Q1 2015 - 10-Q
Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
ý
Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 
for the Quarterly Period Ended March 31, 2015.
 
o
Transition report pursuant to Section 13 or 15 (d) of the Exchange Act
 
For the Transition Period from                    to                   .
 
No. 0-17077
(Commission File Number)
 
PENNS WOODS BANCORP, INC.
(Exact name of Registrant as specified in its charter) 
PENNSYLVANIA
 
23-2226454
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
300 Market Street, P.O. Box 967 Williamsport, Pennsylvania
 
17703-0967
(Address of principal executive offices)
 
(Zip Code)
 

(570) 322-1111
Registrant’s telephone number, including area code

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

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

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

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

On May 1, 2015 there were 4,785,627 shares of the Registrant’s common stock outstanding.

Table of Contents


PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
 
 
March 31,
 
December 31,
(In Thousands, Except Share Data)
 
2015
 
2014
ASSETS:
 
 

 
 

Noninterest-bearing balances
 
$
20,871

 
$
19,403

Interest-bearing balances in other financial institutions
 
901

 
505

Total cash and cash equivalents
 
21,772

 
19,908

 
 
 
 
 
Investment securities available for sale, at fair value
 
225,302

 
232,213

Loans held for sale
 
1,063

 
550

Loans
 
943,870

 
915,579

Allowance for loan losses
 
(10,826
)
 
(10,579
)
Loans, net
 
933,044

 
905,000

Premises and equipment, net
 
20,847

 
21,109

Accrued interest receivable
 
4,326

 
3,912

Bank-owned life insurance
 
26,165

 
25,959

Investment in limited partnerships
 
1,395

 
1,560

Goodwill
 
17,104

 
17,104

Intangibles
 
1,373

 
1,456

Deferred tax asset
 
7,801

 
8,101

Other assets
 
8,641

 
8,139

TOTAL ASSETS
 
$
1,268,833

 
$
1,245,011

 
 
 
 
 
LIABILITIES:
 
 

 
 

Interest-bearing deposits
 
$
750,258

 
$
738,041

Noninterest-bearing deposits
 
246,231

 
243,378

Total deposits
 
996,489

 
981,419

 
 
 
 
 
Short-term borrowings
 
30,625

 
40,818

Long-term borrowings
 
86,176

 
71,176

Accrued interest payable
 
439

 
381

Other liabilities
 
18,100

 
15,250

TOTAL LIABILITIES
 
1,131,829

 
1,109,044

 
 
 
 
 
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; 5,003,169 and 5,002,649 shares issued
 
41,693

 
41,688

Additional paid-in capital
 
49,914

 
49,896

Retained earnings
 
54,205

 
53,107

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized gain on available for sale securities
 
3,291

 
2,930

Defined benefit plan
 
(4,597
)
 
(4,597
)
Treasury stock at cost, 207,444 and 197,834 shares
 
(7,502
)
 
(7,057
)
TOTAL SHAREHOLDERS’ EQUITY
 
137,004

 
135,967

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,268,833

 
$
1,245,011

 
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
 
 
Three Months Ended March 31,
(In Thousands, Except Per Share Data)
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 

 
 

Loans, including fees
 
$
9,323

 
$
8,813

Investment securities:
 
 

 
 

Taxable
 
1,014

 
1,458

Tax-exempt
 
767

 
931

Dividend and other interest income
 
293

 
127

TOTAL INTEREST AND DIVIDEND INCOME
 
11,397

 
11,329

INTEREST EXPENSE:
 
 

 
 

Deposits
 
743

 
758

Short-term borrowings
 
19

 
15

Long-term borrowings
 
524

 
469

TOTAL INTEREST EXPENSE
 
1,286

 
1,242

NET INTEREST INCOME
 
10,111

 
10,087

PROVISION FOR LOAN LOSSES
 
700

 
485

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
9,411

 
9,602

NON-INTEREST INCOME:
 
 

 
 

Service charges
 
553

 
595

Securities gains, net
 
661

 
393

Bank-owned life insurance
 
188

 
370

Gain on sale of loans
 
299

 
290

Insurance commissions
 
234

 
420

Brokerage commissions
 
245

 
271

Other
 
1,080

 
872

TOTAL NON-INTEREST INCOME
 
3,260

 
3,211

NON-INTEREST EXPENSE:
 
 

 
 

Salaries and employee benefits
 
4,470

 
4,503

Occupancy
 
628

 
630

Furniture and equipment
 
595

 
671

Pennsylvania shares tax
 
224

 
244

Amortization of investment in limited partnerships
 
165

 
165

Federal Deposit Insurance Corporation deposit insurance
 
215

 
178

Marketing
 
129

 
110

Intangible amortization
 
82

 
92

Other
 
1,960

 
2,050

TOTAL NON-INTEREST EXPENSE
 
8,468

 
8,643

INCOME BEFORE INCOME TAX PROVISION
 
4,203

 
4,170

INCOME TAX PROVISION
 
848

 
701

NET INCOME
 
$
3,355

 
$
3,469

EARNINGS PER SHARE - BASIC
 
$
0.70

 
$
0.72

EARNINGS PER SHARE - DILUTED
 
$
0.70

 
$
0.72

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
 
4,801,505

 
4,819,575

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED
 
4,801,505

 
4,819,575

DIVIDENDS DECLARED PER SHARE
 
$
0.47

 
$
0.47

 
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
 
Three Months Ended March 31,
(In Thousands)
 
2015
 
2014
Net Income
 
$
3,355

 
$
3,469

Other comprehensive income:
 
 

 
 

Change in unrealized gain on available for sale securities
 
1,208

 
5,328

Tax effect
 
(411
)
 
(1,812
)
Net realized gain included in net income
 
(661
)
 
(393
)
Tax effect
 
225

 
134

Total other comprehensive income
 
361

 
3,257

Comprehensive income
 
$
3,716

 
$
6,726

 
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
TREASURY STOCK
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
Balance, December 31, 2013
 
4,999,929

 
$
41,665

 
$
49,800

 
$
47,554

 
$
(4,894
)
 
$
(6,310
)
 
$
127,815

Net income
 
 

 
 

 
 

 
3,469

 
 

 
 

 
3,469

Other comprehensive income
 
 

 
 

 
 

 
 

 
3,257

 
 

 
3,257

Dividends declared, ($0.47 per share)
 
 

 
 

 
 

 
(2,265
)
 
 

 
 

 
(2,265
)
Common shares issued for employee stock purchase plan
 
632

 
6

 
23

 
 

 
 

 
 

 
29

Balance, March 31, 2014
 
5,000,561

 
$
41,671

 
$
49,823

 
$
48,758

 
$
(1,637
)
 
$
(6,310
)
 
$
132,305

 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
 
TREASURY STOCK
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
Balance, December 31, 2014
 
5,002,649

 
$
41,688

 
$
49,896

 
$
53,107

 
$
(1,667
)
 
$
(7,057
)
 
$
135,967

Net income
 
 

 
 

 
 

 
3,355

 
 

 
 

 
3,355

Other comprehensive income
 
 

 
 

 
 

 
 

 
361

 
 

 
361

Dividends declared, ($0.47 per share)
 
 

 
 

 
 

 
(2,257
)
 
 

 
 

 
(2,257
)
Common shares issued for employee stock purchase plan
 
520

 
5

 
18

 
 

 
 

 
 

 
23

Purchase of treasury stock (9,610 shares)
 
 
 
 
 
 
 
 
 
 
 
(445
)
 
(445
)
Balance, March 31, 2015
 
5,003,169

 
$
41,693

 
$
49,914

 
$
54,205

 
$
(1,306
)
 
$
(7,502
)
 
$
137,004

 
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
 
 
Three Months Ended March 31,
(In Thousands)
 
2015
 
2014
OPERATING ACTIVITIES:
 
 

 
 

Net Income
 
$
3,355

 
$
3,469

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

 
 

Depreciation and amortization
 
826

 
737

Amortization of intangible assets
 
82

 
92

Provision for loan losses
 
700

 
485

Accretion and amortization of investment security discounts and premiums
 
208

 
146

Securities gains, net
 
(661
)
 
(393
)
Originations of loans held for sale
 
(9,424
)
 
(8,561
)
Proceeds of loans held for sale
 
9,210

 
8,830

Gain on sale of loans
 
(299
)
 
(290
)
Earnings on bank-owned life insurance
 
(188
)
 
(370
)
Decrease in deferred tax asset
 
114

 
227

Other, net
 
(2,193
)
 
(2,650
)
Net cash provided by operating activities
 
1,730

 
1,722

INVESTING ACTIVITIES:
 
 

 
 

Investment securities available for sale:
 
 

 
 

Proceeds from sales
 
15,807

 
43,794

Proceeds from calls, maturities, and repayments of principal
 
5,204

 
2,496

Purchases
 
(9,217
)
 
(24,476
)
Net increase in loans
 
(28,751
)
 
(4,376
)
Acquisition of premises and equipment
 
(128
)
 
(609
)
Proceeds from the sale of foreclosed assets
 
476

 
460

Purchase of bank-owned life insurance
 
(27
)
 
(26
)
Proceeds from bank-owned life insurance death benefit
 
—

 
367

Proceeds from redemption of regulatory stock
 
2,265

 
1,053

Purchases of regulatory stock
 
(2,693
)
 
(547
)
Net cash (used for) provided by investing activities
 
(17,064
)
 
18,136

FINANCING ACTIVITIES:
 
 

 
 

Net increase in interest-bearing deposits
 
12,217

 
8,661

Net increase in noninterest-bearing deposits
 
2,853

 
1,363

Proceeds from long-term borrowings
 
15,000

 
—

Net decrease in short-term borrowings
 
(10,193
)
 
(12,589
)
Dividends paid
 
(2,257
)
 
(2,265
)
Issuance of common stock
 
23

 
29

Purchases of treasury stock
 
(445
)
 
—

Net cash provided by (used for) provided by financing activities
 
17,198

 
(4,801
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
1,864

 
15,057

CASH AND CASH EQUIVALENTS, BEGINNING
 
19,908

 
24,606

CASH AND CASH EQUIVALENTS, ENDING
 
$
21,772

 
$
39,663

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
1,228

 
$
1,259

Income taxes paid
 
800

 
950

Transfer of loans to foreclosed real estate
 
7

 
—

 
See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.  Basis of Presentation
 
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank, and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are referred to together as the “Banks”) and Jersey Shore State Bank’s wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”).  All significant inter-company balances and transactions have been eliminated in the consolidation.

The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 39 through 45 of the Form 10-K for the year ended December 31, 2014.

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.
 
Note 2.  Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component as of March 31, 2015 and 2014 were as follows:

 
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
(In Thousands)
 
Net Unrealized Gain on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
 
Net Unrealized Gain
(Loss) on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
Beginning balance
 
$
2,930

 
$
(4,597
)
 
$
(1,667
)
 
$
(2,169
)
 
$
(2,725
)
 
$
(4,894
)
Other comprehensive income before reclassifications
 
797

 
—

 
797

 
3,516

 
—

 
3,516

Amounts reclassified from accumulated other comprehensive income (loss)
 
(436
)
 
—

 
(436
)
 
(259
)
 
—

 
(259
)
Net current-period other comprehensive income
 
361

 
—

 
361

 
3,257

 
—

 
3,257

Ending balance
 
$
3,291

 
$
(4,597
)
 
$
(1,306
)
 
$
1,088

 
$
(2,725
)
 
$
(1,637
)
 
The reclassifications out of accumulated other comprehensive loss as of March 31, 2015 and 2014 were as follows:

Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
 
Net unrealized gain on available for sale securities
 
$
661

 
$
393

 
Securities gains, net
Income tax effect
 
225

 
134

 
Income tax provision
 
 
$
436

 
$
259

 
Net of tax
 
Note 3.  Recent Accounting Pronouncements

In January 2014, FASB issued ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance

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in the income statement as a component of income tax expense (benefit). The amendments in this update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This ASU did not have an impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor, and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method. The Company has provided the necessary disclosures in Note 7. Loans.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operation.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This ASU did not have an impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This ASU is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this update require that a mortgage loan be de-recognized and that a separate other receivable be

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recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This ASU did not have an impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The amendments in this update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity's most recent change-in-control event. The amendments in this update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This update will not have an impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement -Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This update eliminates from GAAP the concept of extraordinary items. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This update is not expected to have a significant impact on the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This update is not expected to have a significant impact on the Company’s financial statements.
 
In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the

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month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangible - Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities. This update is not expected to have a significant impact on the Company’s financial statements.

Note 4. Per Share Data

There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share.  Net income as presented on the consolidated statement of income will be used as the numerator.  The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive earnings per share computation.

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Weighted average common shares issued
 
5,002,832

 
5,000,171

Average treasury stock shares
 
(201,327
)
 
(180,596
)
Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share
 
4,801,505

 
4,819,575

 
Note 5. Investment Securities
 
The amortized cost and fair values of investment securities at March 31, 2015 and December 31, 2014 are as follows:
 
 
March 31, 2015
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
3,707

 
$
—

 
$
(37
)
 
$
3,670

Mortgage-backed securities
 
11,509

 
465

 
(6
)
 
11,968

Asset-backed securities
 
2,346

 
25

 
(4
)
 
2,367

State and political securities
 
100,160

 
3,630

 
(556
)
 
103,234

Other debt securities
 
89,388

 
1,496

 
(772
)
 
90,112

Total debt securities
 
207,110

 
5,616

 
(1,375
)
 
211,351

Financial institution equity securities
 
8,776

 
886

 
(9
)
 
9,653

Other equity securities
 
4,429

 
52

 
(183
)
 
4,298

Total equity securities
 
13,205

 
938

 
(192
)
 
13,951

Total investment securities AFS
 
$
220,315

 
$
6,554

 
$
(1,567
)
 
$
225,302

 
 
 
December 31, 2014
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
3,953

 
$
—

 
$
(112
)
 
$
3,841

Mortgage-backed securities
 
12,240

 
485

 
(28
)
 
12,697

Asset-backed securities
 
2,468

 
27

 
(3
)
 
2,492

State and political securities
 
104,820

 
3,885

 
(589
)
 
108,116

Other debt securities
 
89,911

 
1,031

 
(1,299
)
 
89,643

Total debt securities
 
213,392

 
5,428

 
(2,031
)
 
216,789

Financial institution equity securities
 
8,823

 
1,110

 
(18
)
 
9,915

Other equity securities
 
5,558

 
79

 
(128
)
 
5,509

Total equity securities
 
14,381

 
1,189

 
(146
)
 
15,424

Total investment securities AFS
 
$
227,773

 
$
6,617

 
$
(2,177
)
 
$
232,213

 
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014.

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March 31, 2015
 
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(In Thousands)
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
U.S. Government and agency securities
 
$
—

 
$
—

 
$
3,670

 
$
(37
)
 
$
3,670

 
$
(37
)
Mortgage-backed securities
 
3,880

 
(6
)
 
—

 
—

 
3,880

 
(6
)
Asset-backed securities
 
—

 
—

 
470

 
(4
)
 
470

 
(4
)
State and political securities
 
4,586

 
(59
)
 
1,287

 
(497
)
 
5,873

 
(556
)
Other debt securities
 
13,637

 
(285
)
 
18,609

 
(487
)
 
32,246

 
(772
)
Total debt securities
 
22,103

 
(350
)
 
24,036

 
(1,025
)
 
46,139

 
(1,375
)
Financial institution equity securities
 
438

 
(9
)
 
—

 
—

 
438

 
(9
)
Other equity securities
 
2,178

 
(162
)
 
779

 
(21
)
 
2,957

 
(183
)
Total equity securities
 
2,616

 
(171
)
 
779

 
(21
)
 
3,395

 
(192
)
Total
 
$
24,719

 
$
(521
)
 
$
24,815

 
$
(1,046
)
 
$
49,534

 
$
(1,567
)
 
 
December 31, 2014
 
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(In Thousands)
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
U.S. Government and agency securities
 
$
—

 
$
—

 
$
3,841

 
$
(112
)
 
$
3,841

 
$
(112
)
Mortgage-backed securities
 
6,741

 
(28
)
 
—

 
—

 
6,741

 
(28
)
Asset-backed securities
 
—

 
—

 
519

 
(3
)
 
519

 
(3
)
State and political securities
 
8,243

 
(14
)
 
6,382

 
(575
)
 
14,625

 
(589
)
Other debt securities
 
23,174

 
(718
)
 
29,266

 
(581
)
 
52,440

 
(1,299
)
Total debt securities
 
38,158

 
(760
)
 
40,008

 
(1,271
)
 
78,166

 
(2,031
)
Financial institution equity securities
 
407

 
(18
)
 
—

 
—

 
407

 
(18
)
Other equity securities
 
1,837

 
(100
)
 
773

 
(28
)
 
2,610

 
(128
)
Total equity securities
 
2,244

 
(118
)
 
773

 
(28
)
 
3,017

 
(146
)
Total
 
$
40,402

 
$
(878
)
 
$
40,781

 
$
(1,299
)
 
$
81,183

 
$
(2,177
)
 
At March 31, 2015 there were a total of 29 securities in a continuous unrealized loss position for less than twelve months and 15 individual securities that were in a continuous unrealized loss position for twelve months or greater.

The Company reviews its position quarterly and has determined that, at March 31, 2015, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.  The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at March 31, 2015, 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.


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(In Thousands)
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
4,220

 
$
4,241

Due after one year to five years
 
40,569

 
41,108

Due after five years to ten years
 
96,622

 
97,529

Due after ten years
 
65,699

 
68,473

Total
 
$
207,110

 
$
211,351

 
Total gross proceeds from sales of securities available for sale were $15,807,000 and $43,794,000 for the three months ended March 31, 2015 and 2014, respectively.  The following table represents gross realized gains and losses on those transactions:
 
 
Three Months Ended March 31,
(In Thousands)
2015
 
2014
Gross realized gains:
 

 
 

State and political securities
396

 
345

Other debt securities
74

 
307

Financial institution equity securities
155

 
112

Other equity securities
132

 
55

Total gross realized gains
$
757

 
$
819

 
 
 
 
Gross realized losses:
 

 
 

U.S. Government and agency securities
$
—

 
$
31

State and political securities
22

 
320

Other debt securities
32

 
75

Other equity securities
42

 
—

Total gross realized losses
$
96

 
$
426

 
There were no impairment charges included in gross realized losses for the three months ended March 31, 2015 and 2014, respectively.

Investment securities with a carrying value of approximately $128,724,000 and $128,501,000 at March 31, 2015 and December 31, 2014, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

Note 6.  Federal Home Loan Bank Stock

The Banks are both members of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and as such, are required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB.  The stock is bought from and sold to the FHLB based upon its $100 par value.  The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment as necessary.  The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB.

Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.  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 be transferred at the $100 par value, and the payment of dividends.
 
Note 7. Loans

Management segments the Banks' loan portfolio to a level that enables risk and performance monitoring according to similar risk characteristics.  Loans are segmented based on the underlying collateral characteristics.  Categories include commercial, financial,

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and agricultural, real estate, and installment loans to individuals.  Real estate loans are further segmented into three categories: residential, commercial, and construction.

The following table presents the related aging categories of loans, by segment, as of March 31, 2015 and December 31, 2014:
 
 
 
March 31, 2015
 
 
 
 
Past Due
 
Past Due 90
 
 
 
 
 
 
 
 
30 To 89
 
Days Or More
 
Non-
 
 
(In Thousands)
 
Current
 
Days
 
& Still Accruing
 
Accrual
 
Total
Commercial, financial, and agricultural
 
$
130,868

 
$
665

 
$
216

 
$
834

 
$
132,583

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
466,322

 
7,043

 
129

 
709

 
474,203

Commercial
 
281,544

 
2,682

 
—

 
8,311

 
292,537

Construction
 
21,538

 
4

 
46

 
908

 
22,496

Installment loans to individuals
 
22,867

 
402

 
—

 
4

 
23,273

 
 
923,139

 
$
10,796

 
$
391

 
$
10,766

 
945,092

Net deferred loan fees and discounts
 
(1,222
)
 
 

 
 

 
 

 
(1,222
)
Allowance for loan losses
 
(10,826
)
 
 

 
 

 
 

 
(10,826
)
Loans, net
 
$
911,091

 
 

 
 

 
 

 
$
933,044

 
 
December 31, 2014
 
 
 
 
Past Due
 
Past Due 90
 
 
 
 
 
 
 
 
30 To 89
 
Days Or More
 
Non-
 
 
(In Thousands)
 
Current
 
Days
 
& Still Accruing
 
Accrual
 
Total
Commercial, financial, and agricultural
 
$
122,624

 
$
773

 
$
—

 
$
759

 
$
124,156

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
450,503

 
6,078

 
332

 
847

 
457,760

Commercial
 
279,731

 
1,819

 
54

 
9,744

 
291,348

Construction
 
21,485

 
—

 
—

 
511

 
21,996

Installment loans to individuals
 
21,125

 
383

 
1

 
—

 
21,509

 
 
895,468

 
$
9,053

 
$
387

 
$
11,861

 
916,769

Net deferred loan fees and discounts
 
(1,190
)
 
 

 
 

 
 

 
(1,190
)
Allowance for loan losses
 
(10,579
)
 
 

 
 

 
 

 
(10,579
)
Loans, net
 
$
883,699

 
 

 
 

 
 

 
$
905,000

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

Upon the acquisition of Luzerne Bank on June 1, 2013, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.  Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and March 31, 2015.  The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral.  The carrying value of purchased loans acquired with deteriorated credit quality was $447,000 at March 31, 2015.

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne Bank acquisition was $1,211,000 and the estimated fair value of the loans was $878,000. Total contractually required payments on these loans, including interest, at the acquisition date was $1,783,000. However, the Company’s preliminary estimate of expected cash flows was $941,000. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from either the customer or liquidation of collateral) of $842,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable

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fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $63,000 on the acquisition date relating to these impaired loans.

The carrying value of the loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Luzerne Bank acquisition as of June 1, 2013.

The amortizable yield for purchased credit-impaired loans was fully amortized during 2014. Changes in the amortizable yield for purchased credit-impaired loans were as follows for the three months ended March 31, 2014:

(In Thousands)
 
March 31, 2014
Balance at beginning of period or at acquisition
 
$
35

Accretion
 
(7
)
Balance at end of period
 
$
28

 
The following table presents additional information regarding loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality:
(In Thousands)
 
March 31, 2015
 
December 31, 2014
Outstanding balance
 
$
447

 
$
449

Carrying amount
 
347

 
349

 
There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and March 31, 2015. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality as of March 31, 2015.

The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three months ended March 31, 2015 and 2014:

 
 
Three Months Ended March 31,
 
 
2015
 
2014
(In Thousands)
 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
 
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
 
Interest
Income
Recorded on
a Cash Basis
Commercial, financial, and agricultural
 
$
12

 
$
8

 
$
2

 
$
—

Real estate mortgage:
 
 

 
 

 
 

 
 

Residential
 
5

 
9

 
8

 
4

Commercial
 
105

 
25

 
131

 
34

Construction
 
15

 
7

 
19

 
8

 
 
$
137

 
$
49

 
$
160

 
$
46

 
Impaired Loans

Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Banks evaluate such loans for impairment individually and does not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap.  The 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.

15
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Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard.  Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis.

Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired.  Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.  Interest income for impaired loans is recorded consistent with the Banks' policy on non-accrual loans.

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2015 and December 31, 2014:

 
 
March 31, 2015
 
 
Recorded
 
Unpaid Principal
 
Related
(In Thousands)
 
Investment
 
Balance
 
Allowance
With no related allowance recorded:
 
 

 
 

 
 

Commercial, financial, and agricultural
 
$
516

 
$
516

 
$
—

Real estate mortgage:
 
 

 
 

 
 

Residential
 
594

 
594

 
—

Commercial
 
4,435

 
4,435

 
—

Construction
 
610

 
610

 
—

 
 
6,155

 
6,155

 
—

With an allowance recorded:
 
 

 
 

 
 

Commercial, financial, and agricultural
 
670

 
670

 
264

Real estate mortgage:
 
 

 
 

 
 

Residential
 
1,314

 
1,414

 
211

Commercial
 
10,196

 
10,433

 
1,451

Construction
 
307

 
307

 
66

 
 
12,487

 
12,824

 
1,992

Total:
 
 

 
 

 
 

Commercial, financial, and agricultural
 
1,186

 
1,186

 
264

Real estate mortgage:
 
 

 
 

 
 

Residential
 
1,908

 
2,008

 
211

Commercial
 
14,631

 
14,868

 
1,451

Construction
 
917

 
917

 
66

 
 
$
18,642

 
$
18,979

 
$
1,992


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December 31, 2014
 
 
Recorded
 
Unpaid Principal
 
Related
(In Thousands)
 
Investment
 
Balance
 
Allowance
With no related allowance recorded:
 
 

 
 

 
 

Commercial, financial, and agricultural
 
$
439

 
$
439

 
$
—

Real estate mortgage:
 
 

 
 

 
 

Residential
 
139

 
139

 
—

Commercial
 
3,228

 
3,228

 
—

Construction
 
716

 
716

 
—

 
 
4,522

 
4,522

 
—

With an allowance recorded:
 
 

 
 

 
 

Commercial, financial, and agricultural
 
673

 
673

 
298

Real estate mortgage:
 
 

 
 

 
 

Residential
 
1,327

 
1,449

 
147

Commercial
 
10,745

 
10,889

 
1,581

Construction
 
309

 
309

 
67

 
 
13,054

 
13,320

 
2,093

Total:
 
 

 
 

 
 

Commercial, financial, and agricultural
 
1,112

 
1,112

 
298

Real estate mortgage:
 
 

 
 

 
 

Residential
 
1,466

 
1,588

 
147

Commercial
 
13,973

 
14,117

 
1,581

Construction
 
1,025

 
1,025

 
67

 
 
$
17,576

 
$
17,842

 
$
2,093

 
The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended for March 31, 2015 and 2014:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
(In Thousands)
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
 
Average
Investment in
Impaired Loans
 
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
 
Interest Income
Recognized on a
Cash Basis on
Impaired Loans
Commercial, financial, and agricultural
 
$
1,149

 
$
5

 
$
7

 
$
528

 
$
7

 
$
—

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

 
 

Residential
 
1,644

 
12

 
5

 
1,170

 
13

 
4

Commercial
 
14,773

 
71

 
25

 
9,492

 
42

 
15

Construction
 
719

 
—

 
7

 
1,120

 
—

 
8

 
 
$
18,285

 
$
88

 
$
44

 
$
12,310

 
$
62

 
$
27

 
Currently, there is $184,000 committed to be advanced in connection with impaired loans.

Troubled Debt Restructurings

The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.  These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were no loan modifications considered TDRs completed during the three months ended March 31, 2014. Loan modifications that are considered TDRs completed during the three months ended March 31, 2015 were as follows:

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Three Months Ended March 31,
 
 
2015
(In Thousands, Except Number of Contracts)
 
Number
of
Contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Commercial, financial, and agricultural
 
2

 
$
97

 
$
97

Real estate mortgage:
 
 

 
 

 
 

Residential
 
5

 
234

 
234

Commercial
 
1

 
270

 
270

 
 
8

 
$
601

 
$
601

 
There was one loan modification considered a TDRs made during the twelve months previous to March 31, 2015 that defaulted during the three months ended March 31, 2015.  The loan that defaulted is a commercial loan with a recorded investment of $48,000 at March 31, 2015. There were two loan modifications considered TDRs made during the twelve months previous to March 31, 2014 that defaulted during the three months ended March 31, 2014. The loans that defaulted are commercial real estate loans that are currently in litigation with a recorded investment of $1,634,000 at March 31, 2014.

Troubled debt restructurings amounted to $9,666,000 and $11,810,000 as of March 31, 2015 and December 31, 2014.

The amount of foreclosed residential real estate held at March 31, 2015 and December 31, 2014, totaled $125,000 and $324,000, respectively. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at March 31, 2015 and December 31, 2014, totaled $401,000 and $382,000, respectively.

Internal Risk Ratings

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

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Banks have a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  An external annual loan review of large commercial relationships is performed, as well as a sample of smaller transactions. Confirmation of the appropriate risk category is included in the review. Detailed reviews, including plans for resolution, are performed on loans classified as substandard, doubtful, or loss on a quarterly basis.

The following table presents the credit quality categories identified above as of March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
 
 
Commercial, Financial, and Agricultural
 
Real Estate Mortgages
 
Installment Loans to Individuals
 
 
(In Thousands)
 
 
Residential
 
Commercial
 
Construction
 
 
Totals
Pass
 
$
127,707

 
$
471,113

 
$
260,831

 
$
21,486

 
$
23,273

 
$
904,410

Special Mention
 
2,315

 
1,971

 
13,983

 
400

 
—

 
18,669

Substandard
 
2,561

 
1,119

 
17,723

 
610

 
—

 
22,013

 
 
$
132,583

 
$
474,203

 
$
292,537

 
$
22,496

 
$
23,273

 
$
945,092

 

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December 31, 2014
 
 
Commercial, Financial, and Agricultural
 
Real Estate Mortgages
 
Installment Loans to Individuals
 
 
(In Thousands)
 
 
Residential
 
Commercial
 
Construction
 
 
Totals
Pass
 
$
118,210

 
$
454,885

 
$
256,444

 
$
20,927

 
$
21,509

 
$
871,975

Special Mention
 
3,186

 
2,384

 
16,262

 
445

 
—

 
22,277

Substandard
 
2,760

 
491

 
18,642

 
624

 
—

 
22,517

 
 
$
124,156

 
$
457,760

 
$
291,348

 
$
21,996

 
$
21,509

 
$
916,769

 
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.