Edgar Filing: PENNS WOODS BANCORP INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended June 30, 2013.

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 x 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 x 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 x

On August 2, 2013 there were 4,818,483 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

Part I	Financial Information

Item 1.	Financial Statements	3

Consolidated Balance Sheet (Unaudited) as of June 30, 2013 and December 31, 2012		3

Consolidated Statement of Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012		4

Consolidated Statement of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012		5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2013 and 2012		5

Consolidated Statement of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and 2012		6

Notes to Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

Part II	Other Information

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	42

Signatures		43

Exhibit Index and Exhibits		44

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

	June 30,			December 31,
(In Thousands, Except Share Data)	2013			2012

ASSETS:
Noninterest-bearing balances	$	26,888		$	12,695
Interest-bearing deposits in other financial institutions	1,417			2,447
Federal funds sold	134			—
Total cash and cash equivalents	28,439			15,142

Investment securities available for sale, at fair value	311,289			289,316
Loans held for sale	5,409			3,774
Loans	786,961			512,232
Allowance for loan losses	(9,404		)	(7,617		)
Loans, net	777,557			504,615
Premises and equipment, net	17,101			8,348
Accrued interest receivable	4,999			4,099
Bank-owned life insurance	25,022			16,362
Investment in limited partnerships	2,552			2,883
Goodwill	17,104			3,032
Intangibles	1,984			—
Deferred tax asset	9,906			4,731
Other assets	5,596			4,233
TOTAL ASSETS	$	1,206,958		$	856,535

LIABILITIES:
Interest-bearing deposits	$	744,265		$	527,073
Noninterest-bearing deposits	211,096			114,953
Total deposits	955,361			642,026

Short-term borrowings	39,000			33,204
Long-term borrowings, Federal Home Loan Bank (FHLB)	70,750			76,278
Accrued interest payable	442			366
Other liabilities	15,477			10,935
TOTAL LIABILITIES	1,081,030			762,809

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; 4,998,881 and 4,019,112 shares issued	41,657			33,492
Additional paid-in capital	49,759			18,157
Retained earnings	45,343			43,030
Accumulated other comprehensive (loss) income:
Net unrealized gain on available for sale securities	286			10,164
Defined benefit plan	(4,807		)	(4,807		)
Treasury stock at cost, 180,596 shares	(6,310		)	(6,310		)
TOTAL SHAREHOLDERS’ EQUITY	125,928			93,726
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,206,958		$	856,535

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In Thousands, Except Per Share Data)	2013		2012		2013		2012

INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	7,277	$	6,294	$	14,045	$	12,608
Investment securities:
Taxable	1,507		1,517		2,950		2,991
Tax-exempt	1,162		1,383		2,429		2,788
Dividend and other interest income	72		86		134		178
TOTAL INTEREST AND DIVIDEND INCOME	10,018		9,280		19,558		18,565

INTEREST EXPENSE:
Deposits	760		934		1,551		1,895
Short-term borrowings	22		28		47		62
Long-term borrowings, FHLB	482		620		1,001		1,240
TOTAL INTEREST EXPENSE	1,264		1,582		2,599		3,197

NET INTEREST INCOME	8,754		7,698		16,959		15,368

PROVISION FOR LOAN LOSSES	575		600		1,075		1,200

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	8,179		7,098		15,884		14,168

NON-INTEREST INCOME:
Service charges	538		458		980		905
Securities gains, net	1,274		170		2,260		759
Bank-owned life insurance	144		133		282		401
Gain on sale of loans	302		343		653		526
Insurance commissions	247		316		511		758
Brokerage commissions	299		247		547		459
Other	731		614		1,035		1,236
TOTAL NON-INTEREST INCOME	3,535		2,281		6,268		5,044

NON-INTEREST EXPENSE:
Salaries and employee benefits	3,442		2,850		6,510		5,867
Occupancy	397		318		748		646
Furniture and equipment	412		357		820		703
Pennsylvania shares tax	208		167		392		336
Amortization of investment in limited partnerships	166		166		331		331
Federal Deposit Insurance Corporation deposit insurance	119		115		248		238
Marketing	120		140		215		273
Intangible amortization	31		—		31		—
Other	2,070		1,230		3,521		2,413
TOTAL NON-INTEREST EXPENSE	6,965		5,343		12,816		10,807

INCOME BEFORE INCOME TAX PROVISION	4,749		4,036		9,336		8,405
INCOME TAX PROVISION	1,090		638		1,993		1,318
NET INCOME	$	3,659	$	3,398	$	7,343	$	7,087

EARNINGS PER SHARE - BASIC	$	0.88	$	0.89	$	1.84	$	1.85

EARNINGS PER SHARE - DILUTED	$	0.88	$	0.89	$	1.84	$	1.85

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	4,151,035		3,837,579		3,995,716		3,837,391

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	4,151,035		3,837,579		3,995,716		3,837,391

DIVIDENDS DECLARED PER SHARE	$	0.47	$	0.47	$	1.19	$	0.94

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2013			2012			2013			2012
Net Income	$	3,659		$	3,398		$	7,343		$	7,087
Other comprehensive (loss) income:
Change in unrealized (loss) gain on available for sale securities	(11,196		)	2,028			(12,707		)	7,038
Tax effect	3,807			(690		)	4,321			(2,393		)
Net realized gain included in net income	(1,274		)	(170		)	(2,260		)	(759		)
Tax effect	433			58			768			258
Total other comprehensive (loss) income	(8,230		)	1,226			(9,878		)	4,144
Comprehensive (loss) income	$	(4,571	)	$	4,624		$	(2,535	)	$	11,231

See accompanying notes to the unaudited consolidated financial statements.

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

									ACCUMULATED
	COMMON			ADDITIONAL					OTHER						TOTAL
	STOCK			PAID-IN		RETAINED			COMPREHENSIVE			TREASURY			SHAREHOLDERS’
(In Thousands, Except Per Share Data)	SHARES	AMOUNT		CAPITAL		EARNINGS			INCOME (LOSS)			STOCK			EQUITY
Balance, December 31, 2011	4,017,677	$	33,480	$	18,115	$	36,394		$	(1,219	)	$	(6,310	)	$	80,460

Comprehensive income:
Net income						7,087									7,087
Other comprehensive income									4,144						4,144
Dividends declared, ($0.94 per share)						(3,607		)							(3,607		)
Common shares issued for employee stock purchase plan	709	6		21											27
Balance, June 30, 2012	4,018,386	$	33,486	$	18,136	$	39,874		$	2,925		$	(6,310	)	$	88,111

									ACCUMULATED
	COMMON			ADDITIONAL					OTHER						TOTAL
	STOCK			PAID-IN		RETAINED			COMPREHENSIVE			TREASURY			SHAREHOLDERS’
(In Thousands, Except Per Share Data)	SHARES	AMOUNT		CAPITAL		EARNINGS			INCOME (LOSS)			STOCK			EQUITY
Balance, December 31, 2012	4,019,112	$	33,492	$	18,157	$	43,030		$	5,357		$	(6,310	)	$	93,726

Comprehensive loss:
Net income						7,343									7,343
Other comprehensive loss									(9,878		)				(9,878		)
Dividends declared, ($1.19 per share)						(5,030		)							(5,030		)
Common shares issued for employee stock purchase plan	792	7		24											31
Common shares issued for acqusition of Luzerne National Bank Corporation	978,977	8,158		31,578											39,736
Balance, June 30, 2013	4,998,881	$	41,657	$	49,759	$	45,343		$	(4,521	)	$	(6,310	)	$	125,928

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	June 30,
(In Thousands)	2013			2012

OPERATING ACTIVITIES:
Net Income	$	7,343		$	7,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	415			380
Amortization of intangible assets	31			—
Provision for loan losses	1,075			1,200
Accretion and amortization of investment security discounts and premiums	(117		)	(605		)
Securities gains, net	(2,260		)	(759		)
Originations of loans held for sale	(27,697		)	(15,872		)
Proceeds of loans held for sale	26,715			16,689
Gain on sale of loans	(653		)	(526		)
Earnings on bank-owned life insurance	(282		)	(401		)
(Increase) decrease in deferred tax asset	(162		)	216
Other, net	889			(1,937		)
Net cash provided by operating activities	5,297			5,472
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales	42,910			18,014
Proceeds from calls and maturities	8,780			13,725
Purchases	(63,942		)	(49,670		)
Investment securities held to maturity:
Proceeds from calls and maturities	—			55
Net increase in loans	(23,666		)	(30,287		)
Acquisition of bank premises and equipment	(1,200		)	(902		)
Proceeds from the sale of foreclosed assets	—			698
Purchase of bank-owned life insurance	(977		)	(29		)
Proceeds from bank-owned life insurance death benefit	—			383
Proceeds from redemption of regulatory stock	548			549
Purchases of regulatory stock	(822		)	—
Acquisition, net of cash acquired	17,487			—
Net cash used for investing activities	(20,882		)	(47,464		)
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	22,754			53,095
Net increase in noninterest-bearing deposits	13,625			6,408
Repayment of long-term borrowings, FHLB	(5,528		)	—
Net increase (decrease) in short-term borrowings	3,030			(11,743		)
Dividends paid	(5,030		)	(3,607		)
Issuance of common stock	31			27
Net cash provided by financing activities	28,882			44,180
NET INCREASE IN CASH AND CASH EQUIVALENTS	13,297			2,188
CASH AND CASH EQUIVALENTS, BEGINNING	15,142			13,885
CASH AND CASH EQUIVALENTS, ENDING	$	28,439		$	16,073

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

	Six Months Ended
	June 30,
(In Thousands)	2013		2012
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	2,523	$	3,243
Income taxes paid	1,795		1,950
Transfer of loans to foreclosed real estate	26		—
Acquisition of Luzerne National Bank Corporation
Noncash assets acquired:
Federal funds sold	$	67
Securities available for sale	21,783
Loans	250,377
Premises and equipment, net	8,014
Accrued interest receivable	726
Bank-owned life insurance	7,419
Intangibles	2,015
Other assets	2,636
Goodwill	14,072
	307,109
Liabilities assumed:
Deferred tax liability	76
Interest-bearing deposits	194,438
Noninterest-bearing deposits	82,518
Short-term borrowings	2,766
Accrued interest payable	103
Other liabilities	4,892
	284,793
Net noncash assets acquired	22,316
Cash acquired	$	20,296

See accompanying notes to the unaudited consolidated financial statements.

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 (“Luzerne”) and Jersey Shore State Bank (referred to together as the “Bank”) 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, 2012.

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 35 through 39 of the Annual Report on Form 10-K for the year ended December 31, 2012.

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

The changes in accumulated other comprehensive income by component as of June 30, 2013 were as follows:

	Three Months Ended June 30, 2013									Three Months Ended June 30, 2012
(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
Balance, March 31	$	8,516		$	(4,807	)	$	3,709		$	5,832		$	(4,133	)	$	1,699

Other comprehensive (loss) income before reclassifications	(7,389		)	—			(7,389		)	1,338			—			1,338

Amounts reclassified from accumulated other comprehensive (loss) income	(841		)	—			(841		)	(112		)	—			(112		)

Net current-period other comprehensive (loss) income	(8,230		)	—			(8,230		)	1,226			—			1,226

Balance, June 30	$	286		$	(4,807	)	$	(4,521	)	$	7,058		$	(4,133	)	$	2,925

	Six Months Ended June 30, 2013									Six Months Ended June 30, 2012
(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
Balance, December 31	$	10,164		$	(4,807	)	$	5,357		$	2,914		$	(4,133	)	$	(1,219	)

Other comprehensive (loss) income before reclassifications	(8,386		)	—			(8,386		)	4,645			—			4,645

Amounts reclassified from accumulated other comprehensive (loss) income	(1,492		)	—			(1,492		)	(501		)	—			(501		)

Net current-period other comprehensive (loss) income	(9,878		)	—			(9,878		)	4,144			—			4,144

Balance, June 30	$	286		$	(4,807	)	$	(4,521	)	$	7,058		$	(4,133	)	$	2,925

The reclassifications out of accumulated other comprehensive income as of June 30, 2013 were as follows:

Table of Contents

(In Thousands)

Details about Accumulated Other	Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the
Comprehensive Income Components	Three Months Ended June 30, 2013		Three Months Ended June 30, 2012		Consolidated Statement of Income
Net unrealized gain on available for	$	1,274	$	170	Securities gains, net
sale securities	433		58		Income tax provision
Total reclassifications for the period	$	841	$	112	Net of tax

(In Thousands)

Details about Accumulated Other	Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the
Comprehensive Income Components	Six Months Ended June 30, 2013		Six Months Ended June 30, 2012		Consolidated Statement of Income
Net unrealized gain on available for	$	2,260	$	759	Securities gains, net
sale securities	768		258		Income tax provision
Total reclassifications for the period	$	1,492	$	501	Net of tax

Note 3. Recent Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU did not have a significant impact on the Company’s financial statements.

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11. This ASU is not expected to have a significant impact on the Company’s financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has provided the necessary disclosures in Note 2 - Accumulated Other Comprehensive Income.

Note 4. Per Share Data

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Weighted average common shares issued	4,331,631		4,018,175		4,176,312		4,017,987
Average treasury stock shares	(180,596	)	(180,596	)	(180,596	)	(180,596	)
Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share	4,151,035		3,837,579		3,995,716		3,837,391

Note 5. Investment Securities

The amortized cost and fair values of investment securities at June 30, 2013 and December 31, 2012 are as follows:

Table of Contents

	June 30, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In Thousands)	Cost		Gains		Losses			Value
Available for sale (AFS)
U.S. Government and agency securities	$	31,937	$	870	$	(293	)	$	32,514
State and political securities	164,477		4,611		(4,687		)	164,401
Other debt securities	103,860		933		(2,479		)	102,314
Total debt securities	300,274		6,414		(7,459		)	299,229
Financial institution equity securities	9,810		1,515		(4		)	11,321
Other equity securities	772		—		(33		)	739
Total equity securities	10,582		1,515		(37		)	12,060
Total investment securities AFS	$	310,856	$	7,929	$	(7,496	)	$	311,289

	December 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In Thousands)	Cost		Gains		Losses			Value
Available for sale (AFS)
U.S. Government and agency securities	$	24,475	$	1,384	$	(19	)	$	25,840
State and political securities	168,843		12,805		(1,424		)	180,224
Other debt securities	70,108		1,750		(259		)	71,599
Total debt securities	263,426		15,939		(1,702		)	277,663
Financial institution equity securities	8,422		1,140		(14		)	9,548
Other equity securities	2,068		74		(37		)	2,105
Total equity securities	10,490		1,214		(51		)	11,653
Total investment securities AFS	$	273,916	$	17,153	$	(1,753	)	$	289,316

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 June 30, 2013 and December 31, 2012.

	June 30, 2013
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In Thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. Government and agency securities	$	15,150	$	(293	)	$	—	$	—		$	15,150	$	(293	)
State and political securities	41,588		(3,019		)	4,327		(1,668		)	45,915		(4,687		)
Other debt securities	60,578		(2,457		)	728		(22		)	61,306		(2,479		)
Total debt securities	117,316		(5,769		)	5,055		(1,690		)	122,371		(7,459		)
Financial institution equity securities	—		—			63		(4		)	63		(4		)
Other equity securities	739		(33		)	—		—			739		(33		)
Total equity securities	739		(33		)	63		(4		)	802		(37		)
Total	$	118,055	$	(5,802	)	$	5,118	$	(1,694	)	$	123,173	$	(7,496	)

Table of Contents

	December 31, 2012
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In Thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. Government and agency securities	$	910	$	(19	)	$	—	$	—		$	910	$	(19	)
State and political securities	8,882		(316		)	5,647		(1,108		)	14,529		(1,424		)
Other debt securities	11,250		(189		)	3,727		(70		)	14,977		(259		)
Total debt securities	21,042		(524		)	9,374		(1,178		)	30,416		(1,702		)
Financial institution equity securities	66		(1		)	205		(13		)	271		(14		)
Other equity securities	701		(28		)	63		(9		)	764		(37		)
Total equity securities	767		(29		)	268		(22		)	1,035		(51		)
Total	$	21,809	$	(553	)	$	9,642	$	(1,200	)	$	31,451	$	(1,753	)

At June 30, 2013 there were a total of 182 and 13 individual securities that were in a continuous unrealized loss position for less than twelve months and twelve months or greater, respectively.

The Company reviews its position quarterly and has determined that, at June 30, 2013, 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 June 30, 2013, 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	$	6,180	$	6,197
Due after one year to five years	41,234		41,746
Due after five years to ten years	87,544		85,721
Due after ten years	165,316		165,565
Total	$	300,274	$	299,229

Total gross proceeds from sales of securities available for sale were $42,910,000 and $18,014,000, for the six months ended June 30, 2013 and 2012, respectively. The following table represents gross realized gains and losses on those transactions:

	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2013		2012		2013		2012
Gross realized gains:
U.S. Government and agency securities	$	—	$	—	$	—	$	138
State and political securities	1,062		45		1,641		51
Other debt securities	178		22		299		77
Financial institution equity securities	—		106		130		461
Other equity securities	34		—		250		126
Total gross realized gains	$	1,274	$	173	$	2,320	$	853

Gross realized losses:
U.S. Government and agency securities	$	—	$	—	$	—	$	—
State and political securities	—		2		60		2
Other debt securities	—		—		—		—
Financial institution equity securities	—		1		—		67
Other equity securities	—		—		—		25
Total gross realized losses	$	—	$	3	$	60	$	94

There were no impairment charges included in gross realized losses for the three and six months ended June 30, 2013 and 2012, respectively.

Table of Contents

Note 6. Federal Home Loan Bank Stock

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

Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. More consideration was given to the long-term prospects for the FHLB as opposed to the recent stress caused by the extreme economic conditions the world is facing. Management also considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears adequate, new shares of FHLB stock continue to change hands at the $100 par value, and the resumption of dividends.

Note 7. Credit Quality and Related Allowance for Loan Losses

Management segments the Bank’s 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 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 June 30, 2013 and December 31, 2012:

	June 30, 2013
				Past Due		Past Due 90
				30 To 89		Days Or More		Non-
(In Thousands)	Current			Days		& Still Accruing		Accrual		Total
Commercial and agricultural	$	118,303		$	78	$	—	$	572	$	118,953
Real estate mortgage:
Residential	338,083			1,779		8		1,106		340,976
Commercial	292,728			137		—		3,664		296,529
Construction	15,193			1		—		1,165		16,359
Installment loans to individuals	14,753			352		—		—		15,105
	779,060			$	2,347	$	8	$	6,507	787,922
Net deferred loan fees and discounts	(961		)							(961		)
Allowance for loan losses	(9,404		)							(9,404		)
Loans, net	$	768,695								$	777,557

Table of Contents

	December 31, 2012
				Past Due		Past Due 90
				30 To 89		Days Or More		Non-
(In Thousands)	Current			Days		& Still Accruing		Accrual		Total
Commercial and agricultural	$	48,322		$	133	$	—	$	—	$	48,455
Real estate mortgage:
Residential	245,674			4,888		351		1,229		252,142
Commercial	177,539			443		—		4,049		182,031
Construction	13,813			177		—		6,077		20,067
Installment loans to individuals	10,550			109		—		—		10,659
	495,898			$	5,750	$	351	$	11,355	513,354
Net deferred loan fees and discounts	(1,122		)							(1,122		)
Allowance for loan losses	(7,617		)							(7,617		)
Loans, net	$	487,159								$	504,615

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

Upon acquisition, 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 June 30, 2013. 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 $882,000 at June 30, 2013.

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne 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 the customer nor 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 carrying value of the loans acquired and accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated 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 acquisition as of June 1, 2013:

(In Thousands)
Unpaid principal balance	$	1,211
Interest	572
Contractual cash flows	1,783
Non-accretable discount	(842		)
Expected cash flows	941
Accretable discount	(63		)
Estimated fair value	$	878

Changes in the amortizable yield for purchased credit-impaired loans were as follows for the month ended June 30, 2013:

(In Thousands)
Balance at beginning of period	$	63
Accretion	(4		)
Balance at end of period	$	59

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30:

Table of Contents

	June 1, 2013		June 30, 2013
(In Thousands)	Acquired Loans with Specific Evidence of Deterioration in Credit Quality (ASC 310-30)		Acquired Loans with Specific Evidence of Deterioration in Credit Quality (ASC 310-30)
Outstanding balance	$	1,211	$	1,211
Carrying amount	878		882

The following table presents the interest income if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,
	2013				2012
(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 and agricultural	$	4	$	—	$	—	$	—
Real estate mortgage:
Residential	22		3		4		7
Commercial	31		34		22		5
Construction	40		14		105		25
	$	97	$	51	$	131	$	37

Six Months Ended June 30,

2013

2012

(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 and agricultural

—