

 

97,610

 

4,877

 

4,704

 

 

 

 

 

103,860

 

102,314

 

Total debt securities AFS

 

$

284,525

 

$

284,038

 

$

5,778

 

$

5,623

 

$

 

$

 

$

9,971

 

$

9,568

 

$

300,274

 

$

299,229

 

 

Financing Activities

 

Deposits

 

Total deposits increased $313,335,000 from December 31, 2012 to June 30, 2013 with the acquisition of Luzerne providing approximately $280,000,000 of the increase.  The growth was led by an increase in non-interest bearing deposits accounts from December 31, 2012 to June 30, 2013 of 83.64% as Luzerne provided approximately $85,000,000 of the $96,143,000 increase.  The increase in core deposits (deposits less time deposits) has provided relationship driven funding for the loan and investment portfolios.  The increase in deposits is the result of our focus on building relationships, not by offering market leading rates.  Over the past year and through the first six months of 2013, time deposits, excluding the impact of the Luzerne acquisition, have decreased as we have taken a position of using these accounts as complementary accounts to core deposits.  To facilitate this strategy we are actively working single product time deposit relationships to create a solid relationship through the addition of other products to the customer’s portfolio.

 

Deposit balances and their changes for the periods being discussed follow:

 

 

 

June 30, 2013

 

December 31, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Demand deposits

 

$

211,096

 

22.10

%

$

114,953

 

17.90

%

$

96,143

 

83.64

%

NOW accounts

 

161,972

 

16.95

 

130,454

 

20.32

 

31,518

 

24.16

 

Money market deposits

 

203,076

 

21.26

 

144,722

 

22.54

 

58,354

 

40.32

 

Savings deposits

 

140,667

 

14.72

 

82,546

 

12.86

 

58,121

 

70.41

 

Time deposits

 

238,550

 

24.97

 

169,351

 

26.38

 

69,199

 

40.86

 

 

 

$

955,361

 

100.00

%

$

642,026

 

100.00

%

$

313,335

 

48.80

%

 

Borrowed Funds

 

Total borrowed funds increased 0.24% or $268,000 to $109,750,000 at June 30, 2013 compared to $109,482,000 at December 31, 2012.  Long-term borrowings decreased due to a FHLB borrowings that matured during 2013 at an average rate of 3.94%.

 

 

 

June 30, 2013

 

December 31, 2012

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB repurchase agreements

 

$

21,350

 

19.46

%

$

16,236

 

14.83

%

$

5,114

 

31.50

%

Securities sold under agreement to repurchase

 

17,650

 

16.08

 

16,968

 

15.50

 

682

 

4.02

 

Total short-term borrowings

 

39,000

 

35.54

 

33,204

 

30.33

 

5,796

 

17.46

 

Long-term borrowings, FHLB

 

70,750

 

64.46

 

76,278

 

69.67

 

(5,528

)

(7.25

)

Total borrowed funds

 

$

109,750

 

100.00

%

$

109,482

 

100.00

%

$

268

 

0.24

%

 

38



Table of Contents

 

Capital

 

The adequacy of the Company’s capital is reviewed on an ongoing basis with reference to the size, composition, and quality of the Company’s resources and regulatory guidelines.  Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings.

 

Bank holding companies are required to comply with the Federal Reserve Board’s risk-based capital guidelines.  The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.  Specifically, each is required to maintain certain minimum dollar amounts and ratios of total risk-based, tier I risk-based, and tier I leverage capital. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act (FDICIA) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” To be classified as “well capitalized”, total risk-based, tier I risked-based, and tier I leverage capital ratios must be at least 10%, 6%, and 5%, respectively.

 

Capital ratios as of June 30, 2013 and December 31, 2012 were as follows:

 

 

 

June 30, 2013

 

December 31, 2012

 

(In Thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

Actual

 

$

114,518

 

13.01

%

$

85,377

 

14.97

%

For Capital Adequacy Purposes

 

70,425

 

8.00

 

45,641

 

8.00

 

To Be Well Capitalized

 

88,031

 

10.00

 

57,051

 

10.00

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

Actual

 

$

104,417

 

11.86

%

$

77,717

 

13.62

%

For Capital Adequacy Purposes

 

35,213

 

4.00

 

22,820

 

4.00

 

To Be Well Capitalized

 

52,819

 

6.00

 

34,231

 

6.00

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Average Assets)

 

 

 

 

 

 

 

 

 

Actual

 

$

104,417

 

10.96

%

$

77,717

 

9.47

%

For Capital Adequacy Purposes

 

38,109

 

4.00

 

32,818

 

4.00

 

To Be Well Capitalized

 

47,636

 

5.00

 

41,022

 

5.00

 

 

In June 2012, the federal bank regulatory agencies issued a series of proposed revisions to the agencies’ capital adequacy guidelines and prompt corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III.  In July 2013, the federal bank regulatory agencies adopted final rules, which differ in certain respects from the June 2012 proposals.

 

The July 2013 final rules generally implement higher minimum capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital.  The new minimum capital to risk-adjusted assets requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”).  Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.  The new minimum capital requirements are effective on January 1, 2015.  The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.

 

The July 2013 final rules include three significant changes from the June 2012 proposals:  (i) the final rules do not change the current risk weighting for residential mortgage exposures; (ii) the final rules permit institutions, other than certain large institutions, to elect to continue to treat certain components of accumulated other comprehensive income as permitted under the current general risk-based capital rules, and not reflect unrealized gains and losses on available-for-sale securities in common equity tier 1 calculations; and (iii) the final rules permit institutions with less than $15.0 billion in assets to grandfather certain non-qualifying capital instruments (including trust preferred securities) issued prior to May 19, 2009 into tier 1 capital.

 

The Company and the Bank will continue to analyze these new rules and their effects on the business, operations and capital levels of the Company and the Bank.

 

Liquidity; Interest Rate Sensitivity and Market Risk

 

The asset/liability committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio.  In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.

 

39



Table of Contents

 

The following liquidity measures are monitored for compliance and were within the limits cited at June 30, 2013:

 

1.            Net Loans to Total Assets, 85% maximum

2.              Net Loans to Total Deposits, 100% maximum

3.              Cumulative 90 day Maturity GAP %, +/- 20% maximum

4.              Cumulative 1 Year Maturity GAP %, +/- 25% maximum

 

Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk.  The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to depositors, loan customers, and shareholders.  Additionally, it provides funds for normal operating expenditures and business opportunities as they arise.  The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.

 

The Bank, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments and originations, and expenses.  In order to control cash flow, the Bank estimates future cash flows from deposits, loan payments, and investment security payments.  The primary sources of funds are deposits, principal and interest payments on loans and investment securities, FHLB borrowings, and brokered deposits.  Management believes the Bank has adequate resources to meet its normal funding requirements.

 

Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends.  Cash flow needs are assessed and sources of funds are determined.  Funding strategies consider both customer needs and economical cost.  Both short and long-term funding needs are addressed by maturities and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold.  The use of these resources, in conjunction with access to credit provides core funding to satisfy depositor, borrower, and creditor needs.

 

Management monitors and determines the desirable level of liquidity.  Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds.  The Company has a total current maximum borrowing capacity at the FHLB of $399,378,000.  In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $32,166,000.  Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.  FHLB borrowings totaled $92,100,000 as of June 30, 2013.

 

Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities.  Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them.  Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected.  Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or difference. Once known, the gap is managed based on predictions about future market interest rates.  Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted.  However, if market rates behave in a manner contrary to predictions, net interest income will suffer.  Gaps, therefore, contain an element of risk and must be prudently managed.  In addition to gap management, the Company has an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s balance sheet.

 

The Company currently maintains a GAP position of being liability sensitive.  The Company has strategically taken this position as it has decreased the duration of the time deposit portfolio, while continuing to maintain a primarily fixed rate earning asset portfolio with a duration greater than the liabilities utilized to fund earning assets.  Lengthening of the liability portfolio coupled with the addition of limited short-term assets is being undertaken.  These actions are expected to reduce, but not eliminate, the liability sensitive structure of the balance sheet.

 

A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Company’s balance sheet and more specifically shareholders’ equity.  The Company does not manage the balance sheet structure in order to maintain compliance with this calculation.  The calculation serves as a guideline with greater emphases placed on interest rate sensitivity.  Changes to calculation results from period to period are reviewed as changes in results could be a signal of future events.  As of the most recent analysis, the results of the market value at risk calculation were within established guidelines due to the strategic direction being taken.

 

Interest Rate Sensitivity

 

In this analysis the Company examines the result of a 100, 200, 300, and 400 basis point change in market interest rates and the effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner.  Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.

 

The following is a rate shock forecast for the twelve month period ending June 30, 2014 assuming a static balance sheet as of June 30, 2013.

 

40



Table of Contents

 

 

 

Parallel Rate Shock in Basis Points

 

(In Thousands)

 

-200

 

-100

 

Static

 

+100

 

+200

 

+300

 

+400

 

Net interest income

 

$

38,165

 

$

39,801

 

$

40,990

 

$

41,334

 

$

41,853

 

$

42,367

 

$

42,560

 

Change from static

 

(2,825

)

(1,189

)

 

344

 

863

 

1,377

 

1,570

 

Percent change from static

 

-6.89

%

-2.90

%

 

0.84

%

2.11

%

3.36

%

3.83

%

 

The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities.  Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change.  In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

 

Inflation

 

The asset and liability structure of a financial institution is primarily monetary in nature.  Therefore, interest rates rather than inflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors which are not measured by a price index.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk.  Interest rate risk and liquidity risk management is performed at the Bank level as well as the Company level.  The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party.  There have been no substantial changes in the Company’s gap analyses or simulation analyses compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2012.  Additional information and details are provided in the “Liquidity and Interest Rate Sensitivity” section of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013.

 

Changes in Internal Control over Financial Reporting

 

The Company completed its acquisition of Luzerne National Bank Corporation on June 1, 2013. As a result of the Luzerne National Bank Corporation acquisition, the Company has begun the process of evaluating the internal control processes of Luzerne National Bank Corporation, and integrating those processes into the Company’s existing control environment. Other than the Luzerne National Bank Corporation acquisition, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2013, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

41



Table of Contents

 

Part II.  OTHER INFORMATION

 

Item 1.                           Legal Proceedings

 

None.

 

Item 1A.  Risk Factors

 

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.

 

Item 2.                           Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

Total

 

Average

 

Total Number of

 

Maximum Number (or

 

 

 

Number of

 

Price Paid

 

Shares (or Units)

 

Approximate Dollar Value)

 

 

 

Shares (or

 

per Share

 

Purchased as Part of

 

of Shares (or Units) that

 

 

 

Units)

 

(or Units)

 

Publicly Announced

 

May Yet Be Purchased

 

Period

 

Purchased

 

Purchased

 

Plans or Programs

 

Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

Month #1 (April 1 - April 30, 2013)

 

 

$

 

 

76,776

 

 

 

 

 

 

 

 

 

 

 

Month #2 (May 1 - May 31, 2013)

 

 

 

 

76,776

 

 

 

 

 

 

 

 

 

 

 

Month #3 (June 1 - June 30, 2013)

 

 

 

 

76,776

 

 

On April 23, 2013, the Board of Directors extended the previously approved authorization to repurchase up to 197,000 shares, or approximately 5%, of the outstanding shares of the Company for an additional year to April 30, 2014.  To date, there have been 120,224 shares repurchased under this plan.

 

Item 3.                           Defaults Upon Senior Securities

 

None.

 

Item 4.                           Mine Safety Disclosures

 

Not applicable.

 

Item 5.                           Other Information

 

None.

 

Item 6.                           Exhibits

 

3(i)

 

Articles of Incorporation of the Registrant as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant’s Annual Report on Form 10-Q for the period ended March 31, 2012 filed May 9, 2012).

3(ii)

 

Bylaws of the Registrant as presently in effect (incorporated by reference to Exhibit 3(ii) of the Registrant’s Current Report on Form 8-K filed June 17, 2005).

31(i)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.

31(ii)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.

32(i)

 

Section 1350 Certification of Chief Executive Officer.

32(ii)

 

Section 1350 Certification of Chief Financial Officer.

101

 

Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at June 30, 2013 and December 31, 2012; (ii) the Consolidated Statement of Income for the three and six months ended June 30, 2013 and 2012; (iii) the Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2013 and 2012; (iv) Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2013 and 2012; (v) the Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012; and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.

 

42



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

PENNS WOODS BANCORP, INC.

 

(Registrant)

 

 

Date:    August 9, 2013

/s/ Richard A. Grafmyre

 

Richard A. Grafmyre, President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Date:    August 9, 2013

/s/ Brian L. Knepp

 

Brian L. Knepp, Senior Vice President and Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting

 

Officer)

 

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Table of Contents

 

EXHIBIT INDEX

 

Exhibit 31(i)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer

Exhibit 31(ii)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer

Exhibit 32(i)

 

Section 1350 Certification of Chief Executive Officer

Exhibit 32(ii)

 

Section 1350 Certification of Chief Financial Officer

Exhibit 101

 

Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at June 30, 2013 and December 31, 2012; (ii) the Consolidated Statement of Income for the three and six months ended June 30, 2013 and 2012; (iii) the Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2013 and 2012; (iv) Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2013 and 2012; (v) the Consolidated Statement of Cash Flows for the six months ended June 30, 2013 and 2012; and (vi) the Notes to Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.

 

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