Q3 2013 - 10-Q
Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
ý
Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 
for the Quarterly Period Ended September 30, 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 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 2, 2013 there were 4,819,054 shares of the Registrant’s common stock outstanding.

Table of Contents


PENNS WOODS BANCORP, INC.
 
INDEX TO QUARTERLY REPORT ON FORM 10-Q
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents


Part I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
 
 
September 30,
 
December 31,
(In Thousands, Except Share Data)
 
2013
 
2012
ASSETS:
 
 

 
 

Noninterest-bearing balances
 
$
23,073

 
$
12,695

Interest-bearing deposits in other financial institutions
 
9,776

 
2,447

Federal funds sold
 
195

 
—

Total cash and cash equivalents
 
33,044

 
15,142

Investment securities available for sale, at fair value
 
285,383

 
289,316

Loans held for sale
 
1,588

 
3,774

Loans
 
806,163

 
512,232

Allowance for loan losses
 
(9,630
)
 
(7,617
)
Loans, net
 
796,533

 
504,615

Premises and equipment, net
 
18,352

 
8,348

Accrued interest receivable
 
4,639

 
4,099

Bank-owned life insurance
 
25,216

 
16,362

Investment in limited partnerships
 
2,387

 
2,883

Goodwill
 
17,104

 
3,032

Intangibles
 
1,892

 
—

Deferred tax asset
 
10,389

 
4,731

Other assets
 
7,563

 
4,233

TOTAL ASSETS
 
$
1,204,090

 
$
856,535

 
 
 
 
 
LIABILITIES:
 
 

 
 

Interest-bearing deposits
 
$
760,147

 
$
527,073

Noninterest-bearing deposits
 
215,374

 
114,953

Total deposits
 
975,521

 
642,026

Short-term borrowings
 
15,060

 
33,204

Long-term borrowings, Federal Home Loan Bank (FHLB)
 
70,750

 
76,278

Accrued interest payable
 
435

 
366

Other liabilities
 
16,472

 
10,935

TOTAL LIABILITIES
 
1,078,238

 
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; 4,999,483 and 4,019,112 shares issued
 
41,662

 
33,492

Additional paid-in capital
 
49,782

 
18,157

Retained earnings
 
46,324

 
43,030

Accumulated other comprehensive (loss) income:
 
 

 
 

Net unrealized (loss) gain on available for sale securities
 
(799
)
 
10,164

Defined benefit plan
 
(4,807
)
 
(4,807
)
Treasury stock at cost, 180,596 shares
 
(6,310
)
 
(6,310
)
TOTAL SHAREHOLDERS’ EQUITY
 
125,852

 
93,726

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,204,090

 
$
856,535

 
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)
 
2013
 
2012
 
2013
 
2012
INTEREST AND DIVIDEND INCOME:
 
 

 
 

 
 

 
 

Loans, including fees
 
$
9,211

 
$
6,346

 
$
23,256

 
$
18,954

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
1,570

 
1,486

 
4,520

 
4,477

Tax-exempt
 
1,124

 
1,339

 
3,553

 
4,127

Dividend and other interest income
 
74

 
96

 
208

 
274

TOTAL INTEREST AND DIVIDEND INCOME
 
11,979

 
9,267

 
31,537

 
27,832

INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Deposits
 
855

 
902

 
2,406

 
2,797

Short-term borrowings
 
16

 
38

 
63

 
100

Long-term borrowings, FHLB
 
479

 
637

 
1,480

 
1,877

TOTAL INTEREST EXPENSE
 
1,350

 
1,577

 
3,949

 
4,774

NET INTEREST INCOME
 
10,629

 
7,690

 
27,588

 
23,058

PROVISION FOR LOAN LOSSES
 
600

 
600

 
1,675

 
1,800

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
10,029

 
7,090

 
25,913

 
21,258

NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Service charges
 
671

 
489

 
1,651

 
1,394

Securities (losses) gains, net
 
(3
)
 
447

 
2,257

 
1,206

Bank-owned life insurance
 
199

 
138

 
481

 
539

Gain on sale of loans
 
551

 
527

 
1,204

 
1,053

Insurance commissions
 
286

 
295

 
797

 
1,053

Brokerage commissions
 
250

 
239

 
797

 
698

Other
 
888

 
636

 
1,923

 
1,872

TOTAL NON-INTEREST INCOME
 
2,842

 
2,771

 
9,110

 
7,815

NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
4,515

 
2,939

 
11,025

 
8,806

Occupancy
 
554

 
317

 
1,302

 
963

Furniture and equipment
 
422

 
355

 
1,242

 
1,058

Pennsylvania shares tax
 
225

 
169

 
617

 
505

Amortization of investment in limited partnerships
 
165

 
165

 
496

 
496

Federal Deposit Insurance Corporation deposit insurance
 
173

 
111

 
421

 
349

Marketing
 
156

 
132

 
371

 
405

Intangible amortization
 
91

 
—

 
122

 
—

Other
 
2,674

 
1,270

 
6,195

 
3,683

TOTAL NON-INTEREST EXPENSE
 
8,975

 
5,458

 
21,791

 
16,265

INCOME BEFORE INCOME TAX PROVISION
 
3,896

 
4,403

 
13,232

 
12,808

INCOME TAX PROVISION
 
650

 
736

 
2,643

 
2,054

NET INCOME
 
$
3,246

 
$
3,667

 
$
10,589

 
$
10,754

EARNINGS PER SHARE - BASIC
 
$
0.67

 
$
0.96

 
$
2.48

 
$
2.80

EARNINGS PER SHARE - DILUTED
 
$
0.67

 
$
0.96

 
$
2.48

 
$
2.80

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
 
4,818,494

 
3,837,925

 
4,272,989

 
3,837,570

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED
 
4,818,494

 
3,837,925

 
4,272,989

 
3,837,570

DIVIDENDS DECLARED PER SHARE
 
$
0.47

 
$
0.47

 
$
1.66

 
$
1.41

 
See accompanying notes to the unaudited consolidated financial statements.

4
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2013
 
2012
 
2013
 
2012
Net Income
 
$
3,246

 
$
3,667

 
$
10,589

 
$
10,754

Other comprehensive (loss) income:
 
 

 
 

 
 

 
 

Change in unrealized (loss) gain on available for sale securities
 
(1,647
)
 
6,190

 
(14,354
)
 
13,228

Tax effect
 
560

 
(2,105
)
 
4,881

 
(4,498
)
Net realized loss (gain) included in net income
 
3

 
(447
)
 
(2,257
)
 
(1,206
)
Tax effect
 
(1
)
 
152

 
767

 
410

Total other comprehensive (loss) income
 
(1,085
)
 
3,790

 
(10,963
)
 
7,934

Comprehensive income (loss)
 
$
2,161

 
$
7,457

 
$
(374
)
 
$
18,688

 
See accompanying notes to the unaudited consolidated financial statements.

5
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
TREASURY STOCK
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
Balance, December 31, 2011
 
4,017,677

 
$
33,480

 
$
18,115

 
$
36,394

 
$
(1,219
)
 
$
(6,310
)
 
$
80,460

Comprehensive income:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
 

 
 

 
 

 
10,754

 
 

 
 

 
10,754

Other comprehensive income
 
 

 
 

 
 

 
 

 
7,934

 
 

 
7,934

Dividends declared, ($1.41 per share)
 
 

 
 

 
 

 
(5,411
)
 
 

 
 

 
(5,411
)
Common shares issued for employee stock purchase plan
 
1,100

 
9

 
33

 
 

 
 

 
 

 
42

Balance, September 30, 2012
 
4,018,777

 
$
33,489

 
$
18,148

 
$
41,737

 
$
6,715

 
$
(6,310
)
 
$
93,779

 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
 
TREASURY STOCK
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
Balance, December 31, 2012
 
4,019,112

 
$
33,492

 
$
18,157

 
$
43,030

 
$
5,357

 
$
(6,310
)
 
$
93,726

Comprehensive loss:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income
 
 

 
 

 
 

 
10,589

 
 

 
 

 
10,589

Other comprehensive loss
 
 

 
 

 
 

 
 

 
(10,963
)
 
 

 
(10,963
)
Dividends declared, ($1.66 per share)
 
 

 
 

 
 

 
(7,295
)
 
 

 
 

 
(7,295
)
Common shares issued for employee stock purchase plan
 
1,394

 
12

 
47

 
 

 
 

 
 

 
59

Common shares issued for acquisition of Luzerne National Bank Corporation
 
978,977

 
8,158

 
31,578

 
 

 
 

 
 

 
39,736

Balance, September 30, 2013
 
4,999,483

 
$
41,662

 
$
49,782

 
$
46,324

 
$
(5,606
)
 
$
(6,310
)
 
$
125,852

 
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)
 
2013
 
2012
OPERATING ACTIVITIES:
 
 

 
 

Net Income
 
$
10,589

 
$
10,754

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

 
 

Depreciation and amortization
 
708

 
569

Amortization of intangible assets
 
122

 
—

Provision for loan losses
 
1,675

 
1,800

Accretion and amortization of investment security discounts and premiums
 
(44
)
 
(816
)
Securities gains, net
 
(2,257
)
 
(1,206
)
Originations of loans held for sale
 
(42,985
)
 
(32,116
)
Proceeds of loans held for sale
 
46,375

 
34,671

Gain on sale of loans
 
(1,204
)
 
(1,053
)
Earnings on bank-owned life insurance
 
(481
)
 
(539
)
(Increase) decrease in deferred tax asset
 
(86
)
 
315

Other, net
 
(445
)
 
(1,189
)
Net cash provided by operating activities
 
11,967

 
11,190

INVESTING ACTIVITIES:
 
 

 
 

Investment securities available for sale:
 
 

 
 

Proceeds from sales
 
69,898

 
35,847

Proceeds from calls and maturities
 
12,775

 
17,259

Purchases
 
(71,221
)
 
(64,965
)
Investment securities held to maturity:
 
 

 
 

Proceeds from calls and maturities
 
—

 
55

Net increase in loans
 
(43,401
)
 
(50,513
)
Acquisition of bank premises and equipment
 
(2,744
)
 
(1,109
)
Proceeds from the sale of foreclosed assets
 
—

 
700

Purchase of bank-owned life insurance
 
(981
)
 
(33
)
Proceeds from bank-owned life insurance death benefit
 
—

 
383

Proceeds from redemption of regulatory stock
 
2,237

 
1,034

Purchases of regulatory stock
 
(980
)
 
—

Acquisition, net of cash acquired
 
17,487

 
—

Net cash used for investing activities
 
(16,930
)
 
(61,342
)
FINANCING ACTIVITIES:
 
 

 
 

Net increase in interest-bearing deposits
 
38,636

 
55,515

Net increase in noninterest-bearing deposits
 
17,903

 
3,931

Proceeds from long-term borrowing, FHLB
 
—

 
15,000

Repayment of long-term borrowings, FHLB
 
(5,528
)
 
—

Net decrease in short-term borrowings
 
(20,910
)
 
(11,666
)
Dividends paid
 
(7,295
)
 
(5,411
)
Issuance of common stock
 
59

 
42

Net cash provided by financing activities
 
22,865

 
57,411

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
17,902

 
7,259

CASH AND CASH EQUIVALENTS, BEGINNING
 
15,142

 
13,885

CASH AND CASH EQUIVALENTS, ENDING
 
$
33,044

 
$
21,144

 
See accompanying notes to the unaudited consolidated financial statements.

7
Table of Contents


 
 
Nine Months Ended September 30,
(In Thousands)
 
2013
 
2012
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
3,880

 
$
4,809

Income taxes paid
 
2,770

 
2,350

Transfer of loans to foreclosed real estate
 
185

 
—

Acquisition of Luzerne National Bank Corporation
 
 

 
 

Noncash assets acquired:
 
 

 
 

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

 
 

 
 
307,042

 
 

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
 
22,249

 
 

Cash and cash equivalents acquired
 
$
20,363

 
 

 
See accompanying notes to the unaudited consolidated financial statements.

8
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 September 30, 2013 were as follows:
 
 
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
(In Thousands)
 
Net Unrealized Gain (Loss) on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
 
Net Unrealized
Gain on Available
for Sale Securities
 
Defined
Benefit 
Plan
 
Total
Balance, June 30
 
$
286

 
$
(4,807
)
 
$
(4,521
)
 
$
7,058

 
$
(4,133
)
 
$
2,925

Other comprehensive (loss) income before reclassifications
 
(1,087
)
 
—

 
(1,087
)
 
4,085

 
—

 
4,085

Amounts reclassified from accumulated other comprehensive (loss) income
 
2

 
—

 
2

 
(295
)
 
—

 
(295
)
Net current-period other comprehensive (loss) income
 
(1,085
)
 
—

 
(1,085
)
 
3,790

 
—

 
3,790

Balance, September 30
 
$
(799
)
 
$
(4,807
)
 
$
(5,606
)
 
$
10,848

 
$
(4,133
)
 
$
6,715

 
 
 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
(In Thousands)
 
Net Unrealized Gain (Loss) 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
 
(9,473
)
 
—

 
(9,473
)
 
8,730

 
—

 
8,730

Amounts reclassified from accumulated other comprehensive (loss) income
 
(1,490
)
 
—

 
(1,490
)
 
(796
)
 
—

 
(796
)
Net current-period other comprehensive (loss) income
 
(10,963
)
 
—

 
(10,963
)
 
7,934

 
—

 
7,934

Balance, September 30
 
$
(799
)
 
$
(4,807
)
 
$
(5,606
)
 
$
10,848

 
$
(4,133
)
 
$
6,715

 

9
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The reclassifications out of accumulated other comprehensive income as of September 30, 2013 were as follows:
(In Thousands)
 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
Net unrealized loss on available for
 
$
(3
)
 
$
447

 
Securities (losses) gains, net
sale securities
 
(1
)
 
152

 
Income tax provision
Total reclassifications for the period
 
$
(2
)
 
$
295

 
Net of tax
 
(In Thousands)
 
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item in the Consolidated Statement of Income
 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
Net unrealized gain on available for
 
$
2,257

 
$
1,206

 
Securities gains, net
sale securities
 
767

 
410

 
Income tax provision
Total reclassifications for the period
 
$
1,490

 
$
796

 
Net of tax
 
Note 3.  Recent Accounting Pronouncements
 
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.
 
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

Note 4. Per Share Data
 

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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 September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Weighted average common shares issued
 
4,999,090

 
4,018,521

 
4,453,585

 
4,018,166

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
 
4,818,494

 
3,837,925

 
4,272,989

 
3,837,570

 
Note 5. Investment Securities
 
The amortized cost and fair values of investment securities at September 30, 2013 and December 31, 2012 are as follows:
 
 
September 30, 2013
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
30,263

 
$
795

 
$
(289
)
 
$
30,769

State and political securities
 
148,581

 
3,215

 
(4,924
)
 
146,872

Other debt securities
 
97,691

 
858

 
(2,424
)
 
96,125

Total debt securities
 
276,535

 
4,868

 
(7,637
)
 
273,766

Financial institution equity securities
 
8,384

 
1,616

 
(10
)
 
9,990

Other equity securities
 
1,675

 
11

 
(59
)
 
1,627

Total equity securities
 
10,059

 
1,627

 
(69
)
 
11,617

Total investment securities AFS
 
$
286,594

 
$
6,495

 
$
(7,706
)
 
$
285,383

 
 
 
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 September 30, 2013 and December 31, 2012.
 

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September 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
 
$
16,179

 
$
(275
)
 
$
747

 
$
(14
)
 
$
16,926

 
$
(289
)
State and political securities
 
41,626

 
(3,224
)
 
3,993

 
(1,700
)
 
45,619

 
(4,924
)
Other debt securities
 
60,151

 
(2,424
)
 
—

 
—

 
60,151

 
(2,424
)
Total debt securities
 
117,956

 
(5,923
)
 
4,740

 
(1,714
)
 
122,696

 
(7,637
)
Financial institution equity securities
 
160

 
(10
)
 
—

 
—

 
160

 
(10
)
Other equity securities
 
1,175

 
(59
)
 
—

 
—

 
1,175

 
(59
)
Total equity securities
 
1,335

 
(69
)
 
—

 
—

 
1,335

 
(69
)
Total
 
$
119,291

 
$
(5,992
)
 
$
4,740

 
$
(1,714
)
 
$
124,031

 
$
(7,706
)
 
 
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 September 30, 2013 there were a total of 190 and 11 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 September 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 September 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
 
$
5,783

 
$
5,803

Due after one year to five years
 
30,823

 
31,301

Due after five years to ten years
 
94,538

 
92,686

Due after ten years
 
145,391

 
143,976

Total
 
$
276,535

 
$
273,766

 
Total gross proceeds from sales of securities available for sale were $69,898 and $35,847, for the nine months ended September 30, 2013 and 2012, respectively.  The following table represents gross realized gains and losses on those transactions:

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Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2013
 
2012
 
2013
 
2012
Gross realized gains:
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
—

 
$
—

 
$
—

 
$
138

State and political securities
 
276

 
52

 
1,917

 
103

Other debt securities
 
163

 
142

 
462

 
219

Financial institution equity securities
 
—

 
144

 
130

 
605

Other equity securities
 
—

 
397

 
250

 
523

Total gross realized gains
 
$
439

 
$
735

 
$
2,759

 
$
1,588

 
 
 
 
 
 
 
 
 
Gross realized losses:
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
—

 
$
—

 
$
—

 
$
—

State and political securities
 
415

 
144

 
475

 
146

Other debt securities
 
27

 
53

 
27

 
53

Financial institution equity securities
 
—

 
—

 
—

 
67

Other equity securities
 
—

 
91

 
—

 
116

Total gross realized losses
 
$
442

 
$
288

 
$
502

 
$
382

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

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 September 30, 2013 and December 31, 2012:
 

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September 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
 
$
105,001

 
$
66

 
$
4

 
$
108

 
$
105,179

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
378,441

 
2,117

 
228

 
894

 
381,680

Commercial
 
280,793

 
2,840

 
—

 
3,782

 
287,415

Construction
 
17,044

 
—

 
—

 
1,049

 
18,093

Installment loans to individuals
 
14,346

 
335

 
—

 
—

 
14,681

 
 
795,625

 
$
5,358

 
$
232

 
$
5,833

 
807,048

Net deferred loan fees and discounts
 
(885
)
 
 

 
 

 
 

 
(885
)
Allowance for loan losses
 
(9,630
)
 
 

 
 

 
 

 
(9,630
)
Loans, net
 
$
785,110

 
 

 
 

 
 

 
$
796,533

 
 
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 September 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 $909,000 at September 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

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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)
 
June 1, 2013
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 four months ended September 30, 2013:
 
(In Thousands)
 
September 30, 2013
Balance at beginning of period
 
$
63

Accretion
 
(17
)
Balance at end of period
 
$
46

 
The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30:
(In Thousands)
 
June 1, 2013
 
September 30, 2013
Outstanding balance
 
$
1,211

 
$
1,225

Carrying amount
 
878

 
909

 
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 nine ended September 30, 2013 and 2012:
 
 
 
Three Months Ended September 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
 
$
—

 
$
—

 
$
—

 
$
—

Real estate mortgage:
 
 

 
 

 
 

 
 

Residential
 
13

 
10

 
13

 
4

Commercial
 
49

 
5

 
92

 
43

Construction
 
16

 
8

 
77

 
11

 
 
$
78

 
$
23

 
$
182

 
$
58



15
Table of Contents


 
 
Nine Months Ended September 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
 
67

 
22

 
25

 
17

Commercial
 
165

 
89

 
135

 
51

Construction
 
97

 
33

 
298

 
67