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 every Interactive Data File required to be submitted 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 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, a smaller reporting company. or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Small reporting company x
Emerging growth company o
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $8.33 par value
PWOD
The Nasdaq Global Select Market
On May 1, 2019 there were 4,692,305 shares of the Registrant’s common stock outstanding.
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”). The Company also owns a controlling interest in United Insurance Solutions, LLC. 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, 2018.
Newly Adopted Accounting Standards
In February 2016, the FASB issued the Leasing Standard, which is codified in ASC 842, Leases, and is intended to increase transparency and comparability among organizations and require lessees to record an right-of-use (ROU) asset and a liability representing the obligation to make lease payments for long-term leases. Accounting by lessors remains largely unchanged. The Company adopted the standard on January 1, 2019, using the modified retrospective transition under the option to apply the Leasing Standard at its effective date without adjusting the prior period comparative financial statements. Among other things, these updates require lessees to recognize a lease liability, measured on a discounted basis, related to the lessee's obligation to make lease payments arising under a lease contract; and a right-of-use asset related to the lessee’s right to use, or control the use of, a specified asset for the lease term. On January 1, 2019, the Company recorded operating lease liabilities and ROU asset of $4.3 million and finance lease liabilities and ROU asset of $6.0 million upon adoption of the Standard. The balance sheet effects of the new lease accounting standard also impacted regulatory capital ratios, performance ratios and other measures which are dependent upon asset or liability balances. For additional information and required disclosures related to ASC 842, see Note 13, “Leases.”
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 41 through 50 of the Form 10-K for the year ended December 31, 2018.
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 shown net of tax and parenthesis indicating debits, as of March 31, 2019 and 2018 were as follows:
Three Months Ended March 31, 2019
Three Months Ended March 31, 2018
(In Thousands)
Net Unrealized 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
$
(1,360
)
$
(5,276
)
$
(6,636
)
$
(54
)
$
(4,920
)
$
(4,974
)
Other comprehensive gain (loss) before reclassifications
1,567
—
1,567
(1,155
)
—
(1,155
)
Amounts reclassified from accumulated other comprehensive loss
(10
)
37
27
6
34
40
Net current-period other comprehensive income (loss)
The reclassifications out of accumulated other comprehensive loss shown, net of tax and parenthesis indicating debits to net income, as of March 31, 2019 and 2018 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 March 31, 2019
Three Months Ended March 31, 2018
Net unrealized gain (loss) on available for sale securities
$
13
$
(9
)
Net debt securities gains (losses), available for sale
Income tax effect
(3
)
3
Income tax provision
Total reclassifications for the period
$
10
$
(6
)
Net unrecognized pension costs
$
(47
)
$
(42
)
Salaries and employee benefits
Income tax effect
10
8
Income tax provision
Total reclassifications for the period
$
(37
)
$
(34
)
Note 3. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted Update 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12. For public business entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update 2017-12. This Update is not expected to have a significant impact on the Company’s financial statements.
In November 2018, the FASB issued ASU 018-18, Collaborative Arrangements (Topic 808), which made the following targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements (1) clarified that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (2) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606, and (3) require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to (1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
Note 4. Per Share Data
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share. There were a total of 423,700 stock options, with an average exercise price of $43.94, outstanding on March 31, 2019. All options were excluded, on a weighted average basis, in the computation of diluted earnings per share for the period due to the average market price of common shares being $40.10 for the period. There were a total of 118,500 stock options outstanding for the same period end in 2018 that had an average exercise price of $43.91 and were excluded, on a weighted average basis, in the computation of diluted earnings per share because the quarterly average closing market price of common shares was $40.36. for the period. Net income as presented on the consolidated statement of income is used as the numerator. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive earnings per share computation.
Three Months Ended March 31,
2019
2018
Weighted average common shares issued
5,011,902
5,009,526
Weighted average treasury stock shares
(320,150
)
(320,150
)
Weighted average common shares outstanding - basic and diluted
4,691,752
4,689,376
Note 5. Investment Securities
The amortized cost, gross unrealized gains and losses, and fair values of our investment securities portfolio at March 31, 2019 and December 31, 2018 are as follows:
Total net trading gains of $10,000 for the three months ended March 31, 2019 along with net trading gains of $3,000 for the three months ended March 31, 2018 are 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 debt securities have been in a continuous unrealized loss position, at March 31, 2019 and December 31, 2018.
March 31, 2019
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):
Mortgage-backed securities
$
1,168
$
(9
)
$
4,612
$
(140
)
$
5,780
$
(149
)
State and political securities
2,409
(1
)
6,559
(129
)
8,968
(130
)
Other debt securities
5,765
(14
)
36,588
(1,168
)
42,353
(1,182
)
Total debt securities
$
9,342
$
(24
)
$
47,759
$
(1,437
)
$
57,101
$
(1,461
)
December 31, 2018
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):
Mortgage-backed securities
$
3,023
$
(75
)
$
2,930
$
(165
)
$
5,953
$
(240
)
State and political securities
14,819
(128
)
13,648
(298
)
28,467
(426
)
Other debt securities
10,133
(153
)
34,776
(1,537
)
44,909
(1,690
)
Total debt securities
$
27,975
$
(356
)
$
51,354
$
(2,000
)
$
79,329
$
(2,356
)
At March 31, 2019, there were a total of 6 securities in a continuous unrealized loss position for less than twelve months and 36 individual securities that were in a continuous unrealized loss position for twelve months or greater.
The Company reviews its position quarterly and has determined that, at March 31, 2019, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at March 31, 2019, 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
$
3,708
$
3,713
Due after one year to five years
45,818
45,010
Due after five years to ten years
69,669
70,352
Due after ten years
22,318
22,687
Total
$
141,513
$
141,762
Total gross proceeds from sales of debt securities available for sale for the three months ended March 31, 2019 was $6,986,000, an increase from the 2018 total $3,363,000.
The following table represents gross realized gains and losses from the sales of debt securities available for sale:
Three Months Ended March 31,
(In Thousands)
2019
2018
Available for sale (AFS):
Gross realized gains:
State and political securities
$
15
$
—
Other debt securities
4
—
Total gross realized gains
$
19
$
—
Gross realized losses:
State and political securities
$
2
$
9
Other debt securities
4
—
Total gross realized losses
$
6
$
9
There were no impairment charges included in gross realized losses for the three months ended March 31, 2019 and 2018, respectively.
Investment securities with a carrying value of approximately $81,179,000 and $73,327,000 at March 31, 2019 and December 31, 2018, respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
At March 31, 2019 and December 31, 2018, we had $1,819,000 and $1,776,000, respectively, in equity securities recorded at fair value. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. At December 31, 2017, net unrealized gains of $537,000 had been recognized in AOCI. On January 1, 2018, these unrealized gains and losses were reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net equity securities gains (losses). The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2019 and 2018:
Three Months Ended March 31,
(In Thousands)
2019
2018
Net gains (losses) recognized in equity securities during the period
$
43
$
(34
)
Less: Net gains (losses) realized on the sale of equity securities during the period
—
—
Unrealized gains (losses) recognized in equity securities held at reporting date
Net gains and losses on trading account securities are as follows for the three months ended March 31, 2019 and 2018:
Three Months Ended March 31,
(In Thousands)
2019
2018
Net gains (losses) on sale transactions
$
5
$
(15
)
Net mark-to-market gains (losses)
5
18
Net gain (loss) on trading account securities
$
10
$
3
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. Real estate loans are further segmented into three categories: residential, commercial, and construction, while installment loans are classified as either consumer automobile loans or other installment loans.
The following table presents the related aging categories of loans, by segment, as of March 31, 2019 and December 31, 2018:
The following table presents interest income the Banks would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three months ended March 31, 2019 and 2018:
Three Months Ended March 31,
2019
2018
(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
$
24
$
39
$
1
$
—
Real estate mortgage:
Residential
33
23
31
11
Commercial
89
40
61
17
Construction
1
1
—
—
Consumer automobile loans
2
1
—
—
Other consumer installment loans
1
—
—
—
$
150
$
104
$
93
$
28
Impaired Loans
Impaired loans are loans for which it is probable the Banks will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Banks evaluate such loans for impairment individually and do not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap. The Banks may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loan. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $100,000 and if the loan is either on non-accrual status or has a risk rating of substandard. Management may also elect to measure an individual loan for impairment if less than $100,000 on a case-by-case basis.
Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed. Interest income for impaired loans is recorded consistent with the Banks' policy on non-accrual loans.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2019 and December 31, 2018: