Painting the vision for success.
2015 ANNUAL REPORT
2015 ANNUAL REPORT
FIRST NATIONAL COMMUNITY BANCORP, INC.
TABLE of CONTENTS
Shareholder Letter...................................................................................
Financial Information...............................................................................
Mission, Vision and Values......................................................................
1-5
6-7
8-9
Commercial Banking............................................................................
10-13
Spotlight : Automotive..........................................................................
14-17
Retail Lending...........................................................................................
18
Retail Banking............................................................................................
19
Community Responsibility...................................................................
Officers & Directors.............................................................................
20-21
22-23
Community Offices...................................................................................
24
To Our Shareholders, Customers & Friends:
Looking back over the past five years, our Company faced a time of adversity and financial strain brought
on substantially by the financial crisis of 2008 and Great Recession. Our Board of Directors and manage-
ment team accepted that challenge to lead our Company out of this difficult time, by painting a vision of
the future for FNCB, communicating the success of this vision to our shareholders, employees and
customers and inspiring all stakeholders to assist in achieving this vision. Today, after much hard work
and with the patience and dedication of our stakeholders, we are pleased to say FNCB has emerged from
this adversity simply better!
Simply Better Structure, Policies and Procedures and Execution
Five years ago we began implementing disciplined policies and procedures to improve the Bank’s risk profile
and to strengthen corporate governance practices. We accomplished this by adopting industry best practices
throughout all areas of the Bank’s operations, enhancing management oversight and developing a culture within
our organization that is focused on mitigating risk.
As a result, the Company was notified by the Federal Reserve Bank of Philadelphia (“FRB”) that effective
September 2, 2015 it was released from the Written Agreement it had been operating under since November
2010. This good news followed the announcement received earlier in the year that our wholly-owned subsidiary,
First National Community Bank (the “Bank”), was fully and completely released from the Consent Order with the
Office of the Comptroller of the Currency (“OCC”) that it had been operating under since September 2010. The
termination of these regulatory enforcement actions signified that we were successful in our endeavors!
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 1
Solid Performance
The Company reported record earnings in 2015 of $35.8 million, or $2.17 per basic and diluted share,
compared to $13.4 million, or $0.81 per basic and diluted share in 2014. The $22.4 million, or 167.1%,
increase in earnings was significantly impacted by the reversal of the deferred tax asset (“DTA”) valuation
allowance, which resulted in the Company recording an income tax benefit of $27.8 million in 2015. The
Company’s earnings performance in 2015 was also favorably influenced by a $0.9 million, or 3.3%,
increase in net interest income and a $5.1 million, or
15.2%, reduction in non-interest expense. Offsetting these
positive factors were decreases in non-interest income
and credit for loan and lease losses of $7.1 million and
$4.5 million, respectively. These reductions were largely
due to non-recurring transactions in 2014, including
higher gains on the sale of investment securities, a favor-
able legal settlement involving judgements filed pursuant
to a large, previously charged-off commercial relationship
and the divestiture of the Company’s retail banking opera-
tions in Monroe County.
Management’s focus in 2015 involved continuing the initia-
tives that began in 2014 with the implementation of new
strategies aimed at maximizing profitability and generating
taxable income to support the reversal of the Company’s
valuation allowance for its DTA. The continued reposition-
ing of the investment portfolio and rate modification of the
Company’s subordinated notes were the two foremost
strategies. The Company sold the majority of its remaining
Pictured: Jerry A. Champi,
Chief Operating Officer
tax-exempt obligations and replaced them with taxable securities. In addition to creating taxable income
streams, the Company benefitted from movements in market interest rates and recorded a $2.3 million net
gain on the sale of these securities.
Given the Company’s improved risk profile, management successfully negotiated a reduction in the interest
rate on the subordinated notes from 9.00% to 4.50% effective July 1, 2015 and repaid $11.0 million, or
44.0%, of the outstanding principal on June 30, 2015. The rate modification and partial repayment resulted
in a 36.4% reduction in interest expense related to these notes in 2015. In addition, the Company reinsti-
tuted and paid the regular quarterly interest payments on the subordinated notes beginning September 1,
2015. Previously while under the Written Agreement, the Company had been deferring the quarterly
interest payments, which at December 31, 2015 amounted to $10.8 million in deferred and unpaid interest.
2015 ANNUAL REPORT | 2
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
Pictured:
James M. Bone, Jr., CPA,
Executive Vice President,
Chief Financial Officer,
Treasurer
The release from the OCC Consent Order and FRB Written Agreement was the catalyst which allowed the
Company to re-gain its competitive position within the Northeastern Pennsylvania market area. The Bank
was, once again, able to access alternative, lower-costing sources of liquidity such as brokered deposits,
which allowed management to successfully reduce funding costs and formulate competitive strategies
within its market area. In addition, the Company’s improved risk profile directly led to reductions in non-
interest expense thereby improving operating efficiency. Specifically, the Company experienced reduc-
tions of 75.7% in legal fees, 47.3% in regulatory assessments, 35.3% in professional fees and 30.7% in
insurance costs because of its improved risk profile.
In November 2015, the Company successfully completed the conversion of its core operating system. The
new state-of-the-art, highly-robust platform will allow us to create efficiencies and provides us with the
flexibility to more effectively manage and adapt our product offerings and relationships to our customers’
ever-changing needs.
SIMPLY BETTER FINANCIAL CONDITION
Solid Growth, Stronger Capital Position, Improved Asset Quality
The Company experienced solid balance sheet growth as total assets reached $1.1 billion at December
31, 2015. The $120.6 million, or 12.4%, growth reflected increases in the Company’s loan and investment
portfolios, coupled with the reversal of the DTA valuation allowance. Net loans posted double-digit growth,
increasing $66.2 million, or 10.0%, which reflected strong demand for both commercial and consumer
loan products. In addition, available-for-sale investment securities increased $34.8 million, or 15.9%.
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 3
“
We are committed to focus
every effort on creating value
for our customers, stakeholders
and community by offering
unsurpassed service in an
environment that promotes
the safety and soundness of
our institution.
“
Funding this growth were increases in total deposits of $26.2 million, or 3.3%, and advances through the
Federal Home Loan Bank of Pittsburgh (“FHLB”) of $74.6 million, or 121.9%. With regard to the increase
in total deposits, non-interest-bearing demand deposits grew $30.5 million, or 24.6%, while interest-
bearing deposits decreased $4.3 million, or 0.6%. The growth in demand deposits reflected the positive
balance fluctuation of several large commercial customer relationships, while the decrease in interest-
bearing deposits was largely related to lower deposit balances of the Company’s municipal customers
due to a delay in funding caused by the state budget impasse. Also impacting interest-bearing deposits
was the planned runoff of higher-costing certificates of deposit generated through a national listing
service, partially offset by the attainment of a large commercial deposit relationship.
The reversal of the DTA valuation allowance resulted in a stronger capital position for the Company.
Largely impacted by record net income, total shareholders’ equity increased $34.8 million, or 67.7%. Both
the Company’s and the Bank’s total risk-based capital and Tier I leverage ratios well exceeded the ratios
of 10.0% and 5.0% required to be considered well capitalized under the provisions of the Basel III capital
framework for U.S. banking organizations.
The Company’s asset quality continued to improve in 2015, reflecting management’s ongoing focus
toward sound problem credit resolutions and commitment to disciplined credit risk management. Non-
performing loan levels improved dramatically as evidenced by a 30 basis point decrease in the ratio of
non-performing loans to total loans and a 24.3% reduction in delinquent loans. The continued improve-
ment in asset quality metrics allowed the Company to release reserves for the third consecutive year and
bring the allowance for loan and lease losses more in line with that of peer groups.
2015 ANNUAL REPORT | 4
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
Looking Forward to 2016 and Beyond
Focusing on Our Mission Statement
and Core Values
We are excited and ready to move forward to
paint a new vision of success for FNCB. A key
goal for 2016 is to center our attention on and
re-establish our Mission, Vision and Values as
the guiding light for our endeavors. We are
committed to focus every effort on creating
value for our customers, stakeholders and
community by offering unsurpassed service
in an environment that promotes the safety
and soundness of our institution.
Dominick L. DeNaples
Chairman of the Board
Steven R. Tokach
President and CEO
With our stakeholders in mind, our first initiatives in 2016 involved making the holders of our subordinated
debt whole and providing a return for our shareholders. We would not be where we are today without these
stakeholders and we sincerely appreciate their ongoing trust in and support for the Company. On March
1, 2016, the Company paid the $10.8 million in deferred interest on the subordinated notes in its entirety
and effectively improved its leverage position. We are also pleased to note that on March 15, 2016, the
Company paid a dividend of $0.02 per share on its common stock and intends to continue the payment
of quarterly dividends going forward.
Having served the local community for more than 100 years, our knowledge and experience provides us
with a competitive advantage enabling us to be the premier banking institution in Northeastern Pennsylva-
nia. We believe our strong capital position, experienced leadership and commitment to our community,
paint a vision for a bright and successful future for FNCB!
Dominick L. DeNaples
Chairman of the Board
Steven R. Tokach
President and Chief Executive Officer
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 5
FINANCIAL INFORMATION
(dollars in thousands)
FINANCIAL PERFORMANCE
Net income
2015
2014
2013
2012
2011
Earnings per share (fully diluted)
$35,840
$13,420
$ 6,382
($13,711)
($ 335)
2015
2014
2013
2012
2011
Return on average assets
Return on average equity
2015
2014
2013
2012
2011
3.57%
1.38%
0.67%
(1.35%)
(0.03%)
2015
2014
2013
2012
2011
FINANCIAL CONDITION
Total assets
Total loans
2015
2014
2013
2012
2011
$1,090,618
$ 970,029
$1,003,808
$ 968,274
$1,102,639
2015
2014
2013
2012
2011
$ 2.17
$ 0.81
$ 0.39
($ 0.83)
($ 0.02)
68.24%
29.50%
18.65%
(34.09%)
( 0.98 %)
$731,152
$669,494
$643,372
$597,775
$679,521
2015
17.6%
6.3%
17.9%
20.5%
33.5%
2014
18.2%
6.0%
18.4%
19.7%
34.9%
$ 122,832
$233,473
$ 18,835
$132,057
$122,092
$ 40,205
$669,494
4.2%
2.8%
Loan portfolio composition
Residential real estate
Commercial real estate
Construction, land acquisition
Commercial and industrial
Consumer
State and political subdivisions
Total deposits
2015
2014
2013
2012
2011
$130,696
$245,198
$ 30,843
$149,826
$128,533
$ 46,056
$731,152
$821,546
$795,336
$884,698
$854,613
$957,136
2015 ANNUAL REPORT | 6
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
Deposit composition
2015
2014
Non-interest bearing demand
Interest-bearing demand
Savings
Time > $100,000
Time < $100,000
$154,531
$364,303
$ 92,890
$ 76,197
$133,625
$821,546
16.3%
18.8%
9.3%
11.3%
44.3%
$124,064
$345,679
$ 89,489
$112,044
$124,060
$795,336
15.6%
15.6%
14.1%
11.2%
43.5%
ASSET QUALITY
Nonperforming loans
as a percentage of total loans
0.52%
0.82%
0.99%
2015
2014
2013
2012
2011
1.62%
2.93%
Total delinquent loans
as a percentage of total loans
2015
2014
2013
2012
2011
0.84%
1.21%
1.54%
2.13%
4.03%
Allowance for loan and lease losses
as a percentage of total loans
Allowance for loan and lease losses
as a percentage of nonperforming loans
2015
2014
2013
2012
2011
1.20%
1.72%
2.18%
3.10%
3.07%
2015
2014
2013
2012
2011
232.05%
208.62%
219.87%
190.92%
104.60%
CAPITAL POSITION
Book value per share
(Total capital/shares of common stock outstanding)
2015
2014
2013
2012
2011
$3.12
$2.04
$2.24
$2.43
$5.22
Tier 1 leverage ratio (Bank)
(Tier 1 capital/average assets)
Total risk-based capital ratio (Bank)
(Total risk-based capital/risk-weighted assets)
2015
2014
2013
2012
2011
9.79%
9.78%
8.32%
7.20%
7.20%
2015
2014
2013
2012
2011
13.83%
15.42%
13.43%
11.79%
11.73%
FIRST NATIONAL COMMUNITY BANCORP., INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 7
MISSION
The mission of First National Community Bank is to enhance stakeholder value by maximizing long-term
earnings consistent with safety and soundness and risk detection and management practices.
We will accomplish this objective by offering unsurpassed service to meet the needs of our most impor-
tant asset, our loyal customer base.
The goal of this mission statement is to focus every effort in the Bank on creating value for our customers,
stakeholders and community, in our direct interactions with them and in all services that are performed.
The objective is to be …
Simply a better bank.TM
2015 ANNUAL REPORT | 8
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
VISION
Values
Our vision is simple.
Strive to be a financially viable, growing
Simplicity
Simplify processes, systems and products that
community bank operating with integrity and
provide value and satisfaction resulting in a better
fairness, and providing unsurpassed
banking experience.
customer service and a commitment to our
stakeholders; while remaining dedicated to
the communities we serve in our pursuit to be
“SIMPLY a better bank”.
Customer Satisfaction
Actively seek unparalleled customer satisfac-
tion, maintain a tireless service attitude, and
Integrity
An organization maintaining the highest ethical
standards and practices operating with honesty,
fairness and respect for each other.
Mission
A simple and unending commitment to be a better
offer the right mix of products and services to
bank with a focus on quality at every level of the
earn customer loyalty.
organization.
Community Involvement
Maintain a strong community presence within
People
A culture of dedicated, empowered employees who
our service area by offering meaningful and
are loyal to the community, our customers and one
impactful support through lending activities,
another.
volunteerism, financial donations and spon-
sorships.
Stakeholder Commitment
Establish a positive team focused culture of
Leadership
An organization that prospers under the guidance
of clear, strong, well-communicated direction,
emphasizing a commitment to measure and reward
dedicated, empowered and passionate
achievement.
employees who will exceed customer expec-
tations resulting in FNCB being the bank of
choice in NEPA delivering exceptional stake-
You
Our values SIMPLY equal YOU!
holder value through long-term growth and
return on investment.
Continuous Improvement
Through the commitment to continuous
improvement objectives, we will develop a
culture built on mutual trust that is more
efficient, productive and conducive to a
proficient work environment.
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 9
COMMERCIAL BANKING
The most important aspect of Commercial
Banking is the relationship with our customers.
It’s important to build a trusted, personalized
relationship so we can suggest the right
customized products and services to help their
business grow.
The FNCB Commercial Banking Team consists
of experienced, well-rounded banking profes-
sionals who are dedicated to helping our
customer’s business achieve success. How-
ever, we go beyond just making product and
service recommendations to really getting to
know our customer’s business and the people
behind their success. This is just one more
reason why we’re simply a better bank.
Pictured: Brian C. Mahlstedt, Executive Vice President,
Chief Lending Officer
2015 ANNUAL REPORT | 10
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
TFP LIMITED
TFP Limited is a Wilkes-Barre based real
estate development and management
company founded by Northeastern Pennsyl-
vania entrepreneur Robert L. Tambur in 1994.
Robert's real estate vision has been contin-
ued by his son, Robert Tamburro, who
currently serves as the Trustee, General
Partner. TFP performs all facets of its devel-
opment projects — from property and entitle-
ment acquisition to leasing and construction.
In 2013, a subsidiary, TFP LP, acquired a
commercial property from FNCB on Mundy
Street in Wilkes-Barre Township that was being utilized as an
employee training and commercial lending facility. Tamburro had
the vision, skill and expertise to perform renovations on the prop-
Pictured: Robert Tamburro (left), TFP
Limited Trustee, General Partner and
Patrick J. Barrett, FNCB Senior Vice
President, Commercial Officer
erty that included an expansion of the existing building footprint
from 5,000 to 12,000 square feet.
Completed in 2015 with the help of financing through FNCB, the brand new Mundy Street Square is a key
player along the Mundy Street retail corridor and features numerous national retailers including Chipotle,
Five Guys Burgers & Fries and the Vitamin Shoppe. "It was a pleasure working with First National Commu-
nity Bank on the Mundy Street Square project,” said Tamburro. “I worked with many different bank repre-
sentatives, from branch tellers to the President. Each team member was friendly, positive, knowledgeable,
and customer service oriented. I cannot say enough about the people of FNCB."
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 11
MAIN STREET REALTY, LLC
When a pair of successful Luzerne County businessmen
teamed up to redevelop a landmark property in downtown
Pittston, FNCB was with them every step of the way.
Since forming Main Street Realty LLC, co-owners Santino
Ferretti, from N-B Enterprises, Inc., and Patrick Hadley, of
Hadley Construction Inc., have successfully developed
several projects in the local market.
Among them is the Newrose Building on Main Street.
Formerly known as the Newrose Hotel, it was once called
Pittston’s first skyscraper upon its opening in 1922 and over
the years housed various tenants. Recently, however, the
property fell into poor condition.
Now, in addition to the building’s historical landmark status,
newly renovated apartments and street level shops, an
impressive five-story “Inspiration Mural” honoring private
donors and the many people who have influenced the
history of Pittston, graces the side of the building.
Ferretti and Hadley’s multi-million dollar renovation to make
the Newrose a key piece of Pittston’s downtown revitaliza-
tion was made possible through a partnership with FNCB.
“We chose FNCB as our banking partner for the project
because they offered us a competitive rate and term, easy
funding and a hassle free experience,” said Ferretti.
Top photo: Karen Smith, FNCB Assistant
Vice President, Commercial Officer in front
of the recently renovated Newrose Building
in downtown Pittston which features a five
story “Inspiration Mural.”
2015 ANNUAL REPORT | 12
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
FRANCIS SMITH & SONS, INC.
For generations, Francis Smith & Sons, Inc. and
Smith Air Center have been the industry leaders
in providing the highest quality in sales, service
and construction of petroleum equipment
systems and compressed air solutions through-
out Northeastern Pennsylvania and New York’s
Southern Tier.
In 2015, Francis Smith and Sons, Inc. recognized
the need to expand their facility. FNCB was
asked to provide quick financing to aid with the
construction of two new facilities in Scott Township.
“After several months of ‘back and forth’ with
Pictured above: Amy Branning, FNCB Assistant Vice
President, Commercial Officer, left and Craig Smith,
President, Francis Smith & Sons, Inc.
another lender, FNCB stepped in and addressed my needs in less than a month — between the year-end
holidays to boot,” said company president Craig Smith.
When construction was completed, Francis Smith and Sons, Inc. more than
doubled their footprint to over 19,000 square feet of office and garage space.
Relocation to this larger facility allowed the company to not only retain, but
increase, their existing workforce.
Francis Smith and Sons, Inc. prides itself on being a family oriented company
committed to growth through its dedicated employees and suppliers and as
a community bank, FNCB reflects those same values. It is with these values
that both companies have successfully served the needs of northeastern
Pennsylvania for generations.
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 13
SPOTLIGHT | automotive
GIBBONS FORD
Since 1949, the family owned and operated Gibbons Ford in Dickson
City has been serving the car buying needs of Northeastern Pennsyl-
vania. Customers have come to trust their quality product and
outstanding sales and service department.
A growing demand for car sales and service coupled with a desire to
pass along the dealership to future generations of the Gibbons family
sparked a move to build a mega-dealership along Viewmont Drive in
Dickson City.
The new 49,607 square foot facility sits on an 8-acre parcel and
houses everything in one building including a 30 bay service center,
a showroom capable of displaying 10 vehicles and a sales lot that
can hold up to 500 vehicles.
To help make the new dealership a reality, FNCB
provided funding for the land, construction and
equipment as well as assisted with payment
requests
from contractors and equipment
vendors. FNCB is proud to have been part of the
project from ground breaking to grand opening.
“The personal service we received from the
commercial lending team at FNCB was second-
to-none,” said John Grow, Gibbons Ford Dealer
Principal. “They were very attentive and went out
of their way to make sure all of our financing
needs were met.”
Pictured above: John Grow, Gibbons Ford Dealer
Principal, left and Nancy Jeffers, FNCB Vice Presi-
dent, Commercial Officer, right.
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 15
WYOMING VALLEY MOTORS
FNCB shares Wyoming Valley Motors’ main goal: customer satisfaction.
In keeping with FNCB‘s mission and values, Wyoming Valley Motors is also customer centric while deliver-
ing exceptional service. Wyoming Valley Motors sells and services seven of the most sought after brands;
Audi, BMW, Porsche, Subaru, Mazda, Kia and Volkswagen.
With an award-winning sales and service department, they strive to earn new customers and keep existing
customers forever. Having been in business for over 47 years, WVM keeps their promises and earns the
respect of customers, employees and their families.
As a bank, FNCB provides the same unsur-
passed service that WVM demands, earn-
ing us a
longstanding and successful
indirect lending relationship, benefiting the
residents of northeastern Pennsylvania.
According to Steve Ubaldini, WVM Dealer
Principal, “FNCB is like Wyoming Valley
Motors, they’re ‘Making Good Deals and
Making Good Friends.’”
Above L-R: Lisa Kinney, FNCB Senior Vice President, Retail
Lending Officer; Kelly Gulvas, FNCB Indirect/Consumer
Lending Manager; and Steve Ubaldini, Dealer Principal,
Wyoming Valley Motors.
2015 ANNUAL REPORT | 16
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
POMPEY AUTOMOTIVE GROUP
Just as FNCB takes great pride in meet-
ing the financial needs of our local
community,
the Pompey Automotive
Group takes pride in serving drivers
from all over Northeastern Pennsylvania
with the very best in new and used auto
sales, service and financing.
At the family owned and operated
Pompey Automotive Group, which
includes Scranton Dodge Chrysler Jeep
Ram and Tunkhannock Auto Mart,
you're not just another customer; you're
a member of their family.
Housing an impressive inventory of new
Top left: Jenny Severs, FNCB Retail Lending Sales Manager;
Lisa Kinney, FNCB Senior Vice President, Retail Lending
Officer and Matthew Pompey, Pompey Automotive Group
Co-Owner
and used vehicles, their finance team is serious about working within customer’s budgets by finding a deal
that works. FNCB is proud to play a role in meeting their customer’s needs by providing competitive
financing through a strong indirect lending relationship.
"After the financial crisis of 2008, my brother and I were looking for a bank that we could call our partner,
a bank where a win-win truly made sense and was a mutual priority,” said Matthew Pompey, Pompey Auto-
motive Group Co-Owner. “FNCB does business in such a positive and refreshing manner; they are simply
the best bank we've ever worked with. My brother Dave and I are proud to call FNCB OUR bank."
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 17
retail lending
STOCK PHOTO
At certain times, our customers may find that
they need access to a loan to meet a particular
financial requirement.
Maybe it’s to buy a car, finance college tuition or
make home improvements. Or maybe they’ve
been planning a dream vacation and need a
little more cash to add to their accumulated
savings.
FNCB offers a variety of products to fit all of our
customers’ needs, because part of being a
simply better bank is understanding what our
customers need throughout all of their impor-
tant life stages.
2015 ANNUAL REPORT | 18
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
retail banking
Our customers depend on us for a wide array of
financial products and services. Our products
range from checking and savings accounts to
personal loans, mortgages, home equity lines of
credit, certificates of deposit
(CDs) and
Individual Retirement Accounts (IRAs).
But banking is about more than just products
and services - or at least, it should be. For us, it’s
about building relationships and providing the
right products and services. That’s our goal,
and it lies at the heart of why we're a simply
better bank.
Top photo L-R: FNCB Customers Logan Novobilski,
Ryan Novobilski, Paige Novobilski and Joseph
Novobilski with Ellen Pritchard, FNCB Honesdale
Community Office Manager.
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 19
COMMUNITY RESPONSIBILITY
Since the Bank’s founding more than 100 years
ago, FNCB has recognized the importance of
blending day-to-day operations with an on-going
commitment to the communities we serve. This
commitment to community is an integral part of
FNCB’s core values — highlighted by corporate
donations, financial literacy programs, fundrais-
ing initiatives and volunteer efforts.
Simply put, FNCB has positioned itself as one of
the area’s
foremost
leaders
in community
responsibility.
A notable fundraising program that enjoyed
great success in 2015 was “Jeans for a Cause.”
Benefiting
organizations
serving
low-to-
moderate income individuals, employees made
small donations in exchange for the opportunity
to wear jeans to work one Friday every month.
Combined with a corporate match, over $10,000
was raised while employees enjoyed a dozen
dress-down days.
2015 ANNUAL REPORT | 20
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
community impact
Through volunteer efforts, FNCB employees
contributed more than 400 hours of service
time at local non-profit organizations, led by
members of the “Emerging Leaders” program.
The program, a six-month long professional
development course, provides
leadership
training through creativity and teamwork while making an
impact in the community.
A key component of the program involved class members
designing team-based projects aimed at meeting specific
needs in the local community. Organizations benefiting from
Emerging Leader service projects included; St. Francis of
Assisi Kitchen, The Baby Pantry at St. Joseph’s Center,
Treasure House Scranton and Family to Family Thanksgiving
Dinner Program.
Additionally, through FNCB’s “Teach Children to Save” and
“Get Smart About Credit” programs, branch and administra-
tive center employees visited with more than 1,000 students in
Northeastern Pennsylvania teaching them valuable lessons in
financial literacy.
“Our entire team is a group of locally aware and dedicated
employees who represent the core values and mission of the
Bank,” said Donald J. Ryan, Senior Vice President and Human
Resources Officer. “Their volunteer efforts and generosity are
extraordinary.”
COMMUNITY RESPONSIBILITY
2015 HIGHLIGHTS
$179,736
$181,000
FNCB donated
to over
125 local
organizations
PA Educational
Improvement
Tax Credit
contributions
430 Hrs
FNCB employees
volunteered
430 hours in
25 local agencies
FNCB is proud to
support these & other
organizations that work
to meet the needs
of the community!
Allied Services Foundation
ARC of Wayne County
Association for the Blind
Candy's Place
Care and Concern Clinic
Catholic Social Services
Children's Advocacy Center of NEPA
Dress for Success Lackawanna
F.M. Kirby Center
Greater Wilkes-Barre Family YMCA
Habitat for Humanity
Hazleton YMCA & YWCA
Jude Zayac Foundation
Junior Achievement of NEPA
Kathleen's Crusade
Komen NEPA Race for the Cure
Lackawanna Pro Bono
Lions Club International
Little Sisters of the Poor
Marley's Mission
NeighborWorks Northeastern Pennsylvania
Osterhout Free Library
Ronald McDonald House of Scranton
Saint Joseph's Center
Scranton Cultural Center
Scranton Lackawanna
Human Development Agency
Serving Seniors, Inc.
UNICO Scranton Foundation
United Neighborhood Centers of NEPA
United Way of Lackawanna and Wayne
Voluntary Action Center
Volunteers in Medicine
Wayne County Community Foundation
Women's Resource Center
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 21
First National Community Bancorp, Inc. | Officers & Directors
OFFICERS
DIRECTORS
Dominick L. DeNaples
Chairman of the Board
Joseph Coccia
Secretary
Steven R. Tokach
President and
Chief Executive Officer
James M. Bone, Jr., CPA
Executive Vice President,
Chief Financial Officer,
Treasurer
William G. Bracey
Keith W. Eckel
Joseph Coccia
Thomas J. Melone, CPA
Dominick L. DeNaples
John P. Moses, Esquire
Louis A. DeNaples
Steven R. Tokach
Dr. Louis A. DeNaples, Jr.
First National Community Bank | Directors
Dominick L. DeNaples
Chairman of the Board
Dr. Louis A. DeNaples, Jr.
Vice Chairman of the Board
Steven R. Tokach
President and
Chief Executive Officer
Joseph Coccia
Secretary
William G. Bracey
Louis A. DeNaples
Keith W. Eckel
Thomas J. Melone, CPA
John P. Moses, Esquire
First National Community Bank | Bank Officers
Steven R. Tokach
President and
Chief Executive Officer
Gerard A. Champi
Chief Operating Officer
James M. Bone, Jr., CPA
Executive Vice President
Chief Financial Officer, Treasurer
Brian C. Mahlstedt
Executive Vice President
Chief Lending Officer
Joseph J. Earyes, CPA
First Senior Vice President
Operations and Technology Services Officer
Patrick J. Barrett
Senior Vice President
Commercial Officer
Cathy J. Conrad
Senior Vice President
Credit Administration Officer
Ronald S. Honick, CPA, CIA
Senior Vice President
Audit Officer
Donna M. Czerw
Senior Vice President
Retail Banking Operations Manager
Lisa L. Kinney
Senior Vice President
Retail Lending Officer
Mary G. Cummings
Senior Vice President
General Counsel
Richard D. Drust
Senior Vice President
Retail Banking Officer
Paul S. Dunda
Senior Vice President
Applications Services Manager
Mary Ann Gardner, CRCM
Senior Vice President
Compliance Officer
Richard F. Post, Jr.
Senior Vice President
Asset Recovery Manager
Donald H. Ryan
Senior Vice President
Human Resources Officer
Stephanie A. Westington, CPA
Senior Vice President
Controller
Ryan J. Barhight
Vice President
Credit Analyst Supervisor
2015 ANNUAL REPORT | 22
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
First National Community Bank | Bank Officers (continued)
Joan M. Dwyer
Vice President
Organizational Development/Staffing Officer
Amy L. Branning
Assistant Vice President
Commercial Officer
Dawn D. Gronski
Vice President
Compensation/Benefits Officer
Amy M. Kelley
Assistant Vice President
Assistant Controller
Nancy A. Jeffers
Vice President
Commercial Officer
David A. Kapsick
Vice President
Retail Market Manager
Matthew D. Karotko
Vice President
Operations Officer
Deborah J. Kennedy
Vice President
Retail Market Manager
Thomas C. Lunney
Vice President
Property Manager
Madolyn A. MacArthur
Vice President
Community Office Manager III
Philip E. Ogren
Vice President
Technology Services Officer
Frank J. Kost
Assistant Vice President
Applications Services Analyst II
Larae L. Kowalchik
Assistant Vice President
Credit Administration Supervisor
Frank N. Mazzitelli
Assistant Vice President
Community Officer Manager II
William A. McGuigan, CPA
Assistant Vice President
Audit Manager
Richard D. Padula
Assistant Vice President
Mortgage Loan Originator
Darlene A. Pusateri
Assistant Vice President
Compliance Manager
Eileen A. Sennett
Assistant Vice President
Loan Operations Manager
Karen M. Weller
Vice President
Retail Sales and Service Manager
Jenny J. Severs
Assistant Vice President
Retail Lending Sales Manager
Angelo Ambrosecchia
Assistant Vice President
Commercial Officer
Roger R. Anderson
Assistant Vice President
Commercial Officer
Bernice A. Shipp
Assistant Vice President
Community Office Manager III
Lucy E. Singer
Assistant Vice President
Community Office Manager III
Michael N. Barrouk
Assistant Vice President
Government Banking Sales Officer
Debra A. Skurkis
Assistant Vice President
Community Office Manager III
Elizabeth M. Benkoski
Assistant Vice President
Retail Training Coordinator
Karen M. Smith
Assistant Vice President
Commercial Officer
Ashley M. Tomko
Assistant Vice President
Retail Lending Processing
Supervisor/Compliance Liaison
Michael S. Cummings
Banking Officer
Marketing Specialist
Kelly Gulvas
Banking Officer
Retail Underwriting Supervisor
Elizabeth A. Healey
Banking Officer
Accounting Manager
Mary C. King
Banking Officer
Community Officer Manager I
Christine E. Klime
Banking Officer
Credit Analyst III
Nadine A. Limongelli
Banking Officer
Community Office Manager II
Keehna Murphy
Banking Officer
Credit Analyst III
Sara L. Matusinski
Banking Officer
Customer Care Center Supervisor
Walter M. Jurgiewicz
Banking Officer
System & Desktop Services Manager
Christopher P. Kunz
Banking Officer
Telecommunications Manager
Ellen M. Pritchard
Banking Officer
Community Office Manager III
Joan M. Shoemaker
Banking Officer
Deposit Operations Manager
Joan M. Triolo
Banking Officer
Government Banking Officer
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
2015 ANNUAL REPORT | 23
banking
wayne
Honesdale Rt. 6
Honesdale
MOBILE
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COMMUNITY OFFICE
Dunmore-Main
102 East Drinker Street, Dunmore, PA
570.346.7667
lackawanna
Clarks
Green Dickson
City
Dunmore MAIN
Scranton
Wheeler
Ave.
Keyser Village
Rt. 315
Back
Mountain
Pittston
Exeter
Plains
Daleville
Kingston Wilkes-Barre
Nanticoke
Hanover
Township
luzerne
Hazleton
Simply a better bank.TM
TM
1-877-TRY-FNCB | fncb.com | Member FDIC
Back Mountain
1919 Memorial Hwy
Shavertown, PA
570.674.3622
Clarks Green
269 East Grove Street
Clarks Green, PA
570.586.3622
Daleville
Route 502 & 435
Daleville, PA
570.848.3622
Dickson City
934 Main Street
Dickson City, PA
570.489.8617
Dunmore-Wheeler
1219 Wheeler Avenue
Dunmore, PA
570.207.7300
Exeter
1625 Wyoming Avenue
Exeter, PA
570.603.1000
Hanover Township
734 San Souci Parkway
Hanover Township, PA
570.270.3622
Hazleton
340 West Broad Street
Hazleton, PA
570.501.3622
Honesdale
1001 Main Street
Honesdale, PA
570.253.1096
Honesdale Route 6
1127 Texas Palmyra Hwy.
Honesdale, PA
570.251.8840
Keyser Village
1743 North Keyser Avenue
Scranton, PA
570.348.4880
Kingston
754 Wyoming Avenue
Kingston, PA
570.283.3622
Nanticoke
194 South Market Street
Nanticoke, PA
570.258.3622
Pittston
1700 North Twp. Blvd.
Pittston, PA
570.655.3622
Plains
27 North River Street
Plains, PA
570.825.3622
Route 315
3 Old Boston Road
Pittston, PA
570.602.3622
Scranton
419-421 Spruce Street
Scranton, PA
570.343.6572
Wilkes-Barre
1 North Main Street
Wilkes-Barre, PA
570.831.1000
2015 ANNUAL REPORT | 24
FIRST NATIONAL COMMUNITY BANCORP, INC. and SUBSIDIARIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 000-53869
FIRST NATIONAL COMMUNITY BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
(State or Other Jurisdiction of Incorporation or Organization)
23-2900790
(I.R.S. Employer Identification No.)
102 E. Drinker St., Dunmore, PA
(Address of Principal Executive Offices)
18512
(Zip Code)
Registrant’s telephone number, including area code (570) 346-7667
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or section 15(d) of the Act. Yes ☐ No ☒
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 ☒ No ☐
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 ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☐
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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
Large Accelerated Filer ☐
Non-Accelerated Filer ☐
(Do not check if a smaller reporting company)
Accelerated Filer ☒
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock of the registrant, held by non-affiliates was $86,331,852 at
June 30, 2015.
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 16,530,432
shares of common stock as of March 11, 2016.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Certain information required by Items 10, 11, 12, 13 and 14 is incorporated by reference into Part III hereof from portions of the Proxy
Statement for the registrant’s 2016 Annual Meeting of Shareholders.
DOCUMENTS INCORPORATED BY REFERENCE
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Contents
1
PART I ............................................................................................................................................................................
Item 1. Business .........................................................................................................................................................
1
Item 1A. Risk Factors ................................................................................................................................................... 10
Item 1B. Unresolved Staff Comments .......................................................................................................................... 18
Properties ....................................................................................................................................................... 19
Item 2.
Item 3. Legal Proceedings ......................................................................................................................................... 20
Item 4. Mine Safety Disclosures ................................................................................................................................ 22
PART II ........................................................................................................................................................................... 22
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities ....................................................................................................................................................... 22
Item 6.
Selected Financial Data ................................................................................................................................. 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................ 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................................... 63
Financial Statements and Supplementary Data ............................................................................................. 66
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................ 127
Item 9A. Controls and Procedures ................................................................................................................................ 127
Item 9B. Other Information .......................................................................................................................................... 129
PART III ......................................................................................................................................................................... 129
Item 10. Directors, Executive Officers and Corporate Governance ............................................................................ 129
Item 11. Executive Compensation ............................................................................................................................... 129
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 129
Item 13. Certain Relationships and Related Transactions, and Director Independence .............................................. 129
Item 14. Principal Accounting Fees and Services ........................................................................................................ 129
PART IV ......................................................................................................................................................................... 130
Item 15. Exhibits and Financial Statement Schedules ................................................................................................. 130
This page intentionally left blank
PART I
Item 1. Business
Overview
The Company
First National Community Bancorp, Inc., incorporated in 1997, is a Pennsylvania business corporation and a registered bank
holding company headquartered in Dunmore, Pennsylvania. In this report the terms “Company,” “we,” “us,” and “our” refer
to First National Community Bancorp, Inc. and its subsidiaries, unless the context requires otherwise. In certain
circumstances, however, First National Community Bancorp, Inc. uses the term “Company” to refer to itself.
The Company became an active bank holding company on July 1, 1998 when it acquired ownership of First National
Community Bank (the “Bank”). The Bank is a wholly-owned subsidiary of the Company. The Company’s primary activity
consists of owning and operating the Bank, which provides practically all of the Company’s earnings as a result of its banking
services.
The Company had net income of $35.8 million, $13.4 million and $6.4 million in 2015, 2014 and 2013, respectively. Total
assets were $1.1 billion at December 31, 2015 and $1.0 billion at both December 31, 2014 and 2013.
The Bank
Established as a national banking association in 1910, as of December 31, 2015 the Bank operated 19 full-service branch
offices within three contiguous counties, Lackawanna, Luzerne and Wayne, its primary market area located in the Northeast
section of the state.
Products and Services
Retail Banking
The Bank provides a wide variety of traditional banking products and services to individuals and businesses, including Debit
Cards, Online Banking, Mobile Banking, Image Checking and E-Statements. Deposit products include various checking,
savings and certificate of deposit products, as well as a line of preferred products for higher-balance customers. The Bank is
a member of the Promontory Interfinancial Network and participates in their Certificate of Deposit Account Registry
(“CDARs”) and Insured Cash Sweep (“ICS”) programs, which allow customers to secure Federal Deposit Insurance
Corporation (“FDIC”) insurance on balances in excess of the standard limitations.
The Bank also offers customers the convenience of 24-hour banking, seven days a week, through FNCB Online Banking
(“FNCB Online”) via a secure website, https://www.fncb.com. FNCB Online’s product suite includes Bill Payment, Finance
Works, Funds Transfer and POP Money (person to person transfers), and Purchase Rewards. FNCB Online can also be
accessed through the Bank’s mobile application. Customers can also access money from their deposit accounts by using their
debit card to make purchases or cash withdrawals from any automated teller machines (“ATMs”) including ATMs located in
each of the Bank’s branch offices as well as additional locations. FNCB’s mobile deposit, available to personal banking
customers with access to FNCB Online Banking and an eligible deposit account, allows customers to deposit checks,
electronically from start to finish, from anywhere at any time.
Through FNCB Online, customers can directly access their accounts, open new accounts and apply for a mortgage or obtain
a pre-qualification approval through the Bank’s mortgage center. Telephone banking (Account Link), a service that provides
customers with the ability to access account information and perform related account transfers through the use of a touch
tone telephone, is also available. The Bank offers Bounce Protection, Savings Overdraft Protection and Instant Money loans
which provide customers with an added level of protection against unanticipated overdrafts due to cash flow emergencies
and account reconciliation errors. The Bank offers its customers an identity theft protection plan through a strategic
partnership with an independent vendor. Subscribers select which coverage package they desire by visiting the Bank’s secure
website and choosing “Identity Protection” from the Resources menu.
FNCB Business Online Banking is a menu driven product that provides the Bank’s business customers direct access to their
account information and the ability to perform internal and external transfers, wire transfers and payments through ACH
1
transactions, and process Direct Deposit payroll transactions for employees, 24 hours a day, 7 days a week, from their place
of business. Remote Deposit Capture allows business customers the ability to process daily check deposits to their accounts
through an online image capture environment. Business customers can access money from their deposit account by using
their “business” debit card, providing a faster, more convenient way to make purchases, track business expenses and manage
finances.
Lending Activities
The Bank offers a variety of loans, including residential real estate loans, construction, land acquisition and development
loans, commercial real estate loans, commercial and industrial loans, loans to state and political subdivisions, and consumer
loans, generally to individuals and businesses in its primary market area. These lending activities are described in further
detail below.
Residential Mortgage Loans
The Bank offers a variety of fixed-rate one- to four-family residential loans including First Time Homebuyer mortgages and
Home Possible® mortgages to meet the home financing needs of customers with low downpayments. The Bank also offers
a “WOW” mortgage, a first-lien, fixed-rate mortgage product with maturity terms of 7.5, 10 and 14.5 years. At December
31, 2015, one- to four-family residential mortgage loans totaled $130.7 million, or 17.9%, of the total loan portfolio. Except
for the WOW mortgage, one- to four-family mortgage loans are originated generally for sale in the secondary market.
However, management may portfolio one- to four-family residential mortgage loans as deemed necessary according to
current asset/liability management strategies. During the year ended December 31, 2015, the Bank sold $7.9 million of one-
to four-family mortgages. The Bank retains servicing rights on these mortgages.
Construction, Land Acquisition and Development Loans
The Bank offers interim construction financing secured by residential property for the purpose of constructing one- to four-
family homes. The Bank also offers interim construction financing for the purpose of constructing residential developments
and various commercial properties including shopping centers, office complexes and single purpose owner-occupied
structures and for land acquisition. At December 31, 2015, construction, land acquisition and development loans amounted
to $30.8 million and represented 4.2% of the total loan portfolio.
Commercial Real Estate Loans
At December 31, 2015, commercial real estate loans totaled $245.2 million, or 33.5%, of the total loan portfolio. Commercial
real estate mortgage loans represent the largest portion of the Bank’s total loan portfolio and loans in this portfolio generally
have larger loan balances. The commercial real estate loan portfolio is secured by a broad range of real estate, including but
not limited to, office complexes, shopping centers, hotels, warehouses, gas stations, convenience markets, residential care
facilities, nursing care facilities, restaurants, multifamily housing, farms and land subdivisions.
Commercial and Industrial Loans
The Bank generally offers commercial loans to individuals and businesses located in its primary market area. The commercial
loan portfolio includes, but is not limited to, lines of credit, dealer floor plan lines, equipment loans, vehicle loans and term
loans. These loans are primarily secured by vehicles, machinery and equipment, inventory, accounts receivable, marketable
securities, deposit accounts and real estate. At December 31, 2015, commercial and industrial loans totaled $149.8 million,
or 20.5%, of the total loan portfolio.
Consumer Loans
Consumer loans include both secured and unsecured installment loans, lines of credit and overdraft protection loans. The
Bank is also in the business of underwriting indirect auto loans which are originated through various auto dealers in
northeastern Pennsylvania and dealer floor plan loans. Generally, the Bank also offers home equity loans and lines of credit
with a maximum combined loan-to-value ratio of 90%, based on the appraised value of the property. Home equity loans have
fixed rates of interest and are for terms up to 15 years. Home equity lines of credit have adjustable interest rates and are based
off of the prime interest rate. At December 31, 2015, consumer loans totaled $128.6 million, or 17.6%, of the total loan
portfolio.
2
State and Political Subdivision Loans
The Bank originates state and political subdivision loans, including general obligation and tax anticipation notes, primarily
to municipalities in the Bank’s market area. At December 31, 2015, state and political subdivision loans totaled $46.1 million,
or 6.3%, of the total loan portfolio.
For more information regarding the loan portfolio and lending policies, please refer to Note 2 “Summary of Significant
Accounting Policies” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Wealth Management
The Company offers customers wealth management services through a third party provider. Customers are able to access
alternative deposit products such as mutual funds, annuities, stocks, and bonds directly for purchase from an outside provider.
Deposit Activities
In general, deposits, borrowings and loan repayments are the major sources of the Bank’s funds for lending and other
investment purposes. The Bank grows its deposits within its market area primarily by offering a wide selection of deposit
accounts. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. In determining the terms of the Bank’s deposit accounts, the Bank considers
the interest rates offered by its competitors, the interest rates available on borrowings, its liquidity needs and customer
preferences. The Bank regularly reviews its deposit mix and deposit pricing as part of its asset/liability management, taking
into consideration rates offered by competitors in its market area.
Competition
The Company faces substantial competition in originating loans and in attracting deposits from a significant number of
financial institutions operating in its market area, many with a statewide or regional presence, and in some cases, a national
presence, as well as other financial institutions outside of its market area through online loan and deposit product offerings.
The competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and,
with respect to deposits, institutions offering investment alternatives, including money market funds and online savings
accounts. The increased competition has resulted from changes in the legal and regulatory guidelines, as well as from
economic conditions. The cost of regulatory compliance remains high for community banks as compared to their larger
competitors that are able to achieve economies of scale.
As a result of consolidation in the banking industry, some of the Bank’s competitors and their respective affiliates are larger
and may enjoy advantages such as greater financial resources, a wider geographic presence, a wider array of services, or
more favorable pricing alternatives and lower origination and operating costs. The Company considers its major competition
to be local commercial banks as well as other commercial banks with branches in the Company’s market area. Competitors
may offer deposits at higher rates and loans with lower fixed rates, more attractive terms and less stringent credit structures
than the Company has been able to offer. The growth and profitability of the Company depend on its continued ability to
successfully compete.
Supervision and Regulation
The Company participates in a highly regulated industry and is subject to a variety of statutes, regulations and policies, as
well as ongoing regulatory supervision and review. These laws, regulations and policies are subject to frequent change and
the Company takes measures to comply with applicable requirements.
Supervisory Actions
The Bank was under a Consent Order (the “Order”) from the Office of the Comptroller of the Currency (“OCC”) dated
September 1, 2010. On March 25, 2015, after meeting all of the requirements of the Order, the Bank was fully and completely
released from the Order. The Company was also subject to a Written Agreement (the “Agreement”) with the Federal Reserve
Bank of Philadelphia (the “Reserve Bank”) dated November 24, 2010. On September 8, 2015, the Company was notified by
the Reserve Bank that, effective September 2, 2015, it had been fully and completely released from the Written Agreement.
3
The Company
The Company is a bank holding company registered with, and subject to regulation by, the Reserve Bank and the Board of
Governors of the Federal Reserve System (“FRB”). The Bank Holding Company Act of 1956, as amended (the “BHCA”),
and other federal laws subject bank holding companies to restrictions on the types of activities in which they may engage,
and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and
regulations and unsafe and unsound banking practices.
The BHCA requires approval of the FRB for, among other things, the acquisition by a proposed bank holding company of
control of more than five percent (5%) of the voting shares, or substantially all the assets, of any bank or the merger or
consolidation by a bank holding company with another bank holding company. The BHCA also generally permits the
acquisition by a bank holding company of control or substantially all the assets of any bank located in a state other than the
home state of the bank holding company, except where the bank has not been in existence for the minimum period of time
required by state law; but if the bank is at least 5 years old, the FRB may approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited from acquiring control of any voting shares of any
company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or furnishing services to or performing services for its authorized subsidiaries. A
bank holding company may, however, engage in, or acquire an interest in a company that engages in, activities that the FRB
has determined by order or regulation to be so closely related to banking or managing or controlling banks as to be properly
incident thereto. In making such a determination, the FRB is required to consider whether the performance of such activities
can reasonably be expected to produce benefits to the public, such as convenience, increased competition or gains in
efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The FRB is also empowered to differentiate between activities
commenced de novo and activities commenced by the acquisition, in whole or in part, of a going concern. Some of the
activities that the FRB has determined by regulation to be closely related to banking include making or servicing loans,
performing certain data processing services, acting as a fiduciary or investment or financial advisor, and making investments
in corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or any of its subsidiaries, or investments in the stock or other securities
thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Further, a holding company and
any subsidiary bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. A
subsidiary bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any
of the foregoing on the condition that: (i) the customer obtain or provide some additional credit, property or services from or
to such bank other than a loan, discount, deposit or trust service; (ii) the customer obtain or provide some additional credit,
property or service from or to the bank holding company or any other subsidiary of the bank holding company; or (iii) the
customer not obtain some other credit, property or service from competitors, except for reasonable requirements to assure the
soundness of credit extended.
The Gramm Leach-Bliley Act of 1999 (the “GLB Act”) allows a bank holding company or other company to certify status
as a financial holding company, which allows such company to engage in activities that are financial in nature, that are
incidental to such activities, or are complementary to such activities without further approval. The Company is not a financial
holding company. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting
insurance or acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and
engaging in merchant banking under certain restrictions. It also authorizes the FRB to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto.
The Bank
The Bank, as a national bank, is a member of the Federal Reserve System and its accounts are insured up to the maximum
legal limit by the Deposit Insurance Fund of the FDIC. The Bank is subject to regulation, supervision and regular examination
by the OCC. The regulations of these agencies and the FDIC govern most aspects of the Bank’s business, including required
reserves against deposits, loans, investments, mergers and acquisitions, borrowings, dividends and location and number of
branch offices. State laws may also apply to the Bank to the extent that federal law does not preempt the state law. The laws
and regulations governing the Bank generally have been promulgated to protect depositors and the Deposit Insurance Fund,
and not for the purpose of protecting shareholders.
4
On February 26, 2016, the Bank filed an application with the Pennsylvania Department of Banking and Securities to convert
from an OCC-chartered banking institution to a Pennsylvania state-chartered banking institution and has notified the OCC
and the FDIC of the same. If and when the conversion application is approved, the primary banking regulators of the Bank
would become the Pennsylvania Department of Banking and Securities and the FDIC. The Company would continue to be
regulated by the Federal Reserve. There can be no assurance as to the ability and timing to obtain the requisite approvals of
the foregoing conversion application.
Branching and Interstate Banking. The federal banking agencies are authorized to approve interstate bank merger transactions
without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks
has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the “Riegle-Neal Act”) by adopting a law after the date of enactment of the Riegle-Neal Act and before June 1, 1997
that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks.
Interstate bank mergers are also subject to the nationwide and statewide insured deposit concentration limitations described
in the Riegle-Neal Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) permits national and
state banks to establish de novo branches in other states to the same extent as a bank chartered by that state would be so
permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state
banks to establish branches in that state. Pennsylvania law had previously permitted banks chartered in Pennsylvania to
branch in other states without limitation, thereby permitting national banks in Pennsylvania to establish branches anywhere
in the state, but only permitted out of state banks to branch in Pennsylvania if the home state of the out of state bank permits
Pennsylvania banks to establish de novo branches. The branching provisions of the Dodd-Frank Act could result in more
banks from other states establishing de novo branches in the Bank’s market area.
USA Patriot Act and BSA. Under the BSA, a financial institution is required to have systems in place to detect certain
transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash
transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file
suspicious activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects or
has reason to suspect, involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose.
Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act, commonly referred to as the “USA Patriot Act” or the “Patriot Act,” financial institutions are subject to prohibitions
against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to
detect, and prevent, the use of the United States financial system for money laundering and terrorist financing activities. The
Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including employee
training and independent audit requirements, meet minimum standards specified by the act, follow minimum standards for
customer identification and maintenance of customer identification records, and regularly compare customer lists against lists
of suspected terrorists, terrorist organizations and money launderers.
Capital Adequacy Requirements. The FRB and OCC have adopted risk based capital adequacy and leverage capital adequacy
requirements pursuant to which they assess the adequacy of capital in examining and supervising banks and bank holding
companies and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital
based on the risk inherent in various classes of assets and off-balance sheet items.
In December 2010, the Basel Committee on Banking Supervision released its final framework for strengthening international
capital and liquidity regulation (“Basel III”). The regulations adopted by the U.S. federal bank regulatory agencies, when
fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital, with a greater
emphasis on common equity. The Basel III final capital framework, among other things, (i) introduces as a new capital
measure “Common Equity Tier I” (“CET I”), (ii) specifies that Tier I capital consists of CET I and “Additional Tier I capital”
instruments meeting specified requirements, (iii) defines CET I narrowly by requiring that most adjustments to regulatory
capital measures be made to CET I and not to the other components of capital and (iv) expands the scope of the adjustments
as compared to existing regulations.
When fully phased-in, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of
CET I to risk-weighted assets of at least 4.50%, plus a “capital conservation buffer” of 2.50 %; (ii) a minimum ratio of Tier
I capital to risk-weighted assets of at least 6.00%, plus the capital conservation buffer, or 8.50%; (iii) a minimum ratio of
total (Tier I plus Tier 2) capital to risk-weighted assets of at least 8.00% plus the capital conservation buffer, or 10.50%; and
(iv) as a newly adopted international standard, a minimum leverage ratio of 3.00%, calculated as the ratio of Tier I capital to
balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end
ratios for the quarter).
5
Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that
excess aggregate credit growth becomes associated with a buildup of systemic risk that would be a CET I add-on to the capital
conservation buffer in the range of 0.00% to 2.50% when fully implemented. The capital conservation buffer is designed to
absorb losses during periods of economic stress.
Banking institutions with a ratio of CET I to risk-weighted assets above the minimum but below the conservation buffer (or
below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face
constraints on their ability to pay dividends, to effect equity repurchases and pay discretionary bonuses to executive officers,
which constraints vary based on the amount of the shortfall.
The Basel III final framework provides for a number of new deductions from and adjustments to CET I. These include, for
example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and
significant investments in non-consolidated financial entities be deducted from CET I to the extent that any one such category
exceeds 10.00% of CET I or all such categories in the aggregate exceed 15.00% of CET I.
The federal banking regulators issued a final rulemaking in July 2013 (the “Basel III Rule”) to implement Basel III under
regulations substantially consistent with the above. The Basel III Rule also includes, as part of the definition of CET I capital,
a requirement that banking institutions include the amount of Accumulated Other Comprehensive Income (“AOCI,” which
primarily consists of unrealized gains and losses on available-for-sale securities, that are not required to be treated as OTTI,
net of tax) in calculating regulatory capital, unless the institution makes a one-time opt-out election from this provision in
connection with the filing of its first regulatory reports after applicability of the Basel III Rule to that institution. The Basel
III Rule also imposes a 4.00% minimum Tier I leverage ratio.
The Basel III Rule also makes changes to the manner of calculating risk-weighted assets. It imposes methodologies for
determining risk weighted assets, including revisions to recognition of credit risk mitigation, such as a greater recognition of
financial collateral and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past
due loans; and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit
risk profiles, including higher loan to value and equity components.
As discussed below, the Basel III Rule also integrates the new capital requirements into the prompt corrective action
provisions under Section 38 of the FDIA.
In general, the Basel III Rule became applicable to the Company and Bank on January 1, 2015. The Company and Bank
elected to exclude AOCI in calculating regulatory capital with the filing of their respective first regulatory reports after
applicability of the Basel III Rule to them. Additionally, the Company’s outstanding subordinated notes are subject to phase
out and will cease to qualify as capital for regulatory purposes. Overall, the Company believes that implementation of the
Basel III Rule did not have a material adverse effect on the Company’s or Bank’s capital ratios, earnings, shareholder’s
equity, or its ability to pay discretionary bonuses to executive officers.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of
prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA.
The following are the capital requirements under the Basel III Rules integrated into the prompt corrective action category
definitions. As of December 31, 2015, the following capital requirements were applicable to the Bank for purposes of Section
38 of the FDIA.
Capital Category
Well capitalized ....................... >/= 10.0%
Adequately capitalized ............ >/= 8.0%
< 8.0%
Undercapitalized .....................
< 6.0%
Significantly undercapitalized .
N/A
Critically undercapitalized ......
Total
Tier I
Risk-Based
Capital Ratio Capital Ratio Capital Ratio
Risk-Based
Leverage
Ratio
Common
Equity
Tier I
>/= 8.0%
>/= 6.0%
< 6.0%
< 4.0%
N/A
>/= 6.5%
>/= 4.5%
< 4.5%
< 3.0%
N/A
>/= 5.0%
>/= 4.0%
< 4.0%
< 3.0%
N/A
6
Tangible
Equity
to Assets
N/A
N/A
N/A
N/A
Less than 2.0%
The Company’s total capital to risk-weighted assets ratio at December 31, 2015 and 2014 were 11.79% and 13.67%,
respectively. The same ratio for the Bank was 13.83% and 15.42% at December 31, 2015 and 2014, respectively. The Tier I
capital to risk-weighted assets ratio for the Company at December 31, 2015 and 2014 was 9.42% and 8.76%, respectively.
The Bank’s Tier I Capital to risk-weighted assets ratio was 12.69% at December 31, 2015 and 14.16% at December 31, 2014.
The Tier I capital to average assets ratio for the Company was 7.27% and 6.05%, at December 31, 2015 and 2014,
respectively. This ratio for the Bank was 9.79% and 9.78% at December 31, 2015 and 2014, respectively. At December 31,
2015, the Company’s and the Bank’s common equity Tier I capital to risk-weighted assets ratios were 9.42% and 12.69%,
respectively.
Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general,
these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with
regulatory authorities.
The Bank and its “institution-affiliated parties,” including its management, employees, agents, independent contractors,
consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs,
are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a governmental
agency. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and
institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance and cease-and-desist
orders. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or
practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also
be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined
by the ordering agency to be appropriate.
Under provisions of the federal securities laws, a determination by a court or regulatory agency that certain violations have
occurred at a company or its affiliates can result in fines, restitution, a limitation of permitted activities, disqualification to
continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions
and violations can also affect a public company in its timing and ability to expeditiously issue new securities into the capital
markets.
The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect to the classification of assets and the
establishment of adequate loan loss allowances for regulatory purposes.
As a result of the previous volatility and instability in the financial system, Congress, the bank regulatory authorities and
other government agencies have called for or proposed additional regulation and restrictions on the activities, practices and
operations of banks and their holding companies. While many of these proposals relate to institutions that have accepted
investments from, or sold troubled assets to, the Department of the Treasury or other government agencies, or otherwise
participate in government programs intended to promote financial stabilization, Congress and the federal banking agencies
have broad authority to require all banks and holding companies to adhere to more rigorous or costly operating procedures,
corporate governance procedures, or to engage in activities or practices which they might not otherwise elect. Any such
requirement could adversely affect the Company’s business and results of operations. The Company did not accept an
investment by the Treasury Department in its preferred stock or warrants to purchase common stock, and except for the
temporary increases in deposit insurance for customer accounts, has not participated in any of the programs adopted by the
Treasury Department, FDIC or Federal Reserve.
7
The Dodd-Frank Act. The Dodd-Frank Act made significant changes to the bank regulatory structure and affects the lending,
deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank
Act has required a number of federal agencies to adopt a broad range of new rules and regulations, and to prepare various
studies and reports for Congress. The federal agencies have been given significant discretion in drafting these rules and
regulations. To date, the following provisions of the Dodd-Frank Act are considered to be of greatest significance to the
Company:
● expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured
depository institutions;
● requires a bank holding company to be well capitalized and well managed to receive approval of an interstate bank
acquisition;
● changes standards for federal preemption of state laws related to national banks and their subsidiaries;
● provides mortgage reform provisions regarding a customer’s ability to pay and making more loans subject to
provisions for higher-cost loans and new disclosures;
● creates the Consumer Financial Protection Bureau (the “CFPB”) that has rulemaking authority for a wide range of
consumer protection laws that apply to all banks and has broad powers to supervise and enforce consumer protection
laws;
● creates the Financial Stability Oversight Council with authority to identify institutions and practices that might pose
a systemic risk;
● introduces additional corporate governance and executive compensation requirements on companies subject to the
Securities and Exchange Act of 1934, as amended;
● permits FDIC-insured banks to pay interest on business demand deposits;
● requires that holding companies and other companies that directly or indirectly control an insured depository
institution serve as a source of financial strength;
● makes permanent the $250 thousand limit for federal deposit insurance at all insured depository institutions; and
● permits national and state banks to establish interstate branches to the same extent as the branch host state allows
establishment of in-state branches.
Consumer Financial Protection Bureau. The Dodd-Frank Act created the CFPB, a new independent federal agency within
the Federal Reserve System, having broad rulemaking, supervisory and enforcement powers under various federal consumer
financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the consumer financial privacy provisions of
the Gramm-Leach-Bliley Act and certain other statutes. The CFPB, which began operations on July 21, 2011, has examination
and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller
institutions, including the Bank, are subject to rules promulgated by the CFPB but continue to be examined and supervised
by federal banking regulators for compliance with federal consumer protection laws and regulations. The CFPB also has
authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.
The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those
adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the
state and federal laws and regulations.
A focus of the CFPB’s rulemaking efforts has been on reforms related to residential mortgage transactions. In 2013, the
CFPB issued final rules related to a borrower’s ability to repay and qualified mortgage standards, mortgage servicing
standards, loan originator compensation standards, requirements for high-cost mortgages, appraisal and escrow standards and
requirements for higher-priced mortgages. Several of the CFPB’s rulemakings became effective in January 2014. In
November 2013, the CFPB issued final rules establishing integrated disclosure requirements for lenders and settlement agents
in connection with most closed end, real estate secured consumer loans. These rules became effective in August 2015. During
8
2015, the CFPB issued additional rulemaking expanding the scope of information lenders must report in connection with
mortgage and other housing-related loan applications under the Home Mortgage Disclosure Act.
The final rule implementing the Dodd-Frank Act requirement that lenders determine whether a consumer has the ability to
repay a mortgage loan, which went into effect on January 10, 2014, establishes certain minimum requirements for creditors
when making ability to pay determinations, and establishes certain protections from liability for mortgages meeting the
definition of “qualified mortgages.” The rule affords greater legal protections for lenders making qualified mortgages that
are not “higher priced.” Qualified mortgages must generally satisfy detailed requirements related to product features,
underwriting standards, and a points and fees requirement whereby the total points and fees on a mortgage loan cannot exceed
specified amounts or percentages of the total loan amount. Mandatory features of a qualified mortgage include: (1) a loan
term not exceeding 30 years and (2) regular periodic payments that do not result in negative amortization, deferral of principal
repayment, or a balloon payment. The rule creates special categories of qualified mortgages originated by certain smaller
creditors. The Bank’s current business strategy, product offerings, and profitability may change as the rule is interpreted by
the regulators and courts.
The final rules adopting new mortgage servicing standards, which took effect on January 10, 2014, impose new requirements
regarding force-placed insurance, mandate certain notices prior to rate adjustments on adjustable-rate mortgages, and
establish requirements for periodic disclosures to borrowers. These requirements will affect notices to be given to consumers
as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding
“force-placed” insurance. Servicers will be prohibited from processing foreclosures when a loan modification is pending, and
must wait until a loan is more than 120 days delinquent before initiating a foreclosure action. Servicers must provide direct
and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain
accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred.
FDIC Insurance Premiums. The FDIC maintains a risk-based assessment system for determining deposit insurance
premiums. Four risk categories (I-IV), each subject to different premium rates, are established based upon an institution’s
status as well capitalized, adequately capitalized or undercapitalized, and the institution’s supervisory rating.
The Dodd-Frank Act permanently increased the maximum deposit insurance amount for banks, savings institutions and credit
unions to $250,000 per depositor. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments
are now based on a financial institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act
requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by
2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio
exceeds certain thresholds. The Dodd-Frank Act eliminated the statutory prohibition against the payment of interest on
business checking accounts.
An insured institution is required to pay deposit insurance premiums on its assessment base in accordance with its risk
category. There are three adjustments that can be made to an institution’s initial base assessment rate: (1) a potential decrease
for long-term unsecured debt, including senior and subordinated debt and, for small institutions, a portion of Tier I capital;
(2) a potential increase for secured liabilities above a threshold amount; and (3) for non-Risk Category I institutions, a
potential increase for brokered deposits above a threshold amount. The FDIC may also impose special assessments from time
to time.
Effective February 2, 2015 and for the remainder of the year ended December 31, 2015, the Bank was considered risk category
I for deposit insurance assessments and paid an annual assessment rate ranging from 0.0005 basis points to 0.0006 basis
points on the assessment base of average consolidated total assets less the average tangible equity during the assessment
period.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Bank. The Company’s revenues (on a parent company only
basis) result almost entirely from dividends paid by its subsidiary, the Bank, to the Company. The right of the Company, and
consequently the right of creditors and shareholders of the Company, to participate in any distribution of the assets or earnings
of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors
of the subsidiary (including depositors) except to the extent that claims of the Company, in its capacity as a creditor, may be
recognized. Additionally, the ability of the Bank to pay dividends to the Company is subject to various regulatory restrictions.
9
The declaration of cash dividends on the Company’s common stock is at the discretion of its board of directors, and any
decision to declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial
condition, regulatory capital levels, applicable covenants under any credit agreements, notes and other contractual
restrictions, Pennsylvania law, federal bank regulatory law, and other factors deemed relevant.
Employees
As of December 31, 2015, the Company and the Bank employed 269 persons, including 39 part-time employees.
Available Information
The Company files reports, proxy and information statements and other information electronically with the Securities and
Exchange Commission (“SEC”). You may read and copy any materials that the Company files with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information may be obtained on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s
website site address is http://www.sec.gov. The Company’s website address is http://www.fncb.com. The Company makes
its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto
available through its website at www.fncb.com. They may also be obtained free of charge as soon as practicable after filing
or furnishing them to the SEC upon request by sending an email to corporatesecretary@fncb.com. Information may also be
obtained via written request to First National Community Bancorp, Inc. Attention: Chief Financial Officer, 102 East Drinker
Street, Dunmore, PA 18512.
Item 1A. Risk Factors.
The risk factors discussed below, which could materially affect the Company’s business, operating results or financial
condition, should be considered in addition to the other information about the Company presented in this Annual Report on
Form 10-K. However, the risk factors described below are not meant to be all inclusive. Additional risks and uncertainties
not currently known or that the Company currently deems to be insignificant may also materially adversely affect the
business, operating results or financial condition of the Company.
Risks Related to the Company and its Business
The Company may not be able to successfully compete with others for business.
The Company competes for loans, deposits and investment dollars with numerous regional and national banks and other
community banking institutions, online divisions of banks located in other markets as well as other kinds of financial
institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage
brokers, and private lenders. There is also competition for banking business from competitors outside of its market area. As
noted above, the Company and the Bank are subject to extensive regulations and supervision, including, in many cases,
regulations that limit the type and scope of activities. Many competitors have substantially greater resources than the
Company, may offer certain services that the Bank does not provide, and operate under less stringent regulatory
environments. The differences in available resources and applicable regulations may make it harder for the Company to
compete profitably, reduce the rates that it can earn on loans and investments, increase the rates it must offer on deposits and
other funds, and adversely affect its overall financial condition and earnings. For additional discussion of the Company’s
competitive environment, see the section entitled “Business – Competition” included in Item 1 to this Annual Report on Form
10-K.
The economic environment continues to pose significant challenges for the Company and could adversely affect its
financial condition and results of operations.
The Company is operating in a challenging economic environment, including uncertain national and local conditions.
Additionally, concerns from some of the countries in the European Union, Asia and elsewhere have also strained the financial
markets both abroad and domestically. Financial institutions continue to be affected by softness in the real estate market and
constrained financial markets. While conditions appear to have improved since the depths of the financial crisis, generally
and in the Company’s market area, should declines in real estate values, home sales volumes, and financial stress on
borrowers as a result of the uncertain economic environment re-emerge, such events could have an adverse effect on our
borrowers or their customers, which could adversely affect our financial condition and results of operations. A worsening of
10
these conditions would likely exacerbate the adverse effects on us and others in the financial institutions industry.
Deterioration in economic conditions in our markets could drive loan losses beyond that which is provided for in the
Company’s ALLL, which would necessitate further increases in the provision for loan and lease losses, and, in turn, reduce
the Company’s earnings and capital. The Company may also face the following risks in connection with the economic
environment:
● economic conditions that negatively affect housing prices and the job market have resulted in the past, and may
continue to result, in a deterioration in credit quality of our loan portfolios, and such deterioration in credit quality
has had, and could continue to have, a negative impact on our business;
● market developments may affect consumer confidence levels and may reduce loan demand and cause adverse
changes in payment patterns, leading to a reduced asset base, as well as increases in delinquencies and default rates
on loans and other credit facilities;
● the methodologies the Company uses to establish the ALLL rely on complex judgments, including forecasts of
economic conditions, that are inherently uncertain and may be inadequate;
● the continuation of low market interest rates, may further pressure our interest margins as interest-earning assets,
such as loans and investments, are reinvested or reprice at lower rates;
● volatility in the market, and lower level of confidence in the banking system, could require the Bank to pay higher
interest rates to obtain deposits to meet the needs of its depositors and borrowers, resulting in reduced margin and
net interest income. If conditions worsen, it is possible that banks such as the Bank may be unable to meet the needs
of their depositors and borrowers, which could, in the worst case, result in the Bank being placed into receivership;
and
● compliance with increased regulation of the banking industry may increase our costs, limit our ability to pursue
business opportunities, and divert management efforts.
If these conditions or similar ones continue to exist or worsen, the Company could experience adverse effects on its financial
condition.
The Company is subject to lending risk.
As of December 31, 2015, approximately 37.8% of the Company’s loan portfolio consisted of commercial real estate loans
and construction, land acquisition and development loans. These types of loans are generally viewed as having more risk of
default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real
estate loans and consumer loans. Because the Company’s loan portfolio contains a significant number of commercial real
estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase
in non-performing loans. All non-performing loans totaled $3.8 million, or 0.5% of total gross loans, as of December 31,
2015, and $5.5 million, or 0.8% of total gross loans, as of December 31, 2014. Although non-performing asset levels
decreased from the prior year, an increase in non-performing loans could result in an increase in the provision for loan and
lease losses and an increase in loan charge-offs, both of which could have a material adverse effect on the Company’s
financial condition and results of operations. The lending activities in which the Bank engages carry the risk that the
borrowers will be unable to perform on their obligations. As such, general economic conditions, nationally and in the
Company’s primary market area, will have a significant impact on its results of operations. To the extent that economic
conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Bank in full, in a
timely manner, resulting in decreased earnings or losses to the Bank. To the extent that loans are secured by real estate,
adverse conditions in the real estate market may reduce the ability of the borrower to generate the necessary cash flow for
repayment of the loan, and reduce the ability to collect the full amount of the loan upon a default. To the extent that the Bank
makes fixed-rate loans, general increases in interest rates will tend to reduce its spread as the interest rates the Company must
pay for deposits would increase while interest income is flat. Economic conditions and interest rates may also adversely affect
the value of property pledged as security for loans.
11
The Company’s concentrations of loans, including those to insiders and related parties, may create a greater risk of loan
defaults and losses.
A substantial portion of the Company’s loans are secured by real estate in the Northeastern Pennsylvania market, and
substantially all of its loans are to borrowers in that area. The Company also has a significant amount of commercial real
estate, commercial and industrial, construction, land acquisition and development loans and land-related loans for residential
and commercial developments. At December 31, 2015, $433.7 million, or 59.3%, of gross loans were secured by real estate,
primarily commercial real estate. Management has taken steps to mitigate the Company’s commercial real estate
concentration risk by diversification among the types and characteristics of real estate collateral properties, sound
underwriting practices, and ongoing portfolio monitoring and market analysis. Of total gross loans, $30.8 million, or 4.2%,
were construction, land acquisition and development loans. Construction, land acquisition and development loans have the
highest risk of uncollectability. An additional $149.8 million, or 20.5%, of portfolio loans were commercial and industrial
loans not secured by real estate. Historically, commercial and industrial loans generally have had a higher risk of default than
other categories of loans, such as single family residential mortgage loans. The repayments of these loans often depend on
the successful operation of a business and are more likely to be adversely affected by adverse economic conditions. While
the Company believes that its loan portfolio is well diversified in terms of borrowers and industries, these concentrations
expose the Company to the risk that adverse developments in the real estate market, or in the general economic conditions in
the Company’s general market area, could increase the levels of non-performing loans and charge-offs, and reduce loan
demand. In that event, the Company would likely experience lower earnings or losses. Additionally, if, for any reason,
economic conditions in its market area deteriorate, or there is significant volatility or weakness in the economy or any
significant sector of the area’s economy, the Company’s ability to develop business relationships may be diminished, the
quality and collectability of its loans may be adversely affected, the value of collateral may decline and loan demand may be
reduced.
Commercial real estate, commercial and industrial and construction, land acquisition and development loans tend to have
larger balances than single family mortgage loans and other consumer loans. Because the loan portfolio contains a significant
number of commercial and industrial loans, commercial real estate loans and construction, land acquisition and development
loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in non-
performing assets. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the
provision for loan and lease losses, or an increase in loan charge-offs, which could have an adverse impact on the Company’s
results of operations and financial condition.
Guidance adopted by federal banking regulators provides that banks having concentrations in construction, land development
or commercial real estate loans are expected to have and maintain higher levels of risk management and, potentially, higher
levels of capital, which may adversely affect shareholder returns, or require the Company to obtain additional capital sooner
than the Company otherwise would. Excluded from the scope of this guidance are loans secured by non-farm nonresidential
properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by
the party, or affiliate of the party, who owns the property.
Outstanding loans and line of credit balances to directors, officers and their related parties totaled $52.7 million as of
December 31, 2015. At December 31, 2015, there were no loans to directors, officers and their related parties that were
categorized as criticized loans within the Bank’s risk rating system, meaning they are not considered to present a higher risk
of collection than other loans. For more information regarding loans to officers and directors and/or their related parties,
please refer to Note 14 — “Related Party Transactions” to the consolidated financial statements included in Item 8 and Item
13, “Certain Relationships and Related Transactions, and Director Independence” to this Annual Report on Form 10-K.
The Company’s financial condition and results of operations would be adversely affected if the ALLL is not sufficient to
absorb actual losses or if increases to ALLL were required.
The lending activities in which the Bank engages carry the risk that the borrowers will be unable to perform on their
obligations, and that the collateral securing the payment of their obligations may be insufficient to assure repayment. The
Company may experience significant credit losses, which could have a material adverse effect on its operating results. The
Company makes various assumptions and judgments about the collectability of its loan portfolio, including the
creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of
many of its loans, which it uses as a basis to estimate and establish its reserves for losses. In determining the amount of the
ALLL, the Company reviews its loans, its loss and delinquency experience, and evaluates current economic conditions. If
these assumptions prove to be incorrect, the ALLL may not cover inherent losses in its loan portfolio at the date of its financial
12
statements. Material additions to the Company’s allowance or extensive charge-offs would materially decrease its net income.
At December 31, 2015, the ALLL totaled $8.8 million, representing 1.2% of total loans.
Although the Company believes it has underwriting standards to manage normal lending risks, it is difficult to assess the
future performance of its loan portfolio due to the ongoing economic environment and the state of the real estate market. The
assessment of future performance of the loan portfolio is inherently uncertain. The Company can give no assurance that non-
performing loans will not increase or that non-performing or delinquent loans will not adversely affect the Company’s future
performance.
In addition, federal regulators periodically review the Company’s ALLL and may require increases to the ALLL or further
loan charge-offs. Any increase in ALLL or loan charge-offs as required by these regulatory agencies could have a material
adverse effect on the Company’s results of operations and financial condition.
If the Company concludes that the decline in value of any of its investment securities is other-than-temporary, the
Company is required to write-down the security, to reflect credit-related impairments through a charge to earnings.
The Company reviews its investment securities portfolio at each quarter-end reporting period to determine whether the fair
value is below the current carrying value. When the fair value of any of the Company’s debt investment securities has declined
below its carrying value, the Company is required to assess whether the decline is an OTTI. If the Company concludes that
the decline is other-than-temporary, it is required to write down the value of that security to reflect the credit-related
impairments through a charge to earnings. Changes in the expected cash flows of securities in its portfolio and/or prolonged
price declines in future periods may result in impairment of the Company’s investment securities that is other-than-temporary,
which would require a charge to earnings. Due to the complexity of the calculations and assumptions used in determining
whether an asset is impaired, any impairment disclosed may not accurately reflect the actual impairment in the future. In
addition, to the extent that the value of any of the Company’s investment securities is sensitive to fluctuations in interest
rates, any increase in interest rates may result in a decline in the value of such investment securities.
The Company held approximately $6.3 million in capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) as
of December 31, 2015. The Company must own such capital stock to qualify for membership in the Federal Home Loan
Bank system which enables it to borrow funds under the FHLB advance program. If FHLB were to cease operations, the
Company’s business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.
Changes in interest rates could reduce income, cash flows and asset values.
The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the
difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid
on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are
beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory
agencies and, in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not
only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings,
but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, (ii) the fair value of the
Company’s financial assets and liabilities, and (iii) the average duration of the Company’s mortgage-backed securities
portfolio.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and
investments, the Company’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on
deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material
adverse effect on the Company’s financial condition and results of operations.
The Company may need to raise additional capital in the future, but that capital may not be available when it is needed
and on terms favorable to current shareholders.
Laws, regulations and banking regulators require the Company and Bank to maintain adequate levels of capital to support its
operations. In addition, capital levels are determined by the Company’s management and Board of Directors based on capital
levels that they believe are necessary to support the Company’s business operations. The Company regularly evaluates its
present and future capital requirements and needs and analyzes capital raising alternatives and options. Although the
Company succeeded in meeting its current regulatory capital requirements, it may need to raise additional capital in the future
13
to support possible loan losses or potential OTTI during future periods, to meet future regulatory capital requirements or for
other reasons.
The Board of Directors may determine from time to time that the Company needs to raise additional capital by issuing
additional common shares or other securities. The Company is not restricted from issuing additional common shares,
including securities that are convertible into or exchangeable for, or that represent the right to receive, common shares.
Because the Company’s decision to issue securities in any future offering will depend on market conditions and other factors
beyond its control, the Company cannot predict or estimate the amount, timing or nature of any future offerings, or the prices
at which such offerings may be affected. Such offerings will likely be dilutive to common shareholders from ownership,
earnings and book value perspectives. New investors also may have rights, preferences and privileges that are senior to, and
that adversely affect, its then current common shareholders. Additionally, if the Company raises additional capital by making
additional offerings of debt or preferred equity securities, upon liquidation, holders of the Company’s debt securities and
shares of preferred shares, and lenders with respect to other borrowings, will receive distributions of the Company’s available
assets prior to the holders of the Company’s common shares. Additional equity offerings may dilute the holdings of existing
shareholders or reduce the market price of the Company’s common shares, or both. Holders of the Company’s common
shares are not entitled to preemptive rights or other protections against dilution.
The Company cannot assure that additional capital will be available on acceptable terms or at all. Any occurrence that may
limit the Company’s access to the capital markets may adversely affect the Company’s capital costs and its ability to raise
capital and, in turn, its liquidity. Moreover, if the Company needs to raise capital, it may have to do so when many other
financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An
inability to raise additional capital on acceptable terms when needed could have a material adverse effect on the Company’s
business, financial condition and results of operations.
Interruptions or security breaches of the Company’s information systems could negatively affect its financial performance
or reputation.
In conducting its business, the Company relies heavily on its information systems. The Company collects and stores sensitive
data, including proprietary business information and personally identifiable information of its customers and employees, in
its data centers and on its networks. The secure processing, maintenance and transmission of this information is critical to the
Company’s operations and business strategy. Maintaining and protecting those systems is difficult and expensive, as is
dealing with any failure, interruption or breach of those systems. Despite security measures, the Company’s information
technology and infrastructure may be vulnerable to security breaches, cyber attacks by hackers or breaches due to employee
error, malfeasance or other disruptions. Any damage, failure or breach could cause an interruption in the Company’s
operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in
and transmitted through the Company’s computer systems and network infrastructure. The occurrence of any failures,
interruptions or breaches could damage the Company’s reputation, disrupt operations and the services provided to customers,
cause a loss of confidence in the products and the services provided, cause the Company to incur additional expenses, result
in a loss of customer business and data, result in legal claims or proceedings, result in liability under laws that protect the
privacy of personal information, result in regulatory penalties, or expose the Company to other liability, any of which could
have a material adverse effect on the Company’s business, financial condition and results of operations and the Company’s
competitive position.
If the Company’s information technology is unable to keep pace with growth or industry developments or if technological
developments result in higher costs or less advantageous pricing, financial performance may suffer.
Effective and competitive delivery of the Company’s products and services increasingly depends on information technology
resources and processes, both those provided internally as well as those provided through third party vendors. In addition to
better serving customers, the effective use of technology can improve efficiency and help reduce costs. The Company’s future
success will depend, in part, upon its ability to address the needs of its customers by using technology to provide products
and services to enhance customer convenience, as well as to create efficiencies in its operations. There is increasing pressure
to provide products and services at lower prices. This can reduce net interest income and noninterest income from fee-based
products and services. In addition, the widespread adoption of new technologies could require the Company to make
substantial capital expenditures to modify or adapt existing products and services or develop new products and services. The
Company may not be successful in introducing new products and services in response to industry trends or developments in
technology, or those new products may not achieve market acceptance. Many of the Company’s competitors have greater
resources to invest in technological improvements. Additionally, as technology in the financial services industry changes and
evolves, keeping pace becomes increasingly complex and expensive. There can be no assurance that the Company will be
14
able to effectively implement new technology-driven products and services, which could reduce its ability to compete
effectively. As a result, the Company could lose business, be forced to price products and services on less advantageous terms
to retain or attract customers, or be subject to cost increases.
The Company’s profitability depends significantly on economic conditions in the Commonwealth of Pennsylvania,
specifically in Lackawanna, Luzerne and Wayne Counties.
The Company’s success depends primarily on the general economic conditions in the Commonwealth of Pennsylvania and
the specific local markets in which the Company operates. Unlike larger national or other regional banks that are more
geographically diversified, the Company provides banking and financial services to customers primarily in the Lackawanna,
Luzerne and Wayne County markets. The local economic conditions in these areas have a significant impact on the demand
for the Company’s products and services as well as the ability of the Company’s customers to repay loans, the value of the
collateral securing loans, and the stability of the Company’s deposit funding sources. A significant decline in general
economic conditions, caused by inflation, recession, acts of terrorism, severe weather or natural disasters, outbreak of
hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could
impact these local economic conditions and, in turn, have a material adverse effect on the Company’s financial condition and
results of operations.
The Company relies on management and other key personnel and the loss of any of them may adversely affect its
operations.
The Company believes each member of the senior management team is important to the Company’s success and the
unexpected loss of any of these persons could impair day-to-day operations as well as its strategic direction.
The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people
in most activities engaged in by the Company can be intense and the Company may not be able to hire people or retain them.
The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the
Company’s business due to the loss of their skills, knowledge of the Company’s market, years of industry experience and to
the difficulty of promptly finding qualified replacement personnel.
The Company may be a defendant from time to time in a variety of litigation and other actions, which could have a
material adverse effect on its financial condition, results of operations and cash flows.
The Company has been and may continue to be involved from time to time in a variety of litigation matters arising out of its
business. An increased number of lawsuits, including purported class action lawsuits and other consumer driven litigation,
have been filed and will likely continue to be filed against financial institutions, which may involve substantial compensatory
and/or punitive damages. The Company believes the risk of litigation generally increases during downturns in the national
and local economies. The Company’s insurance may not cover all claims that may be asserted against it, and any claims
asserted against it, regardless of merit or eventual outcome, may harm the Company’s reputation and may cause it to incur
significant expense. Should the ultimate judgments or settlements in any litigation exceed the Company’s insurance coverage,
they could have a material adverse effect on its financial condition, results of operations and cash flows. In addition, the
Company may not be able to obtain appropriate types or levels of insurance in the future, nor may the Company be able to
obtain adequate replacement policies with acceptable terms, if at all. For additional discussion of the Company’s current legal
matters, refer to Item 3, “Legal Proceedings” to this Annual Report on Form 10-K.
The Company’s disclosure controls and procedures and internal controls over financial reporting may not achieve their
intended objectives.
The Company maintains disclosure controls and procedures designed to ensure the timely filing of reports as specified in the
rules and forms of the Securities and Exchange Commission. The Company also maintains a system of internal control over
financial reporting. These controls may not achieve their intended objectives. Control processes that involve human diligence
and compliance, such as its disclosure controls and procedures and internal controls over financial reporting, are subject to
lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or
improper management override. Because of such limitations, there are risks that material misstatements due to error or fraud
may not be prevented or detected and that information may not be reported on a timely basis. If the Company’s controls are
not effective, it could have a material adverse effect on its financial condition, results of operations, and market for its
common stock, and could subject the Company to additional regulatory scrutiny.
15
Risks Related to the Company’s Common Stock
The price of the Company’s common shares may fluctuate significantly, which may make it difficult for investors to resell
common shares at a time or price they find attractive.
The Company’s share price may fluctuate significantly as a result of a variety of factors, many of which are beyond its
control. These factors include, in addition to those described above:
● actual or anticipated quarterly fluctuations in operating results and financial condition;
● changes in financial estimates or publication of research reports and recommendations by financial analysts or
actions taken by rating agencies with respect to the Company or other financial institutions;
● speculation in the press or investment community generally or relating to the Company’s reputation or the financial
services industry;
● strategic actions by the Company or its competitors, such as acquisitions, restructurings, dispositions or financings;
● fluctuations in the stock price and operating results of the Company’s competitors;
● future sales of the Company’s equity or equity-related securities;
● proposed or adopted regulatory changes or developments;
● anticipated or pending investigations, proceedings, audits or litigation that involve or affect the Company;
● domestic and international economic factors unrelated to the Company’s performance; and
● general market conditions and, in particular, developments related to market conditions for the financial services
industry.
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility
has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to
their operating performance. These broad market fluctuations may adversely affect the Company’s share price,
notwithstanding the Company’s operating results. The Company expects that the market price of its common shares will
continue to fluctuate and there can be no assurances about the levels of the market prices for its common shares.
An active public market for the Company’s common stock does not currently exist. As a result, shareholders may not be
able to quickly and easily sell their common shares.
The Company’s common shares are currently quoted on OTC Markets Group, Inc. During the year ended December 31,
2015, an average of 1817 shares traded on a daily basis. There can be no assurance that an active and liquid market for the
Company’s common shares will develop, or if one develops that it can be maintained. The absence of an active trading market
may make it difficult to subsequently sell the Company’s common shares at the prevailing price, particularly in large
quantities. For a further discussion, see Item 5- “Market for Registrant’s Common Equity, Related Shareholder Matters, and
Issuer Purchases of Equity Securities” to this Annual Report on Form 10-K.
The Company’s ability to pay dividends or repurchase shares is subject to limitiations.
The Company conducts its principal business operations through the Bank and the cash that it uses to pay dividends is derived
from dividends paid to the Company by the Bank; therefore, its ability to pay dividends is dependent on the performance of
the Bank and on the Bank’s capital requirements. The Bank’s ability to pay dividends to the Company and the Company’s
ability to pay dividends to its shareholders are also limited by certain legal and regulatory restrictions.
Risks Related to Government Regulation and Accounting Pronouncements
The Company is subject to extensive government regulation, supervision and possible regulatory enforcement actions,
which may subject it to higher costs and lower shareholder returns.
The banking industry is subject to extensive regulation and supervision that govern almost all aspects of its operations. The
extensive regulatory framework is primarily intended to protect the federal deposit insurance fund and depositors, not
shareholders. The Company and Bank are regulated and supervised by the FRB and the OCC. Compliance with applicable
laws and regulations can be difficult and costly and, in some instances, may put banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, mortgage banking companies and leasing companies. The
Company’s regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities,
including with respect to the imposition of restrictions on the operation of a bank or a bank holding company, the imposition
of significant fines, the ability to delay or deny merger or other regulatory applications, the classification of assets by a bank,
16
and the adequacy of a bank’s allowance for loan losses, among other matters. The Company’s industry is facing increased
regulation and scrutiny; for instance, areas such as BSA compliance (including BSA and related anti-money laundering
regulations) and real estate-secured consumer lending (such as Truth-in-Lending regulations, changes in Real Estate
Settlement Procedures Act regulations, implementation of licensing and registration requirements for mortgage originators
and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are being
confronted with escalating regulatory expectations and scrutiny. Non-compliance with laws and regulations such as these,
even in cases of inadvertent non-compliance, could result in litigation, significant fines and/or sanctions. Any failure to
comply with, or any change in, any applicable regulation and supervisory requirement, or change in regulation or enforcement
by such authorities, whether in the form of policies, regulations, legislation, rules, orders, enforcement actions, or decisions,
could have a material impact on the Company, the Bank and other affiliates, and its operations. Federal economic and
monetary policy may also affect the Company’s ability to attract deposits and other funding sources, make loans and
investments, and achieve satisfactory interest spreads. Any failure to comply with such regulation or supervision could result
in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse
effect on the Company’s business, financial condition and results of operations. In addition, compliance with any such action
could distract management’s attention from the Company’s operations, cause the Company to incur significant expenses,
restrict it from engaging in potentially profitable activities and limit its ability to raise capital.
The impact of recent legislation, proposed legislation, and government programs designed to stabilize the financial markets
cannot be predicted at this time, and such legislation is subject to change. In addition, the failure of financial markets to
stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect the
Company’s business, financial condition, results of operations and access to capital.
New or changed legislation or regulation and regulatory initiatives could adversely affect the Company through increased
regulation and increased costs of doing business.
Changes in federal and state legislation and regulation may affect the Company’s operations. New and modified regulation,
such as the Dodd-Frank Act and Basel III, may have unforeseen or unintended consequences on the banking industry. The
Dodd-Frank Act has implemented significant changes to the U.S. financial system, including the creation of new regulatory
agencies (such as the Financial Stability Oversight Council to oversee systemic risk and the CFPB to develop and enforce
rules for consumer financial products), changes in retail banking regulations, and changes to deposit insurance assessments.
For example, the Dodd-Frank Act has implemented new requirements with respect to “qualified mortgages” and new
mortgage servicing standards that may increase costs associated with this business. For a more detailed description, see the
section entitled “Business – The Bank – Consumer Financial Protection Bureau” included in Item 1 to this Annual Report
on Form 10-K.
Additionally, final rules to implement Basel III adopted in July 2013 revise risk-based and leverage capital requirements and
also limit capital distributions and certain discretionary bonuses if a banking organization does not hold a “capital
conservation buffer.” The rule became effective for the Company on January 1, 2015, with some additional transition periods.
This additional regulation could increase compliance costs and otherwise adversely affect operations. For a more detailed
description of the final rules, see the description in Item 1 of this Annual Report on Form 10-K under the heading “Capital
Adequacy Requirements”. The potential also exists for additional federal or state laws or regulations, or changes in policy or
interpretations, affecting many of the Company’s operations, including capital levels, lending and funding practices,
insurance assessments, and liquidity standards. The effect of any such changes and their interpretation and application by
regulatory authorities cannot be predicted, may increase the Company’s cost of doing business and otherwise affect the
Company’s operations, may significantly affect the markets in which the Company does business, and could have a materially
adverse effect on the Company.
The Company is also subject to the guidelines under the Gramm-Leach-Bliley Act (“GLBA”). The GLBA guidelines require,
among other things, that each financial institution develop, implement and maintain a written, comprehensive information
security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and
scope of the financial institution’s activities and the sensitivity of any customer information at issue. In recent years there
also has been increasing enforcement activity in the areas of privacy, information security and data protection in the United
States, including at the federal level. Compliance with these laws, rules and regulations regarding the privacy, security and
protection of customer and employee data could result in higher compliance and technology costs. In addition, non-
compliance could result in potentially significant fines, penalties and damage to the Company’s reputation and brand.
17
Changes in accounting standards could impact reported earnings.
From time to time there are changes in the financial accounting and reporting standards that govern the preparation of
financial statements. These changes can materially impact how the Company records and reports its financial condition and
results of operations. In some instances, the Company could be required to apply a new or revised standard retroactively,
resulting in the restatement of prior period financial statements.
Item 1B. Unresolved Staff Comments.
None.
18
Item 2. Properties.
The Company currently conducts business from its main office located at 102 East Drinker Street, Dunmore, Pennsylvania,
18512 and from its additional 18 branches located throughout Lackawanna, Luzerne and Wayne counties. At December 31,
2015, aggregate net book value of premises and equipment was $11.2 million. With the exception of potential remodeling of
certain facilities to provide for the efficient use of work space and/or to maintain an appropriate appearance, each property is
considered reasonably adequate for current and anticipated needs.
Property
Location
1 102 East Drinker Street
Dunmore, PA
Ownership
Type of Use
Own
Main Office/Branch
2 419-421 Spruce Street
Scranton, PA
3 934 Main Street
Dickson City, PA
4 1743 North Keyser Avenue
Scranton, PA
5 1 North Main Street
Wilkes-Barre, PA
6 1700 North Township Blvd.
Pittston, PA
7 754 Wyoming Avenue
Kingston, PA
8 1625 Wyoming Avenue
Exeter, PA
9 Route 502 & 435
Daleville, PA
10 27 North River Road
Plains, PA
11 1919 Memorial Highway
Shavertown, PA
12 269 East Grove Street
Clarks Green, PA
13 734 Sans Souci Parkway
Hanover Township, PA
14 194 South Market Street
Nanticoke, PA
15 330-352 West Broad Street
Hazleton, PA
Own
Scranton Branch
Own
Dickson City Branch
Lease
Keyser Village Branch
Lease
Wilkes-Barre Branch
Lease
Pittston Plaza Branch
Lease
Kingston Branch
Lease
Exeter Branch
Lease
Daleville Branch
Lease
Plains Branch
Lease
Back Mountain Branch
Own
Clarks Green Branch
Lease
Hanover Township Branch
Own
Nanticoke Branch
Own
Hazleton Branch
19
Property
Location
Ownership
Type of Use
15 330-352 West Broad Street
Hazleton, PA
16 3 Old Boston Road
Pittston, PA
17 1001 Main Street
Honesdale, PA
18 1127 Texas Palmyra Highway
Honesdale, PA
19 200 South Blakely Street
Dunmore, PA
20 107-109 South Blakely Street
Dunmore, PA
21 114-116 South Blakely Street
Dunmore, PA
22 1708 Tripp Avenue
Dunmore, PA
23 119-123 South Blakely Street
Dunmore, PA
24 Main Street
Taylor, PA
25 1219 Wheeler Avenue
Dunmore, PA
26 124 South Blakely Street
Dunmore, PA
27 100 Commerce Boulevard
Wilkes-Barre, PA
Own
Hazleton Branch
Lease
Route 315 Branch
Own
Honesdale Branch
Lease
Honesdale Route 6 Branch
Lease
Administrative Center
Own
Parking Lot
Own
Parking Lot
Own
Parking Lot
Own
Parking Lot
Own
Land
Lease
Wheeler Ave. Branch
Own
Bank Offices
Lease
Commercial Lending Office
Item 3. Legal Proceedings.
On August 8, 2011, the Company announced that it had received document subpoenas from the SEC. The information
requested generally related to disclosure and financial reporting by the Company and the restatement of the Company’s
financial statements for the year ended December 31, 2009, and the quarters ended March 31, 2010 and June 30, 2010. On
January 28, 2015, the Company and the SEC entered into a settlement agreement resolving these issues related to disclosure
and financial reporting and the restatements of the Company’s financial statements for the year ended December 31, 2009
and the quarters ended March 31, 2010 and June 30, 2010. As part of this settlement agreement, on January 30, 2015 the
Company paid a civil money penalty of $175 thousand to the SEC. The Company accrued for the $175 thousand civil money
penalty in its 2014 results of operations.
On May 24, 2012, a putative shareholder filed a complaint in the Court of Common Pleas for Lackawanna County
(“Shareholder Derivative Suit”) against certain present and former directors and officers of the Company (the “Individual
Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment. The
Company was named as a nominal defendant. The parties to the Shareholder Derivative Suit commenced settlement
discussions and on December 18, 2013, the Court entered an Order Granting Preliminary Approval of Proposed Settlement
subject to notice to shareholders. On February 4, 2014, the Court issued a Final Order and Judgment for the matter granting
20
approval of a Stipulation of Settlement (the “Settlement”) and dismissing all claims against the Company and the Individual
Defendants. As part of the Settlement, there was no admission of liability by the Individual Defendants. Pursuant to the
Settlement, the Individual Defendants, without admitting any fault, wrongdoing or liability, agreed to settle the derivative
litigation for $5.0 million. The $5.0 million Settlement payment was made to the Company on March 28, 2014. The Individual
Defendants reserved their rights to indemnification under the Company’s Articles of Incorporation and Bylaws, resolutions
adopted by the Board, the Pennsylvania Business Corporation Law and any and all rights they have against the Company’s
and the Bank’s insurance carriers. In addition, in conjunction with the Settlement, the Company accrued $2.5 million related
to fees and costs of the plaintiff’s attorneys, which was included in non-interest expense in the Consolidated Statements of
Income for the year ended December 31, 2013. On April 1, 2014, the Company paid the $2.5 million related to fees and costs
of the plaintiff’s attorneys and partial indemnification of the Individual Defendants in the amount of $2.5 million, and as
such, as of December 31, 2015 $2.5 million plus accrued interest remains accrued in other liabilities related to the potential
indemnification of the Individual Defendants. The Company settled any and all claims it had or may have had against
Demetrius & Company, LLC, John Demetrius and Robert L. Rossi & Company in connection with the Shareholder Derivative
Suit in 2014.
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against the Company and the
Bank, as well as several current and former officers and directors of the Company, in the United States District Court for the
Middle District of Pennsylvania. F&D has asserted a claim for the rescission of a directors’ and officers’ insurance policy
and a bond that it had issued to the Company. On November 9, 2012, the Company and the Bank answered the claim and
asserted counterclaims for the losses and expenses already incurred by the Company and the Bank. The Company and the
other defendants are defending the claims and have opposed F&D’s requested relief by way of counterclaims, breaches of
contract and bad faith claims against F&D for its failure to fulfill its obligations to the Company and the Bank under the
insurance policy. At this time, the matter is in the discovery stage and the Company cannot reasonably determine the outcome
or potential range of loss in connection with this matter.
On August 13, 2013, Steven Antonik, individually, as Administrator of the Estate of Linda Kluska, William R. Howells, and
Louise A. Howells, on behalf of themselves and others similarly situated, filed a consumer protection class action against the
Company and Bank in the Lackawanna County Court of Common Pleas, seeking equitable, injunction and monetary relief
to address an alleged pattern and practice of wrong doing by the Bank relating to the repossession and sale of the Plaintiffs’
and class members’ financed motor vehicles. On December 17, 2015 the Honorable Margaret Moyle entered an Order
outlining the primary terms of a tentative agreement to settle this matter, pending a finalized, more-detailed settlement
agreement, class notice and a class fairness hearing, said Order covering both this matter and the matter involving Plaintiff
Charles Saxe, II individually and on behalf of all others similarly situated. The primary terms of the tentative agreement to
settle are 1) Defendants to pay the Plaintiffs’ class members, which the Defendants have stated are approximately 430
members, the total sum of $750,000; 2) Plaintiffs will release all claims against Defendants; 3) Defendants will remove to
vacate any judgements against any class members arising from the vehicle loans that are the subject of these actions; 4)
Defendants will remove the trade line on each class member’s credit report associated with the subject vehicle loans that are
at issue in these actions for Experian, Equifax and TransUnion, providing Plaintiffs’ counsel with verification of such; 5)
Defendants will verify that the aggregate amount received from class members by Defendants and its agents during the
alleged unjust enrichment class period does not exceed $45,000; and 6) Defendants will waive the disputed deficiency
balances relating to the subject loans of each class member and agree not to issue IRS Forms 1099-C in connection with these
deficiency waivers or to sell, assign , or otherwise collect on the alleged deficiencies.
On September 17, 2013, Charles Saxe, III individually and on behalf of all others similarly situated filed a consumer class
action against the Bank in the Lackawanna County Court of Common Pleas alleging violations of the Pennsylvania Uniform
Commercial Code in connection with the repossession and resale of financed vehicles. On December 17, 2015 the Honorable
Margaret Moyle entered an Order outlining the primary terms of a tentative agreement to settle this matter, pending a
finalized, more-detailed settlement agreement, class notice and a class fairness hearing, said Order covering both this matter
and the matter involving Plaintiffs Steven Antonik, individually, as Administrator of the Estate of Linda Kluska, William R.
Howells, and Louise A. Howells, on behalf of themselves and all others similarly situated. The primary terms of the tentative
agreement to settle are 1) Defendants to pay the Plaintiffs’ class members, which the Defendants have stated are
approximately 430 members, the total sum of $750,000; 2) Plaintiffs will release all claims against Defendants; 3) Defendants
will remove to vacate any judgements against any class members arising from the vehicle loans that are the subject of these
actions; 4) Defendants will remove the trade line on each class member’s credit report associated with the subject vehicle
loans that are at issue in these actions for Experian, Equifax and TransUnion, providing Plaintiffs’ counsel with verification
of such; 5) Defendants will verify that the aggregate amount received from class members by Defendants and its agents
during the alleged unjust enrichment class period does not exceed $45,000; and 6) Defendants will waive the disputed
21
deficiency balances relating to the subject loans of each class member and agree not to issue IRS Forms 1099-C in connection
with these deficiency waivers or to sell, assign , or otherwise collect on the alleged deficiencies.
On January 22, 2014, the Bank was advised by the Department of Treasury’s Financial Crimes Enforcement Network
(“FinCEN”) that FinCEN was investigating the Bank for alleged violations of the Bank Secrecy Act (“BSA”). On May 28,
2014 the Bank was advised by the OCC that the OCC was investigating allegations that the Bank failed to file timely SARS.
On November 18, 2014 both FinCEN and OCC advised the Bank that they intended on assessing civil money penalties
against the Bank. Subsequent to November 18, 2014, the Bank had been in discussions with both regulatory agencies about
the alleged BSA violations. On February 27, 2015, the Bank reached a comprehensive settlement with FinCEN and OCC to
resolve the BSA allegations. In order to settle the matter, the Bank consented to an aggregate civil money penalty assessment
of $1.5 million which was accrued for at December 31, 2014 and included in non-interest expense for the year ended
December 31, 2014. The Company paid the $1.5 million civil money penalty on February 27, 2015.
The Company has been subject to tax audits and is also a party to routine litigation involving various aspects of its business,
such as employment practice claims, claims to enforce liens, condemnation proceedings on properties in which the Company
holds security interests, claims involving the making and servicing of real property loans and other issues incident to its
business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results
of operations or liquidity of the Company.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities.
Market Prices of Stock and Dividends Paid
Effective February 17, 2015, the Company’s common shares are quoted on the OTCQX Marketplace operated by the OTC
Markets Group, Inc. under the sysmbol “FNCB.” Previous to this date, the Company’s common shares were quoted on the
OTCQB Venture Marketplace operated by the OTC Markets Group, Inc. The principal market area for the Company’s shares
is northeastern Pennsylvania, although shares are held by residents of other states across the country. Quarterly market highs
and lows and dividends paid for each of the past two years are presented below. These prices represent actual transactions.
Market Price
High
Low
Quarter
First .................................................................................. $
Second ..............................................................................
Third .................................................................................
Fourth ...............................................................................
Quarter
First .................................................................................. $
Second ..............................................................................
Third .................................................................................
Fourth ...............................................................................
Holders
2015
6.10 $
6.55
6.05
5.50
2014
9.90 $
6.85
6.85
6.65
Dividends Paid
Per Share
2015
5.12 $
5.15
5.02
5.06
5.91 $
5.15
5.75
5.60
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
2014
As of February 29, 2016 there were approximately 1,778 holders of record of the Company’s common shares. Because many
of the Company’s shares are held by brokers and other institutions on behalf of shareholders, the Company is unable to
estimate the total number of shareholders represented by these record holders.
22
Dividends
From February 26, 2010 through September 2, 2015, as a result of the Order and Agreement, the Company suspended paying
dividends For a further discussion of the Company’s dividend limitations, refer to the section entitled “Capital Analysis”
included in Item 7 “Management’s Discussion and Analysis” to this Annual Report on Form 10-K.
Equity Compensation Plans
For more information regarding the Company’s equity compensation plans, see Part III, Item 12 “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” to this Annual Report on Form 10-K.
Performance Graph
The following graph compares the cumulative total shareholder return (i.e. price change, reinvestment of cash dividends and
stock dividends received) on the Company’s common shares against the cumulative total return of the NASDAQ Stock
Market (U.S. Companies) Index, the SNL Bank Index for banks with $500 million to $1 billion in assets and the SNL U.S.
Bank Pink for banks traded on the OTC with total assets greater than $500 million. The stock performance graph assumes
that $100 was invested on December 31, 2010. The graph further assumes the reinvestment of dividends into additional shares
of the same class of equity securities at the frequency with which dividends are paid on such securities during the relevant
fiscal year. The yearly points marked on the horizontal axis correspond to December 31 of that year. The Company calculates
each of the referenced indices in the same manner. All are market-capitalization-weighted indices, so companies judged by
the market to be more important (i.e. more valuable) count for more in all indices.
First National Community Bancorp, Inc.
Index
First National Community Bancorp, Inc. ..
NASDAQ Composite ................................
SNL Bank $500M-$1B .............................
SNL Bank Pink > $500M ..........................
Period Ending
12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
174.42
201.40
181.11
171.37
100.00
100.00
100.00
100.00
289.04
163.75
146.26
131.77
199.34
188.03
160.46
154.48
100.66
116.82
112.79
108.42
83.06
99.21
87.98
98.32
(*) Source: SNL Financial LC, Charlottesville, VA © 2011. SNL Securities is a research and publishing firm specializing in
the collection and dissemination of data on the banking, thrift and financial services industries.
23
Purchase of Equity Securities by the Issuer or Affiliates Purchasers
None.
Recent Sales of Unregistered Securities
On November 25, 2015, the Board of Directors adopted the 2015 Employee Stock Grant Plan (the “2015 Stock Grant Plan”)
under which shares of common stock not to exceed 13,550 were authorized to be granted to employees. On the same date the
Company granted 50 shares of the Company’s common stock to each active full and part time employee. There were 13,300
shares issued under this grant at a fair value of $5.15 per share on the date of the grant. The total cost of these grants, which
was included in salary expense in the Consolidated Statements of Income, amounted to $68 thousand for the year ended
December 31, 2015. No additional shares were granted under this plan. This share grant was effected without registration
under the Securities Act in reliance upon Section 2(a)(3) of the Securities Act, as a non-sale distribution of securities by the
Company. These shares were given to all employees of the Company as a share bonus and not as individual incentive
compensation or in lieu of a cash payment, with no investment decision on the part of the recipients or receipt of value by
the Company in return. There were no underwriters employed in the issuance of the securities or in connection with this
transaction, and no proceeds were received by the Company for this stock grant. There have been no sales of unregistered
securities during 2015.
24
Item 6. Selected Financial Data
The selected consolidated financial and other data and management’s discussion and analysis of financial condition and
results of operations set forth below and in Item 7 hereof is derived in part from, and should be read in conjunction with, the
consolidated financial statements and notes thereto contained elsewhere herein. Certain reclassifications have been made to
prior years’ consolidated financial statements to conform to the current year’s presentation. Those reclassifications did not
impact net income.
For the Years Ended December 31,
2013
2012
2014
2011
2015
(dollars in thousands, except per share data)
Balance Sheet Data:
Total assets ........................................................... $ 1,090,618 $ 970,029 $ 1,003,808 $
203,867
Securities, available-for-sale ................................
Securities, held-to-maturity ..................................
2,308
629,880
Net loans ..............................................................
884,698
Total deposits .......................................................
62,433
Borrowed funds ....................................................
33,578
Shareholders' equity .............................................
253,773
-
724,926
821,546
160,112
86,178
218,989
-
658,747
795,336
96,504
51,398
968,274 $ 1,102,639
185,475
185,361
2,094
2,198
659,044
579,396
957,136
854,613
83,571
53,903
39,925
36,925
Income Statement Data:
Interest income ..................................................... $
Interest expense ....................................................
Net interest income before (credit) provision for
loan and lease losses ..........................................
(Credit) provision for loan and lease losses .........
Non-interest income ............................................
Non-interest expense ............................................
Income (loss) before income taxes .......................
Income tax (benefit) expense ...............................
Net income (loss) .................................................
Earnings (loss) per share, basic and diluted .........
Capital and Related Ratios:
Cash dividends declared per share ....................... $
Book value per share ............................................
Tier I leverage ratio ..............................................
Total risk-based capital to risk-adjusted assets ....
Average equity to average total assets (1) ............
Tangible equity to tangible assets ........................
Selected Performance Ratios:
Return on average assets (1) .................................
Return on average equity (1) ................................
Net interest margin (2) .........................................
Noninterest income/operating income (2) ............
Asset Quality Ratios:
Allowance for loan and lease losses/total loans ...
Nonperforming loans/total loans ..........................
Allowance for loan and lease
losses/nonperforming loans ...............................
Net charge-offs/average loans ..............................
Loan loss provision/net charge-offs .....................
32,201 $
4,801
32,673 $
6,147
32,953 $
7,176
37,027 $
9,218
42,936
13,867
27,400
(1,345)
7,800
28,464
8,081
(27,759)
35,840
2.17
26,526
(5,869)
14,920
33,569
13,746
326
13,420
0.81
25,777
(6,270)
9,283
34,948
6,382
-
6,382
0.39
27,809
4,065
4,283
41,738
(13,711)
-
(13,711)
(0.83)
29,069
523
12,949
41,830
(335)
-
(335)
(0.02)
- $
5.22
7.27%
11.79%
5.64%
7.89%
- $
3.12
6.05%
13.67%
4.66%
5.27%
- $
2.04
4.71%
11.58%
3.60%
3.30%
- $
2.24
4.07%
10.20%
3.97%
3.75%
-
2.43
4.72%
11.35%
3.04%
3.55%
3.57%
68.24%
2.99%
18.73%
1.38%
29.50%
3.08%
30.30%
0.67%
18.65%
3.21%
20.79%
(1.35%)
(34.09%)
3.26%
9.71%
(0.03%)
(0.98%)
3.10%
21.82%
1.20%
0.52%
1.72%
0.82%
2.18%
0.99%
3.10%
1.62%
3.07%
2.93%
232.05%
0.20%
***
208.62%
(0.51%)
***
219.87%
(0.28%)
***
190.92%
0.97%
63.88%
104.60%
0.31%
23.10%
*** Ratio is not meaningful for 2015, 2014 and 2013.
(1) Average balances were calculated using average daily balances. Average balances for loans include non-accrual loans.
(2) Tax-equivalent adjustments were calculated using the prevailing statutory rate of 34.0 percent.
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) represents an overview of the financial condition and results of operations
and should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8 and Risk
Factors detailed in Item 1A of Part I to this Annual Report on Form 10-K.
The Company is in the business of providing customary retail and commercial banking services to individuals and businesses.
The Company’s core market is Northeastern Pennsylvania.
FORWARD-LOOKING STATEMENTS
The Company may from time to time make written or oral “forward-looking statements,” including statements contained in
the Company’s filings with the Securities and Exchange Commission (“SEC”), in its reports to shareholders, and in other
communications by the Company, which are made in good faith by the Company pursuant to the “safe harbor” provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals,
expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to
change based on various factors (some of which are beyond the Company’s control). The words “may,” “could,” “should,”
“would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements:
the strength of the United States economy in general and the strength of the local economies in the Company’s markets; the
effects of, and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development
of and acceptance of new products and services; the ability of the Company to compete with other institutions for business;
the composition and concentrations of the Company’s lending risk and the adequacy of the Company’s reserves to manage
those risks; the valuation of the Company’s investment securities; the ability of the Company to pay dividends or repurchase
common shares; the ability of the Company to retain key personnel; the impact of any pending or threatened litigation against
the Company; the marketability of shares of the Company and fluctuations in the value of the Company’s share price; the
impact of the Company’s ability to comply with its regulatory agreements and orders; the effectiveness of the Company’s
system of internal controls; the ability of the Company to attract additional capital investment; the impact of changes in
financial services’ laws and regulations (including laws concerning capital adequacy, taxes, banking, securities and
insurance); the impact of technological changes and security risks upon the Company’s information technology systems;
changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms, and the
success of the Company at managing the risks involved in the foregoing and other risks and uncertainties, including those
detailed in the Company’s filings with the SEC.
The Company cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place
undue reliance on any forward-looking statements, which reflect management’s analysis only as of the date of this report,
even if subsequently made available by the Company on its website or otherwise. The Company does not undertake to update
any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company
to reflect events or circumstances occurring after the date of this report.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect
the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations
for the periods indicated. Actual results could differ significantly from those estimates.
The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial
condition and results of operations. Management has identified the policies on the determination of the allowance for loan
and lease losses (“ALLL”), securities’ valuation and impairment evaluation, and the valuation of other real estate owned
(“OREO”) and income taxes to be critical, as management is required to make subjective and/or complex judgments about
matters that are inherently uncertain and could be most subject to revision as new information becomes available.
The judgments used by management in applying the critical accounting policies discussed below may be affected by a further
and prolonged deterioration in the economic environment, which may result in changes to future financial results.
26
Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant
changes in the ALLL in future periods, and the inability to collect on outstanding loans could result in increased loan losses.
In addition, the valuation of certain securities in the Company’s investment portfolio could be negatively impacted by
illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to impairment losses.
Allowance for Loan and Lease Losses
Management evaluates the credit quality of the Company’s loan portfolio on an ongoing basis, and performs a formal review
of the adequacy of the ALLL on a quarterly basis. The ALLL is established through a provision for loan losses charged to
earnings and is maintained at a level management considers adequate to absorb estimated probable losses inherent in the loan
portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged
off against the ALLL, while recoveries of amounts previously charged off are credited to the ALLL.
Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment
and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses
on pools of homogeneous loans based on historical loss experience, qualitative factors, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their
examination of the Company, also review the ALLL. Such regulators may require, based on their judgments about
information available to them at the time of their examination, that certain loan balances be charged off or require that
adjustments be made to the ALLL. Additionally, the ALLL is determined, in part, by the composition and size of the loan
portfolio.
The ALLL consists of two components, a specific component and a general component. The specific component relates to
loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral
value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component
covers all other loans and is based on historical loss experience adjusted by qualitative factors. The general reserve component
of the ALLL is based on pools of unimpaired loans segregated by loan segment and risk rating categories of “Pass”, “Special
Mention” or “Substandard and Accruing.” Historical loss factors and various qualitative factors are applied based on the risk
profile in each risk rating category to determine the appropriate reserve related to those loans. Substandard loans on
nonaccrual status above the $100 thousand loan relationship threshold and all loans considered troubled debt restructurings
(“TDRs”) are classified as impaired.
See Note 2-“Summary of Significant Accounting Policies” and Note 5-“Loans” of the notes to consolidated financial
statements included in Item 8-“Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for
additional information about the ALLL.
Securities Valuation and Evaluation for Impairment
Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted
quoted market prices in active markets (Level 1) or quoted prices for similar assets or models using inputs that are observable,
either directly or indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence
of observable inputs or if markets are illiquid, valuation techniques are used to determine fair value of any investments that
require inputs that are both unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation
techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, adjustments for
nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments
using Level 3 inputs. The use of different assumptions could have a positive or negative effect on the consolidated statements
of financial condition or results of operations. See Note 6-“Securities” and Note 7-“Fair Value Measurements” of the notes
to consolidated financial statements included in Item 8 – “Financial Statements and Supplementary Data” to this Annual
Report on Form 10-K for additional information about the Company’s securities valuation techniques.
On a quarterly basis, management evaluates individual investment securities classified as held-to-maturity and available-for-
sale having unrealized losses to determine whether or not the security is other-than-temporarily-impaired (“OTTI”). The
analysis of OTTI requires the use of various assumptions, including but not limited to, the length of time an investment’s fair
value is less than book value, the severity of the investment’s decline, any credit deterioration of the issuer, whether
management intends to sell the security, and whether it is more-likely-than-not that the Company will be required to sell the
security prior to recovery of its amortized cost basis. Debt investment securities deemed to be OTTI are written down by the
impairment related to the estimated credit loss, and the non-credit related impairment loss is recognized in other
27
comprehensive income. The Company did not recognize OTTI charges on investment securities for years ended December
31, 2015, 2014 and 2013 within the consolidated statements of income.
See Note 2-“Summary of Significant Accounting Policies” and Note 4-“Securities” of the notes to consolidated financial
statements included in Item 8-“Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for
additional information about valuation of securities.
Other Real Estate Owned
OREO consists of property acquired through foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a
loan, and bank premises that is no longer used for operation or for future expansion. OREO is held for sale and is initially
recorded at fair value less costs to sell at the date of acquisition or transfer, which establishes a new cost basis. Upon
acquisition of the property through foreclosure or deed-in-lieu of foreclosure, any write-down to fair value less estimated
selling costs is charged to the ALLL. The determination is made on an individual asset basis. Bank premises no longer used
for operations or future expansion are transferred to OREO at fair value less estimated selling costs with any related write-
down included in non-interest expense unless conditions warrant an adjustment to value, as determined by management.
Subsequent to acquisition, valuations are periodically performed by management and the assets are carried at the lower of
cost basis or fair value less cost to sell. Fair value is determined through external appraisals, current letters of intent, broker
price opinions or executed agreements of sale. Costs relating to the development and improvement of the OREO properties
may be capitalized, while holding period costs and any subsequent changes to the valuation allowance are charged to expense
as incurred.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s
financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been
recognized in the Company’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these
future tax consequences could impact the Company’s consolidated financial condition or results of operations.
The Company records an income tax provision or benefit based on the amount of tax, including alternative minimum tax,
currently payable or receivable and the change in deferred tax assets and liabilities. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting
purposes. Management conducts quarterly assessments of all available positive and negative evidence to determine the
amount of deferred tax assets that will more likely than not be realized. A valuation allowance is established for deferred tax
assets and records a charge to income if management determines, based on available evidence at the time the determination
is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the
need for a valuation allowance, management considers past operating results, estimates of future taxable income based on
approved business plans, future capital requirements and ongoing tax planning strategies. This evaluation process involves
significant management judgment about assumptions that are subject to change from period to period depending on the related
circumstances. The recognition of deferred tax assets requires management to make significant assumptions and judgments
about future earnings, the periods in which items will impact taxable income, future corporate tax rates, and the application
of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items
recognized, which can result in equity and earnings volatility because such changes are reported in current period earnings.
On December 31, 2010, management established a valuation allowance equal to 100 percent of the Company’s net deferred
tax asset, excluding deferred tax assets and liabilities related to unrealized holding gains and losses on available-for-sale
securities, and has maintained such an allowance through December 31, 2014. As part of its evaluation conducted as of
December 31, 2015, management reviewed all the positive and negative evidence available at that time and concluded that
significant positive evidence outweighed any negative evidence and the valuation allowance previously established for the
Company’s deferred tax assets should be reversed, except for the amount established for charitable contribution carryovers.
In connection with determining the income tax provision or benefit, the Company considers maintaining liabilities for
uncertain tax positions and tax strategies that management believes contain an element of uncertainty. Periodically, the
Company evaluates each of its tax positions and strategies to determine whether a liability for uncertain tax benefits is
required. As of December 31, 2015 and 2014, the Company determined that it did not have any uncertain tax positions or tax
strategies and that no liability was required to be recorded.
28
See Note 2-“Summary of Significant Accounting Policies” and Note 13-“Income Taxes” of the notes to consolidated financial
statements included in Item 8-“Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for
additional information about the reversal of the valuation allowance for deferred tax assets and the accounting for income
taxes.
New Authoritative Accounting Guidance
Accounting Standards Update (“ASU”) 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40):
“Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” clarifies that an in
substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential
real estate property collateralizing a consumer mortgage loan, upon either (a) the creditor obtaining legal title to residential
real estate property upon completion of a foreclosure or (b) the borrower conveying all interest in the residential real estate
property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal
agreement. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential
real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential
real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The
adoption of this guidance on January 1, 2015 did not have a material effect on the operating results or financial position of
the Company.
ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): “Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity,” changes the criteria for reporting a
discontinued operation. Under the new guidance, a disposal of a component of an entity or group of components of an entity
is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major
effect on the entity’s operations and financial results. This new guidance reduces complexity by removing the complex and
extensive implementation guidance and illustrations that are necessary to apply the current definition of a discontinued
operation. The new guidance also requires expanded disclosures about discontinued operations that will provide users with
more information about the assets, liabilities, revenues and expenses of a discontinued operation and will require pre-tax
income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations
reporting, which will provide users with information about the ongoing trends in a reporting organization’s results from
continuing operations. The adoption of this guidance on January 1, 2015 did not have a material effect on the operating results
or financial position of the Company.
ASU 2014-11, Transfers and Servicing (Topic 860): “Repurchase-to-Maturity Transactions, Repurchase Financings, and
Disclosures,” changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements by
aligning the accounting for these transactions with the accounting for other typical repurchase agreements. Going forward,
these transactions would all be accounted for as secured borrowings. The new guidance eliminates sale accounting for
repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial assets and a
contemporaneous repurchase financing could be accounted for on a combined basis as a forward arrangement, which has
resulted in outcomes referred to as off-balance sheet accounting. ASU 2014-11 also requires a new disclosure for transactions
economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic
return on the transferred financial assets throughout the term of the transaction, and requires expanded disclosure about the
nature of the collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The
adoption of this guidance on January 1, 2015 did not have a material effect on the operating results or financial position of
the Company.
ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): “Classification of Certain
Government-Guaranteed Mortgage Loans Upon Foreclosure,” requires that a mortgage loan be derecognized and that a
separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government
guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to
convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover
under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value
of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the
loan balance (principal and interest) expected to be recovered from the guarantor. The adoption of this guidance on January
1, 2015 did not have a material effect on the operating results or financial position of the Company.
29
Accounting Guidance to be Adopted in Future Periods
ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Section A, “Summary and Amendments That Create
Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contract with Customers
(Subtopic 340-40);” Section B, “Conforming Amendments to Other Topics and Subtopics in the Codification and Status
Tables;” and Section C, “Background Information and Basis for Conclusions,” provides a robust framework for addressing
revenue recognition issues, upon its effective date, and replaces almost all existing revenue recognition guidance, including
industry specific guidance, in current GAAP. The core principle of ASU 2014-09 is for companies to recognize revenue to
depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects
to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced interim and annual
disclosures, both qualitative and quantitative, about revenue in order to help financial statement users understand the nature,
amount, timing and uncertainty of revenue and related cash flows. ASU 2014-09 is effective in annual reporting periods
beginning after December 15, 2016 and the interim periods within that year for public business entities, not-for-profit entities
that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or over-the-
counter market and employee benefit plans that file or furnish financial statements to the SEC. On August 12, 2015, the
FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): “Deferral of the Effective Date,” which
defers the adoption of ASU 2014-09 for one year for all entities. Accordingly, the Company will adopt this guidance on
January 1, 2018 in accordance with ASU 2015-14, and is currently evaluating the effect this guidance may have on its
operating results or financial position.
ASU 2014-12, Compensation – Stock Compensation (Topic 718): “Accounting for Share-Based Payments When the Terms
of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period,” requires a
performance target that affects vesting and that can be achieved after the requisite service period to be treated as a performance
condition. To account for such awards, an entity should apply existing guidance as it relates to awards with performance
conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant-date fair value
of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target
will be achieved and should represent compensation cost attributable to the period(s) for which the requisite service already
has been rendered. If the performance target becomes probable of being achieved before the end of the requisite service
period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite
service periods. The total amount of compensation cost should reflect the number of awards that are expected to vest and
should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 is effective for annual periods and interim
periods within those annual periods beginning after December 15, 2015. The adoption of this guidance on January 1, 2016 is
not expected to have a material effect on the operating results or financial position of the Company.
ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): “Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern,” defines management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a going concern and provide guidance for related footnote disclosures.
ASU 2014-15 requires an entity’s management to assess the entity’s ability to continue as a going concern by incorporating
and expanding upon certain principles that are currently in U.S. auditing standards. Specifically ASU 2014-15: (1) provides
a definition of the term substantial doubt; (2) requires an evaluation as to whether there are conditions or events, considered
in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the
date the financial statements are issued (or within one year after the date that the financial statements are available to be
issued when applicable); (3) provides principles for considering the mitigating effect of management’s plans; (4) requires
certain disclosures when substantial doubt is alleviated; and (5) require an express statement and other disclosures when
substantial doubt is not alleviated. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for
annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance on December 31,
2016 is not expected to have a material effect on the operating results or financial position of the Company.
ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): “Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items,” will alleviate uncertainty for preparers, auditors and
regulators because auditors and regulators will no longer be required to evaluate whether a preparer presented an unusual
and/or infrequent item appropriately. Although ASU 2015-01 eliminates the concept of extraordinary items, the presentation
and disclosure guidance for items that are unusual in nature or infrequent in occurrence has been retained and has been
expanded to include items that are both unusual in nature or infrequent in occurrence. The nature and financial effects of each
event or transaction is required to be presented as a separate component of income from continuing operations or,
alternatively, in the notes to the financial statements. ASU 2015-01 is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. Early adoption of this guidance is permitted provided that the guidance
30
is applied from the beginning of the fiscal year of adoption. The adoption of this guidance on January 1, 2016 is not expected
to have a material effect on the operating results or financial position of the Company.
ASU 2015-02, Consolidation (Topic 810): “Amendments to the Consolidation Analysis,” improves targeted areas of the
consolidation guidance and reduces the number of consolidation models. The new consolidation standard changes the way
reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a
decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a
VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates
the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and
similar entities. ASU 2015-02 is effective for public entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015. The adoption of this guidance on January 1, 2016 is not expected to have a material
effect on the operating results or financial position of the Company.
ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): “Simplifying the Presentation of Debt Issuance Costs,”
more closely aligns the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS
standards. Under ASU 2015-03, debt issuance costs related to a recognized debt liability will no longer be recorded as a
separate asset, but will be presented on the balance sheet as a direct deduction from the debt liability, similar to the
presentation of debt discounts. The costs will continue to be amortized to interest expense using the effective interest method.
ASU 2015-03 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015, and requires retrospective application to all prior periods presented in the financial statements. Early
adoption of this guidance is permitted. The adoption of this guidance on January 1, 2016 is not expected to have a material
effect on the operating results or financial position of the Company.
ASU 2015-05, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): “Customer’s Accounting for Fees
Paid in a Cloud Computing Arrangement,” provides explicit guidance on a customer’s accounting for fees paid in a cloud
computing environment. Specifically, the amendments in this ASU provide guidance to customers about whether a cloud
computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the
customer should account for the software license element of the arrangement consistent with the acquisition of other software
licenses. If a cloud computing arrangement does not include a software license, the customer should account for the
arrangement as a service contract. ASU 2015-05 is effective for public entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. Early adoption of this guidance is permitted. The adoption of this
guidance on January 1, 2016 is not expected to have a material effect on the operating results or financial position of the
Company.
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and
Financial Liabilities” requires all equity investments to be measured at fair value with changes in the fair value recognized
through net income (other than those accounted for under equity method of accounting or those that result in consolidation
of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk
when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments. In addition, this ASU eliminates the requirement to disclose the fair value of financial instruments measured at
amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet for public business entities. ASU 2016-01 is effective for fiscal years beginning after December 15,
2017 for public entities. The adoption of this guidance on January 1, 2018 is not expected to have a material effect on the
operating results or financial position of the Company.
ASU 2016-02, Leases (Topic 842): “Leases” will require organizations that lease assets to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. Consistent
with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by the
lessee will primarily depend on its classification as a finance or operating lease. However, unlike current GAAP, which
requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be
recognized on the balance sheet. ASU 2016-02 will also require disclosures to help investors and other financial statement
users better understand the amount, timing and uncertainty of cash flows arising from leases. The new disclosures will include
both qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial
statements. ASU 2016-02 is effective with fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018 for public entities. Accordingly, the Company will adopt this guidance on January 1, 2019, and is
currently evaluating the effect this guidance may have on its operating results or financial position.
31
EXECUTIVE OVERVIEW
The following overview should be read in conjunction with this Management’s Discussion and Analysis in its entirety.
Results of Operations
The year ended December 31, 2015 was a successful and pivotal year for the Company from not only a profitability
standpoint, but a regulatory, strategic and operational standpoint as well. The Company reported record earnings in 2015 of
$35.8 million, or $2.17 per diluted common share, an increase of $22.4 million, or 167.1%, compared to $13.4 million, or
$0.81 per diluted common share, in 2014. The strong earnings performance was impacted by the reversal of the deferred tax
asset (“DTA”) valuation allowance. The Company’s earnings performance in 2015 was also impacted by a $5.1 million, or
15.2%, reduction in non-interest expense, a $0.9 million, or 3.3%, increase in net interest income, a $7.1 million, or 47.7%,
decrease in non-interest income and a $4.5 million, or 77.1%, decrease in the credit for loan and lease losses. Return on
average assets and return on average shareholders’ equity equaled 3.57% and 63.24%, respectively, in 2015, compared to
1.38% and 29.50%, respectively, in 2014. For the three months ended December 31, 2015, return on average assets and return
on average shareholders’ equity were 10.99% and 192.68%, respectively, compared to (0.01)% and (0.24)%, respectively,
for the same three months of 2014. The Company did not pay any dividends during the years ended December 31, 2015 and
2014.
Release of Regulatory Enforcement Actions and Improved Risk Profile
On September 8, 2015, the Company was notified by the Federal Reserve Bank of Philadelphia (the “Reserve Bank”) that
effective September 2, 2015 it was released from the Written Agreement it had been under with the Reserve Bank since
November 24, 2010. Previously, on March 25, 2015, the OCC notified First National Community Bank, the Company’s
wholly-owned subsidiary (the “Bank”), that it was fully and completely released from the Consent Order it entered into with
the OCC in September 2010. These releases signify that the Reserve Bank and OCC have determined that the Company and
the Bank have met all of the requirements mandated by the Written Agreement and Consent Order.
The release of regulatory enforcement actions, coupled with an improved risk profile, directly resulted in reductions in certain
noninterest expenses, specifically regulatory assessments and insurance expense which had been elevated due to operating
under the Consent Order and Written Agreement. Regulatory assessments, which include FDIC insurance and OCC
assessments, decreased $0.9 million, or 47.3%, while insurance expense decreased $0.3 million, or 30.7%, comparing 2015
and 2014.
In addition, while operating under the Consent Order, the Company was prohibited from using brokered deposits as a source
of liquidity. After the release from the Consent Order, the Company began utilizing this lower-costing funding alternative in
the second quarter of 2015.
Management’s Focus in 2015
In 2015, management developed strategies and initiatives focused on maximizing profitability and taxable income generation
in order to facilitate the reversal of the DTA valuation allowance, and improving customer service and creating efficiencies
through the conversion of the Bank’s core operating system. These initiatives, which are discussed in further detail in this
MD&A, involved, but are not limited to, the following:
● The continued repositioning of the investment portfolio in 2015 by selling almost all of the Company’s remaining
tax-exempt obligations of states and political subdivisions and replacing them with taxable obligations of U.S.
government and government-sponsored agencies including, collateralized mortgage obligations, residential
mortgage-backed securities and single-maturity bonds in order to maximize the generation of taxable interest
income. In addition, the Company was able to benefit from movements in Treasury yields and record a net gain on
the sale of investment securities of $2.3 million.
● Accelerating a partial prepayment of and modifying the annual interest on the Company’s fixed-rate subordinated
debentures due September 1, 2019 (“Notes”). On June 30, 2015, the Company repaid $11.0 million, or 44.0%, of
outstanding principal of the Notes, and, effective July 1, 2015, modified the annual interest rate paid on the Notes to
4.50% from 9.00%. The prepayment and rate modification resulted in a $0.8 million, or 36.4%, reduction in interest
expense related to the Notes comparing 2015 and 2014. In addition to the modification, the Company reinstituted
and paid the quarterly interest payments due September 1, 2015 and December 1, 2015 to the Noteholders which
32
included interest accrued for the period June 1, 2015 through August 31, 2015 and September 1, 2015 through
November 30, 2015, respectively. While under the Written Agreement, the Company had been deferring the
quarterly interest payment on the Notes beginning December 1, 2010, which continued through May 31, 2015.
Deferred interest on the Notes that remained outstanding at December 31, 2015 totaled $10.8 million.
● Continuing to effectively manage funding costs through the strategic use of lower-costing borrowings through the
FHLB and the reinstitution of brokered certificates of deposits to replace maturing, higher-costing certificates of
deposit generated through a national deposit listing service. This transitioning was the primary factor leading to a
$0.5 million decrease in interest expense on deposits and an 8 basis point reduction in the Company’s cost of funds
associated with those deposits.
● Converting the Bank’s core operating system to a state-of-the-art, highly-flexible, real-time operating platform. On
November 17, 2015, the Company completed the conversion of its operating system. The Company outsources its
data processing through a third party service provider. The Company did capitalize software implementation costs
associated with the conversion and anticipates a minor increase in data processing costs for 2016. The Company
expects to realize efficiencies through process improvements, decrease in paper costs and possible reduction in FTEs
through attrition.
Balance Sheet Profile
Total assets increased $0.1 billion, or 12.4%, to $1.1 billion at December 31, 2015 from $1.0 billion at December 31, 2014.
Net loans grew $66.2 million, or 10.0%, which reflected strong demand for both commercial and consumer loan products. In
addition, available-for-sale securities increased $34.8 million, or 15.9%. The balance sheet increase also reflected the change
in the DTA valuation allowance in the amount of $30.0 million. Total deposits increased $26.2 million, or 3.3%, to $821.5
million at December 31, 2015 from $795.3 million at the end of 2014. Specifically, non-interest-bearing demand deposits
increased $30.5 million, or 24.6%, while interest-bearing deposits decreased $4.3 million, or 0.6%. The increase in non-
interest bearing demand deposits primarily reflected the positive balance fluctuations of several large commercial customer
relationships. The decrease in interest-bearing deposits was largely related to lower deposit balances of the Company’s
municipal customers due to a state budget impasse, and the planned runoff of higher-costing certificates of deposit generated
through a national deposits listing service. These decreases were partially offset by the attainment of a large commercial
deposit relationship. Due to their lower cost, the Company increased its utilization of FHLB borrowings as an alternative
funding source of liquidity by $74.6 million or 121.9%. This was the primary factor leading to a $63.6 million, or 65.9%,
increase in total borrowed funds. Partially offsetting the increase in FHLB advances was the $11.0 million principal
prepayment of the Company’s subordinated debentures.
Impacted by the DTA valuation allowance reversal, total shareholders’ equity improved $34.8 million, or 67.7%, to $86.2
million at December 31, 2015 from $51.4 million at the end of 2014. Net income for 2015 of $35.8 million, which included
an income tax benefit of $27.8 million related to the reversal of the DTA valuation allowance, was the primary factor leading
to the Company’s improved capital position.
At December 31, 2015, the Company’s total risk-based capital ratio and the Tier 1 leverage ratio were 11.75% and 7.27%,
respectively. The respective ratios for the Bank at December 31, 2015 were 13.79% and 9.79%. The ratios for both the
Company and the Bank exceeded the 10.00% and 5.00% required to be well capitalized under the prompt corrective action
provisions of the Basel III capital framework for U.S. Banking organizations, which became effective for the Company and
the Bank on January 1, 2015.
Looking Ahead to 2016
For 2016, management plans to utilize the Company’s improved capital position to reduce its leverage and enhance
shareholder value. On January 29, 2016, the Company announced that the board of directors authorized the payment on
March 1, 2016 of all interest that the Company had previously been deferring on the Notes. The aggregate payments totaling
$10.8 million represent interest accrued and deferred on the Notes from September 1, 2010 through May 31, 2015.
Also on January 29, 2016, the Company announced that the board of directors had declared a first quarter dividend of $0.02
per share on its common stock, payable March 15, 2016 to shareholders of record March 1, 2016. The dividend represents a
1.53% annualized yield based on the the closing stock price of the Company’s common stock on December 31, 2015.
33
In addition, the Company is focused on developing strategies aimed at building on accomplishments achieved in 2015 to
improve long-term financial performance, creating process efficiencies post core conversion, and increasing the level of core
deposits through collaboration between the Company’s retail and commercial banking units and instituting a governmental
banking unit in 2016.
Summary of Performance
Net Interest Income
2015 compared to 2014
Net interest income is the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest
expense, interest paid on the Company’s deposits and borrowed funds. Net interest income represents the largest component
of the Company’s operating income and, as such, is the primary determinant of profitability. Net interest income is impacted
by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market
rates and the level of non-performing assets. Interest income is shown on a fully tax-equivalent basis and is calculated by
adjusting tax-free interest using a marginal tax rate of 34.0% in order to equate the yield to that of taxable interest rates.
Tax-equivalent net interest income in 2015 was $28.1 million, a decrease of $0.1 million from $28.2 million in 2014. Tax-
equivalent interest income decreased $1.4 million, which was almost entirely offset by a $1.3 million reduction in interest
expense.Tax-equivalent interest income was negatively impacted by a continued decline in loan yields and the sell off of tax-
free securities and reinvestment into taxable securities, partially offset by higher loan volumes. The decrease in interest
expense largely reflected the 44.0% partial prepayment and the modification of the interest rate of the Company’s Notes,
which had a positive effect on funding costs. In addition, the Company’s cost of funds was also favorably impacted by
reinstituting the use of lower-costing brokered deposits, including CDARs, as a source of funding.
The Company’s tax-equivalent interest margin compressed 9 basis points to 2.99% in 2015 from 3.08% in 2014. Tax-
equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets
relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-
earning assets. Rate spread, the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities shown on a fully tax-equivalent basis, was 2.89% for the year ended December 31, 2015, a decrease
of 6 basis points compared to 2.95% for the year ended December 31, 2014.
Tax-equivalent interest income was decreased $1.4 million, or 4.0%, to $32.9 million in 2015 from $34.3 million in 2014.
Tax-equivalent interest income was significantly impacted by the repositioning of the investment portfolio from tax-exempt
obligations of state and political subdivisions to taxable investments. As a result, the average balance of tax-exempt
investments decreased $37.9 million, or 94.0%, to $2.4 million in 2015 from $40.3 million in 2014, which caused a $2.6
million corresponding decrease to tax-equivalent interest income. The average balance of taxable investments increased $45.1
million, or 25.0%, but was only able to mitigate the decrease by $1.1 million. The tax-equivalent yield on the investment
portfolio decreased 71 basis points from 3.15% in 2014 to 2.44% in 2015. However, a 12 basis point increase in the yield on
taxable investment securities more than offset the effects of a 25 basis point decrease in the yield on tax-exempt investment
securities. Overall, changes in the volumes and rates on the investment portfolio resulted in a $1.4 million decrease in tax-
equivalent interest income in 2015.
With regard to the loan portfolio, the Company experienced strong loan demand in 2015, which resulted in a $30.3 million,
or 4.5%, increase in average total loans to $696.6 million in 2015 compared to $666.3 million in 2014. The average loan
growth resulted in additional tax-equivalent interest income of $1.2 million. However, this additional interest income was
entirely offset by a 17 basis point decline in the tax-equivalent yield on the loan portfolio to 3.93% in 2015 compared to
4.10% in 2014, which caused a corresponding decrease in tax-equivalent interest income of $1.2 million. The decrease in
loan yields reflected competitive pressures for commercial loans within the Company’s market area and current promotions
involving short-term residential mortgage products and indirect auto loans.
Almost entirely offsetting the decrease in tax-equivalent interest income was a $1.3 million, or 21.9%, decrease in interest
expense to $4.8 million in 2015 from $6.1 million in 2014. The decrease in interest expense was driven primarily by a 19
basis point decrease in the Company’s cost of funds to 0.61% in 2015 compared to 0.80% in 2014, which resulted in a $1.4
million corresponding decrease in interest expense due to change in rates. Specifically, the modification of the interest rate
on the subordinated debentures from 9.0% to 4.5% had the greatest impact on interest expense, as it was the leading factor
driving a 116 basis point decrease in the cost of borrowed funds to 2.01% in 2015 from 3.17% in 2014. The decrease in
34
borrowing costs resulted in a $1.2 million reduction in interest expense. In addition, the Company’s cost of deposits decreased
8 basis points to 0.39% in 2015 from 0.47% in 2014, which resulted from decreases in the cost of time deposits greater than
$100,000 and other time, paritially offset by an increase in the average rate paid for interest-bearing demand deposits.
Changes in the average deposit rates resulted in a $0.2 million decrease in interest expense.
Average interest-bearing liabilities increased $11.0 million, or 1.4%, to $782.5 million in 2015 from $771.5 million in 2014.
Specifically, a $14.3 million, or 15.2%, increase in average borrowed funds, resulted in additional interest expense of $0.4
million. The additional interest from borrowed funds was almost entirely offset by a $0.3 million reduction in interest
expenses resulting from a $3.2 million decrease in average interest-bearing deposits. One of the Company’s ALCO initiatives
in 2015 included the replacement of higher-costing certificates of deposit originated through a national deposit listing service
and maturing certificates of deposit bearing higher interest rates with lower-costing brokered deposits and FHLB of Pittsburgh
advances.
2014 compared to 2013
Comparing the years ended December 31, 2014 and 2013, tax-equivalent net interest income was stable, decreasing only $26
thousand, or 0.09%. The Company’s tax-equivalent net interest margin contracted 13 basis points to 3.08% in 2014 from
3.21% in 2013,while the rate spread decreased 13 basis points to 2.95% in 2014 compared to 3.08% in 2013. The Company’s
net interest margin and rate spread were impacted by several strategic tax planning and ALCO initiatives in 2014, as well as
an ongoing challenging rate environment and competitive pressures that continued to impact loan pricing.
In 2014, management continued tax planning strategies designed to generate taxable income and reduce the amount of credit
and concentration risk within the investment portfolio. Accordingly, management continued repositioning the investment
portfolio by selling the majority of the Company’s tax-exempt obligations of state and political subdivisions and replacing
them with taxable obligations of U.S. government and government-sponsored agencies including collateralized mortgage
obligations (“CMOs”), residential mortgage-backed securities and single-maturity bonds. The effect of this repositioning was
the primary factor leading to a $534 thousand, or 7.1%, decrease in tax-equivalent interest income genereated from the
investment portfolio.
Despite increased demand for the Company’s loan products, competition within its market area for loans escalated, which
along with the already challenging rate environment, forced loan yields down. In addition, one of the Company’s niche
markets is indirect auto lending. Demand for these loans increased in 2014 due to several promotions directed at the
Company’s automobile dealer customers. However, rates offered on consumer automobile loans are generally lower than
those offered on other types of loan products offered to commercial customers.
Tax-equivalent interest income decreased $1.1 million, or 3.0%, to $34.3 million in 2014 from $35.4 million in 2013. The
repositioning of the investment portfolio accounted for $534 thousand, or 50.6%, of the overall decrease in tax-equivalent
interest income. In addition, the tax-equivalent yield on the loan portfolio decreased 27 basis points from 4.37% in 2013 to
4.10% in 2014, which resulted in a corresponding decrease in tax-equivalent interest income of $1.8 million. Specifically,
the yield on taxable loans decreased 27 basis points, while the yield on tax-exempt loans fell 37 basis points, and accounted
for corresponding decreases in interest income of $1.6 million and $147 thousand, respectively. Partially offsetting this
decrease due to loan yields was a $29.9 million, or 4.7%, increase in average total loans to $666.3 million in 2014 from
$636.5 million in 2013. The growth in average loans resulted in an increase in tax-equivalent interest income of $1.3 million.
However, the effects of the securities portfolio repositioning and declining loan yields was almost entirely mitigated by a
$1.0 million, or 14.3%, reduction in interest expense, which resulted primarily from the planned replacement of maturing
certificates of deposit with lower-costing advances from the FHLB. Overall, the Company’s cost of funds decreased 14 basis
points to 0.80% in 2014 from 0.94% in 2013. The decrease in funding costs resulted in a $1.8 million decrease in interest
expense. Partially offsetting the reduction in interest expense due to changes in rates was a $5.8 million, or 0.8%, increase in
average interest-bearing liabilities to $771.5 million in 2014 from $765.7 million in 2013.
Total average time deposits decreased $49.0 million, or 15.4%. Of the total decrease in average time deposits, $25.1 million,
or 51.2%, resulted from a decrease in average time deposits generated through QwickRate®, a national deposit listing service.
In addition, the cost of time deposits decreased 12 basis points to 0.99% in 2014 from 1.11% in 2013, as these rate-sensitive
deposits continued to runoff at maturing rates that were higher than current rates. The decrease in volume and cost of time
deposits resulted in a combined decrease in interest expense of $0.8 million. Average borrowed funds increased $33.5 million,
or 55.5%, to $93.7 million in 2014 from $60.2 million in 2013. The increase in borrowed funds was entirely attributable to
an increase in advances through the FHLB of Pittsburgh and resulted in additional interest expense of $1.3 million. However,
35
this was more than entirely offset by a 183 basis point reduction in the cost of borrowed funds, which resulted in a
corresponding decrease in interest expense of $1.3 million. Changes in the volumes and rates paid for borrowed funds resulted
in a combined net decrease in interest expense of $45 thousand.
Interest-bearing demand deposits and savings deposits averaged $18.5 million and $2.8 million higher in 2014 as compared
to 2013, respectively, while the cost of interest-bearing demand deposits and savings accounts each decreased 4 basis points.
The changes in volumes and rates for interest-bearing demand deposits and savings accounts netted a combined decrease in
interest expense of $139 thousand.
Non-accrual loans
The interest income that would have been earned on non-accrual and restructured loans outstanding at December 31, 2015,
2014 and 2013 in accordance with their original terms approximated $406 thousand, $406 thousand and $572 thousand,
respectively. Interest income on impaired loans of $258 thousand, $235 thousand, and $366 thousand was recognized based
on payments received in 2015, 2014 and 2013.
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The following table reflects the components of net interest income for each of the three years ended December 31, 2015,
2014 and 2013:
Summary of Net Interest Income
Year ended December 31,
2015
Balance Interest Yield/
Average
Cost
Year ended December 31,
2014
Balance Interest Yield/
Cost
Average
Year ended December 31,
2013
Average
Balance
Interest Yield/
Cost
(dollars in thousands)
ASSETS
Earning assets (2)(3)
Loans-taxable (4) ............. $ 654,470 $ 25,360
1,988
Loans-tax free (4) .............
Total loans (1)(2) ......... 696,605 27,348
5,374
165
5,539
Securities-taxable ............. 224,955
2,419
Securities-tax free ............
Total securities (1)(5) .. 227,374
42,135
Interest-bearing deposits
in other banks ................
46
Total earning assets ..... 942,055 32,933
18,076
Non-earning assets ...........
Allowance for loan and
73,587
(10,729)
lease losses ....................
Total assets .................. $1,004,913
3.87% $ 625,969 $ 25,316
1,989
4.72% 40,370
3.93% 666,339 27,305
4,090
2.39% 179,903
2,853
6.82% 40,277
6,943
2.44% 220,180
0.25% 28,729
71
3.50% 915,248 34,319
73,713
(13,094 )
$ 975,867
4.04% $
4.93%
4.10%
2.27%
7.08%
3.15%
0.25%
3.75%
$
597,776 $
38,694
636,470
131,478
70,938
202,416
40,067
878,953
89,749
(18,613)
950,089
25,744
2,050
27,794
2,406
5,071
7,477
103
35,374
4.31%
5.30%
4.37%
1.83%
7.15%
3.69%
0.26%
4.02%
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing liabilities
Interest-bearing demand
deposits ......................... $ 358,442 $
91,603
Savings deposits ...............
Time deposits over
$100,000 ........................
97,687
Other time deposits .......... 126,851
Total interest-bearing
deposits ..................... 674,583
Borrowed funds and other
interest-bearing
liabilities ........................ 107,965
Total interest-bearing
liabilities ................... 782,548
Demand deposits .............. 139,945
25,744
Other liabilities ................
56,676
Shareholders' equity .........
Total liabilities and
shareholders' equity .. $1,004,913
672
60
0.19% $ 320,780 $
0.07% 88,678
453
57
0.14% $
0.06%
302,258 $
85,872
559
90
679
1,220
0.70% 135,871
0.96% 132,489
1,048
1,622
0.77%
1.22%
160,728
156,639
1,301
2,214
0.18%
0.10%
0.81%
1.41%
2,631
0.39% 677,818
3,180
0.47%
705,497
4,164
0.59%
2,170
2.01% 93,694
2,967
3.17%
60,240
3,012
5.00%
6,147
0.80%
4,801
0.61% 771,512
134,132
24,724
45,499
$ 975,867
765,737
130,186
19,946
34,220
950,089
7,176
0.94%
Net interest
income/interest rate
spread (6) ......................
Tax equivalent
adjustment .....................
Net interest income as
reported .........................
2.89%
28,132
(732)
$ 27,400
2.95%
28,172
(1,646 )
$ 26,526
Net interest margin (7) .....
2.99%
3.08%
28,198
(2,421)
25,777
$
3.08%
3.21%
(1) Interest income is presented on a tax-equivalent basis using a 34% rate.
(2) Loans are stated net of unearned income.
(3) Non-accrual loans are included in loans within earning assets.
(4) Loan fees included in interest income are not significant.
(5) The yields for securities that are classified as available-for-sale are based on the average historical amortized cost.
(6) Interest rate spread represents the difference between the average yield on interest-earning assets and the cost of average
interest-bearing liabilities and is presented on a tax-equivalent basis.
(7) Net interest income as a percentage of total average interest earning assets.
37
Rate Volume Analysis
The most significant impact on net income between periods is derived from the interaction of changes in the volume and
rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of earning assets, specifically loans
and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods. Components of interest income and interest
expense are presented on a tax-equivalent basis using the statutory federal income tax rate of 34%.
The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the
interest rates earned and paid on these assets and liabilities have on net interest income comparing years ended December 31,
2015 and 2014. The net change or mix component attributable to the combined impact of rate and volume changes has been
allocated proportionately to the change due to volume and the change due to rate.
Net Interest Income Changes Due to Rate and Volume
For the Year Ended December 31,
For the Year Ended December 31,
2015 vs. 2014
2014 vs. 2013
(in thousands)
Interest income:
Increase (Decrease) due to change in Increase (Decrease) due to change in
Volume
Volume
Total
Total
Rate
Rate
Loans - taxable........................... $
Loans - tax free ..........................
Total loans ..............................
Securities - taxable .....................
Securities - tax free ....................
Total securities .......................
Interest-bearing deposits in
1,128 $
85
1,213
1,067
(2,586)
(1,519)
(1,084) $
(86)
(1,170)
217
(102)
115
44 $
(1)
43
1,284
(2,688)
(1,404)
1,182 $
86
1,268
1,016
(2,211)
(1,195)
(1,610) $
(147)
(1,757)
668
(7)
661
(428)
(61)
(489)
1,684
(2,218)
(534)
other banks ..............................
Total interest income ..........
(27)
(333)
2
(1,053)
(25)
(1,386)
(30)
43
(2)
(1,098)
(32)
(1,055)
Interest expense:
Interest-bearing demand
deposits ....................................
Savings deposits ........................
Time deposits over $100,000 .....
Other time deposits ....................
Total interest-bearing
58
2
(316)
(67)
161
1
(53)
(335)
219
3
(369)
(402)
33
3
(208)
(366)
(139)
(36)
(45)
(226)
(106)
(33)
(253)
(592)
deposits ................................
(323)
(226)
(549)
(538)
(446)
(984)
Borrowed funds and other
interest-bearing liabilities ........
Total interest expense .........
Net Interest Income ...................... $
Provision for Loan and Lease Losses
403
80
(413) $
(1,200)
(1,426)
373 $
(797)
(1,346)
(40) $
1,303
765
(722) $
(1,348)
(1,794)
696 $
(45)
(1,029)
(26)
Management closely monitors the loan portfolio and the adequacy of the ALLL considering underlying borrower financial
performance and collateral values and associated credit risks. Future material adjustments may be necessary to the provision
for loan and lease losses and the ALLL if economic conditions or loan performance differ substantially from the assumptions
management used in making its evaluation of the ALLL. The provision for loan and lease losses is an expense charged against
net interest income to provide for probable losses attributable to uncollectible loans and is based on management’s analysis
of the adequacy of the ALLL. A credit to loan and lease losses reflects the reversal of amounts previously charged to the
ALLL.
2015 compared to 2014
For the year ended December 31, 2015, the Company recorded a credit for loan and lease losses of $1.3 million compared to
a credit for loan and lease losses of $5.9 million for the year ended December 31, 2014. The credit for loan and lease losses
38
in 2015 was due largely to improvement in the Company’s historical loss and certain qualitative factors and levels of classified
loans. The balance of loans classified as “Substandard” decreased $8.9 million, or 34.7%, to $16.8 million at December 31,
2015 from $25.7 million at the end of 2014.
Management closely monitors the loan portfolio, nonperforming loans and the adequacy of the ALLL considering underlying
borrower financial performance and collateral values and increasing credit risks.
2014 compared to 2013
The Company recorded a credit for loan and lease losses of $5.9 million in 2014, compared to a credit of $6.3 million in
2013.
During 2014, the Bank received a substantial legal settlement in the amount of $5.8 million resulting from judgments filed
by the Bank pursuant to a large credit relationship. Of the total amount received, $3.6 million represented full recovery of
previously charged-off loans, which was the primary factor leading to the credit for loan and lease losses. The remainder of
the settlement represented satisfaction of all past due interest and late charges and reimbursement of all legal fees and other
related expenses associated with these credits distributed as follow: 1) $1.8 million included in non-interest income for
amounts recovered that were incurred in prior years; and 2) $0.4 million included as a credit to non-interest expense for
amounts recovered that were incurred and paid in 2014.
In addition to this settlement, the Company’s asset quality metrics improved, which also factored into the release of reserves
in 2014. Non-performing loans decreased $0.9 million, or 13.4%, to $5.5 million at December 31, 2014 from $6.4 million at
December 31, 2013. The Company recorded net recoveries of $3.4 million for the year ended December 31, 2014, compared
to $1.7 million for the same period of 2013.
Non-Interest Income:
The following table lists the components of non-interest income for the years ended December 31, 2015, 2014 and 2013:
Components of Non-Interest Income
(in thousands)
Deposit service charges ...................................................................... $
Net gain on the sale of securities ........................................................
Net gain on the sale of loans held for sale ..........................................
Net loss on the sale of classified loans ...............................................
Net loss on the sale of education loans ...............................................
Net gain on the sale of other real estate owned ..................................
Gain on the sale of bank premises and equipment and other assets ...
Gain on branch divestitures ................................................................
Loan-related fees ................................................................................
Income from bank-owned life insurance ...........................................
Legal settlements ................................................................................
Other...................................................................................................
Total non-interest income .............................................................. $
Year Ended December 31,
2014
2015
2013
2,960 $
2,296
292
-
-
162
-
-
442
564
184
900
7,800 $
2,975 $
6,640
292
-
(13)
209
-
607
440
650
2,127
993
14,920 $
2,945
2,887
362
(223)
-
135
579
-
423
706
288
1,181
9,283
2015 compared to 2014
For the year ended December 31, 2015, non-interest income decreased $7.1 million, or 47.7%, to $7.8 million compared to
$14.9 million for the same period of 2014. Non-interest income levels in 2015 were impacted by a reduction in net gains on
the sale of securities and non-recurring income in 2014. Year-to-date net gains on the sale of securities totaled $2.3 million
in 2015, a decrease of $4.3 million from $6.6 million in 2014. In addition, non-recurring income in 2014 included monies
received from the settlement of judgements filed pursuant to a large commercial credit relationship and a net gain recorded
on the divestiture of the Company’s Monroe County branch offices.
The sale of OREO properties generated net gains of $162 thousand in 2015, a decrease of $47 thousand, or 22.5%, from $209
thousand in 2014. Deposit service charges, loan-related fees and net gains on the sale of loans held for sale all were relatively
39
flat comparing 2015 and 2014. Income from bank-owned life insurance policies and other income decreased $86 thousand
and $93 thousand, respectively, in 2015 as compared to 2014.
2014 compared to 2013
Non-interest income totaled $14.9 million in 2014, an increase of $5.6 million, or 60.7%, from $9.3 million in 2013. The
increase was due largely to an increase in net gains on the sale of investment securities, monies received from a legal
settlement and a $0.6 million net gain recorded on the divestiture of the Company’s Monroe County branch offices. Net gains
on the sale of investment securities increased $3.7 million, or 130.0%, to $6.6 million in 2014 from $2.9 million in 2013.
The Company’s non-interest income was also impacted by increases in net gains on the sale of OREO properties, deposit
service charges and loan related fees, along with decreases in net gains on the sale of mortgage loans held for sale, income
from bank-owned life insurance and other income, and a $13 thousand net loss on the sale of the Company’s student loan
portfolio. In addition, in 2013 the Company sold its administrative facility located in Luzerne County. This property had a
net book value of $1.2 million at the time of sale and the Company recorded a gain on the sale of $579 thousand in 2013.
Net gains on the sale of OREO properties in 2014 amounted to $209 thousand, which was an increase of $74 thousand, or
54.8%, compared to a net gain of $135 thousand in 2013. Service charges on deposit accounts increased $30 thousand, or
1.0%, comparing the years ended December 31, 2014 and 2013, which resulted from changes to the Company’s service
charge structure. Loan-related fees increased $17 thousand, or 4.0%, to $440 thousand in 2014 from $423 thousand in 2013,
which was due primarily to additional fees from issuing letters of credit.
During 2014, the Company held 15- and 20-year mortgages in its portfolio rather than selling these loans on the secondary
market as part of its asset/liability management strategy. In addition, the volume of mortgages originated was negatively
impacted by new and more stringent regulations, which became effective at the beginning of 2014. Moreover, the volume of
mortgage loans refinanced slowed considerably as mortgage rates had remained stable for a considerable time. As a result,
net gains recorded on the sale of mortgage loans in 2014 decreased $70 thousand, or 19.3%, to $292 thousand in 2014 from
$362 thousand in 2013. Comparing the years ended December 31, 2014 and 2013, income from bank-owned life insurance
decreased $56 thousand, or $7.9%, while other income decreased $188 thousand, or 15.9%. A 12.2% decline in revenue
generated from wealth management services was the primary factor leading to the decrease in other income.
Non-Interest Expense
The following table lists the major components of non-interest expense for the years ended December 31, 2015, 2014 and
2013:
Components of Non-Interest Expense
(in thousands)
Salaries and employee benefits .......................................................... $
Occupancy expense ............................................................................
Equipment expense ............................................................................
Advertising expense ...........................................................................
Data processing expense ....................................................................
Regulatory assessments ......................................................................
Bank shares tax ..................................................................................
Expense of other real estate ................................................................
Legal expense .....................................................................................
Professional fees .................................................................................
Insurance expense ..............................................................................
Loan collection expenses ...................................................................
Legal settlements ................................................................................
Other losses ........................................................................................
Other operating expenses ...................................................................
Total non-interest expense .............................................................. $
Year Ended December 31,
2014
2013
2015
13,810 $
2,284
1,657
483
1,976
950
705
400
437
1,014
659
280
777
281
2,751
28,464 $
13,111 $
2,088
1,471
470
2,088
1,801
522
2,569
1,799
1,567
951
90
-
2,279
2,763
33,569 $
13,218
2,215
1,468
523
2,066
2,515
800
719
2,488
1,674
1,179
482
2,500
123
2,978
34,948
40
2015 compared to 2014
Non-interest expense levels were favorably impacted by continued improvement in the Company’s risk profile in 2015. Non-
interest expense totaled $28.5 million in 2015, a decrease of $5.1 million, or 15.2%, from $33.6 million in 2014. The decrease
resulted primarily from reductions in expenses of other real estate owned, regulatory assessments, legal expenses,
professional fees, insurance expense and other losses. Partially offsetting these decreases were increases in salaries and
employee benefits, occupancy and equipment expense and legal settlements.
Expenses of other real estate owned amounted to $400 thousand in 2015, a decrease of $2.2 million from $2.6 million in
2014. Valuation adjustments to the values of OREO properties decreased $2.0 million comparing 2015 and 2014, which was
the primary factor leading to the decrease in OREO-related expenses.
During the second quarter of 2015, the Company was notified by the FDIC that its risk category for FDIC assessments had
improved to a risk category I, the lowest risk category from risk category II based upon its most recent regulatory examination.
The change in risk categories became effective on February 1, 2015, and as a result the Company’s initial base assessment
rate for deposit insurance decreased from 0.14 basis points to a range of 0.05 – 0.09 basis points. The change in assessment
rate contributed to a decrease in regulatory assessments of $851 thousand, or 47.3%, to $1.0 million in 2015 from $1.8 million
in 2014.
Legal expense decreased significantly due to the resolution of longstanding regulatory matters and litigation. Legal expense
was $437 thousand in 2015, a decrease of $1.4 million, or 75.7%, from $1.8 million in 2014. Similarly, professional fees in
2015 decreased $553 thousand, or 35.3%, to $1.0 million in 2015 from $1.6 million in 2014, as the Company continues to
monitor and decrease its reliance on third-party consultants.
Due to its improved risk profile, in mid-2015, the Company was once again able to renew its professional liability, fidelity
bond and errors and omissions insurance policies at lower rates. As a result, insurance expense decreased $292 thousand, or
30.7%, to $0.7 million in 2015 from $1.0 million in 2014.
Other losses sustained by the Company were $281 thousand in 2015, a decrease of $2.0 million compared to $2.3 million.
For 2015, other losses predominantly included losses related to debit card transactions and minor losses sustained during the
core conversion. Other losses in 2014 included penalties assessed by two regulatory agencies totaling $1.7 million.
Salaries and employee benefits expense increased $699 thousand, or 5.3%, to $13.8 million in 2015 from $13.1 million in
2014. Total salary expense increased $540 thousand, or 5.0%, due to increases in stock-based compensation and employee
incentive compensation. At December 31, 2015, the number of full-time equivalent employees was 250 as compared to 237
at December 31, 2014. Payroll taxes and employee benefits increased $158 thousand, or 7.1%, which was due primarily due
to increases in state unemployment taxes and costs associated with the establishment of a supplemental executive retirement
plan.
On October 1, 2015, the Bank executed a Supplemental Executive Retirement Plan (“SERP”) for a select group of
management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of The
Employee Retirement Income Security Act of 1974. The general provisions of the SERP provide for annual year-end
contributions, performance contingent contributions and discretionary contributions. The SERP contributions are unfunded
for Federal tax purposes and constitute an unsecured promise by the Bank to pay benefits in the future. Participants in the
SERP shall have the status of general unsecured creditors of the Bank. Annual accrued unfunded contributions included in
salaries and employee benefits expense totaled $130 thousand in 2015.
The Company has a defined contribution profit sharing plan for employess that includes the provisions under section 401(k)
of the Internal Revenue Code (“401(k)”). The 401(k) feature of the plan permits employees to make voluntary salary deferrals,
either pre-tax or Roth, up to the dollar limit prescribed by law. The Company may make discretionary matching contributions
equal to a uniform percentage of employee salary deferrals. Company discretionary matching contributions are determined
each year by management. For 2014, the Company matched 50.0% of employee salary deferrals up to 4.0% for each
employee. For 2015, employee salary deferrals of up to 4.0% for each employee were matched 50.0% through June 30, 2015.
Effective July 1, 2015, the Company matched 100.0% of employee salary deferrals up to 2.0% for each employee. Company
matching contributions to the 401(k) Plan totaled $149 thousand and $134 thousand in 2015 and 2014, respectively.
41
Pursuant to the 2015 Employee Stock Grant Plan and the 2014 Employee Stock Grant Plan, the Board of Directors granted
50 shares of the Company’s common stock in both 2015 and 2014, respectively, to each active full and part time employee.
There were 13,300 shares at a cost per share of $5.15 granted under the 2015 Stock Grant Plan and 12,850 shares at a cost
per share of $6.02 granted under the 2014 Stock Grant Plan. The total costs of these grants were $69 thousand and $77
thousand, respectively, for the years ended December 31, 2015 and 2014, which were included in salaries and employee
benefits expense.
Increases in rent expense, real estate taxes and building maintenance costs resulted in a $0.2 million, or 9.3%, increase in
occupancy costs, while higher equipment maintenance caused a $0.2 million, or 12.6% increase in equipment expense.
The Company successfully completed a conversion of its core operating system in the fourth quarter of 2015. The Company
expects only a minor increase in equipment expense, specifically related to depreciation and maintenance costs, as a result of
this conversion.
2014 compared to 2013
The Company experienced a $1.4 million, or 3.9%, decrease in non-interest expense to $33.6 million in 2014 from $34.9
million in 2013. Non-interest expense was primarily impacted by reductions in regulatory assessments, legal expense, loan
collection expense, insurance expense, bank shares tax and other operating expenses, partially offset by valuation adjustments
to properties held in other real estate owned and other losses, which were primarily related to penalties assessed by certain
regulatory agencies. Non-interest expense also benefitted from decreases in salaries and employee benefits and occupancy
costs.
During the first quarter of 2014, the Company was notified by the Federal Deposit Insurance Corporation (“FDIC”) that its
risk category for FDIC assessments had improved from a risk category III to a risk category II based upon the Company’s
most recent regulatory examination. Due to the change in risk categories, the Company’s initial base assessment rate for
deposit insurance decreased from 0.23 basis points to 0.14 basis points. The new assessment rate became effective on
February 18, 2014. The changes in assessment rates resulted in a $714 thousand, or 28.4%, decrease in regulatory assessments
expense included in non-interest expense.
As a result of the resolution of certain long-standing litigation, legal expense declined $689 thousand, or 27.7% to $1.8
million in 2014 from $2.5 million in 2013. Despite the decrease, the Company’s legal expense remains elevated. Decreases
in non-performing loans, coupled with reimbursement of certain expenses related to the settlement of judgments filed against
parties to a large credit relationship, the Company’s loan collection expenses decreased $392 thousand, or 81.3%. During the
second quarter of 2014, the Company’s professional liability, fidelity bond and errors and omissions insurance policies were
renewed at lower rates for the upcoming insurance period. As a result, the Company experienced a $228 thousand, or 19.3%
decrease in insurance expense comparing 2014 and 2013. Effective January 1, 2014, the Commonwealth of Pennsylvania
enacted a reduction in the bank shares tax rate, which resulted in a decrease in bank shares tax expense of $278 thousand, or
34.8%. The $367 thousand, or 11.4%, decrease in other operating expenses resulted primarily from a 41.8% decrease in
telecommunication cost associated with enhancements made by the Company to its network.
Expenses associated with other real estate owned increased $1.9 million, or 257.3%, to $2.6 million from $0.7 million for the
same period of 2013. The Company recorded valuation adjustments to the cost basis of several OREO properties totaling
$2.2 million. The valuation adjustments reflected the continued decline in real estate values for properties located in Monroe
County, Pennsylvania. In addition, the Company adjusted the cost basis of four OREO properties to liquidation value, as
these properties were approaching the five-year regulatory holding period threshold.
Included in other losses were penalties assessed by regulatory agencies regarding two separate settlements. The Company
recorded a penalty in the amount of $175 thousand related to a settlement agreement it reached with the SEC. In addition, the
Bank recorded a penalty assessment in the amount of $1.5 million related to a joint settlement agreement it reached with the
OCC and FinCEN. These two penalties accounted for approximately 73.5% of other losses recorded in 2014. The remaining
amount in other losses in 2014 related to charges incurred on the abandonment of software and losses sustained in several
branch robberies, fraudulent debit card transactions and wire transfers.
42
Salaries and employee benefits expense decreased $107 thousand, or 0.8%, to $13.1 million in 2014 from $13.2 million in
2013. Total salary expense decreased $209 thousand, or 1.9%, due to a decline in the number of full-time equivalent
employees, partially offset by increases in stock-based compensation and employee incentive compensation. At December
31, 2014, the number of full-time equivalent employees was 237 as compared to 260 at December 31, 2013. Payroll taxes
and employee benefits increased $102 thousand, or 4.9%, which was due primarily to an increase in health care costs.
Under the Company’s profit sharing and 401(k) Plan, for 2014 and 2013, the Company matched 50.0% of employee salary
deferrals up to 4.0% for each employee. Company matching contributions to the 401(k) Plan totaled $134 thousand and $129
thousand in 2014 and 2013, respectively.
Pursuant to the 2014 Employee Stock Grant Plan and the 2013 Employee Stock Grant Plan, the Board of Directors granted
50 shares of the Company’s common stock in both 2014 and 2013, respectively to each active full and part time employee.
There were 12,850 shares at a cost per share of $6.02 granted under the 2014 Stock Grant Plan and 14,400 shares at a cost
per share of $4.26 granted under the 2013 Stock Grant Plan. The total costs of these grants was $77 thousand and $61
thousand, respectively, for the years ended December 31, 2014 and 2013, which were included in salaries and employee
benefits expense.
Occupancy costs decreased $127 thousand, or 5.7%, to $2.1 million in 2014 from $2.2 million in 2013. The decrease in
occupancy costs reflected decreases in real estate taxes, utility costs and depreciation, which resulted primarily from the
divestitures of the Monroe County branches.
Provision for Income Taxes
The Company recorded an income tax benefit of $27.8 million in 2015, which resulted primarily from the reversal of the
valuation allowance for the Company’s deferred tax assets. The Company recorded income tax expense of $0.3 million in
2014, which was related entirely to alternative minimum tax. The Company did not record a provision or benefit for income
taxes for the year ended December 31, 2013.
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently, if necessary,
in accordance with guidance set forth in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine
whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized within its life cycle,
based on the weight of available evidence. If management determines based on available evidence, both positive and negative,
that it is more likely than not that some portion or all of the deferred tax asset will not be realized in future periods, a valuation
allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s
estimates and judgments used in their evaluation of both positive and negative evidence.
In its evaluation of available evidence, management considered, among other factors, historical financial performance,
expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry
forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies
and timing of reversals of temporary differences. In assessing the need for a valuation allowance, management carefully
weighed both positive and negative evidence currently available. The weight given to the potential effect of positive and
negative evidence must be commensurate with the extent to which it can be objectively verified. In particular, additional
scrutiny must be given to deferred tax assets of an entity that is in a cumulative loss position in recent years because it is
significant negative evidence that is objective and verifiable and therefore difficult to overcome. In line with industry practice,
the Company interpreted the term “recent years” to mean the current year and the prior two years based on a rolling twelve
quarters and used pre-tax income (loss) adjusted for permanent differences and any non-recurring income, including gains
on the sale of securities and a favorable legal settlement in 2014. While the Company generated positive pre-tax book income
adjusted for permanent differences in 2014 and 2013, it recorded a pre-tax loss in 2012. In addition, the pre-tax book income
in 2014 and 2013 included significant non-recurring or non-taxable income, which when adjusted for, resulted in the
Company being in a three-year cumulative loss position at December 31, 2014. Accordingly, based on the analysis of all
available positive and negative evidence, management determined that the negative evidence that existed at December 31,
2014 outweighed any positive evidence that existed at that time. Accordingly, management established valuation allowance
equal to 100.0% of net deferred tax assets, excluding deferred tax assets or liabilities related to unrealized holding gains and
losses on available-for-sale securities.
Management evaluated the carrying amount of the Company’s deferred tax assets at March 31, 2015, June 30, 2015 and
September 30, 2015 using pre-tax income (loss) adjusted for permanent differences and non-recurring income on a rolling
twelve-quarter basis consistent with its previous evaluations and determined that the Company was in a cumulative three-
43
year loss position at each of the respective quarter ends. Based on each quarterly analysis, management concluded that the
negative evidence that existed at each quarter-end outweighed any available positive evidence at those times and determined
that the established valuation allowance equal to 100.0% of net deferred tax assets, excluding deferred tax assets or liabilities
related to unrealized holding gains and losses on available-for-sale securities, should continue to be maintained.
Management performed an evaluation of the Company’s deferred tax assets at December 31, 2015 and determined that based
on its consistent methodology, the Company was now in a cumulative three-year income position, which it considered to be
positive evidence. The Company had sustained significant losses in the fourth quarter of 2012, which at December 31, 2015
were no longer part of this calculation. The negative evidence related to cumulative losses in prior period evaluations no
longer existed at December 31, 2015.
In addition, when determining the need for a valuation allowance, management assessed the possible sources of taxable
income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards as defined in
ASC Topic 740. As part of its assessment, management considered normalization of the Company’s core earnings, scheduling
the reversal of existing temporary differences at December 31, 2015 and projections of future core earnings based on known
facts at December 31, 2015. Management also incorporated into its assessment certain tax planning strategies recently
implemented designed to promote the generation of taxable income. These strategies included: 1) the sale of tax-exempt
obligations of states and political subdivisions with fair values greater than book values and redeployment of the sales
proceeds into taxable investment options; 2) the sale of lower-yielding taxable securities with fair values greater than book
values, and the redeployment of the sales proceeds into higher-yielding taxable investment options; and 3) reducing the
annual rate paid on the Company’s Notes from 9.0% to 4.5% and making an $11.0 million, or 44.0%, principal prepayment
on the Notes.
During 2015, positive evidence continued to build and become more apparent by the end of the year. Specifically, the
resolution of costly litigation and release from the Consent Order by the OCC on March 25, 2015 and the Written Agreement
by the Reserve Bank on September 2, 2015 has led to an improvement in the Company’s overall risk profile. The Company
was notified by the FDIC that, effective February 1, 2015, its risk category for FDIC insurance improved from Risk Category
II to Risk Category I, which resulted in a decrease in the Company’s initial base assessment rate for deposit insurance from
0.14 basis points to 0.05 basis points. As a result of these developments, the Company has experienced and anticipates further
reductions in its non-interest expense levels, specifically legal expense and regulatory assessments. Furthermore, as a result
of the improved risk profile, the Company renewed its professional liability, fidelity bond and errors and omissions insurance
policies at lower rates effective July 1, 2015 and accordingly experienced a decrease in insurance expense going forward.
As part of its assessment, management projected future core earnings for years 2016 through 2040. Years 2016, 2017 and
2018 were based on the Company’s annual three-year budget taking into consideration the positive developments and tax
planning strategies detailed above. The budget was completed and approved by the Board of Directors in January 2016. For
years 2019 through 2040, management used 2018 budgeted core earnings and estimated it to remain flat. Based on these
projections the Company is expected to generate normalized core earnings greater that the total deferred tax assets existing
at December 31, 2015, which management considered to be positive evidence. In addition, consistent with accounting
guidance in ASC 740, management scheduled the reversal of existing temporary differences at December 31, 2015. This
analysis supported the reversal of the valuation allowance established for deferred tax assets at December 31, 2015 except
for the valuation allowance established for charitable contribution carryforwards. Management does not believe at the current
moment that enough positive evidence exists to remove the valuation allowance associated with charitable contribution
carryovers. Unlike the expiration period for net operating loss carryforwards (generally 20 years) and AMT Credit carryovers
(indefinite), the expiration of an excess charitable contribution carryover occurs after the 5th succeeding tax year for which
a charitable contribution is made. Because the Company is in a net deferred tax asset position, without regard to net operating
loss carryovers, the reversal of existing temporary timing differences over the next 5 years makes it more likely than not that
a portion of the charitable contribution carryovers will not be recognized. Accordingly, management believes a valuation
allowance continues to be appropriate strictly in the case of the excess charitable contribution carryover deferred tax asset.
Based on its evaluation of all available positive and negative evidence that existed at December 31, 2015, management
concluded the significant positive evidence outweighed any negative evidence and the valuation allowance established for
its deferred tax assets should be reversed, except for the amount established for charitable contribution carryovers.
The Company calculates its current and deferred tax provision based on estimates and assumptions that could differ from
actual results reflected in income tax returns filed during the subsequent year. Any adjustments required based on filed returns
are recorded when identified in the subsequent year.
44
FINANCIAL CONDITION
Total assets for the Company were $1.1 billion at December 31, 2015, an increase of $120.6 million, or 12.4%, from $970.0
million, at December 31, 2014. The balance sheet growth resulted primarily from a $66.2 million, or 10.1%, increase in loans,
net of deferred costs and the allowance for loan and lease losses and a $34.8 million, or 15.9%, increase in available-for-sale
securities. The growth in loans and securities were funded by a $26.2 million, or 3.3%, increase in total deposits, coupled
with a $74.6 million, or 121.9% increase in advances through the FHLB of Pittsburgh. The Company’s balance sheet was
also impacted by the reversal of the valuation allowance for its deferred tax assets, which led to a $27.8 million net deferred
tax asset.
On June 30, 2015, the Company repaid $11.0 million, or 44.0%, of the principal amount outstanding on the Notes and also
amended the original terms of the Notes to reduce the interest rate payable on the Notes from 9.00% to 4.50% effective July
1, 2015. Pursuant to the approved amendment, the remaining $14.0 million in principal on the Notes is to be repaid as follows:
(a) 16% of the original principal amount, or $4.0 million, payable on September 1, 2017; (b) 20% of the original principal
amount, or $5.0 million, payable on September 1, 2018; and (c) the final 20% of the original principal amount, or $5.0 million,
payable on September 1, 2019, the maturity date of the Notes.
The Company’s capital position strengthened as evidenced by an increase in total shareholders’ equity of $34.8 million, or
67.7% . Net income of $35.8 million, partially offset by a $1.4 million decrease in accumulated other comprehensive income
due to depreciation in the fair value of the Company’s available-for-sale securities portfolio, accounted for the majority of
the capital improvement. Since 2010, in order to comply with the regulatory requirements of the Consent Order and Written
Agreement, the Company had suspended paying dividends, and accordingly, did not pay any dividends in 2015 or 2014. As
previously mentioned, during 2015 the Company has since been completely released from all formal regulatory actions. On
January 29, 2016, the Company declared a $0.02 per share dividend for the first quarter of 2016, payable on March 15, 2016
to shareholders of record on March 1, 2016.
Securities
The Company’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and
interest income to increase profitability. Additionally, the Company utilizes the investment securities portfolio to meet
pledging requirements to secure public deposits and for other purposes. Management classifies investment securities as either
held-to-maturity or available for sale at the time of purchase based on its intent. Held-to-maturity securities are carried at
amortized cost, while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported
as a component of shareholders’ equity in accumulated other comprehensive income (loss), net of tax. Since the Company
sold held-to-maturity securities in 2014 for reasons other than those permitted under GAAP, management did not classify
any securities as held-to-maturity in 2014 and 2015. Decisions to purchase or sell investment securities are based upon
management’s current assessment of long- and short-term economic and financial conditions, including the interest rate
environment and asset/liability management and tax planning strategies. Securities with limited marketability and/or
restrictions, such as FHLB of Pittsburgh and FRB stocks, are carried at cost. FRB stock is included in other assets.
At December 31, 2015, the Company’s investment portfolio was comprised principally of fixed-rate securities issued by U.S.
government or U.S. government-sponsored agencies, which include residential mortgage-backed securities, residential and
commercial CMOs and single-maturity bonds and fixed-rate taxable obligations of state and political subdivisions. Except
for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded
10.0% of shareholders’ equity as of December 31, 2015.
Because of the predominantly fixed-rate nature of the portfolio, the Company’s debt securities are inherently subject to
interest rate risk, defined as the risk that an investment’s value will change due to a change in interest rates, in the spread
between two rates and in the shape of the yield curve. A security’s value is usually affected inversely by changes in rates. As
previously mentioned, the FOMC raised the federal funds target rate 25 basis points in December 2015. As a result, shorter-
term U.S. Treasury rates increased. The 2-year treasury rate was 1.06% at December 31, 2015, an increase of 39 basis points
compared to 0.67% at December 31, 2014. However, the yield curve flattened as the 10-year treasury rate decreased 13 basis
points to 2.18% at the end of 2015 from 2.31% at the close of 2014. The change in interest rates resulted in an aggregate $1.4
million decrease in the fair value of the Company’s available-for-sale securities portfolio. The Company reported a net
unrealized holding loss of $238 thousand, net of income taxes of $123 thousand, at December 31, 2015, compared to an
unrealized holding gain of $1.1 million, net of income taxes of $0.6 million, at December 31, 2014. The FOMC indicated in
its report to Congress in February 2016 that it anticipates that economic conditions will warrant gradual increases in the
federal funds rate. Any additional increases in interest rates could result in further depreciation in the fair value of the
Company’s securities portfolio and capital position.
45
The following table presents the carrying value of available-for-sale securities, which are carried at fair value, and held-to-
maturity securities, which are carried at amortized cost, at December 31, 2015, 2014 and 2013:
Composition of the Investment Portfolio
(in thousands)
Available-for-sale
Obligations of U.S. government agencies .......................................... $
Obligations of state and political subdivisions ...................................
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential ...........................
Collateralized mortgage obligations - commercial .........................
Residential mortgage-backed securities ..........................................
Corporate debt securities ....................................................................
Negotiable certificates of deposit .......................................................
Equity securities .................................................................................
Total securities available-for-sale ...................................................... $
2015
December 31,
2014
2013
44,043 $
75,407
29,276 $
24,509
22,269
89,423
18,098
423
3,162
948
253,773 $
26,231
61,256
74,098
420
2,232
967
218,989 $
-
78,054
3,221
31,578
89,656
407
-
951
203,867
Held-to-maturity
Obligations of state and political subdivisions ................................... $
- $
- $
2,308
Management actions during 2015 reflected the Company’s ongoing investment strategy designed to replace tax-free holdings
with taxable securities as required under tax planning initiatives, take advantage of changing market conditions and address
the Company’s liquidity needs. With regard to tax planning initiatives, the Company currently has $55.6 million in net
operating loss (“NOL”) carryovers, which it uses to offset any taxable income. In addition, at December 31, 2014 the
Company had established a full valuation allowance for its deferred tax assets. Because of this tax position, the Company
does not benefit from holding tax-exempt obligations of state and political subdivisions. Accordingly, current tax planning
initiatives for 2015 focused on generating sustained taxable income to be able to reduce NOL carryovers and support the
reversal of the deferred tax asset valuation allowance.
As part of this strategy in 2015, the Company sold 34 of its available-for-sale securities including 18 tax-exempt and 3 taxable
obligations of state and political subdivisions, 9 residential mortgage-backed securities, 3 commercial CMOs and 1 U.S.
government agency bond. The securities sold had an aggregate amortized cost of $86.4 million. Gross proceeds received
totaled $88.7 million, with net gains of $2.3 million realized upon the sales and included in non-interest income.
During the year ended ended December 31, 2014, the Company sold its entire holdings of held-to-maturity securities
comprised of four zero-coupon obligations of state and political subdivisions with an aggregate amortized cost of $2.3
million. Gross proceeds received from the sale of held-to-maturity securities were $2.7 million, with net gains of $0.4 million
realized upon the sale. These securities were sold as part of the previoiusly mentioned tax planning initiatives and
management’s strategy to reduce the amount of potential credit and concentration risk in the investment portfolio. Since the
securities were sold for reasons other than those permitted under GAAP, management did not classify securities as held-to-
maturity in 2015 and 2014.
Securities purchased during the year ended December 31, 2015 totaled $133.3 million, including $73.2 million in taxable
obligations of state and political subdivisions, $40.7 million in commercial CMOs of U.S. government-sponsored agencies,
$17.3 million of single-maturity bonds of U.S. government-sponsored agencies, $1.2 million in residential CMOs of U.S.
government-sponsored agencies, and $0.9 million in negotiable certificates of deposit.
The following table presents the maturities of available-for-sale securities, based on carrying value at December 31, 2015,
and the weighted average yields of such securities calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security. The yields on obligations of states and political subdivisions are presented on a tax-
equivalent basis using an effective tax rate of 34.0%. Because residential and commercial collateralized mortgage obligations
and residential mortgage-backed securities are not due at a single maturity date, they are not included in the maturity
categories in the following summary.
46
Maturity Distribution of the Investment Portfolio
December 31, 2015
Collateralized
Mortgage
Obligations
and
Mortgage-
Backed
No Fixed
> 1 – 5
6-10
Over
Years Years 10 Years Securities
Maturity Total
Within
One
Year
- $ 26,574 $ 17,469 $
2.31%
1.95 %
- $
- $
- $ 44,043
2.09%
-
1,513 72,143
2.80%
2.30 %
1,751
5.95%
-
- 75,407
2.86%
-
-
-
-
-
-
-
-
-
-
-
-
3,162
2.04 %
-
-
-
-
-
-
-
-
423
0.95%
-
-
- $ 31,249 $ 89,612 $ 2,174 $
4.98%
2.70%
1.98 %
0.00%
22,269
2.39%
89,423
2.29%
18,098
2.81%
-
-
-
129,790 $
2.38%
- 22,269
2.39%
- 89,423
2.29%
- 18,098
-
2.81%
423
0.95%
-
3,162
2.04%
948
3.51%
948
3.51%
948 $ 253,773
3.51%
2.47%
(dollars in thousands)
Available-for-sale
Obligations of U.S. government agencies .. $
Yield ..........................................................
Obligations of state and political
subdivisions ............................................
Yield ..........................................................
U.S. government/government-sponsored
agencies:
Collateralized mortgage obligations -
residential ............................................
Yield ......................................................
Collateralized mortgage obligations -
commercial ..........................................
Yield ......................................................
Residential mortgage-backed securities .
Yield ......................................................
Corporate debt securities ............................
Yield ..........................................................
Negotiable certificates of deposit ...............
Yield ..........................................................
Equity securities .........................................
Yield ..........................................................
Total securities available-for-sale ......... $
Weighted yield .......................................
OTTI Evaluation
There was no OTTI recognized during the years ended December 31, 2015, 2014 and 2013. For additional information
regarding the management’s evaluation of securities for OTTI, see Note 4- “Securities” of the notes to consolidated financial
statements included in Item 8 – “Financial Statement and Supplementary Data” to this Annual Report on Form 10-K.
Investments in FHLB and Federal Reserve Bank (“FRB”) stock, which have limited marketability, are carried at cost and
totaled $7.7 million and $4.2 million at December 31, 2015 and 2014, respectively. FRB stock of $1.3 million is included in
Other Assets at December 31, 2015 and 2014. Management noted no indicators of impairment for the FHLB of Pittsburgh
and FRB of Philadelphia at December 31, 2015.
Loans
Despite unanticipated paydowns on several large commercial lending relationships received in the first quarter of 2015, the
Company experienced strong demand for its lending throughout 2015. New loan originations exceeded maturities and payoffs
in 2015 and resulted in a $61.7 million, or 9.2%, increase in total loans to $731.2 million at December 31, 2015 from $669.5
million at December 31, 2014. Solid increases were exhibited in both the Company’s commercial and retail lending activities.
Historically, commercial lending activities have represented a significant portion of the Company’s loan portfolio.
Commercial lending includes commercial and industrial loans, commercial real estate loans and construction, land acquisition
and development loans, and represented 58.2% and 57.4% of total loans at December 31, 2015 and December 31, 2014,
respectively.
From a collateral standpoint, a majority of the Company’s loan portfolio consists of loans secured by real estate. Real estate
secured loans, which include commercial real estate, construction, land acquisition and development, residential real estate
loans and home equity lines of credit (“HELOCs”), increased $28.7 million, or 7.1%, to $433.7 million at December 31, 2015
47
from $405.0 million at December 31, 2014. Real estate secured loans represented 59.3% of total gross loans at December 31,
2015 and 60.5% at December 31, 2014.
Commercial and industrial loans increased $17.7 million, or 13.5%, during the year to $149.8 million at December 31, 2015
from $132.1 million at December 31, 2014. Commercial and industrial loans consist primarily of equipment loans, working
capital financing, automobile floor plans, revolving lines of credit and loans secured by cash and marketable securities. Loans
secured by commercial real estate increased $11.7 million, or 5.0%, to $245.2 million at December 31, 2015 from $233.5
million at December 31, 2014. Commercial real estate loans include long-term commercial mortgage financing and are
primarily secured by first or second lien mortgages. Construction, land acquisition and development loans increased $12.0
million, or 63.8%, during the year to $30.8 million at December 31, 2015, from $18.8 million at December 31, 2014. The
Company continues to monitor its exposure to this higher-risk portfolio segment.
Residential real estate loans totaled $130.7 million at December 31, 2015, an increase of $7.9 million, or 6.4%, from $122.8
million at December 31, 2014. The components of residential real estate loans include fixed-rate and variable-rate mortgage
loans. HELOCs are not included in this category but are included in consumer loans. The Company primarily underwrites
fixed-rate purchase and refinance of residential mortgage loans for sale in the secondary market to reduce interest rate risk
and provide funding for additional loans. In addition, in January 2015, management began a campaign to promote the
Company’s “WOW” residential mortgage product. This product is a non-saleable mortgage with maturity terms of 7.5, 10
and 14.5 years that offers customers an attractive fixed interest rate, low closing cost and quicker close. As a result of this
campaign, the balance outstanding of “WOW” mortgages increased $7.8 million, or 28.8%, to $35.0 million at December
31, 2015 from $27.2 million at December 31, 2014, which accounted for the majority of the growth in residential real estate
loans.
Consumer loans totaled $128.5 million at December 31, 2015, an increase of $6.4 million, or 5.3%, from $122.1 million at
December 31, 2014, reflecting the growth in the Company’s portfolio of indirect automobile loans, which increased $9.4
million, or 10.1%, in 2015.
During 2015, the Company instituted a “Government Banking” sector within its Commercial Banking Unit, which will focus
efforts on meeting the banking needs of the municipalities within the Company’s market area. Loans to state and municipal
governments increased $5.9 million, or 14.6%, to $46.1 million at December 31, 2015 from $40.2 million at December 31,
2014.
The following table summarizes loans receivable, net by category at December 31, 2015, for each of the last five years:
Loan Portfolio Detail
(in thousands)
Residential real estate ........................................... $
Commercial real estate .........................................
Construction, land acquisition and development ..
Commercial and industrial ...................................
Consumer .............................................................
State and political subdivisions ............................
Total loans, gross ..............................................
Unearned income .................................................
Net deferred loan costs .........................................
Allowance for loan and lease losses .....................
Loans, net ......................................................... $
2014
2015
130,696 $ 122,832 $
233,473
245,198
18,835
30,843
132,057
149,826
122,092
128,533
40,205
46,056
669,494
731,152
(98)
(98)
2,662
871
(11,520)
(8,790)
724,926 $ 658,747 $
December 31,
2013
114,925 $
218,524
24,382
127,021
118,645
39,875
643,372
(143)
668
(14,017)
629,880 $
2012
2011
90,228 $
221,591
32,502
109,693
109,783
33,978
597,775
(103)
260
(18,536)
579,396 $
80,056
256,508
33,450
174,233
111,778
23,496
679,521
(159)
516
(20,834)
659,044
48
The following schedule shows the maturity distribution and interest rate information of the loan portfolio by major
classification as of December 31, 2015:
Maturity Distribution of the Loan Portfolio
Within
One Year
December 31, 2015
One to Five
Years
Over Five
Years
(in thousands)
Residential real estate ................................................................... $
Commercial real estate .................................................................
Construction, land acquisition and development ..........................
Commercial and industrial ...........................................................
Consumer .....................................................................................
State and political subdivisions ....................................................
3,033 $
17,094
5,726
84,498
8,166
1,200
Total .......................................................................................... $ 119,717 $
6,873 $ 120,790 $
176,485
51,619
18,733
6,384
28,935
36,393
51,077
69,290
34,691
10,165
180,724 $ 430,711 $
Total
130,696
245,198
30,843
149,826
128,533
46,056
731,152
Loans with predetermined interest rates ....................................... $
Loans with floating rates ..............................................................
20,694 $
99,023
Total .......................................................................................... $ 119,717 $
125,262 $ 166,061 $
264,650
180,724 $ 430,711 $
55,462
312,017
419,135
731,152
At December 31, 2015, 2014 and 2013, the Bank’s loan portfolio was concentrated in loans in the following industries:
Loan Concentrations
2015
December 31,
2014
2013
(dollars in thousands)
Retail space/shopping centers ....... $
Automobile dealers .......................
1-4 family residential investment
properties ....................................
Colleges and Universities ..............
Office complexes/units ..................
Land subdivision ...........................
Physicians ......................................
Asset Quality
Amount
% of gross
loans
Amount
% of gross
loans
Amount
% of gross
loans
35,292
34,594
18,957
18,540
18,487
12,673
10,677
4.83% $
4.73%
33,140
24,194
4.95% $
3.61%
23,472
18,467
2.59%
2.54%
2.53%
1.73%
1.46%
12,764
16,680
17,249
15,220
13,636
1.91%
2.49%
2.58%
2.27%
2.04%
18,839
12,671
17,924
15,974
13,932
3.65 %
2.87 %
2.93 %
1.97 %
2.79 %
2.48 %
2.17 %
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at
the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by the ALLL. The ALLL
is established through a provision for loan and lease losses charged to earnings.
The Company has established and consistently applies loan policies and procedures designed to foster sound underwriting
and credit monitoring practices. The Company manages credit risk through the efforts of loan officers, the loan review
function, and the Loan Quality and the ALLL management committees, as well as oversight from the Board of Directors.
The Company continually evaluates its credit risk management practices to ensure it is reacting to problems in the loan
portfolio in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent
in part on local and general economic conditions that are beyond the Company’s control.
Under the Company’s risk rating system, loans that are rated pass, special mention, substandard, doubtful, or loss are reviewed
regularly as part of the Company’s risk management practices. The Company’s Loan Quality Committee, which consists of
key members of senior management, finance and credit administration, meets monthly or more often as necessary to review
individual problem credits and workout strategies and provides monthly reports to the Board of Directors.
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due (including
principal and interest) according to the contractual terms of the note and loan agreement. For purposes of the Company’s
analysis, loans that are modified under a troubled debt restructuring (“TDRs”), loan relationships with an aggregate
49
outstanding balance greater than $100 thousand rated substandard and non-accrual, and loans that are identified as doubtful
or loss are considered impaired. Impaired loans are analyzed individually to determine the amount of impairment. The
Company utilizes the fair value of collateral method for collateral-dependent loans. A loan is considered to be collateral
dependent when repayment of the loan is expected to be provided through the liquidation of the collateral held. For impaired
loans that are secured by real estate, external appraisals are obtained annually, or more frequently as warranted, to ascertain
a fair value so that the impairment analysis can be updated. Should a current appraisal not be available at the time of
impairment analysis, other sources of valuation may be used including, current letters of intent, broker price opinions or
executed agreements of sale. For non-collateral-dependent loans, the Company measures impairment based on the present
value of expected future cash flows, net of any deferred fees and costs, discounted at the loan’s original effective interest
rate.
Loans to borrowers that are experiencing financial difficulty that are modified and result in the Company granting concessions
to the borrower are classified as TDRs and are considered to be impaired. Such concessions generally involve an extension
of a loan’s stated maturity date, a reduction of the stated interest rate, payment modifications, capitalization of property taxes
with respect to residential mortgage loans or a combination of these modifications. Non-accrual TDRs are returned to accrual
status if principal and interest payments, under the modified terms, are brought current, are performing under the modified
terms for six consecutive months, and management believes that collection of the remaining interest and principal is probable.
Non-performing loans are monitored on an ongoing basis as part of the Company’s loan review process. Additionally, work-
out efforts continue and are actively monitored for non-performing loans and OREO through the Loan Quality Committee.
A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair
market value of the pledged collateral, less cost to sell.
Loans are placed on non-accrual when a loan is specifically determined to be impaired or when management believes that
the collection of interest or principal is doubtful. This generally occurs when a default of interest or principal has existed for
90 days or more, unless such loan is well secured and in the process of collection, or when management becomes aware of
facts or circumstances that the loan would default before 90 days. The Company determines delinquency status based on the
number of days since the date of the borrower’s last required contractual loan payment. When the interest accrual is
discontinued, all unpaid interest income is reversed and charged back against current earnings. Any subsequent cash payments
received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts, with any
excess treated as a recovery of lost interest. A non-accrual loan is returned to accrual status when the loan is current as to
principal and interest payments, is performing according to contractual terms for six consecutive months and future payments
are reasonably assured.
Management actively manages impaired loans in an effort to reduce loan balances by working with customers to develop
strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means.
Real estate values in the Company’s market area have appeared to stabilize. In addition, employment conditions within the
Company’s market area have shown substantial improvement. The unemployment rate for the Scranton/Wilkes-
Barre/Hazleton Pennsylvania metropolitan area improved to 5.1% for December 2015 from 6.0% for December 2014.
However, continued improvement of these metrics cannot be assured. Any weakening of economic and employment
conditions could result in real estate devaluations which could negatively impact asset quality and, accordingly, cause an
increase in the provision for loan and lease losses.
Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan
amount and the fair value of the collateral, less the estimated costs to sell. For the Company’s calculations for real estate
secured loans, a factor of 10% is generally utilized to estimate costs to sell, which is based on typical cost factors, such as a
6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. If the
valuation indicates that the fair value has deteriorated below the carrying value of the loan, the difference between the fair
value and the principal balance is charged off. For impaired loans for which the value of the collateral less costs to sell
exceeds the loan value, the impairment is considered to be zero.
50
The following schedule reflects non-performing loans including non-performing TDRs, OREO and accruing TDRs as of
December 31 for each of the last five years:
Non-performing Loans, OREO and Accruing TDRs
(dollars in thousands)
Non-accrual loans, including non-accrual TDRs ......... $
Loans past due 90 days or more and still accruing .......
Total non-performing loans ..........................................
Other real estate owned ................................................
Total non-performing loans and OREO .................... $
2015
2014
December 31,
2013
2012
3,788 $
-
3,788
3,154
6,942 $
5,522 $
-
5,522
2,255
7,777 $
9,652 $
6,356 $
57
19
9,709
6,375
4,246
3,983
10,621 $ 13,692 $
2011
19,913
5
19,918
6,958
26,876
Accruing TDRs ............................................................ $
Non-performing loans as a percentage of gross loans ..
4,982 $
0.52%
5,282 $
0.82 %
3,995 $
0.99%
7,517 $
1.62%
5,680
2.93 %
Work-out efforts focused on the effective management and resolution of problem credits and the prompt and aggressive
disposition of foreclosed properties lead to continued improvement in the Company’s asset quality in 2015. Total non-
performing loans and OREO decreased $0.8 million, or 10.7%, to $6.9 million at December 31, 2015 from $7.8 million at
December 31, 2014. The Company’s ratio of non-performing loans to total gross loans improved to 0.52% at December 31,
2015 from 0.82% at December 31, 2014, as management continued to reduce the balance of non-accrual loans. Moreover,
the Company’s ratio of non-performing loans and OREO as a percentage of shareholders’ equity decreased to 8.1% at
December 31, 2015 from 15.1% at December 31, 2014. Management continues to monitor non-accrual loans, delinquency
trends and economic conditions within the Company’s market area on an on-going basis in order to proactively address any
potential collection-related issues.
TDRs at December 31, 2015 and 2014 were $5.8 million and $9.0 million, respectively. Accruing and non-accruing TDRs
were $5.0 million and $0.8 million, respectively at December 31, 2015 and $5.3 million and $3.7 million, respectively at
December 31, 2014. There were 8 loans modified as TDRs during the year ended ended December 31, 2015, with an
aggregate post-modification outstanding balance of $1.7 million. New modifications during the year ended December 31,
2015 included 5 residential real estate loans, 1 commercial real estate loan, 1 construction, land acquisition and development
loan and 1 commercial and industrial loan. The terms of such modifications included one or a combination of the following:
extension of term, capitalization of real estate taxes or principal forbearance.
The average balance of impaired loans was $11.1 million and $9.5 million for the years ended December 31, 2015 and 2014,
respectively. The Company recognized $258 thousand and $235 thousand of interest income on impaired loans for the years
ended December 31, 2015 and 2014, respectively.
The following table presents the changes in non-performing loans for the years ended December 31, 2015 and 2014. Loan
foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees:
Changes in Non-performing Loans
Year ended December 31,
(in thousands)
Balance, January 1 ........................................................................................................... $
Loans newly placed on non-accrual .................................................................................
Change in loans past due 90 days or more and still accruing ...........................................
Loan foreclosures ............................................................................................................
Loans returned to performing status .................................................................................
Loans charged-off ............................................................................................................
Loan payments received ...................................................................................................
Balance, December 31...................................................................................................... $
2015
2014
5,522 $
5,636
-
(3,697)
(135)
(2,576)
(962)
3,788 $
6,375
2,348
(19)
(13)
(222)
(1,289)
(1,658)
5,522
51
The additional interest income that would have been earned on non-accrual and restructured loans had the loans been
performing in accordance with their original terms for both of the years ended December 31, 2015 and 2014 approximated
$0.4 million.
The Company had one large commercial real estate loan in the amount of $3.5 million that was a nonperforming TDR at
December 31, 2014. The loan is also supported by a guarantee by a U.S. governmental agency. The Company foreclosed
upon this property and it was transferred to OREO in 2015 at its fair value less cost to sell of $1.5 million, which is based on
a signed sales agreement with an unrelated third party that is scheduled to close prior to the close of the first quarter of 2016.
The remaining loan balance of $2.1 million is included in other assets as a receivable due from the U.S. governmental agency.
The majority of the loans placed on non-accrual status were comprised of three commercial relationships totaling $3.1 million.
Specifically, one relationship involving a construction, land acquisition and development loan with a recorded investment of
$0.7 million was placed on non-accrual in the third quarter of 2015, and based on a current appraisal, written down $0.3
million to $0.4 million. Another commercial relationship involving a commercial real estate loan and a commercial and
industrial loan with an aggregate recorded investment of $0.8 million was also placed on non-accrual in the third quarter of
2015. In the second quarter of 2015 one large commercial real estate loan with a recorded investment of $1.7 million was
modified as a TDR and placed on non-accrual. As part of its impairment analysis, the Company determined this loan to be
collateral-dependent, with the analysis resulting in the loan being partially charged-down in the amount of $0.9 million.
In addition to the non-performing loans identified in the table above, the Bank regularly monitors potential problem loans
which consist of substandard and accruing loans. The Company experienced substantial improvement in the volume of these
loans which decreased $6.9 million, or 32.4% to $14.4 million at December 31, 2015 from $21.3 million at December 31,
2014.
The following table outlines accruing loan delinquencies and non-accrual loans as a percentage of gross loans at December
31, 2015, 2014 and 2013:
Loan Delinquencies and Non-accrual Loans
Accruing (in days):
30 - 59
60 - 89
90+
.......................................................................
.......................................................................
.......................................................................
.......................................................................
Total delinquencies .......................................................................
Non-accrual
2015
December 31,
2014
2013
0.18%
0.14%
0.00%
0.52%
0.84%
0.30%
0.09%
0.00%
0.82%
1.21%
0.46%
0.09%
0.00%
0.99%
1.54%
Total delinquencies, as a percent of gross loans, continued to improve in 2015, as delinquencies for accruing loans decreased
$0.2 million to $2.4 million at December 31, 2015 from $2.6 million at December 31, 2014, primarily due to decreases in
past due residential real estate and consumer loans. In its evaluation of the ALLL, management considers a variety of
qualitative factors including changes in the volume and severity of delinquencies.
While economic conditions improved significantly in the Company’s market area, management continues to recognize some
weakness within the local real estate and job markets.. As previously mentioned, the unemployment rate for the Scranton-
Wilkes-Barre-Hazleton metropolitan area, the Company’s predominant market area, improved to a seasonally adjusted rate
of 5.1% for December 2015 from 6.0% for December 2014. However, unemployment in the Company’s market continues to
rank among the highest as compared to Pennsylvania’s 14 metropolitan areas and lags behind the unemployment rate of 4.8%
for the entire Commonwealth. The Company tries to mitigate these factors by emphasizing strict underwriting standards.
52
Allowance for Loan and Lease Losses
The ALLL represents management’s estimate of probable loan losses inherent in the loan portfolio. The ALLL is analyzed
in accordance with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ALLL
in relation to the risks inherent in the loan portfolio.
As part of its evaluation, management considers qualitative and environmental factors, including, but not limited to:
• Changes in national, local, and business economic conditions and developments, including the condition of various
market segments;
• Changes in the nature and volume of the Company’s loan portfolio;
• Changes in the Company’s lending policies and procedures, including underwriting standards, collection, charge-
off and recovery practices and results;
• Changes in the experience, ability and depth of the Company’s management and staff;
• Changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board
of Directors;
• Changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of
non-accrual loans, TDRs and other loan modifications;
• The existence and effect of any concentrations of credit and changes in the level of such concentrations;
• The effect of external factors such as competition and legal and regulatory requirements on the level of estimated
credit losses in the Company’s current loan portfolio; and
• Analysis of customers’ credit quality, including knowledge of their operating environment and financial condition.
Evaluations are intrinsically subjective, as the results are estimated based on management knowledge and experience and are
subject to interpretation and modification as information becomes available or as future events occur. Management monitors
the loan portfolio on an ongoing basis with emphasis on weakness in both the real estate market and the economy in general
and its effect on repayment. Adjustments to the ALLL are made based on management’s assessment of the factors noted
above.
For purposes of its analysis, all loan relationships with an aggregate balance greater than $100 thousand that are rated
substandard and non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed
individually to determine the amount of impairment. Circumstances such as construction delays, declining real estate values,
and the inability of the borrowers to make scheduled payments have resulted in these loan relationships being classified as
impaired. The Company utilizes the fair value of collateral method for collateral-dependent loans and TDRs for which
repayment depends on the sale of collateral. For non-collateral-dependent loans and TDRs, the Company measures
impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate.
With regard to collateral-dependent loans, appraisals are received at least annually to ensure that impairment measurements
reflect current market conditions. Should a current appraisal not be available at the time of impairment analysis, other
valuation sources including current letters of intent, broker price opinions or executed agreements of sale may be used. Only
downward adjustments are made based on these supporting values. Included in all impairment calculations is a cost to sell
adjustment of approximately 10%, which is based on typical cost factors, including a 6% broker commission, 1% transfer
taxes and 3% various other miscellaneous costs associated with the sales process. Sales costs are periodically revised based
on actual experience. The ALLL analysis is adjusted for subsequent events that may arise after the end of the reporting period
but before the financial reports are filed.
The Company’s ALLL consists of both specific and general components. At December 31, 2015, the ALLL that related to
impaired loans that are individually evaluated for impairment, the guidance for which is provided by ASC 310 “Impairment
of a Loan” (“ASC 310”), was $381 thousand, or 4.3%, of the total ALLL. A general allocation of $8.4 million was calculated
for loans analyzed collectively under ASC 450 “Contingencies” (“ASC 450”), which represented 95.7% of the total ALLL
of $8.8 million. The ratio of the ALLL to total loans at December 31, 2015 and December 31, 2014 was 1.20% and 1.72%,
respectively, based on total loans of $731.2 million and $669.5 million, respectively. The decrease in the ALLL as a
percentage of total loans reflects asset quality improvements, reductions in historical loss factors and improvements in
qualitative factors.
At December 31, 2015, based on its evaluation of the ALLL, management established an unallocated reserve of $74 thousand.
As part of its evaluation, management applies loss rates to each loan segment. The loss rates are based on actual historical
loss experience for the respective loan segment. The Company has experienced net recoveries related to its commercial and
industrial segment of the loan portfolio for the majority of the quarters in the twelve-quarter lookback period, which resulted
53
in an overall negative historical loss factor for this segment. Management decided to reverse the negative provision created
by the negative historical loss factor and establish an unallocated reserve. Management will continue to monitor the
unallocated balance for propriety as part of its quarterly evaluation of the ALLL.
The ALLL equaled $8.8 million at December 31, 2015, a decrease of $2.7 million from $11.5 million at December 31, 2014.
The Company recorded net charge offs of $1.4 million in 2015. However, due to continued improvement in historical loss
ratios, levels of criticized loans and qualitative factors, the Company recorded a credit for loan and lease losses of $1.3 million
for the year ended December 31, 2015.
The following table presents an allocation of the ALLL and percent of loans in each category at December 31, for each of
the last five years:
Allocation of the ALLL
2015
2014
December 31,
2013
2012
2011
Percentage
of Loans
in Each
Category
to Total
Loans
Percentage
of Loans
in Each
Category
to Total
Loans
Allowance
Percentage
of Loans
in Each
Category
to Total
Loans
Allowance
Allowance
Percentage
of Loans
in Each
Category
to Total
Loans
Allowance
Percentage
of Loans
in Each
Category
to Total
Loans
Allowance
(dollars in
thousands)
Residential real
estate ................. $
Commercial real
estate ................
Construction, land
acquisition and
development ....
Commercial and
industrial ...........
Consumer .............
State and political
subdivisions ......
Unallocated ..........
Total ................ $
1,333
17.87 % $
1,772
18.35 % $
2,287
17.86 % $
1,764
15.09 % $
1,823
11.78%
3,346
33.54 %
4,663
34.87 %
6,017
33.97 %
8,062
37.07 %
11,151
37.75%
853
4.22 %
665
2.81 %
924
3.79 %
2,162
5.44 %
2,590
4.92%
1,205
1,494
485
74
8,790
20.49 %
17.58 %
2,104
1,673
19.72 %
18.24 %
2,321
1,789
19.74 %
18.44 %
4,167
1,708
18.35 %
18.37 %
3,292
1,526
25.64%
16.45%
6.30 %
0.00 %
598
45
100.00 % $ 11,520
6.01 %
0.00 %
679
-
100.00 % $ 14,017
6.20 %
0.00 %
673
-
100.00 % $ 18,536
5.68 %
0.00 %
452
-
100.00 % $ 20,834
3.46%
0.00%
100.00%
54
The following table presents an analysis of the ALLL category for each of the last five years:
Reconciliation of the ALLL
(in thousands)
Balance, January 1, .............................................. $
Charge-offs:
Residential real estate .......................................
Commercial real estate .....................................
Construction, land acquisition and
development ...................................................
Commercial and industrial ................................
Consumer ..........................................................
State and political subdivision ..........................
Total charge-offs ..................................................
Recoveries of charged-off loans:
Residential real estate .......................................
Commercial real estate .....................................
Construction, land acquisition and
development ...................................................
Commercial and industrial ................................
Consumer ..........................................................
State and political subdivision ..........................
Total recoveries ....................................................
Net charge-offs (recoveries) ................................
(Credit) provision for loan and lease losses .........
Balance, December 31.......................................... $
Ratios:
Net charge-offs (recoveries) as a percentage of
2015
For the Year Ended December 31,
2012
2013
2014
2011
11,520 $
14,017
$
18,536
$
20,834 $
22,575
139
912
688
180
716
-
2,635
58
307
-
400
485
-
1,250
1,385
(1,345)
8,790 $
204
-
45
217
922
-
1,388
90
362
3,538
262
508
-
4,760
(3,372)
(5,869)
11,520
$
664
65
179
341
655
-
1,904
343
879
130
1,853
450
-
3,655
(1,751)
(6,270)
14,017
$
683
3,298
258
3,389
673
-
8,301
35
1,035
265
265
338
-
1,938
6,363
4,065
18,536 $
1,273
2,395
1,857
416
739
-
6,680
57
93
2,188
1,852
226
-
4,416
2,264
523
20,834
average loans .....................................................
0.20%
(0.51)%
(0.28)%
0.97%
0.31%
Allowance for loan and lease losses as a percent
of gross loans outstanding at period end ............
1.20%
1.72%
2.18%
3.10%
3.07%
Other Real Estate Owned
At December 31, 2015, there were 11 properties with an aggregate carrying value of $3.2 million in OREO, compared to 15
properties with an aggregate balance of $2.3 million at December 31, 2014. During the year ended December 31, 2015, there
were four properties with an aggregate carrying value of $1.7 million foreclosed upon. Comprising approximately 91.0% of
the carrying value of the foreclosures was one commercial real estate property with a fair value less cost to sell of $1.5
million. The property is currently under a sales agreement, which is scheduled to close by the end of the first quarter of 2016.
During the year ended December 31, 2014, the Company foreclosed on one property with a carrying value of $13 thousand.
Included in OREO were three properties previously held in bank premises and equipment that were transferred to OREO due
to a change in their intended use. The properties include two commercial lots previously held for future expansion and a
former branch office located in Stroudsburg, Pennsylvania. The aggregate carrying value of these properties was $1.4 million
and represented 43.7% of OREO at December 31, 2015.
During the year ended December 31, 2015, there were seven sales and one partial sale of properties with an aggregate carrying
value of $0.6 million. The Company realized net gains on the sale of these properties of $162 thousand, which is included in
non-interest income. There were eight sales and two partial sales of properties with an aggregate carrying value of $1.6
million during the twelve months ended December 31, 2014. The Company realized net gains on the sale of these properties
of $209 thousand, which is included in non-interest income for the year ended December 31, 2014.
55
The Company adjusts for subsequent declines in the fair value of OREO properties through valuation adjustments included
in non-interest expense. Valuation adjustments totaled $0.2 million in 2015 and $2.2 million in 2014. The large valuation
adjustment in 2014 included writedowns to liquidation value of four properties that were approaching the regulatory 5-year
holding period and subsequent writedowns on two properties that were transferred from bank premises and equipment located
in Monroe County, Pennsylvania due to continued declines in real estate values in this area.
The Company actively markets OREO properties for sale through a variety of channels including internal marketing and the
use of outside brokers/realtors. The carrying value of OREO is generally calculated at an amount not greater than 90% of the
most recent fair market appraised value unless specific conditions warrant an exception. A 10% factor is generally used to
estimate costs to sell, which is based on typical cost factors, such as 6% broker commission, 1% transfer taxes, and 3%
various other miscellaneous costs associated with the sales process. This fair value is updated on an annual basis or more
frequently if new valuation information is available. Further deterioration in the real estate market could result in additional
losses on these properties.
The following table presents the activity in OREO for each of the three years ended December 31, 2015, 2014 and 2013:
Activity in OREO
(in thousands)
Balance, Janauary 1 ........................................................................................ $
Property foreclosures .....................................................................................
Bank premises transferred to OREO ..............................................................
Valuation adjustments ....................................................................................
Carrying value of OREO sold ........................................................................
Balance, December 31.................................................................................... $
For the Years Ended December 31,
2013
2014
2015
2,255 $
1,717
-
(208)
(610)
3,154 $
4,246 $
13
1,749
(2,200)
(1,553)
2,255 $
3,983
255
1,819
(223)
(1,588)
4,246
The following table presents a distribution of OREO at December 31 for the past five years:
Distribution of OREO
(in thousands)
Land / lots ............................................................. $
Commercial real estate .........................................
Residential real estate ...........................................
Total other real estate owned ............................ $
2015
2014
December 31,
2013
2012
2011
785 $
2,342
27
3,154 $
1,287 $
941
27
2,255 $
3,549 $
647
50
4,246 $
2,711 $
1,245
27
3,983 $
4,293
1,845
820
6,958
The expenses related to maintaining OREO, including the subsequent write-downs of the properties related to declines in
value since foreclosure, net of any income received, amounted to $0.4 million, $2.6 million, and $0.7 million for the years
ended December 31, 2015, 2014, and 2013, respectively.
Deposits
Total deposits increased $26.2 million, or 3.3%, to $821.5 million at December 31, 2015 from $795.3 million at the end of
2014. Non-interest-bearing demand deposits increased $30.5 million, or 24.6%, while interest-bearing deposits decreased
$4.3 million, or 0.6%. The increase in non-interest-bearing demand deposits primarily reflected balance fluctuations of
several large commercial relationships. The decrease in interest-bearing deposits was primarily due to a decrease in time
deposits $100 thousand and over of $35.8 million, partially offset by increases in interest-bearing demand, savings and other
time deposits of $18.6 million, $3.4 million and $9.6 million, respectively. The 32.0% decrease in large denomination time
deposits was due largely to the planned runoff of $33.3 million in certificates of deposit that were generated through a national
deposit listing service. As part of the Company’s asset/liability management strategy, management focused on replacing these
higher-costing deposits as they matured with lower-costing core-customer deposits, brokered certificates of deposit and
advances through the FHLB of Pittsburgh. The 5.4% increase in interest-bearing demand deposits reflected a $68.9 million,
or 70.2%, increase in money market accounts, which was due primarly to the attainment of a large deposit relationship at the
end of the second quarter of 2015. Partially offsetting the increase in money market accounts was a $51.2 million, or 22.1%,
56
decrease in NOW accounts, which resulted from decreases in public fund balances, as a state budget impasse caused delays
in funding for the Company’s municipal customers, as well as the loss of one large public fund deposit relationship in the
third quarter of 2015.
Non-interest-bearing demand deposits averaged $5.8 million, or 4.3%, higher in 2015 as compared to 2014. Interest-bearing
deposits averaged $674.6 million in 2015, a decrease of $3.2 million, or 0.5%, compared to $677.8 million in 2014. The
decline was concentrated in time deposits, as average time deposits over $100,000 decreased $38.2 million, or 28.1%, to
$97.7 million in 2015 from $135.9 million in 2014 due to the planned runoff of the certificates generated throught the national
listing service. Time deposits with balances less than $100 thousand declined $5.6 million, or 4.3%, to $126.9 million in
2015 from $132.5 million in 2014. Partially offsetting the decreases in time deposits were increases in average interest-
bearing demand and savings deposits which grew $37.7 million, or 11.7%, and $2.9 million, or 3.3%, respectively, comparing
2015 and 2014. The Company was successful in continuing to reduce its funding costs as evidenced by an 8 basis point
decrease in the rate paid on average interest-bearing deposits to 0.39% in 2015 from 0.47% in 2014. The decrease was driven
primarily by pricing decreases from time deposits, which are sensitive to interest rate changes. The Company elected to allow
higher-costing time deposits to mature and chose to be more conservative in setting rates on new deposits and renewals. The
average rate paid on time deposits with balances less than $100 thousand decreased 26 basis points to 0.96%, while the rate
paid on time deposits over $100 thousand decreased 7 basis points to 0.70% during 2015.
Management recognizes the importance of deposit growth as the Company’s primary funding source for its loan products
and is in the process of developing new products and strategies focused on growing commercial and consumer demand
deposit balances and municipal deposit relationships in 2016.
The average amount of, and the rate paid on, the major classifications of deposits for the past three years are summarized in
the following table:
Deposit Distribution
(dollars in thousands)
Interest-bearing deposits:
2015
For the Year Ended December 31,
2014
2013
Amount Rate
Amount Rate
Amount Rate
Demand...................................... $
Savings ......................................
Time ..........................................
Total interest-bearing deposits ......
358,442
91,603
224,538
674,583
0.19 % $
0.07 %
0.85 %
0.39 %
320,780
88,678
268,360
677,818
0.14% $ 302,258
85,872
0.06%
317,367
0.99%
705,497
0.47%
0.18 %
0.10 %
1.11 %
0.59 %
Non-interest-bearing deposits .......
139,945
134,132
130,186
Total deposits ................................ $
814,528
$
811,950
$ 835,683
The following table presents the maturity distribution of time deposits of $100,000 or more at December 31, 2015 and 2014:
Maturity Distribution of Time Deposits Greater than $100,000
(in thousands)
3 months or less ................................................................................................................ $
Over 3 through 6 months ..................................................................................................
Over 6 through 12 months ................................................................................................
Over 12 months ................................................................................................................
Total .............................................................................................................................. $
December 31,
2015
2014
26,773 $
16,186
19,185
14,053
76,197 $
30,040
27,919
32,052
22,033
112,044
57
Borrowings
Short-term borrowings generally represent overnight borrowing transactions through the FHLB providing for short-term
funding requirements of the Company and mature within one business day of the transaction. Short-term borrowings may
also include Federal funds sold and borrowings through the FRB discount window and are considered to be a contingency
source of funding. Other than testing its availability for contingency funding planning purposes, the Company did not
purchase any Federal funds or borrow from the Federal Reserve discount window during the years ended December 31, 2015,
2014 and 2013. The Company had $60.5 million in outstanding short-term borrowings with the FHLB of Pittsburgh at
December 31, 2015. There were no short-term borrowings outstanding at December 31, 2014 and 2013.
Long-term debt is comprised of FHLB term advances, subordinated debentures and junior subordinated debentures and
totaled $99.6 million at December 31, 2015, an increase of $3.1 million, or 3.2%, from $96.5 million at December 31, 2014.
The increase was related a $14.1 million increase in advances through the FHLB of Pittsburgh, partially offset by an $11.0
million reduction in the Notes. FHLB advances are collateralized under a blanket pledge agreement. The Company is also
required to purchase FHLB stock based upon the amount of advances outstanding. Due to the increase in FHLB advances,
the FHLB stock required to be held by the Company was $6.3 million at December 31, 2015, an increase of $3.5 million
from $2.8 million at December 31, 2014. At December 31, 2015, the Company had $127.3 million of credit with the FHLB
available for borrowing purposes.
On September 1, 2009, the Company offered only to accredited investors up to $25.0 million principal amount of unsecured
subordinated debentures due September 1, 2019 (the “Notes”). Prior to July 1, 2015, the Notes had a fixed interest rate of 9%
per annum. Payments of interest are payable to registered holders of the Notes (the “Noteholders”) quarterly on the first of
every third month, subject to the right of the Company to defer such payment. On June 30, 2015, pursuant to approval from
all of the Noteholders and the Reserve Bank, the Company amended the original terms of the Notes to reduce the interest rate
payable from 9.00% to 4.50% effective July 1, 2015 and to accelerate a partial repayment of principal amount under the
Notes. Pursuant to the approved amendment, on June 30, 2015, the Company repaid 44% of the original principal amount,
or $11.0 million, of the Notes outstanding to the holders on June 30, 2015, with the remaining $14.0 million in principal to
be repaid as follows: (a) 16% of the original principal amount, or $4.0 million, payable on September 1, 2017; (b) 20% of
the original principal amounts, or $5.0 million, payable on September 1, 2018; and (c) the final 20% of the original principal
amount, or $5.0 million, payable on September 1, 2019, the maturity date of the Notes. The principal balance outstanding for
these notes was $14.0 million at December 31, 2015 and $25.0 million at December 31, 2014.
While the Company was under the Written Agreement, principal and interest payments on the Notes required written non-
objection from the Reserve Bank. Pursuant to the Written Agreement, the Company had been deferring the quarterly interest
payments on the Notes beginning December 1, 2010 and ending on June 1, 2015. Regularly scheduled quarterly interest
payments were resumed on September 1, 2015, and it is the Company’s intent to continue scheduled interest payments on a
go-forward basis. Additionally, on January 27, 2016, that the Board of Directors authorized payment on March 1, 2016 of all
interest that the Company had previously been deferring on the Notes. The aggregate payment, totaling $11.0 million,
includes all deferred interest and interest that is due and payable on March 1, 2016. The accrued and unpaid interest associated
with the Notes amounted to $10.9 million and $9.9 million at December 31, 2015 and 2014, respectively.
The Company also had $10.3 million of junior subordinated debentures at December 31, 2015 and 2014. The interest rate on
these debentures, resets quarterly at a spread of 1.67% above the current 3-month Libor rate. The average rate paid for junior
subordinated debentures in 2015 was 1.99%, compared to 1.93% in 2014.
Average borrrowed funds increased $14.3 million, or 15.2%, to $108.0 million in 2015 from $93.7 million in 2014. The
average rate paid for long-term debt decreased 116 basis points to 2.01% in 2015 from 3.17% in 2014. The decrease in rate
on the long-term debt was due to a reduction in the interest rate on the Company’s subordinated notes, coupled with a decrease
in the cost of FHLB funding. The Company participates in the FHLB’s “Community Lending Program,” which offers match
funding for loans originated for qualified community and economic development projects at very competitive rates that are
typically 15 to 25 basis points below the FHLB’s regular published rates. Of the $75.3 million in FHLB term advances
outstanding at December 31, 2015, $46.4 million were advances under this program had a weighted-average cost of 0.33%
and maturity terms ranging from three months to two years.
The maximum amount of total borrowings outstanding at any month end during the years ended December 31, 2015 and
2014 were $160.1 million and $122.7 million, respectively. For further discussion of the Company’s borrowings, see Note
11-“Borrowed Funds” in the Notes to the consolidated financial statements included in Item 8 hereof to this Annual Report
on Form 10-K.
58
Liquidity
The term liquidity refers to the ability of the Company to generate sufficient amounts of cash to meet its cash flow
needs. Liquidity is required to fulfill the borrowing needs of the Company’s credit customers and the withdrawal and maturity
requirements of its deposit customers, as well as to meet other financial commitments. The Company’s liquidity position is
impacted by several factors, which include, among others, loan origination volumes, loan and investment maturity structure
and cash flows, deposit demand and certificate of deposit maturity structure and retention. The Company has liquidity and
contingent funding policies in place that are designed with controls in place to provide advanced detection of potentially
significant funding shortfalls, establish methods for assessing and monitoring risk levels, and institute prompt responses that
may alleviate a potential liquidity crisis. Management monitors the Company’s liquidity position and fluctuations daily so
that the Company can adapt accordingly to market influences and balance sheet trends. Management also forecasts liquidity
needs, performs stress tests on its liquidity levels and develops strategies to ensure adequate liquidity at all times.
The Company’s statements of cash flows present the change in cash and cash equivalents from operating, investing and
financing activities. Cash and due from banks and interest-bearing deposits in other banks are the Company’s most liquid
assets. At December 31, 2015, cash and cash equivalents totaled $21.1 million, a decrease of $14.6 million from $35.7
million at December 31, 2014, as net cash outlays for investing activities exceeded net cash inflows from operating and
financing activities. Cash outlays for investing activities used $109.0 million of cash and cash equivalents during the year
ended December 31, 2015, which was due largely to a net increase in loans to customers of $68.8 million. In addition,
purchases of available-for-sale securities, net of proceeds received from sales, maturities, calls and principal reductions from
securities, and FHLB of Pittsburgh stock used $36.0 million and $3.5 million of cash and cash equivalents, respectively.
Financing activities provided $89.8 million in net cash, which resulted primarily from $74.6 million in proceeds from FHLB
of Pittsburgh advances, net of repayments, and a $26.2 million net increase in deposits. Partially offsetting these inflows was
an $11.0 million principal reduction on the Notes. Additionally, the Company’s operating activities provided $4.6 million in
net cash in 2015. Net income, adjusted for the effects of non cash transactions including, among others, depereciation and
amortization, the credit for loan and lease losses and change in deferred taxes, is the primary source of funds from operations.
Despite the decrease in cash and cash equivalents, management believes that the Company’s liquidity position is sufficient
to meet its cash flow needs as of December 31, 2015. The Company generally utilizes core deposits as its primary source of
liquidity. Core deposits include non-interest-bearing and interest-bearing demand deposits, savings deposits and other time
deposits, net of brokered deposits and deposits generated through the Promontory Interfinancial Network, which include time
deposits issued under Certificate of Deposit Account Registry Service (“CDARs”) and money market and NOW accounts
issued through the Insured Cash Sweep (“ICS”) program. Participating in the Promontory Interfinancial Network programs
allow the Company to service and attract potential high-balance deposits customers who want the security of full-FDIC
insurance but want to maintain a local deposit relationship. Core deposits averaged $680.8 million for the year ended
December 31, 2015, an increase of $9.3 million, or 1.4%, compared to $671.5 million for the year ended December 31, 2014.
The increase in core deposits primarily reflected growth in interest-bearing demand, net of deposits issued through the ICS
program, of $15.7 million, non-interest-bearing demand deposits of $5.8 million and savings deposits of $2.9 million.
Partially offsetting these increases was a decrease in other time deposits, net of brokered deposits and CDARs certificates, of
$15.1 million. In addition to core deposits, the Company currently utilizes brokered certificates of deposit, funding through
the Promontory Financial Network and advances through the FHLB of Pittsburgh as alternative sources of liquidity. At
December 31, 2015, the Company had available borrowing capacity with the FHLB of Pittsburgh of $160.2 million.
Capital
A strong capital base is essential to the continued growth and profitability of the Company and is therefore a management
priority. The Company’s principal capital planning goals are to provide an adequate return to shareholders while retaining a
sufficient base from which to provide for future growth, while at the same time complying with all regulatory standards. As
more fully described in Note 17, “Regulatory Matters” to the notes to the consolidated financial statements included in Item
8 of this Annual Report on Form 10-K, regulatory authorities have prescribed specified minimum capital ratios as guidelines
for determining capital adequacy to help assure the safety and soundness of financial institutions.
59
The following schedules present information regarding the Company’s risk-based capital at December 31, 2015, 2014, and
2013 and selected other capital ratios:
(in thousands)
Company:
Tier I common equity ......................................................................... $
2015
December 31,
2014
2013
74,945
N/A
N/A
Tier I capital .......................................................................................
74,945 $
59,930 $
46,165
Tier II capital:
Subordinated notes .........................................................................
Allowable portion of allowance for loan losses ..............................
Total tier II capital ..........................................................................
Total risk-based capital ...................................................................... $
9,800
9,090
18,890
93,835 $
25,000
8,591
33,591
93,521 $
23,085
8,462
31,547
77,712
Total risk-weighted assets .................................................................. $
Total average assets (for Tier 1 leverage ratio) .................................. $
795,887 $
1,031,426 $
683,956 $
990,346 $
670,894
980,754
Bank:
Tier I common equity ......................................................................... $
100,949
N/A
N/A
Tier I capital .......................................................................................
100,949
96,816
81,581
Tier II capital:
Allowable portion of allowance for loan losses ..............................
Total tier II capital ..........................................................................
Total risk-based capital ...................................................................... $
9,090
9,090
110,039 $
8,587
8,587
105,403 $
8,456
8,456
90,037
Total risk-weighted assets .................................................................. $
Total average assets (for Tier 1 leverage ratio) .................................. $
795,490 $
1,030,828 $
683,576 $
990,407 $
670,416
980,747
60
For Capital
To Be Well
Capitalized
Under Prompt
Corrective
Actual
Amount Ratio
Adequacy Purposes Action Provision
Amount Ratio
Amount Ratio
(dollars in thousands)
December 31, 2015
Total capital (to risk-weighted assets)
Company ............................................... $
93,835
Bank ...................................................... $ 110,039
11.79% $ >63,671
13.83% $ >63,639
N/A
8.00%
8.00% $ >79,549
N/A
10.00%
Tier I capital (to risk-weighted assets)
74,945
Company ............................................... $
Bank ...................................................... $ 100,949
9.42% $ >47,753
12.69% $ >47,729
N/A
6.00%
6.00% $ >63,639
N/A
8.00%
Tier I common equity (to risk-weighted
assets)
74,945
Company ............................................... $
Bank ...................................................... $ 100,949
Tier I capital (to average assets)
9.42% $ >35,815
12.69% $ >35,797
N/A
4.50%
4.50% $ >51,707
Company ............................................... $
74,945
Bank ...................................................... $ 100,949
7.27% $ >41,257
9.79% $ >41,233
4.00%
N/A
4.00% $ >51,541
N/A
6.50%
N/A
5.00%
For Capital
To Be Well
Capitalized
Under Prompt
Corrective
Actual
Amount Ratio
Adequacy Purposes Action Provision
Amount Ratio
Amount Ratio
(dollars in thousands)
December 31, 2014
Total capital (to risk-weighted assets)
Company ............................................... $
93,521
Bank ...................................................... $ 105,403
13.67% $ >54,717
15.42% $ >54,686
Tier I capital (to risk-weighted assets)
>8.00%
>8.00% $ >68,358 >10.00%
N/A
N/A
Company ............................................... $
Bank ...................................................... $
59,930
96,816
8.76% $ >27,358
14.16% $ >27,343
N/A
>4.00%
>4.00% $ >41,015
N/A
>6.00%
Tier I capital (to average assets)
Company ............................................... $
Bank ...................................................... $
59,830
96,816
6.05% $ >39,614
9.78% $ >39,616
>4.00%
N/A
>4.00% $ >49,520
N/A
>5.00%
Despite net income of $35.8 million in 2015, the Company’s total regulatory capital increased only $0.3 million to $93.8
million at December 31, 2015 from $93.5 million at December 31, 2014. For regulatory capital purposes, Tier I capital is
adjusted for deferred tax assets that arise of NOLs and tax credit carryforwards. In addition, the Company’s Tier II capital
was impacted by the $11.0 million prepayment of the Notes. The Company’s and the Bank’s risk-based capital ratios
exceeded the minimum regulatory capital ratios required for adequately capitalized institutions. Based on the most recent
notification from the OCC, the Bank was categorized as well capitalized at December 31, 2015 and 2014. There are no
conditions or events since this notification the management believes have changed this category.
As of December 31, 2015, there were 33,485,755 common shares available for future sale or share dividends. The number of
shareholders of record at December 31, 2015 was 1,778. Quarterly market highs and lows, dividends paid and known market
makers are highlighted in Part I, Item 5 of this report. Refer to Note 17, “Regulatory Matters,” to the Notes to consolidated
financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of our capital requirements
and dividend limitations.
Additionally, the Company has available 20,000,000 authorized shares of preferred stock. There were no preferred shares
issued and outstanding at December 31, 2015 and 2014.
During 1999, the Company implemented a Dividend Reinvestment Plan (“DRP”) which permits participants to automatically
reinvest cash dividends on all of their shares and to make voluntary cash contributions under terms of the plan. Under the
61
DRP, participants purchase, at a 10% discount to the 10-day trading average, common shares that are either newly-issued by
the Company or acquired by the plan administrator in the open market or privately. While under the Consent Order and
Written Agreement, the Company was prohibited from paying dividends without the prior approval of the OCC and the
Reserve Bank. Accordingly, the board of directors on February 26, 2010 voted to suspend payment of the Company’s
quarterly dividend in an effort to conserve capital and subsequently suspended the operation of the DRP Plan in 2011. There
was no new capital issued under the DRP in 2015 and 2014. The Company plans to reinstate the DRP Plan in 2016.
As previously mentioned, the Company and the Bank was released from all regulatory enforcement actions and is no longer
subject to the provisions of the Consent Order or Written Agreement. On January 27, 2016, the Company declared a $0.02
per share dividend payable on March 15, 2016 to shareholders of record March 1, 2016.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP,
are not recorded in our consolidated financial statements, or are recorded in amounts that differ from the notional amounts.
These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions may be
used for general corporate purposes or for customer needs. Corporate purpose transactions would be used to help manage
credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers' requests for
funding.
For the year ended December 31, 2015, the Company did not engage in any off-balance sheet transactions that would have
or would be reasonably likely to have a material effect on its consolidated financial condition. For a further discussion of the
Company’s off-balance sheet arrangements, refer to Note 15, “Commitments, Contingencies, and Concentrations” to the
notes to the consolidated financial statements included in Item 8 hereof to this Annual Report on Form 10-K.
Financial instruments whose contract amounts represent credit risk at December 31 are as follows:
Off-Balance Sheet Commitments
(in thousands)
Commitments to extend credit ................................................................................ $
Standby letters of credit ...........................................................................................
December 31,
2015
2014
170,465 $
22,092
181,446
21,364
The following table details the Company’s commercial commitments summarized by expiration at December 31, 2015:
Expiration of Off-Balance Sheet Commitments
(in thousands)
Commitments to extend credit ............................. $ 170,465 $ 170,447 $
Standby letters of credit........................................
22,092
Total ..................................................................... $ 192,557 $ 192,539 $
22,092
one Year
18 $
-
18 $
- $
-
- $
-
-
-
Total
Amounts
Commited
Less Than
1-3 Years
More Than
3-5 Years
5 Years
In order to provide for probable losses inherent in these instruments, the Company recorded reserves for unfunded
commitments of $300 thousand and $416 thousand at December 31, 2015 and 2014, respectively, which were included in
other liabilities on the consolidated statements of financial condition.
The Company's Finance unit proactively monitors the level of unused commitments against the Company’s available sources
of liquidity from its investment portfolio, from deposit gathering activities as well as available unused borrowing capacity
from the FHLB and the Federal Reserve. The Finance unit reports the results of its liquidity monitoring regularly to the
Company’s Asset/Liability Committee, the Rate and Liquidity Committee, the Senior Management Committee and the Board
of Directors.
62
Contractual Obligations
The following table details the Company’s contractual obligations as of December 31, 2015. Payments due by period in the
following table are based on final maturity dates without consideration of early redemption.
Maturities of Contractual Obligations
(in thousands)
Federal Home Loan Bank advances ..................... $
Subordinated debentures ......................................
Junior subordinated debt ......................................
Operating lease obligations ..................................
Total contractual cash obligations ........................ $
Contractual Payments Due by Period
Less Than
one Year
1-3 Years
3-5 Years
More Than
5 Years
Total
135,802 $ 114,423 $
-
-
585
161,789 $ 115,008 $
14,000
10,310
1,677
15,000 $
9,000
-
587
24,587 $
6,379 $
5,000
-
228
11,607 $
-
-
10,310
277
10,587
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Interest Rate Sensitivity
Market risk is the risk to earnings and/or financial position resulting from adverse changes in market rates or prices, such as
interest rates, foreign exchange rates or equity prices. The Company’s exposure to market risk is primarily interest rate risk
associated with our lending, investing and deposit gathering activities, all of which are other than trading. Changes in interest
rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses.
In addition, variations in interest rates affect the underlying economic value of our assets, liabilities and off-balance sheet
items.
Asset and Liability Management
The Company manages these objectives through its Asset and Liability Management Committee (“ALCO”) and its Rate and
Liquidity and Investment Committees, which consist of certain members of senior management and certain members of the
finance department. Members of the committees meet regularly to develop balance sheet strategies affecting the future level
of net interest income, liquidity and capital. The major objectives of ALCO are to:
● Manage exposure to changes in the interest rate environment by limiting the changes in net interest margin to an
acceptable level within a reasonable range of interest rates;
● Ensure adequate liquidity and funding;
● Maintain a strong capital base; and
● Maximize net interest income opportunities.
ALCO monitors the Company’s exposure to changes in net interest income over both a one-year planning horizon and a
longer-term strategic horizon. ALCO uses net interest income simulations and economic value of equity (“EVE”) simulations
as the primary tools in measuring and managing the Company’s position and considers balance sheet forecasts, the
Company’s liquidity position, the economic environment, anticipated direction of interest rates and the Company’s earnings
sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable
negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO has been enhanced to require
periodic back testing of modeling results, which involves after-the-fact comparisons of projections with the Company’s actual
performance to measure the validity of assumptions used in the modeling techniques.
63
Earnings at Risk and Economic Value at Risk Simulations
Earnings at Risk
Earnings-at-risk simulation measures the change in net interest income and net income under various interest rate
scenarios. Specifically, given the current market rates, ALCO looks at “earnings at risk” to determine anticipated changes in
net interest income from a base case scenario with rate shock scenarios of + 200, +400 and -100 basis point changes to interest
rates. The simulation takes into consideration that not all assets and liabilities re-price equally and simultaneously with market
rates (i.e., savings rate).
Economic Value at Risk
While earnings-at-risk simulation measures the short-term risk in the balance sheet, economic value (or portfolio equity) at
risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets
and liabilities. ALCO examines this ratio regularly, and given the current rate environment, has utilized rate shocks of +200,
+400 and - 100 basis points for simulation purposes. Management recognizes that, in some instances, this ratio may contradict
the “earnings at risk” ratio.
While ALCO regularly performs a wide variety of simulations under various strategic balance sheet and treasury yield curve
scenarios, the following results reflect the Company’s sensitivity over the subsequent twelve months based on the following
assumptions:
● Asset and liability levels using December 31, 2015 as a starting point;
● Cash flows are based on contractual maturity and amortization schedules with applicable prepayments derived from
internal historical data and external sources; and
● Cash flows are reinvested into similar instruments so as to keep interest-earning asset and interest-bearing liability
levels constant.
The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points,
+200 basis points and -100 basis points on net interest income and the change in economic value over a one-year time horizon
from the December 31, 2015 levels:
Rates +200
Rates +400
Rates -100
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Earnings at risk:
Percent change in net interest
income ....................................
(3.2)%
(10.0)%
(6.6)%
(20.0)%
(2.0)%
(5.0)%
Economic value at risk:
Percent change in economic
value of equity ........................
(11.2)%
(20.0)%
(20.7)%
(35.0)%
(4.0)%
(10.0)%
Under the model, the Company’s net interest income and economic value of equity is expected to decrease 3.2% and 11.2%,
respectively, under a 200 basis point interest rate shock. In comparison, model results at December 31, 2014 indicated net
interest income was expected to increase 0.9% given a +200 basis point rate shocks. The shift in Company’s asset/liability
position during 2015 primarily reflected an increase in interest-bearing demand deposits and overnight advances from the
FHLB of Pittsburgh, which reprice immediately under rate shock scenarios.
This analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating
results. These simulations are based on numerous assumptions: the nature and timing of interest rate levels, prepayments on
loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacements of asset and
liability cash flows, and other factors. While assumptions reflect current economic and local market conditions, the Company
cannot make any assurances as to the predictive nature of these assumptions, including changes in interest rates, customer
preferences, competition and liquidity needs, or what actions ALCO might take in responding to these changes.
64
As previously mentioned, as part of its ongoing monitoring, ALCO requires periodic back testing of modeling results, which
involves after-the-fact comparisons of projections with the Company’s actual performance to measure the validity of
assumptions used in the modeling techniques. As part of its quarterly review, management compared tax-equivalent net
interest income recorded for the three months ended December 31, 2015 with tax-equivelent net interest income that was
projected for the same three-month period. The variance between actual and projected tax-equivalent net interest income for
the three-month period ended December 31, 2015 was $137 thousand or 1.7%. Although the variance was deemed immaterial,
ALCO performs a rate/volume analysis between actual and projected results in order to continue to improve the accuracy of
its simulation models.
65
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors of
First National Community Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition of First National Community Bancorp,
Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of income,
comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of First National Community Bancorp, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the results of
their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 11, 2016 expressed an unqualified opinion.
/s/Baker Tilly Virchow Krause, LLP
Wilkes-Barre, Pennsylvania
March 11, 2016
66
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
First National Community Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations, comprehensive loss, changes in shareholders’
equity and cash flows for the year ended December 31, 2013 of First National Community Bancorp, Inc. and Subsidiaries
(the “Company”). These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of
operations and cash flows of First National Community Bancorp, Inc. and Subsidiaries for the year ended December 31,
2013, in conformity with U.S. generally accepted accounting principles.
/s/ RSM US LLP
New Haven, Connecticut
March 24, 2014
67
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
Assets
Cash and cash equivalents:
December 31, December 31,
2015
2014
Cash and due from banks .............................................................................................. $
Interest-bearing deposits in other banks .......................................................................
Total cash and cash equivalents .......................................................................................
Securities available for sale, at fair value .........................................................................
Stock in Federal Home Loan Bank of Pittsburgh, at cost ................................................
Loans held for sale ...........................................................................................................
Loans, net of allowance for loan and lease losses of $8,790 and $11,520 .......................
Bank premises and equipment, net ...................................................................................
Accrued interest receivable ..............................................................................................
Intangible assets ...............................................................................................................
Bank-owned life insurance ...............................................................................................
Other real estate owned ....................................................................................................
Net deferred tax assets......................................................................................................
Other assets ......................................................................................................................
Total assets ............................................................................................................... $
Liabilities
Deposits:
Demand (non-interest-bearing) ..................................................................................... $
Interest-bearing .............................................................................................................
Total deposits ...................................................................................................................
Borrowed funds:
Federal Home Loan Bank of Pittsburgh advances ........................................................
Subordinated debentures ...............................................................................................
Junior subordinated debentures ....................................................................................
Total borrowed funds ................................................................................................
Accrued interest payable ..................................................................................................
Other liabilities .................................................................................................................
Total liabilities .........................................................................................................
19,544 $
1,539
21,083
253,773
6,344
683
724,926
11,193
2,475
137
29,381
3,154
27,807
9,662
1,090,618 $
154,531 $
667,015
821,546
135,802
14,000
10,310
160,112
11,165
11,617
1,004,440
22,657
13,010
35,667
218,989
2,803
603
658,747
11,003
2,075
302
28,817
2,255
-
8,768
970,029
124,064
671,272
795,336
61,194
25,000
10,310
96,504
10,262
16,529
918,631
Shareholders' equity
Preferred shares ($1.25 par)
Authorized: 20,000,000 shares at December 31, 2015 and December 31, 2014
Issued and outstanding: 0 shares at December 31, 2015 and December 31, 2014 .........
-
-
Common shares ($1.25 par)
Authorized: 50,000,000 shares at December 31, 2015 and December 31, 2014
Issued and outstanding: 16,514,245 shares at December 31, 2015 and 16,484,419
shares at December 31, 2014 .........................................................................................
Additional paid-in capital .................................................................................................
Retained earnings (accumulated deficit) ..........................................................................
Accumulated other comprehensive (loss) income ............................................................
Total shareholders' equity ......................................................................................
Total liabilities and shareholders’ equity .......................................................... $
20,643
62,059
3,714
(238 )
86,178
1,090,618 $
20,605
61,781
(32,126)
1,138
51,398
970,029
The accompanying notes to consolidated financial statements are an integral part of these statements.
68
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share data)
Interest income
Interest and fees on loans ......................................................................................................... $
Interest and dividends on securities:
U.S. government agencies ...................................................................................................
State and political subdivisions, tax-free .............................................................................
State and political subdivisions, taxable ..............................................................................
Other securities ....................................................................................................................
Total interest and dividends on securities.......................................................................
Interest on interest-bearing deposits in other banks .................................................................
Total interest income ...............................................................................................
Interest expense
Interest on deposits ...................................................................................................................
Interest on borrowed funds:
Interest on Federal Home Loan Bank of Pittsburgh advances ............................................
Interest on subordinated debentures ....................................................................................
Interest on junior subordinated debentures ........................................................................
Total interest on borrowed funds ....................................................................................
Total interest expense ..............................................................................................
Net interest income before credit for loan and lease losses ................................................
Credit for loan and lease losses ................................................................................................
Net interest income after credit for loan and lease losses ...................................................
Non-interest income
Deposit service charges ............................................................................................................
Net gain on the sale of securities ..............................................................................................
Net gain on the sale of mortgage loans held for sale ...............................................................
Net loss on the sale of classified loans .....................................................................................
Net loss on the sale of education loans ....................................................................................
Net gain on the sale of other real estate owned ........................................................................
Gain on the sale of bank premises and equipment and other assets ........................................
Gain on branch divestitures ......................................................................................................
Loan-related fees ......................................................................................................................
Income from bank-owned life insurance ..................................................................................
Legal settlements ......................................................................................................................
Other .........................................................................................................................................
Total non-interest income .......................................................................................
Non-interest expense
Salaries and employee benefits ................................................................................................
Occupancy expense ..................................................................................................................
Equipment expense ...................................................................................................................
Advertising expense .................................................................................................................
Data processing expense...........................................................................................................
Regulatory assessments ............................................................................................................
Bank shares tax .........................................................................................................................
Expense of other real estate owned ..........................................................................................
Legal expense ...........................................................................................................................
Professional fees .......................................................................................................................
Insurance expenses ...................................................................................................................
Loan collection expenses ..........................................................................................................
Legal settlements ......................................................................................................................
Other losses ...............................................................................................................................
Other operating expenses .........................................................................................................
Total non-interest expense ......................................................................................
Income before income taxes ...................................................................................................
Income tax (benefit) expense ...................................................................................................
Net income .............................................................................................................................. $
Earnings per share
Basic ..................................................................................................................................... $
Diluted ................................................................................................................................. $
Cash Dividends Declared Per Common Share ................................................................... $
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
For the Year Ended December 31,
2014
2015
2013
26,672 $
26,629 $
4,036
109
905
433
5,483
46
32,201
3,494
1,883
324
272
5,973
71
32,673
2,631
3,180
514
1,450
206
2,170
4,801
27,400
(1,345)
28,745
2,960
2,296
292
-
-
162
-
-
442
564
184
900
7,800
13,810
2,284
1,657
483
1,976
950
705
400
437
1,014
659
280
777
281
2,751
28,464
8,081
(27,759)
35,840 $
2.17 $
2.17 $
- $
450
2,281
236
2,967
6,147
26,526
(5,869 )
32,395
2,975
6,640
292
-
(13 )
209
-
607
440
650
2,127
993
14,920
13,111
2,088
1,471
470
2,088
1,801
522
2,569
1,799
1,567
951
90
-
2,279
2,763
33,569
13,746
326
13,420 $
0.81 $
0.81 $
- $
27,097
1,859
3,347
393
154
5,753
103
32,953
4,164
527
2,281
204
3,012
7,176
25,777
(6,270 )
32,047
2,945
2,887
362
(223 )
-
135
579
-
423
706
288
1,181
9,283
13,218
2,215
1,468
523
2,066
2,515
800
719
2,488
1,674
1,179
482
2,500
123
2,978
34,948
6,382
-
6,382
0.39
0.39
-
Basic .....................................................................................................................................
Diluted .................................................................................................................................
16,499,622
16,499,622
16,472,660
16,472,871
16,458,353
16,458,353
The accompanying notes to consolidated financial statements are an integral part of these statements.
69
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income ......................................................................................... $
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale ...............
Taxes ..............................................................................................
Net of tax amount ...........................................................................
Reclassification adjustment for gains included in net income ........
Taxes ..............................................................................................
Net of tax amount ...........................................................................
For the Year Ended December 31,
2014
2015
2013
35,840 $
13,420 $
6,382
211
(72)
139
(2,296)
781
(1,515)
12,682
(4,312 )
8,370
(6,272 )
2,132
(4,140 )
(11,946 )
4,061
(7,885 )
(2,887 )
982
(1,905 )
Total other comprehensive (loss) income...........................................
(1,376)
4,230
(9,790 )
Comprehensive income (loss) ........................................................... $
34,464 $
17,650 $
(3,408 )
The accompanying notes to consolidated financial statements are an integral part of these statements.
70
FIRST NATIONAL COMMUNITY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2015, 2014 and 2013
Accumulated Accumulated
Number of
Common Common Paid-in Retained
Capital Earnings
Additional
Stock
(Deficit) /
Other
Total
Comprehensive Shareholders'
Income (Loss)
Equity
(in thousands, except share data) Shares
Balances, December 31, 2012 ........ 16,457,169 $ 20,571 $
-
18
Net income for the year ..............
Stock-based compensation ..........
Other comprehensive loss, net of
-
14,400
tax of $5,043 .............................
-
Balances, December 31, 2013 ........ 16,471,569 $ 20,589 $
-
16
-
Net income for the year ..............
Stock-based compensation ..........
Restricted stock awards ..............
Other comprehensive income,
-
12,850
-
-
net of tax of $2,180 ..................
-
Balances, December 31, 2014 ........ 16,484,419 $ 20,605 $
-
17
Net income for the year ..............
Stock-based compensation ..........
Common stock issued under
-
13,300
-
61,584 $
-
43
-
61,627 $
-
61
93
-
61,781 $
-
52
(51,928) $
6,382
-
-
(45,546) $
13,420
-
-
-
(32,126) $
35,840
-
6,698 $
-
-
(9,790)
(3,092) $
-
-
-
4,230
1,138 $
-
-
36,925
6,382
61
(9,790)
33,578
13,420
77
93
4,230
51,398
35,840
69
long-term incentive
compensation plan ....................
Restricted stock awards ..............
Other comprehensive loss, net of
16,526
-
21
-
(21)
247
-
-
-
-
-
247
tax of $709................................
-
Balances, December 31, 2015 ........ 16,514,245 $ 20,643 $
-
-
62,059 $
-
3,714 $
(1,376)
(238) $
(1,376)
86,178
The accompanying notes to consolidated financial statements are an integral part of these statements.
71
FIRST NATIONAL COMMUNITY BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities:
Net income ............................................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
Investment securities amortization, net ....................................................................................
Equity in trust ...........................................................................................................................
Depreciation and amortization .................................................................................................
Credit for loan and lease losses ................................................................................................
Valuation adjustment for off-balance sheet commitments ......................................................
Stock-based compensation expense .........................................................................................
Gain on the sale of available-for-sale securities ......................................................................
Gain on the sale of held-to-maturity securities ........................................................................
Gain on the sale of loans held for sale .....................................................................................
Loss on the sale of classified loans ..........................................................................................
Loss on the sale of education loans ..........................................................................................
Gain on branch divestitures ......................................................................................................
Loss (gain) on the disposition of bank premises and equipment and other assets ..................
Net gain on the sale of other real estate owned ........................................................................
Valuation adjustment for other real estate owned ....................................................................
Income from bank-owned life insurance .................................................................................
Proceeds from the sale of loans held for sale ...........................................................................
Funds used to originate loans held for sale ..............................................................................
Deferred income tax benefit .....................................................................................................
(Increase) decrease in interest receivable .................................................................................
Decrease in refundable federal income taxes ...........................................................................
Decrease in prepaid expenses and other assets ........................................................................
Increase in interest payable ......................................................................................................
(Decrease) increase in accrued expenses and other liabilities .................................................
Total adjustments ......................................................................................................................
Net cash provided by operating activities ............................................................................
Cash flows from investing activities:
Maturities, calls and principal payments of investment securities available for sale ..............
Proceeds from the sale of securities available for sale .............................................................
Proceeds from the sale of held-to-maturity securities ..............................................................
Purchases of securities available for sale .................................................................................
(Purchase) redemption of the stock of the Federal Home Loan Bank of Pittsburgh ...............
Net increase in loans to customers ...........................................................................................
Proceeds from the sale of classified loans ................................................................................
Proceeds from the sale of education loans ...............................................................................
Proceeds from the sale of other real estate owned ...................................................................
Purchases of bank premises and equipment .............................................................................
Proceeds from the sale of bank premises and equipment ........................................................
Net cash used in investing activities ......................................................................................
Cash flows from financing activities:
Net increase (decrease) in deposits ..........................................................................................
Net proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight .................
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term ................................
Repayment of Federal Home Loan Bank of Pittsburgh advances - term ................................
Principal reduction on subordinated debentures ......................................................................
Net cash provided by (used in) financing activities .............................................................
Net decrease in cash and cash equivalents ...........................................................................
Cash and cash equivalents at beginning of year ..................................................................
Cash and cash equivalents at end of year ............................................................................ $
Supplemental cash flow information
Cash paid (received) during the period for:
Interest ..................................................................................................................................... $
Income taxes ............................................................................................................................
Other transactions:
Principal balance of loans transferred to other real estate owned ............................................
Government guarantee receivable on loans transferred to other real estate owned .................
Transfer of bank premises and equipment to other real estate owned .....................................
Change in deferred gain on sale of other real estate owned .....................................................
For the Year Ended December 31,
2014
2013
2015
35,840 $
13,420 $
6,382
1,423
(6)
1,703
(1,345)
(117)
316
(2,296)
-
(292)
-
-
-
-
(162)
208
(564)
8,210
(7,998)
(27,684)
(400)
-
917
903
(4,195)
(31,379)
4,461
8,615
88,658
-
(133,269)
(3,541)
(68,665)
-
-
758
(1,419)
-
(108,863)
26,210
60,500
151,300
(137,192)
(11,000)
89,818
(14,584)
35,667
21,083 $
3,898 $
22
3,697
(1,980)
-
14
1,356
(6 )
1,470
(5,869 )
(94 )
170
(6,272 )
(368 )
(292 )
-
13
(607 )
232
(209 )
2,200
(650 )
8,555
(8,046 )
-
116
-
169
1,530
1,694
(4,908 )
8,512
8,331
111,243
2,686
(123,380 )
(657 )
(25,321 )
-
2,537
1,737
(1,217 )
2,505
(21,536 )
(88,936 )
-
194,235
(160,164 )
-
(54,865 )
(67,889 )
103,556
35,667 $
4,617 $
308
13
-
1,749
26
487
(6 )
1,265
(6,270 )
(246 )
61
(2,887 )
-
(362 )
223
-
-
(579 )
(135 )
223
(706 )
12,944
(11,787 )
-
8
11,592
4,209
2,305
1,713
12,052
18,434
14,596
53,787
-
(99,432 )
3,811
(47,490 )
3,275
-
1,668
(810 )
1,831
(68,764 )
30,085
-
32,250
(23,720 )
-
38,615
(11,715 )
115,271
103,556
4,871
(11,592 )
255
-
1,819
55
The accompanying notes to the consolidated financial statements are an integral part of these statements.
72
Notes to Consolidated Financial Statements
Note 1. ORGANIZATION
First National Community Bancorp, Inc. is a registered bank holding company under the Bank Holding Company Act of
1956 incorporated under the laws of the Commonwealth of Pennsylvania in 1997. It is the parent company of First National
Community Bank (the “Bank”) and the Bank’s wholly owned subsidiaries FNCB Realty Company, Inc., FNCB Realty
Company I, LLC, and FNCB Realty Company II, LLC. Unless the context otherwise requires, the term “Company” is used
to refer to First National Community Bancorp, Inc., and its subsidiaries. In certain circumstances, however, the term
“Company” refers to First National Community Bancorp, Inc., itself.
The Bank provides customary banking services to individuals and businesses through its 19 banking locations located in
northeastern Pennsylvania.
FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II, LLC were formed to hold real
estate and/or operate businesses acquired in exchange for debt settlement or foreclosure.
In December 2006, First National Community Statutory Trust I (“Issuing Trust”), which is wholly owned by the Company,
was formed under Delaware law to provide the Company with an additional funding source through the issuance of pooled
trust preferred securities. The Company has adopted Accounting Standards Codification 810-10, Consolidation, for the
Issuing Trust. Accordingly, the Issuing Trust has not been consolidated with the accounts of the Company, because the
Company is not the primary beneficiary of the trust.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of the Company include the accounts of First National Community Bancorp, Inc., the
Bank, and the Bank’s wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in
consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted
in the United States of America (“GAAP”) and general practices within the banking industry.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ significantly from these estimates. Material estimates that are particularly susceptible to change in the
near term are the allowance for loan and lease losses, investment security valuations, the evaluation of investment securities
and other real estate owned for impairment, and the evaluation of deferred income taxes.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include cash on hand and amounts due from banks.
Securities
The Company classifies investment securities as either held-to-maturity or available-for-sale at the time of purchase.
Investment securities that are classified as held-to-maturity are carried at amortized cost when management has the positive
intent and ability to hold them to maturity. Investment securities that are classified as available-for-sale are carried at fair
value with unrealized gains and losses recognized as a component of shareholders’ equity in accumulated other
comprehensive income. Premiums and discounts are amortized or accreted over the life of the related security as an
adjustment to yield using the interest method. Realized gains and losses on sales of investment securities are based on
amortized cost using the specific identification method on the trade date.
73
On a quarterly basis, the Company evaluates each of its investment securities classified as held-to-maturity or available-for-
sale in an unrealized loss position for other-than-temporary impairment (“OTTI”). An individual security is considered
impaired when its current fair value is less than its amortized cost basis. As part of the OTTI evaluation, management
considers the following factors in determining whether the security’s impairment is other than temporary:
● The length of time and extent of the impairment;
● The causes of the decline in fair value, such as credit deterioration, interest rate fluctuations, or market volatility;
● Adverse industry or geographic conditons;
● Historical implied volatility;
● Payment structure of the security and whether or not Company expects to receive all contractual cash flows;
● Failure of the issuer to make contractual interest or principal payments in the past;
● Changes in the security’s rating; and
● Recoveries or additional declines in the security’s fair value subsequent to the balance sheet date.
Based on current authoritative guidance, when a held-to-maturity or available-for-sale debt security is assessed for OTTI, the
Company must first consider (a) whether management intends to sell the security and (b) whether it is more likely than not
that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these
circumstances applies to a security, an OTTI loss is recognized in the statement of income equal to the full amount of the
decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Company does not
expect to recover the entire amortized cost basis, an OTTI loss has occurred that must be separated into two categories: (a)
the amount related to credit loss and (b) the amount related to other factors (such as market risk). In assessing the level of
OTTI attributable to credit loss, the Company compares the present value of cash flows expected to be collected with the
amortized cost basis of the security. The portion of the total OTTI related to credit loss is identified as the amount of principal
cash flows not expected to be received over the remaining term of the security as estimated based on cash flow projections
discounted at the applicable original yield of the security, and is recognized in earnings, while the amount related to other
factors is recognized in other comprehensive income. The total OTTI loss is presented in the statement of income less the
portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its
amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
For equity securities, the Company evaluates whether or not the unrealized loss is expected to recovered based on evidence
to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the amortized cost basis
will not be recovered, taking into consideration the estimated recovery period and ability of the Company to hold the security
until recovery, the entire difference between the security’s cost basis and its fair value is recognized in earnings at the balance
sheet date.
Investments in the Federal Reserve Bank and Federal Home Loan Bank stock have limited marketability, are carried at cost
and are evaluated for impairment based on the Company’s determination of the ultimate recoverability of the par value of the
stock. The investment in the Federal Reserve Bank stock is included in other assets.
Loans and Loan Fees
Loans receivable, other than loans held for sale, are stated at the principal outstanding, net of unamortized loan fees and costs,
unearned income, partial charge-offs and the allowance for loan and lease losses. Interest income on all loans is recognized
using the effective interest method. Loan origination and commitment fees, as well as certain direct loan origination costs,
are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Company generally amortizes
these amounts over the life of the related loan except for residential mortgage loans, where the timing and amount of
prepayments can be reasonably estimated. For these mortgage loans, the net deferred fees or costs are amortized over an
estimated average life of five years. Amortization of deferred loan fees or costs is discontinued when a loan is placed on non-
accrual status.
Loans are placed on non-accrual status when a loan is specifically determined to be impaired or when management believes
that the collection of interest or principal is doubtful. This is generally when a default of interest or principal has existed for
90 days or more, unless the loan is fully secured and in the process of collection, or when management becomes aware of
facts or circumstances that the loan would default before 90 days. The Company determines delinquency status based on the
number of days since the date of the borrower’s last required contractual loan payment. When the interest accrual is
discontinued, the balance of any previously accrued but unpaid interest is reversed and charged against interest income. Any
cash payments subsequently received are applied, first to the outstanding loan amounts, then to the recovery of any charged-
off loan amounts. Any excess amount is treated as a recovery of lost interest. A non-accrual loan is returned to accrual status
74
when the loan is current as to principal and interest payments, is performing according to contractual terms for six consecutive
months and future payments are reasonably assured.
In accordance with federal regulations, prior to making, extending, renewing or advancing additional funds in excess of $250
thousand on a loan secured by real estate, the Company requires an appraisal of the property by an independent, state-
certified or state-licensed appraiser (depending upon collateral type and loan amount) that is approved by the Board of
Directors. Appraisals are reviewed internally and, under certain circumstances, by an independent third party engaged by the
Company. Generally, management obtains a new appraisal when a loan is deemed impaired. These appraisals may be more
limited in scope than those obtained at the initial underwriting of the loan.
Troubled Debt Restructurings
The Company considers a loan to be a troubled debt restructuring (“TDR”) when it grants a concession to the borrower for
legal or economic reasons related to the borrower’s financial difficulties that it would not otherwiseconsider. Such
concessions granted generally involve a reduction of the stated interest rate, an extension of a loan’s maturity date,
capitalization of real estate taxes, or payment modifications. A non-accrual TDR is returned to accrual status when principal
and interest payments under the modified terms are current, the TDR is performing under the modified terms for six
consecutive months and future payments are reasonably assured.
Loan Impairment
A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due (including
principal and interest) according to the contractual terms of the note and loan agreement. For purposes of the Company’s
analysis, TDRs, loans rated substandard and on non-accrual status with an aggregate loan relationship greater than $100
thousand, and loans that are identified as doubtful or loss, are considered impaired. Impaired loans are analyzed individually
for impairment. The Company generally utilizes the fair value of collateral method for collateral dependent loans. A loan is
considered to be collateral dependent when repayment of the loan is expected to be provided through the liquidation of the
collateral held. Generally, for impaired loans that are secured by real estate, external appraisals are obtained annually, or
more frequently as warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a current
appraisal not be available at the time of impairment analysis, other sources of valuation such as current letters of intent, broker
price opinions or executed agreements of sale may be used. For non-collateral dependent impaired loans, the Company
measures impairment based on the present value of expected future cash flows, discounted at the loan’s original effective
interest rate.
Generally, all loans with balances of $100 thousand or less are considered within homogeneous pools and are not individually
evaluated for impairment. However, individual loans with balances of $100 thousand or less are individually evaluated for
impairment if that loan is part of a larger impaired loan relationship or the loan is a TDR.
Impaired loans, or portions thereof, are charged-off upon determination that all or a portion of the loan balance is uncollectible
and exceeds the fair value of the collateral. A loan is considered uncollectible when the borrower is delinquent with respect
to principal or interest repayment and it is unlikely that the borrower will have the ability to pay the debt in a timely manner,
collateral value is insufficient to cover the outstanding indebtedness and the guarantors (if applicable) do not provide adequate
support for the loan.
Allowance for Loan and Lease Losses
Management continually evaluates the credit quality of the Company’s loan portfolio, and performs a formal review of the
adequacy of the allowance for loan and lease losses (“ALLL”) on a quarterly basis. Management establishes the ALLL
through provisions for loan and lease losses charged to earnings and maintains the ALLL at a level it considers adequate to
absorb probable losses inherent in the loan portfolio as of the evaluation date. Loans, or portions of loans, determined by
management to be uncollectable are charged off against the ALLL, while recoveries of amounts previously charged off are
credited to the ALLL.
Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment
and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses
on pools of homogeneous loans based on historical loss experience and qualitative factors, and consideration of current
economic trends and conditions, all of which may be susceptible to significant change. Various banking regulators, as an
integral part of their examinations of the Company, also review the ALLL. Such regulators may require, based on their
75
judgments about information available to them at the time of their examination, that certain loan balances be charged off or
require that adjustments be made to the ALLL. Additionally, the ALLL is determined, in part, by the composition and size
of the loan portfolio.
The ALLL consists of primarily of two components, a specific component and a general component. The specific component
relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows or
the fair value of the collateral is lower than its carrying value for loans that are collateral dependent. The general component
covers all other loans and is based on historical loss experience adjusted by qualitative factors. The general reserve component
of the ALLL is based on pools of unimpaired loans segregated by loan segment and risk rating categories of “Pass”, “Special
Mention” or “Substandard and Accruing.” Historical loss factors and various qualitative factors are applied based on the risk
profile in each risk rating category to determine the appropriate reserve related to those loans. As previously mentioned, loans
relationships with an aggregate balance greater than $100 thousand that are rated substandard and on nonaccrual status are
included in impaired loans. Based on its evaluation, management may establish an unallocated component for a respective
loan segment (as discussed below) when the actual historical loss experience for that loan segment results in an overall
negative historical loss factor.
When establishing the ALLL, management categorizes loans into the following loan segments that are based generally on
the nature of the collateral and basis of repayment. These risk characteristics of the Company’s loan segments are as follows:
Construction, Land Acquisition and Development loans - These loans consist of loans secured by real estate, with the purpose
of constructing one- to four-family homes, residential developments and various commercial properties including, shopping
centers, office complexes and single-purpose, owner-occupied structures. Additionally, loans in this category include loans
for land acquisition, secured by raw land. The Company’s construction program offers either short-term, interest-only loans
that require the borrower to pay interest only during the construction phase with a balloon payment of the principal
outstanding at the end of the construction period or interest only during construction with a conversion to amortizing principal
and interest when the construction is complete. Loans for undeveloped real estate are subject to a loan-to-value ratio not to
exceed 65%. Construction loans are treated similarly to the developed real estate loans and are generally subject to an 80%
loan to value ratio based upon an “as-completed” appraised value. Construction loans generally yield a higher interest rate
than other mortgage loans but also carry more risk.
Commercial Real Estate Loans - These loans represent the largest portion of the Company’s total loan portfolio and loans in
this portfolio generally carry larger loan balances. The commercial real estate mortgage loan portfolio consists of owner-
occupied and non-owner-occupied properties that are secured by a broad range of real estate, including but not limited to,
office complexes, shopping centers, hotels, warehouses, gas stations/ convenience markets, residential care facilities, nursing
care facilities, restaurants and multifamily housing. The Company offers commercial real estate loans at various rates and
terms that generally do not exceed 20 years. These types of loans are subject to specific loan-to-value guidelines prior to the
time of closing. The policy limits for developed real estate loans are subject to a maximum loan-to-value ratio of 80%.
Commercial mortgage loans must also meet specific criteria that include the capacity, capital, credit worthiness and cash
flow of the borrower and the project being financed. Potential borrower(s) and guarantor(s) are required to provide the
Company with historical and current financial data. As part of the underwriting process for commercial real estate loans,
management performs a review of the cash flow analysis of the borrower(s), guarantor(s) and the project in addition to
considering the borrower’s expertise, credit history, net worth and the value of the underlying property.
Commercial and Industrial Loans - The Company offers commercial loans at various rates and terms to businesses located
in its primary market area. The commercial loan portfolio includes lines of credit, dealer floor plan lines, equipment loans,
vehicle loans, improvement loans and term loans. These loans generally carry a higher risk than commercial real estate loans
by the nature of the underlying collateral, which can be machinery and equipment, inventory, accounts receivable, vehicles
or marketable securities. Generally, a collateral lien is placed on the collateral supporting the loan. In order to reduce the risk
associated with these loans, management may attempt to secure real estate as collateral and obtain personal guarantees of the
borrower as deemed necessary.
State and Political Subdivision Loans - The Company originates general obligation notes and tax anticipation loans to state
and political subdivisions, which are primarily municipalities in the Company’s market area.
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Residential Real Estate Loans - The Company offers fixed- and variable-rate one- to four-family residential loans. Residential
first lien mortgages are generally subject to an 80% loan to value ratio based on the appraised value of the property. The
Company will generally require the mortgagee to purchase Private Mortgage Insurance (“PMI”) if the amount of the loan
exceeds the 80% loan to value ratio. Residential mortgage loans are generally smaller in size and are considered homogeneous
as they exhibit similar characteristics.The Company may sell loans and retain servicing when warranted by market conditions.
Consumer Loans - Include both secured and unsecured installment loans, personal lines of credit and overdraft protection
loans. The Company is also in the business of underwriting indirect auto loans which are originated through various auto
dealers in northeastern Pennsylvania and dealer floor plan loans. The Company offers home equity loans and home equity
lines of credit (“HELOCs”) with a maximum combined loan-to-value ratio of 90% based on the appraised value of the
property. Home equity loans have fixed rates of interest and carry terms up to 15 years. HELOCs have adjustable interest
rates and are based upon the prime interest rate. Consumer loans are generally smaller in size and exhibit homogeneous
characteristics.
Liability for Off-Balance-Sheet Credit-Related Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing need of its customers. These financial instruments include commitments to extend credit, unused portions of lines
of credit, including revolving HELOCs, and letters of credit. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument is represented by the contractual notional amount of these
instruments. The Company uses the same credit policies in making these commitments as it does for on-balance sheet
instruments. In order to provide for probable losses inherent in these instruments, the Company records a reserve for unfunded
commitments, included in other liabilities on the consolidated statements of financial condition, with the offsetting expense
recorded in other operating expenses in the consolidated statements of income.
Mortgage Banking Activities and Servicing
Mortgage loans originated and intended for sale are carried at the lower of aggregate cost or fair value determined on an
individual loan basis. Net unrealized losses are recorded as a valuation allowance and charged to earnings. Gains and losses
on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan
sold and include the value assigned to the rights to service the loan. Net gains on the sale of residential mortgage loans for
the years ended December 31, 2015, 2014 and 2013 were $292 thousand, $292 thousand and $362 thousand, respectively.
Loans held for sale are generally sold with loan servicing rights retained by the Company. At December 31, 2015 and 2014,
loans held for sale amounted to $683 thousand and $603 thousand, respectively.
Mortgage servicing rights are recorded at fair value upon sale of the loan and reported in other assets on the consolidated
statements of financial condition. Mortgage servicing rights are amortized in proportion to and over the period during which
estimated servicing income will be received.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternately, is based on
a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the
discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
Mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.
Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate,
loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent
that fair value is less than the capitalized amount for the tranche. If management later determines that all or a portion of the
impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu
of foreclosure of a loan, and bank premises that are no longer used for operations or for future expansion. OREO is held for
sale and is initially recorded at fair value less costs to sell at the date of acquisition or transfer, which establishes a new cost
basis. Upon acquisition of a property through foreclosure or deed in-lieu of foreclosure, any write-down to fair value less
estimated selling costs is charged to the ALLL. The determination is made on an individual asset basis. Bank premises no
longer used for operations or future expansion is transferred to OREO at fair value less estimated selling costs with any
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related write-down included in non-interest expense. Subsequent to acquisition or transfer, valuations of properties are
periodically performed by management and the assets are carried at the lower of cost basis or fair value less estimated cost
to sell. Any subsequent reduction in value of an OREO property is recognized by a write-down included in non-interest
expense. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed
agreements of sale. Costs relating to the development and improvement of the OREO properties may be capitalized, while
holding period costs such as real estate taxes and maintenance and repairs are charged to expense as incurred.
Bank Premises and Equipment
Land is stated at cost. Bank premises, equipment and leasehold improvements are stated at cost less accumulated depreciation.
Costs for routine maintenance and repair are expensed as incurred, while significant expenditures for improvements are
capitalized. Depreciation expense is computed generally using the straight-line method over the following ranges of estimated
useful lives, or in the case of leasehold improvements, to the expected terms of the leases, if shorter.
Buildings and improvements (in years) ...............................................................................................
Furniture, fixtures and equipment (in years) .......................................................................................
Leasehold improvements (in years) ....................................................................................................
10 to 40
3 to 15
2 to 39
Intangible Assets
Intangible assets consist entirely of a core deposit intangible which arose in connection with the acquisition of the Company’s
Honesdale branch. The core deposit intangible is amortized over an estimated useful life of 10 years.
Long-lived Assets
Intangible assets and bank premises and equipment are reviewed by management at least annually for potential impairment
and whenever events or circumstances indicate that carrying amounts may not be recoverable.
Income Taxes
The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more-likely-than-not that all or some portion of the deferred tax assets will not be realized.
The Company files a consolidated Federal income tax return. Under tax sharing agreements, each subsidiary provides for and
settles income taxes with the Company as if it would have filed on a separate return basis. Interest and penalties, if any, as a
result of a taxing authority examinations and recognized within non-interest expense. The Company is not currently subject
to an audit by any of its tax authorities and with limited exception is no longer subject to federal and state income tax
examinations by taxing authorities for years before 2012.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that
would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the
largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described
above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. The Company determined that it had no liabilities for uncertain tax
positions at December 31, 2015 and 2014.
78
Earnings per Share
Earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year.
Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential
dilution that could occur if outstanding stock options were exercised and converted into common stock. The dilutive effect
of stock options is calculated using the treasury stock method.
Stock-Based Compensation
The Company is required to measure and record compensation expense for stock-based payments based on the instrument’s
fair value on the date of the grant.The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The fair value of shares of restricted stock awarded under the Long Term Incentive Compensation Plan
(“LTIP”) is determined using an average of the high and low prices for the Company’s common stock for the 10 days
preceding the grant date. The fair value of shares of stock granted under Employee Stock Grant Plans is determined using the
closing price of the Company’s common stock on the grant date. Stock-based compensation expense for stock options and
restricted stock is recognized ratably over the vesting period. Stock-based compensation expense for shares of stock awarded
under the Employee Stock Grant Plan is recognized on the grant date.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) represents the cash surrender value of life insurance policies on certain current and
former directors and officers of the Company. The Company purchased the insurance as a tax-deferred investment and future
source of funding for the Company’s liabilities, including the payment of employee benefits such as health care. BOLI is
carried in the consolidated statements of financial condition at its cash surrender value. Increases in the cash value of the
policies, as well as proceeds received, are recorded in non-interest income, and are not subject to income taxes unless
surrendered. The Company does not intend to surrender these policies and, accordingly, no deferred taxes have been recorded
on the earnings from these policies. Under some of these policies, the beneficiaries receive a portion of the death benefit. The
net present value of the future death benefits scheduled to be paid to the beneficiaries was $101 thousand and $97 thousand
at December 31, 2015 and 2014, respectively, and is reflected in “Other Liabilities” on the consolidated statements of
financial condition.
Fair Value Measurement
The Company uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to
determine fair value disclosures. Available-for-sale securities are recorded at fair value on a recurring basis. Additionally,
from time to time, the Company may be required to recognize adjustments to other assets at fair value on a nonrecurring
basis, such as impaired loans, other securities, and OREO.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction
that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual
and customary for transactions involving such assets or liabilities: it is not a forced transaction.
Accounting standards define fair value, establish a framework for measuring fair value, establish a three-level hierarchy for
disclosure of fair value measurement and provide disclosure requirements about fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
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The three levels of the fair value hierarchy are:
● Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
● Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market
prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques
for which all significant assumptions are observable in the market or can be corroborated by market data.
● Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar
techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in determining fair value.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss).
Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the shareholders’ equity section of the statement of financial condition, such items, along
with a net income (loss), are components of comprehensive income (loss).
New Authoritative Accounting Guidance
Accounting Standards Update (“ASU”) 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40):
“Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” clarifies that an in
substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential
real estate property collateralizing a consumer mortgage loan, upon either (a) the creditor obtaining legal title to residential
real estate property upon completion of a foreclosure or (b) the borrower conveying all interest in the residential real estate
property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal
agreement. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential
real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential
real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The
adoption of this guidance on January 1, 2015 did not have a material effect on the operating results or financial position of
the Company.
ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): “Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity,” changes the criteria for reporting a
discontinued operation. Under the new guidance, a disposal of a component of an entity or group of components of an entity
is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major
effect on the entity’s operations and financial results. This new guidance reduces complexity by removing the complex and
extensive implementation guidance and illustrations that are necessary to apply the current definition of a discontinued
operation. The new guidance also requires expanded disclosures about discontinued operations that will provide users with
more information about the assets, liabilities, revenues and expenses of a discontinued operation and will require pre-tax
income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations
reporting, which will provide users with information about the ongoing trends in a reporting organization’s results from
continuing operations. The adoption of this guidance on January 1, 2015 did not have a material effect on the operating results
or financial position of the Company.
ASU 2014-11, Transfers and Servicing (Topic 860): “Repurchase-to-Maturity Transactions, Repurchase Financings, and
Disclosures,” changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements by
aligning the accounting for these transactions with the accounting for other typical repurchase agreements. Going forward,
these transactions would all be accounted for as secured borrowings. The new guidance eliminates sale accounting for
repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial assets and a
contemporaneous repurchase financing could be accounted for on a combined basis as a forward arrangement, which has
resulted in outcomes referred to as off-balance sheet accounting. ASU 2014-11 also requires a new disclosure for transactions
economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic
return on the transferred financial assets throughout the term of the transaction, and requires expanded disclosure about the
nature of the collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The
adoption of this guidance on January 1, 2015 did not have a material effect on the operating results or financial position of
the Company.
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ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): “Classification of Certain
Government-Guaranteed Mortgage Loans Upon Foreclosure,” requires that a mortgage loan be derecognized and that a
separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government
guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to
convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover
under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value
of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the
loan balance (principal and interest) expected to be recovered from the guarantor. The adoption of this guidance on January
1, 2015 did not have a material effect on the operating results or financial position of the Company.
Accounting Guidance to be Adopted in Future Periods
ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Section A, “Summary and Amendments That Create
Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contract with Customers
(Subtopic 340-40);” Section B, “Conforming Amendments to Other Topics and Subtopics in the Codification and Status
Tables;” and Section C, “Background Information and Basis for Conclusions,” provides a robust framework for addressing
revenue recognition issues, and upon its effective date, replaces almost all existing revenue recognition guidance, including
industry specific guidance, in current GAAP. The core principle of ASU 2014-09 is for companies to recognize revenue to
depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects
to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced interim and annual
disclosures, both qualitative and quantitative, about revenue in order to help financial statement users understand the nature,
amount, timing and uncertainty of revenue and related cash flows. ASU 2014-09 is effective in annual reporting periods
beginning after December 15, 2016 and the interim periods within that year for public business entities, not-for-profit entities
that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or over-the-
counter market and employee benefit plans that file or furnish financial statements to the SEC. On August 12, 2015, the
FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): “Deferral of the Effective Date,” which
defers the adoption of ASU 2014-09 for one year for all entities. Accordingly, the Company will adopt this guidance on
January 1, 2018 in accordance with ASU 2015-14, and is currently evaluating the effect this guidance may have on its
operating results or financial position.
ASU 2014-12, Compensation – Stock Compensation (Topic 718): “Accounting for Share-Based Payments When the Terms
of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period,” requires a
performance target that affects vesting and that can be achieved after the requisite service period to be treated as a performance
condition. To account for such awards, an entity should apply existing guidance as it relates to awards with performance
conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant-date fair value
of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target
will be achieved and should represent compensation cost attributable to the period(s) for which the requisite service already
has been rendered. If the performance target becomes probable of being achieved before the end of the requisite service
period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite
service periods. The total amount of compensation cost should reflect the number of awards that are expected to vest and
should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 is effective for annual periods and interim
periods within those annual periods beginning after December 15, 2015. The adoption of this guidance on January 1, 2016 is
not expected to have a material effect on the operating results or financial position of the Company.
ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): “Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern,” defines management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a going concern and provide guidance for related footnote disclosures.
ASU 2014-15 requires an entity’s management to assess the entity’s ability to continue as a going concern by incorporating
and expanding upon certain principles that are currently in U.S. auditing standards. Specifically ASU 2014-15: (1) provides
a definition of the term substantial doubt; (2) requires an evaluation as to whether there are conditions or events, considered
in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the
date the financial statements are issued (or within one year after the date that the financial statements are available to be
issued when applicable); (3) provides principles for considering the mitigating effect of management’s plans; (4) requires
certain disclosures when substantial doubt is alleviated; and (5) require an express statement and other disclosures when
substantial doubt is not alleviated. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for
annual periods and interim periods thereafter. Early application is permitted. The adoption of this guidance on December 31,
2016 is not expected to have a material effect on the operating results or financial position of the Company.
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ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): “Simplifying Income Statement
Presentation by Eliminating the Concept of Extraordinary Items,” will alleviate uncertainty for preparers, auditors and
regulators because auditors and regulators will no longer be required to evaluate whether a preparer presented an unusual
and/or infrequent item appropriately. Although ASU 2015-01 eliminates the concept of extraordinary items, the presentation
and disclosure guidance for items that are unusual in nature or infrequent in occurrence has been retained and has been
expanded to include items that are both unusual in nature or infrequent in occurrence. The nature and financial effects of each
event or transaction is required to be presented as a separate component of income from continuing operations or,
alternatively, in the notes to the financial statements. ASU 2015-01 is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. Early adoption of this guidance is permitted provided that the guidance
is applied from the beginning of the fiscal year of adoption. The adoption of this guidance on January 1, 2016 is not expected
to have a material effect on the operating results or financial position of the Company.
ASU 2015-02, Consolidation (Topic 810): “Amendments to the Consolidation Analysis,” improves targeted areas of the
consolidation guidance and reduces the number of consolidation models. The new consolidation standard changes the way
reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a
decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a
VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates
the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and
similar entities. ASU 2015-02 is effective for public entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015. The adoption of this guidance on January 1, 2016 is not expected to have a material
effect on the operating results or financial position of the Company.
ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): “Simplifying the Presentation of Debt Issuance Costs,”
more closely aligns the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS
standards. Under ASU 2015-03, debt issuance costs related to a recognized debt liability will no longer be recorded as a
separate asset, but will be presented on the balance sheet as a direct deduction from the debt liability, similar to the
presentation of debt discounts. The costs will continue to be amortized to interest expense using the effective interest method.
ASU 2015-03 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2015, and requires retrospective application to all prior periods presented in the financial statements. Early
adoption of this guidance is permitted. The adoption of this guidance on January 1, 2016 is not expected to have a material
effect on the operating results or financial position of the Company.
ASU 2015-05, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): “Customer’s Accounting for Fees
Paid in a Cloud Computing Arrangement,” provides explicit guidance on a customer’s accounting for fees paid in a cloud
computing environment. Specifically, the amendments in this ASU provide guidance to customers about whether a cloud
computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the
customer should account for the software license element of the arrangement consistent with the acquisition of other software
licenses. If a cloud computing arrangement does not include a software license, the customer should account for the
arrangement as a service contract. ASU 2015-05 is effective for public entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015. Early adoption of this guidance is permitted. The adoption of this
guidance on January 1, 2016 is not expected to have a material effect on the operating results or financial position of the
Company.
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and
Financial Liabilities” requires all equity investments to be measured at fair value with changes in the fair value recognized
through net income (other than those accounted for under equity method of accounting or those that result in consolidation
of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income
the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk
when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments. In addition, this ASU eliminates the requirement to disclose the fair value of financial instruments measured at
amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized
cost on the balance sheet for public business entities. ASU 2016-01 is effective for fiscal years beginning after December 15,
2017 for public entities. The adoption of this guidance on January 1, 2018 is not expected to have a material effect on the
operating results or financial position of the Company.
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ASU 2016-02, Leases (Topic 842): “Leases” will require organizations that lease assets to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. Consistent
with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by the
lessee will primarily depend on its classification as a finance or operating lease. However, unlike current GAAP, which
requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be
recognized on the balance sheet. ASU 2016-02 will also require disclosures to help investors and other financial statement
users better understand the amount, timing and uncertainty of cash flows arising from leases. The new disclosures will include
both qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial
statements. ASU 2016-02 is effective with fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018 for public entities. Accordingly, the Company will adopt this guidance on January 1, 2019, and is
currently evaluating the effect this guidance may have on its operating results or financial position.
Reclassification of Prior Year Financial Statements
Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s
presentation. Such reclassifications had no impact on the Company’s results of operations.
Note 3. RESTRICTED CASH BALANCES
The Company is required to maintain certain average reserve balances as established by the Federal Reserve Bank. The
amount of those reserve balances for the reserve computation periods which included December 31, 2015 and 2014 were
$1.0 million and $1.4 million, respectively. The Company satisfied the required reserve balances through the restriction of
vault cash and deposits maintained at the Federal Reserve Bank.
In addition, the Company maintains compensating balances at correspondent banks, most of which are not required, but are
used to offset specific charges for services. At December 31, 2015 and 2014, the amount of these balances was $173 thousand
and $306 thousand, respectively.
83
Note 4. SECURITIES
The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of the Company’s
securities at December 31, 2015 and 2014:
December 31, 2015
Gross
Gross
Unrealized Unrealized
Amortized Holding Holding
Cost
Gains
Losses
Fair
Value
(in thousands)
Available-for-sale:
Obligations of U.S. government agencies .................................... $
Obligations of state and political subdivisions .............................
U.S. government/government-sponsored agencies:
43,787 $
75,401
Collateralized mortgage obligations - residential .....................
Collateralized mortgage obligations - commercial ...................
Residential mortgage-backed securities ....................................
Corporate debt securities ..............................................................
Negotiable certificates of deposit .................................................
Equity securities ...........................................................................
22,162
89,900
18,201
500
3,173
1,010
Total available-for-sale securities ............................................ $ 254,134 $
256 $
428
116
124
58
-
-
-
982 $
- $
422
44,043
75,407
9
601
161
77
11
62
1,343 $
22,269
89,423
18,098
423
3,162
948
253,773
(in thousands)
Available-for-sale:
Obligations of U.S. government agencies .................................... $
Obligations of state and political subdivisions .............................
U.S. government/government-sponsored agencies:
December 31, 2014
Gross
Gross
Unrealized Unrealized
Amortized Holding Holding
Cost
Gains
Losses
Fair
Value
29,246 $
23,132
77 $
1,380
47 $
3
29,276
24,509
Collateralized mortgage obligations - residential .....................
Collateralized mortgage obligations – commercial ..................
Residential mortgage-backed securities ....................................
Corporate debt securities ..............................................................
Negotiable certificates of deposit .................................................
Equity securities ...........................................................................
26,129
61,017
73,998
500
2,232
1,010
Total available-for-sale securities ............................................ $ 217,264 $
103
492
441
-
-
-
2,493 $
1
253
341
80
-
43
768 $
26,231
61,256
74,098
420
2,232
967
218,989
Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that
exceeded 10.0% of shareholders’ equity at December 31, 2015 or 2014.
84
The following table shows the amortized cost and approximate fair value of the Company’s available-for-sale debt securities
at December 31, 2015 using contractual maturities. Expected maturities will differ from contractual maturity because issuers
may have the right to call or prepay obligations with or without call or prepayment penalties. Because collateralized mortgage
obligations and residential mortgage-backed securities are not due at a single maturity date, they are not included in the
maturity categories in the following maturity summary.
December 31, 2015
Available-for-Sale
Amortized
(in thousands)
Amounts maturing in:
One year or less ................................................................................................................ $
One year through five years .............................................................................................
After five years through ten years ....................................................................................
After ten years ..................................................................................................................
Collateralized mortgage obligations .................................................................................
Residential mortgage-backed securities ...........................................................................
Total .............................................................................................................................. $
Cost
- $
31,156
89,490
2,215
112,062
18,201
253,124 $
Fair
Value
-
31,249
89,612
2,174
111,692
18,098
252,825
The following table presents the gross proceeds received and gross realized gains and losses on sales of available-for-sale
and held-to-maturity securities for each of the three years ended December 31, 2015, 2014 and 2013.
(in thousands)
Available-for-sale:
Gross proceeds received ..................................................................... $
Gross realized gains ...........................................................................
Gross realized losses ..........................................................................
Held-to-maturity:
Gross proceeds received ..................................................................... $
Gross realized gains ...........................................................................
Gross realized losses ..........................................................................
Year Ended December 31,
2014
2015
2013
88,658 $
2,325
(29)
111,243 $
6,272
-
53,787
3,295
(408 )
- $
-
-
2,686 $
368
-
-
-
-
The Company sold its entire held-to-maturity portfolio consisting of four obligations of state and political subdivisions with
an aggregate amortized cost of $2.3 million during the year ended December 31, 2014. The four securities were tax-exempt,
zero-coupon bonds of California municipalities. These securities were sold as part of management’s strategy to reduce the
amount of potential credit and concentration risk in the investment portfolio, and as part of tax planning strategies aimed at
reducing tax-exempt interest income. Since the held-to-maturity securities were sold for for reasons other than those permitted
under GAAP, the Company did not classify any securities as held-to-maturity in 2014 and 2015.
85
The following tables present the number of, fair value and gross unrealized losses of available-for-sale securities with
unrealized losses at December 31, 2015 and 2014, aggregated by investment category and length of time the securities have
been in an unrealized loss position.
Less than 12 Months
December 31, 2015
12 Months or Greater
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Total
Fair
Value
Gross
Unrealized
Losses
(dollars in thousands)
Obligantions of U.S.
government agencies .........
- $
- $
-
- $
- $
-
- $
- $
-
Obligations of state and
policitical subdivisions ......
31
33,022
419
1
264
3
32
33,286
422
U.S. government/
government-sponsored
agencies:
Collateralized mortgage
obligations - residential .
4
5,738
9
-
-
-
4
5,738
9
Collateralized mortgage
obligations -
commercial ....................
Residential mortgage-
backed securities ...........
Corporate debt securities ......
Negotiable certificates of
deposit ................................
Equity securities ...................
Total ......................................
16
67,969
601
7
-
16,779
-
161
-
12
-
2,913
-
70 $ 126,421 $
11
-
1,201
-
-
1
-
1
3 $
-
-
16
67,969
-
423
-
938
1,625 $
-
77
-
62
142
7
1
16,779
423
12
1
2,913
938
73 $ 128,046 $
11
62
1,343
601
161
77
Less than 12 Months
December 31, 2014
12 Months or Greater
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Total
Fair
Value
Gross
Unrealized
Losses
(dollars in thousands)
Obligations of U.S.
government agencies .........
2 $
9,513 $
47
- $
- $
Obligations of state and
policitical subdivisions ......
-
-
-
1
254
-
3
2 $
9,513 $
1
254
47
3
U.S. government/
government-sponsored
agencies:
Collateralized mortgage
obligations - residential .
1
653
1
-
-
-
1
653
1
Collateralized mortgage
obligations -
commercial ....................
Residential mortgage-
backed securities ...........
Corporate debt securities ......
Negotiable certificates of
deposit ................................
Equity Securities ...................
Total ......................................
7
32,513
105
3
8,693
148
10
41,206
3
-
16,659
-
-
-
-
-
13 $ 59,338 $
56
-
-
-
209
6
1
37,619
420
-
1
-
957
12 $ 47,943 $
285
80
-
43
559
9
1
54,278
420
-
1
-
957
25 $ 107,281 $
253
341
80
-
43
768
Management evaluates individual securities in an unrealized loss position quarterly for OTTI. As part of its evaluation,
management considers, among other things, the length of time a security’s fair value is less than its amortized cost, the
severity of decline, any credit deterioration of the issuer, whether or not management intends to sell the security, and whether
it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost.
There were 73 securities in an unrealized loss position at December 31, 2015 including 27 securities issued by a U.S.
government or government-sponsored agency, 32 obligations of state and political subdivisions, 12 negotiable certificates of
deposit, 1 corporate bond and 1 equity security. Management performed a review of the fair values of all securities in an
unrealized loss position as of December 31, 2015 and determined that movements in the fair values of the securities were
consistent with the change in market interest rates. In addition, as part of its review, management noted that there was no
material change in the credit quality of any of the issuers or other events or circumstances that may cause a significant adverse
86
effect on the fair value of these securities. Moreover, to date, the Company has received all scheduled principal and interest
payments and expects to fully collect all future contractual principal and interest payments on all securities in an unrealized
loss position at December 31, 2015. The Company does not intend to sell the securities nor is it more likely than not that the
Company will be required to sell the securities prior to recovery of their amortized cost. Based on the results of its review
and considering the attributes of these debt and equity securities, management concluded that the individual unrealized losses
were temporary and OTTI did not exist at December 31, 2015.
Investments in FHLB of Pittsburgh and FRB stock, which have limited marketability, are carried at cost and totaled $7.7
million and $4.2 million at December 31, 2015 and 2014, respectively. FRB Stock of $1.3 million is included in Other Assets
at December 31, 2015 and 2014. Management noted no indicators of impairment for the FHLB of Pittsburgh and the FRB of
Philadelphia stock at December 31, 2015 and 2014.
Note 5. LOANS
The following table summarizes loans receivable, net, by category at December 31, 2015 and 2014:
(in thousands)
Residential real estate ........................................................................................... $
Commercial real estate .........................................................................................
Construction, land acquisition and development ..................................................
Commercial and industrial ...................................................................................
Consumer .............................................................................................................
State and political subdivisions ............................................................................
Total loans, gross ..............................................................................................
Unearned income .................................................................................................
Net deferred loan costs .........................................................................................
Allowance for loan and lease losses .....................................................................
Loans, net ......................................................................................................... $
December 31,
2015
2014
130,696 $
245,198
30,843
149,826
128,533
46,056
731,152
(98 )
2,662
(8,790 )
724,926 $
122,832
233,473
18,835
132,057
122,092
40,205
669,494
(98)
871
(11,520)
658,747
The Company has granted loans, letters of credit and lines of credit to certain executive officers and directors of the Company
as well as to certain related parties of executive officers and directors. For more information about related party transactions,
refer to Note 14 – “Related Party Transactions” to these consolidated financial statements.
For information about credit concentrations within the Company’s loan portfolio, refer to Note 15 – “Commitments,
Contingencies and Concentrations” to these consolidated financial statements.
The Company originates one- to four-family mortgage loans for sale in the secondary market. During the years ended
December 31, 2015, 2014 and 2013, the Company sold $7.9 million, $8.3 million and $12.6 million of one- to four-family
mortgages, respectively. The Company retains servicing rights on these mortgages. The Company had $683 thousand and
$603 thousand in loans held-for-sale at December 31, 2015 and 2014, respectively. All loans held for sale are one- to four-
family residential mortgage loans.
The Company sold all of its education loans, which are categorized as consumer loans, to a third party during the year ended
December 31, 2014. The education loans had a recorded investment of $2.6 million at the time of sale. The Company
recognized a loss of $13 thousand upon the sale of these loans which is included in non-interest income for the year ended
December 31, 2014.
The Company sold one performing classified commercial real estate loan and five non-performing classified one- to four-
family residential mortgage loans during the year ended December 31, 2013. The loans had an aggregate recorded investment
of $3.5 million at the time of sale, net of charge-offs recorded. The Company recognized a loss of $223 thousand upon the
sale of these loans which was included in non-interest income in 2013. The Company did not sell any performing or non-
performing classified loans in 2015 or 2014.
The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally
targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs,
judgments, and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high
debt-burden ratios.
87
The Company provides for loan losses based on the consistent application of its documented ALLL methodology. Loan
losses are charged to the ALLL and recoveries are credited to it. Additions to the ALLL are provided by charges against
income based on various factors which, in management’s judgment, deserve current recognition of estimated probable losses.
Loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, the Company
will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated recoverable amount based on
its methodology detailed below. The Company regularly reviews the loan portfolio and makes adjustments for loan losses in
order to maintain the ALLL in accordance with GAAP. The ALLL consists primarily of the following two components:
(1) Specific allowances are established for impaired loans, which are defined by the Company as all loan relationships
with an aggregate outstanding balance greater than $100 thousand that are rated substandard and on non-accrual
status, rated doubtful or loss, and all troubled debt restructured loans (“TDRs”). The amount of impairment provided
for as an allowance is represented by the deficiency, if any, between the carrying value of the loan and either (a) the
present value of expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable
market price, or (c) the fair value of the underlying collateral, less estimated costs to sell, for collateral dependent
loans. Impaired loans that have no impairment losses are not considered for general valuation allowances described
below. If the Company determines that collection of the impairment amount is remote, the Company will record a
charge-off.
(2) General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of
impaired. The Company divides its portfolio into loan segments for loans exhibiting similar characteristics. Loans
rated special mention or substandard and accruing, which are embedded in these loan segments, are then separated
from these loan segments, as these loans are subject to an analysis that emphasizes the credit risk associated with
these specific loans. The Company applies an estimated loss rate to each loan segment. The loss rates applied to each
loan segment are based on the Company’s own historical loss experience for each respective loan segment. In
addition, management evaluates and applies certain qualitative or environmental factors that are likely to cause
estimated credit losses associated with the Company’s existing portfolio to differ from historical experience, which
are discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible
to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may
be significantly more than the ALLL that is established, which could have a material negative effect on the
Company’s operating results or financial condition.
Management makes adjustments for loan losses based on its evaluation of several qualitative and environmental factors,
including but not limited to:
● Changes in national, local, and business economic conditions and developments, including the condition of various
market segments;
● Changes in the nature and volume of the Company’s loan portfolio;
● Changes in the Company’s lending policies and procedures, including underwriting standards, collection, charge-
off and recovery practices and results;
● Changes in the experience, ability and depth of the Company’s lending management and staff;
● Changes in the quality of the Company's loan review system and the degree of oversight by the Company’s Board
of Directors;
● Changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of
non-accrual loans, troubled debt restructurings and other loan modifications;
● The existence and effect of any concentrations of credit and changes in the level of such concentrations;
● The effect of external factors such as competition and legal and regulatory requirements on the level of estimated
credit losses in the Company's current loan portfolio; and
● Analysis of customers’ credit quality, including knowledge of their operating environment and financial condition.
Each quarter, management evaluates the ALLL and adjusts the ALLL as appropriate through a provision or credit for loan
losses. While the Company uses the best information available to make evaluations, future adjustments to the ALLL may be
necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral
part of its examination process, bank regulators periodically review the Company’s ALLL. These regulators may require the
Company to adjust the ALLL based on its analysis of information available to it at the time of its examination.
Based on its evaluation of the ALLL, management established an unallocated reserve of $74 thousand and $45 thousand at
December 31, 2015 and 2014, respectively. As previously mentioned, as part of its evaluation, management applies loss rates
to each loan segment. These loan rates are based on the Company’s actual historical loss experience for the previous twelve
88
consecutive quarters, which have resulted in overall negative historical loss factors and consequently negative provisions for
the commercial and industrial loan segment at December 31, 2015 and the construction, land acquisition and development
loan segment at December 31, 2014. Based on the risk characteristics inherent in these segments of the portfolio, management
reversed the negative provision and established the unallocated reserves.
The following table summarizes the activity in the ALLL by loan category for the years ended December 31, 2015, 2014 and
2013:
Allowance for Loan and Lease Losses by Loan Category
December 31, 2015
Real Estate
Residential
Real
Estate
Commercial
Real Estate
Construction,
Land
Acquisition
and
Development
Commercial
and
Industrial
State and
Political
Subdivisions
Consumer
Unallocated
Total
(in thousands)
Allowance for loan losses:
Beginning balance, January 1,
2015 ...................................... $
Charge-offs .........................
Recoveries ...........................
Provisions (credits) .............
Ending balance, December 31,
2015 ...................................... $
Ending balance, December 31,
2015:
Individually evaluated for
impairment ............................ $
Ending balance, December 31,
2015:
Collectively evaluated for
impairment ............................ $
Loans receivable:
1,772 $
(139)
58
(358)
4,663 $
(912)
307
(712)
665 $
(688 )
-
876
2,104 $
(180)
400
(1,119)
1,673 $
(716)
485
52
598 $
-
-
(113)
45 $
-
-
29
11,520
(2,635)
1,250
(1,345)
1,333 $
3,346 $
853 $
1,205 $
1,494 $
485 $
74 $
8,790
92 $
287 $
1 $
- $
1 $
- $
- $
381
1,241 $
3,059 $
852 $
1,205 $
1,493 $
485 $
74 $
8,409
Ending balance, December 31,
2015 ...................................... $ 130,696 $
245,198 $
30,843 $
149,826 $ 128,533 $
46,056 $
- $ 731,152
Ending balance, December 31,
2015:
Individually evaluated for
impairment ............................ $
2,930 $
3,831 $
646 $
203 $
351 $
- $
- $
7,961
Ending balance, December 31,
2015:
Collectively evaluated for
impairment ............................ $ 127,766 $
241,367 $
30,197 $
149,623 $ 128,182 $
46,056 $
- $ 723,191
89
Allowance for Loan and Lease Losses by Loan Category
December 31, 2014
Real Estate
Residential
Real
Estate
Commercial
Real Estate
Construction,
Land
Acquisition
and
Development
Commercial
and
Industrial
State and
Political
Subdivisions
Consumer
Unallocated
Total
(in thousands)
Allowance for loan losses:
Beginning balance, January 1,
2014 ...................................... $
Charge-offs .........................
Recoveries ...........................
Provisions (credits) .............
Ending balance, December 31,
2014 ...................................... $
Ending balance, December 31,
2014:
Individually evaluated for
impairment ............................ $
Ending balance, December 31,
2014:
Collectively evaluated for
impairment ............................ $
Loans receivable:
2,287 $
(204)
90
(401)
6,017 $
-
362
(1,716)
924 $
(45 )
3,538
(3,752 )
2,321 $
(217)
262
(262)
1,789 $
(922)
508
298
679 $
-
-
(81)
- $
-
-
45
14,017
(1,388)
4,760
(5,869)
1,772 $
4,663 $
665 $
2,104 $
1,673 $
598 $
45 $
11,520
51 $
331 $
1 $
- $
1 $
- $
- $
384
1,721 $
4,332 $
664 $
2,104 $
1,672 $
598 $
45 $
11,136
Ending balance, December 31,
2014 ...................................... $ 122,832 $
233,473 $
18,835 $
132,057 $ 122,092 $
40,205 $
- $ 669,494
Ending balance, December 31,
2014:
Individually evaluated for
impairment ............................ $
2,487 $
6,660 $
256 $
32 $
361 $
- $
- $
9,796
Ending balance, December 31,
2014:
Collectively evaluated for
impairment ............................ $ 120,345 $
226,813 $
18,579 $
132,025 $ 121,731 $
40,205 $
- $ 659,698
90
Allowance for Loan and Lease Losses by Loan Category
December 31, 2014
Real Estate
Residential
Real
Estate
Commercial
Real Estate
Construction,
Land
Acquisition
and
Development
Commercial
and
Industrial
State and
Political
Subdivisions
Consumer
Unallocated
Total
(in thousands)
Allowance for loan losses:
Beginning balance, January 1,
2013 ...................................... $
Charge-offs .........................
Recoveries ...........................
Provisions (credits) .............
Ending balance, December 31,
2013 ...................................... $
Ending balance, December 31,
2013:
Individually evaluated for
impairment ............................ $
Ending balance, December 31,
2013:
Collectively evaluated for
impairment ............................ $
Loans receivable:
1,764 $
(664)
343
844
8,062 $
(65)
879
(2,859)
2,162 $
(179 )
130
(1,189 )
4,167 $
(341)
1,853
(3,358)
1,708 $
(655)
450
286
673 $
-
-
6
- $
-
-
-
18,536
(1,904)
3,655
(6,270)
2,287 $
6,017 $
924 $
2,321 $
1,789 $
679 $
- $
14,017
12 $
296 $
1 $
- $
1 $
- $
- $
310
2,275 $
5,721 $
923 $
2,321 $
1,788 $
679 $
- $
13,707
Ending balance, December 31,
2013 ...................................... $ 114,925 $
218,524 $
24,382 $
127,021 $ 118,645 $
39,875 $
- $ 643,372
Ending balance, December 31,
2013:
Individually evaluated for
impairment ............................ $
1,985 $
6,626 $
306 $
- $
316 $
- $
- $
9,233
Ending balance, December 31,
2013:
Collectively evaluated for
impairment ............................ $ 112,940 $
211,898 $
24,076 $
127,021 $ 118,329 $
39,875 $
- $ 634,139
Credit Quality Indicators – Commercial Loans
Management continuously monitors the credit quality of the Company’s commercial loans by regularly reviewing certain
credit quality indicators. Management utilizes credit risk ratings as the key credit quality indicator for evaluating the credit
quality of the Company’s loan receivables.
The Company’s commercial loan classification and credit grading processes are part of the lending, underwriting, and credit
administration functions to ensure an ongoing assessment of credit quality. The Company’s formal loan classification and
credit grading system reflects the risk of default and credit losses. A written description of the risk ratings is maintained that
includes a discussion of the factors used to assign appropriate classifications of credit grades to loans. The process identifies
groups of loans that warrant the special attention of management. The risk grade groupings provide a mechanism to identify
risk within the loan portfolio and provide management and the Board with periodic reports by risk category. Accurate and
timely loan classification and credit grading is a critical component of loan portfolio management. Loan officers are required
to review their loan portfolio risk ratings regularly for accuracy.
The loan review function uses the same risk rating system in the loan review process. Quarterly, the Company engages an
independent third party to assess the quality of the loan portfolio and evaluate the accuracy of ratings with the loan officer’s
and management’s assessment. The credit risk ratings play an important role in the establishment and evaluation of the
provision for loan and lease losses and the ALLL. After determining the historical loss factor which is adjusted for qualitative
and environmental factors for each portfolio segment, the portfolio segment balances that have been collectively evaluated
for impairment are multiplied by the general reserve loss factor for the respective portfolio segments to determine the general
91
reserve. Loans that have an internal credit rating of special mention or substandard follow the same process; however, the
qualitative and environmental factors are further adjusted for the increased risk.
The Company’s loan rating system assigns a degree of risk to commercial loans based on relevant information about the
ability of borrowers to service their debt such as: current financial information, historical payment experience, credit
documentation, public information and current economic trends, among other factors. Management analyzes these non-
homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan.
Commercial and industrial loans include commercial indirect auto loans which are not individually risk rated, and
construction, land acquisition and development loans include residential construction loans which are also not individually
risk rated. These loans are monitored on a pool basis due to their homogeneous nature as described in “Credit Quality
Indicators – Other Loans” below. The Company risk rates certain residential real estate loans and consumer loans that are
part of a larger commercial relationship using its credit grading system as described in “Credit Quality Indicators –
Commercial Loans.” The grading system contains the following basic risk categories:
1. Minimal Risk
2. Above Average Credit Quality
3. Average Risk
4. Acceptable Risk
5. Pass - Watch
6. Special Mention
7. Substandard - Accruing
8. Substandard - Non-Accrual
9. Doubtful
10. Loss
This analysis is performed on a quarterly basis using the following definitions for risk ratings:
Pass - Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are
considered fully collectible. All such loans are considered collectively for ALLL calculation purposes. However, accruing
TDRs that have been performing for an extended period of time, do not represent a higher risk of loss, and have been upgraded
to a pass rating are evaluated individually for impairment.
Special Mention – Assets classified as special mention do not currently expose the Company to a sufficient degree of risk to
warrant an adverse classification but do possess credit deficiencies or potential weaknesses deserving close attention. Special
Mention assets have a potential weakness or pose an unwarranted financial risk which, if not corrected, could weaken the
asset and increase risk in the future.
Substandard - Assets classified as substandard have well defined weaknesses based on objective evidence, and are
characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable based on
current circumstances.
Loss - Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is
not warranted.
92
Credit Quality Indicators – Other Loans
Certain residential real estate loans, consumer loans, and commercial indirect auto loans are monitored on a pool basis due
to their homogeneous nature. Loans that are delinquent 90 days or more are placed on non-accrual status unless collection of
the loan is in process and reasonably assured. The Company utilizes accruing versus non-accrual status as the credit quality
indicator for these loan pools.
The following tables present the recorded investment in loans receivable by loan category and credit quality indicator at
December 31, 2015 and 2014:
Credit Quality Indicators
December 31, 2015
Commercial Loans
Other Loans
Special
accrual Subtotal Total
Pass Mention Substandard Doubtful Loss Commercial Loans Loans Other Loans
22,451 $ 107,204 $ 1,041 $108,245 $130,696
- $
- 245,198
245,198
-
Subtotal Accruing Non-
984 $
7,992
- $
-
-
-
Residential real estate ............. $ 21,018 $
449 $
Commercial real estate ........... 225,850 11,356
Construction, land acquisition
and development .................. 23,946
Commercial and industrial ..... 142,242
Consumer ................................ 2,747
State and political
358
595
9
subdivisions ......................... 45,464
120
Total ................................... $461,267 $ 12,887 $
5,137
2,209
39
472
16,833 $
-
-
-
-
- $
-
-
-
-
- $
Credit Quality Indicators
December 31, 2014
29,441
145,046
1,402
4,775
2,795 125,392
- 1,402 30,843
5 4,780 149,826
346 125,738 128,533
46,056
- 46,056
490,987 $ 238,773 $ 1,392 $240,165 $731,152
-
-
Commercial Loans
Other Loans
Residential real estate ............. $ 19,892 $
451 $
Commercial real estate ........... 204,252 13,217
Construction, land acquisition
and development .................. 10,910 1,423
Commercial and industrial ..... 122,261 1,962
Consumer ................................ 3,414
-
State and political
925
subdivisions ......................... 38,685
Total ................................... $399,414 $ 17,978 $
Special
accrual Subtotal Total
Pass Mention Substandard Doubtful Loss Commercial Loans Loans Other Loans
836 $101,412 $122,832
- $
- 233,473
-
21,420 $ 100,576 $
-
233,473
1,077 $
16,004
Subtotal Accruing Non-
- $
-
-
5,566
2,397
125
595
25,764 $
-
-
-
-
- $
-
-
-
-
- $
17,899
126,620
936
5,437
3,539 118,377
-
936 18,835
- 5,437 132,057
176 118,553 122,092
- 40,205
40,205
443,156 $ 225,326 $ 1,012 $226,338 $669,494
-
-
Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in
the financial condition of the borrowers. The recorded investment in these non-accrual loans was $3.8 million and $5.5
million at December 31, 2015 and 2014, respectively. Generally, loans are placed on non-accrual status when they become
90 days or more delinquent, and remain on non-accrual status until they are brought current, have six months of performance
under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exists.
Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a
non-accrual status. There were no loans past due 90 days or more and still accruing at December 31, 2015 and 2014.
93
The following tables present the delinquency status of past due and non-accrual loans at December 31, 2015 and 2014:
(in thousands)
Performing (accruing) loans:
Real estate:
December 31, 2015
Delinquency Status
0-29 Days 30-59 Days 60-89 Days >/= 90 Days
Past Due Past Due Past Due Past Due
Total
Residential real estate ................................... $
Commercial real estate .................................
Construction, land acquisition and
129,206 $
243,168
development ...............................................
Total real estate ................................................
30,475
402,849
51 $
53
26
130
225 $
286
-
511
- $
-
129,482
243,507
-
-
30,501
403,490
Commercial and industrial ...............................
149,329
236
66
-
149,631
Consumer .........................................................
126,760
994
433
-
128,187
State and political subdivisions ........................
Total performing (accruing) loans ....................
46,056
724,994
-
1,360
-
1,010
-
-
46,056
727,364
Non-accrual loans:
Real estate:
Residential real estate ...................................
Commercial real estate .................................
Construction, land acquisition and
development ...............................................
Total real estate ................................................
Commercial and industrial ...............................
Consumer .........................................................
923
1,576
342
2,841
98
69
99
-
-
99
-
21
44
115
-
159
-
3
State and political subdivisions ........................
Total non-accrual loans ....................................
-
3,008
-
120
-
162
148
-
-
148
97
253
-
498
1,214
1,691
342
3,247
195
346
-
3,788
Total loans receivable....................................... $
728,002 $
1,480 $
1,172 $
498 $
731,152
94
(in thousands)
Performing (accruing) loans:
Real estate:
December 31, 2014
Delinquency Status
0-29 Days 30-59 Days 60-89 Days >/= 90 Days
Past Due Past Due Past Due Past Due
Total
Residential real estate ................................... $
Commercial real estate .................................
Construction, land acquisition and
121,407 $
229,207
development ...............................................
Total real estate ................................................
18,740
369,354
420 $
136
-
556
- $
-
95
95
- $
-
121,827
229,343
-
-
18,835
370,005
Commercial and industrial ...............................
131,621
90
135
-
131,846
Consumer .........................................................
120,204
1,334
378
-
121,916
State and political subdivisions ........................
Total peforming (accruing) loans .....................
40,205
661,384
-
1,980
-
608
-
-
40,205
663,972
Non-accrual loans:
Real estate:
Residential real estate ...................................
Commercial real estate .................................
Construction, land acquisition and
development ...............................................
Total real estate ................................................
Commercial and industrial ...............................
Consumer .........................................................
495
288
-
783
55
42
99
3,628
-
3,727
-
-
17
19
-
36
394
195
-
589
52
104
58
76
1,005
4,130
-
5,135
211
176
State and political subdivisions ........................
Total non-accrual loans ....................................
-
880
-
3,727
-
146
-
769
-
5,522
Total loans receivable....................................... $
662,264 $
5,707 $
754 $
769 $
669,494
95
The following tables present a distribution of the recorded investment, unpaid principal balance and the related allowance for
the Company’s impaired loans, which have been analyzed for impairment under ASC 310, at December 31, 2015 and 2014.
Non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold are not evaluated
individually for impairment and are accordingly not included in the following tables. However, these loans are evaluated
collectively for impairment as homogenous pools in the general allowance under ASC Topic 450. Total non-accrual loans,
other than TDRs, with balances less than the $100 thousand loan relationship threshold that were evaluated under ASC Topic
450 amounted to $0.8 million and $1.0 million at December 31, 2015 and 2014, respectively.
(in thousands)
With no allowance recorded:
Real estate:
Recorded
Investment
December 31, 2015
Unpaid
Principal
Balance
Related
Allowance
Residential real estate ..................................................................... $
Commercial real estate ..................................................................
Construction, land acquisition and development ............................
Total real estate .................................................................................
1,042 $
1,850
470
3,362
1,138 $
2,868
844
4,850
Commercial and industrial .................................................................
124
156
Consumer ...........................................................................................
-
-
State and political subdivisions ..........................................................
Total impaired loans with no related allowance recorded ..................
-
3,486
-
5,006
With a related allowance recorded:
Real estate:
Residential real estate .....................................................................
Commercial real estate ...................................................................
Construction, land acquisition and development ............................
Total real estate .................................................................................
Commercial and industrial .................................................................
Consumer ...........................................................................................
State and political subdivisions ..........................................................
Total impaired loans with a related allowance recorded ....................
Total of impaired loans
Real estate:
Residential real estate .....................................................................
Commercial real estate ...................................................................
Construction, land acquisition and development ............................
Total real estate .................................................................................
Commercial and industrial .................................................................
Consumer ...........................................................................................
State and political subdivisions ..........................................................
Total impaired loans .......................................................................... $
1,888
1,981
176
4,045
79
351
-
4,475
2,930
3,831
646
7,407
203
351
-
7,961 $
1,888
1,981
176
4,045
79
351
-
4,475
3,026
4,849
1,020
8,895
235
351
-
9,481 $
-
-
-
-
-
-
-
-
92
287
1
380
-
1
-
381
92
287
1
380
-
1
-
381
96
(in thousands)
With no allowance recorded:
Real estate:
December 31, 2014
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Residential real estate ..................................................................... $
Commercial real estate ..................................................................
Construction, land acquisition and development ............................
Total real estate .................................................................................
Commercial and industrial .................................................................
Consumer ...........................................................................................
385 $
4,401
68
4,854
32
-
410 $
5,024
68
5,502
59
-
State and political subdivisions ..........................................................
Total impaired loans with no related allowance recorded ..................
-
4,886
-
5,561
With a related allowance recorded:
Real estate:
Residential real estate .....................................................................
Commercial real estate ...................................................................
Construction, land acquisition and development ............................
Total real estate .................................................................................
2,102
2,259
188
4,549
2,137
2,259
188
4,584
Commercial and industrial .................................................................
-
-
Consumer ...........................................................................................
361
361
State and political subdivisions ..........................................................
Total impaired loans with a related allowance recorded ....................
-
4,910
-
4,945
Total of impaired loans
Real estate:
Residential real estate .....................................................................
Commercial real estate ...................................................................
Construction, land acquisition and development ............................
Total real estate .................................................................................
Commercial and industrial .................................................................
Consumer ...........................................................................................
2,487
6,660
256
9,403
32
361
2,547
7,283
256
10,086
59
361
State and political subdivisions ..........................................................
Total impaired loans .......................................................................... $
-
9,796 $
-
10,506 $
-
-
-
-
-
-
-
-
51
331
1
383
-
1
-
384
51
331
1
383
-
1
-
384
The total recorded investment in impaired loans, which consists of non-accrual loans with an aggregate loan relationship
greater than $100,000 and TDRs, amounted to $8.0 million and $9.8 million at December 31, 2015 and 2014, respectively.
The related allowance on impaired loans was $0.4 million at both December 31, 2015 and 2014.
97
The following table presents the average balance and the interest income recognized on impaired loans for the years ended
December 31, 2015, 2014 and 2013:
(in thousands)
Real estate:
2015
Year Ended December 31,
2014
2013
Average
Balance
Interest
Income (1)
Average
Balance
Interest
Income (1)
Average
Balance
Interest
Income (1)
Residential real estate ................ $
Commercial real estate ..............
Construction, land acquisition
3,157 $
6,830
121 $
106
2,226 $
6,616
91 $
118
2,301 $
10,004
and development .....................
Total real estate .............................
570
10,557
18
245
284
9,126
15
224
761
13,066
Commercial and industrial ............
174
2
76
-
-
Consumer ......................................
356
11
343
11
79
State and political subdivisions .....
-
-
-
-
-
22
313
28
363
-
3
-
Total impaired loans ...................... $
11,087 $
258 $
9,545 $
235 $
13,145 $
366
(1) Interest income represents income recognized on performing TDRs.
The additional interest income that would have been earned on non-accrual and restructured loans had these loans performed
in accordance with their original terms approximated $0.4 million for each of the years ended December 31, 2015 and 2014,
and $0.6 million for the year ended December 31, 2013.
Troubled Debt Restructured Loans
TDRs at December 31, 2015 and 2014 were $5.8 million and $9.0 million, respectively. Accruing and non-accruing TDRs
were $5.0 million and $0.8 million, respectively at December 31, 2015 and $5.3 million and $3.7 million, respectively at
December 31, 2014. Approximately $295 thousand and $346 thousand in specific reserves have been established for TDRs
as of December 31, 2015 and 2014, respectively. The Bank was not committed to lend additional funds to any loan classified
as a TDR at December 31, 2015 and 2014.
The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest
rate of the loan, an extension of the maturity date, capitalization of real estate taxes, or a permanent reduction of the recorded
investment in the loan.
98
The following tables show the pre- and post- modification recorded investment in loans modified as TDRs during the years
ended December 31, 2015 and 2014:
For the Year Ended December 31, 2015 For the Year Ended December 31, 2014
Pre-
Modification
Post-
Modification
Number Outstanding Outstanding Number Outstanding Outstanding
Recorded Recorded
Contracts Investments Investments Contracts Investments Investments
Recorded Recorded
Pre-
Modification
Post-
Modification
of
of
5 $
1
1
1
-
-
810 $
1,654
96
79
-
-
827
742
96
79
-
-
12 $
4
-
-
2
-
780 $
238
-
-
182
-
862
238
-
-
187
-
(in thousands)
Troubled debt restructurings:
Residential real estate ...................
Commercial real estate .................
Construction, land acquisition and
development ...............................
Commercial and industrial ...........
Consumer .....................................
State and political subdivisions ....
Total new troubled debt
restructurings ..........................
8 $
2,639 $
1,744
18 $
1,200 $
1,287
The TDRs described above increased the allowance for loan losses by $2 thousand and $4 thousand through allocation of a
specific reserve for the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2015,
there was one commercial real estate loan that was modified with a recorded investment prior to modification of $1.7 million.
Pursuant to the modification, management conducted an analysis and determined that there was impairment on the loan.
Accordingly, the Company recorded a $912 thousand partial charge-off related to this loan. Charge-offs that resulted from
the TDRs described above during the year ended December 31, 2015 totaled $912 thousand. There were no charge-offs that
resulted from the TDRs described above during the year ended December 31, 2014.
99
The following table shows the pre-modification recorded investment of loans modified as TDRs stratified by type of
modification made during the years ended December 31, 2015 and 2014:
(in thousands)
Type of modification:
Residential real estate ................. $
Commercial real estate ...............
Construction, land acquisition
and development ......................
Commercial and industrial .........
Consumer ...................................
State and political subdivisions ..
Total modifications ................. $
(in thousands)
Type of modification:
Residential real estate ................. $
Commercial real estate ...............
Construction, land acquisition
and development ......................
Commercial and industrial .........
Consumer ...................................
State and political subdivisions ..
Total modifications ................. $
For the Year Ended December 31, 2015
Extension of
Term and
Capitalization
of Taxes
Capitalization
of Taxes
Principal
Forbearance
Total
Modifications
Extension of
Term
710 $
-
96
-
-
-
806 $
100 $
-
-
-
-
-
100 $
- $
-
-
-
-
-
- $
- $
1,654
-
79
-
-
1,733 $
810
1,654
96
79
-
-
2,639
For the Year Ended December 31, 2014
Extension of
Term and
Capitalization
of Taxes
Capitalization
of Taxes
Principal
Forbearance
Total
Modifications
Extension of
Term
263 $
238
-
-
135
-
636 $
339 $
-
-
-
52
-
391 $
35 $
-
-
-
-
-
35 $
225 $
-
-
-
-
-
225 $
862
238
-
-
187
-
1,287
During the years ended December 31, 2015 and 2014 there were no TDRs which re-defaulted (defined as past due 90 days)
that were restructured within the twelve months prior to such redefault.
As of December 31, 2015, there were four TDRs with a recorded investment of $188 thousand that were delinquent between
30 and 89 days. There was one TDR with a recorded investment of $3.5 million that re-defaulted during the year ended
December 31, 2015. The re-default did not occur within one year of the original modification. During the fourth quarter of
2015, the TDR was foreclosed upon and transferred to OREO.
Note 6. OTHER REAL ESTATE OWNED
The following table presents the composition of OREO at December 31, 2015 and 2014:
(in thousands)
Land / lots ......................................................................................................................... $
Commercial real estate .....................................................................................................
Residential real estate .......................................................................................................
Total other real estate owned ........................................................................................ $
December 31, 2015
2015
2014
785 $
2,342
27
3,154 $
1,287
941
27
2,255
100
The following table presents the activity in OREO for the years ended December 31, 2015, 2014 and 2013:
(in thousands)
Balance, beginning of year ................................................................. $
Property foreclosures .........................................................................
Bank premises transferred to OREO ..................................................
Valuation adjustments ........................................................................
Carrying value of OREO sold ...........................................................
Balance, end of year ........................................................................... $
For the Years Ended December 31,
2014
2015
2013
2,255 $
1,717
-
(208)
(610)
3,154 $
4,246 $
13
1,749
(2,200)
(1,553)
2,255 $
3,983
255
1,819
(223)
(1,588)
4,246
The following table presents the components of net expense of OREO for the years ended December 31, 2015, 2014 and
2013:
For the Years Ended December 31,
(in thousands)
Insurance ............................................................................................ $
Legal fees ...........................................................................................
Maintenance .......................................................................................
Professional fees .................................................................................
Real estate taxes .................................................................................
Utilities ...............................................................................................
Other...................................................................................................
Valuation adjustments ........................................................................
Total expense .................................................................................
Income from the operation of foreclosed properties ..........................
Net expense of OREO .................................................................... $
2015
86 $
38
5
6
38
15
5
208
401
(1)
400 $
2014
96 $
55
17
85
144
8
14
2,200
2,619
(50 )
2,569 $
2013
147
131
37
35
122
6
45
223
746
(27 )
719
The Company recorded net gains on the sale of properties held in OREO of $162 thousand in 2015, $209 thousand in 2014
and $135 thousand in 2013.
There were three consumer mortgage loans secured by residential real estate properties with an aggregate recorded investment
of $340 thousand that were in the process of foreclosure at December 31, 2015. There were three residential properties with
a fair value less cost to sell of $162 thousand that were foreclosed upon during the year ended December 31, 2015. There
were two residential properties with an aggregate carrying value of $41 thousand and one residential property with a carrying
value of $27 thousand included in OREO at December 31, 2015 and 2014, respectively.
Note 7. BANK PREMISES AND EQUIPMENT
The following table summarizes bank premises and equipment at December 31, 2015 and 2014:
(in thousands)
Land ................................................................................................................................. $
Buildings and improvements ............................................................................................
Furniture, fixtures and equipment ....................................................................................
Leasehold improvements ..................................................................................................
Total ..............................................................................................................................
Accumulated depreciation ................................................................................................
Net ................................................................................................................................ $
December 31,
2015
2014
2,731 $
7,406
12,674
5,007
27,818
(16,625 )
11,193 $
2,711
7,187
11,638
4,985
26,521
(15,518)
11,003
Depreciation and amortization expense amounted to $1.2 million for the year ended December 31, 2015 and $1.3 million for
each of the years ended December 31, 2014 and 2013.
On January 24, 2014, the Company sold the premises and certain equipment of its Marshalls Creek, Monroe County branch
as part of the Branch Purchase Agreement with ESSA Bank and Trust. The property sold had a net book value of $2.3 million,
101
and the Company realized a gain on the sale of the property of $181 thousand, which is included in the $607 thousand gain
on branch divestiture in non-interest income for the year ended December 31, 2014.
Note 8. SERVICING
The Company originates one- to four-family residential loans that it sells in the secondary market. Servicing of these loans
is retained by the Company. Loans serviced for others are not included in the accompanying consolidated statements of
financial condition, but the related servicing income and expenses are recognized in the consolidated statements of income.
In 2015, 2014 and 2013 the Company also serviced a pool of automobile loans that it sold in 2010. The balance of these loans
had been entirely repaid in 2015. The unpaid balances of mortgage and other loans serviced for others were $110.7 million,
$122.2 million and $130.5 million at December 31, 2015, 2014 and 2013, respectively. At December 31, 2015, substantially
all of the loans serviced for others were performing in accordance with their contractual terms.
The following table summarizes the activity pertaining to mortgage servicing rights for the years ended December 31, 2015,
2014 and 2013. Mortgage servicing rights are included in other assets in the consolidated statements of financial condition.
(in thousands)
Balance, beginning of year ................................................................. $
Mortgage servicing rights capitalized ................................................
Amortization ......................................................................................
Balance, end of year ........................................................................... $
For the Year Ended December 31,
2014
2015
2013
333 $
82
(175)
240 $
529 $
77
(273 )
333 $
675
119
(265 )
529
The fair value of all servicing assets was $880 thousand and $898 thousand at December 31, 2015 and 2014, respectively. Fair
value has been determined using discount rates ranging from 2.75% to 8.34% and prepayment speeds ranging from 113% to
369% derived from the Public Securities Association (“PSA”) standard prepayment model, depending upon the stratification
of the specific right. Based upon this fair value, management has determined that no valuation allowance associated with
these mortgage servicing rights is necessary at December 31, 2015 and 2014.
Note 9. INTANGIBLE ASSETS
Intangible assets consist entirely of a core deposit premium acquired in connection with the purchase of the Honesdale branch
in 2006. The core deposit intangible is being amortized, using the straight-line method over the useful life of 10 years.
Management reviews the core deposit intangible at least annually for potential impairment. Management’s evaluation at
December 31, 2015 and 2014 indicated that there was no impairment to the core deposit intangible.
The following table summarizes core deposit intangible assets at December 31, 2015 and 2014:
(in thousands)
Gross carrying amount ..................................................................................................... $
Accumulated amortization ...............................................................................................
Net carrying amount ......................................................................................................... $
December 31,
2015
2014
1,650 $
(1,513 )
137 $
1,650
(1,348)
302
Amortization expense on core deposit intangible assets totaled $165 thousand in each of the three years ended 2015, 2014
and 2013. Amortization expense on core deposit intangible assets with finite useful lives is expected to total $137 thousand
for 2016 at which time it will be fully amortized.
102
Note 10. DEPOSITS
The following table summarizes deposits at December 31, 2015 and 2014:
(in thousands)
Demand (non-interest bearing) ........................................................................................ $
Interest-bearing:
Interest-bearing demand ...............................................................................................
Savings .........................................................................................................................
Time ($250,000 and over) ............................................................................................
Other time .....................................................................................................................
Total interest-bearing ....................................................................................................
Total deposits ............................................................................................................ $
December 31,
2015
2014
154,531 $
124,064
364,303
92,890
68,155
141,667
667,015
821,546 $
345,679
89,489
112,044
124,060
671,272
795,336
The aggregate amount of deposits reclassified as loans was $69 thousand at December 31, 2015 and $136 thousand at
December 31, 2014. Management evaluates transaction accounts that are overdrawn for collectability as part of its evaluation
for credit losses. During 2015 and 2014, no deposits were received on terms other than those available in the normal course
of business.
The following table summarizes scheduled maturities of time deposits, including certificates of deposit and individual
retirement accounts, at December 31, 2015:
(in thousands)
2016 .................................................................................................... $
2017 ....................................................................................................
2018 ....................................................................................................
2019 ....................................................................................................
2020 ....................................................................................................
2021 and thereafter .............................................................................
Total ................................................................................................ $
Time Deposits
$250,000
and Over
Other
Time Deposits
101,412 $
20,991
9,071
3,809
6,284
100
141,667 $
54,102 $
7,477
3,137
1,248
2,191
-
68,155 $
Total
155,514
28,468
12,208
5,057
8,475
100
209,822
Investment securities with a carrying value of $252.4 million and $217.6 million at December 31, 2015 and 2014,
respectively, were pledged to collateralize certain municipal deposits.
Note 11. BORROWED FUNDS/SUBSEQUENT EVENTS
The following table summarizes the components of borrowed funds at December 31, 2015 and 2014:
(in thousands)
Federal Home Loan Bank of Pittsburgh advances - overnight ..................................... $
Federal Home Loan Bank of Pittsburgh advances - term .............................................
Subordinated debentures ..............................................................................................
Junior subordinated debentures ....................................................................................
Total .......................................................................................................................... $
December 31,
2015
2014
60,500 $
75,302
14,000
10,310
160,112 $
-
61,194
25,000
10,310
96,504
The Company may also utilize short-term Federal funds purchased which represent overnight borrowings providing for the
short-term funding requirements of the Bank and generally mature within one business day of the transaction. Federal Reserve
Discount Window borrowings also represent overnight funding to meet the short-term liquidity requirements of the Bank and
are fully collateralized with investment securities. Other than testing its availability for contingency funding planning
purposes, the Company did not purchase Federal funds or borrow from the Federal Reserve Discount Window during the
year ended December 31, 2015.
103
The following table presents borrowed funds by their maturity dates at December 31, 2015:
(in thousands)
Within one year ........................................................................................................... $
After one year but within two years ............................................................................
After two years but within three years ........................................................................
After three years but within four years ........................................................................
After four years but within five years .........................................................................
After five years ............................................................................................................
Total ......................................................................................................................... $
December 31, 2015
Weighted
Average
Interest Rate
Amount
114,423
14,000
10,000
11,379
-
10,310
160,112
0.39%
1.92%
2.77%
3.28%
0.00%
1.91%
0.98%
The FHLB of Pittsburgh overnight advances of $60.5 million, and term borrowings of $75.3 million, consisting of fixed-rate
advances having original maturities between nine months and fifteen years, are collateralized under a blanket pledge
agreement. Loans of $377.5 million and $378.9 million, at December 31, 2015 and 2014, respectively, were pledged to
collateralize FHLB advances under this agreement. In addition, the Company is required to purchase FHLB stock based upon
the amount of advances outstanding. The Company was in compliance with this requirement, having a stock investment in
FHLB of Pittsburgh of $6.3 million at December 31, 2015.
The maximum amount of borrowings outstanding at any month end during the years ended December 31, 2015 and 2014
was $160.1 million and $122.7 million, respectively.
On December 14, 2006, the Issuing Trust issued $10.0 million of trust preferred securities (the “Trust Securities”) at a variable
interest rate of 7.02%, with a scheduled maturity of December 15, 2036. The Company owns 100.0% of the ownership interest
in the Trust. The proceeds from the issue were invested in $10.3 million, 7.02% Junior Subordinated Debentures (the
“Debentures”) issued by the Company. The interest rate on the Trust Securities and the Debentures resets quarterly at a spread
of 1.67% above the current 3-month Libor rate. The average interest rate paid on the Debentures was 1.99% in 2015, 1.93%
in 2014, and 1.97% in 2013. The Debentures are unsecured and rank subordinate and junior in right to all indebtedness,
liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Interest on the Trust
Securities is deferrable until a period of twenty consecutive quarters has elapsed. The Company had the option to prepay the
Trust Securities beginning December 15, 2011. The Company has, under the terms of the Debentures and the related
Indenture, as well as the other operative corporate documents, agreed to irrevocably and unconditionally guarantee the Trust’s
obligations under the Debentures. The Company has reflected this investment on a deconsolidated basis. As a result, the
Debentures totaling $10.3 million, have been reflected in Borrowed Funds in the consolidated statements of financial
condition at December 31, 2015 and 2014 under the caption “Junior Subordinated Debentures”. The Company records interest
expense on the Debentures in its consolidated statements of income. The Company also records its common stock investment
issued by First National Community Statutory Trust I in “Other Assets” in its consolidated statements of financial condition
at December 31, 2015 and 2014.
The Company was released from a Written Agreement with the Federal Reserve Bank on September 2, 2015. While the
Company was under the Written Agreement, principal and interest payments on the Debentures required written non-
objection from the Reserve Bank. Pursuant to the Written Agreement, the Company had been deferring the quarterly interest
payments on the Debentures beginning September 14, 2010 and ending on December 15, 2014. During 2014, the Company
requested and received non-objection from the Reserve Bank to make a distribution on the Debentures to cure the interest
deferral on December 15, 2014, at which time the Company paid all deferred and currently payable accrued interest totaling
$884 thousand. Since that date, the Company has continued to make regularly scheduled quarterly interest payments due on
the Debentures. At December 31, 2015 and 2014, accrued and unpaid interest associated with the Debentures amounted to
$11 thousand and $9 thousand, respectively.
On September 1, 2009, the Company offered only to accredited investors up to $25.0 million principal amount of unsecured
subordinated debentures due September 1, 2019 (the “Notes”). Prior to July 1, 2015, the Notes had a fixed interest rate of 9%
per annum. Payments of interest are payable to registered holders of the Notes (the “Noteholders”) quarterly on the first of
every third month, subject to the right of the Company to defer such payment. On June 30, 2015, pursuant to approval from
all of the Noteholders and the Reserve Bank, the Company amended the original terms of the Notes to reduce the interest rate
payable from 9.00% to 4.50% effective July 1, 2015 and to accelerate a partial repayment of principal amount under the
Notes. Pursuant to the approved amendment, on June 30, 2015, the Company repaid 44% of the original principal amount,
104
or $11.0 million, of the Notes outstanding to the holders on June 30, 2015, with the remaining $14.0 million in principal to
be repaid as follows: (a) 16% of the original principal amount, or $4.0 million, payable on September 1, 2017; (b) 20% of
the original principal amounts, or $5.0 million, payable on September 1, 2018; and (c) the final 20% of the original principal
amount, or $5.0 million, payable on September 1, 2019, the maturity date of the Notes. The principal balance outstanding for
these notes was $14.0 million at December 31, 2015 and $25.0 million at December 31, 2014.
While the Company was under the Written Agreement, principal and interest payments on the Notes required written non-
objection from the Reserve Bank. Pursuant to the Written Agreement, the Company had been deferring the quarterly interest
payments on the Notes beginning December 1, 2010 and ending on June 1, 2015. Beginning with the September 1, 2015
payment, the Company resumed the regularly scheduled quarterly interest payments and since that date has continued to
make the scheduled interest payments going forward. Additionally, on January 27, 2016, the Board of Directors authorized
payment on March 1, 2016 of all interest that the Company had previously been deferring on the Notes. The aggregate
payment, totaling $11.0 million, includes all deferred interest and interest that is due and payable on March 1, 2016. The
accrued and unpaid interest associated with the Notes amounted to $10.9 million and $9.9 million at December 31, 2015 and
2014, respectively.
Note 12. BENEFIT PLANS
The Bank has a defined contribution profit sharing plan (“Profit Sharing Plan”) which covers all eligible employees. The
Bank’s contribution to the plan is determined at management’s discretion at the end of each year and funded. On April 25,
2012, the Board of Directors ratified an amendment to the defined contribution profit sharing plan to include the provisions
under section 401(k) of the Internal Revenue Code (“401(k) ”). The 401(k) feature of the plan, which became effective on
September 1, 2012, permits employees to make voluntary salary deferrals, either pre-tax or Roth, up to the dollar limit
prescribed by law. The Company may make discretionary matching contributions equal to a uniform percentage of employee
salary deferrals. Company discretionary matching contributions are determined each year by management. Since September
1, 2012, the Company has been matching 50.0% of employee salary deferrals up to 4.0% for each employee. Effective July
1, 2015, the Company match was changed to 100% of employee salary deferrals up to 2.0% for each employee. Company
matching contributions to the 401(k) Plan are funded bi-weekly and are included in salaries and employee benefits expense.
Employee salary deferrals vest immediately. Prior to January 1, 2015, Company discretionary contributions began vesting
20.0% each year after two year of credited service with employee participants 100.0% vested after six years of credited
service. On February 25, 2015, the Board of Directors approved a change in the vesting schedule of discretionary
contributions made by the Company under the Profit Sharing Plan, including the 401(k) feature. The change in the vesting
schedule, which was retroactively effective to January 1, 2015, provides that Company contributions will vest 25.0% each
year of credited service, with employee participants being 100.0% vested after four years of credited service.
There were no discretionary annual contributions made to the profit sharing plan in 2015, 2014 and 2013. Discretionary
matching contributions under the 401(k) feature of the plan totaled $149 thousand, $134 thousand, and $129 thousand in
2015, 2014 and 2013, respectively.
The Bank has an unfunded non-qualified deferred compensation plan covering all eligible Bank officers and directors as
defined by the plan. This plan permits eligible participants to elect to defer a portion of their compensation. Elective deferred
compensation and accrued earnings, included in other liabilities in the accompanying statements of financial condition,
aggregated $3.1 million at December 31, 2015 and $7.2 million at December 31, 2014.
On October 1, 2015, the Bank executed a Supplemental Executive Retirement Plan (“SERP”) for a select group of
management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of The
Employee Retirement Income Security Act of 1974. The general provisions of the SERP provide for annual year-end
contributions, performance contingent contributions and discretionary contributions. The SERP contributions are unfunded
for Federal tax purposes and constitute an unsecured promise by the Bank to pay benefits in the future. Participants in the
SERP shall have the status of general unsecured creditors of the Bank. SERP expense totaled $130 thousand in 2015.
105
Note 13. INCOME TAXES
The following table summarizes the current and deferred amounts of the provision for income tax (benefit) expense and the
change in valuation allowance for each of the three years ended December 31, 2015, 2014 and 2013:
(in thousands)
Current ......................................................................................... $
Deferred .......................................................................................
Change in valuation allowance.....................................................
Income tax (benefit) expense .................................................... $
For the Year Ended December 31,
2014
2015
2013
(75) $
2,297
(29,981)
(27,759) $
326 $
3,799
(3,799)
326 $
-
347
(347)
-
The following table presents a reconciliation between the effective income tax expense (benefit) and the income tax expense
that would have been provided at the federal statutory tax rate of 34.0% for each of the years ended December 31, 2015, 2014
and 2013:
(in thousands)
Provision at statutory tax rates ..................................................... $
Add (deduct):
Tax effects of non-taxable income ...............................................
Non-deductible interest expense ..................................................
Bank-owned life insurance ...........................................................
Change in valuation allowance ....................................................
Regulatory penalties .....................................................................
Other items, net ............................................................................
Income tax (benefit) provision ..................................................... $
For the Year Ended December 31,
2014
2015
2013
2,748 $
4,674 $
2,170
(483)
11
(192)
(29,981)
-
138
(27,759) $
(1,087)
21
(221)
(3,799)
570
168
326 $
(1,574 )
37
(240 )
(347 )
-
(46 )
-
The following table summarizes the components of the net deferred tax asset included in other assets at December 31, 2015
and 2014:
(in thousands)
Allowance for loan and lease losses ................................................................................. $
Deferred compensation ....................................................................................................
Unrealized holding losses on securities available-for-sale ...............................................
Other real estate owned valuation ....................................................................................
Deferred intangible assets ................................................................................................
Employee benefits ............................................................................................................
Accrued interest ...............................................................................................................
AMT tax credits ...............................................................................................................
Charitable contribution carryover ....................................................................................
Accrued rent expense .......................................................................................................
Accrued vacation ..............................................................................................................
Accrued legal settlement costs .........................................................................................
Deferred income ...............................................................................................................
Net operating loss carryover ............................................................................................
Gross deferred tax assets ..............................................................................................
Deferred loan origination fees ..........................................................................................
Unrealized holding gains on securities available-for-sale ................................................
Prepaid expenses ..............................................................................................................
Depreciation .....................................................................................................................
Gross deferred tax liabilities .........................................................................................
Net deferred asset before valuation allowance .............................................................
Valuation allowance .........................................................................................................
Net deferred tax assets (liabilities) ............................................................................... $
106
December 31,
2015
2014
3,105 $
1,171
123
265
1,189
258
199
2,466
355
217
83
923
96
18,910
29,360
(1,074 )
-
(73 )
(51 )
(1,198 )
28,162
(355 )
27,807 $
4,073
2,467
-
486
1,360
157
439
2,457
403
182
58
884
19
17,919
30,904
(425)
(586)
(63)
(80)
(1,154)
29,750
(30,336)
(586)
As of December 31, 2015, the Company had $55.6 million of net operating loss carryovers resulting in deferred tax assets of
$18.9 million. Beginning in 2030, these net operating loss carryovers will expire if not utilized. As of December 31, 2015,
the Company also had $1.0 million of charitable contribution carryovers resulting in gross deferred tax assets of $355
thousand. These charitable contribution carryovers will begin to expire after December 31, 2016 if not utilized. In addition,
the Company had alternative minimum tax (“AMT”) credit carryovers of $2.5 million as of December 31, 2015 that have an
indefinite life. As of December 31, 2014, the Company had carryovers for NOLs, charitable contributions and AMT credits
of $52.7 million, $1.2 million and $2.5 million, respectively.
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently, if necessary,
in accordance with guidance set forth in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine
whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized within its life cycle,
based on the weight of available evidence. If management determines based on available evidence, both positive and negative,
that it is more likely than not that some portion or all of the deferred tax asset will not be realized in future periods, a valuation
allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s
estimates and judgments used in their evaluation of both positive and negative evidence.
In evaluating available evidence, management considers, among other factors, historical financial performance, expectation
of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods,
experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of
reversals of termporary differences. In assessing the need for a valuation allowance, management carefully weighed both
positive and negative evidence currently available. The weight given to the potential effect of positive and negative evidence
must be commensurate with the extent to which it can objectively verified. In particular, additional scrutiny must be given to
deferred tax assets of an entity that is in a cumulative loss position in recent years because it is significant negative evidence
that is objective and verifiable and therefore difficult to overcome. In line with industry practice, the Company interpreted
the term “recent years” to mean the current year and the prior two years based on a rolling twelve quarters and used pre-tax
income (loss) adjusted for permanent differences and any non-recurring income, including gains on the sale of securities and
a.favorable legal settlement in 2014. While, the Company generated positive pre-tax book income adjusted for permanent
differences in 2014 and 2013, it recorded a pre-tax loss in 2012. In addition, the pre-tax book income in 2014 and 2013
included significant non-recurring or non-taxable income, which, when adjusted for, resulted in the Company being in a
three-year cumulative loss position at December 31, 2014. Accordingly, based on the analysis of all available positive and
negative evidence, management determined that the negative evidence that existed at December 31, 2014 outweighed any
positive evidence that existed at that time. Accordingly, management established a valuation allowance equal to 100.0% of
net deferred tax assets, excluding deferred tax assets or liabilities related to unrealized holding gains and losses on available-
for-sale securities.
Management evaluated the carrying amount of the Company’s deferred tax assets at March 31, 2015, June 30, 2015 and
September 30, 2015 using pre-tax income (loss) adjusted for permanent differences and non-recurring income on a rolling
twelve-quarter basis consistent with its previous evaluations and determined that the Company was in a cumulative three-
year loss position at each of the respective quarter ends. Based on each quarterly analysis, management concluded that the
negative evidence that existed at each quarter-end outweighed any available positive evidence at those times and determined
that the established valuation allowance equal to 100.0% of net deferred tax assets, excluding deferred tax assets or liabilities
related to unrealized holding gains and losses on available-for-sale securities, should continue to be maintained.
Management performed an evaluation the Company’s deferred tax assets at December 31, 2015 and determined that based
on its consistent methodology, the Company was now in a cumulative three-year income position, which it considered to be
positive evidence. The Company had sustained significant losses in the fourth quarter of 2012, which at December 31, 2015
were no longer part of this calculation. The negative evidence related to cumulative losses in prior period evaluations no
longer existed at December 31, 2015.
In addition, when determining the need for a valuation allowance, the management assessed the possible sources of taxable
income available under tax law to realize a tax benefit for deductible temporary differences and carryforwards as defined in
ASC Topic 740. As part of its assessment, management considered normalization of the Company’s core earnings, scheduling
the reversal of existing temporary differences at December 31, 2015 and projections of future core earnings based on known
facts at December 31, 2015. Management also incorporated into its assessment certain tax planning strategies recently
implemented designed to promote the generation of taxable income. These strategies included: 1) the sale of tax-exempt
obligations of states and political subdivisions with fair values greater than book values and redeployment of the sales
proceeds into taxable investment options; 2) the sale of lower-yielding taxable securities with fair values greater than book
values, and the redeployment of sales proceeds into higher-yielding taxable investment options; and 3) reducing the annual
107
rate paid on the Company’s Notes from 9.0% to 4.5% and making an $11.0 million, or 44.0%, principal prepayment on the
Notes.
During 2015, positive evidence continued to build and become more apparent by the end of the year. Specifically, the
resolution of costly litigation and release from the Consent Order by the OCC on March 25, 2015 and the Written Agreement
by the Reserve Bank on September 2, 2015 has led to an improvement in the Company’s overall risk profile. The Company
was notified by the FDIC that effective February 1, 2015, its risk category for FDIC insurance improved from Risk Category
II to Risk Category I, which resulted in a decrease in the Company’s initial base assessment rate for deposit insurance from
0.14 basis points to 0.05 basis points. As a result of these developments, the Company has experienced and anticipates further
reductions in its non-interest expense levels, specifically legal expense and regulatory assessments. Furthermore, as a result
of the improved risk profile, the Company renewed its professional liability, fidelity bond and errors and omissions insurance
policies at lower rates effective July 1, 2015 and accordingly experienced a decrease in insurance expense going forward.
As part of its assessment, management projected future core earnings for years 2016 through 2040. Years 2016, 2017 and
2018 were based on the Company’s annual three-year budget taking into consideration the positive developments and tax
planning strategies detailed above. The budget was approved by the Board of Directors in January 2016. For years 2019
through 2040, management used 2018 budgeted core earnings and estimated it to remain flat. Based on these projections the
Company is expected to generate future core earnings greater that the total deferred tax assets existing at December 31, 2015,
which management considered to be positive evidence. In addition, consistent with accounting guidance in ASC 740,
management scheduled the reversal of existing temporary differences at December 31, 2015. This analysis supported the
reversal of the valuation allowance established for deferred tax assets at December 31, 2015 except for the valuation
allowance established for charitable contribution carryforwards. Management does not believe at the current moment that
enough positive evidence exists to remove the valuation allowance associated with charitable contribution carryovers. Unlike
the expiration period for net operating loss carryforwards (generally 20 years) and AMT Credit carryovers (indefinite), the
expiration of an excess charitable contribution carryover occurs after the 5th succeeding tax year for which a charitable
contribution is made. Because the Company is in a net deferred tax asset position, without regard to net operating loss
carryovers, the reversal of existing temporary timing differences over the next 5 years makes it more likely than not that a
portion of the charitable contribution carryovers will not be recognized. Accordingly, management believes a valuation
allowance continues to be appropriate strictly in the case of the excess charitable contribution carryover deferred tax asset.
Based on its evaluation of all available positive and negative evidence that existed at December 31, 2015, management
concluded the significant positive evidence outweighed any negative evidence and the valuation allowance established for
its deferred tax assets should be reversed, except for the amount established for charitable contribution carryovers.
Note 14. RELATED PARTY TRANSACTIONS
The Company has engaged in and intends to continue to engage in banking and financial transactions in the conduct of its
business with directors and the executive officers of the Company and their related parties.
The Company has granted loans, letters of credit and lines of credit to directors, executive officers and their related parties.
The following table summarizes the changes in the total amounts of such outstanding loans, advances under lines of credit,
net of participations sold, as well as repayments during the years ended December 31, 2015 and 2014:
(in thousands)
Balance January 1, ....................................................................................................... $
Additions, new loans and advances ..........................................................................
Repayments ..............................................................................................................
Other (1) ...................................................................................................................
Balance December 31,.................................................................................................. $
2015
2014
36,783 $
65,411
(48,852)
(690)
52,652 $
29,301
63,465
(55,899)
(84)
36,783
For the Year Ended December 31,
(1) Other represents loans to related parties that ceased being related parties during the year
At December 31, 2015, there were no loans made to directors, executive officers and their related parties that were not
performing in accordance with the terms of the loan agreements.
108
Included in related party loans is a commercial line of credit with a company owned by a director with a total aggregate
balance outstanding of $11.0 million at December 31, 2015. The Company also sold a participation interest in this line to the
same director in the amount of $5.2 million, of which $4.4 million is outstanding. The Company receives a 25 basis point
annual servicing fee from this director on the participation balance. At December 31, 2014, the aggregate amount outstanding
under the line was $11.7 million and the participation interest sold under this line was $4.7 million.
Deposits from directors, executive officers and their related parties held by the Bank at December 31, 2015 and 2014
amounted to $106.1 million and $77.4 million, respectively. Interest paid on the deposits amounted to $276 thousand, $97
thousand, and $80 thousand for the years ended December 31, 2015, 2014 and 2013, respectively.
In the course of its operations, the Company acquires goods and services from and transacts business with various companies
affiliated with related parties, which include, but are not limited to, employee health insurance, fidelity bond and errors and
omissions insurance, legal services and repair of repossessed automobiles for resale The Company recorded payments to
related parties for goods and services of $2.1 million, $2.7 million, and $2.6 million in 2015, 2014, and 2013, respectively.
The Notes held by directors and/or their related parties totaled $8.6 million at December 31, 2015 and $9.0 million at
December 31, 2014. On June 12, 2015, the Company solicited consent from all existing Noteholders to amend the Notes by
reducing the interest rate payable on the Notes from 9.00% to 4.50% effective July 1, 2015, and prepaying 44% of the
principal amount outstanding on June 30, 2015. A group of Noteholders holding $14.0 million of the principal balance
outstanding on the Notes at June 12, 2015, comprised of both related parties or their interests and non-related parties, offered
to purchase the Notes of any Noteholder who did not wish to consent to the amendments. There were seven, non-related party
Noteholders, who elected to have their Notes purchased by the group, for a total principal balance of $10.0 million. Of the
$10.0 million, $6.4 million was purchased by related parties or their interests. On June 30, 2015, the Company made an $11.0
million principal reduction on the Notes. Total principal payments on Notes held by directors and/or their related parties
totaled $6.8 million, of which $6.4 million was used to purchase the Notes referenced above.
For the year ended December 31, 2015, the Company made the quarterly interest payments due on the Notes for the periods
of June 1, 2015 through August 31, 2015, and September 1, 2015 through November 30, 2015, totaling $453 thousand, of
which $233 thousand was paid to directors and/or their related interests. There was no interest paid to directors on these
Notes for the years ended December 31, 2014 or 2013. Interest expense recorded on the Notes to directors and/or their related
interests amounted to $606 thousand and $921 thousand for the years ended December 31, 2015 and 2014, respectively.
Interest accrued and unpaid on the Notes to directors and/or their related interest totaled $3.9 million and $3.6 million at
December 31, 2015 and 2014, respectively.
The following table summarizes the activity related to the Company’s subordinated debt for the year ended December 31,
2015:
(in thousands)
Balance, beginning of period, .......................................... $
Assignments .................................................................
Principal reductions ......................................................
Balance, end of period ...................................................... $
9,000 $
6,429
(6,789)
8,640 $
Related Party
Subordinated
Noteholders
For the Year Ended
December 31, 2015
Other
Subordinated
Noteholders
Total
Subordinated
Notes Outstanding
25,000
-
(11,000)
14,000
16,000 $
(6,429)
(4,211)
5,360 $
109
Note 15. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Leases
At December 31, 2015, the Company was obligated under certain non-cancelable leases with initial or remaining terms of
one year or more. Minimum future obligations under non-cancelable leases in effect at December 31, 2015 are as follows:
(in thousands)
2016 .................................................................................................... $
2017 ....................................................................................................
2018 ....................................................................................................
2019 ....................................................................................................
2020 ....................................................................................................
2021 and thereafter .............................................................................
Total ................................................................................................ $
Minimum Future Lease Payments
December 31, 2015
Equipment
Total
Facilities
535 $
299
228
112
84
277
1,535 $
50 $
33
27
27
5
-
142 $
585
332
255
139
89
277
1,677
Total rental expense under leases amounted to $795 thousand, $660 thousand and $692 thousand in 2015, 2014 and 2013,
respectively.
Financial Instruments with off-balance sheet commitments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of
credit that involve varying degrees of credit, interest rate or liquidity risk in excess of the amount recognized in the balance
sheet. 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 those instruments.
Financial instruments whose contract amounts represent credit risk at December 31, 2015 and 2014 are as follows:
(in thousands)
Commitments to extend credit ................................................................................ $
Standby letters of credit ...........................................................................................
December 31,
2015
2014
170,465 $
22,092
181,446
21,364
In order to provide for probable losses inherent in these instruments, the Company recorded reserves for unfunded
commitments of $300 thousand and $416 thousand at December 31, 2015 and 2014, respectively, which were included in
other liabilities on the consolidated balance sheets.
Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These
commitments usually are for specific periods or contain termination clauses and may require the payment of a fee. The total
amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire
without being drawn upon.
Letters of credit and financial guarantees are agreements whereby the Company guarantees the performance of a customer to
a third party. Collateral may be required to support letters of credit in accordance with management’s evaluation of the
creditworthiness of each customer. The credit exposure assumed in issuing letters of credit is essentially equal to that in other
lending activities.
110
Federal Home Loan Bank — Mortgage Partnership Finance Program
Under a secondary market loan servicing program with the FHLB, the Company, in exchange for a monthly fee, provides a
credit enhancement guarantee to the FHLB for foreclosure losses in excess of 1% of original loan principal sold to the FHLB.
At December 31, 2015, the Company serviced payments on $7.0 million of first lien residential loan principal under these
terms for the FHLB. At December 31, 2015, the maximum obligation for such guarantees by the Company would be
approximately $1.0 million if total foreclosure losses on the entire pool of loans exceed approximately $77 thousand.
Management believes the likelihood of a reimbursement for loss payable to the FHLB beyond the monthly credit
enhancement fee is remote.
Concentrations of Credit Risk
Cash Concentrations: The Bank maintains cash balances at several correspondent banks. There were no due from bank
accounts in excess of the $250 thousand limit covered by the Federal Deposit Insurance Corporation (“FDIC”) at December
31, 2015 or December 31, 2014.
Loan Concentrations: The Company attempts to limit its exposure to concentrations of credit risk by diversifying its loan
portfolio and closely monitoring any concentrations of credit risk. The commercial real estate and construction, land
acquisition and development portfolios comprise $276.0 million, or 37.8% of gross loans at December 31, 2015. Geographic
concentrations exist because the Company provides its services in its primary market area of Northeastern Pennsylvania and
conducts limited activities outside of that area. At December 31, 2015, the Company had commercial real estate and
construction, land acquisition and development loans and loan commitments totaling $27.4 million, or 3.7%, of gross loans
to customers outside of it primary market area.
The Company considers an industry concentration within the loan portfolio to exist if the aggregate loan balance outstanding
for that industry exceeds 25.0% of capital. The following table summarizes the concentrations within the Company’s loan
portfolio by industry at December 31, 2015 and 2014:
(in thousands)
Retail space/shopping centers ...................................................... $
Automobile dealers ......................................................................
1-4 family residential investment properties** ............................
Colleges and Universities** .........................................................
Office complexes/units** .............................................................
Land subdivision** ......................................................................
Physicians** .................................................................................
December 31, 2015
% of
Gross
Loans
Amount
December 31, 2014
% of
Gross
Loans
Amount
35,292
34,594
18,957
18,540
18,487
12,673
10,677
4.83% $
4.73%
2.59%
2.54%
2.53%
1.73%
1.46%
33,140
24,194
12,764
16,680
17,249
15,220
13,636
4.95 %
3.61 %
1.91 %
2.49 %
2.58 %
2.27 %
2.04 %
** Not a concentration at December 31, 2015. Balance shown is for comparative purposes only.
Litigation
On May 24, 2012, a putative shareholder filed a complaint in the Court of Common Pleas for Lackawanna County
(“Shareholder Derivative Suit”) against certain present and former directors and officers of the Company (the “Individual
Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment. The
Company was named as a nominal defendant. The parties to the Shareholder Derivative Suit commenced settlement
discussions and on December 18, 2013, the Court entered an Order Granting Preliminary Approval of Proposed Settlement
subject to notice to shareholders. On February 4, 2014, the Court issued a Final Order and Judgment for the matter granting
approval of a Stipulation of Settlement (the “Settlement”) and dismissing all claims against the Company and the Individual
Defendants. As part of the Settlement, there was no admission of liability by the Individual Defendants. Pursuant to the
Settlement, the Individual Defendants, without admitting any fault, wrongdoing or liability, agreed to settle the derivative
litigation for $5.0 million. The $5.0 million Settlement payment was made to the Company on March 28, 2014. The Individual
Defendants reserved their rights to indemnification under the Company’s Articles of Incorporation and Bylaws, resolutions
adopted by the Board, the Pennsylvania Business Corporation Law and any and all rights they have against the Company’s
and the Bank’s insurance carriers. In addition, in conjunction with the Settlement, the Company accrued $2.5 million related
to fees and costs of the plaintiff’s attorneys, which was included in non-interest expense in the Consolidated Statements of
111
Income for the year ended December 31, 2013. On April 1, 2014, the Company paid the $2.5 million related to fees and costs
of the plaintiff’s attorneys and partial indemnification of the Individual Defendants in the amount of $2.5 million, and as
such, as of December 31, 2015 $2.5 million plus accrued interest remains accrued in other liabilities related to the potential
indemnification of the Individual Defendants. The Company settled any and all claims it had or may have had against
Demetrius & Company, LLC, John Demetrius and Robert L. Rossi & Company in connection with the Shareholder Derivative
Suit in 2014.
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against the Company and the
Bank, as well as several current and former officers and directors of the Company, in the United States District Court for the
Middle District of Pennsylvania. F&D has asserted a claim for the rescission of a directors’ and officers’ insurance policy
and a bond that it had issued to the Company. On November 9, 2012, the Company and the Bank answered the claim and
asserted counterclaims for the losses and expenses already incurred by the Company and the Bank. The Company and the
other defendants are defending the claims and have opposed F&D’s requested relief by way of counterclaims, breaches of
contract and bad faith claims against F&D for its failure to fulfill its obligations to the Company and the Bank under the
insurance policy. At this time, the matter is in the discovery stage and the Company cannot reasonably determine the outcome
or potential range of loss in connection with this matter.
On August 13, 2013, Steven Antonik, individually, as Administrator of the Estate of Linda Kluska, William R. Howells, and
Louise A. Howells, on behalf of themselves and others similarly situated, filed a consumer protection class action against the
Company and Bank in the Lackawanna County Court of Common Pleas, seeking equitable, injunction and monetary relief
to address an alleged pattern and practice of wrong doing by the Bank relating to the repossession and sale of the Plaintiffs’
and class members’ financed motor vehicles. On December 17, 2015 the Honorable Margaret Moyle entered an Order
outlining the primary terms of a tentative agreement to settle this matter, pending a finalized, more-detailed settlement
agreement, class notice and a class fairness hearing, said Order covering both this matter and the matter involving Plaintiff
Charles Saxe, II individually and on behalf of all others similarly situated. The primary terms of the tentative agreement to
settle are 1) Defendants to pay the Plaintiffs’ class members, which the Defendants have stated are approximately 430
members, the total sum of $750,000; 2) Plaintiffs will release all claims against Defendants; 3) Defendants will remove to
vacate any judgements against any class members arising from the vehicle loans that are the subject of these actions; 4)
Defendants will remove the trade line on each class member’s credit report associated with the subject vehicle loans that are
at issue in these actions for Experian, Equifax and TransUnion, providing Plaintiffs’ counsel with verification of such; 5)
Defendants will verify that the aggregate amount received from class members by Defendants and its agents during the
alleged unjust enrichment class period does not exceed $45,000; and 6) Defendants will waive the disputed deficiency
balances relating to the subject loans of each class member and agree not to issue IRS Forms 1099-C in connection with these
deficiency waivers or to sell, assign , or otherwise collect on the alleged deficiencies.
On September 17, 2013, Charles Saxe, III individually and on behalf of all others similarly situated filed a consumer class
action against the Bank in the Lackawanna County Court of Common Pleas alleging violations of the Pennsylvania Uniform
Commercial Code in connection with the repossession and resale of financed vehicles. On December 17, 2015 the Honorable
Margaret Moyle entered an Order outlining the primary terms of a tentative agreement to settle this matter, pending a
finalized, more-detailed settlement agreement, class notice and a class fairness hearing, said Order covering both this matter
and the matter involving Plaintiffs Steven Antonik, individually, as Administrator of the Estate of Linda Kluska, William R.
Howells, and Louise A. Howells, on behalf of themselves and all others similarly situated. The primary terms of the tentative
agreement to settle are 1) Defendants to pay the Plaintiffs’ class members, which the Defendants have stated are
approximately 430 members, the total sum of $750,000; 2) Plaintiffs will release all claims against Defendants; 3) Defendants
will remove to vacate any judgements against any class members arising from the vehicle loans that are the subject of these
actions; 4) Defendants will remove the trade line on each class member’s credit report associated with the subject vehicle
loans that are at issue in these actions for Experian, Equifax and TransUnion, providing Plaintiffs’ counsel with verification
of such; 5) Defendants will verify that the aggregate amount received from class members by Defendants and its agents
during the alleged unjust enrichment class period does not exceed $45,000; and 6) Defendants will waive the disputed
deficiency balances relating to the subject loans of each class member and agree not to issue IRS Forms 1099-C in connection
with these deficiency waivers or to sell, assign , or otherwise collect on the alleged deficiencies.
On January 28, 2015, the Company and the SEC entered into a settlement agreement resolving issues related to disclosure
and financial reporting and the restatements of the Company’s financial statements for the year ended December 31, 2009
and the quarters ended March 31, 2010 and June 30, 2010. As part of this settlement agreement, on January 30, 2015 the
Company paid a civil money penalty of $175 thousand to the SEC. The Company accrued for the $175 thousand civil money
penalty in its 2014 results of operations.
112
On February 27, 2015, the Bank reached a comprehensive settlement with the Department of Treasury’s Financial Crimes
Enforcement Network (“FinCEN”) and the OCC to resolve alleged violations of the Bank Secrecy Act. In order to settle the
matter, the Bank consented to an aggregate civil money penalty assessment of $1.5 million which was accrued for at
December 31, 2014 and included in non-interest expense for the year ended December 31, 2014. The Company paid the $1.5
million civil money penalty on February 27, 2015.
The Company has been subject to tax audits and is also a party to routine litigation involving various aspects of its business,
such as employment practice claims, claims to enforce liens, condemnation proceedings on properties in which the Company
holds security interests, claims involving the making and servicing of real property loans and other issues incident to its
business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results
of operations or liquidity of the Company.
Note 16. STOCK COMPENSATION PLANS/SUBSEQUENT EVENTS
On August 30, 2000, the Company’s Board adopted the 2000 Employee Stock Incentive Plan (the “Stock Incentive Plan”) in
which options may be granted to key officers and other employees of the Company. The aggregate number of shares which
may be issued upon exercise of the options under the plan cannot exceed 1,100,000 shares. Options and rights granted under
the Stock Incentive Plan become exercisable six months after the date the options are awarded and expire ten years after the
award date. Upon exercise, the shares are issued from the Company’s authorized but unissued stock. The Stock Incentive
Plan expired on August 30, 2010. Therefore, no further grants will be made under the plan.
The Board also adopted on August 30, 2000, the 2000 Independent Directors Stock Option Plan (the “Directors’ Stock Plan”)
for directors who are not officers or employees of the Company. The aggregate number of shares issuable under the Directors’
Stock Plan cannot exceed 550,000 shares and are exercisable six months from the date the awards are granted and expire
three years after the award date. Upon exercise, the shares are issued from the Company’s authorized but unissued shares.
The Directors’ Stock Plan expired on August 30, 2010, therefore, no further grants will be made under the plan.
No compensation expense related to options under either the Stock Incentive Plan or the Directors’ Stock Plan was required
to be recorded in each of the years ended December 31, 2015, 2014, and 2013.
The following table summarizes the status of the Company’s stock option plans:
2015
For the Years Ended December 31,
2014
2013
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Outstanding at the beginning of
the year .......................................
Granted ..........................................
Exercised .......................................
Forfeited ........................................
Outstanding at the end of the year .
Options exercisable at year end .....
Weighted average fair value of
options granted during the year ...
Stock-based compensation
expense .......................................
64,479 $
-
-
(13,733)
50,746 $
50,746 $
15.87
-
-
18.33
15.20
15.20
82,598 $
-
-
(18,119)
64,479 $
64,479 $
15.98
-
-
16.37
15.87
15.87
129,170 $
-
-
(46,572)
82,598 $
82,598 $
$
$
-
-
$
$
-
-
$
$
14.26
-
-
11.22
15.98
15.98
-
-
At December 31, 2015, 2014 and 2013 the exercisable options had no total intrinsic value and there was no unrecognized
compensation expense.
113
The following table presents information pertaining to options outstanding at December 31, 2015:
Range of Exercise Price
$10.81 - $23.13
Number
Outstanding
50,746
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
Options Excercisable
Number
Exercisable
Weighted
Average
Exercise
Price
2.23 $
15.20
50,746 $
15.20
On November 27, 2013, the Board of Directors adopted the 2013 Employee Stock Grant Plan (the “2013 Stock Grant Plan”)
under which shares of common stock not to exceed 15,000 were authorized to be granted to employees. On December 2,
2013, the Company granted 50 shares of the Company’s common stock to each active full and part time employee. There
were 14,400 shares granted under the 2013 Stock Grant Plan at a fair value of $4.26 per share.
On October 29, 2014, the Board of Directors adopted a 2014 Employee Stock Grant Plan (the “2014 Stock Grant Plan”)
under which shares of common stock not to exceed 13,500 were authorized to be granted to employees. On December 1,
2014, the Company granted 50 shares of the Company’s common stock to each active full and part time employee. There
were 12,850 shares granted under the 2014 Stock Grant Plan at a fair value of $6.02 per share.
On November 25, 2015, the Board of Directors adopted a 2015 Employee Stock Grant Plan (the “2015 Stock Grant Plan”)
under which shares of common stock not to exceed 13,550 were authorized to be granted to employees. On November 25,
2015, the Company granted 50 shares of the Company’s common stock to each active full and part time employee. There
were 13,300 shares granted under the 2015 Stock Grant Plan at a fair value of $5.15 per share.
The total cost of these grants, which was included in salary expense in the Consolidated Statements of Income, amounted to
$68 thousand, $77 thousand and $61 thousand for the years ended December 31, 2015, 2014 and 2013, respectively. No
additional shares were granted under these plans.
On October 23, 2013, the Board of Directors adopted a Long Term Incentive Compensation Plan (“LTIP”) that is designed
to reward executives and key employees for their contributions to the long-term success of the Company, primarily as
measured by the increase in the Company’s stock price. The LTIP authorizes up to 1,200,000 shares of common stock for
issuance and provides the Board with the authority to offer several different types of long-term incentives, including stock
options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares. The
Board approved initial awards under the terms of the LTIP, which were granted to executives and key employees on March
1, 2014. The initial grant was comprised solely of 45,750 shares of restricted stock. On March 1, 2015, an additional 84,900
shares of restricted stock were awarded under the LTIP. At December 31, 2015, there were 1,070,516 shares of common
stock available for award under the LTIP. For the years ended December 31, 2015 and 2014, stock-based compensation
expense, which is included in salaries and benefits expense in the Consolidated Statements of Income, totaled $247 thousand
and $93 thousand, respectively. Total unrecognized compensation expense related to unvested restricted stock awards at
December 31, 2015 and 2014 was $453 thousand and $214 thousand, respectively. On March 1, 2016, an additional 67,600
shares were awarded under the LTIP.
The following table summarizes the activity related to the Company’s unvested restricted stock awards during the year ended
December 31, 2015.
2015
2014
Unvested unrestricted stock awards at January 1, ........................
Awards granted ............................................................................
Forfeitures ....................................................................................
Vestings ........................................................................................
Unvested unrestricted stock awards at December 31, ..................
Weighted-
Average
Weighted-
Average
Restricted Grant Date Restricted Grant Date
Fair Value
Shares
-
- $
6.70
45,750
-
-
-
-
6.70
45,750 $
Fair Value Shares
6.70
5.75
6.70
6.70
5.99
45,750 $
84,900
(1,166)
(16,526)
112,958 $
114
Note 17. REGULATORY MATTERS/SUBSEQUENT EVENTS
The Bank was under a Consent Order (the “Order”) from the OCC dated September 1, 2010. On March 25, 2015, after
meeting all of the requirements of the Order, the Bank was fully and completely released from the Order. The Company was
subject to a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”) dated
November 24, 2010. On September 8, 2015, the Company was notified by the Reserve Bank that effective September 2,
2015, it had been fully and completely released from the Written Agreement.
The Company’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to the
Company. Bank regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory
agency. Furthermore, while under the Order and Agreement, the Bank and the Company were previously restricted from
paying any dividends without the prior approval of their respective regulators and accordingly did not pay dividends from
2010 through 2015. Subsequent to December 31, 2015, on January 27, 2016, the Company declared a $0.02 per share dividend
payable on March 15, 2016 to shareholders of record March 1, 2016.
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material adverse effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices must
be met. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
In July 2013, the Federal Reserve, the OCC and the FDIC approved the final Basel III capital framework for U.S. banking
organizations (the “Regulatory Capital Rules”) implementing regulatory capital reforms and changes required by the Dodd-
Frank Act.
The Regulatory Capital Rules were effective on January 1, 2014; however, the mandatory compliance date for the Company
and the Bank as “standardized approach” banking organizations began on January 1, 2015 and is subject to transitional
provisions extending to January 1, 2019. The Regulatory Capital Rules include new risk-based capital and leverage ratios
and refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level
requirements applicable to the Company and the Bank under the Regulatory Capital Rules are:
● a total capital ratio of 8.00% (unchanged from current rules);
● a Tier I risk-based capital ratio of 6.00% (increased from 4.00%);
● a new common equity Tier I risk-based capital ratio of 4.50%; and
● a Tier I capital to average assets (“Tier I leverage rate”) of 4.00% for all institutions.
The Regulatory Capital Rules also establish a “capital conservation buffer” above the new regulatory minimum capital
requirements, which must consist entirely of common equity Tier I capital and result in the following minimum ratios
effective January 1, 2019:
● a total risk-based capital ratio of 10.50%;
● a Tier I risk-based capital ratio of 8.50%; and
● a common equity Tier I risk-based capital ratio of 7.00%.
The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted
assets and will increase by that amount each year until fully implemented in January 2019 at 2.50%. An institution will be
subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level
falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that could
be utilized for such actions.
The Regulatory Capital Rules also implement revisions and clarifications consistent with Basel III regarding the various
components of Tier I capital, including common equity, unrealized gains and losses, as well as certain instruments that will
no longer qualify as Tier I capital, some of which will be phased out over time.
115
The Regulatory Capital Rules also revise the prompt corrective action framework, which is designed to place restrictions on
insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions
took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital
conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in
order to qualify as “well capitalized”:
● a total risk-based capital ratio of 10.00% (unchanged from current rules);
● a Tier I risk-based capital ratio of 8.00% (increased from 6.00%);
● a new common equity Tier I risk-based capital ratio of 6.50%; and
● a Tier I leverage ratio of 5.00%.
The Regulatory Capital Rules set forth certain changes for the calculation of risk-weighted assets, which are required to be
utilized beginning January 1, 2015. The provisions applicable to banking organizations under the “standardized approach”
include changes with respect to risk weights for commercial real estate loans, past due exposures and conversion factors for
commitments with an original maturity of one year or less.
Current quantitative measures established by regulation to ensure capital adequacy require the Company to maintain
minimum amounts and ratios (set forth in the table below) of total capital, Tier I capital, and Tier I common equity (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
The Company’s and the Bank’s capital positions for risk-based capital purposes at December 31, 2015, 2014 and 2013 are
presented in the following table:
(in thousands)
Company:
Tier I common equity ......................................................................... $
2015
December 31,
2014
2013
74,945
N/A
N/A
Tier I capital .......................................................................................
74,945 $
59,930 $
46,165
Tier II capital:
Subordinated notes .........................................................................
Allowable portion of allowance for loan losses ..............................
Total tier II capital ..........................................................................
Total risk-based capital ...................................................................... $
9,800
9,090
18,890
93,835 $
25,000
8,591
33,591
93,521 $
23,085
8,462
31,547
77,712
Total risk-weighted assets .................................................................. $
Total average assets (for Tier 1 leverage ratio) .................................. $
795,887 $
1,031,426 $
683,956 $
990,346 $
670,894
980,754
Bank:
Tier I common equity ......................................................................... $
100,949
N/A
N/A
Tier I capital .......................................................................................
100,949
96,816
81,581
Tier II capital:
Allowable portion of allowance for loan losses ..............................
Total tier II capital ..........................................................................
Total risk-based capital ...................................................................... $
9,090
9,090
110,039 $
8,587
8,587
105,403 $
8,456
8,456
90,037
Total risk-weighted assets .................................................................. $
Total average assets (for Tier 1 leverage ratio) .................................. $
795,490 $
1,030,828 $
683,576 $
990,407 $
670,416
980,747
116
The following tables present summary information regarding the Company’s and the Bank’s risk-based capital and related
ratios at December 31, 2015 and 2014:
Company
Bank
(dollars in thousands)
December 31, 2015
Total capital (to risk-weighted
Amount Ratio
Amount Ratio
Ratio
Minimum
Required
For
Capital
Adequacy
Purposes
To Be Well
Capitalized
Under
Prompt
Corrective
Action
Ratio
assets) ......................................... $
93,835
11.79% $ 110,039
13.83%
8.00%
10.00%
Tier I capital (to risk-weighted
assets) .........................................
74,945
9.42%
100,949
12.69%
6.00%
8.00%
Tier I common equity (to risk-
weighted assets) .........................
74,945
9.42%
100,949
12.69%
4.50%
6.50%
Tier I capital (to average assets) ...
74,945
7.27%
100,949
9.79%
4.00%
5.00%
Company
Bank
(dollars in thousands)
December 31, 2014
Total capital (to risk-weighted
Amount Ratio
Amount Ratio
Ratio
Minimum
Required
For
Capital
Adequacy
Purposes
To Be Well
Capitalized
Under
Prompt
Corrective
Action
Ratio
assets) ......................................... $
93,521
13.67% $ 105,403
15.42%
8.00%
10.00%
Tier I capital (to risk-weighted
assets) .........................................
59,930
8.76%
96,816
14.16%
4.00%
6.00%
Tier I common equity (to risk-
weighted assets) .........................
N/A
N/A
N/A
N/A
N/A
N/A
Tier I capital (to average assets) ...
59,930
6.05%
96,816
9.78%
4.00%
5.00%
*Applies to the Bank only.
117
Note 18. FAIR VALUE MEASUREMENTS
In determining fair value, the Company uses various valuation approaches, including market, income and cost approaches.
Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable
inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market
data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s knowledge about the
assumptions the market participants would use in pricing an asset or liability, which are developed based on the best
information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). A financial asset or
liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value
measurement. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
● Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.
● Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market
prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques
for which all significant assumptions are observable in the market or can be corroborated by market data; and
● Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar
techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in determining fair value.
A description of the valuation methodologies used for assets recorded at fair value, and for estimating fair value of financial
instruments not recorded at fair value, is set forth below.
Cash, Short-term Investments, Accrued Interest Receivable and Accrued Interest Payable
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities
The estimated fair values of available-for-sale equity securities are determined by obtaining quoted prices on nationally
recognized exchanges (Level 1 inputs). The estimated fair values for the Company’s investments in obligations of U.S.
government agencies, obligations of state and political subdivisions, government-sponsored agency CMOs and residential
mortgage-backed securities, corporate debt securities, and negotiable certificates of deposit are obtained by the Company
from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities
and applying available market information through processes such as benchmark curves, benchmarking of like securities,
sector groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely
used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather
by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider
observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels,
trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among
other things and are based on market data obtained from sources independent from the Company. The Level 2 investments
in the Company’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect
the assumptions that market participants would use to price the assets. The Company has determined that the Level 2
designation is appropriate for these securities because, as with most fixed-income securities, those in the Company’s portfolio
are not exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed
market data. The Company has reviewed the pricing service’s methodology to confirm its understanding that such
methodology results in a valuation based on quoted market prices for similar instruments traded in active markets, quoted
markets for identical or similar instruments traded in markets that are not active and model-based valuation techniques for
which the significant assumptions can be corroborated by market data as appropriate to a Level 2 designation.
For those securities for which the inputs used by an independent pricing service were derived from unobservable market
information (Level 3 inputs), the Company evaluates the appropriateness and quality of each price. The Company reviews
the volume and level of activity for all classes of securities and attempted to identify transactions which may not be orderly
118
or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received
from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair
values based on Level 3 inputs). If applicable, the adjustment to fair value was derived based on present value cash flow
model projections prepared by the Company or obtained from third party providers utilizing assumptions similar to those
incorporated by market participants.
The Company did not own any securities for which fair value was determined using Level 3 inputs at December 31, 2015 or
2014. The Company did own one security issued by a state and political subdivision that was valued using Level 3 inputs
during 2014, which was paid off prior to December 31, 2014. This security had a credit rating that was either withdrawn or
downgraded by nationally recognized credit rating agencies, and as a result the market for these securities had become
inactive. This security was historically priced using level 2 inputs. The credit ratings withdrawal and downgrade resulted in
the level of significant other observable inputs for this investment security at the measurement dates. Broker pricing and
bid/ask spreads were very limited for this security. The balance of this security at January 1, 2014 was $571 thousand, which
was repaid in its entirety during 2014.
Loans
Except for collateral dependent impaired loans, fair values of loans are estimated by discounting the projected future cash
flows using market discount rates that reflect the credit, liquidity, and interest rate risk inherent in the loan. Projected future
cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.
The estimated fair value of collateral dependent impaired loans is based on the appraised loan value or other reasonable offers
less estimated costs to sell. The Company does not record loans at fair value on a recurring basis. However from time to time,
a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent
impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of the collateral is
generally based on appraisals. In some cases, adjustments are made to the appraised values due to various factors including
age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral.
When significant adjustments are based on unobservable inputs, the resulting fair value measurement is categorized as a
Level 3 measurement.
Loans Held For Sale
Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.
Mortgage Servicing Rights
The fair value of mortgage servicing rights is estimated using a discounted cash flow model that applies current estimated
prepayments derived from the mortgage-backed securities market and utilizes a current market discount rate for observable
credit spreads. The Company does not record mortgage servicing rights at fair value on a recurring basis.
Restricted Stock
Ownership in equity securities of FHLB of Pittsburgh and the FRB is restricted and there is no established market for their
resale. The carrying amount is a reasonable estimate of fair value.
Deposits
The fair value of demand deposits, savings deposits, and certain money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit is estimated based on discounted cash flows using
FHLB advance rates currently offered for similar remaining maturities.
Borrowed funds
The Company uses discounted cash flows using rates currently available for debt with similar terms and remaining maturities
to estimate fair value.
119
Commitments to extend credit and standby letters of credit
The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of off-balance sheet commitments is insignificant and therefore not included in
the table for non-recurring assets and liabilities.
Assets Measured at Fair Value on a Recurring Basis
The following tables present financial assets that are measured at fair value on a recurring basis at December 31, 2015 and
2014, and the fair value hierarchy of the respective valuation techniques utilized by the Company to determine the fair value:
Fair Value Measurements at December 31, 2015
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Fair Value
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
44,043 $
75,407
- $
-
44,043 $
75,407
(in thousands)
Available-for-sale securities:
Obligations of U.S. government agencies ........ $
Obligations of state and political subdivisions .
U.S. government/government-sponsored
agencies:
Collateralized mortgage obligations -
residential ...................................................
22,269
-
22,269
Collateralized mortgage obligations -
commercial ................................................
Residential mortgage-backed securities .......
Corporate debt securities ..................................
Negotiable certificates of deposit .....................
Equity securities ...............................................
Total available-for-sale securities ................... $
89,423
18,098
423
3,162
948
253,773 $
-
-
-
-
948
948 $
89,423
18,098
423
3,162
-
252,825 $
Fair Value Measurements at December 31, 2014
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Fair Value
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
29,276 $
24,509
- $
-
29,276 $
24,509
(in thousands)
Available-for-sale securities:
Obligations of U.S. government agencies ........ $
Obligations of state and political subdivisions .
U.S. government/government-sponsored
agency:
Collateralized mortgage obligations –
residential ...................................................
26,231
-
26,231
Collateralized mortgage obligations –
commercial ................................................
Residential mortgage-backed securities .......
Corporate debt securities ..................................
Negotiable certificates of deposit .....................
Equity securities ...............................................
Total available-for-sale securities ................... $
61,256
74,098
420
2,232
967
218,989 $
-
-
-
-
967
967 $
61,256
74,098
420
2,232
-
218,022 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
There were no transfers between levels within the fair value hierarchy during the years ended December 31, 2015 and 2014.
120
Assets Measured at Fair Value on a Non-Recurring Basis
The following tables present assets that are measured at fair value on a non-recurring basis at December 31, 2015 and 2014,
and additional quantitative information about the valuation techniques and inputs utilized by the Company to determine fair
value. All assets were measured using Level 3 inputs.
Fair Value Measurement
Quantitative Information
Recorded Valuation
Fair
Investment Allowance Value
Valuation
Technique
Unobservable
Inputs
Value/
Range
December 31, 2015
(in thousands)
Impaired loans - collateral
dependent ............................... $
Impaired loans - other ...............
Other real estate owned .............
718 $
3,757
3,104
124 $
257
-
594 Appraisal of collateral Selling costs
3,500 Discounted cash flows Discount rate
3,104 Appraisal of collateral Selling costs
10.0%
3.0% - 7.5%
10.0%
Fair Value Measurement
Quantitative Information
Recorded Valuation
Fair
Investment Allowance Value
Valuation
Technique
Unobservable
Inputs
Value/
Range
December 31, 2014
(in thousands)
Impaired loans - collateral
dependent ................................ $
Impaired loans – other ...............
Other real estate owned ..............
674 $
4,236
2,087
102 $
282
-
572 Appraisal of collateral Selling costs
3,954 Discounted cash flows Discount rate
2,087 Appraisal of collateral Selling costs
10.0%
2.9% - 7.5%
10.0%
The fair value of collateral-dependent impaired loans is determined through independent appraisals or other reasonable offers,
which generally include various Level 3 inputs which are not identifiable. Management reduces the appraised value by the
estimated costs to sell the property and may make adjustments to the appraised values as necessary to consider any declines
in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent, fair value is
determined using the discounted cash flows method. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the
balance of impaired loans, net of any charge-offs and the related allowance for loan losses.
OREO properties are recorded at fair value less the estimated cost to sell at the date of the Company’s acquisition of the
property. Subsequent to the Company’s acquisition, the balance may be written down further. It is the Company’s policy to
obtain certified external appraisals of real estate collateral underlying impaired loans and OREO, and estimate fair value
using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent and executed
sale agreements.
121
The following table summarizes the estimated fair values of the Company’s financial instruments at December 31, 2015 and
2014. The Company discloses fair value information about financial instruments, whether or not recognized in the Statement
of Financial Condition, for which it is practicable to estimate that value. The following estimated fair value amounts have
been determined by the Company using available market information and appropriate valuation methodologies. However,
management judgment is required to interpret data and develop fair value estimates. Accordingly, the estimates below are
not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
(in thousands)
Financial assets
December 31, 2015
December 31, 2014
Fair Value
Measurement
Carrying
Value
Fair Value
Carrying
Value
Fair Value
Level 1
Cash and short term investments ..............
$
Securities available for sale ...................... See previous table
FHLB and FRB Stock ...............................
Loans held for sale ....................................
Loans, net .................................................
Accrued interest receivable .......................
Mortgage servicing rights .........................
Level 2
Level 2
Level 3
Level 2
Level 3
21,083 $
253,773
7,695
683
724,926
2,475
240
21,083 $
253,773
7,695
683
716,412
2,475
880
35,667 $
218,989
4,154
603
658,747
2,075
333
35,667
218,989
4,154
603
659,231
2,075
898
Financial liabilities
Deposits ....................................................
Borrowed funds ........................................
Accrued interest payable ...........................
Level 2
Level 2
Level 2
821,546
160,112
11,165
798,466
160,266
11,165
795,336
96,504
10,262
779,986
100,020
10,262
Note 19. EARNINGS PER SHARE
For the Company, the numerator of both the basic and diluted earnings per common share is net income available to common
shareholders (which is equal to net income less dividends on preferred stock and related discount accretion). The weighted
average number of common shares outstanding used in the denominator for basic earnings per common share is increased to
determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common share
equivalents utilizing the treasury stock method. For the Company, common share equivalents are outstanding stock options
to purchase the Company’s common shares and unvested restricted stock.
The following table presents the calculation of both basic and diluted earnings per common share for the years ended
December 31, 2015, 2014 and 2013:
(in thousands, except share data)
Net income ......................................................................................... $
For the Year Ended December 31,
2014
2015
2013
35,840 $
13,420 $
6,382
Basic weighted-average number of common shares outstanding .......
Plus: common share equivalents ........................................................
Diluted weighted-average number of common shares outstanding ....
16,499,622
-
16,499,622
16,472,660
211
16,472,871
16,458,353
-
16,458,353
Income per common share:
Basic ............................................................................................... $
Diluted ............................................................................................ $
2.17 $
2.17 $
0.81 $
0.81 $
0.39
0.39
There were no common share equivalents for the year ended December 31, 2015. For the year ended December 31, 2014,
common share equivalents in the table above are related entirely to the incremental shares of unvested restricted stock. Stock
options of 50,746 shares, 64,479 shares, and 82,598 shares, respectively for the years ended December 31, 2015, 2014 and
2013 were excluded from common share equivalents. The exercise prices of stock options exceeded the average market price
of the Company’s common shares during the periods presented. Similarly, the weighted-average stock price for the
Company’s common stock for the year ended December 31, 2015 exceeded the fair market value of the restricted stock at
the date of grant, therefore, inclusion of these common share equivalents would be anti-dilutive to the diluted earnings per
common share calculation.
122
Note 20. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the reclassifications out of accumulated other comprehensive income (loss), which is
comprised entirely of unrealized gains and losses on available-for-sale securities, for each of the years ended December 31,
2015, 2014 and 2013:
For the year Ended December 31, 2015
Amount Reclassified
from Accumulated
Other Comprehensive
Affected Line Item
in the Consolidated
Statements of Income
(in thousands)
Available-for-sale securities:
Reclassification adjustment for net gains reclassified into net
income ................................................................................. $
Taxes .......................................................................................
Net of tax amount ................................................................ $
Income (Loss)
(2,296) Net gain on sale of securities
781 Income taxes
(1,515)
For the year Ended December 31, 2014
Amount Reclassified
from Accumulated
Other Comprehensive
Affected Line Item
in the Consolidated
Statements of
Operations
(in thousands)
Available-for-sale securities:
Reclassification adjustment for net gains reclassified into net
income ................................................................................. $
Taxes .......................................................................................
Net of tax amount ................................................................ $
Income (Loss)
(6,272) Net gain on sale of securities
2,132 Income taxes
(4,140)
For the year Ended December 31, 2013
Amount Reclassified
from Accumulated
Other Comprehensive
Affected Line Item
in the Consolidated
Statements of
Operations
(in thousands)
Available-for-sale securities:
Reclassification adjustment for net gains reclassified into net
income ................................................................................. $
Taxes .......................................................................................
Net of tax amount ................................................................ $
Income (Loss)
(2,887) Net gain on sale of securities
982 Income taxes
(1,905)
The following table summarizes the changes in accumulated other comprehensive income (loss), net of tax for the years
ended December 31, 2015, 2014 and 2013:
(in thousands)
Balance, January 1, ............................................................................ $
Other comprehensive income (loss) before reclassifications .............
Amounts reclassified from accumulated other comprehensive
income (loss) ....................................................................................
Net other comprehensive (loss) income during the period .................
Balance, December 31, ....................................................................... $
123
For the Year Ended December 31,
2014
2015
2013
1,138 $
139
(1,515)
(1,376)
(238) $
(3,092 ) $
8,370
(4,140 )
4,230
1,138 $
6,698
(7,885 )
(1,905 )
(9,790 )
(3,092 )
Note 21. CONDENSED FINANCIAL INFORMATION — PARENT COMPANY ONLY
The following tables present condensed parent company only financial information:
Condensed Statements of Condition
(in thousands)
Assets:
Cash .................................................................................................................................. $
Investment in statutory trust .............................................................................................
Investment in subsidiary (equity method) ........................................................................
Other assets ......................................................................................................................
Total assets ................................................................................................................... $
Liabilities and Shareholders’ Equity:
Subordinated debentures .................................................................................................. $
Junior subordinated debentures ........................................................................................
Accrued interest payable ..................................................................................................
Other liabilities .................................................................................................................
Total liabilities ..............................................................................................................
Shareholders’ equity .........................................................................................................
Total liabilities and shareholders’ equity ...................................................................... $
Condensed Statements of Income
December 31,
2015
2014
947 $
377
122,182
609
124,115 $
14,000 $
10,310
10,902
2,725
37,937
86,178
124,115 $
462
370
98,286
276
99,394
25,000
10,310
9,903
2,783
47,996
51,398
99,394
For the Year Ended December 31,
2014
2013
2015
12,500 $
6
-
12,506
1,450
206
168
114
1,938
10,568
-
10,568
25,272
35,840 $
1,000 $
6
275
1,281
2,281
236
128
276
2,921
(1,640 )
-
(1,640 )
15,060
13,420 $
-
6
-
6
2,281
204
123
2,500
5,108
(5,102 )
-
(5,102 )
11,484
6,382
(in thousands)
Income:
Dividends from subsidiaries ............................................................... $
Income from trust ...............................................................................
Other income ......................................................................................
Total income ...................................................................................
Expense:
Interest on subordinated notes ............................................................
Interest on junior subordinated debt ...................................................
Other operating expenses ...................................................................
Other losses ........................................................................................
Total expenses ................................................................................
Income (loss) before income taxes .....................................................
Provision (credit) for income taxes ....................................................
Income (loss) before equity in undistributed net income of
subsidiary .........................................................................................
Equity in undistributed net income of subsidiary ...............................
Net income ......................................................................................... $
124
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income ...................................................................................... $
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed income of subsidiary .................................
Equity in trust .................................................................................
Increase in accrued interest payable ...............................................
Increase in other assets ...................................................................
(Decrease) increase in other liabilities ...........................................
Net cash provided by (used in) operating activities ...................
Cash flows from financing activites:
Principal reduction on subordinated debentures ............................
Net cash used in financing activities ...........................................
Increase (decrease) in cash .................................................................
Cash and cash equivalents at beginning of year ................................
Cash and cash equivalents at end of year ........................................... $
2015
For the Year Ended
2014
2013
35,840 $
13,420 $
6,382
(25,272)
(6)
999
(18)
(58)
11,485
(11,000)
(11,000)
485
462
947 $
(15,060 )
(6 )
1,596
-
258
208
-
-
208
254
462 $
(11,484 )
(6 )
2,485
-
2,522
(101 )
-
-
(101 )
355
254
125
Note 22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2015
Quarter Ended
March 31,
(in thousands, except share data)
Interest income ..................................................... $
Interest expense ....................................................
Net interest income ...........................................
(Credit) provision for loan and lease losses .........
Net interest income after (credit) provision for
loan and lease losses .......................................
Non-interest income ............................................
Non-interest expense ............................................
Income before taxes ..........................................
Income tax (benefit) expense ............................
Net income ........................................................ $
Income per share:
Basic ................................................................. $
Diluted .............................................................. $
March 31,
(in thousands, except share data)
Interest income ..................................................... $
Interest expense ....................................................
Net interest income ...........................................
Credit for loan and lease losses ............................
Net interest income after credit for loan and
lease losses .....................................................
Non-interest income ............................................
Non-interest expense ............................................
Income (loss) before taxes ................................
Income tax expense ..........................................
Net income (loss) .............................................. $
Income (loss) per share:
Basic ................................................................. $
Diluted .............................................................. $
June 30,
September 30, December 31,
8,606
8,199 $
991
1,017
7,615
7,182
(1,005)
(191)
7,699 $
1,378
6,321
345
5,976
1,545
6,680
841
22
819 $
0.05 $
0.05 $
7,373
1,379
6,415
2,337
-
2,337 $
0.14 $
0.14 $
8,620
1,457
8,587
1,490
(27,719)
29,209
1.77
1.77
2014
Quarter Ended
June 30,
September 30, December 31,
8,019
8,312 $
1,523
1,501
6,496
6,811
(240)
(54)
8,218 $
1,550
6,668
(4,005)
10,673
4,962
8,965
6,670
90
6,580 $
0.40 $
0.40 $
6,865
4,442
7,783
3,524
166
3,358 $
0.20 $
0.20 $
6,736
2,063
8,830
(31)
-
(31)
-
-
7,697 $
1,415
6,282
(494)
6,776
3,419
6,782
3,413
(62)
3,475 $
0.21 $
0.21 $
8,124 $
1,573
6,551
(1,570)
8,121
3,453
7,991
3,583
70
3,513 $
0.21 $
0.21 $
126
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company’s management has evaluated the effectiveness of the design and operation of the Company’s disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended, as of December 31, 2015.
Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded the Company’s
disclosure controls and procedures were effective as of December 31, 2015.
There have been no changes to the Company’s internal control over financial reporting during the Company’s fourth quarter
of 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for First
National Community Bancorp, Inc. (the “Company”). Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles in the United States and is not intended to
provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.
Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that
in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are only being made in
accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. The design of a control system inherently has limitations and the benefits of
controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the controls. Therefore, no assessment of a cost-
effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will
be detected.
As of December 31, 2015, management of the Company conducted an assessment of the effectiveness of the Company’s
internal control over financial reporting based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission . Management’s assessment included
extensive documenting, evaluating and testing the design and operating effectiveness of our internal control over financial
reporting.
Based on this evaluation under the criteria in the Framework, management concluded that the Company’s system of internal
control over financial reporting was effective as of December 31, 2015.
Baker Tilly Virchow Krause, LLP, the Company’s independent registered public accounting firm that audited the Company’s
consolidated financial statements, has issued an audit report on the Company’s internal control over financial reporting as of
December 31, 2015. That report appears below.
/s/ Steven R. Tokach
Steven R. Tokach
President and Chief Executive Officer
/s/ James M. Bone, Jr., CPA
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
127
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors of
First National Community Bancorp, Inc. and Subsidiaries
We have audited First National Community Bancorp, Inc. and Subsidiaries’ (the “Company”) internal control over financial
reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated statements of financial condition of First National Community Bancorp, Inc. and Subsidiaries as of
December 31, 2015 and 2014 and the related consolidated statements of income, comprehensive income (loss), changes in
shareholders’ equity, and cash flows for the years then ended, and our report dated March 11, 2016 expressed an unqualified
opinion.
/s/Baker Tilly Virchow Krause, LLP
Wilkes-Barre, Pennsylvania
March 11, 2016
128
Item 9B. Other Information
None
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information concerning the Directors and Executive Officers of the Company required by this Item 10 is incorporated
herein by reference to the sections entitled “Information as to Nominees, Directors and Executive Officers” in the Company’s
Definitive Proxy Statement for its 2016 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission on or about April 18, 2016 (the “Proxy Statement”). Disclosure of compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, by the Company’s Directors and Executive Officers is incorporated by
reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. In
addition, information concerning Audit Committee and Audit Committee Financial Expert is included in the Proxy Statement
under the caption “Audit Committee Report” and is incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to the Company’s directors and
employees, including the President and Principal Executive Officer (“PEO”), Principal Financial Officer (“PFO”) and
Principal Accounting Officer (“PAO”). The Code includes guidelines relating to compliance with laws, the ethical handling
of actual or potential conflicts of interest, the use of corporate opportunities, protection and use of the Company’s confidential
information, accepting gifts and business courtesies, accurate financial and regulatory reporting, and procedures for
promoting compliance with, and reporting violations of, the Code. The Code is available on the Company’s website at
www.fncb.com/investorrelations/ under the heading “Governance Documents.” The Company intends to post any
amendments to the Code on its website and also to disclose any waivers (to the extent applicable to the Company’s President,
PEO, PFO or PAO) on a Form 8-K within the prescribed time period.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to the section entitled “Executive Compensation”
in the Company’s Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference to the section entitled “Principal Beneficial
Owners of the Company’s Common Stock” in the Company’s Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 related to certain relationships and related transactions is incorporated herein by
reference to the section entitled “Certain Relationships and Related Transactions” in the Company’s Proxy Statement. The
information required under this Item 13 related to Director Independence is incorporated herein by reference to the section
entitled “Corporate Governance” in the Company’s Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated herein by reference to the section entitled “Fees Paid to Independent
Registered Public Accounting Firm” in the Company’s Proxy Statement.
129
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
PART IV
The following financial statements are included by reference in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm ..............................................................................................
Consolidated Statements of Financial Condition ...............................................................................................................
Consolidated Statements of Income ...................................................................................................................................
Consolidated Statements of Comprehensive Income (Loss) .............................................................................................
Consolidated Statements of Changes in Shareholders’ Equity ..........................................................................................
Consolidated Statements of Cash Flows ............................................................................................................................
Notes to Consolidated Financial Statements ......................................................................................................................
66
68
69
70
71
72
73
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown
in the respective financial statements or in the notes thereto.
3. The following exhibits are filed herewith or incorporated by reference.
EXHIBIT 3.1
EXHIBIT 3.2
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4+
EXHIBIT 10.5+
Amended and Restated Articles of Incorporation dated May 19, 2010 — filed as Exhibit 3.1 to the
Company’s Current Report on Form 8-K on May 19, 2010, is hereby incorporated by reference.
Amended and Restated Bylaws - filed as Exhibit 3.2 to the Company’s Form 10-Q for the quarter
ended September 30, 2013, as filed on November 12, 2013, is hereby incorporated by reference
Form of Common Stock Certificate — filed as Exhibit 4.1 to the Company’s Form 10-Q for the
quarter ended September 30, 2014, as filed on November 10, 2014, is hereby incorporated by
reference.
Form of Amended and Restated Subordinated Note — filed as Exhibit 4.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, as filed on August 7, 2015, is
hereby incorporated by reference.
Amended and Restated Declaration of Trust by and among Wilmington Trust Company. First
National Community Bancorp, Inc. and with individuals as administrators, dated as of December 14,
2006, filed as Exhibit 10.1 to the Company’s 8-K on December 19, 2006 is hereby incorporated by
reference.
Guarantee Agreement by and between First National Community Bancorp, Inc. and Wilmington
Trust Company, dated as of December 14, 2006, filed as Exhibit 10.4 to the Company’s Current
Report on Form 8-K on December 19, 2006, SEC file number 333-24121, is hereby incorporated by
reference.
Indenture by and between First National Community Bancorp, Inc. and Wilmington Trust Company,
dated as of December 14, 2006, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-
K on December 19, 2006, SEC file number 333-24121, is hereby incorporated by reference.
2000 Stock Incentive Plan-filed as Exhibit 10.2 to the Company’s Form 10-K for the year ended
December 31, 2004, SEC file number 333-24121, as filed on March 16, 2005, is hereby incorporated
by reference.
Directors’ and Officers’ Deferred Compensation Plan - filed as Exhibit 10.4 to the Company’s
Form 10-K for the year ended December 31, 2004, as filed on March 16, 2005, is hereby
incorporated by reference.
130
EXHIBIT 10.6
Stipulation of Settlement dated November 27, 2013 – filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K on December 4, 2013, is hereby incorporated by reference.
EXHIBIT 10.7+
2013 Long-Term Incentive Compensation Plan – filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K on December 27, 2013, is hereby incorporated by reference.
EXHIBIT 10.8+
Executive Incentive Plan – filed as Exhibit 10.14 to the Company’s Form 10-K for the year ended
December 31, 2012, as filed on March 28, 2013, is hereby incorporated by reference.
EXHIBIT 10.9+
2012 Employee Stock Grant Plan – filed as Exhibit 10.15 to the Company’s Form 10-K for the year
ended December 31, 2012, as filed on March 28, 2013, is hereby incorporated by reference.
EXHIBIT 10.10+
2013 Employee Stock Grant Plan – filed as Exhibit 10.18 to the Company’s Form 10-K for the year
ended December 31, 2013, as filed on March 24, 2014, is hereby incorporated by reference.
EXHIBIT 10.11+
2014 Employee Stock Grant Plan – filed as Exhibit 10.1 to the Company’s Form 10-Q for the
quarter ended September 30, 2014, as filed on November 10, 2014 is hereby incorporated by
reference.
EXHIBIT 10.12*
2015 Employee Stock Grant Plan.
EXHIBIT 10.13+
Form of Restricted Stock Award Agreement – filed as Exhibit 4.2 to the Company’s Form S-8 on
January 24, 2014 is hereby incorporated by reference.
EXHIBIT 10.14+
Form of Stock Option Award Agreement – filed as Exhibit 4.3 to the Company’s Form S-8 on
January 24, 2014 is hereby incorporated by reference.
EXHIBIT 10.15+
First National Community Bank Supplemental Executive Retirement Plan – filed as Exhibit 10.16
to the Company’s Current Report on Form 8-K on October 2, 2015, is hereby incorporated by
reference.
EXHIBIT 10.16+
Employment Agreement Between First National Community Bank and Gerard A. Champi, COO –
filed as Exhibit 10.17 to the Company’s Current Report on Form 8-K on October 2, 2015, is hereby
incorporated by reference.
EXHIBIT 10.17+
EXHIBIT 10.18+
Employment Agreement Between First National Community Bancorp, Inc., First National
Community Bank and James M. Bone, Jr. CFO – filed as Exhibit 10.18 to the Company’s Current
Report on Form 8-K on October 2, 2015, is hereby incorporated by reference.
Employment Agreement Between First National Community Bank and Brian C. Mahlstedt, CLO –
filed as Exhibit 10.19 to the Company’s Current Report on Form 8-K on October 2, 2015, is hereby
incorporated by reference.
EXHIBIT 21
Subsidiaries— filed as Exhibit 21 to the Company’s Form 10-K for the year ended December 31,
2009, as filed on March 16, 2010, is hereby incorporated by reference.
EXHIBIT 23*
Consent of Baker Tilly Virchow Krause, LLP
EXHIBIT 23.1*
Consent of RSM US LLP.
EXHIBIT 31.1*
Certification of Chief Executive Officer
EXHIBIT 31.2*
Certification of Chief Financial Officer
EXHIBIT 32**
Section 1350 Certification — Chief Executive Officer and Chief Financial Officer
131
EXHIBIT 101.INS
XBRL INSTANCE DOCUMENT
EXHIBIT 101.SCH
XBRL TAXONOMY EXTENSION SCHEMA
EXHIBIT 101.CAL
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EXHIBIT 101.DEF
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EXHIBIT 101.LAB
XBRL TAXONOMY EXTENSION LABEL LINKBASE
EXHIBIT 101.PRE
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
_____________________________
* Filed herewith
** Furnished herewith
+ Management contract, compensatory plan or arrangement
132
Pursuant to the requirements of Section 13 or 15(d) 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:
Registrant: FIRST NATIONAL COMMUNITY BANCORP, INC.
/s/ Steven R. Tokach
Steven R. Tokach
President and Chief Executive Officer
/s/ James M. Bone, Jr.
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
Principal Financial Officer
/s/ Stephanie A. Westington
Stephanie A. Westington, CPA
Senior Vice President and Controller
Principal Accounting Officer
March 11, 2016
Date
March 11, 2016
Date
March 11, 2016
Date
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Directors:
/s/ William G. Bracey.
William G, Bracey
March 11, 2016
Date
/s/ Joseph Coccia
Joseph Coccia
March 11, 2016
Date
/s/ Dominick L. DeNaples
Dominick L. DeNaples
March 11, 2016
Date
/s/ Louis A. DeNaples
Louis A. DeNaples
March 11, 2016
Date
/s/ Louis A. DeNaples, Jr.
Louis A. DeNaples, Jr.
March 11, 2016
Date
/s/ Keith W. Eckel
Keith W. Eckel
March 11, 2016
Date
/s/ Thomas J. Melone
Thomas J. Melone
March 11, 2016
Date
/s/ John P. Moses
John P. Moses
March 11, 2016
Date
/s/ Steven R. Tokach
Steven R. Tokach
March 11, 2016
Date
133
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Wealth Management Services
fncb.com/wealthmanagementservices | 570.348.4321
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FIRST NATIONAL COMMUNITY BANCORP, INC.
102 East Drinker Street • Dunmore, PA 18512