Annual
Report
& Form 10-K 2018
001CSN38E2
Jersey Shore State Bank Locations
& Luzerne Bank Locations
CLINTON COUNTY
LYCOMING COUNTY
MISSION STATEMENT
To be the most significant regional community bank
JERSEY
SHORE
LOCK HAVEN
•
CENTRE COUNTY
• SNOW SHOE
• MILL HALL
• MONTOURSVILLE
LOYALSOCK •
• WILLIAMSPORT
• DUBOISTOWN
• MUNCY
• MONTGOMERY
Y
LEWISBURG
•
• DANVILLE
DALLAS
•
LAKE •
LUZERNE • PLAINS
• PITTSTON
• FORTY FORT
•
WILKES-BARRE
CONYNGHAM VALLEY
•
• HAZLE TWP
LUZERNE COUNTY
• ZION
• SPRING MILLS
• CENTRE HALL
• STATE COLLEGE
UNION COUNTY
MONTOUR COUNTY
2
3
4
5
6
7
8
9
111
1 Dear Shareholder,
We continue to monetize past growth initiatives and introduce new expansion plans to build out our
footprint and expand non-spread income. Our past branch expansion continues to pay dividends as we
continue to grow consumer loans and commercial loans, which led to 11% net loan growth during 2018.
We opened a new office in Snow Shoe, Pennsylvania in early 2018 and have had great growth in the
market. A new initiative was kicked off, United Insurance Solutions, LLC (“UIS“). We sold our first
policy in the middle of 2018 and ended the year with over 225 policies sold. We see this as a strong focus
to build non-interest income and provide an affordable solution to our customer base for property and
casualty and other insurance needs. Our growth in monetizing past expansion resulted in net income
in excess of $14.7 million. Looking into 2019, we will remain focused on gathering high-quality assets,
growing the deposit base, and increasing non-interest income through UIS, our investment advisory team
the Comprehensive Financial Group, and our mortgage department. We also have two new branches in
the Luzerne market, Pittston and Forty Fort, which will complement their existing footprint and provide
additional options to their customer base for their banking needs.
Financial Highlights
PWOD continued to return strong results during the past year. Highlights from the period ending
December 31, 2018 include:
Net Income
Basic & Diluted EPS
Total Deposits
Core Deposits
Net Loans
Total Assets
Twelve Months Ended
December 31, 2018
$14,704,000
$3.14
$1,219,903,000
$933,292,000
$1,370,920,000
$1,684,771,000
Twelve Months Ended
December 31, 2017
$9,773,000
$2.08
$1,146,320,000
$916,853,000
$1,233,756,000
$1,474,492,000
% Change
50.46%
50.96%
6.42%
1.79%
11.12%
14.26%
Final Note
All employees at Penns Woods Bancorp, Inc. (“PWOD”) thank you for your
support and pledge to work hard to increase shareholder value. We thank
you for making PWOD your investment choice and ask that you make
JSSB, Luzerne Bank, UIS, and CFG your preference for fulfilling all your
financial needs.
Sincerely,
Richard A. Grafmyre, CFP®
Chief Executive Officer
2 Three Year Financial Highlights
DILUTED
EARNINGS
PER SHARE
RETURN ON
AVERAGE EQUITY
(Percent)
DIVIDENDS
PER
SHARE
3.14
2.64
2.08
$3.50
3.00
2.50
2.00
1.50
13.00
11.00
10.72
8.96
9.00
6.91
7.00
5.00
1.88
1.88
1.88
$2.25
2.00
1.75
1.50
1.25
2016
2017
2018
2016
2017
2018
2016
2017
2018
YEAR-END
DEPOSITS
(In Millions)
1,220
1,146
$1,300
1,200
1,100
1,095
1,000
900
RETURN ON
AVERAGE ASSETS
(Percent)
1.25
1.00
0.93
0.94
0.69
0.75
0.50
0.25
YEAR-END
LOANS
(In Millions)
1,371
1,234
1,081
$1,600
1,400
1,200
1,000
800
2016
2017
2018
2016
2017
2018
2016
2017
2018
3 PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
December 31,
2018
2017
(In Thousands, Except Share Data)
ASSETS:
Noninterest-bearing balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
24,325
$
Interest-bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,417
66,742
25,692
1,551
27,243
Investment debt securities, available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,285
108,627
Investment equity securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities, trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted investment in bank stock, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,776
36
18,862
2,929
2,516
190
13,332
1,196
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,384,757
1,246,614
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,837)
(12,858)
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,370,920
1,233,756
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,580
5,334
28,627
17,104
1,162
5,154
4,260
27,386
4,321
27,982
17,104
1,462
4,388
4,989
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,684,771
$ 1,474,492
LIABILITIES:
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
899,089
$
843,004
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
320,814
303,316
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,219,903
1,146,320
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,865
138,942
1,150
13,367
100,748
70,970
502
17,758
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,541,227
1,336,298
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; 5,011,698 and 5,009,339 shares issued;
4,691,548 and 4,689,189 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss:
Net unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost, 320,150 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . .
Non controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,763
50,737
69,787
(1,360)
(5,276)
(12,115)
143,536
8
41,744
50,173
63,364
(54)
(4,920)
(12,115)
138,192
2
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,544
138,194
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,684,771
$ 1,474,492
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . .
NON-INTEREST INCOME:
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net debt securities (losses) gains, available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net equity securities losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains (losses), trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debit card income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE:
Salaries and employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CONSOLIDATED NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings attributable to noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC. . . . . . . . . . . . . . . $
Year Ended December 31,
2017
2016
2018
54,000
$
45,833
$
42,056
2,784
860
1,102
58,746
6,370
1,757
2,809
10,936
47,810
1,735
46,075
2,460
(47)
(170)
3
662
1,518
365
1,336
1,534
1,800
9,461
21,083
2,702
3,092
712
1,108
2,106
890
767
300
5,247
38,007
17,529
2,819
14,710
6
14,704
2,182
1,218
744
49,977
4,083
234
1,580
5,897
44,080
730
43,350
2,222
600
—
(8)
666
1,674
496
1,378
1,960
1,756
10,744
18,999
2,447
2,915
974
925
2,353
669
958
337
6,285
36,862
17,232
7,459
9,773
—
9,773
2.08
$
$
$
2,424
1,498
835
46,813
3,547
46
1,974
5,567
41,246
1,196
40,050
2,249
1,611
—
58
684
2,102
795
1,098
1,896
1,620
12,113
17,813
2,223
2,793
1,256
873
2,096
767
740
366
6,164
35,091
17,072
4,597
12,475
—
12,475
2.64
$
$
$
EARNINGS PER SHARE - BASIC AND DILUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.14
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED . . . . . . . . . .
4,690,254
4,705,602
4,735,457
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.88
$
1.88
$
1.88
See accompanying notes to the consolidated financial statements.
5 PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In Thousands)
Year Ended December 31,
2017
2016
2018
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
14,704
$
9,773
$
12,475
Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . . . . . . . . .
(1,022)
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized loss (gain) included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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216
47
(10)
(451)
95
Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,125)
1,500
(510)
(600)
204
270
(92)
772
252
(85)
(1,611)
547
(352)
120
(1,129)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
13,579
$
10,545
$
11,346
See accompanying notes to the consolidated financial statements.
6 .
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S
7
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2017
2016
2018
(In Thousands)
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
14,704
$
9,773
$
12,475
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of investment security discounts and premiums, net . . . . . . . . . . . . . . . . . . . .
Securities losses (gains), available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net equity securities losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities (gains) losses, trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Investment debt securities available for sale:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contribution from non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of regulatory stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of regulatory stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES:
Net 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 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,515
300
1,735
776
47
(55,283)
55,068
(1,518)
170
(3)
466
(309)
(662)
(324)
(412)
17,270
19,296
8,033
(58,725)
570
(139,776)
(2,005)
445
(30)
—
15,352
(20,882)
(177,722)
56,085
17,498
80,000
(12,028)
67,117
(8,818)
97
—
199,951
39,499
27,243
2,632
337
730
893
(600)
(53,407)
55,838
(1,674)
—
8
426
(566)
(666)
1,769
2,200
17,693
25,528
11,564
(22,986)
—
(152,806)
(4,999)
1,108
(34)
2
7,677
(12,158)
(147,104)
51,067
39
30,000
(45,028)
87,507
(8,837)
116
(1,881)
112,983
(16,428)
43,671
CASH AND CASH EQUIVALENTS, ENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
66,742
$
27,243
$
See accompanying notes to the consolidated financial statements.
3,146
366
1,196
870
(1,611)
(68,362)
69,268
(2,102)
—
(58)
3,826
(3,753)
(684)
1,543
(7)
16,113
44,829
25,558
(28,322)
—
(49,590)
(4,061)
859
(27)
—
3,160
(3,178)
(10,772)
40,140
23,194
—
(5,027)
(33,397)
(8,903)
101
(574)
15,534
20,875
22,796
43,671
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, 2018
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, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 $210,035,440 at June 30, 2018.
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, 2019
4,691,947 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 23, 2019 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
22
23
23
24
26
27
43
44
93
94
97
97
97
97
97
97
98
100
101
11
ITEM 1
BUSINESS
A. General Development of Business and History
PART I
On January 7, 1983, Penns Woods Bancorp, Inc. (the “Corporation”) was incorporated under the laws of the Commonwealth of
Pennsylvania as a bank holding company. In connection with the organization of the Corporation, Jersey Shore State Bank
("JSSB"), a Pennsylvania state-chartered bank, became a wholly owned subsidiary of the Corporation. On June 1, 2013, the
Corporation acquired Luzerne Bank ("Luzerne") with Luzerne operating as a subsidiary of the Corporation (JSSB and Luzerne
are collectively referred to as the "Banks"). The Corporation’s two other wholly-owned subsidiaries are Woods Real Estate
Development Company, Inc. and Woods Investment Company, Inc. The Corporation is also a partner in United Insurance Solutions,
LLC. The Corporation’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 Corporation 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 251 persons, Luzerne employed 73 persons, and The M Group employed 4 persons as of December 31, 2018 in
either a full-time or part-time capacity. The Corporation does not have any employees. The principal officers of the Banks also
serve as officers of the Corporation.
Woods Investment Company, Inc., a Delaware holding company, maintains an investment portfolio that is managed for total return
and to fund dividend payments by the Corporation.
Woods Real Estate Development Company, Inc. serves the Corporation through its acquisition and ownership of certain properties
utilized by the Bank.
United Insurance Solutions, LLC offers property and casualty and auto insurance products within the Corporation's market footprint.
We post publicly available reports required to be filed with the SEC on our website, www.pwod.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 Corporation
with the SEC.
B. Regulation and Supervision
The Corporation 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”). During 2017, the Corporation elected to become a financial holding company under the BHCA and the
regulations of 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 insurance activities of United Insurance Solutions, LLC are subject to regulation by the Pennsylvania Department of Insurance.
12
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 Corporation 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 Corporation 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.
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.
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 current minimum capital requirements are
a common equity tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”), a tier 1 capital ratio of 6.0%; (8.0% to be
considered “well capitalized”), and a total capital ratio of 8.0% (10.0% to be considered “well capitalized”). In order to avoid
limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers),
as of January 1, 2019, 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.
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
4.0% (5.0% to be considered "well capitalized"). 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 and the
policies of the FDIC and the Department generally encourage the Banks to pay dividends from current net income and retained
earnings. 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 Corporation 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 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 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 may 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. 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.
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 their
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
13
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 set the amount of deposits it insures at $250,000.
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 is a bank’s average assets minus average tangible equity. The range of
assessment rates is a low of 2.5 basis points to a high of 45 basis points, per $100 of assets.
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. 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 members 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, 2018, the Banks had $138,625,000 in FHLB advances.
As a member, the Banks are required to purchase and maintain stock in the FHLB. The amount of required stock varies based on
the FHLB products utilized by the Banks and the amount of the products utilized. At December 31, 2018, the Banks had $18,357,000
in stock of the FHLB, which was in compliance with this requirement.
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”), amended
certain provisions of the Dodd-Frank Act, as well as certain other statutes administered by the federal banking agencies. Some
of the key provisions of the Regulatory Relief Act as it relates to community banks and bank holding companies include: (i)
designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain
documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading
liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital
calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank
leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that
maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage
requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from
14 FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion
to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require
higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the
eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions
with under $3 billion in assets.
Section 201 of the Regulatory Relief Act directed the federal banking agencies to develop a community bank leverage ratio
(“CBLR”) of not less than 8% and not more than 10% for qualifying community banks and bank holding companies with total
consolidated assets of less than $10 billion. Qualifying community banking organizations that exceed the CBLR level established
by the agencies, and that elect to be covered by the CBLR framework, will be considered to have met: (i) the generally applicable
leverage and risk-based capital requirements under the banking agencies’ capital rules; (ii) the capital ratio requirements necessary
to be considered “well capitalized” under the banking agencies’ prompt corrective action framework in the case of insured depository
institutions; and (iii) any other applicable capital or leverage requirements.
On February 8, 2019, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve Board, and
the FDIC published for comment a proposed rule to implement the provisions of Section 201 of the Regulatory Relief Act. Under
the proposal, a qualifying community banking organization would be defined as a depository institution or depository institution
holding company with less than $10 billion in assets and specified limited amounts of off-balance sheet exposures, trading assets
and liabilities, mortgage servicing assets, and certain temporary difference deferred tax assets. A qualifying community banking
organization would be permitted to elect the CBLR framework if its CBLR is greater than 9%. The proposed rulemaking also
addresses opting in and opting out of the CBLR framework by a community banking organization, the treatment of a community
banking organization that falls below CBLR requirements, and the effect of various CBLR levels for purposes of the prompt
corrective action categories applicable to insured depository institutions. Advanced approaches banking organizations (generally,
institutions with $250 billion or more in consolidated assets) are not eligible to use the CBLR framework.
The Corporation continues to analyze the changes implemented by the Regulatory Relief Act, including the CBLR framework
included in the recently proposed rulemaking. The Corporation has not determined at this time whether or not it would qualify
for the CBLR framework or, if so, whether it would elect to utilize the CBLR framework when final rules are adopted. The
Corporation does not believe, however, that the changes resulting from the Regulatory Relief Act will materially impact the
Corporation’s business, operations, or financial results.
Other Legislation
The 2010 Dodd-Frank Act made significant changes to the bank regulatory structure and affects the lending, deposit,
investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act, among
other things: (i) expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured
depository institutions; (ii) requires a bank holding company to be well capitalized and well managed to receive approval of an
interstate bank acquisition; (iii) provides mortgage reform provisions regarding a customer’s ability to pay and making more
loans subject to provisions for higher-cost loans and new disclosures; (iv) creates the Consumer Financial Protection Bureau
(the “CFPB”) that has rulemaking authority for a wide range of consumer protection laws that apply to all banks and has broad
powers to supervise and enforce consumer protection laws; (v) introduces additional corporate governance and executive
compensation requirements on public companies subject to the Securities and Exchange Act of 1934, such as the Corporation;
(vi) permits FDIC-insured banks to pay interest on business demand deposits; (vii) requires that holding companies and other
companies that directly or indirectly control an insured depository institution serve as a source of financial strength to that
institution; (viii) makes permanent the $250 thousand limit for federal deposit insurance at all insured depository institutions;
and (ix) permits national and state banks to establish interstate branches to the same extent as the branch host state allows
establishment of in-state branches.
The Dodd-Frank Act also 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.
Under the Bank Secrecy Act, a financial institution is required to have systems in place to detect certain types of transactions,
based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving
15 more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports
for transactions that involve more than $5,000 and that the financial institution knows, suspects or has reason to suspect, involves
illegal funds, is designed to evade the requirements of the law, or has no lawful purpose.
Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act,
commonly referred to as the “USA PATRIOT Act,” financial institutions are subject to prohibitions against specified financial
transactions and account relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the
United States financial system for money laundering and terrorist financing activities. The Patriot Act requires financial institutions,
including banks, to establish anti-money laundering programs, including employee training and independent audit requirements,
meet minimum specified standards, follow minimum standards for customer identification and maintenance of customer
identification records.
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 Corporation, 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, adopted new rules relating to certain governance matters, including the independence of members of a company’s
audit committee as a condition to listing or continued listing.
Congress is often considering financial industry legislation, and the federal banking agencies routinely propose new regulations.
The Corporation cannot predict how any new legislation, or new rules adopted by federal or state banking agencies, may affect
the business of the Corporation and its subsidiaries in the 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 Corporation 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
Corporation.
Effect of Government Monetary Policies
The earnings of the Corporation 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 Corporation on July 12, 1983. As of December 31, 2018, JSSB had total assets of $1,251,871,000; total
shareholders’ equity of $90,896,000; and total deposits of $862,166,000. JSSB's deposits are insured by the FDIC for the maximum
amount provided under current law.
16
Luzerne was acquired by the Corporation on June 1, 2013. As of December 31, 2018, Luzerne had total assets of $439,086,000;
total shareholders’ equity of $49,580,000; and total deposits of $358,753,000. 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, Union
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: 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 35%, depending
on the collateral offered for the loan. Terms are generally restricted to 30 years or less with the exception of construction and land
development, which are generally limited to one and five years, respectively. Real estate appraisals, property construction
verifications, and site visitations comply with our loan policy and with industry regulatory standards.
Prospective residential mortgage customer’s repayment ability is determined from information contained in the application and
recent income tax returns, or other verified income sources. 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, depending 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 or performance 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 and check lines. 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 both an indirect and direct basis. The Banks, as a practice, do not floor plan and therefore do not discount
17
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 BBB 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 Corporation’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, Union and Luzerne Counties, Pennsylvania is highly
competitive. The Banks operate twenty-six 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 11% 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. The Banks have experienced an
outflow of deposits related to municipalities and school districts due to the ongoing Commonwealth of Pennsylvania budget
impasse.
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 Corporation'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.
18
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.
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.
19 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.
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.
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.
20 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.
The Corporation is required to adopt the FASB's accounting standard which requires measurement of certain financial
assets (including loans) using the current expected credit losses (CECL) beginning in calendar year 2020.
Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a
loss has been incurred. The FASB's amendment replaces the current incurred loss methodology with a methodology that reflects
expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform
credit loss estimates. The Corporation is in the process of evaluating the impact of the adoption of this guidance on the Corporation's
financial statements; however, it is anticipated that the allowance will increase upon the adoption of CECL and that the increased
allowance level will have the effect of decreasing shareholders' equity and the Corporation's and Bank's regulatory capital ratios.
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.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
21
ITEM 2
PROPERTIES
The Corporation owns or leases its properties. Listed herewith are the locations of properties owned or leased as of December 31,
2018, in which the banking offices are located; all properties are in good condition and adequate for the Corporation'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
Montoursville
Danville
Loyalsock
Lewisburg
Muncy-Hughesville
Snow Shoe
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
(Inside Wal-Mart), 173 Hogan Boulevard
Mill Hall, Pennsylvania 17751
Owned
Owned
Owned
Owned
Owned
Owned
Under Lease
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
820 Broad Street
Montoursville, Pennsylvania 17754
150 Continental Boulevard
Danville, Pennsylvania 17821
1720 East Third Street
Williamsport, PA 17701
550 North Derr Drive
Lewisburg, PA 17837
3081 Route 405 Highway
Muncy, PA 17756
493 East Sycamore Road
Snow Shoe, PA 16874
Land Under Lease
Owned
Land Under Lease
Under Lease
Under Lease
Owned
Land Under Lease
Owned
Under Lease
Mansfield Mortgage Office
102 West Wellsboro Street, Suite 2
Under Lease
The M Group, Inc.
Mansfield, PA 16933
1720 East Third Street
Owned
D/B/A The Comprehensive Financial Group Williamsport, PA 17701
22
Office
Luzerne Bank
Address
Dallas
Lake
Hazle Twp.
Luzerne
Plains
Swoyersville
Wilkes-Barre
Wyoming
Conyngham Valley
ITEM 3
LEGAL PROCEEDINGS
509 Main Road
Memorial Highway
Dallas, PA 18612
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
801 Main Street
Swoyersville, PA 18704
67 Public Square
Wilkes-Barre, PA 18701
324 Wyoming Ave.
Wyoming, PA 18644
669 State Route 93 STE 5
Sugarloaf, PA 18249
Ownership
Owned
Owned
Owned
Owned
Under Lease
Owned
Under Lease
Owned
Under Lease
The Corporation 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 Corporation.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
23
PART II
ITEM 5
MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation’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 Corporation’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, 2016.
Price Range
High
Low
Dividends
Declared
2018
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.56
$
39.61
$
46.92
46.27
44.18
41.29
43.22
38.66
2017
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49.45
$
43.28
$
43.60
46.47
49.79
38.17
41.08
45.65
2016
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41.32
$
36.73
$
44.70
44.75
52.03
37.82
40.34
41.00
0.47
0.47
0.47
0.47
0.47
0.47
0.47
0.47
0.47
0.47
0.47
0.47
The Corporation has paid dividends since the effective date of its formation as a bank holding company. It is the present intention
of the Corporation’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 Corporation considers dividend policy. Cash available for dividend distributions to shareholders of the Corporation primarily
comes from dividends paid by Jersey Shore State Bank and Luzerne Bank to the Corporation. Therefore, the restrictions on the
Banks' dividend payments are directly applicable to the Corporation. See also the information appearing in Note 20 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, 2019, the Corporation had approximately 1,247 shareholders of record.
Following is a schedule of the shares of the Corporation’s common stock purchased by the Corporation during the fourth quarter
of 2018.
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, 2018) . . . . . . . . . .
Month #2 (November 1 - November 30, 2018) . . . . . .
Month #3 (December 1 - December 31, 2018). . . . . . .
— $
—
—
—
—
—
—
—
—
342,446
342,446
342,446
24
Set forth below is a line graph comparing the yearly dollar changes in the cumulative shareholder return on the Corporation’s
common stock against the cumulative total return of the S&P 500 Stock Index, NASDAQ Composite, Russell 2000, and SNL
U.S. Bank NASDAQ Index for the period of five fiscal years assuming the investment of $100.00 on December 31, 2013 and
assuming the reinvestment of dividends. The shareholder return shown on the graph below is not necessarily indicative of future
performance.
Index
Penns Woods Bancorp, Inc.
S&P 500
NASDAQ Composite
SNL U.S. Bank NASDAQ
Russell 2000
Period Ending
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
100.00
100.00
100.00
100.00
100.00
100.61
113.69
114.75
103.57
104.89
90.54
115.26
122.74
111.80
100.26
112.42
129.05
133.62
155.02
121.63
108.16
157.22
173.22
163.20
139.44
97.51
150.33
168.30
137.56
124.09
25
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, 2018:
(In Thousands, Except Per Share Data Amounts)
2018
2017
2016
2015
2014
$
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 . . . . . . . . . . . . . . . . . . . . . . .
Consolidated net income. . . . . . . . . . . . . . . . . . . . .
Earnings attributable to noncontrolling interest . . .
Net income attributable to Penns Woods Bancorp,
Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,746
10,936
47,810
1,735
46,075
9,461
38,007
17,529
2,819
14,710
6
$
49,977
$
46,813
$
46,124
$
45,606
5,897
44,080
730
43,350
10,744
36,862
17,232
7,459
9,773
—
5,567
41,246
1,196
40,050
12,113
35,091
17,072
4,597
12,475
—
5,219
40,905
2,300
38,605
12,765
33,736
17,634
3,736
13,898
—
4,962
40,644
2,850
37,794
14,508
33,890
18,412
3,804
14,608
—
14,704
9,773
12,475
13,898
14,608
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 and diluted . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . .
$ 1,684,771
$ 1,474,492
$ 1,348,590
$1,320,057
$1,245,011
1,384,757
(13,837)
1,219,903
138,942
143,536
1,246,614
(12,858)
1,146,320
70,970
138,192
1,093,681
(12,896)
1,095,214
85,998
138,249
1,045,207
(12,044)
1,031,880
91,025
136,279
915,579
(10,579)
981,419
71,176
135,967
$
$
3.14
3.14
1.88
30.60
$
2.08
2.08
1.88
29.47
$
$
2.64
2.64
1.88
29.20
2.91
2.91
1.88
28.71
3.03
3.03
1.88
28.30
4,691,548
4,689,189
4,734,657
4,747,132
4,804,815
4,690,254
4,705,602
4,735,457
4,772,239
4,816,149
10.72%
0.94%
3.31%
59.97%
6.91%
0.69%
3.47%
8.96%
0.93%
3.44%
90.42%
71.37%
10.11%
1.08%
3.61%
64.52%
8.77%
113.51%
10.05%
108.75%
10.36%
99.86%
10.68%
101.29%
10.79%
1.19%
3.81%
61.99%
11.05%
93.29%
26
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 21% for 2018 and 34% for 2017 and 2016. The tax equivalent
adjustments to net interest income for 2018, 2017, and 2016 were $700,000, $1,281,000, and $1,402,000, respectively.
2018 vs. 2017
Reported net interest income increased $3,730,000 to $47,810,000 for the year ended December 31, 2018 compared to the year
ended December 31, 2017, as growth in the earning asset portfolio was coupled with the yield on earning assets increasing to
4.06% from 3.92%. Total interest income increased $8,769,000 primarily from the growth in the average balance of the loan
portfolio along with a slight increase in the average balance of the investment portfolio as the investment portfolio is actively
managed to reduce interest rate and market risk. Interest income on a tax equivalent basis recognized on the loan portfolio increased
$8,188,000 due to a $175,997,000 increase in the average balance in the loan portfolio. Interest and dividend income generated
from the investment portfolio on a tax equivalent basis increased $383,000 due to a $2,946,000 increase in the average balance
in the investment portfolio and a 20 basis point ("bp") increase in the average rate.
Interest expense increased $5,039,000 to $10,936,000 for the year ended December 31, 2018 compared to 2017. The increase in
interest expense was driven by growth in borrowings and total deposits. The average rate paid on interest-bearing liabilities
increased 37 bp to 0.99% for 2018. The average rate paid on time deposits increased 35 bp as the time deposit portfolio was
lengthened in preparation for a rising rate environment.
2017 vs. 2016
Reported net interest income increased $2,834,000 to $44,080,000 for the year ended December 31, 2017 compared to the year
ended December 31, 2016, as growth in the earning asset portfolio was coupled with the yield on earning assets increasing to
3.92% from 3.88%. Total interest income increased $3,164,000 as the impact of growth in the average balance of the loan portfolio
was limited by a decline in the average balance of the investment portfolio as the investment portfolio is actively managed to
reduce interest rate and market risk. Interest income on a tax equivalent basis recognized on the loan portfolio increased $3,801,000
due to a $92,281,000 increase in the average balance in the loan portfolio. Interest and dividend income generated from the
investment portfolio on a tax equivalent basis decreased $808,000 due to a $14,277,000 decrease in the average balance in the
investment portfolio and a 22 basis point ("bp") reduction in the average rate.
Interest expense increased $330,000 to $5,897,000 for the year ended December 31, 2017 compared to 2016. The increase in
interest expense was driven by growth in total deposits, the primary source of funding for the earning asset portfolio growth. The
impact of the growth in interest-bearing liabilities was limited by a minimal increase of 1 bp in cost of funds. The average rate
paid on time deposits increased 13 bp as the time deposit portfolio was lengthened in preparation for a rising rate environment.
27
AVERAGE BALANCES AND INTEREST RATES
The following tables set forth certain information relating to the Corporation’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.
(Dollars In Thousands)
Assets:
2018
2017
2016
Average
Balance (1)
Interest
Average
Rate
Average
Balance (1)
Interest
Average
Rate
Average
Balance (1)
Interest
Average
Rate
Tax-exempt loans (3) . . . . . . . . . . .
$
74,923
$ 2,242
2.99% $
49,982
$ 1,924
3.85% $
47,782
$ 1,852
All other loans (4) . . . . . . . . . . . . .
1,250,521
Total loans (2) . . . . . . . . . . . . . . . .
1,325,444
Taxable securities . . . . . . . . . . . . .
Tax-exempt securities (3) . . . . . . .
Total securities . . . . . . . . . . . . . . .
100,915
36,279
137,194
52,229
54,471
3,828
1,089
4,917
4.18% 1,099,465
4.11% 1,149,447
44,563
46,487
4.05% 1,009,384
4.04% 1,057,166
40,834
42,686
3.79%
3.00%
3.58%
84,079
50,169
134,248
2,689
1,845
4,534
3.20%
3.68%
3.38%
94,887
53,638
148,525
3,072
2,270
5,342
3.87%
4.05%
4.04%
3.24%
4.23%
3.60%
Interest-bearing deposits. . . . . . . .
3,005
58
1.93%
22,461
237
1.06%
36,592
187
0.51%
Total interest-earning assets . . . . .
1,465,643
59,446
4.06% 1,306,156
51,258
3.92% 1,242,283
48,215
3.88%
Other assets. . . . . . . . . . . . . . . . . .
97,577
Total assets . . . . . . . . . . . . . . . . . .
$ 1,563,220
100,481
$ 1,406,637
99,500
$ 1,341,783
Liabilities and shareholders’
equity:
Savings . . . . . . . . . . . . . . . . . . . . .
$ 164,844
75
0.05% $ 157,851
Super Now deposits . . . . . . . . . . .
Money market deposits. . . . . . . . .
Time deposits . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . .
Short-term borrowings . . . . . . . . .
Long-term borrowings . . . . . . . . .
Total borrowings. . . . . . . . . . . . . .
225,885
240,541
259,286
890,556
85,086
128,127
213,213
1,033
1,214
4,048
6,370
1,757
2,809
4,566
0.46%
0.50%
1.56%
0.72%
2.06%
2.19%
2.14%
200,436
274,546
210,608
843,441
25,984
78,745
104,729
62
528
949
2,544
4,083
234
1,580
1,814
0.04% $ 151,397
0.26%
0.35%
1.21%
0.48%
0.89%
1.98%
1.71%
187,106
238,175
221,498
798,176
18,518
90,554
109,072
58
458
648
2,383
3,547
46
1,974
2,020
0.04%
0.24%
0.27%
1.08%
0.44%
0.25%
2.14%
1.82%
Total interest-bearing liabilities . .
1,103,769
10,936
0.99%
948,170
5,897
0.62%
907,248
5,567
0.61%
Demand deposits . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . .
303,606
18,742
137,103
Total liabilities and shareholders’
equity . . . . . . . . . . . . . . . . . . . . . .
$ 1,563,220
Interest rate spread . . . . . . . . . . . .
Net interest income/margin . . . . .
$48,510
302,651
14,398
141,418
279,130
16,152
139,253
$ 1,406,637
$ 1,341,783
3.07%
3.31%
$45,361
3.30%
3.47%
$42,648
3.27%
3.44%
Information on this table has been calculated using average daily balance sheets to obtain average balances.
1.
2. Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.
3.
Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from
tax-exempt obligations and the taxable equivalent of such income at the standard tax rate of 21% for 2018 and 34% for
2017
4. Fees on loans are included with interest on loans as follows: 2018 - $578,000; 2017 - $1,159,000; 2016 - $873,000.
28
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) . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
2017
2016
58,746
$
49,977
$
10,936
47,810
700
5,897
44,080
1,281
48,510
$
45,361
$
46,813
5,567
41,246
1,402
42,648
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,
2018 vs. 2017
2017 vs. 2016
Increase (Decrease) Due To
Increase (Decrease) Due To
Interest income:
Loans, tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . .
$
514
$
6,214
593
(453)
(103)
6,765
2
74
(36)
664
965
1,051
2,720
$
4,045
$
(196) $
1,452
546
(303)
(76)
1,423
11
431
301
840
558
178
2,319
(896) $
PROVISION FOR LOAN LOSSES
2018 vs. 2017
318
$
73
$
7,666
1,139
(756)
(179)
8,188
13
505
265
1,504
1,523
1,229
5,039
3,149
$
3,729
(345)
(142)
(36)
3,279
4
29
107
(35)
25
(250)
(120)
3,399
(1) $
—
(38)
(283)
86
(236)
—
41
194
196
163
(144)
450
(686) $
$
72
3,729
(383)
(425)
50
3,043
4
70
301
161
188
(394)
330
2,713
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 Corporation. 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
29
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, 2018, 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. The banking regulators could require 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 inclined from $12,858,000 at December 31, 2017 to $13,837,000 at December 31, 2018. At
December 31, 2018, the allowance for loan losses was 1.00% of total loans compared to 1.03% of total loans at December 31,
2017.
The provision for loan losses totaled $1,735,000 for the year ended December 31, 2018 compared to $730,000 for the year ended
December 31, 2017. The increase in the provision was appropriate when considering the gross loan growth and low level of net
charge-offs during 2018. Net charge-offs of $756,000 represented 0.06% of average loans for the year ended December 31, 2018
compared to net charge-offs of $768,000 or 0.07% of average loans for the year ended December 31, 2017. The growth in the loan
portfolio was driven by the indirect auto loan portfolio that has experienced minimal charge-offs. In addition, growth occurred
in the home equity segment of the loan portfolio which historically is a lower risk product than commercial loans and requires a
lower allowance for loan losses. Nonperforming loans increased $9,304,000 as a large nonperforming loan was added during the
fourth quarter of 2018. The majority of the nonperforming loans are centered on several loans that are either 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 and decreased level of nonperforming loans noted previously,
dictated a decrease 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.
2017 vs. 2016
The allowance for loan losses declined slightly from $12,896,000 at December 31, 2016 to $12,858,000 at December 31, 2017.
At December 31, 2017, the allowance for loan losses was 1.03% of total loans compared to 1.18% of total loans at December 31,
2016.
The provision for loan losses totaled $730,000 for the year ended December 31, 2017 compared to $1,196,000 for the year ended
December 31, 2016. The decrease in the provision was appropriate when considering the gross loan growth and low level of net
charge-offs during 2017. Net charge-offs of $768,000 represented 0.07% of average loans for the year ended December 31, 2017
compared to net charge-offs of $344,000 or 0.03% of average loans for the year ended December 31, 2016. The growth in the
loan portfolio was driven by home equity product growth which historically is a lower risk product than commercial loans and
requires a lower allowance for loan losses. In addition, growth occurred in the indirect auto loan portfolio that has experienced
minimal charge-offs. Nonperforming loans decreased $4,358,000 as a large nonperforming loan was paid-off during the third
quarter of 2017. The majority of the nonperforming loans are centered on several loans that are either 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 and decreased level of nonperforming loans noted previously, dictated a decrease
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.
NON-INTEREST INCOME
2018 vs. 2017
Total non-interest income decreased $1,283,000 from the year ended December 31, 2017 to December 31, 2018. Excluding net
security gains, non-interest income decreased $477,000 year over year. Service charges increased due to increased level of overdraft
income. Bank owned life insurance income decreased due to a decrease in the earnings rate. Insurance commissions along with
brokerage commissions decreased due to a shift in product mix. Gain on sale of loans decreased due to reduced volume. Debit
30
card income decreased to $1,534,000 for 2018, a decrease of $426,000 or 21.73%, from 2017, primarily due to a change in revenue
recognition in 2018 that reports revenue net of associated expenses (see Note 25. Revenue Recognition).
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
2018
2017
Change
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities (losses) gains, available for sale . . .
Net equity securities losses . . . . . . . . . . . . . . . . . .
Net securities gains (losses) gains, trading . . . . . .
Bank owned life insurance. . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . .
Debit card income . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . .
$
2,460
(47)
(170)
3
662
1,518
365
1,336
1,534
1,800
26.00% $
(0.50)
(1.80)
0.03
7.00
16.04
3.86
14.12
16.21
19.04
2,222
600
—
(8)
666
1,674
496
1,378
1,960
1,756
$
9,461
100.00% $ 10,744
2017 vs. 2016
5.58
20.68% $
n/a
(0.07)
6.20
238
(647)
(170)
11
(4)
(156)
(131)
(42)
(426)
44
100.00% $ (1,283)
15.58
18.24
12.83
16.34
4.62
10.71 %
(107.83)
n/a
137.50
(0.60)
(9.32)
(26.41)
(3.05)
(21.73)
2.51
(11.94)%
Total non-interest income decreased $1,369,000 from the year ended December 31, 2016 to December 31, 2017. Excluding net
security gains, non-interest income decreased $292,000 year over year. Service charges decreased due to decreased level of
overdraft income. Bank owned life insurance income decreased due to a decrease in the earnings rate. Insurance commissions
decreased while brokerage commissions increased due to a shift in product mix. Gain on sale of loans decreased due to reduced
volume. Debit card income increased to $1,960,000 for 2017 an increase of $64,000 or 3.38% from 2016.
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
2017
2016
Change
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains, available for sale. . . . . . . . . .
Net securities gains (losses), trading . . . . . . . . . . .
Bank owned life insurance. . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . .
Debit card income . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE
2018 vs. 2017
$
2,222
20.68% $
2,249
18.57% $
600
(8)
666
1,674
496
1,378
1,960
1,756
5.58
(0.07)
6.20
15.58
4.62
12.83
18.24
16.34
1,611
58
684
2,102
795
1,098
1,896
1,620
$ 10,744
100.00% $ 12,113
13.30
0.48
5.65
17.35
6.56
9.06
15.65
(27)
(1,011)
(66)
(18)
(428)
(299)
280
64
(1.20)%
(62.76)
113.79
(2.63)
(20.36)
(37.61)
25.50
3.38
8.40
(11.30)%
13.38
136
100.00% $ (1,369)
Total non-interest expenses increased $1,145,000 from the year ended December 31, 2017 to December 31, 2018. The increase
in salaries and employee benefits was attributable to increased health insurance expense, annual wage increases, and an increase
in number of employees. Occupancy expense increased primarily due to the opening of a new branch location. Furniture and
equipment expenses increased due to the new branch location and continued enhancement of systems.
31
2018
2017
Change
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
Salaries and employee benefits . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Software Amortization. . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation deposit
insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 21,083
55.47% $ 18,999
51.54% $
2,084
10.97%
2,702
3,092
712
1,108
2,106
890
767
300
7.11
8.14
1.87
2.92
5.54
2.34
2.02
0.79
2,447
2,915
974
925
2,353
669
958
337
6.64
7.91
2.64
2.51
6.38
1.81
2.60
0.91
5,247
13.80
6,285
17.06
255
177
(262)
183
(247)
221
(191)
(37)
(1,038)
10.42
6.07
(26.90)
19.78
(10.50)
33.03
(19.94)
(10.98)
(16.52)
Total non-interest expense . . . . . . . . . . . . . . . . . .
$ 38,007
100.00% $ 36,862
100.00% $
1,145
3.11%
2017 vs. 2016
Total non-interest expenses increased $1,771,000 from the year ended December 31, 2016 to December 31, 2017. The increase
in salaries and employee benefits was attributable to increased health insurance expense and annual wage increases. Occupancy
expense increased primarily due to the opening of a new location that houses executive offices and select operations units. Furniture
and equipment expenses increased due to the continued enhancement of systems. The increase in marketing expense was primarily
related to the home equity and time deposit campaigns. Professional fees increased to $2,353,000 for 2017, an increase of $257,000
or 12.26% from 2016.
(In Thousands)
Amount
% Total
Amount
% Total
Amount
%
2017
2016
Change
Salaries and employee benefits . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . .
Software Amortization. . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation deposit
insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,999
51.54% $ 17,813
50.76% $
1,186
6.66%
2,447
2,915
974
925
2,353
669
958
337
6.64
7.91
2.64
2.51
6.38
1.81
2.60
0.91
2,223
2,793
1,256
873
2,096
767
740
366
6.33
7.96
3.58
2.49
5.97
2.19
2.11
1.04
6,285
17.06
6,164
17.57
224
122
(282)
52
257
(98)
218
(29)
121
10.08
4.37
(22.45)
5.96
12.26
(12.78)
29.46
(7.92)
1.96
Total non-interest expense . . . . . . . . . . . . . . . . . .
$ 36,862
100.00% $ 35,091
100.00% $
1,771
5.05%
INCOME TAXES
2018 vs. 2017
The provision for income taxes for the year ended December 31, 2018 resulted in an effective income tax rate of 16.08% compared
to 43.29% for 2017. This decrease is primarily the result of the change in corporate tax rate.
2017 vs. 2016
The provision for income taxes for the year ended December 31, 2017 increased $2,862,000 and resulted in an effective income
tax rate of 43.29% compared to 26.93% for 2016. The increase was driven by a revaluation of the Corporation's net deferred tax
32
assets that resulted in a recognition of a provisional net income tax expense in the amount of $2,724,000 for the year ended
December 31, 2017 due to the December 2017 passage of the Tax Cuts and Jobs Act.
The Tax Cuts and Jobs Act, among other things, reduces the corporate income tax rate to 21%, effective January 1, 2018. The law
is complex and has extensive implications for the Corporation’s federal and state current and deferred taxes and income tax expense.
Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of
income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies not only
to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income.
Accordingly, in the fourth quarter of 2017, the Corporation conducted a revaluation of our net deferred tax assets and recorded
the effects to reflect the changes associated with the law.
As a result of the reduction in the U.S. federal statutory income tax rate, the Corporation recognized a provisional net income tax
expense totaling $2,724,000 for the year ended December 31, 2017, determined as follows:
(In Thousands)
Amount recognized in
tax expense
Deferred taxes related to items recognized in continuing operations . . . . . . . . . . . . . . . . . . . . . . . .
$
Deferred taxes related to items recognized in other comprehensive income:
Deferred taxes on net actuarial loss on defined benefit post- retirement benefit plan . . . . . . . . . .
Deferred taxes on net unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . .
Net adjustment to deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,906
809
9
2,724
The Tax Cuts and Jobs Act also:
•
•
•
eliminates the corporate alternative minimum tax and allows the use of any net operating loss carryforward to offset
regular tax liability for any taxable year;
limits the deduction for net interest expense incurred by U.S. corporations;
allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable
assets;
eliminates or reduces certain deductions related to meals and entertainment expenses; and
•
• modifies the corporate dividends received deductions.
The Corporation currently is in a deferred tax asset position. Management has reviewed the deferred tax asset and has determined
that the asset will be utilized within the appropriate carryforward period and therefore does not require a valuation allowance.
The foregoing description of the impact of the Tax Cuts and Jobs Act on us should be read in conjunction with Note 12 - "Income
Taxes" and Note 2 - "Accumulated Other Comprehensive Income (Loss)" of the "Notes to Consolidated Financial Statements"
included in Item 8 of this Annual Report on Form 10-K.
FINANCIAL CONDITION
INVESTMENTS
2018
The fair value of the investment portfolio increased $24,764,000 from December 31, 2017 to December 31, 2018. The increase
in value is the result of growth in the municipal segment of the portfolio as the investment portfolio continues to be actively
managed in order to reduce interest rate and market risk. This strategy is being deployed through selective purchasing of bonds
that mature within ten years. The unrealized losses within the debt securities portfolio are the result of market activity, not credit
issues/ratings, as approximately 82% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by
either S&P or Moody’s.
33
2017
The fair value of the investment portfolio decreased $8,885,000 from December 31, 2016 to December 31, 2017. 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 greater than ten years and
securities with a call date within the next five years. In addition, the decrease in corporate bond holdings is being undertaken to
reduce risk and also in response to the changes in bank regulatory capital calculations per Basel III. The proceeds of the bond
sales are primarily being deployed into loans. 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 83% of the debt securities portfolio on an amortized cost basis is
currently rated A or higher by either S&P or Moody’s.
The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2018, 2017, and 2016:
(In Thousands)
Available for sale (AFS):
2018
2017
2016
Balance
% Portfolio
Balance
% Portfolio
Balance
% Portfolio
Mortgage-backed securities . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . .
State and political securities (tax-exempt) . .
State and political securities (taxable) . . . . .
Other bonds, notes and debentures. . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . .
$
6,153
—
27,363
52,178
48,591
134,285
Equity securities:
Other investment equity securities . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,776
36
1,812
4.52% $
—%
20.11%
38.34%
35.70%
98.67%
1.30%
0.03%
1.33%
4,213
—
45,149
11,359
47,906
108,627
2,516
190
2,706
3.78% $
—%
40.55%
10.20%
43.03%
97.57%
2.26%
0.17%
2.43%
9,313
109
45,506
15,428
51,118
121,474
1,483
58
1,541
7.57%
0.09%
37.00%
12.54%
41.55%
98.75%
1.21%
0.05%
1.25%
$ 136,097
100.00% $ 111,333
100.00% $ 123,015
100.00%
34
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 21% tax rate) at December 31, 2018:
(In Thousands)
Mortgage-backed securities:
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities (tax-exempt):
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities (taxable):
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other bonds, notes, and debentures:
AFS Amount. . . . . . . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Amount . . . . . . . . . . . . . . . . . . . . . . . . .
Total Yield. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Securities
Investment Equity Amount. . . . . . . . . . . . . .
Trading Amount . . . . . . . . . . . . . . . . . . . . . .
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
$
— $
— $
— $
778
$
5,607
$
6,385
—%
—%
—%
2.01%
2.94%
2.83%
300
2.00%
—
—%
250
1.90%
2,385
7,365
14,024
3,344
27,418
1.94%
2.18%
2.79%
3.41%
2.62%
—
—%
6,582
33,338
12,020
51,940
3.30%
3.63%
3.66%
3.60%
200
2.84%
27,976
21,838
3.18%
3.57%
—
—%
50,264
3.35%
$
550
$
2,585
$ 41,923
$ 69,978
$ 20,971
136,007
1.95%
2.00%
3.02%
3.42%
3.43%
3.28%
1,628
49
$ 137,684
3.24%
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 21% tax rate (derived by dividing tax-exempt interest by 79%).
The distribution of credit ratings by amortized cost and estimated fair value for the debt security portfolio at December 31, 2018
follows:
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
$
6,385
$
6,153
$
— $ — $
— $ — $
— $ — $
6,385
$
6,153
77,500
27,299
77,741
26,530
1,858
1,800
16,938
16,357
—
—
—
—
—
—
6,027
5,704
79,358
50,264
79,541
48,591
$ 111,184
$ 110,424
$ 18,796
$ 18,157
$
— $ — $
6,027
$ 5,704
$ 136,007
$ 134,285
(In Thousands)
Available for sale
Mortgage-backed securities .
State and political securities .
Other debt securities . . . . . . .
Total debt securities . . . . . . .
LOAN PORTFOLIO
2018
Gross loans of $1,384,757,000 at December 31, 2018 represented an increase of $138,143,000 from December 31, 2017. Indirect
auto lending remained the primary driver of the growth in the loan portfolio. With a continued emphasis on home equity lines of
credit, real estate mortgages also contributed to loan growth. Indirect auto lending and home equity lines are part of the overall
strategy to shorten the duration of the earning asset portfolio in preparation for a rising interest rate environment. Commercial real
estate mortgages increased $39,676,000 but remained at approximately 27% of the total loan portfolio.
35
2017
Gross loans of $1,246,614,000 at December 31, 2017 represented an increase of $152,933,000 from December 31, 2016. Indirect
auto lending, which was introduced in the latter portion of 2016, was the primary driver of the growth in the loan portfolio. Real
estate mortgages increased as growth in home equity lines of credit continued to be an emphasis. Indirect auto lending and home
equity lines are part of the overall strategy to shorten the duration of the earning asset portfolio in preparation for a rising interest
rate environment.
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan at December 31,
2018, 2017, 2016, 2015, and 2014:
(In Thousands)
Amount
% Total
Amount
% Total
Amount
% Total
Amount
% Total
Amount % Total
2018
2017
2016
2015
2014
Commercial,
financial, and
agricultural . . . . . .
Real estate
mortgage:
$ 188,561
13.62% $ 178,885
14.35% $ 146,110
13.36% $ 164,072
15.70% $ 124,156
13.56%
Residential . . . . . .
Commercial . . . . .
Construction . . . . .
622,379
371,695
43,523
Consumer
Automobile . . . . . .
133,183
Other consumer
installment loans . .
Net deferred loan
fees and discounts .
24,552
864
44.94
26.84
3.14
9.63
1.77
0.06
597,077
332,019
31,683
79,714
26,964
272
47.90
26.63
2.54
6.40
2.16
0.02
564,740
306,182
34,650
14,826
28,430
51.63
28.00
3.17
1.36
2.60
526,183
302,539
26,824
50.34
28.95
2.57
457,760
291,348
21,996
50.00
31.82
2.40
—
—
—
—
27,001
2.58
21,509
2.35
(1,257)
(0.12)
(1,412)
(0.14)
(1,190)
(0.13)
Gross loans . . . . . . .
$1,384,757
100.00% $1,246,614
100.00% $1,093,681
100.00% $ 1,045,207
100.00% $ 915,579
100.00%
The amounts of domestic loans at December 31, 2018 are presented below by category and maturity:
(In Thousands)
Loans with variable interest rates:
Commercial,
financial, and
agricultural
Real Estate
Residential
Commercial
Construction
Consumer
automobile
Other
consumer
installment
Total
1 year or less. . . . . . . . . . . . . . .
$
33,017
$
14,252
$
21,445
$
2,373
— $
1,013
$
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 fixed interest rate loans . . . . .
2,689
59,531
42,048
137,285
1,259
35,300
14,531
186
51,276
3,783
26,030
554,441
598,506
1,344
4,860
10,286
7,383
23,873
8,773
42,389
273,033
345,640
1,044
8,675
15,574
762
26,055
251
2,426
32,952
38,002
103
1,850
485
3,083
5,521
—
—
—
—
108
49,980
83,095
—
133,183
—
6
2,650
3,669
1,011
15,323
3,070
1,479
20,883
72,100
15,496
130,382
905,124
1,123,102
4,869
115,988
127,041
12,893
260,791
Total. . . . . . . . . . . . . . . . . . . .
$
188,561
$ 622,379
$ 371,695
$
43,523
$ 133,183
$
24,552
1,383,893
Net deferred loan fees and
discounts. . . . . . . . . . . . . . . . . . . . .
864
$ 1,384,757
· 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.
36
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, 2018.
The following table shows the amount of accrual and nonaccrual TDRs at December 31, 2018 and 2017:
(In Thousands)
Accrual
Nonaccrual
Total
Accrual
Nonaccrual
Total
Accrual
Nonaccrual
Total
2018
2017
2016
Commercial, financial,
and agricultural . . . . . .
Real estate mortgage:
Residential . . . . . . . .
Commercial . . . . . . .
Construction . . . . . . .
Other consumer
installment loans . . . . .
$ — $
1,127
$ 1,127
$
5
$
114
$
119
$
109
$
132
$
241
2,225
3,959
—
—
159
2,129
—
—
2,384
6,088
—
—
2,151
4,429
—
—
273
2,076
—
—
2,424
6,505
—
—
1,491
4,723
—
—
541
2,184
—
—
2,032
6,907
—
—
$ 6,184
$
3,415
$ 9,599
$ 6,585
$
2,463
$ 9,048
$ 6,323
$
2,857
$ 9,180
ALLOWANCE FOR LOAN LOSSES
2018
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 $12,858,000 at December 31, 2017 to $13,837,000 at December 31, 2018. At
December 31, 2018, the allowance for loan losses was 1.00% of total loans compared to 1.03% of total loans at December 31,
2017. The growth in the loan portfolio of home equity product historically is a lower risk product than commercial loans and
requires a lower allowance for loan losses. In addition, the growth in the indirect auto portfolio has incurred minimal losses. Net
loan charge-offs of $756,000 or 0.06% of average loans for the year ended December 31, 2018 partially limited the impact of the
provision for loan losses of $1,735,000. 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.
2017
The allowance for loan losses decreased slightly from $12,896,000 at December 31, 2016 to $12,858,000 at December 31, 2017.
At December 31, 2017, the allowance for loan losses was 1.03% of total loans compared to 1.18% of total loans at December 31,
2016 as loan portfolio growth outpaced the provision for loan losses net of charge-offs. The growth in the loan portfolio was driven
by home equity product growth, which is historically a lower risk product than commercial loans and requires a lower allowance
for loan losses. In addition, the growth in the indirect auto portfolio has incurred minimal losses. Net loan charge-offs of $768,000
or 0.06% of average loans for the year ended December 31, 2017 limited the impact of the provision for loan losses of $730,000.
37
(In Thousands)
Balance at end of
period applicable to:
Commercial,
financial, and
agricultural . . . . . . . .
Real estate mortgage:
Residential . . . . . .
Commercial . . . . .
Construction . . . . .
Consumer
automobiles . . . . . . .
Other consumer
installment loans . . .
Unallocated . . . . . . . .
Allocation of the Allowance For Loan Losses
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
December 31, 2014
Amount % Total
Amount % Total
Amount % Total
Amount % Total
Amount % Total
$ 1,680
13.63% $ 1,177
14.35% $ 1,554
13.34% $ 1,532
15.68% $ 1,124
13.54%
5,616
4,047
143
1,328
259
764
44.97
26.86
3.14
9.62
1.78
—
5,679
4,277
155
804
271
495
47.91
26.64
2.54
6.40
2.16
—
5,383
4,975
178
143
273
390
51.58
27.96
3.17
1.35
2.60
—
5,116
4,217
160
—
243
776
50.27
28.91
2.56
—
2.58
—
3,755
4,205
786
—
245
464
49.93
31.78
2.40
—
2.35
—
$ 13,837
100.00% $12,858
100.00% $12,896
100.00% $12,044
100.00% $10,579
100.00%
NONPERFORMING LOANS
The increase in nonperforming loans during 2018 is primarily due to a commercial loan that became nonaccrual in the fourth
quarter of 2018. The majority of the nonperforming loans are centered on several loans that are either in a secured position and
have sureties with a strong underlying financial position and/or a specific allowance 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)
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Nonperforming Loans
90 Days Past Due
Nonaccrual
Total
$
1,274
$
15,298
$
509
870
979
387
6,759
10,756
8,467
11,861
16,572
7,268
11,626
9,446
12,248
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 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.
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; and
4. Reports of examination of the loan portfolio by the Department and the FDIC.
38
DEPOSITS
2018 vs. 2017
Total average deposits increased $48,070,000 or 4.19% from 2017 to 2018. While deposit gathering efforts have centered on core
deposits, the lengthening of the average maturity of the time deposit portfolio continues to move forward as part of the strategy
to build balance sheet protection in a rising interest rate environment. Time deposit average balance for 2018 increased $48,678,000
to $259,286,000.
2017 vs. 2016
Total average deposits increased $68,786,000 or 6.39% from 2016 to 2017. 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 79.98% in 2017 from 79.44% for 2016.
The average amount and the average rate paid on deposits are summarized below for the years ended December 31, 2018, 2017,
and 2016:
(In Thousands)
Noninterest-bearing . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Super Now . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money Market . . . . . . . . . . . . . . . . . . . . . . . .
Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total average deposits . . . . . . . . . . . . . . . . .
2018
2017
2016
Average
Amount
Rate
Average
Amount
Rate
Average
Amount
Rate
$ 303,606
0.00% $ 302,651
0.00% $ 279,130
0.00%
164,844
225,885
240,541
259,286
0.05
0.46
0.50
1.56
157,851
200,436
274,546
210,608
0.04
0.26
0.35
1.21
151,397
187,106
238,175
221,498
0.04
0.24
0.27
1.08
$1,194,162
0.53% $1,146,092
0.36% $1,077,306
0.33%
SHAREHOLDERS’ EQUITY
2018
Shareholders’ equity increased $5,344,000 to $143,536,000 at December 31, 2018 compared to December 31, 2017. The change
in accumulated other comprehensive loss from $4,974,000 at December 31, 2017 to $6,636,000 at December 31, 2018 is a result
of an increase in unrealized losses on available for sale securities from an unrealized loss of $54,000 at December 31, 2017 to an
unrealized loss of $1,360,000 at December 31, 2018. The amount of accumulated other comprehensive loss at December 31, 2018
was also impacted by the change in net excess of the projected benefit obligation over the fair value of the plan assets of the defined
benefit pension plan resulting in a $356,000 increase in the net loss to $5,276,000 at December 31, 2018. The current level of
shareholders’ equity equates to a book value per share of $30.59 at December 31, 2018 compared to $29.47 at December 31, 2017
and an equity to asset ratio of 8.52% at December 31, 2018 compared to 9.37% at December 31, 2017. Excluding goodwill and
intangibles, book value per share was $26.70 at December 31, 2018 compared to $25.51 at December 31, 2017. Dividends declared
for twelve months ended December 31, 2018 and 2017 were $1.88 per share.
2017
Shareholders’ equity decreased $57,000 to $138,192,000 at December 31, 2017 compared to December 31, 2016. Since December
31, 2016, treasury stock purchases of $1,881,000 for 47,698 shares were completed as part of the stock repurchase plan. The
change in accumulated other comprehensive loss from $4,928,000 at December 31, 2016 to $4,974,000 at December 31, 2017 is
a result of a decrease in unrealized losses on available for sale securities from an unrealized loss of $639,000 at December 31,
2016 to an unrealized loss of $54,000 at December 31, 2017. The amount of accumulated other comprehensive loss at December
31, 2017 was also impacted by the change in net excess of the projected benefit obligation over the fair value of the plan assets
of the defined benefit pension plan resulting in a $631,000 increase in the net loss to $4,920,000 at December 31, 2017. The current
level of shareholders’ equity equates to a book value per share of $29.47 at December 31, 2017 compared to $29.20 at December
31, 2016 and an equity to asset ratio of 9.37% at December 31, 2017 compared to 10.25% at December 31, 2016. Excluding
goodwill and intangibles, book value per share was $25.51 at December 31, 2017 compared to $25.21 at December 31, 2016.
Dividends declared for twelve months ended December 31, 2017 and 2016 were $1.88 per share.
39
Bank regulators have risk based capital guidelines. Under these guidelines the Corporation 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, 2018, both the Corporation’s and each Bank’s required ratios were well above the minimum ratios (and
including the current capital conservation buffer where applicable) as follows:
Common equity tier 1 capital to risk-weighted assets . . . . . . . . . . . . . .
Tier 1 capital to risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital to risk-weighted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 capital to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.178%
10.178%
10.972%
8.176%
9.879%
9.879%
10.764%
7.724%
10.061%
10.061%
10.603%
8.655%
6.375%
7.875%
9.875%
4.000%
Corporation
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 Corporation and the Banks 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 . . . . . . . .
0.94%
10.72%
59.97%
8.77%
0.69%
6.91%
90.42%
10.05%
0.93%
8.96%
71.37%
10.38%
2018
2017
2016
LIQUIDITY, INTEREST RATE SENSITIVITY, AND MARKET RISK
The Asset/Liability Committee addresses the liquidity needs of the Corporation 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, 2018, except for
Net Loans to Total Deposits which was at 112.4%:
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 Corporation’s asset/liability management process are to maintain adequate liquidity while
minimizing interest rate risk. The maintenance of adequate liquidity provides the Corporation with the ability to meet its financial
obligations to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and
business opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by
managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest
rates.
The Corporation, 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 Corporation 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 Corporation has adequate resources to meet its normal funding requirements.
Management monitors the Corporation’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
40
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 Corporation has a current
borrowing capacity at the FHLB of $556,656,000 with $163,495,000 utilized, leaving $393,160,000 available. In addition to this
credit arrangement, the Corporation has additional lines of credit with correspondent banks of $52,000,000. The Corporation’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
Corporation’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 Corporation 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 Corporation’s balance sheet.
The Corporation currently maintains a gap position of being asset sensitive. The Corporation has strategically taken this position
as it has decreased the duration of the earning asset portfolio by adding quality short and intermediate term loans such as home
equity loans and the selling of long-term municipal bonds. Lengthening of the liability portfolio is being undertaken to build
protection in a rising rate environment.
A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Corporation’s balance sheet and
more specifically shareholders’ equity. The Corporation 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 Corporation 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 ending December 31, 2019 assuming a static balance sheet as
of December 31, 2018.
(In Thousands)
(200)
(100)
Static
100
200
300
400
Net interest income . . . . . . . . . .
Change from static . . . . . . . . . .
Percent change from static . . . .
$ 50,175
$ 51,778
$
52,800
$ 53,391
$ 53,804
$ 54,070
$ 54,378
(2,625)
(1,022)
-4.97%
-1.94%
—
—
591
1.12%
1,004
1,270
1,578
1.90%
2.41%
2.99%
Parallel Rate Shock in Basis Points
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 Corporation is well positioned to respond expeditiously when the market interest rate outlook changes.
41
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 Corporation’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 Corporation’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” included in Item 8 of this Annual Report on Form 10-K.
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 Securities
Debt 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 Corporation’s methodology of assessing impairment, refer to Note 4 of the “Notes to Consolidated Financial
Statements” included in Item 8 of this Annual Report on Form 10-K.
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Corporation’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 Corporation’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” included in Item 8 of
this Annual Report on Form 10-K.
Goodwill and Other Intangible Assets
As discussed in Note 8 of the “Notes to Consolidated Financial Statements,” the Corporation 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 Corporation’s net income will be reduced. The Corporation’s deferred tax
assets are described further in Note 12 of the “Notes to Consolidated Financial Statements” included in Item 8 of this Annual
Report on Form 10-K.
42
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 Corporation’s pension obligations and future
expense. Our pension benefits are described further in Note 13 of the “Notes to Consolidated Financial Statements” included in
Item 8 of this Annual Report on Form 10-K.
CONTRACTUAL OBLIGATIONS
The Corporation has various financial obligations, including contractual obligations which may require future cash payments. The
following table presents, as of December 31, 2018, 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”
included in Item 8 of this Annual Report on Form 10-K.
Payments Due In
(In Thousands)
Deposits without a stated maturity . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
One Year
or Less
One to Three
Years
Three to Five
Years
Over Five
Years
Total
$
933,292
$
— $
— $
— $
933,292
133,985
5,662
162,203
32,321
546
146,099
5,284
1,243
—
—
43,363
1,123
—
—
30,031
1,057
—
—
33,227
2,117
286,611
5,662
162,203
138,942
4,843
The Corporation’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 2033. 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 Corporation wishes to
caution readers that the following important factors, among others in addition to the factors discussed in Item 1 - "Business" and
in Item 1A - "Risk Factors", may have affected and could in the future affect the Corporation’s actual results and could cause the
Corporation’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement
made by or on behalf of the Corporation herein: (i) the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Corporation 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; (iii) the effect on the
Corporation’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; and (v) the effect of changes in the business
cycle and downturns in the local, regional or national economies.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk for the Corporation 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 Corporation level. The Corporation’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 Corporation is well positioned to respond expeditiously when the market interest rate outlook
changes.
43
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Penns Woods Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Penns Woods Bancorp, Inc. and subsidiaries (the
“Company”) as of December 31, 2018 and 2017; the related consolidated statements of income, comprehensive income,
changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018;
and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, 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 12, 2019, expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company, in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks.
Basis for Opinion
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1999.
Cranberry Township, Pennsylvania
March 12, 2019
44
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
December 31,
2018
2017
(In Thousands, Except Share Data)
ASSETS:
Noninterest-bearing balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
24,325
$
Interest-bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,417
66,742
25,692
1,551
27,243
Investment debt securities, available for sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,285
108,627
Investment equity securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities, trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted investment in bank stock, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,776
36
18,862
2,929
2,516
190
13,332
1,196
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,384,757
1,246,614
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,837)
(12,858)
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,370,920
1,233,756
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,580
5,334
28,627
17,104
1,162
5,154
4,260
27,386
4,321
27,982
17,104
1,462
4,388
4,989
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,684,771
$ 1,474,492
LIABILITIES:
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
899,089
$
843,004
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
320,814
303,316
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,219,903
1,146,320
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,865
138,942
1,150
13,367
100,748
70,970
502
17,758
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,541,227
1,336,298
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; 5,011,698 and 5,009,339 shares issued;
4,691,548 and 4,689,189 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss:
Net unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost, 320,150 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL PENNS WOODS BANCORP, INC. SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . .
Non controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,763
50,737
69,787
(1,360)
(5,276)
(12,115)
143,536
8
41,744
50,173
63,364
(54)
(4,920)
(12,115)
138,192
2
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,544
138,194
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,684,771
$ 1,474,492
See accompanying notes to the consolidated financial statements.
45
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . .
NON-INTEREST INCOME:
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net debt securities (losses) gains, available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net equity securities losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities gains (losses), trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debit card income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE:
Salaries and employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME TAX PROVISION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CONSOLIDATED NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings attributable to noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME ATTRIBUTABLE TO PENNS WOODS BANCORP, INC. . . . . . . . . . . . . . . $
Year Ended December 31,
2017
2016
2018
54,000
$
45,833
$
42,056
2,784
860
1,102
58,746
6,370
1,757
2,809
10,936
47,810
1,735
46,075
2,460
(47)
(170)
3
662
1,518
365
1,336
1,534
1,800
9,461
21,083
2,702
3,092
712
1,108
2,106
890
767
300
5,247
38,007
17,529
2,819
14,710
6
14,704
2,182
1,218
744
49,977
4,083
234
1,580
5,897
44,080
730
43,350
2,222
600
—
(8)
666
1,674
496
1,378
1,960
1,756
10,744
18,999
2,447
2,915
974
925
2,353
669
958
337
6,285
36,862
17,232
7,459
9,773
—
9,773
2.08
$
$
$
2,424
1,498
835
46,813
3,547
46
1,974
5,567
41,246
1,196
40,050
2,249
1,611
—
58
684
2,102
795
1,098
1,896
1,620
12,113
17,813
2,223
2,793
1,256
873
2,096
767
740
366
6,164
35,091
17,072
4,597
12,475
—
12,475
2.64
$
$
$
EARNINGS PER SHARE - BASIC AND DILUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.14
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED . . . . . . . . . .
4,690,254
4,705,602
4,735,457
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.88
$
1.88
$
1.88
See accompanying notes to the consolidated financial statements.
46
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In Thousands)
Year Ended December 31,
2017
2016
2018
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
14,704
$
9,773
$
12,475
Other comprehensive income (loss):
Change in unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . . . . . . . . .
(1,022)
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized loss (gain) included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Accretion) amortization of unrecognized pension and post-retirement items . . . . . . . . . . .
Tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
216
47
(10)
(451)
95
Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,125)
1,500
(510)
(600)
204
270
(92)
772
252
(85)
(1,611)
547
(352)
120
(1,129)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
13,579
$
10,545
$
11,346
See accompanying notes to the consolidated financial statements.
47
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48
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2017
2016
2018
(In Thousands)
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$
14,704
$
9,773
$
12,475
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of investment security discounts and premiums, net . . . . . . . . . . . . . . . . . . . .
Securities losses (gains), available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net equity securities losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net securities (gains) losses, trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Investment debt securities available for sale:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls and maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital contribution from non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of regulatory stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of regulatory stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES:
Net 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 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,515
300
1,735
776
47
(55,283)
55,068
(1,518)
170
(3)
466
(309)
(662)
(324)
(412)
17,270
19,296
8,033
(58,725)
570
(139,776)
(2,005)
445
(30)
—
15,352
(20,882)
(177,722)
56,085
17,498
80,000
(12,028)
67,117
(8,818)
97
—
199,951
39,499
27,243
2,632
337
730
893
(600)
(53,407)
55,838
(1,674)
—
8
426
(566)
(666)
1,769
2,200
17,693
25,528
11,564
(22,986)
—
(152,806)
(4,999)
1,108
(34)
2
7,677
(12,158)
(147,104)
51,067
39
30,000
(45,028)
87,507
(8,837)
116
(1,881)
112,983
(16,428)
43,671
CASH AND CASH EQUIVALENTS, ENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
66,742
$
27,243
$
See accompanying notes to the consolidated financial statements.
3,146
366
1,196
870
(1,611)
(68,362)
69,268
(2,102)
—
(58)
3,826
(3,753)
(684)
1,543
(7)
16,113
44,829
25,558
(28,322)
—
(49,590)
(4,061)
859
(27)
—
3,160
(3,178)
(10,772)
40,140
23,194
—
(5,027)
(33,397)
(8,903)
101
(574)
15,534
20,875
22,796
43,671
49
(In Thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of loans to foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer due to adoption of ASU 2016-01, equity securities fair value adjust,
reclassification from AOCI to Retained Earnings, net of tax . . . . . . . . . . . . . . . . . . . . .
Transfer due to adoption of ASU 2018-02, income statement - reporting
comprehensive income, reclassification of certain tax effects from accumulated other
comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2017
2018
2016
$
$
10,288
2,350
877
537
5,850
4,450
593
—
—
818
$
5,538
4,025
772
—
—
See accompanying notes to the consolidated financial statements.
50
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" and collectively with JSSB , the "Banks"), Woods Real
Estate Development Co., Inc., Woods Investment Company, Inc., The M Group Inc. D/B/A The Comprehensive Financial Group
(“The M Group”), a wholly owned subsidiary of JSSB and an eighty percent owned subsidiary, United Solutions, LLC, (collectively,
the “Corporation”). 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-six offices located in Clinton, Lycoming, Centre, Montour, Union, 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.
United Insurance Solutions, LLC offers property and casualty and auto insurance products within the Corporation's market footprint.
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").
51
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to
maturity, securities available for sale, or securities held for trading. 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. Equity securities are carried at fair value. Unrealized holding
gains and losses for equity securities are recognized as a separate component within the income statement. 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 Corporation would be required to sell the security before its anticipated
recovery in fair value, and a review of the Corporation’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.
Fair values of investment securities 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
Corporation 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 Corporation’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, 2018, future adjustments could be necessary if circumstances or economic conditions
52 differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, rising
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.
53 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 Corporation 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 Corporation 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 2018, 2017, or 2016.
Intangible Assets
At December 31, 2018, the Corporation had intangible assets of $443,000 as a result of the acquisition of Luzerne National Bank
Corporation, which is net of accumulated amortization of $1,571,000. These intangible assets will continue to be amortized using
the sum-of-the-years digits method of amortization over ten years. The Corporation also had intangible assets of $719,000, which
is net of accumulated amortization of $301,000, as a result of the purchase of two books of business related to investment product
sales. The book of business intangible is being amortized using the straight-line method over a period of ten years.
Investments in Limited Partnerships
The Corporation is a limited partner in three partnerships at December 31, 2018 that provide low income elderly housing in the
Corporation’s geographic market area. The carrying value of the Corporation’s investments in limited partnerships was $218,000
at December 31, 2018 and $402,000 at December 31, 2017. The investments 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 $184,000,
$184,000, and $312,000 for 2018, 2017 and 2016, respectively.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Corporation 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
Corporation reports the amounts in its financial statements.
Marketing Cost
Marketing costs are generally expensed as incurred.
Income Taxes
The Corporation 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
54 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
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 Corporation analyzed its deferred tax asset position and determined that there was not a need for
a valuation allowance due to the Corporation’s ability to generate future ordinary and capital taxable income.
On December 22, 2017 the Tax Cut and Jobs Act was signed into law. ASC 740 (Income Taxes) requires the recognition of the
effect of changes in tax laws or rates in the period in which the legislation is enacted. The changes in the deferred tax assets and
liabilities remeasured at the new 21% federal tax rate are reflected in income tax expense for fiscal year 2017.
The Corporation when applicable recognizes interest and penalties on income taxes as a component of income tax provision.
Earnings Per Share
The Corporation 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 may be made annually at the discretion of the board of directors for the employees of JSSB with no
contributions made since 2015.
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 Corporation 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
55 (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 Corporation has determined that its only reportable segment is Community Banking.
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.
Adopted Accounting Pronouncements
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. Since the guidance scopes out revenue associated with financial instruments,
including loans receivable and investment securities, the adoption of the standard and its related amendments did not result in a
material change from our current accounting for revenue because the majority of the Corporation's revenue is not within the scope
of Topic 606. Upon adoption on January 1, 2018, we have included the related new disclosure requirements in Note 25.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities
and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial
instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method
of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized
in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring
a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments
measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business
entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price
notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial
assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables)
on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need
for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other
deferred tax assets. Upon adoption on January 1, 2018, the Corporation made a one-time cumulative effect adjustment from
accumulated other comprehensive income to retained earnings of $537,000. The net effect was an increase to retained earnings.
Additionally, the methods used to calculate the fair value of financial instruments in Note 22 were based on exit pricing assumptions
as of December 31, 2018.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and
liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability
to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease
term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase
the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease
payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective
for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments
in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning
after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified
retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The
Corporation is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will
have a significant impact on the financial statements. Based on the Corporation’s preliminary analysis of its current portfolio, the
impact to the Corporation’s balance sheet is estimated to result in an increase of $10,294,000 in assets and liabilities. The Corporation
also anticipates additional disclosures to be provided at adoption.
56 In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting
by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other
organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at
the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The
allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the
remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized
financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for
annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will
be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which
the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of
the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any
such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent
measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value
of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its
assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining
the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update,
an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in
this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public
business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment
tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the
amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after
December 15, 2021. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined
Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965). This Update relates primarily to the
reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution
serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers
under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require
a plan's interest in that master trust and any change in that interest to be presented in separate line items in the statement of net
assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in
this Update remove the requirement to disclose the percentage interest in the master trust for plans with divided interests and
require that all plans disclose the dollar amount of their interest in each of those general types of investments, which supplements
the existing requirement to disclose the master trusts balances in each general type of investments. There are also increased
disclosure requirements for investments in master trusts. The amendments in this Update are effective for fiscal years beginning
after December 15, 2018. Early adoption is permitted. This Update is not expected to have a significant impact on the Corporation’s
financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20). The
amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the
amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change
for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments
in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For
all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity
early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a
cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period
of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a
significant impact on the Corporation’s financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480),
and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain
57 equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial
instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure
requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded
conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-
round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per
share (EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is
treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with
embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial
conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in
Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that
now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not
have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of
this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early
adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes
that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial
instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the
beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or
retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in
accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this
Update do not require any transition guidance because those amendments do not have an accounting effect. This Update is not
expected to have a significant impact on the Corporation’s financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the
financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its
financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application
and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities,
the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim
periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net
investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating
the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the
opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update.
The amended presentation and disclosure guidance is required only prospectively. This Update is not expected to have a significant
impact on the Corporation’s financial statements.
In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to
not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current
lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under
Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land
easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition
of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition
requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make
minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by
eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and
circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance
of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods
beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the
Corporation’s financial statements.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify,
correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU
2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic
842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842.
For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date
58 and transition requirements in Topic 842. This Update is not expected to have a significant impact on the Corporation’s financial
statements.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This Update provides another transition
method which allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the
opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods
in accordance with ASC 840, Leases. In addition, this Update provides a practical expedient under which lessors may elect, by
class of underlying assets, to not separate nonlease components from the associated lease component, similar to the expedient
provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or
components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are
the same for the nonlease component(s) and associated lease component and (b) the lease component, if accounted for separately,
would be classified as an operating lease. If the nonlease component or components associated with the lease component are the
predominant component of the combined component, an entity should account for the combined component in accordance with
ASC 606, Revenue from Contracts with Customers. Otherwise, the entity should account for the combined component as an
operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update
is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a
significant impact on the Corporation’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes the
Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons
for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the
valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and
losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the
end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair
value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits (Topic 715-20). This Update amends ASC
715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The
Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized
as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a
one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost
and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal
years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective
for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Corporation’s
financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).
This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service
contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud
computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public
business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early
adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and
interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either
retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to
have a significant impact on the Corporation’s financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit
use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest
rate for hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S.
government, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the
Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted
Update 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12.
For public business entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have
59 adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an
entity already has adopted Update 2017-12. This Update is not expected to have a significant impact on the Corporation’s financial
statements.
In November, 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), which made the following targeted
improvements to generally accepted accounting principles (GAAP) for collaborative arrangements (1) clarified that certain
transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the
collaborative arrangement participant is a customer in the context of a unit of account, (2) add unit-of-account guidance in Topic
808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative
arrangement or a part of the arrangement is within the scope of Topic 606, and (3) require that in a transaction with a collaborative
arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue
recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. For public business entities,
the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim
periods within fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the
Corporation’s financial statements.
In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842), which addressed implementation questions arising from
stakeholders in regard to ASU 2016-02, Leases. Specifically addressed in this Update were issues related to 1) sales taxes and
other similar taxes collected from lessees, 2) certain lessor costs, and 3) recognition of variable payments for contracts with lease
and nonlease components. The amendments in this Update affect the amendments in Update 2016-02, which are not yet effective
but can be early adopted. The effective date and transition requirements for the amendments in this Update are the same as the
effective date and transition requirements in Update 2016-02 (for example, January 1, 2019, for calendar-year-end public business
entities). The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial
position or results of operations. Based on the Corporation’s preliminary analysis of its current portfolio, the impact to the
Corporation’s balance sheet is estimated to result in an increase of $10,294,000 in assets and liabilities. The Corporation also
anticipates additional disclosures to be provided at adoption.
NOTE 2 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in accumulated other comprehensive income (loss) by component shown, net of tax and parenthesis indicating
debits to net income, as of December 31, 2018, 2017, and 2016 were as follows:
Twelve Months Ended
December 31, 2018
Twelve Months Ended
December 31, 2017
Twelve Months Ended
December 31, 2016
Net Unrealized
Gain (Loss)
on Available
for Sale
Securities*
Defined
Benefit
Plan*
Total*
Net Unrealized
Gain (Loss)
on Available
for Sale
Securities*
Defined
Benefit
Plan*
Total*
Net Unrealized
Gain (Loss)
on Available
for Sale
Securities*
Defined
Benefit
Plan*
Total*
(In Thousands)
Beginning balance. . . . . . . . . .
$
(54) $ (4,920) $ (4,974) $
(639) $ (4,289) $ (4,928) $
258
$ (4,057) $ (3,799)
Other comprehensive
income (loss) before
reclassifications . . . . . . . . . .
Amounts reclassified from
accumulated other
comprehensive (loss)
income . . . . . . . . . . . . . . . . .
Net current-period other
comprehensive income (loss) .
Reclassification of certain
income tax effects from
accumulated other
comprehensive loss . . . . . . . . .
Reclassification from
adoption of 2016-01 . . . . . . . .
(806)
(486)
(1,292)
990
63
1,053
167
(333)
(166)
37
130
167
(769)
(356)
(1,125)
(396)
594
115
178
(281)
772
(1,064)
101
(963)
(897)
(232)
(1,129)
—
(537)
—
—
—
(537)
(9)
(809)
(818)
—
—
—
—
—
—
—
—
—
Ending balance . . . . . . . . . . . .
$
(1,360) $ (5,276) $ (6,636) $
(54) $ (4,920) $ (4,974) $
(639) $ (4,289) $ (4,928)
* Amounts net of 34% tax rate for 2016 and 21% for 2018 and 2017
The adoption of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities requires equity securities to run through the income statement and therefore the reclassification
of prior accumulated losses are reflected above.
60
The preceding table includes current guidance issued related to Income Statement- Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The Corporation has
elected to reclassify the portion in accumulated other comprehensive income (AOCI) that would have been otherwise stranded.
Amounts were reclassified for both components included in AOCI and their ending balance as of December 31, 2018 and 2017
is net of tax at the 21% corporate tax rate, and at 34% corporate tax rate as of December 31, 2016.
The reclassifications out of accumulated other comprehensive income shown, net of tax and parenthesis indicating debits to net
income, as of December 31, 2018, 2017, and 2016 were as follows:
(In Thousands)
Amount Reclassified from Accumulated Other Comprehensive Income
Details about Accumulated Other
Comprehensive Income Components
Net realized (loss) gain on
available for sale securities . . . .
Income tax effect. . . . . . . . . . . .
Net unrecognized pension
income (expense) . . . . . . . . . . .
Income tax effect. . . . . . . . . . . .
$
$
$
$
NOTE 3 - PER SHARE DATA
Twelve Months Ended
December 31, 2018
December 31, 2017
December 31, 2016
(47) $
10
(37) $
(165) $
35
(130) $
600
(204)
396
$
$
(174) $
59
(115) $
1,611
(547)
1,064
(153)
52
(101)
Affected Line Item
in the Consolidated
Statement of Income
Securities gains (losses),
net
Income tax provision
Salaries and employee
benefits
Income tax provision
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2018
2017
2016
5,010,404
(320,150)
5,008,073
(302,471)
5,005,971
(270,514)
4,690,254
4,705,602
4,735,457
There were a total of 263,700 non-qualified employee stock options (Note 14) outstanding on December 31, 2018 that had a
weighted average strike price of $45.12. Options on December 31, 2017 had an average strike price of $43.59 with a total of 93,500
options outstanding. Grants outstanding at year-end 2016 totaled to 26,500 options with an average strike price of $42.03. These
options were excluded, on a weighted average basis, in the computation of diluted earnings per share for all periods presented due
to the average market price of common shares being less than the strike price of the options.
61
NOTE 4 - INVESTMENT SECURITIES
The amortized cost, gross gains and losses, and fair values of investment securities at December 31, 2018 and 2017 are as follows:
(In Thousands)
Available for sale (AFS):
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment equity securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading investment equity securities . . . . . . . . . . . . . . . . . . . . . . .
(In Thousands)
Available for sale (AFS):
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment equity securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading investment equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
$
$
$
$
$
$
$
$
6,385
79,358
50,264
136,007
328
1,300
1,628
49
49
Amortized
Cost
4,273
56,295
48,806
109,374
537
1,300
1,837
20
192
212
$
$
$
$
$
$
$
$
$
$
$
$
(240) $
(426)
(1,690)
(2,356) $
6,153
79,541
48,591
134,285
— $
(76)
(76) $
(13) $
(13) $
552
1,224
1,776
36
36
8
609
17
634
224
—
224
$
$
$
$
— $
— $
2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
51
411
180
642
728
—
728
$
$
$
$
— $
2
2
$
(111) $
(198)
(1,080)
(1,389) $
4,213
56,508
47,906
108,627
— $
(49)
(49) $
— $
(24)
(24) $
1,265
1,251
2,516
20
170
190
The following tables show the Corporation’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, 2018 and 2017.
(In Thousands)
Available for Sale (AFS)
Mortgage-backed securities . . . . . . . . . . . .
State and political securities. . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . .
Total Debt Securities AFS . . . . . . . . . . . . .
Less than Twelve Months
Fair
Value
Gross
Unrealized
Losses
2018
Twelve Months or Greater
Fair
Value
Gross
Unrealized
Losses
Total
Gross
Unrealized
Losses
Fair
Value
$
$
3,023
14,819
10,133
27,975
$
$
(75) $
(128)
(153)
(356) $
2,930
13,648
34,776
51,354
$
$
(165) $
(298)
(1,537)
(2,000) $
5,953
28,467
44,909
79,329
$
$
(240)
(426)
(1,690)
(2,356)
62
(In Thousands)
Available for Sale (AFS)
Mortgage-backed securities . . . . . . . . . . . .
State and political securities. . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . .
Total Debt Securities AFS . . . . . . . . . . . . .
2017
Less than Twelve Months
Twelve Months or Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
$
981
15,691
7,512
24,184
$
$
(12) $
(104)
(148)
(264) $
2,276
3,018
28,517
33,811
$
$
(99) $
(94)
(932)
(1,125) $
3,257
18,709
36,029
57,995
$
$
(111)
(198)
(1,080)
(1,389)
At December 31, 2018 there were 23 individual securities in a continuous unrealized loss position for less than twelve months
and 47 individual securities in a continuous unrealized loss position for greater than twelve months.
The Corporation reviews its position quarterly and has asserted that at December 31, 2018 and 2017, the declines outlined in the
above table represent temporary declines and the Corporation 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 Corporation 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, 2018, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
(In Thousands)
Amortized Cost
Fair Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after one year to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five years to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3,135
$
41,923
69,978
20,971
136,007
$
3,134
40,883
69,316
20,952
134,285
63
Total gross proceeds from sales of securities available for sale were $19,296,000, $25,528,000, and $44,829,000 for 2018, 2017,
and 2016, respectively. The following table represents gross realized gains and losses on those transactions:
(In Thousands)
Gross realized gains:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized gains:
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses:
Financial institution equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
Year Ended December 31,
2018
2017
2016
— $
— $
27
19
3
49
69
408
53
11
35
787
283
$
530
$
1,116
— $
— $
$
—
86
10
96
—
—
—
18
51
69
$
288
—
— $
288
$
—
—
— $
—
149
149
$
5
13
1
189
208
572
217
789
—
86
86
There were no impairment charges included in gross realized losses for the years ended December 31, 2018, 2017, and 2016.
Investment securities with a carrying value of approximately $73,327,000 and $89,736,000 at December 31, 2018 and 2017,
respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
Equity securities consist of Community Reinvestment Act funds along with other smaller investments in other financial institutions.
At December 31, 2018 and December 31, 2017, we had $1,776,000 and $2,516,000, respectively, in equity securities recorded at
fair value. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate
component of AOCI, net of tax. At December 31, 2017, net unrealized gains of $679,000 had been recognized in AOCI. On
January 1, 2018, these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent
changes in fair value being recognized in net equity securities gains (losses). The following is a summary of unrealized and realized
gains and losses recognized in net income on equity securities during the year ended December 31, 2018:
(In Thousands)
Net losses recognized in equity securities during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net gains realized on the sale of equity securities during the period . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses recognized in equity securities held at reporting date . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
(170)
361
(531)
Net gains and losses on trading account securities are as follows for the for the years ended December 31, 2018, 2017, and 2016.
(In Thousands)
Net (losses) gain on sales transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net mark-to-market gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain (loss) on trading account securities. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
2017
2016
(6) $
9
3
$
$
16
(24)
(8) $
51
7
58
64
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, are required to maintain a minimum
investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and
sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified
as restricted stock, carried at cost and evaluated for impairment as necessary. The stock’s value is determined by the ultimate
recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will
ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB
as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make
payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of
legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.
Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Management
considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears
adequate, new shares of FHLB stock continue to change hands at the $100 par value, and the payment of dividends.
NOTE 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, financial,
and agricultural, real estate, consumer automobile, and other consumer installment loans. 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, 2018 and 2017:
(In Thousands)
Current
Past Due
30 To 89
Days
2018
Past Due 90
Days Or More
& Still Accruing
Non-Accrual
Total
Commercial, financial, and agricultural . . .
Real estate mortgage:
Residential. . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . .
Other consumer installment loans . . . . . . . .
$
182,651
$
616
$
— $
5,294
$
188,561
611,281
361,624
43,144
132,713
23,902
7,688
2,349
305
412
636
1,238
—
—
27
9
2,172
7,722
74
31
5
622,379
371,695
43,523
133,183
24,552
1,355,315
$
12,006
$
1,274
$
15,298
1,383,893
Net deferred loan fees and discounts . .
Allowance for loan losses . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . .
864
(13,837)
$ 1,342,342
864
(13,837)
$ 1,370,920
65
(In Thousands)
Current
Past Due
30 To 89
Days
2017
Past Due 90
Days Or More
& Still Accruing
Non-Accrual
Total
Commercial, financial, and agricultural . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . .
Commercial. . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . .
Other consumer installment loans. . . . . . . .
$
178,022
$
663
$
86
$
114
$
178,885
588,278
325,148
31,547
79,595
26,740
6,853
1,823
116
87
202
318
80
20
—
5
1,628
4,968
—
32
17
597,077
332,019
31,683
79,714
26,964
1,229,330
$
9,744
$
509
$
6,759
1,246,342
Net deferred loan fees and discounts . .
Allowance for loan losses . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . .
272
(12,858)
$ 1,216,744
272
(12,858)
$ 1,233,756
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, 2018,
2017, and 2016:
2018
Year Ended December 31,
2017
2016
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
$
$
289
$
235
$
23
$
15
$
6
$
—
123
405
5
7
1
88
212
4
5
1
147
390
—
1
4
98
238
—
—
3
151
496
—
—
3
830
$
545
$
565
$
354
$
656
$
101
105
—
—
2
208
(In Thousands)
Commercial,
financial, and
agricultural. . . . . . . .
Real estate mortgage:
Residential. . . . . . . .
Commercial . . . . . . .
Construction . . . . . .
Consumer automobile
loans. . . . . . . . . . . . . .
Other consumer
installment loans . . . .
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.
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 with the exception of loans identified as troubled debt restructurings. Loans that
66
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, 2018 and 2017:
(In Thousands)
With no related allowance recorded:
Commercial, financial, and agricultural. . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial, financial, and agricultural. . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$
1,152
$
1,152
$
2,619
2,457
74
31
—
6,333
4,111
1,591
9,207
—
—
5
2,619
2,457
74
31
—
6,333
4,111
1,591
9,207
—
—
5
—
—
—
—
—
—
—
650
168
1,720
—
—
5
14,914
14,914
2,543
Total:
Commercial, financial, and agricultural. . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,263
5,263
4,210
11,664
74
31
5
4,210
11,664
74
31
5
650
168
1,720
—
—
5
$
21,247
$
21,247
$
2,543
67
(In Thousands)
With no related allowance recorded:
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$
1,033
$
1,033
$
1,428
1,465
—
—
—
1,428
1,465
—
—
—
3,926
3,926
235
2,304
7,981
—
—
—
235
2,353
8,031
—
—
—
—
—
—
—
—
—
—
96
367
1,721
—
—
—
10,520
10,619
2,184
Total:
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,268
3,732
9,446
—
—
—
1,268
3,781
9,496
—
—
—
96
367
1,721
—
—
—
$
14,446
$
14,545
$
2,184
The following table presents the average recorded investment in impaired loans and related interest income recognized for
December 31, 2018, 2017, and 2016:
(In Thousands)
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average
Investment in
Impaired Loans
2018
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
2,018
$
71
$
3,962
9,524
15
14
1
134
235
—
—
—
$
15,534
$
440
$
168
87
194
4
1
1
455
68
Average
Investment in
Impaired Loans
2017
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
(In Thousands)
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
727
$
41
$
3,233
11,551
—
—
5
75
186
—
—
—
$
15,516
$
302
$
Average
Investment in
Impaired Loans
2016
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
(In Thousands)
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer automobile loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer installment loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
400
$
16
$
3,471
12,887
138
—
—
89
187
—
—
—
$
16,896
$
292
$
At December 31, 2018, additional funds totaling $14,000 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.
7
91
233
—
—
1
332
1
101
110
—
—
—
212
69
Loan modifications that are considered TDRs completed during the twelve months ended December 31, 2018 and 2017 were as
follows:
(In Thousands,
Except Number of Contracts)
Commercial, financial, and
agricultural . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . .
Other consumer installment
loans . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2018
2017
Number
of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
1
$
1,027
$
1,027
— $
— $
—
3
1
—
—
5
419
106
—
—
1,552
$
$
419
106
—
—
1,552
6
2
—
—
8
$
1,015
371
—
—
1,386
$
1,015
371
—
—
1,386
Of the five new troubled debt restructurings that were granted for the year ended December 31, 2018, four loans totaling $1,546,000
were granted payment concessions and one loan totaling $6,000 was granted a term concession.
Of the eight new troubled debt restructurings that were granted for the year ended December 31, 2017, six loans totaling $1,061,000
were granted payment concessions, one loan totaling $273,000 was granted a rate concession, and one loan totaling $52,000 was
granted a term concession.
Loan modifications considered troubled debt restructurings made during the twelve months previous to December 31, 2018,
that have defaulted during the twelve month period ending December 31, 2018 were as follows:
(In Thousands, Except Number of Contracts)
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2018
Number of
Contracts
Recorded
Investment
— $
1
—
1
$
—
1
—
1
There were no loan modifications considered troubled debt restructurings made during the twelve months previous to December
31, 2017 that have defaulted during the corresponding twelve month period.
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
70
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 2018, the threshold for the annual loan review was commercial relationships
$1,750,000 or greater for JSSB and $1,500,000 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, 2018 and 2017:
Commercial,
Finance, and
Agricultural
Real Estate Mortgages
2018
Residential
Commercial
Construction
Consumer
automobile
Other
consumer
installment
Totals
$
179,840
$
619,800
$
351,703
$
43,523
$
133,183
$
24,552
$ 1,352,601
3,426
5,295
694
1,885
6,587
13,405
—
—
—
—
—
—
10,707
20,585
$
188,561
$
622,379
$
371,695
$
43,523
$
133,183
$
24,552
$ 1,383,893
(In Thousands)
Pass . . . . . . . . . . . .
Special Mention . .
Substandard. . . . . .
Total . . . . . . . . . . .
Commercial,
Finance, and
Agricultural
Real Estate Mortgages
2017
Residential
Commercial
Construction
Consumer
automobile
Other
consumer
installment
Totals
$
175,603
$
593,828
$
311,209
$
31,535
$
79,714
$
26,964
$ 1,218,853
738
2,544
1,043
2,206
7,337
13,473
—
148
—
—
—
—
9,118
18,371
$
178,885
$
597,077
$
332,019
$
31,683
$
79,714
$
26,964
$ 1,246,342
(In Thousands)
Pass. . . . . . . . . . . .
Special Mention . .
Substandard . . . . .
Total . . . . . . . . . . .
Allowance for Loan Losses
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s
continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions,
diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-
performing loans.
The Banks' methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually
evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as
well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The
total of the two components represents the Banks' ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances
are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that
are collectively evaluated for impairment are grouped into two classes for evaluation. A general allowance is determined for
“Pass” rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated
for impairment.
For the general allowances historical loss trends are used in the estimation of losses in the current portfolio. These historical loss
amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a twelve quarter moving
average. However, management may adjust the moving average time frame by up to four quarters to adjust for variances in the
economic cycle. Management has identified a number of additional qualitative factors which it uses to supplement the historical
charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ
from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from
internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in
delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience,
ability, and depth of lending staff; and concentrations of credit from a loan type, industry, and/or geographic standpoint. There
was a substantial increase in our indirect loan portfolio in 2018 which resulted in an increase of 10 basis points within this qualitative
factor. Recent industry losses in construction loans warrants a higher qualitative factor. Additionally, the tenure of our credit
department allowed us to incur a slight adjustment within our experience factor. Due to an increase in foreclosures nationally, we
adjusted our residential loans category accordingly.
71
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.
Over the last three years, various quantitative and qualitative factors indicate changes in our provision for loan losses. The provision
for commercial and agricultural loans increased based on changes in the economic cycle and our historical loss factors within this
loan type. The change in the provision for residential real estate loans vary based on our observations of industry trends during
2018 in national and market area foreclosure rates. The provision for this loan type is adjusted by national indices as well as our
historical losses. The provision for commercial and construction real estate loans declined as losses have been minimal and
collateral positions have strenghtened. The provision for consumer automobiles has increased over the last three years. This is due
to the increasing trend in volume of loans we have within this loan type. The provision for other consumer installment loans has
remained steady in recent years based on consistent national and economic trends.
Activity in the allowance is presented for the twelve months ended December 31, 2018, 2017, and 2016:
(In Thousands)
Beginning Balance. .
Charge-offs . . . . . .
Recoveries . . . . . . .
Provision . . . . . . . .
Ending Balance . . . .
(In Thousands)
Beginning Balance .
Charge-offs . . . . . .
Recoveries. . . . . . .
Provision . . . . . . . .
Ending Balance . . . .
(In Thousands)
Beginning Balance .
Charge-offs . . . . . .
Recoveries. . . . . . .
Provision . . . . . . . .
Ending Balance . . . .
Commercial,
Finance, and
Agricultural
1,177
$
(82)
36
549
1,680
$
Commercial,
Finance, and
Agricultural
1,554
$
(106)
135
(406)
1,177
$
Commercial,
Finance, and
Agricultural
1,532
$
(167)
62
127
1,554
$
Real Estate Mortgages
2018
$
$
Residential Commercial Construction
155
$
—
7
(19)
143
4,277
(56)
—
(174)
4,047
5,679
(276)
74
139
5,616
$
$
$
Real Estate Mortgages
2017
$
Residential Commercial
4,975
$
(58)
1
(641)
4,277
5,383
(578)
55
819
5,679
$
$
Construction
178
$
—
9
(32)
155
$
2016
Real Estate Mortgages
$
Residential Commercial
4,217
$
(93)
8
843
4,975
5,116
(39)
15
291
5,383
$
$
Construction
160
$
(2)
9
11
178
$
Consumer
automobile
804
$
(246)
16
754
1,328
$
Other
consumer
installment
271
$
(303)
74
217
259
$
Unallocated
495
$
—
—
269
764
$
Totals
$ 12,858
(963)
207
1,735
$ 13,837
Consumer
automobile
143
$
(57)
2
716
804
$
Other
consumer
installment
273
$
(246)
75
169
271
$
Unallocated
390
$
—
—
105
495
$
Totals
$ 12,896
(1,045)
277
730
$ 12,858
Consumer
automobile
$
Other
consumer
installment
243
(229)
92
167
273
— $
—
—
143
143
$
$
Unallocated
776
$
—
—
(386)
390
$
Totals
$ 12,044
(530)
186
1,196
$ 12,896
The Corporation grants commercial, industrial, residential, and installment loans to customers throughout north-central and north-
eastern Pennsylvania. Although the Corporation has a diversified loan portfolio at December 31, 2018 and 2017, a substantial
portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.
The amount of foreclosed residential real estate held at December 31, 2018 and December 31, 2017, totaled $624,000 and $422,000,
respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are
in process at December 31, 2018 and December 31, 2017, totaled $167,000 and $378,000, respectively.
72
The Corporation has a concentration of loans at December 31, 2018 and 2017 as follows:
Owners of residential rental properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Owners of commercial rental properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
14.61%
12.24%
15.16%
13.57%
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, 2018 and 2017:
Commercial,
Finance, and
Agricultural
Real Estate Mortgages
Residential
Commercial
Construction
Consumer
automobile
Other
consumer
installment
Unallocated
Totals
2018
(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 . . . . . . . . . . . . . . . . . . . . .
Collectively evaluated for
impairment . . . . . . . . . . . . . . . . . . . . .
$
$
$
650
$
168
$
1,720
$
— $
— $
5
$
— $
2,543
1,030
5,448
2,327
1,680
$
5,616
$
4,047
$
143
143
1,328
$
1,328
$
254
259
$
764
764
11,294
$
13,837
5,263
$
4,210
$ 11,664
$
74
$
31
$
5
$
21,247
Total ending loans balance . .
$ 188,561
$ 622,379
$ 371,695
$
43,523
$ 133,183
$ 24,552
183,298
618,169
360,031
43,449
133,152
24,547
1,362,646
$ 1,383,893
Commercial,
Finance, and
Agricultural
Real Estate Mortgages
Residential
Commercial
Construction
Consumer
automobile
Other
consumer
installment
Unallocated
Totals
2017
(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. . . . . . . . . . . . . . . . . . . . .
Collectively evaluated for
impairment. . . . . . . . . . . . . . . . . . . . .
$
$
$
96
$
367
$
1,721
$
— $
— $
— $
— $
2,184
1,081
5,312
2,556
1,177
$
5,679
$
4,277
$
155
155
$
804
804
$
271
271
$
495
495
10,674
$
12,858
1,268
$
3,732
$
9,446
$
— $
— $
—
$
14,446
177,617
593,345
322,573
31,683
79,714
26,964
Total ending loans balance . .
$ 178,885
$ 597,077
$ 332,019
$
31,683
$
79,714
$ 26,964
NOTE 7 - PREMISES AND EQUIPMENT
1,231,896
$ 1,246,342
Major classifications of premises and equipment are summarized as follows at December 31, 2018 and 2017:
(In Thousands)
2018
2017
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premises and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,111
$
21,640
10,369
2,911
42,031
14,451
$
27,580
$
7,107
20,808
9,895
2,311
40,121
12,735
27,386
Depreciation and amortization related to premises and equipment for the years ended 2018, 2017, and 2016 was $1,789,000
$1,659,000, and $1,578,000, respectively.
73
NOTE 8 - GOODWILL AND OTHER INTANGIBLES
As of December 31, 2018 and 2017, 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, 2018 or 2017.
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 a trade name intangible which are being
amortized on an accelerated basis, and also book of business intangible that is being amortized on a straight-line basis over the
useful life of such assets. The net carrying amount of the core deposit intangible, the trade name intangible, and the book of
business intangible at December 31, 2018 was $413,000, $30,000, and $719,000 respectively, with $1,468,000, $103,000, and
$301,000 accumulated amortization as of that date.
As of December 31, 2018, the estimated future amortization expense for the core deposit and trade name intangible was:
(In Thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core
Deposit
Intangible
151
$
117
83
48
14
—
—
—
413
$
Trade
Name
Intangible
11
$
8
6
4
1
—
—
—
30
$
Book of
Business
Intangible
102
$
102
102
102
102
102
102
5
719
$
NOTE 9 - TIME DEPOSITS
Time deposits of $250,000 or more totaled approximately $49,826,000 on December 31, 2018 and $43,262,000 on December 31,
2017. Interest expense on time deposits of $100,000 or more was approximately $2,238,000, $1,479,000, and $1,305,000, for the
years ended December 31, 2018, 2017, and 2016, respectively.
At December 31, 2018, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018
38,367
28,102
23,534
83,750
$
173,753
74
Total time deposit maturities are as follows at December 31, 2018:
(In Thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$
133,985
74,062
57,159
14,878
5,225
1,302
$
286,611
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 $57,000,000 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, 2018, 2017, and 2016:
(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:
$
$
2018
2017
2016
$
$
5,662
8,431
7,043
0.20%
0.13%
162,203
162,203
78,043
$
$
7,878
13,782
10,425
0.13%
0.14%
92,870
92,870
15,559
13,241
17,827
15,394
0.16%
0.18%
—
24,346
3,124
At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.62%
2.24%
1.54%
1.41%
—%
0.57%
We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-
term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with
the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on
the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our
safekeeping agents.The remaining contractual maturity of repurchase agreements in the consolidated balance sheets as of
December 31, 2018 and December 31, 2017 is presented in the following tables.
(In Thousands)
Repurchase Agreements:
2018
2017
Remaining Contractual Maturity of the
Agreements
Overnight and
Continuous
Overnight and
Continuous
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total carrying value of collateral pledged. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liability recognized for repurchase agreements . . . . . . . . . . . . . . . . . .
$
$
$
778
$
1,003
6,599
8,380
5,662
$
$
1,898
6,894
8,662
17,454
7,878
75
NOTE 11 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2018 and
2017:
(In Thousands)
Description
Variable
Total Variable
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Total Fixed
Total
Maturity
2018
2018
2019
2020
2021
2022
2023
(In Thousands)
Year Ending December 31,
Weighted Average Interest Rate
Stated Interest Rate Range
2018
2017
From
To
2018
—%
—%
—%
1.84%
1.91%
2.73%
2.24%
3.10%
2.21%
2.21%
3.18%
3.18%
1.13%
1.59%
1.71%
—%
1.99%
—%
1.72%
1.92%
3.18%
3.18% $
— $
—
1.13%
1.54%
1.62%
2.45%
1.98%
3.10%
1.13%
2.12%
2.29%
3.00%
2.56%
3.10%
—
32,292
43,333
30,000
23,000
10,000
138,625
$ 138,625
$
2017
10,000
10,000
2,000
17,292
28,333
—
13,000
—
60,625
70,625
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
Weighted
Average Rate
$
$
32,292
43,333
30,000
23,000
10,000
138,625
1.84%
1.91%
2.73%
2.24%
3.10%
2.21%
The Banks maintain a credit arrangement which includes a revolving line of credit with the FHLB. Under this credit arrangement,
at December 31, 2018, JSSB has a remaining borrowing capacity of $139,140,000 and Luzerne has a remaining capacity of
$155,139,000, 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 state and political securities, along with other 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, 2018 and 2017 was $827,000. The present value of minimum lease payments at December 31, 2018 and
2017 was $317,000 and $345,000. The following is a schedule showing the future minimum lease payments under the capital
lease by years and the present value of the minimum lease payments as of December 31, 2018. 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
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
38
38
38
37
200
351
$
$
$
9
7
7
6
5
34
$
29
31
31
31
195
317
76
NOTE 12 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset position at December 31, 2018 and 2017:
(In Thousands)
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Investment security accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
$
2,909
$
1,339
624
274
52
362
752
6,312
104
451
603
1,158
$
5,154
$
2,714
1,235
684
211
45
14
727
5,630
95
537
610
1,242
4,388
No valuation allowance was established at December 31, 2018 and 2017, because of the Corporation’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 Corporation’s earning potential. The Corporation is no longer subject to federal, state, and local examinations
by tax authorities for years before 2014.
The provision or benefit for income taxes is comprised of the following for the year ended December 31, 2018, 2017, and 2016:
(In Thousands)
2018
2017
2016
Currently payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in corporate tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
3,143
(324)
—
$
5,690
(955)
2,724
2,819
$
7,459
$
3,054
1,543
—
4,597
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, 2018, 2017, and 2016:
(In Thousands)
Amount
%
Amount
%
Amount
%
2018
2017
2016
Provision at expected rate . . . . . . . . . . . . . .
(Decrease) increase in tax resulting from:
Tax-exempt income . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . .
Change in corporate tax rate . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax provision and rate. . . .
$
3,681
21.00% $
5,859
34.00% $
5,804
34.00%
(633)
(177)
—
(52)
$
2,819
(3.61)
(1.01)
—
(0.30)
16.08% $
(811)
(177)
2,724
(136)
7,459
(4.71)
(1.03)
15.81
(0.78)
43.29% $
(1,092)
(312)
—
197
4,597
(6.40)
(1.83)
—
1.16
26.93%
77
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Corporation 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, until December
31, 2014 when the benefit accrual was frozen.
The following table sets forth the obligation and funded status as of December 31, 2018 and 2017:
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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:
2018
2017
$
20,669
$
19,289
706
141
(797)
(1,697)
19,022
17,486
(1,078)
750
(797)
5
$
$
16,366
(2,656) $
756
159
(782)
1,247
20,669
15,090
2,424
750
(782)
4
17,486
(3,183)
(2,656) $
(3,183)
$
$
$
$
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,678
$
6,227
The accumulated benefit obligation for the Plan was $19,022,000 and $20,669,000 at December 31, 2018 and 2017, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in Other Comprehensive Income (Loss) as of December 31,
2018, 2017, and 2016 are as follows:
(In Thousands)
2018
2017
2016
Net periodic pension cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic (benefit) cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
706
(1,098)
165
(227) $
— $
756
(926)
174
4
$
55
775
(989)
153
(6)
78
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31, 2018, 2017, and 2016:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.10%
N/A
3.47%
N/A
3.98%
N/A
2018
2017
2016
Weighted-average assumptions used to determine net periodic cost for years ended December 31, 2018, 2017, and 2016:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.47%
7.00%
3.98%
7.00%
4.17%
7.00%
2018
2017
2016
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, 2018 and 2017 by asset category are as follows:
Asset Category
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inflation Hedges/Real Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hedged Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
4.70%
12.98%
64.26%
5.90%
12.16%
4.96%
11.42%
66.90%
5.82%
10.90%
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 62% equity securities, 15.0% fixed income securities,
10% inflation hedges/real assets, 10% hedged strategies, and 3% 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.
79
The following table sets forth by level, within the fair value hierarchy detailed in Note 21 - Fair Value Measurements, the Plan’s
assets at fair value as of December 31, 2018 and 2017:
(In Thousands)
Assets:
Level I
Level II
Level III
Total
2018
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds - taxable fixed income. . . . . . . . . . . . . . . .
Mutual funds - domestic equity. . . . . . . . . . . . . . . . . . . .
Mutual funds - international equity . . . . . . . . . . . . . . . . .
Inflation Hedges/Real Assets. . . . . . . . . . . . . . . . . . . . . .
Hedged Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . .
$
770
$
— $
— $
2,120
8,550
1,970
965
1,991
—
—
—
—
—
—
—
—
—
—
770
2,120
8,550
1,970
965
1,991
$
16,366
$
— $
— $
16,366
(In Thousands)
Assets:
Level I
Level II
Level III
Total
2017
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds - taxable fixed income. . . . . . . . . . . . . . . .
Mutual funds - domestic equity. . . . . . . . . . . . . . . . . . . .
Mutual funds - international equity . . . . . . . . . . . . . . . . .
Inflation Hedges/Real Assets. . . . . . . . . . . . . . . . . . . . . .
Hedged Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . .
$
868
$
— $
— $
1,992
9,358
2,343
1,019
1,906
—
—
—
—
—
—
—
—
—
—
868
1,992
9,358
2,343
1,019
1,906
$
17,486
$
— $
— $
17,486
The following future benefit payments are expected to be paid:
(In Thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024-2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
886
918
910
929
1,000
5,444
$
10,087
The Corporation expects to contribute a minimum of $500,000 to its Pension Plan in 2019.
401(k) Savings Plan
The Corporation 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 Corporation 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 $428,000, $369,000, and $215,000 for the years ended December 31, 2018, 2017, and 2016,
respectively.
80
Deferred Compensation Plan
The Corporation has a deferred compensation plan whereby participating directors elect to forego directors’ fees paid in cash.
Under this plan, the Corporation 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 Corporation has acquired bank-owned life insurance policies on the
lives of the participating directors for which insurance benefits are payable to the Corporation. The Corporation incurred expenses
related to the plan of $370,000, $330,000, and $303,000 for the years ended December 31, 2018, 2017, and 2016, respectively.
Benefits paid under the plan were approximately $59,000, $79,000, and $85,000 in 2018, 2017, and 2016, respectively.
NOTE 14 - STOCK OPTIONS
In 2014, the Corporation adopted the 2014 Equity Incentive Plan designed to help the Corporation attract, retain, and motivate
employees and non-employee directors. Incentive stock options, non-qualified stock options, and restricted stock may be granted
as part of the plan.
On March 24, 2017, the Corporation issued 70,000 stock options with a strike price of $44.21 to employees. The options granted
in 2017 all expire ten years from the grant date; however, of the 70,000 grants awarded, 46,250 of the options have a three year
vesting period while the remaining 23,750 options vest in five years. The Corporation issued a total of 174,700 stock options
during 2018 and expire ten years from the grant date. On January 5, 2018 a total of 25,000 options were issued and the remaining
149,700 options were issued on August 24, 2018. Of the 174,700 options issued, 62,700 have a vesting period of three years and
the remaining 112,000 options vest in five years.
A summary of stock option activity for the year ended December 31, 2018 is presented below:
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
Outstanding at December 31, 2015 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2016 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017 . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2018 . . . . . . . . . . . .
34,750
—
—
(8,250)
—
26,500
70,000
—
(3,000)
—
93,500
$
174,700
—
(4,500)
—
263,700
$
Options exercisable at December 31, 2018 . . . . . .
— $
42.03
—
—
42.03
—
42.03
44.21
—
44.21
—
43.59
45.87
—
42.76
—
45.12
—
9.67
14,943
224,455
$
279,365
8.66
9.23
8.79
9.56
8.97
$
— $
—
—
81 On December 31, 2018, a total of 263,700 options were outstanding. Outstanding options at December 31, 2018 and the related
vesting schedules are summarized below:
Date
Shares
Forfeited
Outstanding
Strike Price
Vesting Period
Expiration
Stock Options Granted
August 24, 2018
August 24, 2018
January 5, 2018
January 5, 2018
March 24, 2017
March 24, 2017
August 27, 2015
50,200
99,500
12,500
12,500
46,250
23,750
38,750
—
—
—
—
(4,500)
—
(15,250)
50,200
$
99,500
12,500
12,500
41,750
23,750
23,500
46.00
46.00
45.11
45.11
44.21
44.21
42.03
3 years
5 years
3 years
5 years
3 years
5 years
5 years
10 years
10 years
10 years
10 years
10 years
10 years
10 years
The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the
assumptions used in this model for the stock options granted during 2018 and 2017 (no options were issued during 2016):
Risk-free interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average grant date fair value per option . . . . . . . . . . . . . . . . . . . . . . . . . $
2.68%
24.78%
2.16%
7.15 years
7.72
$
1.90%
27.63%
4.20%
6.84 years
8.99
2018
2017
The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straightline basis
over the options’ vesting periods while ensuring that the cumulative amount of compensation cost recognized at least equals the
value of the vested portion of the award at that date. The Corporation determines the fair value of options granted using the Black-
Scholes option-pricing model. The risk-free interest rate is based on the United States Treasury bond with a similar term to the
expected life of the options at the grant date. Expected volatility was estimated based on the adjusted historic volatility of the
Corporation’s shares. The expected life was estimated to equal the contractual life of the options. The dividend yield rate was
based upon recent historical dividends paid on shares.
For the years ended December 31, 2018, 2017, and 2016 there was $486,000, $29,000, and $19,000 in total share-based
compensation expense, respectively. The compensation expense is recorded as part of the non-interest expenses in the Consolidated
Statement of Income.
As of December 31, 2018, total unrecognized compensation costs related to non-vested options was $1,685,000 which is expected
to be recognized over a period of 3.69 years.
NOTE 15 - EMPLOYEE STOCK PURCHASE PLAN
The Corporation maintains the 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 Corporation. 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 2,359 and 2,230 shares
issued under the plan for the years ended December 31, 2018 and 2017, respectively.
82
NOTE 16 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Corporation and the Banks, including their immediate families and companies in
which they are principal owners (more than ten percent), are indebted to the Corporation. 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, 2018 and 2017:
(In Thousands)
Beginning
Balance
New Loans
Repayments
Ending Balance
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,877
$
13,147
$
19,011
5,602
(3,013) $
(6,822)
19,011
17,791
Deposits from related parties held by the Banks amounted to $16,836,000 at December 31, 2018 and $21,700,000 at December 31,
2017.
NOTE 17 - 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, 2018:
(In Thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
546
560
563
456
601
2,117
4,843
The Corporation’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, 2018, 2017, and 2016 were $583,000, $584,000,
and $573,000, respectively.
The Corporation 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 18 - OFF-BALANCE SHEET RISK
The Corporation 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 Corporation
has in particular classes of financial instruments.
The Corporation’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 Corporation uses
the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The
Corporation may require collateral or other security to support financial instruments with off-balance sheet credit risk.
83
Financial instruments whose contract amounts represent credit risk are as follows at December 31, 2018 and 2017:
(In Thousands)
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit exposure from the sale of assets with recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
$
166,417
$
264,982
10,566
6,152
10,406
4,893
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 Corporation
evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Corporation, 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 Corporation 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 19 - CAPITAL REQUIREMENTS
Federal regulations require the Corporation and the Banks to maintain minimum amounts of capital. Specifically, each is required
to maintain certain minimum dollar amounts and ratios of Common Equity Tier 1, 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, 2018 and 2017, 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, common equity tier I risk-based, tier I risked-based,
total risk-based, and tier I leverage capital ratios must be at least 6.5%, 8%, 10%, and 5%, respectively.
.
84
The Corporation’s and the Banks' actual capital ratios (using the definitions from the prompt corrective action rules) are presented
in the following tables, which shows that the Corporation and both Banks met all regulatory capital requirements.
Consolidated Corporation
(In Thousands)
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Average Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
Amount
Ratio
Amount
Ratio
$
132,543
10.178% $
125,513
11.254%
58,601
83,018
84,646
142,876
104,175
128,591
130,219
$
4.500%
6.375%
6.500%
10.972% $
8.000%
9.875%
10.000%
50,187
64,128
72,493
132,094
89,223
103,164
111,528
4.500%
5.750%
6.500%
11.844%
8.000%
9.250%
10.000%
$
132,543
10.178% $
125,513
11.254%
78,135
102,552
104,180
6.000%
7.875%
8.000%
66,916
80,857
89,222
$
132,543
8.176% $
125,513
64,845
81,056
4.000%
5.000%
57,273
71,591
6.000%
7.250%
8.000%
8.766%
4.000%
5.000%
Jersey Shore State Bank
(In Thousands)
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Average Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2018
2017
Amount
Ratio
Amount
Ratio
94,105
42,866
60,727
61,917
102,534
76,205
94,066
95,256
94,105
57,155
75,015
76,206
94,105
48,734
60,917
9.879% $
4.500%
6.375%
6.500%
10.764% $
8.000%
9.875%
10.000%
9.879% $
6.000%
7.875%
8.000%
7.724% $
4.000%
5.000%
88,289
39,259
50,164
56,707
93,145
69,791
80,696
87,239
88,289
52,345
63,251
69,794
88,289
42,885
53,606
10.120%
4.500%
5.750%
6.500%
10.677%
8.000%
9.250%
10.000%
10.120%
6.000%
7.250%
8.000%
8.235%
4.000%
5.000%
85
Luzerne Bank
(In Thousands)
Common Equity Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Risk-weighted Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
Minimum To Maintain Capital Conservation Buffer . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier I Capital (to Average Assets)
Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For Capital Adequacy Purposes . . . . . . . . . . . . . . . . . . . . . . . .
To Be Well Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2018
2017
Amount
Ratio
Amount
Ratio
35,378
15,824
22,417
22,856
37,283
28,130
34,723
35,163
35,378
21,098
27,691
28,131
35,378
16,350
20,438
10.061% $
4.500%
6.375%
6.500%
10.603% $
8.000%
9.875%
10.000%
10.061% $
6.000%
7.875%
8.000%
8.655% $
4.000%
5.000%
31,116
14,389
18,386
20,785
32,533
25,581
29,578
31,977
31,116
19,186
23,183
25,581
31,116
14,845
18,557
9.731%
4.500%
5.750%
6.500%
10.174%
8.000%
9.250%
10.000%
9.731%
6.000%
7.250%
8.000%
8.384%
4.000%
5.000%
NOTE 20 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks.
Accordingly, at December 31, 2018, the balance in the additional paid in capital account totaling $11,657,000 for JSSB and
$42,214,000 for Luzerne 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,
2018, the regulatory lending limit amounted to approximately $18,895,000.
Cash and Due from Banks
JSSB and Luzerne had no reserve requirements by the district Federal Reserve Bank at December 31, 2018 or 2017; 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.
86
NOTE 21 - 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,
2018 and 2017, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
(In Thousands)
Level I
Level II
Level III
Total
2018
Assets measured on a recurring basis:
Investment securities, available for sale:
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment equity securities: . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . .
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities, trading:
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
6,153
$
— $
—
—
552
1,224
36
79,541
48,591
—
—
—
2017
—
—
—
—
—
6,153
79,541
48,591
552
1,224
36
(In Thousands)
Level I
Level II
Level III
Total
Assets measured on a recurring basis:
Investment securities, available for sale:
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . .
State and political securities . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment equity securities: . . . . . . . . . . . . . . . . . . . . . . .
Financial institution equity securities . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities, trading:
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
4,213
$
— $
—
—
1,265
1,251
190
56,508
47,906
—
—
—
—
—
—
—
—
4,213
56,508
47,906
1,265
1,251
190
87
The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of December 31,
2018 and 2017, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
(In Thousands)
Assets measured on a non-recurring basis:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
(In Thousands)
Assets measured on a non-recurring basis:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level I
Level II
Level III
Total
2018
— $
—
— $
—
$
18,704
402
18,704
402
Level I
Level II
Level III
Total
2017
— $
—
— $
—
$
12,262
143
12,262
143
$
$
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, 2018 and 2017:
Quantitative Information About Level III Fair Value Measurements
2018
(In Thousands)
Fair Value
Valuation Technique(s)
Unobservable Inputs
Range
Weighted Average
Impaired loans . . . . . . . . .
$ 12,929
Discounted cash flow
Temporary reduction in
payment amount
7% to (70)%
(6)%
Probability of default
—%
Other real estate owned . .
$
402 Appraisal of collateral (1) Appraisal adjustments (1)
(20)%
5,775 Appraisal of collateral (1) Appraisal adjustments (1)
0 to (90)%
(20)%
(20)%
Quantitative Information About Level III Fair Value Measurements
2017
(In Thousands)
Fair Value
Valuation Technique(s)
Unobservable Inputs
Range
Weighted Average
Impaired loans . . . . . . . . .
$ 6,583 Discounted cash flow
Temporary reduction in
payment amount
3% to (70)%
(4)%
Probability of default
—%
Other real estate owned . .
$
143 Appraisal of collateral (1) Appraisal adjustments (1)
(20)%
5,679 Appraisal of collateral (1) Appraisal adjustments (1)
0 to (20)%
(17)%
(20)%
(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 Corporation’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 Corporation’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 Corporation’s other real estate owned are the same inputs used to value impaired loans using the appraisal of
collateral valuation technique.
88
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation 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 Corporation’s entire holdings of a particular financial instrument.
Also, it is the Corporation’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 Corporation’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 Corporation using historical data and an estimation methodology suitable for each category
of financial instruments. The Corporation’s fair values, methods, and assumptions are set forth below for the Corporation’s other
financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the
Corporation, are not considered financial instruments but have value, the fair value of financial instruments would not represent
the full fair value of the Corporation.
The fair values of the Corporation’s financial instruments not required to be measured or reported at fair value are as follows at
December 31, 2018 and 2017:
(In Thousands)
Financial assets:
Cash and cash equivalents (1) . . . . . .
Restricted investment in bank stock .
Loans held for sale (1) . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance (1) . . . . . .
Accrued interest receivable (1) . . . . .
Financial liabilities:
Interest-bearing deposits . . . . . . . . . .
Noninterest-bearing deposits (1) . . . .
Short-term borrowings (1) . . . . . . . . .
Long-term borrowings . . . . . . . . . . .
Accrued interest payable (1) . . . . . . .
Carrying
Value
Fair Value
Fair Value Measurements at December 31, 2018
Quoted Prices in
Active Markets for
Identical Assets
(Level I)
Significant Other
Observable Inputs
(Level II)
Significant
Unobservable Inputs
(Level III)
$
66,742
$
66,742
$
66,742
$
— $
18,862
2,929
18,862
2,929
1,370,920
1,381,581
28,627
5,334
28,627
5,334
18,862
2,929
—
28,627
5,334
—
—
—
—
—
—
—
—
1,381,581
—
—
$
899,089
$
882,108
$
612,478
$
— $
269,630
320,814
167,865
138,942
1,150
320,814
167,865
137,773
1,150
320,814
167,865
—
1,150
—
—
—
—
—
—
137,773
—
(1) The financial instrument is carried at cost at December 31, 2018, which approximate the fair value of the instruments
89
(In Thousands)
Financial assets:
Cash and cash equivalents. . . . . . . . .
Restricted investment in bank stock .
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, 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level I)
Significant Other
Observable Inputs
(Level II)
Significant
Unobservable Inputs
(Level III)
$
27,243
$
27,243
$
27,243
$
— $
13,332
1,196
13,332
1,196
1,233,756
1,264,584
27,982
4,321
27,982
4,321
13,332
1,196
—
27,982
4,321
—
—
—
—
—
—
1,264,584
—
—
$
843,004
$
838,441
$
611,187
$
— $
227,254
303,316
100,748
70,970
502
303,316
100,748
70,280
502
303,316
100,748
—
502
—
—
—
—
—
—
70,280
—
The methods and assumptions used by the Corporation in estimating fair values of financial instruments at December 31, 2018 is
in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 which requires public entities to use exit
pricing in the calculation of the above tables. Prior period fair value calculations were ran on the assumption of entry pricing and
therefore the comparability between the periods above are diminished.
Cash and Cash Equivalents, Trading Securities, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings,
and Accrued Interest Payable:
The fair value is equal to the carrying value.
Investment Debt Securities and Equity Securities:
The fair value of investment securities available for sale and investment equity securities are 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.
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 Corporation’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.
90
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, 2018 and 2017. 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, 2018
and 2017. The contractual amounts of unfunded commitments and letters of credit are presented in Note 18.
NOTE 23 - 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31,
2018
2017
247
$
132
140,476
131,637
2,694
295
143,712
176
143,536
143,712
$
$
$
5,685
889
138,343
149
138,194
138,343
(In Thousands)
Operating income:
2018
2017
2016
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
9,091
$
6,973
(1,360)
14,704
13,579
$
$
$
$
11,352
(908)
(671)
9,773
10,545
$
10,007
3,128
(660)
12,475
11,346
$
$
91
CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018
2017
2016
$
14,704
$
9,773
$
12,475
(6,973)
620
8,351
(8,818)
582
—
(8,236)
115
132
247
908
(525)
10,156
(8,837)
116
(1,881)
(10,602)
(446)
578
$
132
$
(3,128)
344
9,691
(8,903)
101
(574)
(9,376)
315
263
578
NOTE 24 - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands, Except Per Share Data)
For the Three Months Ended
2018
March 31,
June 30,
Sept. 30,
Dec. 31,
$
13,201
$
14,111
$
15,198
$
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . .
(In Thousands, Except Per Share Data)
2017
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
2,048
11,153
160
2,121
(40)
9,277
3,797
589
3,208
0.68
0.68
$
$
$
2,408
11,703
335
2,347
15
9,517
4,213
733
3,480
0.74
0.74
$
$
$
2,943
12,255
480
2,613
(24)
9,681
4,683
857
3,826
0.82
0.82
$
$
$
16,236
3,537
12,699
760
2,594
(165)
9,532
4,836
640
4,196
0.89
0.89
For the Three Months Ended
March 31,
June 30,
Sept. 30,
Dec. 31,
11,682
$
12,209
$
12,948
$
1,346
10,336
330
2,452
199
8,985
3,672
986
2,686
0.57
0.56
$
$
$
1,385
10,824
215
2,775
(12)
9,063
4,309
1,223
3,086
0.65
0.65
$
$
$
1,496
11,452
60
2,442
298
9,566
4,566
1,282
3,284
0.70
0.70
$
$
$
13,138
1,670
11,468
125
2,483
107
9,248
4,685
3,968
717
0.16
0.15
92
Note 25. Revenue Recognition
On January 1, 2018, the Corporation adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all
subsequent ASUs that modified Topic 606 using the modified retrospective method, and applied the guidance to all contracts in
scope that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented
under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic
accounting under Topic 605.
The core principle of Topic 606, Revenue from Contracts with Customers, is that an entity recognize revenue at an amount that
reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer.
Topic 606 requires entities to exercise more judgment when considering the terms of a contract than under Topic 605, Revenue
Recognition. Topic 606 applies to all contracts with customers to provide goods or services in the ordinary course of business,
except for contracts that are specifically excluded from its scope.
Topic 606 does not apply to revenue associated with interest income on financial instruments, including loans and securities.
Additionally, certain noninterest income streams such as certain credit and debit card fees, income from bank owned life insurance,
and gain and losses on sales of investment securities are out of scope of Topic 606.
Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, merchant income, wire transfer
income, check cashing fees, check printing fees, safe deposit box rental fees, life insurance and brokerage commissions. These
revenue streams are largely transactional based and revenue is recognized upon completion of transaction.
Principal versus Agent Considerations
When more than one party is involved in providing goods or services to a customer, Topic 606 requires the Corporation to determine
whether it is the principal or an agent in these transactions by evaluating the nature of its promise to the customer. An entity is a
principal and therefore records revenue on a gross basis if it controls a promised good or service before transferring that good or
service to the customer. An entity is an agent and records as revenue the net amount it retains for its agency services if its role is
to arrange for another entity to provide the goods or services. The Corporation most commonly acts as a principal and records
revenue on a gross basis, except in certain circumstances. As an example, revenues earned from interchange fees, in which the
Corporation acts as an agent, are recorded as non-interest income, net of the related expenses paid to the principal. Brokerage and
insurance commissions are recognized when The M Group's services to the broker dealer and investment representative are
complete.
Debit Card Fees
Interchange fees are one source of debit and credit card income that is comprised of an amount merchants pay card-issuing banks
for the processing of their electronic transactions as a form of payment. ATM service charges, check card usage, and POS debit
card transactions generate interchange and debit card income. Per Topic 606 interchange and debit card transaction fees are reported
net of related network costs. See Note 1 - Recent Accounting Pronouncements. Prior to the adoption of Topic 606, non-interest
expense included network costs. Interchange and debit card transaction fees at December 31, 2018 are reported on a net basis of
$1,534,000; for the corresponding periods of 2017 and 2016 such amounts were $1,312,000 and $1,327,000, respectively. The
below table compares gross interchange and debit card transaction fees net network costs for 2018, 2017 and 2016:
(In Thousands)
Debit card transaction fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other processing service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross interchange and card based transaction fees. . . . . . . . . . . . . . . .
Network costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interchange and card based transaction fees . . . . . . . . . . . . . . . . .
$
$
2018
2017
2016
2,117
$
1,960
$
275
2,392
858
263
2,223
911
1,534
$
1,312
$
1,896
314
2,210
883
1,327
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
93
ITEM 9A CONTROLS AND PROCEDURES
The Corporation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s
Chief Executive Officer along with the Corporation’s President and Chief Financial Officer, conducted an evaluation of the
effectiveness as of December 31, 2018 of the design and operation of the Corporation’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 Corporation’s
President and Chief Executive Officer along with the Corporation’s Chief Financial Officer concluded that the Corporation’s
disclosure controls and procedures were effective as of December 31, 2018.
There have been no changes in the Corporation’s internal control over financial reporting during the fourth quarter of 2018 that
have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Corporation 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 Corporation’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 Corporation’s internal control over financial reporting as of December 31, 2018.
Management’s assessment did not identify any material weaknesses in the Corporation’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, 2018, the Corporation’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 Corporation’s internal control over financial reporting as of December 31, 2018.
Date: March 12, 2019
/s/ Richard A. Grafmyre
Chief Executive Officer
/s/ Brian L. Knepp
President and Chief Financial Officer
(Principal Financial Officer)
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Penns Woods Bancorp, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Penns Woods Bancorp, Inc. and subsidiaries’ (the “Company”) internal
control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related
consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2018, of the Company, and our report dated March 12, 2019,
expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company, in accordance with U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
95 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.
Cranberry Township, Pennsylvania
March 12, 2019
96 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 Corporation’s Proxy Statement for the Corporation’s 2019 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,” “Nonqualified Deferred Compensation,” “Retirement Plan,” “Potential Post-Employment Payments,” and
"Compensation Committee Interlocks and Insider Participation" 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.
Securities Authorized for Issuance Under Equity Compensation Plans
The following tables provide certain information regarding securities issued or issuable under the Corporation’s equity
compensation plan as of December 31, 2018:
Number of
Securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
Weighted
average
exercise price
of outstanding
options,
warrants and
rights
Number of
securities
remaining available
for issuance under
equity plans
(excluding
securities reflected
in first column)
Equity compensation plan approved by security holders .........
Equity compensation plan not approved by security holders ...
Total ..........................................................................................
263,700
—
263,700
$
$
45.12
—
45.12
319,050
—
319,050
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.
97
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(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
98 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.
(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.
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).
Employment Agreement, dated December 31, 2018, among Penns Woods Bancorp, Inc. and Brian L. Knepp
(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on December
31, 2018).*
Amended and Restated Employment Agreement, dated September 27, 2018, 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 September 28, 2018).*
Employment Agreement, dated February 1, 2014, among Penns Woods Bancorp, Inc., Jersey Shore State Bank
and Aron M. Carter (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-
K for the year ended December 31, 2016).*
Employment Agreement, dated February 1, 2014, among Penns Woods Bancorp, Inc., Jersey Shore State Bank
and Michelle M. Karas (incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2016).*
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, 2018 and December 31, 2017; (ii) the
Consolidated Statement of Income for the years ended December 31, 2018, 2017 and 2016; (iii) the Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017, and 2016; (iv) the
Consolidated Statement of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016;
(v) the Consolidated Statement of Cash Flows for the years ended December 31, 2018, 2017, and 2016; 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.
99 EXHIBIT INDEX
(3) (i)
(21)
(23)
(31) (i)
(31) (ii)
(32) (i)
(32) (ii)
Exhibit 101
Articles of Incorporation of the Registrant, as presently in effect
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, 2018 and December 31, 2017; (ii) the
Consolidated Statement of Income for the years ended December 31, 2018, 2017 and 2016; (iii) the Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017, and 2016; (iv) the Consolidated
Statement of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016; (v) the Consolidated
Statement of Cash Flows for the years ended December 31, 2018, 2017, and 2016; 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.
100
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 12, 2019
PENNS WOODS BANCORP, INC.
/s/ Richard A. Grafmyre
Chief Executive Officer
101
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, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Brian L. Knepp
Brian L. Knepp, President and Chief Financial Officer and Director
(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/ Cameron W. Kephart
Cameron W. Kephart, 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/ Ronald A. Walko
Ronald A. Walko, Director
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
March 12, 2019
102
ARTICLES OF INCORPORATION, AS AMENDED
Exhibit 3 (i)
1. The name of the corporation is Penns Woods Bancorp, Inc.
2. The location and post office address of the initial registered office of the corporation in this Commonwealth is 115 S.
Main Street, Jersey Shore, Pennsylvania 17740.
3. The corporation is incorporated under the Business Corporation Law of the Commonwealth of Pennsylvania for the
following purpose or purposes: To have unlimited power to engage in and do any lawful act concerning any or all lawful
business for which corporations may be incorporated under the provisions of the Business Corporation Law of the
Commonwealth of Pennsylvania. The corporation is incorporated under the provisions of the Business Corporation Law of
the Commonwealth of Pennsylvania (Act of May 5, 1933, P.L. 364 as amended).
4. The term for which the corporation is to exist is perpetual.
5. The corporation shall have authority to issue (i) fifteen million (15,000,000) shares of common stock, par value
$8.33 per share, and (ii) three million (3,000,000) shares of preferred stock, having such par value as the Board of Directors
shall fix and determine (the “Preferred Stock”). The Preferred Stock may be issued from time to time as a class without
series or, if so determined by the Board of Directors of the corporation, either in whole or in part, in one or more series.
There is hereby expressly granted to and vested in the Board of Directors of the corporation authority to fix and determine
(except as fixed and determined herein), by resolution, the par value, voting powers, full or limited, or no voting powers, and
such designations, preferences and relative, participating, optional or other special rights, if any, and the qualifications,
limitations or restrictions thereof, if any, including specifically, but not limited to, the dividend rights, conversion rights,
redemption rights and liquidation preferences, if any, of any wholly unissued series of Preferred Stock (or the entire class of
Preferred Stock if none of such shares have been issued), the number of shares constituting any such series and the terms and
conditions of the issue thereof. Prior to the issuance of any shares of Preferred Stock, a statement setting forth a copy of each
such resolution or resolutions and the number of shares of Preferred Stock of each such class or series shall be executed and
filed in accordance with the Pennsylvania Business Corporation Law. Unless otherwise provided in any such resolution or
resolutions, the number of shares of capital stock of any such class or series so set forth in such resolution or resolutions may
thereafter be increased or decreased (but not below the number of shares then outstanding), by a statement likewise executed
and filed setting forth a statement that a specified increase or decrease therein had been authorized and directed by a
resolution or resolutions likewise adopted by the Board of Directors of the corporation. In case the number of such shares
shall be decreased, the number of shares so specified in the statement shall resume the status they had prior to the adoption of
the first resolution or resolutions.
6. The name(s) and post office address(es) of each incorporator(s) and the number and class of shares subscribed for by
such incorporator(s) is (are):
Name
Theodore H. Reich
Raymond D. Eck
Howard N. Thompson
Address
No. and Class of Shares
226 Front Street, Jersey Shore, PA 17740
R.D. 2 Jersey Shore, PA 17740
P.O. Box 504 Jersey Shore, PA 17740
1
1
1
7. Cumulative voting rights shall not exist with respect to the election of directors.
8. A. The Board of Directors may, if it deems it advisable, oppose a tender, or other offer for the corporation’s securities,
whether the offer is in cash or in securities of a corporation or otherwise. When considering whether to oppose an offer, the
Board of Directors may, but it is not legally obligated to, consider any pertinent issues; by way of illustration, but not of
limitation, the Board of Directors may, but shall not be legally obligated to, consider any and all of the following:
(1) Whether the offer price is acceptable based on the historical and present operating results or financial condition of
the corporation.
(2) Whether a more favorable price could be obtained for the corporation’s securities in the future.
(3) The impact which an acquisition of the corporation would have on its employees, depositors and customers of the
corporation and its subsidiaries in the community which they serve.
103
(4) The reputation and business practices of the offeror and its management and affiliates as they would affect the
employees, depositors and customers of the corporation and its subsidiaries and the future value of the corporation’s
stock.
(5) The value of the securities, if any, which the offeror is offering in exchange for the corporation’s securities, based
on an analysis of the worth of the corporation as compared to the corporation or other entity whose securities are being
offered.
(6) Any antitrust or other legal and regulatory issues that are raised by the offer.
B. If the Board of Directors determines that an offer should be rejected, it may take any lawful action to accomplish its
purpose including, but not limited to, any and all of the following: advising shareholders not to accept the offer; litigation
against the offeror; filing complaints with all governmental and regulatory authorities; acquiring the authorized but unissued
securities or treasury stock or granting options with respect thereto; acquiring a company to create an antitrust or other
regulatory problem for the offeror; and obtaining a more favorable offer from another individual or entity.
9. The Board of Directors of the corporation shall be divided into three classes, the respective terms of office of which
shall end in successive years. The number of directors in each class shall be specified in the Bylaws and shall be nearly as
equal as possible. Unless they are elected to fill vacancies, the directors in each class shall be elected to hold office until the
third successive annual meeting of shareholders after their election and until their successors shall have been elected and
qualified. At each annual meeting of shareholders the directors of only one class shall be elected, except directors who may
be elected to fill vacancies.
10. No holder of shares of any class or of any series of any class shall have any preemptive right to subscribe for, purchase or
receive any shares of the corporation, whether now or hereafter authorized, or any obligations or other securities convertible
into or carrying options to purchase any such shares of the corporation, or any options or rights to purchase any such shares
or securities, issued or sold by the corporation for cash or any other form of consideration, and any such shares, securities or
rights may be issued or disposed of by the Board of Directors to such persons and on such terms as the Board in its discretion
shall deem advisable.
11. The corporation shall have authority to borrow money and the Board of Directors, without the approval of the shareholders
and acting within their sole discretion, shall have the authority to issue debt instruments of the corporation upon such terms
and conditions and with such limitation as the Board of Directors deems advisable. The authority of the Board of Directors
shall include, but not be limited to, the power to issue convertible debentures.
12. Every person who is or was a director, officer, employee, or agent of the corporation, or of any corporation which he
served as such at the request of the corporation, shall be indemnified by the corporation to the fullest extent permitted by law
against all expenses and liabilities reasonably incurred by or imposed upon him in connection with any proceeding to which
he may be made, or threatened to be made, any party, or in which he may become involved by reason of his being or having
been a director, officer, employee or agent of the corporation, or of such other corporation, whether or not he is a director,
officer, employee or agent of the corporation or such other corporation at the time the expenses or liabilities are incurred.
13. No merger, consolidation, liquidation or dissolution of the corporation nor any action that would result in the sale or other
disposition of all or substantially all of the assets of the corporation shall be valid unless first approved by the affirmative
vote of the holders of at least sixty-six and 2/3 percent (66-2/3%) of the outstanding shares of Common Stock. This
Article 12 may not be amended unless first approved by the affirmative vote of the holders of at least sixty-six and 2/3
percent (66-2/3%) of the outstanding shares of Common Stock.
Notwithstanding the preceding sentence, this Article 13 shall not apply to any merger, consolidation, share exchange or
similar transaction involving the Corporation if (i) members of the Board of Directors of the Corporation will constitute at
least a majority of the Board of Directors of the surviving or new corporation or entity immediately after the transaction and
(ii) shareholders of the Corporation will hold in the aggregate voting shares of the surviving or new corporation or entity to
be outstanding immediately after completion of the transaction entitled to cast at least a majority of the votes entitled to be
cast generally for the election of directors. This Article may not be amended unless first approved by the affirmative vote of
the holders of at least sixty-six and two thirds percent (66-2/3%) of the outstanding shares of Common Stock in addition to
any other vote of security holders otherwise required by these Articles of Incorporation or by law.
104
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
United Insurance Solutions, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania
105
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
We consent to the incorporation by reference in Registration Statements File No. 333-205722, File No.
333-134585, and File No. 333-58682 on Form S-8 of Penns Woods Bancorp, Inc. of our report dated March
12, 2019, relating to our audit of the consolidated financial statements and internal control over financial
reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report
on Form 10-K of Penns Woods Bancorp, Inc. for the year ended December 31, 2018.
Cranberry Township, Pennsylvania
March 12, 2019
106
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.;
Exhibit 31(i)
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; and
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 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; and
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 12, 2019
/s/ Richard A. Grafmyre
Richard A. Grafmyre
Chief Executive Officer
(Principal Executive Officer)
107
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; and
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 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; and
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 12, 2019
/s/ Brian L. Knepp
Brian L. Knepp
President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
108
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, 2018 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.
/s/ Richard A. Grafmyre
Richard A. Grafmyre
Chief Executive Officer
March 12, 2019
109
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, 2018 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.
/s/ Brian L. Knepp
Brian L. Knepp
Chief Financial Officer
March 12, 2019
110
BOARD OF DIRECTORS
Penns Woods Bancorp, Inc.
Daniel K. Brewer ......................... Principal, McKonly & Asbury, LLP
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 ....................... Retired Former President & Owner of Eastern Wood Products
Richard A. Grafmyre ................... Chief Executive Officer of the Corporation & JSSB
D. Michael Hawbaker.................. Executive Vice President of Glenn O. Hawbaker, Inc.
Leroy H. Keiler, III ...................... Leroy H. Keiler, III, Attorney at Law
Cameron W. Kephart ................... Executive Vice President, Susquehanna Transit Company
Joseph E. Kluger ......................... Vice Chairman of the Corporation, Chairman of the Board of Luzerne, Managing
Principal of Hourigan, Kluger & Quinn P.C.
Brian L. Knepp ............................ President of the Corporation & Chief Financial Officer of the Corporation, JSSB,
and Luzerne
John G. Nackley .......................... President & CEO of InterMetro Industries Corporation
R. Edward Nestlerode, Jr. ............ Chairman of the Board of the Corporation, President and Chief Executive Officer
of Nestlerode Contracting Co., Inc.
William H. Rockey ...................... Retired; Former Senior Vice President of the Corporation & 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!
Ronald A. Walko ......................... Retired; Former President and Chief Executive Officer of the Corporation and
JSSB
Jersey Shore State Bank
Daniel K. Brewer ......................... Principal, McKonly & Asbury, LLP
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 ....................... Retired Former President & Former Owner of Eastern Wood Products
Richard A. Grafmyre ................... Chief Executive Officer of the Corporation
D. Michael Hawbaker.................. Executive Vice President of Glenn O. Hawbaker, Inc.
Leroy H. Keiler, III ...................... Leroy H. Keiler, III, Attorney at Law
Cameron W. Kephart ................... Executive Vice President, Susquehanna Transit Company
Brian L. Knepp ............................ President of the Corporation, Chief Financial Officer of the Corporation & JSSB
Charles E. Kranich, II .................. President of Kranich’s Jewelers
Robert Q. Miller .......................... President of Miller Brothers Auto Sales & Mor Car Rentals
R. Edward Nestlerode, Jr. ............ Chairman of the Board of the Company, 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
Ronald A. Walko ......................... Retired; Former President and Chief Executive Officer of the Company and JSSB
Karen S. Young............................ President of JSSB
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Luzerne Bank
Patricia Finan Castellano ............ Health Care Consultant
James F. Clemente ...................... Managing Partner, Snyder & Clemente
Robert G. Edgerton ..................... President & Chief Executive Officer of Luzerne
Richard A. Grafmyre ................... Chief Executive Officer of the Corporation
Joseph E. Kluger ......................... Chairman of the Board of Luzerne, Managing Principal of Hourigan, Kluger &
Quinn P.C.
Brian L. Knepp ........................... President of the Corporation, Chief Financial Officer of the Corporation & Luzerne
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 of
Angelo C. Terrana, Jr. ................. Principal, Terrana Law, P.C.
Gosh Yarn It!
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Jersey Shore State Bank Locations
& Luzerne Bank Locations
CLINTON COUNTY
LYCOMING COUNTY
MISSION STATEMENT
To be the most significant regional community bank
JERSEY
SHORE
LOCK HAVEN
•
CENTRE COUNTY
• SNOW SHOE
• MILL HALL
• MONTOURSVILLE
LOYALSOCK •
• WILLIAMSPORT
• DUBOISTOWN
• MUNCY
• MONTGOMERY
Y
LEWISBURG
•
• DANVILLE
DALLAS
•
LAKE •
LUZERNE • PLAINS
• PITTSTON
• FORTY FORT
•
WILKES-BARRE
CONYNGHAM VALLEY
•
• HAZLE TWP
LUZERNE COUNTY
• ZION
• SPRING MILLS
• CENTRE HALL
• STATE COLLEGE
UNION COUNTY
MONTOUR COUNTY
Annual
Report
& Form 10-K 2018
001CSN38E2