Q2 2014 - 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 June 30, 2014.
 
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 August 1, 2014 there were 4,820,951 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)
 
 
 
June 30,
 
December 31,
(In Thousands, Except Share Data)
 
2014
 
2013
ASSETS:
 
 

 
 

Noninterest-bearing balances
 
$
22,905

 
$
23,723

Interest-bearing deposits in other financial institutions
 
1,962

 
770

Federal funds sold
 
—

 
113

Total cash and cash equivalents
 
24,867

 
24,606

Investment securities available for sale, at fair value
 
263,026

 
288,612

Loans held for sale
 
1,827

 
1,626

Loans
 
856,332

 
818,344

Allowance for loan losses
 
(8,811
)
 
(10,144
)
Loans, net
 
847,521

 
808,200

Premises and equipment, net
 
21,007

 
20,184

Accrued interest receivable
 
4,235

 
4,696

Bank-owned life insurance
 
25,601

 
25,410

Investment in limited partnerships
 
1,891

 
2,221

Goodwill
 
17,104

 
17,104

Intangibles
 
1,621

 
1,801

Deferred tax asset
 
6,807

 
9,889

Other assets
 
7,340

 
7,646

TOTAL ASSETS
 
$
1,222,847

 
$
1,211,995

 
 
 
 
 
LIABILITIES:
 
 

 
 

Interest-bearing deposits
 
$
753,068

 
$
755,625

Noninterest-bearing deposits
 
228,758

 
217,377

Total deposits
 
981,826

 
973,002

Short-term borrowings
 
21,926

 
26,716

Long-term borrowings
 
71,202

 
71,202

Accrued interest payable
 
399

 
405

Other liabilities
 
11,692

 
12,855

TOTAL LIABILITIES
 
1,087,045

 
1,084,180

 
 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 

 
 

Preferred stock, no par value, 3,000,000 shares authorized; no shares issued
 
—

 
—

Common stock, par value $8.33, 15,000,000 shares authorized; 5,001,222 and 4,999,929 shares issued
 
41,676

 
41,665

Additional paid-in capital
 
49,846

 
49,800

Retained earnings
 
49,955

 
47,554

Accumulated other comprehensive income (loss):
 
 

 
 

Net unrealized gain (loss) on available for sale securities
 
3,360

 
(2,169
)
Defined benefit plan
 
(2,725
)
 
(2,725
)
Treasury stock at cost, 180,596 shares
 
(6,310
)
 
(6,310
)
TOTAL SHAREHOLDERS’ EQUITY
 
135,802

 
127,815

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
1,222,847

 
$
1,211,995

 
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 June 30,
 
Six Months Ended June 30,
(In Thousands, Except Per Share Data)
 
2014
 
2013
 
2014
 
2013
INTEREST AND DIVIDEND INCOME:
 
 

 
 

 
 

 
 

Loans, including fees
 
$
8,912

 
$
7,277

 
$
17,725

 
$
14,045

Investment securities:
 
 

 
 

 
 

 
 

Taxable
 
1,406

 
1,507

 
2,864

 
2,950

Tax-exempt
 
892

 
1,162

 
1,823

 
2,429

Dividend and other interest income
 
147

 
72

 
274

 
134

TOTAL INTEREST AND DIVIDEND INCOME
 
11,357

 
10,018

 
22,686

 
19,558

INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Deposits
 
741

 
760

 
1,499

 
1,551

Short-term borrowings
 
12

 
22

 
27

 
47

Long-term borrowings
 
473

 
482

 
942

 
1,001

TOTAL INTEREST EXPENSE
 
1,226

 
1,264

 
2,468

 
2,599

NET INTEREST INCOME
 
10,131

 
8,754

 
20,218

 
16,959

PROVISION FOR LOAN LOSSES
 
300

 
575

 
785

 
1,075

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
9,831

 
8,179

 
19,433

 
15,884

NON-INTEREST INCOME:
 
 

 
 

 
 

 
 

Service charges
 
607

 
538

 
1,202

 
980

Securities gains, net
 
487

 
1,274

 
880

 
2,260

Bank-owned life insurance
 
181

 
144

 
551

 
282

Gain on sale of loans
 
421

 
302

 
711

 
653

Insurance commissions
 
283

 
247

 
703

 
511

Brokerage commissions
 
251

 
299

 
522

 
547

Other
 
699

 
731

 
1,571

 
1,035

TOTAL NON-INTEREST INCOME
 
2,929

 
3,535

 
6,140

 
6,268

NON-INTEREST EXPENSE:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
4,167

 
3,442

 
8,670

 
6,510

Occupancy
 
552

 
397

 
1,182

 
748

Furniture and equipment
 
648

 
412

 
1,319

 
820

Pennsylvania shares tax
 
262

 
208

 
506

 
392

Amortization of investment in limited partnerships
 
166

 
166

 
331

 
331

Federal Deposit Insurance Corporation deposit insurance
 
201

 
119

 
379

 
248

Marketing
 
126

 
120

 
236

 
215

Intangible amortization
 
88

 
31

 
180

 
31

Other
 
2,212

 
2,070

 
4,262

 
3,521

TOTAL NON-INTEREST EXPENSE
 
8,422

 
6,965

 
17,065

 
12,816

INCOME BEFORE INCOME TAX PROVISION
 
4,338

 
4,749

 
8,508

 
9,336

INCOME TAX PROVISION
 
875

 
1,090

 
1,576

 
1,993

NET INCOME
 
$
3,463

 
$
3,659

 
$
6,932

 
$
7,343

EARNINGS PER SHARE - BASIC
 
$
0.72

 
$
0.88

 
$
1.44

 
$
1.84

EARNINGS PER SHARE - DILUTED
 
$
0.72

 
$
0.88

 
$
1.44

 
$
1.84

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
 
4,820,193

 
4,151,035

 
4,819,886

 
3,995,716

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED
 
4,820,193

 
4,151,035

 
4,819,886

 
3,995,716

DIVIDENDS DECLARED PER SHARE
 
$
0.47

 
$
0.47

 
$
0.94

 
$
1.19

 
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 June 30,
 
Six Months Ended June 30,
(In Thousands)
 
2014
 
2013
 
2014
 
2013
Net Income
 
$
3,463

 
$
3,659

 
$
6,932

 
$
7,343

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Change in unrealized gain (loss) on available for sale securities
 
3,930

 
(11,196
)
 
9,258

 
(12,707
)
Tax effect
 
(1,336
)
 
3,807

 
(3,148
)
 
4,321

Net realized gain included in net income
 
(487
)
 
(1,274
)
 
(880
)
 
(2,260
)
Tax effect
 
166

 
433

 
299

 
768

Total other comprehensive income (loss)
 
2,272

 
(8,230
)
 
5,529

 
(9,878
)
Comprehensive income (loss)
 
$
5,735

 
$
(4,571
)
 
$
12,461

 
$
(2,535
)
 
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, 2012
 
4,019,112

 
$
33,492

 
$
18,157

 
$
43,030

 
$
5,357

 
$
(6,310
)
 
$
93,726

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 acquisition 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

 
 
 
COMMON STOCK
 
ADDITIONAL
PAID-IN CAPITAL
 
RETAINED EARNINGS
 
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
 
TREASURY STOCK
 
TOTAL
SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Data)
 
SHARES
 
AMOUNT
 
 
 
 
 
Balance, December 31, 2013
 
4,999,929

 
$
41,665

 
$
49,800

 
$
47,554

 
$
(4,894
)
 
$
(6,310
)
 
$
127,815

Net income
 
 

 
 

 
 

 
6,932

 
 

 
 

 
6,932

Other comprehensive income
 
 

 
 

 
 

 
 

 
5,529

 
 

 
5,529

Dividends declared, ($0.94 per share)
 
 

 
 

 
 

 
(4,531
)
 
 

 
 

 
(4,531
)
Common shares issued for employee stock purchase plan
 
1,293

 
11

 
46

 
 

 
 

 
 

 
57

Balance, June 30, 2014
 
5,001,222

 
$
41,676

 
$
49,846

 
$
49,955

 
$
635

 
$
(6,310
)
 
$
135,802

 
See accompanying notes to the unaudited consolidated financial statements.

6
Table of Contents


PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED) 
 
 
Six Months Ended June 30,
(In Thousands)
 
2014
 
2013
OPERATING ACTIVITIES:
 
 

 
 

Net Income
 
$
6,932

 
$
7,343

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

 
 

Depreciation and amortization
 
725

 
415

Amortization of intangible assets
 
180

 
31

Provision for loan losses
 
785

 
1,075

Accretion and amortization of investment security discounts and premiums
 
329

 
(117
)
Securities gains, net
 
(880
)
 
(2,260
)
Originations of loans held for sale
 
(21,292
)
 
(27,697
)
Proceeds of loans held for sale
 
21,802

 
26,715

Gain on sale of loans
 
(711
)
 
(653
)
Earnings on bank-owned life insurance
 
(551
)
 
(282
)
Decrease (increase) in deferred tax asset
 
233

 
(162
)
Other, net
 
(373
)
 
889

Net cash provided by operating activities
 
7,179

 
5,297

INVESTING ACTIVITIES:
 
 

 
 

Investment securities available for sale:
 
 

 
 

Proceeds from sales
 
70,431

 
42,910

Proceeds from calls, maturities, and repayments of principal
 
3,582

 
8,780

Purchases
 
(39,578
)
 
(63,942
)
Net increase in loans
 
(40,239
)
 
(23,666
)
Acquisition of bank premises and equipment
 
(1,571
)
 
(1,200
)
Proceeds from the sale of foreclosed assets
 
475

 
—

Purchase of bank-owned life insurance
 
(25
)
 
(977
)
Proceeds from bank-owned life insurance death benefit
 
367

 
—

Proceeds from redemption of regulatory stock
 
1,072

 
548

Purchases of regulatory stock
 
(992
)
 
(822
)
Acquisition, net of cash acquired
 
—

 
17,487

Net cash used for investing activities
 
(6,478
)
 
(20,882
)
FINANCING ACTIVITIES:
 
 

 
 

Net (decrease) increase in interest-bearing deposits
 
(2,557
)
 
22,754

Net increase in noninterest-bearing deposits
 
11,381

 
13,625

Repayment of long-term borrowings
 
—

 
(5,528
)
Net (decrease) increase in short-term borrowings
 
(4,790
)
 
3,030

Dividends paid
 
(4,531
)
 
(5,030
)
Issuance of common stock
 
57

 
31

Net cash (used for) provided by financing activities
 
(440
)
 
28,882

NET INCREASE IN CASH AND CASH EQUIVALENTS
 
261

 
13,297

CASH AND CASH EQUIVALENTS, BEGINNING
 
24,606

 
15,142

CASH AND CASH EQUIVALENTS, ENDING
 
$
24,867

 
$
28,439







7
Table of Contents


 
 
Six Months Ended June 30,
(In Thousands)
 
2014
 
2013
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 

 
 

Interest paid
 
$
2,474

 
$
2,523

Income taxes paid
 
1,665

 
1,795

Transfer of loans to foreclosed real estate
 
134

 
26

Acquisition of Luzerne National Bank Corporation
 
 
 
 
Non-cash 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 non-cash assets acquired
 
—

 
22,316

Cash acquired
 
$
—

 
$
20,296

 
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 and Jersey Shore State Bank (Jersey Shore State Bank and Luzerne Bank are 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, 2013.
 
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 38 through 43 of the Annual Report on Form 10-K for the year ended December 31, 2013.
 
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, 2014 and 2013 were as follows:
 
 
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
(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, March 31,
 
$
1,088

 
$
(2,725
)
 
$
(1,637
)
 
$
8,516

 
$
(4,807
)
 
$
3,709

Other comprehensive income (loss) before reclassifications
 
2,593

 
—

 
2,593

 
(7,389
)
 
—

 
(7,389
)
Amounts reclassified from accumulated other comprehensive income (loss)
 
(321
)
 
—

 
(321
)
 
(841
)
 
—

 
(841
)
Net current-period other comprehensive income (loss)
 
2,272

 
—

 
2,272

 
(8,230
)
 
—

 
(8,230
)
Balance, June 30
 
$
3,360

 
$
(2,725
)
 
$
635

 
$
286

 
$
(4,807
)
 
$
(4,521
)
 
 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
(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
 
$
(2,169
)
 
$
(2,725
)
 
$
(4,894
)
 
$
10,164

 
$
(4,807
)
 
$
5,357

Other comprehensive (loss) income before reclassifications
 
6,110

 
—

 
6,110

 
(8,386
)
 
—

 
(8,386
)
Amounts reclassified from accumulated other comprehensive (loss) income
 
(581
)
 
—

 
(581
)
 
(1,492
)
 
—

 
(1,492
)
Net current-period other comprehensive (loss) income
 
5,529

 
—

 
5,529

 
(9,878
)
 
—

 
(9,878
)
Balance, June 30
 
$
3,360

 
$
(2,725
)
 
$
635

 
$
286

 
$
(4,807
)
 
$
(4,521
)




9
Table of Contents


The reclassifications out of accumulated other comprehensive income as of June 30, 2014 and 2013 were as follows:
 
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 June 30, 2014
 
Three Months Ended June 30, 2013
 
Net unrealized gain on available for sale securities
 
$
487

 
$
1,274

 
Securities gains, net
Income tax effect
 
166

 
433

 
Income tax provision
Total reclassifications for the period
 
$
321

 
$
841

 
Net of tax

Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
Affected Line Item
 in the Consolidated 
Statement of Income
 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
 
Net unrealized gain on available for sale securities
 
$
880

 
$
2,260

 
Securities gains, net
Income tax effect
 
299

 
768

 
Income tax provision
Total reclassifications for the period
 
$
581

 
$
1,492

 
Net of tax
 
Note 3.  Recent Accounting Pronouncements
 
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.

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

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a

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modified retrospective transition method or a prospective transition method. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. 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.  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,
 
 
2014
 
2013
 
2014
 
2013
Weighted average common shares issued
 
5,000,789

 
4,331,631

 
5,000,482

 
4,176,312

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
 
4,820,193

 
4,151,035

 
4,819,886

 
3,995,716

 

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Note 5. Investment Securities
 
The amortized cost and fair values of investment securities at June 30, 2014 and December 31, 2013 are as follows:
 
 
June 30, 2014
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
5,975

 
$
14

 
$
(127
)
 
$
5,862

Mortgage-backed securities
 
11,420

 
593

 
(9
)
 
12,004

Asset-backed securities
 
2,580

 
40

 
(3
)
 
2,617

State and political securities
 
126,518

 
4,089

 
(1,411
)
 
129,196

Other debt securities
 
99,197

 
1,202

 
(962
)
 
99,437

Total debt securities
 
245,690

 
5,938

 
(2,512
)
 
249,116

Financial institution equity securities
 
8,588

 
1,637

 
(3
)
 
10,222

Other equity securities
 
3,657

 
122

 
(91
)
 
3,688

Total equity securities
 
12,245

 
1,759

 
(94
)
 
13,910

Total investment securities AFS
 
$
257,935

 
$
7,697

 
$
(2,606
)
 
$
263,026

 
 
 
December 31, 2013
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
(In Thousands)
 
Cost
 
Gains
 
Losses
 
Value
Available for sale (AFS)
 
 

 
 

 
 

 
 

U.S. Government and agency securities
 
$
9,989

 
$
17

 
$
(83
)
 
$
9,923

Mortgage-backed securities
 
9,966

 
694

 
(68
)
 
10,592

Asset-backed securities
 
6,700

 
43

 
(179
)
 
6,564

State and political securities
 
145,121

 
2,120

 
(5,446
)
 
141,795

Other debt securities
 
108,939

 
879

 
(3,045
)
 
106,773

Total debt securities
 
280,715

 
3,753

 
(8,821
)
 
275,647

Financial institution equity securities
 
8,842

 
1,820

 
—

 
10,662

Other equity securities
 
2,342

 
28

 
(67
)
 
2,303

Total equity securities
 
11,184

 
1,848

 
(67
)
 
12,965

Total investment securities AFS
 
$
291,899

 
$
5,601

 
$
(8,888
)
 
$
288,612

 
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, 2014 and December 31, 2013.

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June 30, 2014
 
 
Less than Twelve Months
 
Twelve Months or Greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(In Thousands)
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
U.S. Government and agency securities
 
$
—

 
$
—

 
$
3,869

 
$
(127
)
 
$
3,869

 
$
(127
)
Mortgage-backed securities
 
3,965

 
(6
)
 
926

 
(3
)
 
4,891

 
(9
)
Asset-backed securities
 
—

 
—

 
612

 
(3
)
 
612

 
(3
)
State and political securities
 
8,989

 
(99
)
 
11,530

 
(1,312
)
 
20,519

 
(1,411
)
Other debt securities
 
11,631

 
(237
)
 
29,471

 
(725
)
 
41,102

 
(962
)
Total debt securities
 
24,585

 
(342
)
 
46,408

 
(2,170
)
 
70,993

 
(2,512
)
Financial institution equity securities
 
132

 
(3
)
 
—

 
—

 
132

 
(3
)
Other equity securities
 
668

 
(59
)
 
768

 
(32
)
 
1,436

 
(91
)
Total equity securities
 
800

 
(62
)
 
768

 
(32
)
 
1,568

 
(94
)
Total
 
$
25,385

 
$
(404
)
 
$
47,176

 
$
(2,202
)
 
$
72,561

 
$
(2,606
)
 
 
December 31, 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
 
$
7,740

 
$
(83
)
 
$
—

 
$
—

 
$
7,740

 
$
(83
)
Mortgage-backed securities
 
2,483

 
(68
)
 
—

 
—

 
2,483

 
(68
)
Asset-backed securities
 
3,847

 
(177
)
 
712

 
(2
)
 
4,559

 
(179
)
State and political securities
 
42,577

 
(2,558
)
 
8,233

 
(2,888
)
 
50,810

 
(5,446
)
Other debt securities
 
73,254

 
(3,045
)
 
—

 
—

 
73,254

 
(3,045
)
Total debt securities
 
129,901

 
(5,931
)
 
8,945

 
(2,890
)
 
138,846

 
(8,821
)
Financial institution equity securities
 
—

 
—

 
—

 
—

 
—

 
—

Other equity securities
 
274

 
(22
)
 
655

 
(45
)
 
929

 
(67
)
Total equity securities
 
274

 
(22
)
 
655

 
(45
)
 
929

 
(67
)
Total
 
$
130,175

 
$
(5,953
)
 
$
9,600

 
$
(2,935
)
 
$
139,775

 
$
(8,888
)
 
At June 30, 2014 there were a total of 20 securities in a continuous unrealized loss position for less than twelve months and 48 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 June 30, 2014, 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, 2014, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 

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(In Thousands)
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
3,760

 
$
3,795

Due after one year to five years
 
38,383

 
38,921

Due after five years to ten years
 
107,423

 
107,642

Due after ten years
 
96,124

 
98,758

Total
 
$
245,690

 
$
249,116

 
Total gross proceeds from sales of securities available for sale were $70,431,000 and $42,910,000 for the six months ended June 30, 2014 and 2013, 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)
2014
 
2013
2014
 
2013
Gross realized gains:
 

 
 

 

 
 

U.S. Government and agency securities
$
49

 
$
—

$
49

 
$
—

Mortgage-backed securities
76

 
—

76

 
—

State and political securities
387

 
1,062

732

 
1,641

Other debt securities
155

 
178

462

 
299

Financial institution equity securities
16

 
—

128

 
130

Other equity securities
64

 
34

119

 
250

Total gross realized gains
$
747

 
$
1,274

$
1,566

 
$
2,320

 
 
 
 
 
 
 
Gross realized losses:
 

 
 

 

 
 

U.S. Government and agency securities
$
14

 
$
—

$
45

 
$
—

State and political securities
83

 
—

403

 
60

Other debt securities
97

 
—

172

 
—

Other equity securities
66

 
—

66

 
—

Total gross realized losses
$
260

 
$
—

$
686

 
$
60

 
There were no impairment charges included in gross realized losses for the three and six months ended June 30, 2014 and 2013, respectively.

Note 6.  Federal Home Loan Bank Stock
 
Jersey Shore State Bank and Luzerne Bank 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.  Management 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 payment 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

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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, 2014 and December 31, 2013:
 
 
 
June 30, 2014
 
 
 
 
Past Due
 
Past Due 90
 
 
 
 
 
 
 
 
30 To 89
 
Days Or More
 
Non-
 
 
(In Thousands)
 
Current
 
Days
 
& Still Accruing
 
Accrual
 
Total
Commercial and agricultural
 
$
118,326

 
$
645

 
$
—

 
$
156

 
$
119,127

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
413,513

 
3,261

 
397

 
444

 
417,615

Commercial
 
269,481

 
1,839

 
—

 
9,984

 
281,304

Construction
 
19,345

 
—

 
—

 
998

 
20,343

Installment loans to individuals
 
19,123

 
96

 
—

 
—

 
19,219

 
 
839,788

 
$
5,841

 
$
397

 
$
11,582

 
857,608

Net deferred loan fees and discounts
 
(1,276
)
 
 

 
 

 
 

 
(1,276
)
Allowance for loan losses
 
(8,811
)
 
 

 
 

 
 

 
(8,811
)
Loans, net
 
$
829,701

 
 

 
 

 
 

 
$
847,521

 
 
December 31, 2013
 
 
 
 
Past Due
 
Past Due 90
 
 
 
 
 
 
 
 
30 To 89
 
Days Or More
 
Non-
 
 
(In Thousands)
 
Current
 
Days
 
& Still Accruing
 
Accrual
 
Total
Commercial and agricultural
 
$
104,419

 
$
502

 
$
—

 
$
108

 
$
105,029

Real estate mortgage:
 
 

 
 

 
 

 
 

 
 

Residential
 
392,300

 
6,424

 
531

 
526

 
399,781

Commercial
 
272,745

 
2,533

 
—

 
7,198

 
282,476

Construction
 
15,967

 
—

 
73

 
1,242

 
17,282

Installment loans to individuals
 
14,170

 
477

 
—

 
—

 
14,647

 
 
799,601

 
$
9,936

 
$
604

 
$
9,074

 
819,215

Net deferred loan fees and discounts
 
(871
)
 
 

 
 

 
 

 
(871
)
Allowance for loan losses
 
(10,144
)
 
 

 
 

 
 

 
(10,144
)
Loans, net
 
$
788,586

 
 

 
 

 
 

 
$
808,200

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

Upon the acquisition of Luzerne Bank on June 1, 2013, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.  Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between June 1, 2013 (the “acquisition date”) and June 30, 2014.  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 $866,000 at June 30, 2014.
 
On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Luzerne Bank acquisition was $1,211,000 and the estimated fair value of the loans was $878,000. Total contractually required payments on these loans, including interest, at the acquisition date was $1,783,000. However, the Company’s preliminary estimate of expected cash flows was $941,000. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from either the customer or liquidation of collateral) of $842,000 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable

15
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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 in the Luzerne Bank transaction with specific evidence of deterioration in credit quality was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Luzerne Bank acquisition as of June 1, 2013:
 
Changes in the amortizable yield for purchased credit-impaired loans were as follows for the six months ended June 30, 2014 and 2013:
(In Thousands)
 
June 30, 2014
 
June 30, 2013
Balance at beginning of period or at acquisition
 
$
35

 
$
63

Accretion
 
(12
)
 
(4
)
Balance at end of period
 
$
23

 
$
59

 
The following table presents additional information regarding loans acquired in the Luzerne Bank transaction with specific evidence of deterioration in credit quality:
(In Thousands)
 
June 30, 2014
 
December 31, 2013
Outstanding balance
 
$
1,222

 
$
1,224

Carrying amount
 
866

 
868

 
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, 2014. There has been no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of June 30, 2014.

The following table presents interest income the Bank would have recorded if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans and interest income recognized on a cash basis for non-accrual loans for the three and six months ended June 30, 2014 and 2013:
 
 
 
Three Months Ended June 30,
 
 
2014
 
2013
(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
 
$
15

 
$
1

 
$
4

 
$
—

Real estate mortgage:
 
 

 
 

 
 

 
 

Residential
 
5

 
5

 
22

 
3

Commercial
 
147

 
53

 
31

 
34

Construction
 
24

 
—

 
40

 
14

 
 
$
191

 
$
59

 
$
97

 
$
51

 
 
Six Months Ended June 30,
 
 
2014
 
2013
(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
 
$
17

 
$
1

 
$
4

 
$
—

Real estate mortgage:
 
 

 
 

 
 

 
 

Residential
 
7

 
9

 
54

 
12

Commercial
 
275

 
86

 
116

 
84

Construction
 
35

 
—

 
81

 
25

 
 
$
334

 
$
96

 
$
255

 
$
121


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Impaired Loans
 
Impaired loans are loans for which it is probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Bank evaluates such loans for impairment individually and does 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 Bank may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  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 Bank’s policy on nonaccrual loans.
 
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of June 30, 2014 and December 31, 2013:
 
 
 
June 30, 2014
 
 
Recorded
 
Unpaid Principal
 
Related
(In Thousands)
 
Investment
 
Balance
 
Allowance
With no related allowance recorded:
 
 

 
 

 
 

Commercial and agricultural
 
$
—

 
$
—

 
$
—

Real estate mortgage:
 
 

 
 

 
 

Residential
 
454

 
563

 
—

Commercial
 
2,250

 
2,506

 
—

Construction
 
516

 
516

 
—

 
 
3,220

 
3,585

 
—

With an allowance recorded:
 
 

 
 

 
 

Commercial and agricultural
 
512

 
512

 
147

Real estate mortgage:
 
 

 
 

 
 

Residential
 
630

 
653