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 September 30, 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 November 1, 2015 there were 4,746,728 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents


Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
 
September 30,
 
December 31,
(In Thousands, Except Share Data)
 
2015
 
2014
ASSETS:
 
 

 
 

Noninterest-bearing balances
 
$
17,304

 
$
19,403

Interest-bearing balances in other financial institutions
 
951

 
505

Total cash and cash equivalents
 
18,255

 
19,908

 
 
 
 
 
Investment securities, available for sale, at fair value
 
202,593

 
232,213

Investment securities, trading
 
63

 
—

Loans held for sale
 
1,029

 
550

Loans
 
1,001,653

 
915,579

Allowance for loan losses
 
(11,489
)
 
(10,579
)
Loans, net
 
990,164

 
905,000

Premises and equipment, net
 
21,433

 
21,109

Accrued interest receivable
 
4,093

 
3,912

Bank-owned life insurance
 
26,499

 
25,959

Investment in limited partnerships
 
1,064

 
1,560

Goodwill
 
17,104

 
17,104

Intangibles
 
1,316

 
1,456

Deferred tax asset
 
8,618

 
8,101

Other assets
 
7,061

 
8,139

TOTAL ASSETS
 
$
1,299,292

 
$
1,245,011

 
 
 
 
 
LIABILITIES:
 
 

 
 

Interest-bearing deposits
 
$
756,953

 
$
738,041

Noninterest-bearing deposits
 
247,848

 
243,378

Total deposits
 
1,004,801

 
981,419

 
 
 
 
 
Short-term borrowings
 
51,690

 
40,818

Long-term borrowings
 
91,051

 
71,176

Accrued interest payable
 
460

 
381

Other liabilities
 
15,713

 
15,250

TOTAL LIABILITIES
 
1,163,715

 
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; 5,004,372 and 5,002,649 shares issued
 
41,702

 
41,688

Additional paid-in capital
 
49,959

 
49,896

Retained earnings
 
56,523

 
53,107

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized gain on available for sale securities
 
1,418

 
2,930

Defined benefit plan
 
(4,518
)
 
(4,597
)
Treasury stock at cost, 254,144 and 197,834 shares
 
(9,507
)
 
(7,057
)
TOTAL SHAREHOLDERS’ EQUITY
 
135,577

 
135,967

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,299,292

 
$
1,245,011

 
See accompanying notes to the unaudited consolidated financial statements.

3
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands, Except Per Share Data)
 
2015
 
2014
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 

 
 

 
 

 
 

Loans, including fees
 
$
9,862

 
$
9,298

 
$
28,937

 
$
27,023

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
829

 
1,198

 
2,728

 
4,062

Tax-exempt
 
676

 
837

 
2,187

 
2,660

Dividend and other interest income
 
156

 
127

 
597

 
401

TOTAL INTEREST AND DIVIDEND INCOME
 
11,523

 
11,460

 
34,449

 
34,146

INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Deposits
 
800

 
748

 
2,328

 
2,247

Short-term borrowings
 
31

 
5

 
78

 
32

Long-term borrowings
 
458

 
489

 
1,476

 
1,431

TOTAL INTEREST EXPENSE
 
1,289

 
1,242

 
3,882

 
3,710

NET INTEREST INCOME
 
10,234

 
10,218

 
30,567

 
30,436

PROVISION FOR LOAN LOSSES
 
520

 
460

 
1,820

 
1,245

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
9,714

 
9,758

 
28,747

 
29,191

NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Service charges
 
621

 
620

 
1,772

 
1,822

Net securities gains, available for sale
 
526

 
2,145

 
1,713

 
3,025

Net securities losses, trading
 
(33
)
 
—

 
(37
)
 
—

Bank-owned life insurance
 
182

 
185

 
541

 
736

Gain on sale of loans
 
524

 
602

 
1,305

 
1,313

Insurance commissions
 
185

 
212

 
623

 
915

Brokerage commissions
 
297

 
282

 
836

 
804

Other
 
835

 
878

 
2,701

 
2,449

TOTAL NON-INTEREST INCOME
 
3,137

 
4,924

 
9,454

 
11,064

NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
4,302

 
4,126

 
13,073

 
12,796

Occupancy
 
529

 
547

 
1,721

 
1,729

Furniture and equipment
 
686

 
591

 
1,924

 
1,910

Pennsylvania shares tax
 
244

 
232

 
711

 
738

Amortization of investment in limited partnerships
 
165

 
165

 
496

 
496

Federal Deposit Insurance Corporation deposit insurance
 
209

 
193

 
654

 
572

Marketing
 
160

 
144

 
434

 
380

Intangible amortization
 
73

 
82

 
235

 
263

Other
 
2,162

 
2,233

 
6,171

 
6,494

TOTAL NON-INTEREST EXPENSE
 
8,530

 
8,313

 
25,419

 
25,378

INCOME BEFORE INCOME TAX PROVISION
 
4,321

 
6,369

 
12,782

 
14,877

INCOME TAX PROVISION
 
957

 
1,576

 
2,630

 
3,152

NET INCOME
 
$
3,364

 
$
4,793

 
$
10,152

 
$
11,725

EARNINGS PER SHARE - BASIC AND DILUTED
 
$
0.71

 
$
0.99

 
$
2.12

 
$
2.43

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
 
4,761,576

 
4,820,346

 
4,780,776

 
4,820,041

DIVIDENDS DECLARED PER SHARE
 
$
0.47

 
$
0.47

 
$
1.41

 
$
1.41

 
See accompanying notes to the unaudited consolidated financial statements.

4
Table of Contents




PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2015
 
2014
 
2015
 
2014
Net Income
 
$
3,364

 
$
4,793

 
$
10,152

 
$
11,725

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Change in unrealized gain (loss) on available for sale securities
 
592

 
863

 
(579
)
 
10,121

Tax effect
 
(201
)
 
(293
)
 
198

 
(3,442
)
Net realized gain included in net income
 
(526
)
 
(2,145
)
 
(1,713
)
 
(3,025
)
Tax effect
 
179

 
729

 
582

 
1,029

   Amortization of unrecognized pension and post-retirement items
 
39

 
—

 
119

 
—

        Tax effect
 
(13
)
 
—

 
(40
)
 
—

Total other comprehensive income (loss)
 
70

 
(846
)
 
(1,433
)
 
4,683

Comprehensive income
 
$
3,434

 
$
3,947

 
$
8,719

 
$
16,408

 
See accompanying notes to the unaudited consolidated financial statements.

5
Table of Contents


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
 
 

 
 

 
 

 
11,725

 
 

 
 

 
11,725

Other comprehensive income
 
 

 
 

 
 

 
 

 
4,683

 
 

 
4,683

Dividends declared, ($1.41 per share)
 
 

 
 

 
 

 
(6,797
)
 
 

 
 

 
(6,797
)
Common shares issued for employee stock purchase plan
 
2,043

 
17

 
71

 
 

 
 

 
 

 
88

Purchase of treasury stock (11,744 shares)
 
 
 
 
 
 
 
 
 
 
 
(510
)
 
(510
)
Balance, September 30, 2014
 
5,001,972

 
$
41,682

 
$
49,871

 
$
52,482

 
$
(211
)
 
$
(6,820
)
 
$
137,004

 
 
 
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
 
 

 
 

 
 

 
10,152

 
 

 
 

 
10,152

Other comprehensive loss
 
 

 
 

 
 

 
 

 
(1,433
)
 
 

 
(1,433
)
Dividends declared, ($1.41 per share)
 
 

 
 

 
 

 
(6,736
)
 
 

 
 

 
(6,736
)
Common shares issued for employee stock purchase plan
 
1,723

 
14

 
63

 
 

 
 

 
 

 
77

Purchase of treasury stock (56,310 shares)
 
 
 
 
 
 
 
 
 
 
 
(2,450
)
 
(2,450
)
Balance, September 30, 2015
 
5,004,372

 
$
41,702

 
$
49,959

 
$
56,523

 
$
(3,100
)
 
$
(9,507
)
 
$
135,577

 
See accompanying notes to the unaudited consolidated financial statements.

6
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
 
 
Nine Months Ended September 30,
(In Thousands)
 
2015
 
2014
OPERATING ACTIVITIES:
 
 

 
 

Net Income
 
$
10,152

 
$
11,725

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

 
 

Depreciation and amortization
 
2,478

 
2,351

Amortization of intangible assets
 
235

 
263

Provision for loan losses
 
1,820

 
1,245

Accretion and amortization of investment security discounts and premiums
 
644

 
509

Net securities gains, available for sale
 
(1,713
)
 
(3,025
)
Originations of loans held for sale
 
(41,762
)
 
(38,703
)
Proceeds of loans held for sale
 
42,588

 
40,040

Gain on sale of loans
 
(1,305
)
 
(1,313
)
Net securities losses, trading
 
37

 
—

Proceeds from the sale of trading securities
 
490

 
—

Purchases of trading securities
 
(590
)
 
—

Earnings on bank-owned life insurance
 
(541
)
 
(736
)
Decrease in deferred tax asset
 
262

 
440

Other, net
 
(1,486
)
 
309

Net cash provided by operating activities
 
11,309

 
13,105

INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of available for sale securities
 
43,051

 
98,815

Proceeds from calls and maturities of available for sale securities
 
14,832

 
5,731

Purchases of available for sale securities
 
(26,916
)
 
(39,774
)
Net increase in loans
 
(87,324
)
 
(74,874
)
Acquisition of premises and equipment
 
(1,491
)
 
(2,459
)
Proceeds from the sale of foreclosed assets
 
1,613

 
534

Purchase of bank-owned life insurance
 
(30
)
 
(30
)
Proceeds from bank-owned life insurance death benefit
 
—

 
367

Proceeds from redemption of regulatory stock
 
8,801

 
1,654

Purchases of regulatory stock
 
(10,518
)
 
(1,837
)
Net cash used for investing activities
 
(57,982
)
 
(11,873
)
FINANCING ACTIVITIES:
 
 

 
 

Net increase in interest-bearing deposits
 
18,912

 
915

Net increase in noninterest-bearing deposits
 
4,470

 
15,211

Proceeds from long-term borrowings
 
30,625

 
—

Repayment of long-term borrowings
 
(10,750
)
 
—

Net increase (decrease) in short-term borrowings
 
10,872

 
(9,503
)
Dividends paid
 
(6,736
)
 
(6,797
)
Issuance of common stock
 
77

 
88

Purchases of treasury stock
 
(2,450
)
 
(510
)
Net cash provided by (used for) provided by financing activities
 
45,020

 
(596
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(1,653
)
 
636

CASH AND CASH EQUIVALENTS, BEGINNING
 
19,908

 
24,606

CASH AND CASH EQUIVALENTS, ENDING
 
$
18,255

 
$
25,242

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
3,803

 
$
3,704

Income taxes paid
 
2,000

 
2,415

Transfer of loans to foreclosed real estate
 
340

 
352

 
See accompanying notes to the unaudited consolidated financial statements.

7
Table of Contents


PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.  Basis of Presentation
 
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., Luzerne Bank, 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 Income (Loss)

The changes in accumulated other comprehensive income (loss) by component as of September 30, 2015 and 2014 were as follows:

 
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 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
 
$
1,374

 
$
(4,544
)
 
$
(3,170
)
 
$
3,360

 
$
(2,725
)
 
$
635

Other comprehensive income before reclassifications
 
391

 
—

 
391

 
570

 
—

 
570

Amounts reclassified from accumulated other comprehensive (loss) income
 
(347
)
 
26

 
(321
)
 
(1,416
)
 
—

 
(1,416
)
Net current-period other comprehensive income (loss)
 
44

 
26

 
70

 
(846
)
 
—

 
(846
)
Ending balance
 
$
1,418

 
$
(4,518
)
 
$
(3,100
)
 
$
2,514

 
$
(2,725
)
 
$
(211
)

 
 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
(In Thousands)
 
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
Beginning balance
 
$
2,930

 
$
(4,597
)
 
$
(1,667
)
 
$
(2,169
)
 
$
(2,725
)
 
$
(4,894
)
Other comprehensive (loss) income before reclassifications
 
(381
)
 
—

 
(381
)
 
6,679

 
—

 
6,679

Amounts reclassified from accumulated other comprehensive (loss) income
 
(1,131
)
 
79

 
(1,052
)
 
(1,996
)
 
—

 
(1,996
)
Net current-period other comprehensive (loss) income
 
(1,512
)
 
79

 
(1,433
)
 
4,683

 
—

 
4,683

Ending balance
 
$
1,418

 
$
(4,518
)
 
$
(3,100
)
 
$
2,514

 
$
(2,725
)
 
$
(211
)


8
Table of Contents


The reclassifications out of accumulated other comprehensive income (loss) as of September 30, 2015 and 2014 were as follows:

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
 
Net unrealized gain on available for sale securities
 
$
526

 
$
2,145

 
Net securities gains, available for sale
Income tax effect
 
(179
)
 
(729
)
 
Income tax provision
Total reclassifications for the period
 
$
347

 
$
1,416

 
Net of tax
 
 
 
 
 
 
 
Net unrecognized pension costs
 
$
(39
)
 
$
—

 
Salaries and employee benefits
Income tax effect
 
13

 
—

 
Income tax provision
Total reclassifications for the period
 
$
(26
)
 
$
—

 
Net of tax
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
 
Net unrealized gain on available for sale securities
 
$
1,713

 
$
3,025

 
Net securities gains, available for sale
Income tax effect
 
(582
)
 
(1,029
)
 
Income tax provision
Total reclassifications for the period
 
$
1,131

 
$
1,996

 
Net of tax
 
 
 
 
 
 
 
Net unrecognized pension costs
 
$
(119
)
 
$
—

 
Salaries and employee benefits
Income tax effect
 
40

 
—

 
Income tax provision
Total reclassifications for the period
 
$
(79
)
 
$
—

 
Net of tax

Note 3.  Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This update 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 6. Loans.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The updates 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,

9
Table of Contents


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 update 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 update 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 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 update 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 update 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 is not expected to have a significant impact on the Company’s financial statements.


10
Table of Contents


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 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.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and

11
Table of Contents


risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity's financial statements. Earlier application is permitted. This update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-08, Business Combinations - Pushdown Accounting - Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This update is not expected to have a significant impact on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this update. The amendments in this update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this update. This update is not expected to have a significant impact on the Company’s financial statements.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is evaluating the effect of adopting this new accounting update.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. This update is not expected to have a significant impact on the Company’s financial statements.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. 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.  There are 38,750 stock options outstanding, however, since the strike price of $42.03 is greater than the market price the options are not included in the denominator when 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.


12
Table of Contents


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Weighted average common shares issued
 
5,003,979

 
5,001,505

 
5,003,396

 
5,000,827

Average treasury stock shares
 
(242,403
)
 
(181,159
)
 
(222,620
)
 
(180,786
)
Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share
 
4,761,576

 
4,820,346

 
4,780,776

 
4,820,041

 
Note 5. Investment Securities
 
The amortized cost and fair values of investment securities available for sale at September 30, 2015 and December 31, 2014 are as follows:
 
 
September 30, 2015
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
3,588

 
$
—

 
$
(21
)
 
$
3,567

Mortgage-backed securities
 
10,261

 
337

 
(21
)
 
10,577

Asset-backed securities
 
2,086

 
—

 
(27
)
 
2,059

State and political securities
 
90,029

 
1,999

 
(391
)
 
91,637

Other debt securities
 
79,030

 
1,084

 
(1,272
)
 
78,842

Total debt securities
 
184,994

 
3,420

 
(1,732
)
 
186,682

Financial institution equity securities
 
10,362

 
943

 
(32
)
 
11,273

Other equity securities
 
5,089

 
11

 
(462
)
 
4,638

Total equity securities
 
15,451

 
954

 
(494
)
 
15,911

Total investment securities AFS
 
$
200,445

 
$
4,374

 
$
(2,226
)
 
$
202,593

 
 
 
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

 

13
Table of Contents


The amortized cost and fair values of trading investment securities at September 30, 2015 are as follows. There were no trading securities at December 31, 2014.

 
 
September 30, 2015
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Trading
 
 
 
 
 
 
 
 
Financial institution equity securities
 
$
78

 
$
—

 
$
(15
)
 
$
63

Total equity securities
 
78

 
—

 
(15
)
 
63

Total trading securities
 
$
78

 
$
—

 
$
(15
)
 
$
63


Total net unrealized losses of $15,000 and net realized losses of $22,000 for the nine months ended September 30, 2015 were included in the Consolidated Statement of Income.

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 September 30, 2015 and December 31, 2014.

 
 
September 30, 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
Available for sale (AFS)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities
 
$
—

 
$
—

 
$
3,567

 
$
(21
)
 
$
3,567

 
$
(21
)
Mortgage-backed securities
 
3,808

 
(21
)
 
—

 
—

 
3,808

 
(21
)
Asset-backed securities
 
1,693

 
(24
)
 
366

 
(3
)
 
2,059

 
(27
)
State and political securities
 
6,115

 
(97
)
 
1,529

 
(294
)
 
7,644

 
(391
)
Other debt securities
 
21,901

 
(301
)
 
20,037

 
(971
)
 
41,938

 
(1,272
)
Total debt securities
 
33,517

 
(443
)
 
25,499

 
(1,289
)
 
59,016

 
(1,732
)
Financial institution equity securities
 
306

 
(32
)
 
—

 
—

 
306

 
(32
)
Other equity securities
 
3,039

 
(330
)
 
1,027

 
(132
)
 
4,066

 
(462
)
Total equity securities
 
3,345

 
(362
)
 
1,027

 
(132
)
 
4,372

 
(494
)
Total investment securities AFS
 
$
36,862

 
$
(805
)
 
$
26,526

 
$
(1,421
)
 
$
63,388

 
$
(2,226
)


14
Table of Contents


 
 
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
Available for sale (AFS)
 
 
 
 
 
 
 
 
 
 
 
 
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 investment securities AFS
 
$
40,402

 
$
(878
)
 
$
40,781

 
$
(1,299
)
 
$
81,183

 
$
(2,177
)
 
At September 30, 2015 there were a total of 43 securities in a continuous unrealized loss position for less than twelve months and 18 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 September 30, 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 September 30, 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.

(In Thousands)
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
1,059

 
$
1,062

Due after one year to five years
 
47,357

 
48,184

Due after five years to ten years
 
90,859

 
90,528

Due after ten years
 
45,719

 
46,908

Total
 
$
184,994

 
$
186,682

 
Total gross proceeds from sales of securities available for sale were $43,051,000 and $98,815,000 for the nine months ended September 30, 2015 and 2014, respectively. 


15
Table of Contents


The following table represents gross realized gains and losses within the available for sale portfolio:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2015
 
2014
 
2015
 
2014
Gross realized gains:
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
—

 
$
—

 
$
—

 
$
49

Mortgage-backed securities
 
—

 
13

 
—

 
89

State and political securities
 
511

 
1,361

 
1,257

 
2,093

Other debt securities
 
14

 
149

 
273

 
611

Financial institution equity securities
 
1

 
582

 
163

 
710

Other equity securities
 
—

 
86

 
132

 
205

Total gross realized gains
 
$
526

 
$
2,191

 
$
1,825

 
$
3,757

 
 
 
 
 
 
 
 
 
Gross realized losses:
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
—

 
$
—

 
$
—

 
$
45

State and political securities
 
—

 
9

 
22

 
412

Other debt securities
 
—

 
37

 
47

 
209

Other equity securities
 
—

 
—

 
43

 
66

Total gross realized losses
 
$
—

 
$
46

 
$
112

 
$
732

 
The following table represents gross realized gains and losses within the trading portfolios:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2015
 
2014
 
2015
 
2014
Gross realized gains:
 
 

 
 

 
 

 
 

Financial institution equity securities
 
—

 
—

 
2

 
—

Other equity securities
 
2

 
—

 
3

 
—

Total gross realized gains
 
$
2

 
$
—

 
$
5

 
$
—

 
 
 
 
 
 
 
 
 
Gross realized losses:
 
 

 
 

 
 

 
 

Financial institution equity securities
 
12

 
—

 
15

 
—

Other equity securities
 
23

 
—

 
27

 
—

Total gross realized losses
 
$
35

 
$
—

 
$
42

 
$
—


There were no impairment charges included in gross realized losses for the three and nine months ended September 30, 2015 and 2014, respectively.

Investment securities with a carrying value of approximately $157,933,000 and $128,501,000 at September 30, 2015 and December 31, 2014, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.

Note 6. 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, 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 September 30, 2015 and December 31, 2014:
 

16
Table of Contents


 
 
September 30, 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
 
$
139,621

 
$
209

 
$
—

 
$
152

 
$
139,982

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
506,229

 
3,222

 
99

 
747

 
510,297

Commercial
 
293,894

 
366

 
—

 
6,696

 
300,956

Construction
 
23,709

 
—

 
—

 
899

 
24,608

Installment loans to individuals
 
26,695

 
401

 
—

 
15

 
27,111

 
 
990,148

 
$
4,198

 
$
99

 
$
8,509

 
1,002,954

Net deferred loan fees and discounts
 
(1,301
)
 
 

 
 

 
 

 
(1,301
)
Allowance for loan losses
 
(11,489
)
 
 

 
 

 
 

 
(11,489
)
Loans, net
 
$
977,358

 
 

 
 

 
 

 
$
990,164


 
 
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 September 30, 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 $444,000 at September 30, 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 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.


17
Table of Contents


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 nine months ended September 30, 2014:

(In Thousands)
 
September 30, 2014
Balance at beginning of period or at acquisition
 
$
35

Accretion
 
(12
)
Balance at end of period
 
$
23

 
The following table presents additional information regarding loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality:
(In Thousands)
 
September 30, 2015
 
December 31, 2014
Outstanding balance
 
$
444

 
$
449

Carrying amount
 
344

 
349

 
There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and September 30, 2015. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality as of September 30, 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 and nine months ended September 30, 2015 and 2014:

 
 
Three Months Ended September 30,
 
 
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
 
$
3

 
$
—

 
$
17