Penns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17701
2014 Annual Report & Form 10-K
MISSION STATEMENT
To be the most significant regional community bank
TABLE OF CONTENTS
Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three Year Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Changes in Shareholder's Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
3
4
5
6
6
7
9
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
1 Dear Shareholder,
2014 was another successful year for the Penns Woods Bancorp, Inc. (PWOD) banking group. We appreciate
your support throughout the year.
Financial Highlights
PWOD continued to return strong results during the past year. Highlights from the period ending December 31,
2014 include:
Net Income
Basic & Diluted EPS
Total Deposits
Core Deposits
Net Loans
Total Assets
Twelve Months
Ended Dec 31, 2014
$14,608,000
$3.03
$981,419,000
$765,161,000
$905,000,000
$1,245,011,000
Twelve Months
Ended Dec 31, 2013
$14,084,000
$3.19
$973,002,000
$737,780,000
$808,200,000
$1,211,995,000
% Change
3.72%
(5.02)%
0.87%
3.71%
11.98%
2.72%
Company Improvements and Efficiencies
During 2014 the fourteenth JSSB office and headquarters for the company’s
mortgage services division opened in Loyalsock. Site improvements were started
at the JSSB Lewisburg office which is scheduled to open in 2015. It was also
announced in December that the building that houses the Spring Mills office
was sold to Mt. Nittany Health. A more efficient, comfortable JSSB office is
scheduled to open during the summer of 2015 next to the existing branch site.
In addition to new construction, JSSB and Luzerne Bank are continually
making improvements to existing offices. The Jersey Shore Main Street
office completed a major remodel in 2014, while the JSSB Williamsport
operations center is currently undergoing a revitalization to make work
spaces more comfortable and efficient for employees. Major computer
system improvements were implemented during the past year, including
an upgraded core processing system, new teller system as well as several
other ancillary systems.
The focus of the improvements and efficiencies made throughout the
year were to create an engaging and inviting environment for both our
employees and customers. The enhancements have also established a
foundation to allow the continuation of the company’s expansion plans.
We thank you for making Penns Woods Bancorp, Inc your investment
choice and want you to also make JSSB and Luzerne Bank your
preference for all your financial needs.
Sincerely,
Richard A. Grafmyre, CFP®
President & CEO
Three Year Financial Highlights
DILUTED
EARNINGS PER
SHARE
$4.00
3.61
3.19
3.03
3.50
3.00
2.50
2.00
RETURN ON
AVERAGE EQUITY
(Percent)
DIVIDENDS
PER
SHARE
15.36
14.38
12.36
16.00
14.50
13.00
11.50
10.00
2.13
1.88
1.88
$2.25
2.00
1.75
1.50
2012
2013 2014
2012
2013 2014
2012
2013
2014
YEAR-END
DEPOSITS
(In Millions)
$1,100
1,000
973
981
900
800
700
600
500
642
RETURN ON
AVERAGE ASSETS
(Percent)
YEAR-END
LOANS
(In Millions)
2.00
1.70
1.70
1.40
1.10
0.80
0.50
1.32
1.19
905
808
$1,000
900
800
700
600
500
505
400
2012
2013
2014
2012
2013
2014
2012
2013
2014
3 PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
ASSETS:
Noninterest-bearing balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2014
2013
$
$
19,403
505
—
19,908
23,723
770
113
24,606
232,213
550
915,579
(10,579)
905,000
21,109
3,912
25,959
1,560
17,104
1,456
8,101
8,139
$ 1,245,011
288,612
1,626
818,344
(10,144)
808,200
20,184
4,696
25,410
2,221
17,104
1,801
9,889
7,646
$ 1,211,995
LIABILITIES:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
738,041
243,378
981,419
755,625
217,377
973,002
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,818
71,176
381
15,250
1,109,044
26,716
71,202
405
12,855
1,084,180
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued . . . . . . . . . . . . . . . . .
Common stock, par value $8.33, 15,000,000 shares authorized; 5,002,649 and 4,999,929 shares
issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss:
—
41,688
49,896
53,107
—
41,665
49,800
47,554
Net unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost, 197,834 and 180,596 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL SHAREHOLDERS’ EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,930
(4,597)
(7,057)
135,967
$ 1,245,011
(2,169)
(2,725)
(6,310)
127,815
$ 1,211,995
See accompanying notes to the consolidated financial statements.
4
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
INTEREST AND DIVIDEND INCOME:
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend and other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL INTEREST AND DIVIDEND INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2014
2013
2012
36,495
$
32,353
$
25,372
5,111
3,453
547
45,606
2,995
54
1,913
4,962
6,034
4,602
310
43,299
3,221
81
1,962
5,264
5,940
5,429
366
37,107
3,645
137
2,429
6,211
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,644
38,035
30,896
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,850
2,275
2,525
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . .
37,794
35,760
28,371
NON-INTEREST INCOME:
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of investment in limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation deposit insurance . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,419
3,515
923
1,803
1,146
1,077
3,625
14,508
17,273
2,301
2,536
907
661
746
532
345
8,589
33,890
18,412
3,804
14,608
EARNINGS PER SHARE - BASIC AND DILUTED . . . . . . . . . . . . . . . . . . . . . . . . . $
3.03
2,307
2,417
677
1,438
1,084
1,018
3,101
12,042
15,415
1,905
1,815
864
661
594
517
213
8,283
30,267
17,535
3,451
14,084
3.19
$
$
1,894
1,285
670
1,386
1,357
912
2,596
10,100
11,762
1,270
1,452
674
661
468
516
—
5,220
22,023
16,448
2,598
13,850
3.61
$
$
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED. . 4,816,149
4,410,626
3,837,751
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.88
$
2.13
$
1.88
See accompanying notes to the consolidated financial statements.
5
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In Thousands)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gain included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Accretion) amortization of unrecognized pension and post-retirement items. . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2014
2013
2012
$
14,608
$
14,084
$
13,850
11,242
(3,822)
(3,515)
1,195
(2,837)
964
3,227
$
17,835
$
(16,270)
5,532
(2,417)
822
3,155
(1,073)
(10,251)
3,833
12,270
(4,172)
(1,285)
437
(1,021)
347
6,576
$
20,426
See accompanying notes to the consolidated financial statements.
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
SHARES
AMOUNT
COMMON STOCK
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) INCOME
TREASURY
STOCK
TOTAL
SHAREHOLDERS’
EQUITY
Balance, December 31, 2011 . . . . . .
4,017,677
$ 33,480
$
18,115
$
36,394
$
(1,219) $
(6,310) $
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . .
Dividends declared, ($1.88 per
share) . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for
employee stock purchase plan . . . .
1,435
12
Balance, December 31, 2012 . . . . . .
4,019,112
33,492
42
18,157
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . .
Dividends declared, ($2.13 per
share) . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for
acquisition of Luzerne National
Bank Corporation . . . . . . . . . . . . .
Common shares issued for
978,977
8,158
31,578
employee stock purchase plan . . . .
1,840
15
Balance, December 31, 2013 . . . . . .
4,999,929
41,665
65
49,800
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . .
Dividends declared, ($1.88 per
share) . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for
employee stock purchase plan . . . .
2,720
23
96
Purchase of treasury stock (17,238
shares) . . . . . . . . . . . . . . . . . . . . . .
13,850
(7,214)
43,030
14,084
(9,560)
47,554
14,608
(9,055)
6,576
5,357
(6,310)
(10,251)
(4,894)
(6,310)
3,227
(747)
80,460
13,850
6,576
(7,214)
54
93,726
14,084
(10,251)
(9,560)
39,736
80
127,815
14,608
3,227
(9,055)
119
(747)
Balance, December 31, 2014 . . . . . .
5,002,649
$ 41,688
$
49,896
$
53,107
$
(1,667) $
(7,057) $
135,967
See accompanying notes to the consolidated financial statements.
6
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2013
2012
2014
(In Thousands)
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
14,608
$
14,084
$
13,850
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion and amortization of investment security discounts and premiums. . . . . . . . .
Securities gains, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity:
Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from bank-owned life insurance death benefit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of regulatory stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of regulatory stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES:
Net (decrease) increase in interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, ENDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,078
345
2,850
672
(3,515)
(51,119)
53,998
(1,803)
(923)
124
423
18,738
102,145
13,354
(47,902)
—
(101,816)
(2,795)
1,059
(30)
367
3,955
(4,583)
—
(36,246)
(17,584)
26,001
—
(26)
14,102
(9,055)
119
(747)
12,810
(4,698)
24,606
19,908
$
1,448
213
2,275
69
(2,417)
(51,512)
55,098
(1,438)
(677)
123
61
17,327
79,114
16,359
(90,179)
—
(55,953)
(4,918)
143
(981)
—
3,239
(2,384)
17,487
(38,073)
34,114
19,906
452
(5,528)
(9,254)
(9,560)
80
—
30,210
9,464
15,142
24,606
$
1,077
—
2,525
(989)
(1,285)
(44,571)
45,970
(1,386)
(670)
(128)
(427)
13,966
48,460
19,995
(74,791)
55
(78,323)
(1,403)
765
(33)
383
1,171
(796)
—
(84,517)
56,763
3,599
30,000
(15,000)
3,606
(7,214)
54
—
71,808
1,257
13,885
15,142
See accompanying notes to the consolidated financial statements.
7
Year Ended December 31,
2013
2012
2014
$
$
4,986
3,750
2,166
$
5,225
3,998
470
6,381
2,950
—
(In Thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of loans to foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Luzerne National Bank Corporation
Non-cash assets acquired:
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed:
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net non-cash assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
See accompanying notes to the consolidated financial statements.
21,783
250,377
8,014
726
7,419
2,015
2,636
14,072
307,042
76
194,438
82,518
2,766
103
4,892
284,793
22,249
20,363
8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 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, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-17077
PENNS WOODS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
300 Market Street, P.O. Box 967
Williamsport, Pennsylvania
23-2226454
(I.R.S. Employer
Identification No.)
17703-0967
Registrant’s telephone number, including area code (570) 322-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $8.33 per share
Name of each exchange which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
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 website, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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.
9
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
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
State the aggregate market value of the voting stock held by non-affiliates of the registrant $227,051,485 at June 30, 2014.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $8.33 Par Value
Outstanding at March 1, 2015
4,801,094 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held
on April 29, 2015 are incorporated by reference in Part III hereof.
10
ITEM
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
INDEX
PART I
PART II
Item 5.
Item 6.
Item 7.
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Consolidated Financial Condition and Results of
Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers, and Corporate Governance
Item 11.
Item 12.
Item 13.
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Index to Exhibits
Signatures
PAGE
12
18
21
21
22
22
22
25
26
41
42
85
85
88
88
88
88
88
88
88
90
91
11
ITEM 1
BUSINESS
A. General Development of Business and History
PART I
On January 7, 1983, Penns Woods Bancorp, Inc. (the “Company”) was incorporated under the laws of the Commonwealth of
Pennsylvania as a bank holding company. In connection with the organization of the Company, Jersey Shore State Bank ("JSSB"),
a Pennsylvania state-charted bank, became a wholly owned subsidiary of the Company. On June 1, 2013 the Company acquired
Luzerne Bank ("Luzerne") with Luzerne operating as a subsidiary of the Company (JSSB and Luzerne are collectively referred
to as the "Banks"). The Company’s two other wholly-owned subsidiaries are Woods Real Estate Development Company, Inc. and
Woods Investment Company, Inc. The Company’s business has consisted primarily of managing and supervising the Banks, and
its principal source of income has been dividends paid by the Banks and Woods Investment Company, Inc.
The Banks are engaged in commercial and retail banking which includes the acceptance of time, savings, and demand deposits,
the funding of commercial, consumer, and mortgage loans, and safe deposit services. Utilizing a branch office network, ATMs,
Internet, and telephone banking delivery channels, the Banks deliver their products and services to the communities they reside
in.
In October 2000, JSSB acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M Group,
which operates as a subsidiary of JSSB, offers insurance and securities brokerage services. Securities are offered by The M Group
through Voya Financial a registered broker-dealer.
Neither the Company nor the Banks anticipate that compliance with environmental laws and regulations will have any material
effect on capital expenditures, earnings, or their competitive position. The Banks are not dependent on a single customer or a few
customers, the loss of whom would have a material effect on the business of the Banks.
JSSB employed 209 persons, Luzerne employed 71 persons, and The M Group employed 4 persons as of December 31, 2014 in
either a full-time or part-time capacity. The Company does not have any employees. The principal officers of the Banks also
serve as officers of the Company.
Woods Investment Company, Inc., a Delaware holding company, maintains an investment portfolio that is managed for total return
and to fund dividend payments to the Company.
Woods Real Estate Development Company, Inc. serves the Company through its acquisition and ownership of certain properties
utilized by the Bank.
We post publicly available reports required to be filed with the SEC on our website, www.jssb.com, as soon as reasonably practicable
after filing such reports with the SEC. The required reports are available free of charge through our website. Information available
on our website is not part of or incorporated by reference into this Report or any other report filed by this Company with the SEC.
B. Regulation and Supervision
The Company is a registered bank holding company and, as such is subject to the provisions of the Bank Holding Company Act
of 1956, as amended (the “BHCA”) and to supervision and examination by the Board of Governors of the Federal Reserve System
(the “FRB”). The Banks are also subject to the supervision and examination by the Federal Deposit Insurance Corporation (the
“FDIC”), as their primary federal regulator and as the insurer of the Banks' deposits. The Banks are also regulated and examined
by the Pennsylvania Department of Banking and Securities (the “Department”).
The insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The
M Group, conducts business including principally the Pennsylvania Department of Insurance. The securities brokerage activities
of The M Group are subject to regulation by federal and state securities commissions.
The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Company to stand
ready to use its resources to provide adequate capital funds to the Banks during periods of financial stress or adversity. The BHCA
requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any
bank, or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require
approval of the Department.
12
A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than
5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA,
the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary
(other than a non-bank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB’s risk-based capital guidelines. The risk-based capital rules are
designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding
companies and to minimize disincentives for holding liquid assets. Currently, the required minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total
capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, less certain intangible assets. The
remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital
instruments and other debt securities, 45% of net unrealized gains on marketable equity securities, and a limited amount of the
general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio,
under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of
3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or
experiencing significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at
least 4% to 5%. The Banks are subject to similar capital requirements adopted by the FDIC.
Dividends
Federal and state laws impose limitations on the payment of dividends by the Banks. The Pennsylvania Banking Code restricts
the availability of capital funds for payment of dividends by the Banks to their additional paid-in capital.
In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment
of dividends by the Banks if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound
practice in light of the financial condition of the Banks.
Under Pennsylvania law, the Company may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts
as they become due in the usual course of business and, after giving effect to the dividend, the total assets of the Company would
be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time
of distribution, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the
dividend.
It is also the policy of the FRB that a bank holding company generally only pay dividends on common stock out of net income
available to common shareholders over the past twelve months and only if the prospective rate of earnings retention appears
consistent with a bank holding company’s capital needs, asset quality, and overall financial condition. In the current financial and
economic environment, the FRB has indicated that bank holding companies should carefully review their dividend policy and has
discouraged dividend pay-out ratios at the 100% level unless both asset quality and capital are very strong. A bank holding
company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or
that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.
In July 2013, the federal bank regulatory agencies adopted revisions to the agencies’ capital adequacy guidelines and prompt
corrective action rules, which were designed to enhance such requirements and implement the revised standards of the Basel
Committee on Banking Supervision, commonly referred to as Basel III. The final rules generally implement higher minimum
capital requirements, add a new common equity tier 1 capital requirement, and establish criteria that instruments must meet to be
considered common equity tier 1 capital, additional tier 1 capital or tier 2 capital. The new minimum capital to risk-adjusted assets
requirements are a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a tier 1 capital ratio
of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital ratio remains
at 8.0% under the new rules (10.0% to be considered “well capitalized”). Under the new rules, in order to avoid limitations on
capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking
organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based
capital requirements in an amount greater than 2.5% of total risk-weighted assets. The new minimum capital requirements became
13
effective on January 1, 2015. The capital contribution buffer requirements phase in over a three-year period beginning January 1,
2016.
C. Regulation of the Banks
The Banks are highly regulated by the FDIC and the Department. The laws that such agencies enforce limit the specific types of
businesses in which the Banks may engage, and the products and services that the Banks may offer to customers. Generally, these
limitations are designed to protect the insurance fund of the FDIC and/or the customers of the Banks, and not the Banks or its
shareholders. From time to time, various types of new federal and state legislation have been proposed that could result in additional
regulation of, and restrictions on, the business of the Banks. It cannot be predicted whether any such legislation will be adopted
or how such legislation would affect business of the Banks. As a consequence of the extensive regulation of commercial banking
activities in the United States, the Banks' business is particularly susceptible to being affected by federal legislation and regulations
that may increase the costs of doing business. Some of the major regulatory provisions that affect the business of the Banks are
discussed briefly below.
Prompt Corrective Action
The FDIC has specified the levels at which an insured institution will be considered “well-capitalized,” “adequately capitalized,”
“undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized”
category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of
regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent
institution and liability for civil money damages for failure to fulfill its commitment on that guarantee; and (2) the placement of
a hold on increases in assets, number of branches, or lines of business. If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts,
dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions,
the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound
practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.
Deposit Insurance
The FDIC maintains the Deposit Insurance Fund ("DIF") by assessing depository institutions an insurance premium. The FDIC
has increased the amount of deposits it insures from $100,000 to $250,000.
Beginning with the second quarter of 2011, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”), the assessment base that the FDIC uses to calculate assessment premiums became a bank’s average assets
minus average tangible equity. As the asset base of the banking industry is larger than the deposit base previously used to determine
assessments, the range of assessment rates will change to a low of 2.5 basis points to a high of 45 basis points, per $100 of assets;
however, the dollar amount of the actual premiums is expected to be roughly the same.
The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the DIF to achieve a reserve ratio of
1.35% of insured deposits by September 2020. In addition, the FDIC has established a “designated reserve ratio” of 2.0%, a target
ratio that, until it is achieved, will not likely result in the FDIC reducing assessment rates. In attempting to achieve the mandated
1.35% ratio, the FDIC is required to implement assessment formulas that charge banks over $10 billion in asset size more than
banks under that size. Those new formulas began in the second quarter of 2011, but did not affect the Banks. Under the Dodd-
Frank Act, the FDIC is authorized to make reimbursements from the insurance fund to banks if the reserve ratio exceeds 1.50%,
but the FDIC has adopted the “designated reserve ratio” of 2.0% and has announced that any reimbursements from the fund are
indefinitely suspended.
Federal Home Loan Bank System
The Banks are a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home
Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is
funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal
Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by
the board of directors of the Federal Home Loan Bank. At December 31, 2014, the Banks had $97,581,000 in FHLB advances.
As a member, the Banks are required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5%
14
of its outstanding advances from the FHLB. At December 31, 2014, the Banks had $6,296,000 in stock of the FHLB which was
in compliance with this requirement.
Other Legislation
The Dodd-Frank Act was enacted on July 21, 2010. This new law significantly changed the bank regulatory structure and affected
the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The federal
agencies are given significant discretion in drafting rules and regulations to implement the Dodd-Frank Act, and consequently,
much of the impact of the Dodd-Frank Act may not be known for some time.
Certain provisions of the Dodd-Frank Act have already impacted the Company. For example, effective July 21, 2011, a provision
of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have
interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an
adverse impact on the Company’s interest expense. The Dodd-Frank Act also permanently increased the maximum amount of
deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.
Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, will be
permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital; however, trust preferred
securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) after May 19, 2010,
will no longer count as Tier 1 capital. Trust preferred securities still will be entitled to be treated as Tier 2 capital.
The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote on executive compensation and
so-called “golden parachute” arrangements, and may allow greater access by shareholders to the company’s proxy material by
authorizing the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy
materials. The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding
company executives, regardless of whether the company is publicly traded.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer
protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer
protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive”
acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as
the Banks will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank
Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and
gives state attorneys general the ability to enforce federal consumer protection laws.
It is difficult to predict at this time the specific impact the Dodd-Frank Act and the yet to be written implementing rules and
regulations will have on community banks. Given the uncertainty associated with the manner in which the provisions of the Dodd-
Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such
requirements will have on financial institutions’ operations is presently unclear. The changes resulting from the Dodd-Frank Act
may impact the profitability of our business activities, require changes to certain of our business practices, or otherwise adversely
affect our business. These changes may also require us to invest significant management attention and resources to evaluate and
make necessary changes in order to comply with new statutory and regulatory requirements.
The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities
laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic
reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The
legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent
auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to
certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by
insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure
requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations,
and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set
auditing, quality control, and ethics standards for accounting firms. In response to the legislation, the national securities exchanges
and NASDAQ have adopted new rules relating to certain matters, including the independence of members of a company’s audit
committee as a condition to listing or continued listing.
15 Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new
regulations. The Company cannot predict how any new legislation, or new rules adopted by federal or state banking agencies,
may affect the business of the Company and its subsidiaries in the future. Given that the financial industry remains under stress
and severe scrutiny, and given that the U.S. economy has not yet fully recovered to pre-crisis levels of activity, the Company
expects that there will be significant legislation and regulatory actions that may materially affect the banking industry for the
foreseeable future.
Environmental Laws
Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their
loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value
of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs,
and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management
of the borrower. The Company is not aware of any borrower who is currently subject to any environmental investigation or clean
up proceeding which is likely to have a material adverse effect on the financial condition or results of operations of the Company.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of
the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an
important impact on the operating results of commercial banks through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments,
and deposits through its open market operations in the United States Government securities and through its regulation of, among
other things, the discount rate on borrowings by member banks and the reserve requirements against member bank deposits. It is
not possible to predict the nature and impact of future changes in monetary and fiscal policies.
DESCRIPTION OF THE BANKS
History and Business
JSSB was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934 and became a wholly owned
subsidiary of the Company on July 12, 1983.
As of December 31, 2014, JSSB had total assets of $885,707,000; total shareholders’ equity of $81,165,000; and total deposits of
$700,665,000. JSSB's deposits are insured by the FDIC for the maximum amount provided under current law.
Luzerne was acquired by the Company on June 1, 2013. As of December 31, 2014, Luzerne had total assets of $344,223,000;
total shareholders’ equity of $44,359,000; and total deposits of $282,276,000. Luzerne's deposits are insured by the FDIC for the
maximum amount provided under current law.
The Banks engage in business as commercial banks, doing business at locations in Lycoming, Clinton, Centre, Montour, and
Luzerne Counties, Pennsylvania. The Banks offer insurance, securities brokerage services, annuity and mutual fund investment
products, and financial planning through the M Group.
Services offered by the Banks include accepting time, demand and savings deposits including Super NOW accounts, statement
savings accounts, money market accounts, and fixed rate certificates of deposit. Their services also include making secured and
unsecured business and consumer loans that include financing commercial transactions as well as construction and residential
mortgage loans and revolving credit loans with overdraft protection.
The Banks' loan portfolio mix can be classified into three principal categories. These are commercial and agricultural, real estate,
and consumer. Real estate loans can be further segmented into residential, commercial, and construction. Qualified borrowers
are defined by our loan policy and our underwriting standards. Owner provided equity requirements range from 0% to 30% with
a first lien status required. Terms are generally restricted to between 10 and 30 years with the exception of construction and land
development, which are limited to one to five years. Real estate appraisals, property construction verifications, and site visitations
comply with our loan policy and with industry regulatory standards.
16
Prospective residential mortgage customer’s repayment ability is determined from information contained in the application and
recent income tax returns. Emphasis is on credit, employment, income, and residency verification. Broad hazard insurance is
always required and flood insurance where applicable. In the case of construction mortgages, builders risk insurance is requested.
Agricultural loans for the purchase or improvement of real estate must meet the Banks' real estate underwriting criteria. Agricultural
loans made for the purchase of equipment are usually payable in five years, but never more than ten, depending upon the useful
life of the purchased asset. Minimum borrower equity ranges from 0% to 35% depending on the purpose. Livestock financing
criteria depends upon the nature of the operation. Agricultural loans are also made for crop production purposes. Such loans are
structured to repay within the production cycle and not carried over into a subsequent year.
Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment, and for working capital
purposes on a seasonal or revolving basis. General purpose working capital loans are also available with repayment expected
within one year. Equipment loans are generally amortized over three to ten years. Insurance coverage with the Banks as loss payee
is required, especially in the case where the equipment is rolling stock. It is also a general policy to collateralize non-real estate
loans with the asset purchased and, dependant upon loan terms, junior liens are filed on other available assets. Financial information
required on all commercial mortgages includes the most current three years balance sheets and income statements and projections
on income to be developed through the project. In the case of corporations and partnerships, the principals are often asked to
personally guaranty the entity’s debt.
Seasonal and revolving lines of credit are offered for working capital purposes. Collateral for such a loan may vary but often
includes the pledge of inventory and/or receivables. Drawing availability is usually 50% of inventory and 80% of eligible
receivables. Eligible receivables are defined as invoices less than 90 days delinquent. Exclusive reliance is very seldom placed
on such collateral; therefore, other lienable assets are also taken into the collateral pool. Where reliance is placed on inventory
and accounts receivable, the applicant must provide financial information including agings on a specified basis. In addition, the
guaranty of the principals is usually obtained.
Letter of credit availability is usually limited to standby letters of credit where the customer is well known to the Banks. The
credit criteria is the same as that utilized in making a direct loan. Collateral is obtained in most cases.
Consumer loan products include residential mortgages, home equity loans and lines, automobile financing, personal loans and
lines of credit, overdraft check lines, and PHEAA referral loans. Our policy includes standards used in the industry on debt service
ratios and terms are consistent with prudent underwriting standards and the use of proceeds. Verifications are made of employment
and residency, along with credit history.
Second mortgages are confined to equity borrowing and home improvements. Terms are generally fifteen years or less. Loan to
collateral value criteria is 90% or less and verifications are made to determine values. Automobile financing is generally restricted
to five years and done on a direct basis. The Banks, as a practice, do not floor plan and therefore do not discount dealer paper.
Small loan requests are to accommodate personal needs such as debt consolidation or the purchase of small appliances. Overdraft
check lines are usually limited to $5,000 or less.
The Banks' investment portfolios are analyzed and priced on a monthly basis. Investments are made in U.S. Treasuries, U.S.
Agency issues, bank qualified tax-exempt municipal bonds, taxable municipal bonds, corporate bonds, and corporate stocks which
consist of Pennsylvania bank stocks. Bonds with BAA or better ratings are used, unless a local issue is purchased that has a lesser
or no rating. Factors taken into consideration when investments are purchased include liquidity, the Company’s tax position, tax
equivalent yield, third party investment ratings, and the policies of the Asset/Liability Committee.
The banking environment in Lycoming, Clinton, Centre, Montour, and Luzerne Counties, Pennsylvania is highly competitive.
The Banks operate twenty-two full service offices in these markets and compete for loans and deposits with numerous commercial
banks, savings and loan associations, and other financial institutions. The economic base of the region is developed around small
business, health care, educational facilities (college and public schools), light manufacturing industries, and agriculture.
The Banks have a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group
of depositors, excluding public entities that account for approximately 15% of total deposits. Although the Banks have regular
opportunities to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals, and others, it does not rely
on these monies to fund loans or intermediate or longer-term investments.
The Banks have not experienced any significant seasonal fluctuations in the amount of deposits.
17 Supervision and Regulation
As referenced elsewhere, the banking business is highly regulated, and the Banks are only able to engage in business activities,
and to provide products and services, that are permitted by applicable law and regulation. In addition, the earnings of the Banks
are affected by the policies of regulatory authorities including the FDIC and the FRB. An important function of the FRB is to
regulate the money supply and interest rates. Among the instruments used to implement these objectives are open market operations
in U.S. Government Securities, changes in reserve requirements against member bank deposits, and limitations on interest rates
that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall
growth and distribution of bank loans, and their use may also affect interest rates charged on loans or paid for deposits.
The policies and regulations of the FRB have had and will probably continue to have a significant effect on the Banks' deposits,
loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Banks' operation in the
future. The effect of such policies and regulations upon the future business and earnings of the Banks cannot accurately be predicted.
ITEM 1A RISK FACTORS
The following sets forth several risk factors that may affect the Company's financial condition or results of operations.
Changes in interest rates could reduce our income, cash flows and asset values.
Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we
earn on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities
such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of
the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest
we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also
affect our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on
our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net
interest income, and therefore our earnings, could be adversely affected. Our earnings also could be adversely affected if the rates
on our loans and other investments fall more quickly than those on our deposits and other borrowings.
Economic conditions either nationally or locally in areas in which our operations are concentrated may adversely affect
our business.
Deterioration in local, regional, national, or global economic conditions could cause us to experience a reduction in deposits and
new loans, an increase in the number of borrowers who default on their loans, and a reduction in the value of the collateral securing
their loans, all of which could adversely affect our performance and financial condition. Unlike larger banks that are more
geographically diversified, we provide banking and financial services locally. Therefore, we are particularly vulnerable to adverse
local economic conditions.
Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not sufficient
to absorb actual losses or if we are required to increase our allowance.
Despite our underwriting criteria, we may experience loan delinquencies and losses. In order to absorb losses associated with
nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation
of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently
involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of
which may undergo material changes. At any time there are likely to be loans in our portfolio that will result in losses but that
have not been identified as nonperforming or potential problem credits. We cannot be sure that we will be able to identify
deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans that are
identified. We may be required to increase our allowance for loan losses for any of several reasons. Federal regulators, in reviewing
our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses. Changes in
economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans
and other factors, both within and outside of our control, may require an increase in our allowance. In addition, if charge-offs in
future periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any
increases in our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially
affect our results of operations in the period in which the allowance is increased.
18
Many of our loans are secured, in whole or in part, with real estate collateral which is subject to declines in value.
In addition to considering the financial strength and cash flow characteristics of a borrower, we often secure our loans with real
estate collateral. Real estate values and the real estate market are generally affected by, among other things, changes in local,
regional or national economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes
in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral provides an
alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the
real estate collateral securing our loans could be reduced. If we are required to liquidate real estate collateral securing loans during
a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in
security of these systems could result in failures or disruptions in our customer-relationship management, general ledger, deposit,
loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption
or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches
will not occur; or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security
breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny or expose us to civil litigation and possible financial liability; any of which could have a material adverse effect
on our financial condition and results of operations.
We face the risk of cyber-attack to our computer systems.
Our computer systems, software and networks have been and will continue to be vulnerable to unauthorized access, loss or
destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or
other malicious code, cyber-attacks and other events. These threats may derive from human error, fraud or malice on the part of
employees or third parties, or may result from accidental technological failure. If one or more of these events occurs, it could
result in the disclosure of confidential client information, damage to our reputation with our clients and the market, additional
costs to us (such as repairing systems or adding new personnel or protection technologies), regulatory penalties and financial
losses, to both us and our clients and customers. Such events could also cause interruptions or malfunctions in our operations (such
as the lack of availability of our online banking system), as well as the operations of our clients, customers or other third parties.
Although we maintain safeguards to protect against these risks, there can be no assurance that we will not suffer losses in the
future that may be material in amount.
Competition may decrease our growth or profits.
We face substantial competition in all phases of our operations from a variety of different competitors, including commercial
banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies,
leasing companies, insurance companies, and money market mutual funds. There is very strong competition among financial
services providers in our principal service area. Our competitors may have greater resources, higher lending limits, or larger
branch systems than we do. Accordingly, they may be able to offer a broader range of products and services as well as better
pricing for those products and services than we can.
In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation
as is imposed on federally insured financial institutions. As a result, those non-bank competitors may be able to access funding
and provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.
The value of certain investment securities is volatile and future declines or other-than-temporary impairments could
materially adversely affect our future earnings and regulatory capital.
Continued volatility in the market value for certain of our investment securities, whether caused by changes in market perceptions
of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant
fluctuations in the value of the securities. This could have a material adverse impact on our accumulated other comprehensive
income/loss and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults
in these securities could result in future classifications of investment securities as other than temporarily impaired. This could
have a material impact on our future earnings.
19
We may be adversely affected by government regulation.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance
funds and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry
may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations
affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these
changes, which could have a material adverse effect on our profitability or financial condition.
In response to the financial crisis that commenced in 2008, Congress has taken actions that are intended to strengthen confidence
and encourage liquidity in financial institutions, and the FDIC has taken actions to increase insurance coverage on deposit
accounts. The Dodd-Frank Act provides for the creation of a consumer protection division at the Board of Governors of the Federal
Reserve System that will have broad authority to issue regulations governing the services and products we provide consumers. This
additional regulation could increase our compliance costs and otherwise adversely impact our operations. That legislation also
contains provisions that, over time, could result in higher regulatory capital requirements (including through the implementation
of the capital standards of Basel III) and loan loss provisions for the Banks, and may increase interest expense due to the ability
granted in July 2011 to pay interest on all demand deposits. In addition, there have been proposals made by members of Congress
and others that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay under their mortgage
loans and limit an institution’s ability to foreclose on mortgage collateral. These proposals could result in credit losses or increased
expense in pursuing our remedies as a creditor. Recent regulatory changes impose limits on our ability to charge overdraft fees,
which may decrease our non-interest income as compared to more recent prior periods.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting many aspects of our
operations, including capital levels, lending and funding practices, and liquidity standards. New laws and regulations may increase
our costs of regulatory compliance and of doing business and otherwise affect our operations, and may significantly affect the
markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing
operations, costs and profitability.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to
depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management
personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills,
knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were
discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of
the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of
whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic
substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we
neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially
limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default
on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing
laws may increase our exposure to environmental liability.
Failure to implement new technologies in our operations may adversely affect our growth or profits.
The market for financial services, including banking services and consumer finance services is increasingly affected by advances
in technology, including developments in telecommunications, data processing, computers, automation, Internet-based banking,
and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such
technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement
such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely
affect our business, financial condition, or operating results.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund,
or by any other public or private entity. Investment in our common stock is subject to the same market forces that affect the price
of common stock in any company.
20
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
The Company owns and leases its properties. Listed herewith are the locations of properties owned or leased as of December 31,
2014, in which the banking offices are located; all properties are in good condition and adequate for the Company's purposes:
Office
Address
Ownership
Jersey Shore State Bank & Subsidiaries
Main Street
Bridge Street
DuBoistown
Williamsport
Montgomery
Lock Haven
Mill Hall
Spring Mills
Centre Hall
Zion
State College
115 South Main Street, PO Box 5098
Jersey Shore, Pennsylvania 17740
112 Bridge Street
Jersey Shore, Pennsylvania 17740
2675 Euclid Avenue
Williamsport, Pennsylvania 17702
300 Market Street
P.O. Box 967
Williamsport, Pennsylvania 17703-0967
9094 Rt. 405 Highway
Montgomery, Pennsylvania 17752
4 West Main Street
Lock Haven, Pennsylvania 17745
Owned
Owned
Owned
Owned
Owned
Owned
(Inside Wal-Mart), 173 Hogan Boulevard
Under Lease
Mill Hall, Pennsylvania 17751
3635 Penns Valley Road, P.O. Box 66
Under Lease
Spring Mills, Pennsylvania 16875
2842 Earlystown Road
Centre Hall, Pennsylvania 16828
100 Cobblestone Road
Bellefonte, Pennsylvania 16823
2050 North Atherton Street
State College, Pennsylvania 16803
Land Under Lease
Under Lease
Land Under Lease
Under Lease
Under Lease
Owned
Montoursville
820 Broad Street
Danville
Loyalsock
Montoursville, Pennsylvania 17754
606 Continental Boulevard
Danville, Pennsylvania 17821
1720 East Third Street
Williamsport, PA 17701
The M Group, Inc.
705 Washington Boulevard
Under Lease
D/B/A The Comprehensive Financial Group Williamsport, Pennsylvania 17701
21
Office
Luzerne Bank
Address
Ownership
Dallas
Lake
Hazle Twp.
Luzerne
Plains
509 Main Road
Memorial Highway
Dallas, PA 16812
Corners of Rt. 118 & 415
Dallas, PA 18612
10 Dessen Drive
Hazle Twp., PA 18202
118 Main Street
Luzerne, PA 18709
1077 Hwy. 315
Wilkes Barre, PA 18702
Swoyersville
801 Main Street
Swoyersville, PA 18704
Wilkes-Barre
67 Public Square
Wyoming
Wilkes-Barre, PA 18701
324 Wyoming Ave.
Wyoming, PA 18644
ITEM 3
LEGAL PROCEEDINGS
Owned
Owned
Owned
Owned
Under Lease
Owned
Under Lease
Owned
The Company is subject to lawsuits and claims arising out of its business in the ordinary course. In the opinion of management,
after review and consultation with counsel, there are no legal proceedings currently pending or threatened that are reasonably
likely to have a material adverse effect on the consolidated financial position or results of operations of the Company.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5
MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is listed on the NASDAQ Global Select Market under the symbol “PWOD”. The following table
sets forth (1) the quarterly high and low closing sale prices for a share of the Company’s Common Stock during the periods
indicated, and (2) quarterly dividends on a share of the common stock with respect to each quarter since January 1, 2012.
22
Price Range
High
Low
Dividends
Declared
2014
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50.95
$
43.19
$
48.37
48.79
49.26
43.21
42.25
42.18
2013
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41.45
$
38.50
$
41.86
49.89
53.99
39.44
42.76
47.03
2012
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41.67
$
36.20
$
39.90
44.60
45.27
36.72
37.78
37.16
0.47
0.47
0.47
0.47
0.72
0.47
0.47
0.47
0.47
0.47
0.47
0.47
The Company has paid dividends since the effective date of its formation as a bank holding company. It is the present intention
of the Company’s board of directors to continue the dividend payment policy; however, further dividends must necessarily depend
upon earnings, financial condition, appropriate legal restrictions, and other factors relevant at the time the board of directors of
the Company considers dividend policy. Cash available for dividend distributions to shareholders of the Company primarily comes
from dividends paid by Jersey Shore State Bank and Luzerne Bank to the Company. Therefore, the restrictions on the Banks'
dividend payments are directly applicable to the Company. See also the information appearing in Note 19 to “Notes to Consolidated
Financial Statements” for additional information related to dividend restrictions.
Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto,
the corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto
the total assets of the corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders
whose preferential rights are superior to those receiving the dividend.
As of March 1, 2015, the Company had approximately 1,402 shareholders of record.
Following is a schedule of the shares of the Company’s common stock purchased by the Company during the fourth quarter of
2014.
Period
Total
Number of
Shares (or
Units)
Purchased
Average
Price Paid
per Share
(or Units)
Purchased
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or Programs
Month #1 (October 1 - October 31, 2014) . . . . . . . . . .
Month #2 (November 1 - November 30, 2014) . . . . . .
Month #3 (December 1 - December 31, 2014). . . . . . .
5,494
$
43.07
—
—
—
—
5,494
—
—
464,762
464,762
464,762
Set forth below is a line graph comparing the yearly dollar changes in the cumulative shareholder return on the Company’s common
stock against the cumulative total return of the S&P 500 Stock Index, NASDAQ Bank Index, and NASDAQ Composite for the
period of five fiscal years assuming the investment of $100.00 on December 31, 2009 and assuming the reinvestment of dividends.
The shareholder return shown on the graph below is not necessarily indicative of future performance.
23
Index
Penns Woods Bancorp, Inc. . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Composite . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
100.00
100.00
100.00
100.00
129.67
115.06
118.15
114.16
132.92
117.49
117.22
102.17
134.62
136.30
138.02
121.26
192.59
180.44
193.47
171.86
193.77
205.14
222.16
180.31
Period Ending
24
ITEM 6
SELECTED FINANCIAL DATA
The following table sets forth certain financial data for each of the years in the five-year period ended December 31, 2014:
(In Thousands, Except Per Share Data Amounts)
2014
2013
2012
2011
2010
Consolidated Statement of Income Data:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax provision . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . .
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet at End of Period:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . .
Per Share Data: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic . . . . . . . . . . . . . . . . . . . .
Earnings per share - diluted. . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . .
Book value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of shares outstanding, at end of period . . .
Weighted average number of shares outstanding -
basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Ratios:
Return on average shareholders’ equity. . . . . . . . . .
Return on average total assets . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to average total
assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to deposits, at end of period . . . . . . . . . . . . .
$
45,606
$
43,299
$
37,107
$
36,376
$
36,362
4,962
40,644
2,850
37,794
14,508
33,890
18,412
3,804
5,264
38,035
2,275
35,760
12,042
30,267
17,535
3,451
6,211
30,896
2,525
28,371
10,100
22,023
16,448
2,598
7,656
28,720
2,700
26,020
8,219
19,964
14,275
1,913
9,868
26,494
2,150
24,344
7,459
19,492
12,311
1,382
$
14,608
$
14,084
$
13,850
$
12,362
$
10,929
$ 1,245,011
$1,211,995
$ 856,535
$ 763,953
$ 691,688
915,579
(10,579)
981,419
71,176
135,967
818,344
(10,144)
973,002
71,202
127,815
512,232
(7,617)
642,026
76,278
93,726
435,959
(7,154)
581,664
61,278
80,460
415,557
(6,035)
517,508
71,778
66,620
$
$
3.03
3.03
1.88
28.30
$
3.19
3.19
2.13
26.52
$
3.61
3.61
1.88
24.42
3.22
3.22
1.84
20.97
$
2.85
2.85
1.84
17.37
4,804,815
4,819,333
3,838,516
3,837,081
3,835,157
4,816,149
4,410,626
3,837,751
3,836,036
3,834,255
10.79%
1.19%
3.81%
61.99%
11.05%
93.29%
12.36%
15.36%
1.32%
4.13%
1.70%
4.45%
67.88%
52.08%
10.70%
84.11%
11.04%
79.78%
16.60%
1.69%
4.70%
57.10%
10.18%
74.95%
15.30%
1.56%
4.57%
64.56%
10.19%
80.30%
25
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
NET INTEREST INCOME
RESULTS OF OPERATIONS
Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates
paid on interest-bearing liabilities. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable
equivalents based on the marginal corporate federal tax rate of 34%. The tax equivalent adjustments to net interest income for
2014, 2013, and 2012 were $2,219,000, $2,730,000, and $3,203,000, respectively.
2014 vs. 2013
Reported net interest income increased $2,609,000 or 6.86% to $40,644,000 for the year ended December 31, 2014 compared to
the year ended December 31, 2013, although the yield on earning assets decreased to 4.25% from 4.66%. On a tax equivalent
basis, the change in net interest income was an increase of $2,098,000 or 5.15% to $42,863,000 for the year ended December 31,
2014 compared to the year ended December 31, 2013. Total interest income increased $2,307,000 as the impact of growth in the
average balance of the loan portfolio was offset by a decline in the average balance of the investment portfolio and in the portfolio
yields caused by the prolonged low interest rate cycle enacted by the Federal Open Markets Committee (“FOMC”). Interest
income on a tax equivalent basis recognized on the loan portfolio increased $4,223,000 due to a $170,929,000 increase in the
average balance in the loan portfolio which was partially offset by interest rates repricing downward. Interest and dividend income
generated from the investment portfolio on a tax equivalent basis decreased $2,441,000 due to a $36,794,000 decrease in the
average balance in the investment portfolio and a 30 basis point ("bp") reduction in the average rate. The decrease in the portfolio
was driven by a strategic plan to sell off long-term municipal bonds with a maturity date of 2025 or later and securities with a call
date within the next five years, in order to reduce interest rate risk and market risk.
Interest expense decreased $302,000 to $4,962,000 for the year ended December 31, 2014 compared to 2013. Leading the decrease
in interest expense was a decline of 7.02% or $226,000 related to deposits. The FOMC actions noted previously together with a
strategic focus on core deposits led to a 8 bp decline in the rate paid on interest-bearing deposits from 0.48% for the year ended
December 31, 2013 to 0.40% for the year ended December 31, 2014. The overall growth in average deposit balances of $91,174,000
coupled with the decrease in the average investment portfolio were the primary funding source for the growth in the average loans
of $170,929,000.
2013 vs. 2012
Reported net interest income increased $7,139,000 or 23.11% to $38,035,000 for the year ended December 31, 2013 compared
to the year ended December 31, 2012, although the yield on earning assets decreased to 4.66% from 5.25%. The acquisition of
Luzerne was a primary driver for the increase. On a tax equivalent basis, the change in net interest income was an increase of
$6,666,000 or 19.55% to $40,765,000 for the year ended December 31, 2013 compared to the year ended December 31, 2012.
Total interest income increased $6,192,000 as the impact of growth in the average balance of the loan and investment portfolios
was offset by a decline in the portfolio yields caused by the prolonged low interest rate cycle enacted by the Federal Open Markets
Committee (“FOMC”). Interest income recognized on the loan portfolio increased $6,934,000 due to a $216,902,000 increase in
the average balance in the loan portfolio which was partially offset by interest rates repricing downward. Interest and dividend
income generated from the investment portfolio and interest bearing cash deposits decreased $1,215,000. The decrease was driven
by a decrease in yield of 47 basis points ("bp") for the investment portfolio.
Interest expense decreased $947,000 to $5,264,000 for the year ended December 31, 2013 compared to 2012. Leading the decrease
in interest expense was a decline of 11.63% or $424,000 related to deposits. The FOMC actions noted previously and the Luzerne
acquisition, together with a strategic focus on core deposits led to a 23 bp decline in the rate paid on interest-bearing deposits from
0.71% for the year ended December 31, 2012 to 0.48% for the year ended December 31, 2013. Leading the significant decline
in interest-bearing deposit expense was a decline in the cost of time deposits of 41 bp’s and a decline in the cost of money market
deposits of 21 bp’s. The overall growth in average deposit balances of $149,381,000 was the primary funding source for the
growth in the average loans of $216,902,000.
26
AVERAGE BALANCES AND INTEREST RATES
The following tables set forth certain information relating to the Company’s average balance sheet and reflect the average yield
on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and
costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
(In Thousands)
Assets:
2014
2013
2012
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
Interest
Average
Rate
Tax-exempt loans . . . . . . . . . . . . . . .
$
29,461
$ 1,295
4.40% $
24,934
$ 1,056
4.24% $ 23,857
$ 1,195
All other loans . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . .
828,796
858,257
35,640
36,935
4.30%
4.30%
662,394
687,328
31,656
32,712
4.78% 446,569
4.76% 470,426
24,583
25,778
5.01%
5.50%
5.48%
Fed funds sold . . . . . . . . . . . . . . . . .
170
—
—%
226
—
—%
—
—
—%
Taxable securities. . . . . . . . . . . . . . .
Tax-exempt securities. . . . . . . . . . . .
161,889
94,688
5,626
5,232
Total securities . . . . . . . . . . . . . . . . .
256,577
10,858
3.48%
5.53%
4.23%
176,674
116,697
6,326
6,973
3.58% 158,765
5.98% 131,637
6,298
8,226
293,371
13,299
4.53% 290,402
14,524
3.97%
6.25%
5.00%
Interest-bearing deposits . . . . . . . . .
9,318
32
0.34%
6,946
18
0.26%
6,621
8
0.12%
Total interest-earning assets . . . . . . .
1,124,322
47,825
4.25%
987,871
46,029
4.66% 767,449
40,310
5.25%
Other assets . . . . . . . . . . . . . . . . . . .
100,983
Total assets . . . . . . . . . . . . . . . . . . . .
$ 1,225,305
Liabilities and shareholders’ equity:
Savings . . . . . . . . . . . . . . . . . . . . . . .
$ 140,575
Super Now deposits . . . . . . . . . . . . .
Money market deposits . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . . . .
Short-term borrowings . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . .
Total borrowings . . . . . . . . . . . . . . .
182,229
210,066
223,537
756,407
22,342
71,195
93,537
76,593
$1,064,464
49,070
$ 816,519
81
583
561
1,770
2,995
54
1,913
1,967
0.06% $ 118,125
0.32%
0.27%
0.79%
0.40%
0.24%
2.65%
2.07%
154,131
183,460
209,517
665,233
22,281
72,140
94,421
140
687
548
1,846
3,221
81
1,962
2,043
0.12% $ 78,724
0.45% 118,515
0.30% 145,339
0.88% 173,274
0.48% 515,852
0.38%
2.68%
2.14%
20,961
64,994
85,955
65
610
734
2,236
3,645
137
2,429
2,566
0.08%
0.51%
0.51%
1.29%
0.71%
0.65%
3.68%
2.94%
Total interest-bearing liabilities . . . .
849,944
4,962
0.58%
759,654
5,264
0.69% 601,807
6,211
1.03%
Demand deposits . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . .
225,981
13,933
135,447
Total liabilities and shareholders’
equity . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,225,305
Interest rate spread . . . . . . . . . . . . . .
Net interest income/margin . . . . . . .
$42,863
174,909
15,962
113,939
113,431
11,126
90,155
$1,064,464
$ 816,519
3.67%
3.81%
$40,765
3.97%
4.13%
$34,099
4.22%
4.45%
· Fees on loans are included with interest on loans as follows: 2014 - $487,000; 2013 - $610,000; 2012 - $356,000.
· Information in this table has been calculated using average daily balance sheets to obtain average balances.
· Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
· Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income
from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.
27
Reconciliation of Taxable Equivalent Net Interest Income
(In Thousands)
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax equivalent adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income (fully taxable equivalent) . . . . . . . . . . . . . . . . . . . . . . .
$
$
2014
2013
2012
45,606
$
43,299
$
4,962
40,644
2,219
5,264
38,035
2,730
42,863
$
40,765
$
37,107
6,211
30,896
3,203
34,099
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our interest income and interest expense for the periods
indicated. For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes
in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average
volume). Increases and decreases due to both interest rate and volume, which cannot be separated, have been allocated proportionally
to the change due to volume and the change due to interest rate. Income and interest rates are on a taxable equivalent basis.
(In Thousands)
Volume
Rate
Net
Volume
Rate
Net
Year Ended December 31,
2014 vs. 2013
2013 vs. 2012
Increase (Decrease) Due To
Increase (Decrease) Due To
Interest income:
Loans, tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fed funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable investment securities . . . . . . . . . . . . . . . .
Tax-exempt investment securities . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets. . . . . . . . . . . . . . . . .
Interest expense:
Savings deposits. . . . . . . . . . . . . . . . . . . . . . . . . . .
Super Now deposits . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities. . . . . . . . . . . . . .
Change in net interest income . . . . . . . . . . . . . . . .
$
197
$
5,099
—
(524)
(1,246)
3
3,529
3
37
141
45
—
(27)
199
$
3,330
$
PROVISION FOR LOAN LOSSES
2014 vs 2013
42
(1,115)
—
(176)
(495)
11
(1,733)
(62)
(141)
(128)
(121)
(27)
(22)
(501)
(1,232) $
$
239
$
10
$
(149) $
3,984
—
(700)
(1,741)
14
1,796
(59)
(104)
13
(76)
(27)
(49)
(302)
2,098
8,074
(1,001)
341
(905)
—
7,520
40
110
145
126
—
141
562
(313)
(348)
10
(1,801)
35
(33)
(331)
(516)
(56)
(608)
(1,509)
$
6,958
$
(292) $
(139)
7,073
28
(1,253)
10
5,719
75
77
(186)
(390)
(56)
(467)
(947)
6,666
The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to
assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and
recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed
annually for the Company. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
28
mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards
and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for
loan losses is adequate at December 31, 2014, future adjustments could be necessary if circumstances or economic conditions
differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy or employment
and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-
offs, increased loan loss provisions and reductions in interest income. Additionally, as an integral part of the examination process,
bank regulatory agencies periodically review the Banks' loan loss allowance adequacy. The banking regulators could require the
recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their
examination.
While determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio
segments; however, the allowance is available for the entire portfolio as needed.
The allowance for loan losses increased from $10,144,000 at December 31, 2013 to $10,579,000 at December 31, 2014. At
December 31, 2014, the allowance for loan losses was 1.16% of total loans compared to 1.24% of total loans at December 31,
2013.
The provision for loan losses totaled $2,850,000 for the year ended December 31, 2014 compared to $2,275,000 for the year ended
December 31, 2013. The increase in the provision was appropriate when considering the gross loan growth, the increase in the
special mention or substandard rated loans, and charge-offs. Net charge-offs of $2,415,000 represented 0.28% of average loans
for the year ended December 31, 2014 compared to net recoveries of $251,000 or 0.04% of average loans for the year ended
December 31, 2013. In addition, nonperforming loans increased $2,570,000 to $12,248,000 at December 31, 2014 compared to
December 31, 2013, which is primarily the result of certain commercial loans becoming non-performing. The majority of the
nonperforming loans are in a secured position and have sureties with a strong underlying financial position and/or a specific
allowance within the allowance for loan losses. Internal loan review and analysis, coupled with the ratios noted previously, dictated
an increase in the provision for loan losses. Utilizing both internal and external resources, as noted, senior management has
concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
2013 vs 2012
The allowance for loan losses increased from $7,617,000 at December 31, 2012 to $10,144,000 at December 31, 2013. At
December 31, 2013, the allowance for loan losses was 1.24% of total loans compared to 1.49% of total loans at December 31,
2012.
The provision for loan losses totaled $2,275,000 for the year ended December 31, 2013 compared to $2,525,000 for the year ended
December 31, 2012. The decrease in the provision was appropriate when considering the gross loan growth was concentrated in
well collateralized real estate backed loans with the borrowers having strong underlying financial positions. Net recoveries of
$251,000 represented 0.04%% of average loans for the year ended December 31, 2013 compared to net charge-offs of $2,062,000
or 0.44% of average loans for the year ended December 31, 2012. In addition, nonperforming loans decreased $2,028,000 to
$9,678,000 at December 31, 2013 compared to December 31, 2012 as a nonperforming commercial loan was paid-off during
2013. The nonperforming loans are in a secured position and have sureties with a strong underlying financial position and/or a
specific allowance within the allowance for loan losses. Internal loan review and analysis, coupled with the ratios noted previously,
dictated a decrease in the provision for loan losses.
NON-INTEREST INCOME
2014 vs. 2013
Total non-interest income increased $2,466,000 from the year ended December 31, 2013 to December 31, 2014. Excluding net
security gains, non-interest income increased $1,368,000 year over year. Service charges increased primarily due to the impact
of the Luzerne acquisition and the increased number of deposit accounts being serviced, but was partially offset by changes in the
Banks' overdraft product that reduced the number of daily overdrafts on a per customer basis. Bank owned life insurance income
increased primarily due to a gain on death benefit. Insurance commissions and brokerage commissions increased due in part to
the acquisition of Luzerne Bank and a shift in product mix. Gain on sale of loans increased due to an increase in volume that was
driven in part by the access to the greater Wilkes-Barre market provided by the acquisition of Luzerne. The increase in other
income was impacted by the acquisition of Luzerne Bank as it increased the debit and credit card related income and by an
increasing number of merchants that utilize our merchant card services.
29
2014
2013
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance. . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . .
$
2,419
16.67% $
2,307
19.16% $
112
4.85%
3,515
923
1,803
1,146
1,077
3,625
24.23
6.36
12.43
7.90
7.42
24.99
2,417
677
1,438
1,084
1,018
3,101
20.07
5.62
11.94
9.00
8.45
25.76
1,098
246
365
62
59
524
$ 14,508
100.00% $ 12,042
100.00% $
2,466
45.43
36.34
25.38
5.72
5.80
16.90
20.48%
2013 vs. 2012
Total non-interest income increased $1,942,000 from the year ended December 31, 2012 to December 31, 2013. Excluding net
security gains, non-interest income increased $810,000 year over year. Service charges increased primarily due to the impact of
the Luzerne acquisition. Earnings on bank-owned life insurance remained stable as the steady interest rate environment held
crediting rates constant. Insurance commissions decreased due to a change in commission rates coupled with a shift in products.
Management of The M Group continues to pursue new and build upon current relationships. However, the sales cycle for insurance
and investment products can take typically from six months to one year or more to complete. The increase in other income was
primarily due to increases in revenues from debit/credit card transactions and merchant card commissions as electronic payment
methods continue to gain in popularity and an increasing number of merchants use our merchant card services.
2013
2012
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . .
Bank owned life insurance. . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . .
$
2,307
19.16% $
1,894
18.75% $
413
21.81%
2,417
677
1,438
1,084
1,018
3,101
20.07
5.62
11.94
9.00
8.45
25.76
1,285
670
1,386
1,357
912
2,596
12.72
6.63
13.72
13.44
9.03
25.71
1,132
7
52
(273)
106
505
88.09
1.04
3.75
(20.12)
11.62
19.45
$ 12,042
100.00% $ 10,100
100.00% $
1,942
19.23%
NON-INTEREST EXPENSE
2014 vs. 2013
Total non-interest expenses increased $3,623,000 from the year ended December 31, 2013 to December 31, 2014. The increase
in salaries and employee benefits was attributable to increases in salaries and health insurance, coupled with the acquisition of
Luzerne Bank. Occupancy and furniture and equipment expenses increased due to the additional branches of Luzerne Bank and
significant upgrades to the core operating system, a new teller system, and various enhancements to other ancillary systems. Other
expenses increased primarily due to increased fees related to providing debit card services and other expenses related to the
acquisition of Luzerne Bank.
30
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
2014
2013
Change
Salaries and employee benefits . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . .
Amortization of investment in limited
partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . .
Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,273
50.97% $ 15,415
50.93% $
1,858
12.05%
2,301
2,536
907
661
746
532
345
6.79
7.48
2.68
1.95
2.20
1.57
1.02
1,905
1,815
864
661
594
517
213
6.29
6.00
2.85
2.18
1.96
1.71
0.70
8,589
25.34
8,283
27.38
396
721
43
—
152
15
132
306
20.79
39.72
4.98
—
25.59
2.90
61.97
3.69
Total non-interest expense. . . . . . . . . . . . . . . . . .
$ 33,890
100.00% $ 30,267
100.00% $
3,623
11.97%
2013 vs. 2012
Total non-interest expenses increased $8,244,000 from the year ended December 31, 2012 to December 31, 2013. The primary
driver for all items was the acquisition of Luzerne that was effective as of June 1, 2013 and included $1,307,000 in one time
expenses related to the acquisition. Salaries and employee benefits also increased due to routine annual salary increases and related
costs. Intangible amortization of $213,000 is due in its entirety to the Luzerne acquisition.
2013
2012
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
Salaries and employee benefits . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . .
Amortization of investment in limited
partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . .
Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,415
50.93% $ 11,762
53.41% $
3,653
31.06%
1,905
1,815
864
661
594
517
213
6.29
6.00
2.85
2.18
1.96
1.71
0.70
1,270
1,452
674
661
468
516
—
5.77
6.59
3.06
3.00
2.13
2.34
—
635
363
190
—
126
1
213
8,283
27.38
5,220
23.70
3,063
50.00
25.00
28.19
—
26.92
0.19
—
58.68
Total non-interest expense. . . . . . . . . . . . . . . . . .
$ 30,267
100.00% $ 22,023
100.00% $
8,244
37.43%
INCOME TAXES
2014 vs. 2013
The provision for income taxes for the year ended December 31, 2014 resulted in an effective income tax rate of 20.66% compared
to 19.68.% for 2013. This increase is primarily the result of increased pre-tax income which includes an increase in net securities
gains of $1,098,000.
The Company currently is in a deferred tax asset position due to the low income housing tax credits earned both currently and
previously. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate
carry forward period and therefore does not require a valuation allowance.
2013 vs. 2012
The provision for income taxes for the year ended December 31, 2013 resulted in an effective income tax rate of 19.68% compared
to 15.8.% for 2012. This increase is primarily the result of increased pre-tax income which includes an increase in net securities
gains of $1,132,000.
31
FINANCIAL CONDITION
INVESTMENTS
2014
The fair value of the investment portfolio decreased $56,399,000 from December 31, 2013 to December 31, 2014. The decrease
in value is the result of the investment portfolio being actively managed in order to reduce interest rate and market risk. This is
being undertaken primarily through the sale of long term municipal bonds that have a maturity date of 2025 or later and securities
with a call date within the next five years. The proceeds of the bond sales are being deployed into loans and intermediate term
corporate bonds and short and intermediate term municipal bonds. The strategy to sell a portion of the long-term bond portfolio
does negatively impact current earnings, but this action plays a key role in our long-term asset/liability management strategy as
the balance sheet is shortened to better prepare for a rising rate environment. The unrealized losses within the debt securities
portfolio are the result of market activity, not credit issues/ratings, as approximately 90% of the debt securities portfolio on an
amortized cost basis is currently rated A or higher by either S&P or Moody’s.
2013
The fair value of the investment portfolio decreased $704,000 from December 31, 2012 to December 31, 2013. The decrease was
primarily due to a change in the portfolio from having a net unrealized gain to the portfolio having an unrealized loss at December
31, 2013. The increase in amortized cost was primarily the result of purchasing shorter-term corporate bonds. These bonds were
purchased due to their shorter maturity and ability to reduce the duration of the total investment portfolio during the continued
period of low interest rates. The municipal portfolio had the largest change in unrealized gains to an unrealized loss as the portfolio
moved from an unrealized gain of $11,381,000 at December 31, 2012 to an unrealized loss of $3,326,000 at December 31, 2013
as uncertainty continued to cloud the environment.
The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2014 and 2013:
(In Thousands)
U.S. Government agency securities:
2014
2013
Balance
% Portfolio
Balance
% Portfolio
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,841
1.65% $
9,923
3.44%
Mortgage-backed securities:
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,697
5.47
10,592
3.67
Asset-backed securities:
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,492
1.07
6,564
2.27
State and political securities (tax-exempt):
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,024
38.34
105,200
36.45
State and political securities (taxable):
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,092
8.22
36,595
12.68
Other bonds, notes and debentures:
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total bonds, notes and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,643
216,789
38.61
93.36
106,773
275,647
37.00
95.51
Financial institution equity securities:
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,915
4.27
10,662
3.69
Other equity securities:
Available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,509
15,424
2.37
6.64
2,303
12,965
0.80
4.49
$ 232,213
100.00% $ 288,612
100.00%
The following table shows the maturities and repricing of investment securities, at amortized cost and the weighted average yields
(for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) at December 31, 2014:
32
(In Thousands)
U.S. Government agency securities:
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities:
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities:
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities (tax-exempt):
State and political securities (taxable):
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other bonds, notes, and debentures:
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Amount . . . . . . . . . . . . . . . . . . . . . . . . .
Total Yield. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Securities. . . . . . . . . . . . . . . . . . . . . . .
Total Investment Portfolio Value . . . . . . . . . .
Total Investment Portfolio Yield. . . . . . . . . . .
Three
Months or
Less
Over Three
Months
Through
One Year
Over One
Year
Through
Five Years
Over Five
Years
Through
Ten Years
Over Ten
Years
Amortized
Cost Total
$
— $
— $
— $
3,953
$
— $
3,953
—%
—%
—%
1.83%
—%
1.83%
—
—%
—
—%
—
—%
—
—%
—
—%
—
—%
971
3.07%
—
—%
3,914
1.661%
—
—%
8,326
3.824%
12,240
3.13%
—
—%
521
0.68%
1,947
2,468
1.21%
1.09%
12,356
18,710
54,680
87,042
2.60%
4.81%
6.46%
5.50%
932
3.04%
8,124
8,722
17,778
4.47%
5.86%
5.08%
3,103
20,086
66,251
3.07%
2.78%
3.09%
471
6.97%
89,911
3.04%
$
325
$
4,074
$ 37,288
$ 97,559
$ 74,146
213,392
1.15%
3.07%
2.61%
3.47%
5.96%
4.17%
14,381
$ 227,773
3.91%
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
325
1.15%
All yields represent weighted average yields expressed on a tax equivalent basis. They are calculated on the basis of the cost,
adjusted for amortization of premium and accretion of discount, and effective yields weighted for the scheduled maturity of each
security. The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and
the taxable equivalent of such income at the standard 34% tax rate (derived by dividing tax-exempt interest by 66%).
The distribution of credit ratings by amortized cost and estimated fair value for the debt security portfolio at December 31, 2014
follows:
(In Thousands)
Available for sale
U.S. Government and
agency securities. . . . . . . . .
Mortgage-backed securities .
Asset-backed securities . . . .
State and political securities .
Other debt securities . . . . . . .
Total debt securities . . . . . . .
A- to AAA
B- to BBB+
C to CCC+
Not Rated
Total
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
— $
— $
— $ — $
— $ — $
3,953
$ 3,841
$
3,953
$
3,841
12,240
2,468
98,836
76,337
12,697
2,492
102,054
—
—
—
—
—
—
76,532
13,574
13,111
—
—
—
—
—
—
—
—
—
—
—
—
12,240
2,468
12,697
2,492
5,984
6,062
104,820
108,116
—
—
89,911
89,643
$ 189,881
$ 193,775
$ 13,574
$ 13,111
$
— $ — $
9,937
$ 9,903
$ 213,392
$ 216,789
33
LOAN PORTFOLIO
2014
Gross loans of $915,579,000 at December 31, 2014 represented an increase of $97,235,000 from December 31, 2013. The continued
emphasis on well collateralized real estate loans was the primary driver of the overall increase in loans outstanding, with home
equity loans and lines of credit leading the way. Successful campaigns to increase home equity, multifamily residential, and auto
loans were undertaken during 2014 with the increase in residential and commercial loans being directly correlated to the campaigns.
2013
Gross loans of $818,344,000 at December 31, 2013 represented an increase of $306,112,000 from December 31, 2012. The primary
driver of the increase was $254,057,000 in loans acquired from the acquisition of Luzerne as of June 1, 2013. The continued
emphasis on well collateralized real estate loans accounted for the remaining majority of the overall increase in loans outstanding
with home equity loans and lines of credit leading the way. Successful campaigns to increase home equity, multifamily residential,
and auto loans were undertaken during 2013 with the increase in residential and commercial loans being directly correlated to the
campaigns.
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan at December 31,
2014, 2013, 2012, 2011, and 2010:
(In Thousands)
Commercial and
2014
2013
2012
2011
2010
Amount % Total
Amount % Total
Amount % Total
Amount % Total
Amount % Total
agricultural . . . . . . . . .
$ 124,156
13.56% $ 105,029
12.83% $ 48,455
9.46% $ 53,129
12.19% $ 50,853
12.23%
Real estate mortgage:
Residential . . . . . . . . .
Commercial . . . . . . . .
Construction . . . . . . .
457,760
291,348
21,996
50.00
31.82
2.40
399,781
282,476
17,282
48.86
34.52
2.11
252,142
182,031
20,067
49.22
35.54
3.92
179,383
164,288
29,457
41.15
37.68
6.76
173,578
160,189
22,545
41.77
38.55
5.43
Installment loans to
individuals . . . . . . . . .
Net deferred loan fees
and discounts . . . . . . .
21,509
2.35
14,647
1.79
10,659
2.08
11,297
2.59
9,432
2.27
(1,190)
(0.13)
(871)
(0.11)
(1,122)
(0.22)
(1,595)
(0.37)
(1,040)
(0.25)
Gross loans . . . . . . . . . .
$ 915,579
100.00% $ 818,344
100.00% $ 512,232
100.00% $ 435,959
100.00% $ 415,557
100.00%
The amounts of domestic loans at December 31, 2014 are presented below by category and maturity:
(In Thousands)
Loans with variable interest rates:
1 year or less . . . . . . . . . . . . . . . . . . . . . . . .
1 through 5 years . . . . . . . . . . . . . . . . . . . . .
5 through 10 years . . . . . . . . . . . . . . . . . . . .
After 10 years. . . . . . . . . . . . . . . . . . . . . . . .
Total floating interest rate loans . . . . . . .
Loans with fixed interest rates:
1 year or less . . . . . . . . . . . . . . . . . . . . . . . .
1 through 5 years . . . . . . . . . . . . . . . . . . . . .
5 through 10 years . . . . . . . . . . . . . . . . . . . .
After 10 years. . . . . . . . . . . . . . . . . . . . . . . .
Total predetermined interest rate loans . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred loan fees and discounts . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial
and
Agricultural
Real Estate
Residential
Commercial Construction
Installment
Loans to
Individuals
Total
$
31,231
$
11,252
$
12,588
$
3,056
$
4,337
12,549
37,836
85,953
3,073
26,669
5,281
3,180
38,203
3,749
19,568
376,056
410,625
2,387
8,364
14,372
22,012
47,135
12,339
32,395
211,392
268,714
558
11,496
2,507
8,073
22,634
542
268
14,263
18,129
1,010
2,334
240
283
150
161
2
3,251
3,564
$ 58,277
21,128
64,782
642,798
786,985
860
13,812
1,513
1,760
7,888
62,675
23,913
35,308
$ 124,156
$ 457,760
$ 291,348
$
21,996
$
21,509
916,769
(1,190)
$ 915,579
3,867
17,945
129,784
34
· The loan maturity information is based upon original loan terms and is not adjusted for “rollovers.” In the ordinary course
of business, loans maturing within one year may be renewed, in whole or in part, at interest rates prevailing at the date
of renewal.
· Scheduled repayments are reported in maturity categories in which the payment is due.
The Banks do not make loans that provide for negative amortization, nor do any loans contain conversion features. The Banks did
not have any foreign loans outstanding at December 31, 2014.
The following table shows the amount of accrual and nonaccrual TDRs at December 31, 2014 and 2013:
(In Thousands)
Accrual
Nonaccrual
Total
Accrual
Nonaccrual
Total
2014
2013
Commercial and agricultural . . . . . . . . . . . . .
Real estate mortgage: . . . . . . . . . . . . . . . . . . .
Residential . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . .
$
551
$
440
$
991
$
437
$
— $
437
697
3,267
514
—
181
6,160
—
—
878
9,427
514
—
603
4,145
11
7
118
5,123
1,028
—
721
9,268
1,039
7
$
5,029
$
6,781
$
11,810
$
5,203
$
6,269
$
11,472
ALLOWANCE FOR LOAN LOSSES
2014
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses
inherent in its loan portfolio, as of the consolidated balance sheet date. All loan losses are charged to the allowance and all
recoveries are credited to it per the allowance method of providing for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision for loan losses is based upon management’s quarterly
review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies,
ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served.
An external independent loan review is also performed annually for the Banks. Management remains committed to an aggressive
program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards
and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
The allowance for loan losses increased from $10,144,000 at December 31, 2013 to $10,579,000 at December 31, 2014. At
December 31, 2014, the allowance for loan losses was 1.16% of total loans compared to 1.24% of total loans at December 31,
2013. The decrease in the allowance for loan losses to total loans was the result of the increased allowance for loan losses that
was more than offset by the increase in loan growth. The increase in the allowance for loan losses was appropriate when considering
the gross loan growth, level of commercial loans, declining impact of the Marcellus Shale natural gas exploration, and the continued
uncertain economic environment. Net loan charge-offs of $2,415,000 limited the impact of the provision for loan losses of
$2,850,000. Management concluded that the allowance for loan losses is adequate to provide for probable losses inherent in its
loan portfolio as of the balance sheet date as noted in the provision for loan losses discussion.
Based on management’s loan-by-loan review, the past performance of the borrowers, and current economic conditions, including
recent business closures and bankruptcy levels, management does not anticipate any current losses related to nonaccrual,
nonperforming, or classified loans above those that have already been considered in its overall judgment of the adequacy of the
allowance for loan losses.
2013
The allowance for loan losses increased from $7,617,000 at December 31, 2012 to $10,144,000 at December 31, 2013. At
December 31, 2013, the allowance for loan losses was 1.24% of total loans compared to 1.49% of total loans at December 31,
2012. The decrease in the allowance for loan losses to total loans was the result of purchase accounting adjustment that were
35
applied to the Luzerne loan portfolio. The increase in the allowance for loan losses was appropriate when considering the gross
loan growth, level of commercial loans, declining impact of the Marcellus Shale natural gas exploration, and the continued uncertain
economic environment. Net loan recoveries of $251,000 augmented the allowance for loan losses and were the result of a large
recovery on a commercial loan.
(In Thousands)
Amount % Total
Amount % Total
Amount % Total
Amount % Total
Amount % Total
December 31, 2014
December 31, 2013
December 31, 2012
December 31, 2011
December 31, 2010
Allocation of The Allowance For Loan Losses
Balance at end of
period applicable to:
Commercial and
agricultural . . . . . . . .
Real estate mortgage:
Residential . . . . . .
Commercial . . . . .
Construction . . . . .
Installment loans to
individuals . . . . . . . .
Unallocated . . . . . . . .
$ 1,124
13.54% $
474
12.82% $
361
9.44% $
418
12.14% $
443
12.21%
3,755
4,205
786
245
464
49.93
31.78
2.40
2.35
—
3,917
4,079
741
139
794
48.80
34.48
2.11
1.79
—
1,954
3,831
950
144
377
49.11
35.46
3.91
2.08
—
939
2,651
2,775
190
181
41.00
37.55
6.73
2.58
—
908
1,435
2,753
179
317
41.67
38.45
5.41
2.26
—
$ 10,579
100.00% $10,144
100.00% $ 7,617
100.00% $ 7,154
100.00% $ 6,035
100.00%
NONPERFORMING LOANS
Non-accrual loans increased primarily due to several commercial loans that are either in a secured position or have sureties with
a strong underlying financial position or have a specific allocation within the allowance for loan losses.
The following table presents information concerning nonperforming loans. The accrual of interest will be discontinued when the
principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured
and in the process of collection. Consumer loans and residential real estate loans secured by 1 to 4 family dwellings are not
ordinarily subject to those guidelines. The reversal of previously accrued but uncollected interest applicable to any loan placed
in a nonaccrual status and the treatment of subsequent payments of either principal or interest is handled in accordance with GAAP.
These principles do not require a write-off of previously accrued interest if principal and interest are ultimately protected by sound
collateral values. A nonperforming loan may be restored to accruing status when:
1. Principal and interest is no longer due and unpaid;
2. It becomes well secured and in the process of collection; and
3. Prospects for future contractual payments are no longer in doubt.
(In Thousands)
Total Nonperforming Loans
90 Days Past Due
Nonaccrual
Total
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
387
604
351
384
557
$
11,861
$
9,074
11,355
11,625
5,658
12,248
9,678
11,706
12,009
6,215
The level of non-accruing loans continues to fluctuate annually and is attributed to the various economic factors experienced both
regionally and nationally. Overall, the portfolio is well secured with a majority of the balance making regular payments or scheduled
to be satisfied in the near future. Presently, there are no significant amounts of loans where serious doubts exist as to the ability
of the borrower to comply with the current loan payment terms which are not included in the nonperforming categories as indicated
above.
36
Management’s judgment in determining the amount of the additions to the allowance charged to operating expense considers the
following factors with no single factor being determinative:
1. Economic conditions and the impact on the loan portfolio.
2. Analysis of past loan charge-offs experienced by category and comparison to outstanding loans.
3. Effect of problem loans on overall portfolio quality.
4. Reports of examination of the loan portfolio by the Department and the FDIC.
DEPOSITS
2014 vs. 2013
Total average deposits increased $142,246,000 or 16.93% from 2013 to 2014. The growth is a result of an emphasis to increase
and solidify deposit relationships by focusing on core deposits, not time deposits. The actions caused average core deposits, which
exclude time deposits, to increase to 77.25% in 2014 from 75.06% for 2013. In addition to the emphasis on growing core deposits
by utilizing marketing strategies, the core deposit growth is receiving a lift from the attraction of municipal relationships. In
addition, the Banks have continued to capitalize on their reputation of safety and soundness during this prolonged economic
downturn.
2013 vs. 2012
Total average deposits increased $210,859,000 or 33.51% from 2012 to 2013. The growth is a combination of the Luzerne
acquisition and the result of an emphasis to increase and solidify deposit relationships by focusing on core deposits, not time
deposits. The actions caused average core deposits, which exclude time deposits, to increase to 75.06% from 72.46% for 2012.
In addition to the emphasis on growing core deposits by utilizing marketing strategies, the core deposit growth received a lift from
the natural gas exploration throughout our market footprint and municipal account gathering efforts.
The average amount and the average rate paid on deposits are summarized below for the years ended December 31, 2014, 2013,
and 2012:
(In Thousands)
Noninterest-bearing . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Super Now . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money Market . . . . . . . . . . . . . . . . . . . . . . . .
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total average deposits . . . . . . . . . . . . . . . . .
2014
2013
2012
Average
Amount
Rate
Average
Amount
Rate
Average
Amount
Rate
$ 225,981
0.00% $ 174,909
0.00% $ 113,431
0.00%
140,575
182,229
210,066
223,537
0.06
0.32
0.27
0.79
118,125
154,131
183,460
209,517
0.12
0.45
0.30
0.88
78,724
118,515
145,339
173,274
0.08
0.51
0.51
1.29
$ 982,388
0.31% $ 840,142
0.38% $ 629,283
0.58%
SHAREHOLDERS’ EQUITY
2014
Shareholders’ equity increased $8,152,000 to $135,967,000 at December 31, 2014 compared to December 31, 2013. The
accumulated other comprehensive loss of $1,667,000 at December 31, 2014 is a result of an increase in unrealized gains on available
for sale securities from an unrealized loss of $2,169,000 at December 31, 2013 to an unrealized gain of $2,930,000 at December 31,
2014. The amount of accumulated other comprehensive loss at December 31, 2014 was also impacted by the change in net excess
of the projected benefit obligation over the market value of the plan assets of the defined benefit pension plan resulting in an
increase in the net loss of $1,872,000 to $4,597,000 at December 31, 2014. The current level of shareholders’ equity equates to
a book value per share of $28.30 at December 31, 2014 compared to $26.52 at December 31, 2013 and an equity to asset ratio of
10.92% at December 31, 2014 compared to 10.55% at December 31, 2013. Excluding goodwill and intangibles, book value per
share was $24.44 at December 31, 2014 compared to $22.60 at December 31, 2013. Dividends declared for the twelve months
ended December 31, 2014 were $1.88 per share compared to $2.13, which included a special cash dividend of $0.25 per share
declared in the first quarter 2013, for the twelve months ended December 31, 2013.
37
2013
Shareholders’ equity increased $34,089,000 to $127,815,000 at December 31, 2013 compared to December 31, 2012. The
accumulated other comprehensive loss of $4,894,000 at December 31, 2013 is a result of a decrease in unrealized gains on available
for sale securities from an unrealized gain of $10,164,000 at December 31, 2012 to an unrealized loss of $2,169,000 at December 31,
2013. The amount of accumulated other comprehensive loss at December 31, 2013 was also impacted by the change in net excess
of the projected benefit obligation over the market value of the plan assets of the defined benefit pension plan resulting in a decrease
in the net loss of $2,082,000 to $2,725,000 at December 31, 2013. The current level of shareholders’ equity equates to a book
value per share of $26.52 at December 31, 2013 compared to $24.42 at December 31, 2012 and an equity to asset ratio of 10.55%
at December 31, 2013 compared to 10.94% at December 31, 2012. Excluding goodwill and intangibles, book value per share was
$22.60 at December 31, 2013 compared to $23.63 at December 31, 2012. Dividends declared for the twelve months ended
December 31, 2013 were $2.13 per share, which included a special cash dividend of $0.25 per share declared in the first quarter
2013, compared to $1.88 for the twelve months ended December 31, 2012.
Bank regulators have risk based capital guidelines. Under these guidelines the Company and each Bank are required to maintain
minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet
items. At December 31, 2014, both the Company’s and each Bank’s required ratios were well above the minimum ratios as follows:
Tier 1 capital ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.27%
12.65%
8.50%
12.30%
8.56%
10.23%
4.00%
8.00%
Company
Jersey Shore
State Bank
Luzerne
Bank
Minimum
Standards
For a more comprehensive discussion of these requirements, see “Regulation and Supervision” in Item 1 of the Annual Report
on Form 10-K. Management believes that the Company will continue to exceed regulatory capital requirements.
RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average shareholders’ equity, and other certain equity ratios are presented as
follows:
Percentage of net income to:
Average total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of dividends declared to net income . . . . . . . . . . . . . . . . . . . . . . .
Percentage of average shareholders’ equity to average total assets . . . . . . . .
1.19%
10.79%
61.99%
11.05%
1.32%
12.36%
67.88%
10.70%
1.70%
15.36%
52.08%
11.04%
2014
2013
2012
LIQUIDITY, INTEREST RATE SENSITIVITY, AND MARKET RISK
The Asset/Liability Committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet
credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing
liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance and were within the limits cited at December 31, 2014:
1. Net Loans to Total Assets, 85% maximum
2. Net Loans to Total Deposits, 100% maximum
3. Cumulative 90 day Maturity GAP %, +/- 20% maximum
4. Cumulative 1 Year Maturity GAP %, +/- 25% maximum
Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing
interest rate risk. The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations
to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business
opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing
interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.
38
The Company, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit
withdrawals, loan commitments, and expenses. In order to control cash flow, the Company estimates future flows of cash from
deposits and loan payments. The primary sources of funds are deposits, principal and interest payments on loans and mortgage-
backed securities, as well as FHLB borrowings. Funds generated are used principally to fund loans and purchase investment
securities. Management believes the Company has adequate resources to meet its normal funding requirements.
Management monitors the Company’s liquidity on both a short and long-term basis, thereby, providing management necessary
information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding
strategies consider both customer needs and economical cost. Both short and long term funding needs are addressed by maturities
and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments
such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core ingredients to satisfy
depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment
opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a current
borrowing capacity at the FHLB of $484,916,000 with $97,581,000 utilized, leaving $387,335,000 available. In addition to this
credit arrangement, the Company has additional lines of credit with correspondent banks of $35,616,000. The Company’s
management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.
Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the
Company’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and
investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results
in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting
both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected.
Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or difference. Once
known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can
enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary to predictions,
net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap
management, the Company has an asset liability management policy which incorporates a market value at risk calculation which
is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects
of interest rate changes on the Company’s balance sheet.
The Company currently maintains a gap position of being liability sensitive. The Company has strategically taken this position
as it has decreased the duration of the time deposit portfolio over the last several years, while continuing to maintain a primarily
fixed rate earning asset portfolio with a duration greater than the liabilities utilized to fund earning assets. Lengthening of the
liability portfolio coupled with the addition of limited short-term assets is being undertaken. These actions are expected to reduce,
but not eliminate, the liability sensitive structure of the balance sheet.
A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Company’s balance sheet and
more specifically shareholders’ equity. The Company does not manage the balance sheet structure in order to maintain compliance
with this calculation. The calculation serves as a guideline with greater emphasis placed on interest rate sensitivity. Changes to
calculation results from period to period are reviewed as changes in results could be a signal of future events.
INTEREST RATE SENSITIVITY
In this analysis the Company examines the result of various changes in market interest rates in 100 basis point increments and
their effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner.
Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.
The following is a rate shock forecast for the twelve month period ended December 31, 2015 assuming a static balance sheet as
of December 31, 2014.
(In Thousands)
(200)
(100)
Static
100
200
300
400
Net interest income . . . . . . . . . .
Change from static . . . . . . . . . .
Percent change from static . . . .
$ 36,238
$ 37,969
$
39,569
$ 40,728
$ 41,897
$ 42,743
$ 43,325
(3,331)
(1,600)
-8.42%
-4.04%
—
—
1,159
2,328
3,174
3,756
2.93%
5.88%
8.02%
9.49%
Parallel Rate Shock in Basis Points
39
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding
cash flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities. Actual
results could differ significantly from these estimates which would result in significant differences in the calculated projected
change. In addition, the limits stated above do not necessarily represent the level of change under which management would
undertake specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management
believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.
INFLATION
The asset and liability structure of a financial institution is primarily monetary in nature; therefore, interest rates rather than inflation
have a more significant impact on the Company’s performance. Interest rates are not always affected in the same direction or
magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors that are not
measured by a price index.
CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in
detail in Note 1 of the “Notes to Consolidated Financial Statements.” Our most complex accounting policies require management’s
judgment to ascertain the valuation of assets, liabilities, commitments, and contingencies. We have established detailed policies
and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to
period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of our current accounting policies involving significant management
valuation judgments.
Other Than Temporary Impairment of Debt and Equity Securities
Debt and equity securities are evaluated periodically to determine whether a decline in their value is other than temporary.
Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reason underlying the decline,
to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that
the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that
there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in
value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is
recognized. For a full discussion of the Company’s methodology of assessing impairment, refer to Note 4 of the “Notes to
Consolidated Financial Statements.”
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for
loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business
environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in
ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-
off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve
for allowance for loan losses, refer to Note 1 of the “Notes to Consolidated Financial Statements.”
Goodwill and Other Intangible Assets
As discussed in Note 8 of the “Notes to Consolidated Financial Statements,” the Company must assess goodwill and other intangible
assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were
less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against earnings to
write down the assets to the lower value.
Deferred Tax Assets
Management uses an estimate of future earnings to support their position that the benefit of their deferred tax assets will be realized.
If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they
may be applied, the asset may not be realized and the Company’s net income will be reduced. The Company’s deferred tax assets
are described further in Note 12 of the “Notes to Consolidated Financial Statements.”
40
Pension Benefits
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount
rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP,
actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect
recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future
expense. Our pension benefits are described further in Note 13 of the “Notes to Consolidated Financial Statements.”
CONTRACTUAL OBLIGATIONS
The Company has various financial obligations, including contractual obligations which may require future cash payments. The
following table presents, as of December 31, 2014, significant fixed and determinable contractual obligations to third parties by
payment date. Further discussion of the nature of each obligation is included in the “Notes to Consolidated Financial Statements.”
(In Thousands)
One Year
or Less
One to Three
Years
Three to Five
Years
Over Five
Years
Payments Due In
$
Deposits without a stated maturity . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
765,161
98,721
13,987
26,831
26
589
$
— $
— $
— $
66,422
48,718
2,397
—
—
15,805
900
—
—
55,058
601
—
—
287
1,048
Total
765,161
216,258
13,987
26,831
71,176
3,138
The Company’s operating lease obligations represent short and long-term lease and rental payments for branch facilities and
equipment. The Bank leases certain facilities under operating leases which expire on various dates through 2027. Renewal options
are available on the majority of these leases.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or
performance and assumptions and other statements which are other than statements of historical fact. The Company wishes to
caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s
actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in
any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations,
including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of
compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or
of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position
within its market area of the increasing consolidation within the banking and financial services industries, including the increased
competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services;
(iv) the effect of changes in interest rates; (v) the effect of changes in the business cycle and downturns in the local, regional or
national economies; and (vi) the successful integration of the business and operations of Luzerne with those of the Company.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Interest rate risk and
liquidity risk management is performed at the Banks' level as well as the Company level. The Company’s interest rate sensitivity
is monitored by management through selected interest rate risk measures produced internally. Additional information and details
are provided in the Interest Sensitivity section of Item 7 Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook
changes.
41
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Penns Woods Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition of Penns Woods Bancorp, Inc. and subsidiaries
as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These consolidated
financial statements are the responsibility of Penns Woods Bancorp, Inc.’s management. Our responsibility is to express an opinion
on these consolidated 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 audits 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 consolidated
financial position of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 2014 and 2013, and the consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with
U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Penns Woods Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated March 10, 2015, expressed an unqualified opinion on the effectiveness of
Penns Woods Bancorp, Inc.’s internal control over financial reporting.
Wexford, Pennsylvania
March 10, 2015
42
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
ASSETS:
Noninterest-bearing balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2014
2013
$
$
19,403
505
—
19,908
23,723
770
113
24,606
232,213
550
915,579
(10,579)
905,000
21,109
3,912
25,959
1,560
17,104
1,456
8,101
8,139
$ 1,245,011
288,612
1,626
818,344
(10,144)
808,200
20,184
4,696
25,410
2,221
17,104
1,801
9,889
7,646
$ 1,211,995
LIABILITIES:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
738,041
243,378
981,419
755,625
217,377
973,002
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,818
71,176
381
15,250
1,109,044
26,716
71,202
405
12,855
1,084,180
SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued . . . . . . . . . . . . . . . . .
Common stock, par value $8.33, 15,000,000 shares authorized; 5,002,649 and 4,999,929 shares
issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss:
—
41,688
49,896
53,107
—
41,665
49,800
47,554
Net unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost, 197,834 and 180,596 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL SHAREHOLDERS’ EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,930
(4,597)
(7,057)
135,967
$ 1,245,011
(2,169)
(2,725)
(6,310)
127,815
$ 1,211,995
See accompanying notes to the consolidated financial statements.
43
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data)
INTEREST AND DIVIDEND INCOME:
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend and other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL INTEREST AND DIVIDEND INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2014
2013
2012
36,495
$
32,353
$
25,372
5,111
3,453
547
45,606
2,995
54
1,913
4,962
6,034
4,602
310
43,299
3,221
81
1,962
5,264
5,940
5,429
366
37,107
3,645
137
2,429
6,211
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,644
38,035
30,896
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,850
2,275
2,525
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . .
37,794
35,760
28,371
NON-INTEREST INCOME:
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of investment in limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation deposit insurance . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,419
3,515
923
1,803
1,146
1,077
3,625
14,508
17,273
2,301
2,536
907
661
746
532
345
8,589
33,890
18,412
3,804
14,608
EARNINGS PER SHARE - BASIC AND DILUTED . . . . . . . . . . . . . . . . . . . . . . . . . $
3.03
2,307
2,417
677
1,438
1,084
1,018
3,101
12,042
15,415
1,905
1,815
864
661
594
517
213
8,283
30,267
17,535
3,451
14,084
3.19
$
$
1,894
1,285
670
1,386
1,357
912
2,596
10,100
11,762
1,270
1,452
674
661
468
516
—
5,220
22,023
16,448
2,598
13,850
3.61
$
$
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED. . 4,816,149
4,410,626
3,837,751
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.88
$
2.13
$
1.88
See accompanying notes to the consolidated financial statements.
44
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In Thousands)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gain included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Accretion) amortization of unrecognized pension and post-retirement items. . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2014
2013
2012
$
14,608
$
14,084
$
13,850
11,242
(3,822)
(3,515)
1,195
(2,837)
964
3,227
$
17,835
$
(16,270)
5,532
(2,417)
822
3,155
(1,073)
(10,251)
3,833
12,270
(4,172)
(1,285)
437
(1,021)
347
6,576
$
20,426
See accompanying notes to the consolidated financial statements.
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
SHARES
AMOUNT
COMMON STOCK
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
EARNINGS
ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) INCOME
TREASURY
STOCK
TOTAL
SHAREHOLDERS’
EQUITY
Balance, December 31, 2011 . . . . . .
4,017,677
$ 33,480
$
18,115
$
36,394
$
(1,219) $
(6,310) $
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . .
Dividends declared, ($1.88 per
share) . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for
employee stock purchase plan . . . .
1,435
12
Balance, December 31, 2012 . . . . . .
4,019,112
33,492
42
18,157
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . .
Dividends declared, ($2.13 per
share) . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for
acquisition of Luzerne National
Bank Corporation . . . . . . . . . . . . .
Common shares issued for
978,977
8,158
31,578
employee stock purchase plan . . . .
1,840
15
Balance, December 31, 2013 . . . . . .
4,999,929
41,665
65
49,800
Net income . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . .
Dividends declared, ($1.88 per
share) . . . . . . . . . . . . . . . . . . . . . . .
Common shares issued for
employee stock purchase plan . . . .
2,720
23
96
Purchase of treasury stock (17,238
shares) . . . . . . . . . . . . . . . . . . . . . .
13,850
(7,214)
43,030
14,084
(9,560)
47,554
14,608
(9,055)
6,576
5,357
(6,310)
(10,251)
(4,894)
(6,310)
3,227
(747)
80,460
13,850
6,576
(7,214)
54
93,726
14,084
(10,251)
(9,560)
39,736
80
127,815
14,608
3,227
(9,055)
119
(747)
Balance, December 31, 2014 . . . . . .
5,002,649
$ 41,688
$
49,896
$
53,107
$
(1,667) $
(7,057) $
135,967
See accompanying notes to the consolidated financial statements.
45
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2013
2012
2014
(In Thousands)
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
14,608
$
14,084
$
13,850
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion and amortization of investment security discounts and premiums. . . . . . . . .
Securities gains, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity:
Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from bank-owned life insurance death benefit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of regulatory stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of regulatory stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES:
Net (decrease) increase in interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, ENDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,078
345
2,850
672
(3,515)
(51,119)
53,998
(1,803)
(923)
124
423
18,738
102,145
13,354
(47,902)
—
(101,816)
(2,795)
1,059
(30)
367
3,955
(4,583)
—
(36,246)
(17,584)
26,001
—
(26)
14,102
(9,055)
119
(747)
12,810
(4,698)
24,606
19,908
$
1,448
213
2,275
69
(2,417)
(51,512)
55,098
(1,438)
(677)
123
61
17,327
79,114
16,359
(90,179)
—
(55,953)
(4,918)
143
(981)
—
3,239
(2,384)
17,487
(38,073)
34,114
19,906
452
(5,528)
(9,254)
(9,560)
80
—
30,210
9,464
15,142
24,606
$
1,077
—
2,525
(989)
(1,285)
(44,571)
45,970
(1,386)
(670)
(128)
(427)
13,966
48,460
19,995
(74,791)
55
(78,323)
(1,403)
765
(33)
383
1,171
(796)
—
(84,517)
56,763
3,599
30,000
(15,000)
3,606
(7,214)
54
—
71,808
1,257
13,885
15,142
See accompanying notes to the consolidated financial statements.
46
Year Ended December 31,
2013
2012
2014
$
$
4,986
3,750
2,166
$
5,225
3,998
470
6,381
2,950
—
(In Thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of loans to foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of Luzerne National Bank Corporation
Non-cash assets acquired:
Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed:
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net non-cash assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
See accompanying notes to the consolidated financial statements.
21,783
250,377
8,014
726
7,419
2,015
2,636
14,072
307,042
76
194,438
82,518
2,766
103
4,892
284,793
22,249
20,363
47
PENNS WOODS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly owned
subsidiaries, Jersey Shore State Bank (“JSSB”), Luzerne Bank ("Luzerne" collectively with JSSB "Banks"), Woods Real Estate
Development Co., Inc., Woods Investment Company, Inc., and The M Group Inc. D/B/A The Comprehensive Financial Group
(“The M Group”), a wholly owned subsidiary of the Bank (collectively, the “Company”). All significant intercompany balances
and transactions have been eliminated.
Nature of Business
The Banks engage in a full-service commercial banking business, making available to the community a wide range of financial
services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction
financing, farm loans, community development loans, loans to non-profit entities and local government, and various types of
demand and time deposits including, but not limited to, checking accounts, savings accounts, money market deposit accounts,
certificates of deposit, and IRAs. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent
provided by law.
The financial services are provided by the Banks to individuals, partnerships, non-profit organizations, and corporations through
their twenty-two offices located in Clinton, Lycoming, Centre, Montour, and Luzerne Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the
Banks.
Woods Investment Company, Inc., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and financial planning services, which include the sale of life insurance products,
annuities, and estate planning services.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial service
operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses,
valuation of net deferred tax assets, impairment of goodwill, other than temporary impairment of debt and equity securities, fair
value of financial instruments, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks and federal funds sold. Interest-earning deposits mature within 90
days and are carried at cost. Net cash flows are reported for loan, deposit, and short-term borrowing transactions.
Restrictions on Cash and Cash Equivalents
Based on deposit levels, the Banks must maintain cash and other reserves with the Federal Reserve Bank of Philadelphia (FRB).
48
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to
maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost,
adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as
adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a
source of liquidity. Unrealized holding gains and losses for available for sale securities are reported as a separate component of
shareholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification
method for debt securities and the average cost method for marketable equity securities. Interest and dividends on investment
securities are recognized as income when earned.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not
limited to, the length of time and extent to which the fair value has been less than cost, the financial condition of the underlying
issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its
fair value, whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery
in fair value, and a review of the Company’s capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s
ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, and management’s intent and
ability requires considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within
non-interest income in the Consolidated Statement of Income.
Investment securities fair values are based on observed market prices. Certain investment securities do not have observed bid
prices and their fair value is based on instruments with similar risk elements. Since regulatory stock is redeemable at par, the
Company carries it at cost.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are stated
at the principal amount outstanding, net of deferred fees and discounts, unamortized loan fees and costs, and the allowance for
loan losses. Interest on loans is recognized as income when earned on the accrual method. The Company’s general policy has
been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectability of additional interest.
Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in
payment and, in management’s judgment, the borrower has the ability and intent to make future principal payments. Otherwise,
payments are applied to the unpaid principal balance of the loan. Loans are restored to accrual status if certain conditions are met,
including but not limited to, the repayment of all unpaid interest and scheduled principal due, ongoing performance consistent
with the contractual agreement, and the future expectation of continued, timely payments.
Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and amortized as an
adjustment to the related loan’s yield over the contractual lives of the related loans.
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses
inherent in its loan portfolio, as of the Consolidated Balance Sheet date. The allowance method is used in providing for loan
losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses
is established through a provision for loan losses charged to operations. The provision for loan losses is based upon management’s
quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze
delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the
markets served. An external independent loan review is also performed annually for the Bank. Management remains committed
to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, historical loan loss experience, and general economic conditions. In addition, management
considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific
lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for
loan losses is adequate at December 31, 2014, future adjustments could be necessary if circumstances or economic conditions
differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, rising
49
unemployment, or negative performance trends in financial information from borrowers could be indicators of subsequent increased
levels of nonperforming assets and possible charge-offs, which would normally require increased loan loss provisions. An integral
part of the periodic regulatory examination process is the review of the adequacy of the Banks' loan loss allowance. The regulatory
agencies could require the Banks, based on their evaluation of information available at the time of their examination, to provide
additional loan loss provisions to further supplement the allowance.
Impaired loans are commercial and commercial real estate loans for which it is probable the Banks will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The Banks individually evaluate such loans for impairment
and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of
“nonaccrual loans,” although the two categories overlap. The Banks may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial or
commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral
value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected
cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure
is probable, impairment is measured based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans
and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days
or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case
basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the
borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
Loan Charge-off Policies
Loans are generally fully or partially charged down to the fair value of collateral securing the asset when:
•
•
•
•
•
management judges the asset to be uncollectible;
repayment is deemed to be protracted beyond reasonable time frames;
the asset has been classified as a loss by either the internal loan review process or external examiners;
the borrower has filed bankruptcy and the loss becomes evident due to a lack of assets; or
the loan is 180 days past due unless both well secured and in the process of collection.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession
for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified
as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them
to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions,
principal forgiveness, payment forbearance, and other actions intended to minimize the economic loss and to avoid foreclosure
or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or
principal, management measures any impairment on the restructuring as noted above for impaired loans.
In addition to the allowance for the pooled portfolios, management has developed a separate allowance for loans that are identified
as impaired through a TDR. These loans are excluded from pooled loss forecasts and a separate reserve is provided under the
accounting guidance for loan impairment. Consumer loans whose terms have been modified in a TDR are also individually analyzed
for estimated impairment.
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Banks are held for sale and are carried at cost due to their short
holding period, which can range from less than two weeks to a maximum of thirty days. Sold loans are not serviced by the Banks.
Proceeds from the sale of loans in excess of the carrying value are accounted for as a gain. Total gains on the sale of loans are
shown as a component of non-interest income within the Consolidated Statement of Income.
50 Foreclosed Assets
Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Prior to foreclosure, the value of the
underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if
necessary. Any subsequent write-downs are charged against operating expenses. Net operating expenses and gains and losses
realized from disposition are included in non-interest expense and income, respectively, within the Consolidated Statement of
Income.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the related assets, which range from five to ten years for
furniture, fixtures, and equipment and fifteen to forty years for buildings and improvements. Costs incurred for routine maintenance
and repairs are charged to operations as incurred. Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain officers and directors. Bank-owned life insurance is recorded at
its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as a component
of non-interest income within the Consolidated Statement of Income.
Goodwill
The Company performs an annual impairment analysis of goodwill for its purchased subsidiaries, Luzerne and The M Group.
Based on the fair value of these reporting units, estimated using the expected present value of future cash flows, no impairment
of goodwill was recognized in 2014, 2013, or 2012.
Intangible Assets
At December 31, 2014, the Company had intangible assets of $1,456,000 as a result of the acquisition of Luzerne National Bank
Corporation, which is net of accumulated amortization of $558,000. These intangible assets will continue to be amortized using
the sum-of-the-years digits method of amortization over ten years.
Investments in Limited Partnerships
The Company is a limited partner in four partnerships at December 31, 2014 that provide low income elderly housing in the
Company’s geographic market area. The carrying value of the Company’s investments in limited partnerships was $1,560,000 at
December 31, 2014 and $2,221,000 at December 31, 2013. One investment is fully amortized, while the other three are being
amortized over the ten-year tax credit receipt period utilizing the straight-line method. The partnerships are amortized once the
projects reach the level of occupancy needed to begin the ten year tax credit recognition period. Amortization of limited partnership
investments amounted to $661,000 in 2014, 2013, and 2012.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments. Those instruments consist of
commitments to extend credit and standby letters of credit. When those instruments are funded or become payable, the Company
reports the amounts in its financial statements.
Advertising Cost
Advertising costs are generally expensed as incurred.
Income Taxes
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in
the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-
than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be
51
recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions
that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting
period in which that threshold is no longer met.
Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are
reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected
to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The Company analyzed its deferred tax asset position and determined that there was not a need for a
valuation allowance due to the Company’s ability to generate future ordinary and capital taxable income.
The Company when applicable recognizes interest and penalties on income taxes as a component of income tax provision.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing
net income as reported in the numerator and weighted average shares outstanding in the denominator. The computation of diluted
earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator.
Employee Benefits
Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the
eligible employees of JSSB. The plan is funded on a current basis to the extent that it is deductible under existing federal tax
regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering
eligible employees. Contributions matching those made by eligible employees are funded throughout the year. In addition, an
elective contribution is made annually at the discretion of the board of directors for the employees of JSSB.
The M Group Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from
life insurance sales are commission only, as The M Group does not underwrite the policies. Life insurance sales include permanent
and term policies with the majority of the policies written being permanent. Term life insurance policies are written for 10, 15,
20, and 30 year terms with the majority of the policies being written for 20 years. None of these products are offered as an integral
part of lending activities.
Commissions from the sale of annuities are recognized at the time notice is received from the third party broker/dealer or an
insurance company that the transaction has been accepted and approved, which is also the time when commission income is
received.
Life insurance commissions are recognized at varying points based on the payment option chosen by the customer. Commissions
from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly
and semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete. For
example, semi-annual payments on the first of January and July would result in commission income recognition on the first of
January and July, while payments on the first of January, April, July, and October would result in commission income recognition
on those dates. The potential for chargebacks only exists for those policies on a monthly payment plan since income is recognized
at the beginning of the annual coverage period versus at the time of each monthly payment. No liability is maintained for
chargebacks as these are removed from income at the time of the occurrence.
Accumulated Other Comprehensive Income (Loss)
The Company is required to present accumulated other comprehensive income (loss) in a full set of general-purpose financial
statements for all periods presented. Accumulated other comprehensive income (loss) is comprised of unrealized holding gains
(losses) on the available for sale securities portfolio and the unrecognized components of net periodic benefit costs of the defined
benefit pension plan.
Segment Reporting
The Company has determined that its only reportable segment is Community Banking.
52 Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications
did not affect net income or shareholders’ equity.
Recent Accounting Pronouncements
In January 2014, FASB issued ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for
Investments in Qualified Affordable Housing Projects. The amendments in this update permit reporting entities to make an
accounting policy election to account for their investments in qualified affordable housing projects using the proportional
amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost
of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance
in the income statement as a component of income tax expense (benefit). The amendments in this update should be applied
retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in
qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those
preexisting investments. The amendments in this update are effective for public business entities for annual periods and interim
reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This ASU did not
have an impact on the Company’s financial statements.
In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this
update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal
title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the
residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a
similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed
residential real estate property held by the creditor, and (2) the recorded investment in consumer mortgage loans collateralized by
residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.
The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual
periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this update using either a modified
retrospective transition method or a prospective transition method. The Company is currently evaluating the impact the adoption
of the standard will have on the Company’s financial position or results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The
update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition,
this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure
requirements for revenue recognition. This update is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. The Company is currently evaluating the impact the adoption of the standard
will have on the Company’s financial position or results of operations.
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions,
Repurchase Financings, and Disclosures. The amendments in this update change the accounting for repurchase-to-maturity
transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting
for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which
will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures.
The accounting changes in this update are effective for the first interim or annual period beginning after December 15, 2014. An
entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect
adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure
for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December
15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions
accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for
interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before
the effective date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s
financial position or results of operations.
In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based
Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period.
The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period
53 be treated as a performance condition. The amendments in this update are effective for annual periods and interim periods within
those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in
this update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards
with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements
and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update
as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to
the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight
in measuring and recognizing the compensation cost. This ASU did not have a significant impact on the Company’s financial
statements.
In August 2014, the FASB issued ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40). The
amendments in this update require that a mortgage loan be de-recognized 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 amendments in this update are effective for public business entities for annual periods, and interim periods within
those annual periods, beginning after December 15, 2014. This ASU did not have a significant impact on the Company’s financial
statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The
amendments in this update provide guidance in accounting principles generally accepted in the United States of America about
management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern
and to provide related footnote disclosures. The amendments in this update are effective for the annual period ending after December
15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This ASU is not expected to have
a significant impact on the Company’s financial statements.
In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments
in this update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit
activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains
control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in
which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-
control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting
period to the acquired entity's most recent change-in-control event. The amendments in this update are effective on November
18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events
or to its most recent change-in-control event. This update will not have an impact on the Company’s financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement -Extraordinary and Unusual Items, as part of its initiative to
reduce complexity in accounting standards. This update eliminates from GAAP the concept of extraordinary items. The
amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments
retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance
is applied from the beginning of the fiscal year of adoption. This update is not expected to have a significant impact on the
Company’s financial statements.
NOTE 2 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) by component as of December 31, 2014 and 2013 were as
follows:
54
(In Thousands)
Beginning balance. . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income
before reclassifications . . . . . . . . . . . . .
Amounts reclassified from
accumulated other comprehensive
(loss) income. . . . . . . . . . . . . . . . . . . . .
Net current-period other comprehensive
income (loss) . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . .
Twelve Months Ended December 31, 2014
Twelve Months Ended December 31, 2013
Net Unrealized Gain
(Loss) on Available
for Sale Securities
$
Defined
Benefit
Plan
Total
(2,169) $ (2,725) $ (4,894) $
Net Unrealized Gain
(Loss) on Available
for Sale Securities
10,164
Defined
Benefit
Plan
Total
$ (4,807) $ 5,357
7,419
(2,010)
5,409
(10,738)
1,749
(8,989)
(2,320)
138
(2,182)
(1,595)
333
(1,262)
$
5,099
2,930
(1,872)
3,227
$ (4,597) $ (1,667) $
(10,251)
(12,333)
2,082
(2,169) $ (2,725) $ (4,894)
The reclassifications out of accumulated other comprehensive income as of December 31, 2014 and 2013 were as follows:
(In Thousands)
Amount Reclassified from Accumulated Other Comprehensive Income
Details about Accumulated Other
Comprehensive Income Components
Net realized gain on available for
sale securities . . . . . . . . . . . . . . . .
Income tax effect. . . . . . . . . . . . . .
Net unrecognized pension costs . .
Income tax effect. . . . . . . . . . . . . .
$
$
NOTE 3 - PER SHARE DATA
Twelve Months Ended
December 31, 2014
December 31, 2013
Affected Line Item
in the Consolidated
Statement of Income
(3,515) $
1,195
(2,320)
209
(71)
138
$
(2,417) Securities gains, net
Income tax provision
822
(1,595) Net of tax
Salaries and employee
benefits
Income tax provision
504
(171)
333 Net of tax
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share;
therefore, net income as presented on the consolidated statement of income will be used as the numerator. The following table
sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share
computation.
Weighted average common shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average treasury stock shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares used to calculate basic and diluted earnings per
share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No stock options were outstanding during 2014, 2013, or 2012.
NOTE 4 - INVESTMENT SECURITIES
Year Ended December 31,
2014
2013
2012
5,001,171
(185,022)
4,591,222
(180,596)
4,018,347
(180,596)
4,816,149
4,410,626
3,837,751
The amortized cost and fair values of investment securities at December 31, 2014 and 2013 are as follows:
55
(In Thousands)
Available for sale (AFS)
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities AFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In Thousands)
Available for sale (AFS)
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities AFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
3,953
12,240
2,468
104,820
89,911
213,392
8,823
5,558
14,381
227,773
Amortized
Cost
9,989
9,966
6,700
145,121
108,939
280,715
8,842
2,342
11,184
291,899
$
$
$
$
— $
485
27
3,885
1,031
5,428
1,110
79
1,189
6,617
$
(112) $
(28)
(3)
(589)
(1,299)
(2,031)
(18)
(128)
(146)
(2,177) $
3,841
12,697
2,492
108,116
89,643
216,789
9,915
5,509
15,424
232,213
2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
17
694
43
2,120
879
3,753
1,820
28
1,848
5,601
$
$
(83) $
(68)
(179)
(5,446)
(3,045)
(8,821)
—
(67)
(67)
(8,888) $
9,923
10,592
6,564
141,795
106,773
275,647
10,662
2,303
12,965
288,612
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length
of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2014 and 2013.
(In Thousands)
U.S. Government and agency securities . .
Mortgage-backed securities . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . .
State and political securities. . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . .
Total debt securities. . . . . . . . . . . . . . . . .
Financial institution equity securities . . . .
Other equity securities . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
Less than Twelve Months
Twelve Months or Greater
Total
Fair
Value
Gross
Unrealized
Losses
$
— $
6,741
—
8,243
23,174
38,158
407
1,837
2,244
40,402
$
$
— $
(28)
—
(14)
(718)
(760)
(18)
(100)
(118)
(878) $
Fair
Value
3,841
—
519
6,382
29,266
40,008
—
773
773
40,781
Gross
Unrealized
Losses
$
$
(112) $
—
(3)
(575)
(581)
(1,271)
—
(28)
(28)
(1,299) $
Fair
Value
3,841
6,741
519
14,625
52,440
78,166
407
2,610
3,017
81,183
Gross
Unrealized
Losses
$
$
(112)
(28)
(3)
(589)
(1,299)
(2,031)
(18)
(128)
(146)
(2,177)
56
(In Thousands)
U.S. Government and agency securities . .
Mortgage-backed securities . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . .
State and political securities. . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . .
Total debt securities. . . . . . . . . . . . . . . . .
Financial institution equity securities . . . .
Other equity securities . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
Less than Twelve Months
Twelve Months or Greater
Total
Fair
Value
$
7,740
2,483
3,847
42,577
73,254
129,901
—
274
274
$ 130,175
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
$
(83) $
(68)
(177)
(2,558)
(3,045)
(5,931)
—
(22)
(22)
(5,953) $
— $
—
712
8,233
—
8,945
—
655
655
9,600
$
— $
—
(2)
(2,888)
—
(2,890)
—
(45)
(45)
7,740
2,483
4,559
50,810
73,254
138,846
—
929
929
(2,935) $ 139,775
$
$
(83)
(68)
(179)
(5,446)
(3,045)
(8,821)
—
(67)
(67)
(8,888)
At December 31, 2014 there were 45 individual securities in a continuous unrealized loss position for less than twelve months
and 31 individual securities in a continuous unrealized loss position for greater than twelve months.
The Company reviews its position quarterly and has asserted that at December 31, 2014 and 2013, the declines outlined in the
above table represent temporary declines and the Company does not intend to sell and does not believe they will be required to
sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that any impairment
of its investment securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to
result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2014, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
(In Thousands)
Amortized Cost
Fair Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
4,400
$
37,288
97,559
74,145
4,436
37,313
97,682
77,358
213,392
$
216,789
Total gross proceeds from sales of securities available for sale were $102,145,000, $79,114,000, and $48,460,000 for 2014, 2013,
and 2012, respectively. The following table represents gross realized gains and losses on those transactions:
57
(In Thousands)
Gross realized gains:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Year Ended December 31,
2014
2013
2012
$
59
89
$
$
2,327
622
710
491
4,298
45
—
412
209
—
117
783
— $
—
2,076
490
241
340
2
136
327
426
609
587
3,147
$
2,087
— $
92
611
27
—
—
$
730
$
—
—
440
53
67
242
802
There were no impairment charges included in gross realized losses for the years ended December 31, 2014, 2013, and 2012.
Investment securities with a carrying value of approximately $128,501,000 and $141,876,000 at December 31, 2014 and 2013,
respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
There is no concentration of investments that exceed ten percent of shareholders’ equity for any individual issuer, excluding those
guaranteed by the U.S. Government.
NOTE 5 - FEDERAL HOME LOAN BANK STOCK
The Banks are members of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and as such, is required to maintain a minimum
investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and
sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified
as restricted stock, carried at cost and evaluated for impairment as necessary. The stock’s value is determined by the ultimate
recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will
ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB
as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make
payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of
legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.
Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management
considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears
adequate, new shares of FHLB stock continue to change hands at the $100 par value, and the payment of dividends.
NOTE 6 - LOAN CREDIT QUALITY AND RELATED ALLOWANCE FOR LOAN LOSSES
Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk
characteristics. Loans are segmented based on the underlying collateral characteristics. Categories include commercial and
agricultural, real estate, and installment loans to individuals. Real estate loans are further segmented into three categories:
residential, commercial, and construction.
The following table presents the related aging categories of loans, by segment, as of December 31, 2014 and 2013:
58
(In Thousands)
Current
Past Due
30 To 89
Days
2014
Past Due 90
Days Or More
& Still Accruing
Non-Accrual
Total
$
122,624
$
773
$
— $
759
$
124,156
Commercial and agricultural . . . . . . . . . . . .
Real estate mortgage:
Residential. . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals. . . . . . . . . .
Net deferred loan fees and discounts . .
Allowance for loan losses . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(1,190)
(10,579)
883,699
450,503
279,731
21,485
21,125
6,078
1,819
—
383
332
54
—
1
847
9,744
511
—
895,468
$
9,053
$
387
$
11,861
457,760
291,348
21,996
21,509
916,769
(1,190)
(10,579)
905,000
$
(In Thousands)
Current
Past Due
30 To 89
Days
2013
Past Due 90
Days Or More
& Still Accruing
Non-Accrual
Total
$
104,419
$
502
$
— $
108
$
105,029
Commercial and agricultural . . . . . . . . . . .
Real estate mortgage:
Residential. . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals. . . . . . . . .
Net deferred loan fees and discounts .
Allowance for loan losses . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . .
(871)
(10,144)
$
788,586
392,300
272,745
15,967
14,170
6,424
2,533
—
477
531
—
73
—
799,601
$
9,936
$
604
$
526
7,198
1,242
—
9,074
$
399,781
282,476
17,282
14,647
819,215
(871)
(10,144)
808,200
Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan
losses.
Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30.
Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date
of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of
purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral. The
carrying value of purchased loans acquired with deteriorated credit quality was $349,000 at December 31, 2014. The remaining
carrying value of the purchased loan acquired with deteriorated credit quality was transfered into other real estate owned by the
Bank during the 3rd and 4th quarters of 2014.
On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired
in the Luzerne acquisition was $1,211,000 and the estimated fair value of the loans was $878,000. Total contractually required
payments on these loans, including interest, at the acquisition date was $1,783,000. However, the Company’s preliminary estimate
of expected cash flows was $941,000. At such date, the Company established a credit risk related non-accretable discount (a
discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $842,000
relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value
adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair
value and established an accretable discount of $63,000 on the acquisition date relating to these impaired loans.
The carrying value of the loans acquired and accounted for in accordance with ASC 310-30, was determined by projecting discounted
contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased
impaired loans acquired in the Luzerne acquisition as of June 1, 2013:
59
(In Thousands)
Unpaid principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractual cash flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accretable discount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected cash flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretable discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
June 1, 2013
1,211
572
1,783
(842)
941
(63)
878
Changes in the amortizable yield for purchased credit-impaired loans were as follows for December 31, 2014 and 2013:
(In Thousands)
Balance at beginning of period
Accretion
Balance at end of period
December 31, 2014
December 31, 2013
$
$
$
35
(35)
— $
63
(28)
35
The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit
quality under ASC 310-30:
(In Thousands)
December 31, 2014
December 31, 2013
Outstanding balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
449
349
1,224
868
The following table presents the interest income if interest had been recorded based on the original loan agreement terms and rate
of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans as of December 31, 2014,
2013, and 2012:
2014
Year Ended December 31,
2013
2012
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
$
$
42
$
33
$
7
$
3
$
— $
—
63
600
63
768
$
34
264
2
333
$
41
447
88
583
$
20
251
56
330
$
67
281
377
725
$
37
172
74
283
(In Thousands)
Commercial and
agricultural. . . . . . . .
Real estate mortgage:
Residential. . . . . . . .
Commercial . . . . . . .
Construction . . . . . .
Impaired Loans
Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The Banks individually evaluate such loans for impairment and do not aggregate loans by major
risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two
categories overlap. The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain
collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between
the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a
practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded
amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
60
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than
$100,000 and if the loan is either on non-accrual status or has a risk rating of substandard or worse. Management may also elect
to measure an individual loan for impairment if less than $100,000 on a case by case basis.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans
and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days
or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case
basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the
borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Interest income for
impaired loans is recorded consistent to the Banks' policy on non-accrual loans.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment
as of December 31, 2014 and 2013:
2014
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
(In Thousands)
With no related allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
439
$
439
$
139
3,228
716
4,522
673
1,327
10,745
309
13,054
139
3,228
716
4,522
673
1,449
10,889
309
13,320
Total:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,112
1,112
1,466
13,973
1,025
1,588
14,117
1,025
$
17,576
$
17,842
$
—
—
—
—
—
298
147
1,581
67
2,093
298
147
1,581
67
2,093
61
(In Thousands)
With no related allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
— $
— $
916
623
528
2,067
532
319
7,598
512
8,961
532
1,235
8,221
1,040
1,173
879
528
2,580
532
342
7,742
1,367
9,983
532
1,515
8,621
1,895
—
—
—
—
—
224
65
2,153
113
2,555
224
65
2,153
113
2,555
$
11,028
$
12,563
$
The following table presents the average recorded investment in impaired loans and related interest income recognized for
December 31, 2014, 2013, and 2012:
(In Thousands)
Average
Investment in
Impaired Loans
2014
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
763
$
26
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,245
10,987
1,086
46
130
17
$
14,081
$
219
$
25
20
101
89
235
62
—
25
95
569
689
—
49
146
74
269
Average
Investment in
Impaired Loans
2013
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
(In Thousands)
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
538
$
26
$
1,581
8,605
2,651
62
183
1
$
13,375
$
272
$
Average
Investment in
Impaired Loans
2012
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
(In Thousands)
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
$
— $
1,417
7,001
7,831
44
290
1
$
16,346
$
335
$
Additional funds totaling $5,000 are committed to be advanced in connection with impaired loans.
Modifications
The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic
concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These
concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions,
forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure
and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable
period, generally six months.
Loan modifications that are considered TDRs completed during the twelve months ended December 31, 2014 and 2013 were as
follows:
(In Thousands,
Except Number of Contracts)
Commercial and agricultural . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . .
Total
Number
of
Contracts
3
3
3
9
Year Ended December 31,
2014
2013
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
$
$
620
$
620
— $
— $
—
392
636
1,648
$
392
636
1,648
2
4
6
$
61
1,898
1,959
$
61
1,898
1,959
There was one commercial real estate loan modifications considered a troubled debt restructurings made during the twelve months
previous to December 31, 2014 that defaulted during the twelve month period ending December 31, 2014. However, that loan
was paid off in the fourth quarter of 2014. There were four commercial real estate loan modifications considered troubled debt
restructurings with a recorded investment of $1,884,000 made during the twelve months previous to December 31, 2013 that
defaulted during the twelve month period ending December 31, 2013.
63
Internal Risk Ratings
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six
categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management
generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are
potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.
Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct
possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are evaluated
for Substandard classification. Loans in the Doubtful category exhibit the same weaknesses found in the Substandard loans,
however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans
are not yet rated as loss because certain events may occur which would salvage the debt. Loans classified Loss are considered
uncollectible and charge-off is imminent.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the
Banks have a structured loan rating process with several layers of internal and external oversight. Generally, consumer and
residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death
occurs to raise awareness of a possible credit event. An external annual loan review of large commercial relationships is performed,
as well as a sample of smaller transactions. During 2014, the threshold for the annual loan review was commercial relationships
$1,000,000 or greater for JSSB and $1,450,000 or greater for Luzerne. Confirmation of the appropriate risk category is included
in the review. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard, Doubtful, or
Loss on a quarterly basis.
The following table presents the credit quality categories identified above as of December 31, 2014 and 2013:
Commercial and
Real Estate Mortgages
Installment Loans
(In Thousands)
Agricultural
Residential
Commercial
Construction
to Individuals
Totals
Pass . . . . . . . . . . . . . . . .
Special Mention . . . . . .
Substandard . . . . . . . . . .
Total. . . . . . . . . . . . . . . .
$
$
118,210
$
454,885
$
256,444
$
20,927
$
21,509
$
871,975
3,186
2,760
2,384
491
16,262
18,642
445
624
—
—
22,277
22,517
124,156
$
457,760
$
291,348
$
21,996
$
21,509
$
916,769
2014
Commercial and
Real Estate Mortgages
Installment Loans
(In Thousands)
Agricultural
Residential
Commercial
Construction
to Individuals
Totals
Pass. . . . . . . . . . . . . . . .
Special Mention . . . . . .
Substandard . . . . . . . . .
Total . . . . . . . . . . . . . . .
$
$
99,256
$
398,327
$
259,505
$
13,608
$
14,647
$
785,343
4,529
1,244
598
856
10,181
12,790
214
3,460
—
—
15,522
18,350
105,029
$
399,781
$
282,476
$
17,282
$
14,647
$
819,215
2013
Allowance for Loan Losses
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s
continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions,
diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-
performing loans.
The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually
evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as
well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The
total of the two components represents the Banks' ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances
are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that
64
are collectively evaluated for impairment are grouped into two classes for evaluation. A general allowance is determined for
“Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated
for impairment.
For the general allowances historical loss trends are used in the estimation of losses in the current portfolio. These historical loss
amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a twelve quarter moving
average. However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the
economic cycle. Management has identified a number of additional qualitative factors which it uses to supplement the historical
charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ
from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from
internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in
delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience,
ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry, and/or
geographic standpoint.
Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are
closely monitored by management and subject to additional qualitative factors. Management also monitors industry loss factors
by loan segment for applicable adjustments to actual loss experience.
Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL.
When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the
ALL.
Activity in the allowance is presented for the twelve months ended December 31, 2014 and 2013:
(In Thousands)
Beginning Balance . . .
Charge-offs . . . . . . . .
Recoveries. . . . . . . . .
Provision . . . . . . . . . .
Ending Balance . . . . . .
Commercial and
Agricultural
$
$
474
(289)
18
921
1,124
Real Estate Mortgages
2014
Residential
3,917
$
(65)
15
(112)
3,755
$
Commercial
4,079
$
(2,038)
—
2,164
4,205
$
Construction
741
$
—
22
23
786
$
Installment Loans
to Individual
$
$
139
(142)
64
184
245
Unallocated
794
$
—
—
(330)
464
$
Totals
$ 10,144
(2,534)
119
2,850
$ 10,579
(In Thousands)
Commercial and
Agricultural
Real Estate Mortgages
2013
Residential
Commercial Construction
Installment Loans
to Individuals
Unallocated
Totals
Beginning Balance . . . .
Charge-offs. . . . . . . . .
Recoveries . . . . . . . . .
Provision . . . . . . . . . .
Ending Balance . . . . . .
$
$
361
$
1,954
$
$
377
$
(250)
13
2,200
$
3,831
(297)
88
457
950
(100)
850
(959)
741
$
$
144
(116)
61
50
7,617
(767)
1,019
2,275
—
—
417
794
$
3,917
$
4,079
$
139
$
$ 10,144
(4)
7
110
474
The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central and north-
eastern Pennsylvania. Although the Company has a diversified loan portfolio at December 31, 2014 and 2013, a substantial portion
of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.
The Company has a concentration of loans at December 31, 2014 and 2013 as follows:
Owners of residential rental properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owners of commercial rental properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
16.01%
14.67%
15.67%
12.99%
65
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment
and based on impairment method as of December 31, 2014 and 2013:
(In Thousands)
Allowance for Loan Losses:
Ending allowance balance attributable to
loans:
Individually evaluated for impairment. .
Collectively evaluated for impairment. .
Total ending allowance balance . . . . .
Loans:
Individually evaluated for impairment . . .
Loans acquired with deteriorated credit
quality . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collectively evaluated for impairment . . .
Total ending loans balance. . . . . . .
(In Thousands)
Allowance for Loan Losses:
Ending allowance balance attributable to
loans:
Individually evaluated for impairment. .
Collectively evaluated for impairment. .
Total ending allowance balance . . . . .
Loans:
Individually evaluated for impairment. .
Loans acquired with deteriorated credit
quality . . . . . . . . . . . . . . . . . . . . . . . . . .
Collectively evaluated for impairment. .
Total ending loans balance . . . . . . . . .
Commercial
and
Agricultural
Real Estate Mortgages
2014
Residential
Commercial
Construction
Installment
Loans to
Individuals
Unallocated
Totals
$
$
$
298
826
1,124
1,112
$
$
$
147
3,608
3,755
$
$
1,581
2,624
4,205
1,117
$ 13,973
—
123,044
$ 124,156
349
456,294
$ 457,760
—
277,375
$ 291,348
$
$
$
$
67
719
786
1,025
$
$
$
2,093
8,486
$ 10,579
— $
— $
464
464
$
245
245
—
—
20,971
21,996
—
21,509
$ 21,509
$ 17,227
349
899,193
$ 916,769
Commercial
and
Agricultural
Real Estate Mortgages
2013
Residential
Commercial
Construction
Installment
Loans to
Individuals
Unallocated
Totals
$
$
$
$
224
250
474
65
3,852
3,917
532
$
881
$
$
$
2,153
1,926
4,079
7,707
—
104,497
$ 105,029
354
398,546
399,781
514
274,255
$ 282,476
$
$
$
$
113
628
741
1,040
$
$
$
2,555
7,589
$ 10,144
— $
— $
794
794
$
139
139
—
—
16,242
17,282
—
14,647
$ 14,647
$ 10,160
868
808,187
$ 819,215
NOTE 7 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31, 2014 and 2013:
(In Thousands)
2014
2013
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,759
$
14,767
7,435
1,351
29,312
8,203
$
21,109
$
5,823
13,114
7,320
1,347
27,604
7,420
20,184
Depreciation and amortization related to premises and equipment for the years ended 2014, 2013, and 2012 was $1,494,000,
$1,054,000, and $762,000, respectively.
66
NOTE 8 - GOODWILL AND OTHER INTANGIBLES
As of December 31, 2014 and 2013 goodwill had a gross carrying value of $17,380,000 and accumulated amortization of $276,000
resulting in a net carrying amount of $17,104,000.
The gross carrying amount of goodwill is tested for impairment in the third quarter of each fiscal year. Based on the fair value of
the reporting unit, estimated using the expected present value of future cash flows, there was no evidence of impairment of the
carrying amount at December 31, 2014 or 2013.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also
periodically reassessed to determine if any amortization period adjustments are required. Since the acquisition, no such adjustments
were recorded. The identifiable intangible assets consist of a core deposit intangible and trade name intangible which are being
amortized on an accelerated basis over the useful life of such assets. The gross carrying amount of the core deposit intangible and
trade name intangible at December 31, 2014 was $1,360,000 and $96,000, respectively, with $521,000 and $37,000 accumulated
amortization as of that date.
As of December 31, 2014, the estimated future amortization expense for the core deposit and trade name intangible was:
(In Thousands)
2015 . . . . . . .
2016 . . . . . . .
2017 . . . . . . .
2018 . . . . . . .
2019 . . . . . . .
2020 . . . . . . .
2021 . . . . . . .
2022 . . . . . . .
2023 . . . . . . .
$
$
308
272
235
198
162
125
89
52
15
1,456
NOTE 9 - TIME DEPOSITS
Time deposits of $250,000 or more totaled approximately $26,468,000 on December 31, 2014 and $29,822,000 on December 31,
2013. Interest expense on time deposits of $100,000 or more was approximately $875,000, $841,000, and $874,000, for the years
ended December 31, 2014, 2013, and 2012, respectively.
At December 31, 2014, the scheduled maturities on time deposits of $100,000 or more are as follows:
(In Thousands)
Three months or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three months to six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Six months to twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2014
11,235
7,686
18,258
49,680
86,859
Total time deposit maturities are as follows at December 31, 2014:
67
(In Thousands)
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2014
98,721
33,533
32,889
37,231
11,487
2,397
$
216,258
NOTE 10 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase and primarily FHLB advances, which generally
represent overnight or less than six month borrowings. In addition to the outstanding balances noted below, the Banks also have
additional lines of credit totaling $35,616,000 available from correspondent banks other than the FHLB. The outstanding balances
and related information for short-term borrowings are summarized as follows at December 31, 2014, 2013, and 2012:
(In Thousands)
Repurchase Agreements:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . . . .
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate:
At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overnight:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . . . . . .
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate:
$
$
2014
2013
2012
$
$
13,987
18,801
16,350
0.23%
0.22%
26,831
26,831
5,992
$
$
12,391
16,632
16,839
0.28%
0.40%
14,325
21,350
5,508
16,968
21,609
16,951
0.65%
0.73%
16,236
20,175
4,009
At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.27%
0.30%
0.25%
0.31%
0.25%
0.31%
NOTE 11 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2014 and
2013:
(In Thousands)
Description
Variable
Variable
Variable
Total Variable
Fixed
Fixed
Fixed
Total Fixed
Total
Maturity
2015
2017
2018
2015
2016
2017
Weighted Average Interest Rate
Stated Interest Rate Range
2014
2013
From
To
3.97 %
4.22 %
3.18 %
3.90%
6.92 %
0.75 %
0.91 %
1.03%
2.65%
3.97%
4.15%
3.18%
6.92%
0.75%
0.90%
3.97 %
4.22 %
3.18 %
3.90%
6.92 %
0.75 %
0.91 %
1.03%
2.65%
3.97%
4.28%
3.18%
6.92%
0.75%
0.97%
$
2014
10,000
20,000
10,000
40,000
750
5,000
25,000
30,750
70,750
2013
10,000
20,000
10,000
40,000
750
5,000
25,000
30,750
70,750
$
68
(In Thousands)
Year Ending December 31,
2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
Weighted
Average Rate
10,750
5,000
45,000
10,000
70,750
$
4.18 %
0.75 %
2.38 %
3.18 %
2.65%
The terms of the convertible borrowings allow the FHLB to convert the interest rate to an adjustable rate based on the three month
London Interbank Offered Rate (“LIBOR”) at a predetermined anniversary date of the borrowing’s origination, ranging from three
months to five years. If the FHLB converts the interest rate on one of the predetermined dates, the Bank has the ability to pay off
the debt on the conversion date and quarterly thereafter without incurring the customary pre-payment penalty.
The Banks maintain a credit arrangement which includes a revolving line of credit with the FHLB. Under this credit arrangement,
at December 31, 2014 JSSB has a remaining borrowing capacity of $245,776,000 and Luzerne has a remaining capacity of
$141,559,000, which are subject to annual renewal and typically incur no service charges. Under terms of a blanket agreement,
collateral for the FHLB borrowings must be secured by certain qualifying assets of each Bank which consist principally of first
mortgage loans and mortgage-backed securities.
In December 2012, JSSB entered in to a capital lease on a piece of land in Lewisburg, Pennsylvania. The carrying amount of the
land as of December 31, 2014 and 2013 was $827,000. The present value of minimum lease payments at December 31, 2014 and
2013 was $426,000 and $452,000. The following is a schedule showing the furture minimum lease payments under the capital
lease by years and the present value of the minimum lease payments as of December 31, 2014. The interest rate related to the
lease obligation is 2.75% and the maturity date is October 2023.
(In Thousands)
Lease Payment
Interest
Present Value of Minimum
Lease Payment
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
38
38
38
38
38
314
504
$
12
11
10
10
8
27
78
$
$
26
27
28
28
30
287
426
69
NOTE 12 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset position at December 31, 2014 and 2013:
(In Thousands)
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fees and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Unrealized gain on available for sale securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bond accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fees and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
$
3,380
$
1,579
2,172
256
487
—
2,034
98
1,578
11,584
1,510
262
—
734
977
3,483
$
8,101
$
3,167
1,459
1,336
—
689
1,118
2,803
103
1,214
11,889
—
207
49
842
902
2,000
9,889
The current low income housing credit carryforward will expire in twelve years. The current capital loss carryforward will expire
in three years. The Company fully anticipates being able to use the carry-forwards.
No valuation allowance was established at December 31, 2014 and 2013, because of the Company’s ability to carry back capital
losses to recover taxes paid in previous years and certain tax strategies, together with the anticipated future taxable income as
evidenced by the Company’s earning potential. The Corporation is no longer subject to federal, state, and local examinations by
tax authorities for years before 2011.
The provision or benefit for income taxes is comprised of the following for the year ended December 31, 2014, 2013, and 2012:
(In Thousands)
2014
2013
2012
Currently payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred benefit (provision) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3,680
124
3,804
$
$
3,328
123
3,451
$
$
2,726
(128)
2,598
A reconciliation between the expected income tax or benefit and the effective income tax rate on income before income tax
provision or benefit follows for the year ended December 31, 2014, 2013, and 2012:
(In Thousands)
Amount
%
Amount
%
Amount
%
2014
2013
2012
Provision at expected rate . . . . . . . . . . . . . .
(Decrease) increase in tax resulting from:
$
6,260
34.00% $
5,962
34.00% $
5,592
34.00%
Tax-exempt income . . . . . . . . . . . . . . . . . .
(1,673)
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax provision and rate. . . .
$
(737)
(46)
3,804
(9.09)
(4.00)
(0.25)
20.66% $
(1,933)
(737)
159
3,451
(11.02)
(4.20)
0.90
19.68% $
(2,235)
(13.59)
(737)
(22)
2,598
(4.48)
(0.13)
15.80%
70
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age and length
of service requirements that were hired prior to January 1, 2004, at which time entrance into the Plan was frozen. The benefit
accrual for the Plan was subsequently frozen at December 31, 2014. Benefits are based primarily on years of service and the
average annual compensation during the highest five consecutive years within the final ten years of employment - up until December
31, 2014 when the benefit accrual was frozen.
The following table sets forth the obligation and funded status as of December 31, 2014 and 2013:
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, change in actuarial assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets:
Fair value of plan assets at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to fair value of plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts recognized on balance sheet as:
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts not yet recognized as a component of net periodic pension cost:
Amounts recognized in accumulated other comprehensive income (loss) consist of:
2014
2013
$
18,186
$
19,073
484
859
277
(1,660)
5,304
23,450
$
14,258
$
487
850
(1,736)
47
13,906
(9,544) $
574
770
449
(535)
(2,145)
18,186
12,078
1,934
840
(599)
5
14,258
(3,928)
(9,544) $
(3,928)
$
$
$
$
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,965
$
4,128
The accumulated benefit obligation for the Plan was $20,296,000 and $15,866,000 at December 31, 2014 and 2013, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in Other Comprehensive Income (loss) as of December 31,
2014, 2013, and 2012 are as follows:
71
(In Thousands)
2014
2013
2012
Net periodic pension cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of transition asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumptions
$
560
$
638
$
859
(1,153)
—
—
209
475
$
$
770
(985)
—
25
479
927
624
746
(820)
(2)
25
436
$
1,009
Weighted-average assumptions used to determine benefit obligations at December 31, 2014, 2013, and 2012:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.83%
3.00%
4.75%
3.00%
4.00%
3.00%
2014
2013
2012
Weighted-average assumptions used to determine net periodic cost for years ended December 31, 2014, 2013, and 2012:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.75%
8.00%
3.00%
4.00%
8.00%
3.00%
4.50%
8.00%
3.00%
2014
2013
2012
The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the
market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall
lower future returns on similar investments compared to past periods.
Plan Assets
The Plan’s weighted-average asset allocations at December 31, 2014 and 2013 by asset category are as follows:
Asset Category
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
11.54%
12.46%
76.00%
1.48%
19.78%
78.74%
100.00%
100.00%
The investment objective for the Plan is to maximize total return with tolerance for slightly above average risk, meaning the fund
is able to tolerate short-term volatility to achieve above-average returns over the long term.
Asset allocation favors equities, with target allocation of approximately 75% equity securities, 22.5% fixed income securities and
2.5% cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between
the acceptable ranges. The equity portfolio’s exposure is primarily in mid and large capitalization domestic equities with limited
exposure to small capitalization and international stocks.
It is management’s intent to give the investment managers flexibility, within the overall guidelines, with respect to investment
decisions and their timing. However, certain investments require specific review and approval by management. Management is
also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives
to execute investment strategies.
72
The following table sets forth by level, within the fair value hierarchy detailed in Note 20 - Fair Value Measurements, the Plan’s
assets at fair value as of December 31, 2014 and 2013:
(In Thousands)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds - taxable fixed income. . . . . . . . . . . . . . . .
Mutual funds - domestic equity. . . . . . . . . . . . . . . . . . . .
Mutual funds - international equity . . . . . . . . . . . . . . . . .
Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . .
(In Thousands)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds - taxable fixed income. . . . . . . . . . . . . . . .
Mutual funds - domestic equity. . . . . . . . . . . . . . . . . . . .
Mutual funds - international equity . . . . . . . . . . . . . . . . .
Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . .
Level I
Level II
Level III
Total
2014
1,606
$
— $
— $
1,732
8,372
2,196
—
—
—
—
—
—
1,606
1,732
8,372
2,196
13,906
$
— $
— $
13,906
Level I
Level II
Level III
Total
2013
$
211
2,820
7,471
3,756
— $
—
—
—
— $
—
—
—
211
2,820
7,471
3,756
14,258
$
— $
— $
14,258
$
$
$
$
The following future benefit payments that reflect expected future service, as appropriate, are expected to be paid:
(In Thousands)
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
715
728
752
778
838
4,571
8,382
The company expects to contribute a minimum of $600,000 to its Pension Plan in 2015.
401(k) Savings Plan
The Company also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum
percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The Company may make matching
contributions equal to a discretionary percentage that is determined by the Board of Directors. Participants are at all times fully
vested in their contributions and vest over a period of five years regarding the employer contribution. Contribution expense was
approximately $171,000, $132,000, and $118,000 for the years ended December 31, 2014, 2013, and 2012, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan whereby participating directors elect to forego directors’ fees paid in cash. Under
this plan, the Company will make payments for a ten-year period beginning at the later of age 65 or ceasing to be a director in
most cases or at death, if earlier, at which time payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Company has acquired bank-owned life insurance policies on the lives
of the participating directors for which insurance benefits are payable to the Company. The Company incurred expenses related
to the plan of $235,000, $169,000, and $84,000 for the years ended December 31, 2014, 2013, and 2012, respectively. Benefits
paid under the plan were approximately $88,000, $57,000, and $140,000 in 2014, 2013, and 2012, respectively.
73
NOTE 14 - EMPLOYEE STOCK PURCHASE PLAN
The Company maintains a Penns Woods Bancorp, Inc. Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage
employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,000,000 shares to
be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up
to the lesser of 15% of base compensation or $12,000 in market value annually. There were 2,720 and 1,840 shares issued under
the plan for the years ended December 31, 2014 and 2013, respectively.
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which
they are principal owners (more than ten percent), are indebted to the Company. Such indebtedness was incurred in the ordinary
course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below
for the years ended December 31, 2014 and 2013:
(In Thousands)
Beginning
Balance
New Loans
Repayments
Ending Balance
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10,955
$
7,920
$
(9,929) $
8,946
Deposits from related parties held by the Banks amounted to $10,703,000 at December 31, 2014 and $9,295,000 at December 31,
2013.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES
The following schedule shows future minimum rental payments under operating leases with noncancellable terms in excess of
one year as of December 31, 2014:
(In Thousands)
2015 . . . . . . . . . . . . . . . $
2016 . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . .
Total. . . . . . . . . . . . . . $
589
477
423
359
242
1,048
3,138
The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities and equipment.
Total rental expense for all operating leases for the years ended December 31, 2014, 2013, and 2012 were $523,000, $493,000
and $425,000.
The Company is subject to lawsuits and claims arising out of its business. There are no such legal proceedings or claims currently
pending or threatened other than those encountered during the normal course of business.
NOTE 17 - OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in
the Consolidated Balance Sheet. The contract amounts of these instruments express the extent of involvement the Company has
in particular classes of financial instruments.
74
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company
may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at December 31, 2014 and 2013:
(In Thousands)
2014
2013
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
235,940
$
185,415
7,490
4,379
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company
evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company, on an extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer
to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for
these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees
earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the
collateral is typically Bank deposit instruments or customer business assets.
NOTE 18 - CAPITAL REQUIREMENTS
Federal regulations require the Company and the Banks to maintain minimum amounts of capital. Specifically, each is required
to maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five
capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the
requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory
actions.
As of December 31, 2014 and 2013, the FDIC categorized the Banks as well capitalized under the regulatory framework for prompt
corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 leverage
capital ratios must be at least 10%, 6%, and 5%, respectively.
The Company’s and the Banks' actual capital ratios are presented in the following tables, which shows that the Company and both
Banks met all regulatory capital requirements.
75
Consolidated Company
(In Thousands)
Total Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Average Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
Amount
Ratio
Amount
Ratio
$
123,371
12.65% $
117,123
78,019
97,524
8.00%
10.00%
71,200
89,000
$
112,290
11.51% $
106,178
39,010
58,514
4.00%
6.00%
35,600
53,400
$
112,290
9.27% $
106,178
48,476
60,595
4.00%
5.00%
47,111
58,889
13.16%
8.00%
10.00%
11.93%
4.00%
6.00%
9.02%
4.00%
5.00%
Jersey Shore State Bank
(In Thousands)
Total Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Average Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
2014
2013
Amount
Ratio
Amount
Ratio
83,183
54,086
67,608
74,730
27,043
40,565
74,730
35,175
43,968
12.30% $
8.00%
10.00%
11.05% $
4.00%
6.00%
8.50% $
4.00%
5.00%
77,999
50,743
63,428
70,046
25,371
38,057
70,046
34,991
43,739
12.30%
8.00%
10.00%
11.04%
4.00%
6.00%
8.01%
4.00%
5.00%
76
Luzerne Bank
(In Thousands)
Total Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Average Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes. . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
NOTE 19 - REGULATORY RESTRICTIONS
2014
2013
Amount
Ratio
29,856
23,341
29,176
27,886
11,670
17,506
27,886
13,032
16,289
10.23% $
8.00%
10.00%
9.56% $
4.00%
6.00%
8.56% $
4.00%
5.00%
28,150
20,577
25,721
27,884
10,289
15,433
27,884
12,794
15,992
10.94%
8.00%
10.00%
10.84%
4.00%
6.00%
8.72%
4.00%
5.00%
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks.
Accordingly, at December 31, 2014, the balance in the additional paid in capital account totaling $11,657,000 for JSSB and
$42,214,000 for Luzerne Bank is unavailable for dividends.
The Banks are subject to regulatory restrictions, which limit the ability to loan funds to Penns Woods Bancorp, Inc. At December 31,
2014, the regulatory lending limit amounted to approximately $16,985,000.
Cash and Due from Banks
Jersey Shore State Bank and Luzerne Bank had no reserve requirements by the district Federal Reserve Bank at December 31,
2014 or 2013; however, if they did they would be reported with cash and due from banks. The required reserves are computed
by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand and a balance
maintained directly with the Federal Reserve Bank.
NOTE 20 - FAIR VALUE MEASUREMENTS
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in
measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows:
Level I:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as
of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available
but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which
can be directly observed.
Level III:
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers
are unobservable.
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of December 31,
2014 and 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
77
(In Thousands)
Assets measured on a recurring basis:
Investment securities, available for sale:
U.S. Government and agency securities . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities. . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a recurring basis . . . . . . . . . . . .
Level I
Level II
Level III
Total
2014
$
— $
3,841
$
— $
—
—
—
—
9,915
5,509
12,697
2,492
108,116
89,643
—
—
—
—
—
—
—
—
3,841
12,697
2,492
108,116
89,643
9,915
5,509
$
15,424
$
216,789
$
— $
232,213
(In Thousands)
Level I
Level II
Level III
Total
2013
Assets measured on a recurring basis:
Investment securities, available for sale:
U.S. Government and agency securities . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities. . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a recurring basis . . . . . . . . . . . .
$
— $
9,923
$
— $
—
—
—
—
10,662
2,303
10,592
6,564
141,795
106,773
—
—
—
—
—
—
—
—
9,923
10,592
6,564
141,795
106,773
10,662
2,303
$
12,965
$
275,647
$
— $
288,612
The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of December 31,
2014 and 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
(In Thousands)
Level I
Level II
Level III
Total
2014
Assets measured on a non-recurring basis:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a non-recurring basis. . . . . . . . .
(In Thousands)
Assets measured on a non-recurring basis:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a non-recurring basis. . . . . . . . .
$
$
$
$
— $
—
— $
15,483
3,241
18,724
— $
—
— $
2013
Level I
Level II
Level III
— $
—
— $
— $
—
8,473
1,898
— $
10,371
$
$
$
$
15,483
3,241
18,724
Total
8,473
1,898
10,371
The following table provides a listing of significant unobservable inputs used in the fair value measurement process for items
valued utilizing level III techniques as of December 31, 2014 and 2013:
78
Quantitative Information About Level III Fair Value Measurements
2014
(In Thousands)
Fair Value
Valuation Technique(s)
Unobservable Inputs
Range
Weighted Average
Impaired loans
$ 4,749
Discounted cash flow
Temporary reduction in
payment amount
0 to (91)%
Probability of default
—%
Other real estate owned
$ 3,241 Appraisal of collateral (1)
10,734
Appraisal of collateral
Appraisal adjustments (1)
0 to (20)%
(12)%
(15)%
Quantitative Information About Level III Fair Value Measurements
2013
(In Thousands)
Fair Value
Valuation Technique(s)
Unobservable Inputs
Range
Weighted Average
Impaired loans
$ 1,465 Discounted cash flow
Temporary reduction in
payment amount
0 to (91)%
Probability of default
—%
Other real estate owned
$ 1,898 Appraisal of collateral (1)
7,008 Appraisal of collateral
Appraisal adjustments (1)
0 to (44)%
(18)%
(21)%
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation
expenses.
The significant unobservable inputs used in the fair value measurement of the Company’s impaired loans using the discounted
cash flow valuation technique include temporary changes in payment amounts and the probability of default. Significant increases
(decreases) in payment amounts would result in significantly higher (lower) fair value measurements. The probability of default
is 0% for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using
the appraisal of collateral valuation technique.
The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of
collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative
factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value
measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of
collateral valuation technique.
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time,
based on relevant market information and information about the financial instrument. These fair values do not reflect any premium
or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.
Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in
trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair values
are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair
values.
Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category
of financial instruments. The Company’s fair values, methods, and assumptions are set forth below for the Company’s other
financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the
Company, are not considered financial instruments but have value, the fair value of financial instruments would not represent the
full market value of the Company.
The fair values of the Company’s financial instruments are as follows at December 31, 2014 and 2013:
79
(In Thousands)
Financial assets:
Cash and cash equivalents. . . . . . . . .
Investment securities:
Available for sale . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . .
Accrued interest receivable . . . . . . . .
Financial liabilities:
Interest-bearing deposits . . . . . . . . . .
Noninterest-bearing deposits. . . . . . .
Short-term borrowings . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . .
Accrued interest payable . . . . . . . . . .
(In Thousands)
Financial assets:
Cash and cash equivalents. . . . . . . . .
Investment securities:
Available for sale . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . .
Accrued interest receivable . . . . . . . .
Financial liabilities:
Interest-bearing deposits . . . . . . . . . .
Noninterest-bearing deposits. . . . . . .
Short-term borrowings . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . .
Accrued interest payable . . . . . . . . . .
Carrying
Value
Fair Value
Fair Value Measurements at December 31, 2014
Quoted Prices in
Active Markets for
Identical Assets
(Level I)
Significant Other
Observable Inputs
(Level II)
Significant
Unobservable Inputs
(Level III)
$
19,908
$
19,908
$
19,908
$
— $
232,213
232,213
550
550
905,000
916,597
25,959
3,912
25,959
3,912
15,424
550
—
25,959
3,912
216,789
—
—
—
—
—
—
—
916,597
—
—
$
738,041
$
722,724
$
506,875
$
— $
215,849
243,378
243,378
40,818
71,176
381
40,818
73,084
381
243,378
40,818
—
381
—
—
—
—
—
—
73,084
—
Carrying
Value
Fair Value
Fair Value Measurements at December 31, 2013
Quoted Prices in
Active Markets for
Identical Assets
(Level I)
Significant Other
Observable Inputs
(Level II)
Significant
Unobservable Inputs
(Level III)
$
24,606
$
24,606
$
24,606
$
— $
288,612
288,612
1,626
1,626
808,200
808,985
25,410
4,696
25,410
4,696
12,965
1,626
—
25,410
4,696
275,647
—
—
—
—
—
—
—
808,985
—
—
$
755,625
$
724,456
$
488,818
$
— $
235,638
217,377
217,377
26,716
71,202
405
26,716
73,248
405
217,377
26,716
—
405
—
—
—
—
—
—
73,248
—
Cash and Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and Accrued
Interest Payable:
The fair value is equal to the carrying value.
Investment Securities:
The fair value of investment securities available for sale is equal to the available quoted market price. If no quoted market price
is available, fair value is determined by using the quoted market price for similar securities. Regulatory stocks’ fair value is equal
to the carrying value.
80
Loans:
Fair values are determined for portfolios of loans with similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential real estate, construction real estate, and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using market
discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s
historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current
economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated
cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower
information.
Bank-Owned Life Insurance:
The fair value is equal to the cash surrender value of the life insurance policies.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market
accounts, is equal to the amount payable on demand as of December 31, 2014 and 2013. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows.
The fair values above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
Long Term Borrowings:
The fair value of long term borrowings is based on the discounted value of contractual cash flows.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the notional amount and the fair value of off-balance sheet items at December 31, 2014
and 2013. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.
81
NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp, Inc. follows:
CONDENSED BALANCE SHEET, DECEMBER 31,
(In Thousands)
ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries:
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liability and shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
$
1,299
$
1,686
125,524
117,556
8,900
380
136,103
136
135,967
136,103
$
$
$
8,380
351
127,973
158
127,815
127,973
$
$
$
CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
Operating income:
2014
2013
2012
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10,080
$
14,836
$
8,034
3
5,261
(736)
14,608
17,835
$
$
—
346
(1,098)
14,084
3,833
$
$
4
6,407
(595)
13,850
20,426
$
$
CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
OPERATING ACTIVITIES:
2014
2013
2012
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
14,608
$
14,084
$
13,850
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,261)
(50)
9,297
(346)
97
13,835
(6,407)
(145)
7,298
INVESTING ACTIVITIES:
Outlays for business acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(2,876)
—
FINANCING ACTIVITIES:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,055)
118
(747)
(9,684)
(387)
1,686
(9,560)
80
—
(9,480)
1,479
207
$
1,299
$
1,686
$
(7,214)
54
—
(7,160)
138
69
207
82
NOTE 23 - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands, Except Per Share Data)
For the Three Months Ended
2014
March 31,
June 30,
Sept. 30,
Dec. 31,
$
11,329
$
11,357
$
11,460
$
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income, excluding securities gains . . . . . . . .
Securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax provision . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic and diluted . . . . . . . . . . . . . . . .
(In Thousands, Except Per Share Data)
2013
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income, excluding securities gains . . . . . . . .
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax provision . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic and diluted . . . . . . . . . . . . . . . .
$
$
$
$
$
1,242
10,087
485
2,818
393
8,643
4,170
701
3,469
0.72
$
$
1,226
10,131
300
2,442
487
8,422
4,338
875
3,463
0.72
$
$
1,242
10,218
460
2,779
2,145
8,313
6,369
1,576
4,793
0.99
$
$
11,460
1,252
10,208
1,605
2,954
490
8,512
3,535
652
2,883
0.60
For the Three Months Ended
March 31,
June 30,
Sept. 30,
Dec. 31,
9,540
$
10,018
$
11,979
$
1,335
8,205
500
1,747
986
5,851
4,587
903
3,684
0.96
$
$
1,264
8,754
575
2,261
1,274
6,965
4,749
1,090
3,659
0.88
$
$
1,350
10,629
600
2,845
(3)
8,975
3,896
650
3,246
0.67
$
$
11,762
1,315
10,447
600
2,772
160
8,476
4,303
808
3,495
0.73
NOTE 24 - ACQUISITION OF LUZERNE NATIONAL BANK CORPORATION
On June 1, 2013, the Company closed on a merger transaction pursuant to which Penns Woods Bancorp, Inc. acquired Luzerne
National Bank Corporation in a stock and cash transaction. The acquisition extended the Company’s footprint into Luzerne and
Lackawanna Counties, Pennsylvania.
Luzerne National Bank Corporation was the holding company for Luzerne Bank, a Pennsylvania bank that conducted its business
from a main office in Luzerne, Pennsylvania with eight branch offices in Luzerne County and one loan production office in
Lackawanna County, all in northeastern Pennsylvania. Since June 1, 2013, the loan production office in Lackawanna County has
been closed.
Under the terms of the merger agreement, the Company acquired all of the outstanding shares of Luzerne National Bank Corporation
for a total purchase price of approximately $42,612,000. As a result of the acquisition, the Company issued 978,977 common
shares, or 20.37% of the total shares outstanding as of December 31, 2014, to former shareholders of Luzerne National Bank
Corporation. Luzerne Bank is operating as an independent bank under the Penns Woods Bancorp, Inc. umbrella.
The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and
exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews,
appraised collateral values, expected cash flows, and historical loss factors of Luzerne Bank. Real estate acquired through
foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset
representing the core deposit base of Luzerne Bank based on management’s evaluation of the cost of such deposits relative to
83
alternative funding sources. The Company also recorded an identifiable intangible asset representing the trade name of Luzerne
Bank based on management’s evaluation of the value of the name in the market. Management used significant estimates including
the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products.
Management used market quotations to determine the fair value of investment securities.
The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. Luzerne
Bank’s loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required
cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required
payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the
acquisition date, the Company recorded $1,211,000 of purchased credit-impaired loans subject to a non-accretable difference of
$842,000. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated
loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated
loans at amortized cost.
Luzerne’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash
flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value.
Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition,
Luzerne’s loan portfolio without evidence of deterioration totaled $249,789,000 and was recorded at a fair value of $249,500,000.
The following table summarizes the purchase of Luzerne National Bank Corporation as of June 1, 2013:
84
(In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Luzerne National Bank Corporation common shares settled for stock. . . . . . . . . . . . . . . . . . . . . . .
Exchange Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Penns Woods Bancorp, Inc. shares issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value assigned to Penns Woods Bancorp, Inc. common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for
Penns Woods Bancorp, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase Price Consideration - Cash for Common Stock
Luzerne National Bank Corporation shares exchanged for cash . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase price paid to each Luzerne National Bank Corporation common share exchanged for
cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase price assigned to Luzerne National Bank Corporation common shares exchanged for
cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Assets Acquired:
Luzerne National Bank Corporation shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reflect assets acquired at fair value:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specific credit - non-amortizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specific credit - amortizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade name intangible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owned premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased premises contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reflect liabilities acquired at fair value:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
630,216
1.5534
978,977
$
40.59
46,480
$
61.86
$
27,371
$
39,736
2,876
42,612
33
2,680
(3,206)
(58)
(40)
1,882
133
1,138
122
(603)
(912)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill resulting from merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
28,540
14,072
Results of operations for Luzerne National Bank Corporation prior to the acquisition date are not included in the Consolidated
Statement of Income. Due to the significant amount of fair value adjustments, historical results of Luzerne National Bank
Corporation are not relevant to the Company’s results of operations. Therefore, no pro forma information is presented.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company’s management, including the Company’s President
and Chief Executive Officer along with the Company’s Chief Financial Officer, conducted an evaluation of the effectiveness as
of December 31, 2014 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 Exchange Act. Based upon that evaluation, the Company’s President and Chief
Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2014.
85
There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2014 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 of the Company is responsible for establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is
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.
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.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard
No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or
employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.
Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in "Internal Control-Integrated Framework" issued by COSO in May 2013. Because there were no material
weaknesses discovered, management believes that, as of December 31, 2014, the Company’s internal control over financial
reporting was effective.
S.R. Snodgrass, P.C. an independent registered public accounting firm, has audited the consolidated financial statements included
in this Annual Report on Form 10-K, and, as part of the audit, has issued a report, which appears below, on the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2014.
Date: March 10, 2015 /s/ Richard A. Grafmyre
Chief Executive Officer
/s/ Brian L. Knepp
Chief Financial Officer
(Principal Financial Officer)
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Penns Woods Bancorp, Inc.
Williamsport, PA
We have audited Penns Woods Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”) in 2013. Penns Woods Bancorp, Inc.’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 Report on Management’s Assessment of Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on Penns Woods Bancorp, Inc.’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 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 generally accepted
accounting principles. 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, Penns Woods Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by COSO in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated statement of financial condition of Sample Financial Corp. and subsidiaries as of December 31, 2014, and the
related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year
then ended, and our report dated March 10, 2015, expressed an unqualified opinion.
Wexford, Pennsylvania
March 10, 2015
87
ITEM 9B OTHER INFORMATION
None.
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information appearing under the captions “The Board of Directors and its Committees,” “Election of Directors,” “Information
as to Nominees and Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Principal Officers of the
Corporation,” and “Certain Transactions” in the Company’s Proxy Statement for the Company’s 2015 annual meeting of
shareholders (the “Proxy Statement”) is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
Information appearing under the captions “Compensation of Directors," “Compensation Discussion and Analysis,” “Compensation
Committee Report,” “Executive Compensation,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards,” “Option Exercises
and Stock Vested,” “Non-qualified Deferred Compensation,” “Retirement Plan,” and “Potential Post-Employment Payments” in
the Proxy Statement is incorporated herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy
Statement is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information appearing under the captions “Election of Directors” and “Certain Transactions” in the Proxy Statement is
incorporated herein by reference.
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information appearing in the Proxy Statement under the captions, “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “Other
Fees,” and “Pre-Approval of Audit and Permissible Non-Audit Services” is incorporated herein by reference.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
The following consolidated financial statements and reports are set forth in Item 8:
Report of Independent Auditors
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Shareholders’ Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
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.
88
(b) Exhibits:
(3) (i)
(3) (ii)
(10) (i)
(10) (ii)
(10) (iii)
(10) (iv)
(10)(v)
(21)
(23)
(31) (i)
(31) (ii)
(32) (i)
(32) (ii)
Exhibit 101
Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of
the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2011).
Form of First Amendment to the Jersey Shore State Bank Amendment and Restatement of the Director Fee
Agreement, dated as of October 1, 2004 (incorporated by reference to Exhibit 10.7 of the Registrant’s
Current Report on Form 8-K filed on June 29, 2006).
Consulting Agreement, dated July 18, 2005 between Hubert A. Valencik and Penns Woods Bancorp, Inc.
(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on July 18,
2005).
Amended and Restated Employment Agreement, dated February 1, 2014, among Penns Woods Bancorp, Inc.,
Jersey Shore State Bank and Brian L. Knepp (incorporated by reference to Exhibit 10.2 of the Registrant’s
Current Report on Form 8-K filed on February 6, 2014).*
Amended and Restated Employment Agreement, dated November 1, 2014, among Penns Woods
Bancorp, Inc., Jersey Shore State Bank and Richard A. Grafmyre (incorporated by reference to Exhibit 10.1
of the Registrant’s Current Report on Form 8-K filed on October 31, 2014).*
Employment Agreement, dated October 1, 2013, among Penns Woods Bancorp, Inc., Luzerne Bank and
Robert J. Glunk (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K
filed on March 10, 2015).*
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Principal Financial Officer.
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business
Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2014 and December 31, 2013;
(ii) the Consolidated Statement of Income for the years ended December 31, 2014, 2013 and 2012; (iii) the
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013, and 2012;
(iv) the Consolidated Statement of Comprehensive Income for the years ended December 31, 2014, 2013 and
2012; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2014, 2013, and
2012; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text. As provided in
Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration
statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise
subject to liability under those sections.
* Denotes compensatory plan or arrangement.
89 EXHIBIT INDEX
(21)
(23)
(31) (i)
(31) (ii)
(32) (i)
(32) (ii)
Exhibit 101
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Principal Financial Officer.
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business
Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2014 and December 31, 2013; (ii) the
Consolidated Statement of Income for the years ended December 31, 2014, 2013, and 2012; (iii) the Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013, and 2012; (iv) the Consolidated
Statement of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012; (v) the Consolidated
Statement of Cash Flows for the years ended December 31, 2014, 2013, and 2012; and (vi) the Notes to
Consolidated Financial Statements, tagged as blocks of text. As provided in Rule 406T of Regulation S-T, this
interactive data file shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act
of 1934, and shall not be deemed “filed” or part of any registration statement or prospectus for purposes of
Section 11 or 12 under the Securities Act of 1933, or otherwise subject to liability under those sections.
90
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.
SIGNATURES
March 10, 2015
PENNS WOODS BANCORP, INC.
/s/ Richard A. Grafmyre
President and Chief Executive Officer
91
Pursuant to the requirements of the Securities and Exchange 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:
/s/ Richard A. Grafmyre
Richard A. Grafmyre, President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Brian L. Knepp
Brian L. Knepp, Chief Financial Officer (Principal Financial and
Accounting Officer)
/s/ R. Edward Nestlerode, Jr.
R. Edward Nestlerode, Jr., Chairman of the Board
/s/ Daniel K. Brewer
Daniel K. Brewer, Director
/s/ Michael J. Casale, Jr.
Michael J. Casale, Jr., Director
/s/ William J. Edwards
William J. Edwards, Director
/s/ James M. Furey, II
James M. Furey, II, Director
/s/ D. Michael Hawbaker
D. Michael Hawbaker, Director
/s/ Leroy H. Keiler, III
Leroy H. Keiler, III, Director
/s/ Joseph E. Kluger
Joseph E. Kluger, Director
/s/ John G. Nackley
John G. Nackley, Director
/s/ Jill F. Schwartz
Jill F. Schwartz, Director
/s/ William H. Rockey
William H. Rockey, Director
/s/ Hubert A. Valencik
Hubert A. Valencik, Director
/s/ Ronald A. Walko
Ronald A. Walko, Director
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
March 10, 2015
92
Subsidiaries of the Registrant
Exhibit 21
State or Jurisdiction Under the
Law of Which Organized
Jersey Shore State Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania
Luzerne Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania
Woods Real Estate Development Company, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania
Woods Investment Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Delaware
The M Group (subsidiary of the Jersey Shore State Bank) . . . . . . . . . . . . . . . . . .
Pennsylvania
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
The Board of Directors
Penns Woods Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statements (Nos. 333-134585 and 333-58682) on Form S-8 of
Penns Woods Bancorp, Inc. of our reports dated March 10, 2015, relating to our audits of the consolidated financial statements
and internal control over financial reporting, included in and incorporated by reference in the Annual Report on Form 10-K of
Penns Woods Bancorp, Inc. for the year ended December 31, 2014.
Wexford, PA
March 10, 2015
93
Exhibit 31(i)
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer
I, Richard A. Grafmyre, certify that:
1.
I have reviewed this annual report on Form 10-K of Penns Woods Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information;
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 10, 2015
Richard A. Grafmyre
Chief Executive Officer
(Principal Executive Officer)
94
Exhibit 31(ii)
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer
I, Brian L. Knepp, certify that:
1.
I have reviewed this annual report on Form 10-K of Penns Woods Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information;
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 10, 2015
Brian L. Knepp
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
95
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32 (i)
In connection with the Annual Report of Penns Woods Bancorp, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard A. Grafmyre,
Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
Richard A. Grafmyre
Chief Executive Officer
March 10, 2015
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32 (ii)
In connection with the Annual Report of Penns Woods Bancorp, Inc. (the “Company”) on Form 10-K for the period ended
December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian L. Knepp,
Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
Brian L. Knepp
Chief Financial Officer
March 10, 2015
96
BOARD OF DIRECTORS
Penns Woods Bancorp, Inc.
Daniel K. Brewer. . . . . . . . . . . . Principal & Owner, Brewer & Company, LLC
Michael J. Casale, Jr.. . . . . . . . . Principal, Michael J. Casale, Jr. Esq., LLC
William J. Edwards . . . . . . . . . . President & Owner of JEB Environmental Technologies, Inc.
James M. Furey, II. . . . . . . . . . . President & Owner of Eastern Wood Products
Richard A. Grafmyre . . . . . . . . . President & Chief Executive Officer of the Company & JSSB
D. Michael Hawbaker . . . . . . . . Executive Vice President of Glenn O. Hawbaker, Inc.
Leroy H. Keiler, III . . . . . . . . . . Leroy H. Keiler, III, Attorney at Law
Joseph E. Kluger . . . . . . . . . . . . Chairman of the Board of Luzerne, Managing Principal of Hourigan, Kluger &
Quinn P.C.
John G. Nackley . . . . . . . . . . . . President and CEO of InterMetro Industries Corporation
R. Edward Nestlerode, Jr. . . . . . Chairman of the Board of the Company, Vice President and Chief Executive
Officer of Nestlerode Contracting Co., Inc.
William H. Rockey . . . . . . . . . . Retired; Former Senior Vice President of the Company & JSSB; Former
President of First National Bank of Spring Mills
Jill F. Schwartz . . . . . . . . . . . . . Senior Partner of Wyoming Weavers; President of Fortune Fabrics, Inc.; Owner
of Gosh Yarn It!
Hubert A. Valencik . . . . . . . . . . Chairman of the Board of JSSB, Retired; Former Senior Vice President & Chief
Operations Officer of JSSB; Former Senior Vice President of the Company
Ronald A. Walko . . . . . . . . . . . . Retired; Former President and Chief Executive Officer of the Company and
JSSB
Jersey Shore State Bank
Daniel K. Brewer. . . . . . . . . . . . Principal & Owner, Brewer & Company, LLC
Michael J. Casale, Jr.. . . . . . . . . Principal, Michael J. Casale, Jr. Esq., LLC
William J. Edwards . . . . . . . . . . President & Owner of JEB Environmental Technologies, Inc.
James M. Furey, II. . . . . . . . . . . President & Owner of Eastern Wood Products
Richard A. Grafmyre . . . . . . . . . President & Chief Executive Officer of the Company & JSSB
D. Michael Hawbaker . . . . . . . . Executive Vice President of Glenn O. Hawbaker, Inc.
Leroy H. Keiler, III . . . . . . . . . . Leroy H. Keiler, III, Attorney at Law
R. Edward Nestlerode, Jr. . . . . . Chairman of the Board of the Company, Vice President and Chief Executive
Officer of Nestlerode Contracting Co., Inc.
William H. Rockey . . . . . . . . . . Retired; Former Senior Vice President of the Company & JSSB; Former
President of First National Bank of Spring Mills
Hubert A. Valencik . . . . . . . . . . Chairman of the Board of JSSB, Retired; Former Senior Vice President & Chief
Operations Officer of JSSB; Former Senior Vice President of the Company
Ronald A. Walko . . . . . . . . . . . . Retired; Former President and Chief Executive Officer of the Company and
JSSB
97 Luzerne Bank
Patricia Finan Castellano. . . . . . Health Care Consultant
James Clemente . . . . . . . . . . . . . Partner, Snyder & Clemente
Robert J. Glunk . . . . . . . . . . . . . Senior Vice President & Chief Operating Officer of the Company and President
& Chief Executive Officer of Luzerne
Richard A. Grafmyre . . . . . . . . . President & Chief Executive Officer of the Company & JSSB
Joseph E. Kluger . . . . . . . . . . . . Chairman of the Board of Luzerne, Managing Principal of Hourigan, Kluger &
Quinn P.C.
Gary F. Lamont . . . . . . . . . . . . . Principal, Conyngham Pass Co.
Robert G. Lawrence. . . . . . . . . . Partner, Lawrence & Cable, LLP
John G. Nackley . . . . . . . . . . . . President and CEO of InterMetro Industries Corporation
Jill F. Schwartz . . . . . . . . . . . . . Senior Partner of Wyoming Weavers; President of Fortune Fabrics, Inc.; Owner
Angelo C. Terrana, Jr. . . . . . . . . Principal, Terrana Law, P.C.
of Gosh Yarn It!
98
Jersey Shore State Bank Locations
& Luzerne Bank Locations
CLINTON COUNTY
LYCOMING COUNTY
MISSION
to be the most significant regional community bank
JERSEY
SHORE
LOCK HAVEN
•
• MILL HALL
CENTRE COUNTY
• ZION
• SPRING MILLS
• CENTRE HALL
• STATE COLLEGE
• MONTOURSVILLE
LOYALSOCK •
• WILLIAMSPORT
• DUBOISTOWN
• MONTGOMERY
Y
DALLAS
•
LAKE •
• WYOMING
• SWOYERSVILLE
LUZERNE • PLAINS
•
WILKES-BARRE
MONTOUR COUNTY
• DANVILLE
• HAZLE TWP
LUZERNE COUNTY
99 Penns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17701
2014 Annual Report & Form 10-K