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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, 2016.
 
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, 2016 there were 4,734,310 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
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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)
 
2016
 
2015
ASSETS:
 
 

 
 

Noninterest-bearing balances
 
$
23,487

 
$
22,044

Interest-bearing balances in other financial institutions
 
36,694

 
752

Total cash and cash equivalents
 
60,181

 
22,796

 
 
 
 
 
Investment securities, available for sale, at fair value
 
141,057

 
176,157

Investment securities, trading
 
—

 
73

Loans held for sale
 
2,160

 
757

Loans
 
1,069,480

 
1,045,207

Allowance for loan losses
 
(12,718
)
 
(12,044
)
Loans, net
 
1,056,762

 
1,033,163

Premises and equipment, net
 
22,985

 
21,830

Accrued interest receivable
 
3,800

 
3,686

Bank-owned life insurance
 
27,176

 
26,667

Investment in limited partnerships
 
658

 
899

Goodwill
 
17,104

 
17,104

Intangibles
 
1,889

 
1,240

Deferred tax asset
 
7,404

 
8,990

Other assets
 
6,236

 
6,695

TOTAL ASSETS
 
$
1,347,412

 
$
1,320,057

 
 
 
 
 
LIABILITIES:
 
 

 
 

Interest-bearing deposits
 
$
792,698

 
$
751,797

Noninterest-bearing deposits
 
295,599

 
280,083

Total deposits
 
1,088,297

 
1,031,880

 
 
 
 
 
Short-term borrowings
 
11,579

 
46,638

Long-term borrowings
 
91,025

 
91,025

Accrued interest payable
 
481

 
426

Other liabilities
 
16,095

 
13,809

TOTAL LIABILITIES
 
1,207,477

 
1,183,778

 
 
 
 
 
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; 5,006,601 and 5,004,984 shares issued
 
41,721

 
41,708

Additional paid-in capital
 
50,050

 
49,992

Retained earnings
 
60,889

 
58,038

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized gain on available for sale securities
 
1,489

 
258

Defined benefit plan
 
(3,980
)
 
(4,057
)
Treasury stock at cost, 272,452 and 257,852 shares
 
(10,234
)
 
(9,660
)
TOTAL SHAREHOLDERS’ EQUITY
 
139,935

 
136,279

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,347,412

 
$
1,320,057

 
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)
 
2016
 
2015
 
2016
 
2015
INTEREST AND DIVIDEND INCOME:
 
 

 
 

 
 

 
 

Loans, including fees
 
$
10,541

 
$
9,862

 
$
31,362

 
$
28,937

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
601

 
829

 
1,825

 
2,728

Tax-exempt
 
329

 
676

 
1,203

 
2,187

Dividend and other interest income
 
189

 
156

 
666

 
597

TOTAL INTEREST AND DIVIDEND INCOME
 
11,660

 
11,523

 
35,056

 
34,449

INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Deposits
 
909

 
800

 
2,624

 
2,328

Short-term borrowings
 
7

 
31

 
41

 
78

Long-term borrowings
 
497

 
458

 
1,481

 
1,476

TOTAL INTEREST EXPENSE
 
1,413

 
1,289

 
4,146

 
3,882

NET INTEREST INCOME
 
10,247

 
10,234

 
30,910

 
30,567

PROVISION FOR LOAN LOSSES
 
258

 
520

 
866

 
1,820

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
9,989

 
9,714

 
30,044

 
28,747

NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Service charges
 
585

 
621

 
1,678

 
1,772

Net securities gains, available for sale
 
253

 
526

 
1,174

 
1,713

Net securities gains (losses), trading
 
8

 
(33
)
 
54

 
(37
)
Bank-owned life insurance
 
172

 
182

 
516

 
541

Gain on sale of loans
 
658

 
524

 
1,691

 
1,305

Insurance commissions
 
198

 
185

 
604

 
623

Brokerage commissions
 
290

 
297

 
817

 
836

Other
 
918

 
835

 
2,723

 
2,701

TOTAL NON-INTEREST INCOME
 
3,082

 
3,137

 
9,257

 
9,454

NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
4,507

 
4,302

 
13,433

 
13,073

Occupancy
 
544

 
529

 
1,630

 
1,721

Furniture and equipment
 
662

 
686

 
2,042

 
1,924

Pennsylvania shares tax
 
220

 
244

 
698

 
711

Amortization of investment in limited partnerships
 
46

 
165

 
266

 
496

Federal Deposit Insurance Corporation deposit insurance
 
202

 
209

 
670

 
654

Marketing
 
173

 
160

 
568

 
434

Intangible amortization
 
90

 
73

 
276

 
235

Other
 
2,295

 
2,162

 
6,882

 
6,171

TOTAL NON-INTEREST EXPENSE
 
8,739

 
8,530

 
26,465

 
25,419

INCOME BEFORE INCOME TAX PROVISION
 
4,332

 
4,321

 
12,836

 
12,782

INCOME TAX PROVISION
 
1,273

 
957

 
3,307

 
2,630

NET INCOME
 
$
3,059

 
$
3,364

 
$
9,529

 
$
10,152

EARNINGS PER SHARE - BASIC AND DILUTED
 
$
0.65

 
$
0.71

 
$
2.01

 
$
2.12

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
 
4,733,800

 
4,761,576

 
4,735,844

 
4,780,776

DIVIDENDS DECLARED PER SHARE
 
$
0.47

 
$
0.47

 
$
1.41

 
$
1.41

 
See accompanying notes to the unaudited consolidated financial statements.

4
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PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2016
 
2015
 
2016
 
2015
Net Income
 
$
3,059

 
$
3,364

 
$
9,529

 
$
10,152

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Change in unrealized gain (loss) on available for sale securities
 
(276
)
 
592

 
3,039

 
(579
)
Tax effect
 
94

 
(201
)
 
(1,032
)
 
198

Net realized gain on available for sale securities included in net income
 
(253
)
 
(526
)
 
(1,174
)
 
(1,713
)
Tax effect
 
86

 
179

 
398

 
582

   Amortization of unrecognized pension and post-retirement items
 
39

 
39

 
117

 
119

        Tax effect
 
(13
)
 
(13
)
 
(40
)
 
(40
)
Total other comprehensive income (loss)
 
(323
)
 
70

 
1,308

 
(1,433
)
Comprehensive income
 
$
2,736

 
$
3,434

 
$
10,837

 
$
8,719

 
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 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

 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE LOSS (INCOME)
 
TREASURY STOCK
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
Balance, December 31, 2015
 
5,004,984

 
$
41,708

 
$
49,992

 
$
58,038

 
$
(3,799
)
 
$
(9,660
)
 
$
136,279

Net income
 
 

 
 

 
 

 
9,529

 
 

 
 

 
9,529

Other comprehensive income
 
 

 
 

 
 

 
 

 
1,308

 
 

 
1,308

Dividends declared, ($1.41 per share)
 
 

 
 

 
 

 
(6,678
)
 
 

 
 

 
(6,678
)
Common shares issued for employee stock purchase plan
 
1,617

 
13

 
58

 
 

 
 

 
 

 
71

Purchase of treasury stock (14,600 shares)
 
 
 
 
 
 
 
 
 
 
 
(574
)
 
(574
)
Balance, September 30, 2016
 
5,006,601

 
$
41,721

 
$
50,050

 
$
60,889

 
$
(2,491
)
 
$
(10,234
)
 
$
139,935

 
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)
 
2016
 
2015
OPERATING ACTIVITIES:
 
 

 
 

Net Income
 
$
9,529

 
$
10,152

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

 
 

Depreciation and amortization
 
2,394

 
2,478

Amortization of intangible assets
 
276

 
235

Provision for loan losses
 
866

 
1,820

Accretion and amortization of investment security discounts and premiums
 
657

 
644

Net securities gains, available for sale
 
(1,174
)
 
(1,713
)
Originations of loans held for sale
 
(50,824
)
 
(41,762
)
Proceeds of loans held for sale
 
51,112

 
42,588

Gain on sale of loans
 
(1,691
)
 
(1,305
)
Net securities (gains) losses, trading
 
(54
)
 
37

Proceeds from the sale of trading securities
 
3,723

 
490

Purchases of trading securities
 
(3,596
)
 
(590
)
Earnings on bank-owned life insurance
 
(516
)
 
(541
)
Decrease in deferred tax asset
 
952

 
262

Other, net
 
508

 
(1,486
)
Net cash provided by operating activities
 
12,162

 
11,309

INVESTING ACTIVITIES:
 
 

 
 

Proceeds from sales of available for sale securities
 
42,180

 
43,051

Proceeds from calls and maturities of available for sale securities
 
19,267

 
14,832

Purchases of available for sale securities
 
(24,040
)
 
(26,916
)
Net increase in loans
 
(24,548
)
 
(87,324
)
Acquisition of premises and equipment
 
(2,347
)
 
(1,491
)
Proceeds from the sale of foreclosed assets
 
486

 
1,613

Purchase of bank-owned life insurance
 
(27
)
 
(30
)
Proceeds from redemption of regulatory stock
 
2,644

 
8,801

Purchases of regulatory stock
 
(2,569
)
 
(10,518
)
Net cash provided by (used for) investing activities
 
11,046

 
(57,982
)
FINANCING ACTIVITIES:
 
 

 
 

Net increase in interest-bearing deposits
 
40,901

 
18,912

Net increase in noninterest-bearing deposits
 
15,516

 
4,470

Proceeds from long-term borrowings
 
—

 
30,625

Repayment of long-term borrowings
 
—

 
(10,750
)
Net (decrease) increase in short-term borrowings
 
(35,059
)
 
10,872

Dividends paid
 
(6,678
)
 
(6,736
)
Issuance of common stock
 
71

 
77

Purchases of treasury stock
 
(574
)
 
(2,450
)
Net cash provided by provided by financing activities
 
14,177

 
45,020

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
37,385

 
(1,653
)
CASH AND CASH EQUIVALENTS, BEGINNING
 
22,796

 
19,908

CASH AND CASH EQUIVALENTS, ENDING
 
$
60,181

 
$
18,255

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
4,091

 
$
3,803

Income taxes paid
 
3,050

 
2,000

Transfer of loans to foreclosed real estate
 
83

 
340

 
See accompanying notes to the unaudited consolidated financial statements.

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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, 2015.

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 40 through 48 of the Form 10-K for the year ended December 31, 2015.

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 September 30, 2016 and 2015 were as follows:

 
 
Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2015
(In Thousands)
 
Net Unrealized Gain
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
 
Net Unrealized Gain
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
Beginning balance
 
$
1,838


$
(4,006
)

$
(2,168
)
 
$
1,374

 
$
(4,544
)
 
$
(3,170
)
Other comprehensive (loss) income before reclassifications
 
(182
)

—


$
(182
)
 
391

 
—

 
391

Amounts reclassified from accumulated other comprehensive (loss) income
 
(167
)

26


$
(141
)
 
(347
)
 
26

 
(321
)
Net current-period other comprehensive (loss) income
 
(349
)

26


$
(323
)
 
44

 
26

 
70

Ending balance
 
$
1,489


$
(3,980
)

$
(2,491
)
 
$
1,418

 
$
(4,518
)
 
$
(3,100
)
 
 
Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
(In Thousands)
 
Net Unrealized Gain
on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
 
Net Unrealized Gain
(Los) on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
Beginning balance
 
$
258

 
$
(4,057
)
 
$
(3,799
)
 
$
2,930

 
$
(4,597
)
 
$
(1,667
)
Other comprehensive income (loss) before reclassifications
 
2,007

 
—

 
2,007

 
(381
)
 
—

 
(381
)
Amounts reclassified from accumulated other comprehensive (loss) income
 
(776
)
 
77

 
(699
)
 
(1,131
)
 
79

 
(1,052
)
Net current-period other comprehensive income (loss)
 
1,231

 
77

 
1,308

 
(1,512
)
 
79

 
(1,433
)
Ending balance
 
$
1,489

 
$
(3,980
)
 
$
(2,491
)
 
$
1,418

 
$
(4,518
)
 
$
(3,100
)





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Table of Contents


The reclassifications out of accumulated other comprehensive loss as of September 30, 2016 and 2015 were as follows:

Details about Accumulated Other Comprehensive Loss Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2015
 
Net unrealized gain on available for sale securities
 
$
253

 
$
526

 
Net securities gains, available for sale
Income tax effect
 
(86
)
 
(179
)
 
Income tax provision
Total reclassifications for the period
 
$
167

 
$
347

 
Net of tax
 
 
 
 
 
 
 
Net unrecognized pension costs
 
$
(39
)
 
$
(39
)
 
Salaries and employee benefits
Income tax effect
 
13

 
13

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

Details about Accumulated Other Comprehensive Loss Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Six Months Ended June 30, 2016
 
Nine Months Ended September 30, 2015
 
Net unrealized gain on available for sale securities
 
$
1,174

 
$
1,713

 
Net securities gains, available for sale
Income tax effect
 
(398
)
 
(582
)
 
Income tax provision
Total reclassifications for the period
 
$
776

 
$
1,131

 
Net of tax
 
 
 
 
 
 
 
Net unrecognized pension costs
 
$
(117
)
 
$
(119
)
 
Salaries and employee benefits
Income tax effect
 
40

 
40

 
Income tax provision
Total reclassifications for the period
 
$
(77
)
 
$
(79
)
 
Net of tax




Note 3.  Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The core principle of the update 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 January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim

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periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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 February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which: (a) the lease term is 12 months or less, and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a heading instrument under Topic 815. The standards in this update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This update is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. 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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash

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outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.


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 31,000 stock options outstanding, however, since the strike price of $42.03 is greater than the average closing 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.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Weighted average common shares issued
 
5,006,252

 
5,003,979

 
5,005,707

 
5,003,396

Weighted average treasury stock shares
 
(272,452
)
 
(242,403
)
 
(269,863
)
 
(222,620
)
Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share
 
4,733,800

 
4,761,576

 
4,735,844

 
4,780,776

 

Note 5. Investment Securities
 
The amortized cost and fair values of investment securities available for sale at September 30, 2016 and December 31, 2015 are as follows:
 
 
September 30, 2016
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
—

 
$
—

 
$
—

 
$
—

Mortgage-backed securities
 
10,079

 
242

 
(62
)
 
10,259

Asset-backed securities
 
1,543

 
—

 
(5
)
 
1,538

State and political securities
 
60,838

 
1,807

 
(3
)
 
62,642

Other debt securities
 
54,752

 
689

 
(1,228
)
 
54,213

Total debt securities
 
127,212

 
2,738

 
(1,298
)
 
128,652

Financial institution equity securities
 
9,822

 
951

 
—

 
10,773

Other equity securities
 
1,767

 
13

 
(148
)
 
1,632

Total equity securities
 
11,589

 
964

 
(148
)
 
12,405

Total investment securities AFS
 
$
138,801

 
$
3,702

 
$
(1,446
)
 
$
141,057



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December 31, 2015
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
3,586

 
$
—

 
$
(37
)
 
$
3,549

Mortgage-backed securities
 
9,785

 
284

 
(60
)
 
10,009

Asset-backed securities
 
1,960

 
—

 
(20
)
 
1,940

State and political securities
 
84,992

 
1,797

 
(234
)
 
86,555

Other debt securities
 
59,832

 
185

 
(2,245
)
 
57,772

Total debt securities
 
160,155

 
2,266

 
(2,596
)
 
159,825

Financial institution equity securities
 
10,397

 
1,100

 
(14
)
 
11,483

Other equity securities
 
5,214

 
70

 
(435
)
 
4,849

Total equity securities
 
15,611

 
1,170

 
(449
)
 
16,332

Total investment securities AFS
 
$
175,766

 
$
3,436

 
$
(3,045
)
 
$
176,157

 
The amortized cost and fair values of trading investment securities at September 30, 2016 and December 31, 2015 are as follows.

 
 
September 30, 2016
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Trading
 
 
 
 
 
 
 
 
Financial institution equity securities
 
$
—

 
$
—

 
$
—

 
$
—

Total trading securities
 
$
—

 
$
—

 
$
—

 
$
—


 
 
December 31, 2015
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Trading
 
 
 
 
 
 
 
 
Financial institution equity securities
 
$
78

 
$
—

 
$
(5
)
 
$
73

Total trading securities
 
$
78

 
$
—

 
$
(5
)
 
$
73



Total net realized trading gains of $8,000 and $54,000 for the three and nine month periods ended September 30, 2016 compared to the net realized trading loss of $33,000 and $37,000 for the three and nine month periods 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, 2016 and December 31, 2015.


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September 30, 2016
 
 
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
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mortgage-backed securities
 
—

 
—

 
3,653

 
(62
)
 
3,653

 
(62
)
Asset-backed securities
 
—

 
—

 
1,538

 
(5
)
 
1,538

 
(5
)
State and political securities
 
1,001

 
(3
)
 
—

 
—

 
1,001

 
(3
)
Other debt securities
 
11,753

 
(271
)
 
12,187

 
(957
)
 
23,940

 
(1,228
)
Total debt securities
 
12,754

 
(274
)
 
17,378

 
(1,024
)
 
30,132

 
(1,298
)
Financial institution equity securities
 
—

 
—

 
—

 
—

 
—

 
—

Other equity securities
 
780

 
(20
)
 
238

 
(128
)
 
1,018

 
(148
)
Total equity securities
 
780

 
(20
)
 
238

 
(128
)
 
1,018

 
(148
)
Total investment securities AFS
 
$
13,534

 
$
(294
)
 
$
17,616

 
$
(1,152
)
 
$
31,150

 
$
(1,446
)

 
 
December 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
Available for sale (AFS)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities
 
$
—

 
$
—

 
$
3,549

 
$
(37
)
 
$
3,549

 
$
(37
)
Mortgage-backed securities
 
6,081

 
(60
)
 
—

 
—

 
6,081

 
(60
)
Asset-backed securities
 
1,626

 
(16
)
 
314

 
(4
)
 
1,940

 
(20
)
State and political securities
 
7,345

 
(47
)
 
1,656

 
(187
)
 
9,001

 
(234
)
Other debt securities
 
24,381

 
(530
)
 
22,547

 
(1,715
)
 
46,928

 
(2,245
)
Total debt securities
 
39,433

 
(653
)
 
28,066

 
(1,943
)
 
67,499

 
(2,596
)
Financial institution equity securities
 
—

 
—

 
53

 
(14
)
 
53

 
(14
)
Other equity securities
 
2,363

 
(277
)
 
1,001

 
(158
)
 
3,364

 
(435
)
Total equity securities
 
2,363

 
(277
)
 
1,054

 
(172
)
 
3,417

 
(449
)
Total investment securities AFS
 
$
41,796

 
$
(930
)
 
$
29,120

 
$
(2,115
)
 
$
70,916

 
$
(3,045
)
 
At September 30, 2016 there were a total of 13 securities in a continuous unrealized loss position for less than twelve months and 11 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, 2016, 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, 2016, 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
 
$
1,354

 
$
1,354

Due after one year to five years
 
36,382

 
36,887

Due after five years to ten years
 
67,710

 
67,992

Due after ten years
 
21,766

 
22,419

Total
 
$
127,212

 
$
128,652

 
Total gross proceeds from sales of securities available for sale were $42,180,000 and $43,051,000 for the nine months ended September 30, 2016 and 2015, respectively. 

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)
 
2016
 
2015
 
2016
 
2015
Gross realized gains:
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
11

 
$
—

 
$
11

 
$
—

Mortgage-backed securities
 
29

 
—

 
35

 
—

State and political securities
 
146

 
511

 
784

 
1,257

Other debt securities
 
—

 
14

 
258

 
273

Financial institution equity securities
 
68

 
1

 
150

 
163

Other equity securities
 
73

 
—

 
217

 
132

Total gross realized gains
 
$
327

 
$
526

 
$
1,455

 
$
1,825

 
 
 
 
 
 
 
 
 
Gross realized losses:
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
2

 
$
—

 
$
5

 
$
—

Mortgage-backed securities
 
—

 
—

 
—

 
—

Asset-backed securities
 
—

 
—

 
—

 
—

State and political securities
 
1

 
—

 
1

 
22

Other debt securities
 
26

 
—

 
189

 
47

Financial institution equity securities
 
—

 
—

 
—

 
—

Other equity securities
 
45

 
—

 
86

 
43

Total gross realized losses
 
$
74

 
$
—

 
$
281

 
$
112

 
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)
 
2016
 
2015
 
2016
 
2015
Gross realized gains:
 
 

 
 

 
 

 
 

Financial institution equity securities
 
—

 
—

 
$
6

 
$
2

Other equity securities
 
8

 
2

 
76

 
3

Total gross realized gains
 
$
8

 
$
2

 
$
82

 
$
5

 
 
 
 
 
 
 
 
 
Gross realized losses:
 
 

 
 

 
 

 
 

Financial institution equity securities
 
—

 
12

 
$
12

 
$
15

Other equity securities
 
—

 
23

 
16

 
27

Total gross realized losses
 
$
—

 
$
35

 
$
28

 
$
42


There were no impairment charges included in gross realized losses for the three and nine months ended September 30, 2016 and 2015, respectively.

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Investment securities with a carrying value of approximately $102,872,000 and $131,089,000 at September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015:
 
 
 
September 30, 2016
 
 
 
 
Past Due
 
Past Due 90
 
 
 
 
 
 
 
 
30 To 89
 
Days Or More
 
Non-
 
 
(In Thousands)
 
Current
 
Days
 
& Still Accruing
 
Accrual
 
Total
Commercial, financial, and agricultural
 
$
155,157

 
$
233

 
$
—

 
$
137

 
$
155,527

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
551,143

 
2,752

 
114

 
2,603

 
556,612

Commercial
 
289,926

 
987

 
—

 
8,676

 
299,589

Construction
 
26,927

 
2

 
—

 
—

 
26,929

Installment loans to individuals
 
31,648

 
552

 
—

 
—

 
32,200

 
 
1,054,801

 
$
4,526

 
$
114

 
$
11,416

 
1,070,857

Net deferred loan fees and discounts
 
(1,377
)
 
 

 
 

 
 

 
(1,377
)
Allowance for loan losses
 
(12,718
)
 
 

 
 

 
 

 
(12,718
)
Loans, net
 
$
1,040,706

 
 

 
 

 
 

 
$
1,056,762


 
 
December 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
 
$
162,312

 
$
164

 
$
—

 
$
1,596

 
$
164,072

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
517,753

 
6,827

 
714

 
889

 
526,183

Commercial
 
295,784

 
720

 
265

 
5,770

 
302,539

Construction
 
26,545

 
67

 
—

 
212

 
26,824

Installment loans to individuals
 
26,572

 
429

 
—

 
—

 
27,001

 
 
1,028,966

 
$
8,207

 
$
979

 
$
8,467

 
1,046,619

Net deferred loan fees and discounts
 
(1,412
)
 
 

 
 

 
 

 
(1,412
)
Allowance for loan losses
 
(12,044
)
 
 

 
 

 
 

 
(12,044
)
Loans, net
 
$
1,015,510

 
 

 
 

 
 

 
$
1,033,163

 
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

15
Table of Contents


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, 2016.  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 $329,000 at September 30, 2016.

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.
 

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, 2016
 
December 31, 2015
Outstanding balance
 
$
429

 
$
441

Carrying amount
 
329

 
341

 
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, 2016. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality as of September 30, 2016.

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, 2016 and 2015:
 
 
Three Months Ended September 30,
 
 
2016