PENNS WOODS
BANCORP, INC.
2011 Annual Report
& Form 10-K
MISSION STATEMENT
Jersey Shore State Bank is a locally owned, independent, community bank
with emphasis on servicing the needs of consumers and small to medium size
businesses at a profit, thereby enhancing shareholder value through a
professionally-trained and dedicated staff with sound financial resources. We
are committed to community leadership and growth.
TABLE OF CONTENTS
Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three Year Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Changes in Shareholders’ Equity
and Comprehensive Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
3
4
5
6
7
8
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
Management’s Discussion and Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
Management and Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
Offices of Jersey Shore State Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66
1
Dear Shareholders,
2011 provided our bank opportunities to strengthen our organic growth strategies, expand our footprint, and grow core
deposits and loans. We were pleased that new programs and promotions supported strong retail and commercial loan
originations throughout the year. We began the expansion of our footprint by opening a branch in Danville, PA to serve
the Montour, Columbia, and Union County markets. Although the credit cycle challenges and economy remain difficult,
we remain focused on managing credit risk in all markets.
Financial Highlights
Penns Woods Bancorp, Inc. continued to return strong results in 2011. Highlights from the period ending
December 31, 2011 include:
• Net income increased 13% to $12,362,000 from $10,929,000
• Earnings per share increased 13% to $3.22 from $2.85
• Operating earnings increased 11% to $11,952,000 from $10,815,000
• Net interest margin increased to 4.70% from 4.57%
• Total Deposits Increased 12% to $581,664,000 from $517,508,000
• Core Deposits increased 25% to $409,143,000 from $328,233,000
• Net Loans increased 5% to $428,805,000 from $409,522,000
Recognitions
During 2011 the company was recognized as a high performing company in several rankings:
• Pennsylvania Housing Finance Agency Award of Excellence as a Top Performing
Lender in Pennsylvania, a Top Homestead lender, a Top New Construction
Lender, as well as having the best quality post closing submissions in Pennsylvania.
• Top 100 Performing Community Banks by SNL Financial
• Top 15th Percentile of Community Banks by Seifried & Brew, LLC
• KBW Bank Honor Roll by KBW, Inc.
• Top USDA Rural Housing Lender in Pennsylvania
• Centre County Outstanding Homebuyer Participation Award
As we move forward we realize there continue to be challenges facing the entire
financial services sector, however, we will continue to take the position that with
these challenges come opportunities to do great things for our shareholders,
customers, employees, and the communities where we do business.
Thank you for your decision to invest in Penns Woods Bancorp, Inc.
Sincerely,
Richard A. Grafmyre, CFP®
President & CEO
2
Three Year Financial Highlights
DILUTED
EARNINGS PER
SHARE
RETURN ON
AVERAGE EQUITY
(Percent)
DIVIDENDS
PER
SHARE
3.22
2.85
$4.00
3.50
3.00
2.50
2.00
1.50
1.00
1.59
16.60
15.30
20.00
17.00
14.00
11.00
8.00
5.00
9.66
1.84
1.84
1.84
$ 2.00
1.75
1.50
1.25
1.00
’09
’10
’11
’09
’10
’11
’09
’10
’11
YEAR-END
DEPOSITS
(In Millions)
RETURN ON
AVERAGE ASSETS
(Percent)
YEAR-END
LOANS
(In Millions)
582
518
497
$ 625
550
475
400
1.69
1.56
2.00
1.70
1.40
1.10
0.80
0.50
0.92
436
416
$ 450
425
406
400
375
350
’09
’10
’11
’09
’10
’11
’09
’10
’11
17
3
Penns Woods Bancorp, Inc.
Consolidated Balance Sheet
(In Thousands, Except Share Data)
December 31,
2011
2010
ASSETS:
Noninterest-bearing balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
13,829
56
13,885
Investment securities, available for sale, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities, held to maturity, (fair value of $55 and $83) . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LIABILITIES:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, Federal Home Loan Bank (FHLB) . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDERS’ EQUITY:
Common stock, par value $8.33, 10,000,000 shares authorized;
4,017,677 and 4,015,753 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss:
Net unrealized gain (loss) on available for sale securities . . . . . . . . . . . . . . . . . . .
Defined benefit plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Treasury stock at cost, 180,596 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
270,097
54
3,787
435,959
7,154
428,805
7,707
3,905
16,065
3,544
3,032
7,991
5,081
763,953
470,310
111,354
581,664
29,598
61,278
536
10,417
683,493
33,480
18,115
36,394
2,914
(4,133)
(6,310)
80,460
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . .
$
763,953
$
See Accompanying Notes to the Consolidated Financial Statements.
9,467
26
9,493
215,565
83
6,658
415,557
6,035
409,522
7,658
3,765
15,436
4,205
3,032
11,897
4,374
691,688
428,161
89,347
517,508
27,299
71,778
750
7,733
625,068
33,464
18,064
31,091
(7,276)
(2,413)
(6,310)
66,620
691,688
4
Penns Woods Bancorp, Inc.
Consolidated Statement of Income
(In Thousands, Except Per Share Data)
INTEREST AND DIVIDEND INCOME:
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend and other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL INTEREST AND DIVIDEND INCOME. . . . . . . . . . . . . . . .
INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INTEREST INCOME AFTER PROVISION
Year Ended December 31,
2011
2010
2009
25,187
$
25,513
$
25,568
5,677
5,260
252
36,376
4,566
202
2,888
7,656
28,720
2,700
5,584
5,059
206
36,362
6,055
265
3,548
9,868
26,494
2,150
5,424
5,005
194
36,191
8,284
396
3,718
12,398
23,793
917
FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,020
24,344
22,876
NON-INTEREST INCOME:
Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of investment in limited partnerships . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NON-INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME BEFORE INCOME TAX PROVISION (BENEFIT). . . . . . . .
INCOME TAX PROVISION (BENEFIT) . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NET INCOME PER SHARE – BASIC . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NET INCOME PER SHARE – DILUTED . . . . . . . . . . . . . . . . . . . . . . . . $
2,021
621
599
1,130
933
997
1,918
8,219
10,479
1,262
1,379
689
661
525
4,969
19,964
14,275
1,913
12,362
3.22
3.22
$
$
$
2,177
173
636
949
970
965
1,589
7,459
10,214
1,240
1,264
677
693
737
4,667
19,492
12,311
1,382
10,929
2.85
2.85
$
$
$
2,200
(4,846)
713
826
1,189
768
1,437
2,287
10,189
1,266
1,212
685
567
1,067
4,826
19,812
5,351
(742)
6,093
1.59
1.59
WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC . . . . . . .
WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED . . . .
3,836,036
3,836,036
3,834,255
3,834,394
3,832,789
3,832,886
DIVIDENDS PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.84
$
1.84
$
1.84
See Accompanying Notes to the Consolidated Financial Statements.
5
Penns Woods Bancorp, Inc.
Consolidated Statement of Changes In Shareholders’ Equity
(In Thousands, Except Per Share Data)
Balance, December 31, 2008
Comprehensive income:
Net income
Other comprehensive income
Dividends declared, ($1.84 per share)
Common shares issued for employee
stock purchase plan
Balance, December 31, 2009
Comprehensive income:
Net income
Other comprehensive loss
Dividends declared, ($1.84 per share)
Stock options exercised
Common shares issued for employee
stock purchase plan
Purchase of treasury stock (1,568 shares)
Balance, December 31, 2010
Comprehensive income:
Net income
Other comprehensive income
Dividends declared, ($1.84 per share)
Common shares issued for employee
stock purchase plan
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Shareholders’
Equity
4,010,528
$
33,421
$
17,959
$ 28,177
$ (12,266)
$
(6,264)
$ 61,027
2,614
22
49
6,093
(7,052)
6,777
6,093
6,777
(7,052)
71
4,013,142
33,443
18,008
27,218
(5,489)
(6,264)
66,916
441
2,170
3
18
7
49
10,929
(7,056)
(4,200)
10,929
(4,200)
(7,056)
10
67
(46)
(46)
4,015,753
33,464
18,064
31,091
(9,689)
(6,310)
66,620
1,924
16
51
12,362
(7,059)
8,470
12,362
8,470
(7,059)
67
Balance, December 31, 2011
4,017,677
$
33,480
$
18,115
$ 36,394
$ (1,219)
$
(6,310)
$ 80,460
Penns Woods Bancorp, Inc.
Consolidated Statement of Comprehensive Income
(In Thousands)
Year Ended December 31,
Net Income
Other comprehensive income (loss):
Change in unrealized gain (loss) on available
for sale securities
Net realized (gain) loss included in net income,
net of tax provision (benefit) of $211,
$59, and ($1,648)
Defined benefit pension plan, net of tax:
Net transition asset
Prior service cost
Net (loss) gain
2011
2010
2009
$
12,362
$
10,929
$
6,093
10,600
(410)
10,190
(2)
17
(1,735)
(3,593)
(114)
(3,707)
(2)
17
(508)
1,719
3,198
4,917
(1)
16
1,845
Other comprehensive income (loss), net of tax
Comprehensive income
8,470
20,832
$
(4,200)
6,729
$
6,777
12,870
$
See Accompanying Notes to the Consolidated Financial Statements.
6
Penns Woods Bancorp, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31,
2010
2011
2009
$
12,362
$
10,929
$
6,093
(In Thousands)
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion and amortization of investment security
discounts and premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities (gains) losses, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds of loans held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in prepaid federal deposit insurance . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls and maturities. . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities held to maturity:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls and maturities. . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of bank premises and equipment . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of foreclosed assets. . . . . . . . . . . . . . . . . . . . .
Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from bank-owned life insurance death benefit . . . . . . . . . . .
Sale of bank-owned life insurance policy to insured . . . . . . . . . . . . . .
Investment in limited partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of regulatory stock . . . . . . . . . . . . . . . . . .
Purchases of regulatory stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . .
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . .
Net increase in noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . .
Repayment of long-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . .
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . .
CASH AND CASH EQUIVALENTS, BEGINNING . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, ENDING . . . . . . . . . . . . . . . . . . . . . .
$
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
701
2,700
(1,702)
(621)
(36,702)
40,703
(1,130)
(599)
467
314
16,493
13,454
12,226
(63,733)
5
25
(24,049)
(743)
508
(39)
–
–
–
1,282
–
(61,064)
42,149
22,007
(10,500)
2,299
(7,059)
67
–
–
48,963
4,392
9,493
13,885
731
2,150
(2,017)
(173)
(43,659)
42,013
(949)
(636)
666
806
9,861
3,700
15,628
(29,918)
–
26
(11,026)
(401)
194
(80)
82
134
–
364
–
(21,297)
10,773
9,448
(15,000)
8,945
(7,056)
67
10
(46)
7,141
(4,295)
13,788
9,493
10,191
2,550
226
$
$
724
917
(1,590)
4,846
(34,723)
35,108
(826)
(713)
(2,315)
(1,202)
6,319
14,757
9,084
(20,006)
–
29
(25,375)
(847)
491
(59)
376
–
(738)
–
(170)
(22,458)
72,055
3,864
–
(55,592)
(7,052)
71
–
–
13,346
(2,793)
16,581
13,788
12,642
1,325
708
$
$
Interest paid
Income taxes paid
Transfer of loans to foreclosed real estate
$
7,870
2,290
2,066
See Accompanying Notes to the Consolidated Financial Statements.
17
7
PENNS WOODS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly owned
subsidiaries, Jersey Shore State Bank (the “Bank”), Woods Real Estate Development Co., Inc., Woods Investment Company, Inc., and The
M Group Inc. D/B/A The Comprehensive Financial Group (“The M Group”), a wholly owned subsidiary of the Bank (collectively, the
“Company”). All significant intercompany balances and transactions have been eliminated.
Nature of Business
The Bank engages in a full-service commercial banking business, making available to the community a wide range of financial services
including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction financing, farm
loans, community development loans, loans to non-profit entities and local government, and various types of time and demand deposits
including, but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit, and
IRAs. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law.
The financial services are provided by the Bank to individuals, partnerships, non-profit organizations, and corporations through its
thirteen offices located in Clinton, Lycoming, Centre, and Montour Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Bank.
Woods Investment Company, Inc., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and financial planning services, which include the sale of life insurance products, annuities,
and estate planning services.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial service operations
are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses,
deferred tax assets and liabilities, goodwill, other than temporary impairment of debt and equity securities, fair value of financial
instruments, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Cash and Cash Equivalents
Cash equivalents include cash on hand and in banks. Interest-earning deposits mature within 90 days and are carried at cost. Net cash
flows are reported for loan, deposit, and short-term borrowing transactions.
Restrictions on Cash and Cash Equivalents
Based on deposit levels, the Company must maintain cash and other reserves with the Federal Reserve Bank of Philadelphia (FRB).
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for
amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest
income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized
holding gains and losses for available for sale securities are reported as a separate component of shareholders’ equity, net of tax, until
realized. Realized security gains and losses are computed using the specific identification method for debt securities and the average cost
method for marketable equity securities. Interest and dividends on investment securities are recognized as income when earned.
Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to,
the length of time and extent to which the fair value has been less than cost, the financial condition of the underlying issuer, the ability
of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its fair value, whether it is
more likely than not that the Company would be required to sell the security before its anticipated recovery in fair value, and a review
of the Company’s capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s ability to recover any decline
in fair value, the ability of the issuer to meet contractual obligations, and management’s intent and ability requires considerable judgment.
A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated
Statement of Income.
Investment securities fair values are based on observed market prices. Certain investment securities do not have observed bid prices and their
fair value is based on instruments with similar risk elements. Since regulatory stock is redeemable at par, the Company carries it at cost.
Loans
Loans are stated at the principal amount outstanding, net of deferred fees and discounts, unamortized loan fees and costs, and the
allowance for loan losses. Interest on loans is recognized as income when earned on the accrual method. The Company’s general policy
has been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectability of additional interest.
Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in payment and,
in management’s judgment, the borrower has the ability and intent to make future principal payments. Otherwise, payments are applied
to the unpaid principal balance of the loan. Loans are restored to accrual status if certain conditions are met, including but not limited
to, the repayment of all unpaid interest and scheduled principal due, ongoing performance consistent with the contractual agreement, and
the future expectation of continued, timely payments.
Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and amortized as an adjustment
to the related loan’s yield over the contractual lives of the related loans.
Allowance for Loan Losses
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses
inherent in its loan portfolio, as of the Consolidated Balance Sheet date. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is
8
established through a provision for loan losses charged to operations. The provision for loan losses is based upon management’s quarterly
review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain
loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external
independent loan review is also performed annually for the Bank. Management remains committed to an aggressive program of problem
loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been
determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume
of the loan portfolio, historical loan loss experience, and general economic conditions. In addition, management considers industry
standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for loan
losses is adequate at December 31, 2011, future adjustments could be necessary if circumstances or economic conditions differ
substantially from the assumptions used in making the initial determinations. A downturn in the local economy, rising unemployment, or
negative performance trends in financial information from borrowers could be indicators of subsequent increased levels of nonperforming
assets and possible charge-offs, which would normally require increased loan loss provisions. An integral part of the periodic regulatory
examination process is the review of the adequacy of the Bank’s loan loss allowance. The regulatory agencies could require the Bank,
based on their evaluation of information available at the time of their examination, to provide additional loan loss provisions to further
supplement the allowance.
Impaired loans are commercial and commercial real estate 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 individually evaluates such loans for impairment and does not
aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,”
although the two categories overlap. The Bank may choose to place a loan on nonaccrual status due to payment delinquency or uncertain
collectability, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. 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 loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.
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.
Loan Charge-off Policies
Loans are generally fully or partially charged down to the fair value of collateral securing the asset when:
• management judges the asset to be uncollectible;
•
•
•
•
repayment is deemed to be protracted beyond reasonable time frames;
the asset has been classified as a loss by either the internal loan review process or external examiners;
the borrower has filed bankruptcy and the loss becomes evident due to a lack of assets; or
the loan is 180 days past due unless both well secured and in the process of collection.
Troubled Debt Restructurings
In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for
other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled
debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify to more
affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness,
payment forbearance, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.
In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any
impairment on the restructuring as noted above for impaired loans.
In addition to the allowance for the pooled portfolios, management has developed a separate allowance for loans that are identified as
impaired through a TDR. These loans are excluded from pooled loss forecasts and a separate reserve is provided under the accounting
guidance for loan impairment. Consumer loans whose terms have been modified in a TDR are also individually analyzed for estimated
impairment.
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Bank are held for sale and are carried at cost due to their short holding
period, which can range from less than two weeks to a maximum of thirty days. Sold loans are not serviced by the Bank. Proceeds from
the sale of loans in excess of the carrying value are accounted for as a gain. Total gains on the sale of loans are shown as a component
of non-interest income within the Consolidated Statement of Income.
Foreclosed Assets
Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Prior to foreclosure, the value of the underlying
loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any
subsequent write-downs are charged against operating expenses. Net operating expenses and gains and losses realized from disposition
are included in non-interest expense and income, respectively.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line and accelerated
methods over the estimated useful lives of the related assets, which range from five to ten years for furniture, fixtures, and equipment and
fifteen to forty years for buildings and improvements. Costs incurred for routine maintenance and repairs are charged to operations as
incurred. Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain officers and directors. Bank-owned life insurance is recorded at its cash
surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as a component of non-interest
income within the Consolidated Statement of Income.
Goodwill
The Company performs an annual impairment analysis of goodwill for its purchased subsidiary, The M Group. Based on the fair value of this
reporting unit, estimated using the expected present value of future cash flows, no impairment of goodwill was recognized in 2011 and 2010.
9
Investments in Limited Partnerships
The Company is a limited partner in four partnerships at December 31, 2011 that provide low income elderly housing in the Company’s
geographic market area. The carrying value of the Company’s investments in limited partnerships was $3,544,000 at December 31, 2011
and $4,205,000 at December 31, 2010. The Company is fully amortizing the investment in the partnership entered into prior to 2005 over
the fifteen-year holding period. The partnerships entered into after 2004 are being fully amortized over the ten-year tax credit receipt
period utilizing the straight-line method. The partnerships are amortized once the projects reach the level of occupancy needed to begin
the ten year tax credit recognition period. Amortization of limited partnership investments amounted to $661,000 in 2011, $693,000 in
2010, and $567,000 in 2009.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments. Those instruments consist of
commitments to extend credit and standby letters of credit. When those instruments are funded or become payable, the Company reports
the amounts in its financial statements.
Advertising Cost
Advertising costs are generally expensed as incurred.
Income Taxes
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements
only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would
have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at
the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition
threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are reflected
at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Company analyzed its deferred tax asset position and determined that there was not a need for a valuation allowance due to the
Company’s ability to generate future ordinary and capital taxable income.
The Company when applicable recognizes interest and penalties on income taxes as a component of income tax provision.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net
income as reported in the numerator and weighted average shares outstanding in the denominator. The computation of diluted earnings
per share differs in that the dilutive effects of any stock options are adjusted in the denominator.
Employee Benefits
Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the eligible
employees of the Bank. The plan is funded on a current basis to the extent that it is deductible under existing federal tax regulations.
Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees.
Contributions matching those made by eligible employees are funded throughout the year. In addition, an elective contribution is made
annually at the discretion of the Board of Directors.
The M Group Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from life
insurance sales are commission only, as The M Group does not underwrite the policies. Life insurance sales include permanent and term
policies with the majority of the policies written being permanent. Term life insurance policies are written for 10, 15, 20, and 30 year
terms with the majority of the policies being written for 20 years. None of these products are offered as an integral part of lending
activities.
Commissions from the sale of annuities are recognized at the time notice is received from the third party broker/dealer or an insurance
company that the transaction has been accepted and approved, which is also the time when commission income is received.
Life insurance commissions are recognized at varying points based on the payment option chosen by the customer. Commissions from
monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and semi-annual
premium payments are recognized quarterly and semi-annually when the earnings process is complete. For example, semi-annual
payments on the first of January and July would result in commission income recognition on the first of January and July, while payments
on the first of January, April, July, and October would result in commission income recognition on those dates. The potential for
chargebacks only exists for those policies on a monthly payment plan since income is recognized at the beginning of the annual coverage
period versus at the time of each monthly payment. No liability is maintained for chargebacks as these are removed from income at the
time of the occurrence.
Stock Options
The Company maintained a stock option plan for directors and certain officers and employees with the last option grant being in
2000. All options granted under the stock option plan were either exercised or forfeited as of December 31, 2010. All options were
granted when the exercise price of the Company’s stock options was greater than or equal to the market price of the underlying stock
on the date of the grant, therefore, no compensation expense was recognized in the Company’s financial statements.
Accumulated Other Comprehensive Income
The Company is required to present accumulated other comprehensive income in a full set of general-purpose financial statements for all
periods presented. Accumulated other comprehensive income is comprised of unrealized holding gains (losses) on the available for sale
securities portfolio and the unrecognized components of net periodic benefit costs of the defined benefit pension plan.
Segment Reporting
The Company has determined that its only reportable segment is Community Banking.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not
affect net income or shareholders’ equity.
10
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a
Troubled Debt Restructuring. The amendments in this update provide additional guidance or clarification to help creditors in determining
whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining
whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the first interim or
annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of
adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes
of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period
beginning on or after June 15, 2011. The Company has provided the necessary disclosures in Note 5. Credit Quality and Related
Allowance for Loan Losses.
In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The main objective in
developing this update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate
a transferor to repurchase or redeem financial assets before their maturity. The amendments in this update remove from the assessment
of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially
the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that
criterion. The amendments in this update apply to all entities, both public and nonpublic. The amendments affect all entities that enter
into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before
their maturity. The guidance in this update is effective for the first interim or annual period beginning on or after December 15, 2011 and
should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early
adoption is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update result in common fair value
measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe
many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The
amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual
periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after
December 15, 2011. Early application by public entities is not permitted. The Company is currently evaluating the impact the adoption
of the standard will have on the Company’s financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The
amendments in this update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the
prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive
income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part
of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’
equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In
the two-statement approach, the first statement should present total net income and its components followed consecutively by a second
statement that should present total other comprehensive income, the components of other comprehensive income, and the total of
comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes
in this update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim
and annual periods thereafter. The amendments in this update should be applied retrospectively, and early adoption is permitted. This ASU
does not have a significant impact on the Company’s financial statements.
In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for
Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The
amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill
impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.
Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines
that it is more likely than not that its fair value is less than its carrying amount. The amendments in this update apply to all entities, both
public and nonpublic, that have goodwill reported in their financial statements and is effective for interim and annual goodwill impairment
tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim
goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual
or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. This ASU is not
expected to have a significant impact on the Company’s financial statements.
In December 2011, the FASB issued ASU 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real
Estate - a Scope Clarification. The amendments in this update affect entities that cease to have a controlling financial interest in a
subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt. Under the amendments in this update,
when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of
default on the subsidiary's nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it
should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in
substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse
indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity
would continue to include the real estate, debt, and the results of the subsidiary's operations in its consolidated financial statements until
legal title to the real estate is transferred to legally satisfy the debt. The amendments in this update should be applied on a prospective
basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has
continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments in this update
are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, the
amendments are effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is
permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
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
11
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. The Company is currently evaluating the impact the adoption of the standard will have on the
Company’s financial statements.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments
to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No.
2011-05. In order to defer only those changes in update 2011-05 that relate to the presentation of reclassification adjustments, the
paragraphs in this update supersede certain pending paragraphs in update 2011-05. Entities should continue to report reclassifications
out of accumulated other comprehensive income consistent with the presentation requirements in effect before update 2011-05. All other
requirements in update 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a
single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these
requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin
applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. This ASU is not
expected to have a significant impact on the Company’s financial statements.
NOTE 2 - PER SHARE DATA
There are no convertible securities which would affect the denominator in calculating basic and dilutive earnings per share;
therefore, 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 per share computation.
Weighted average common shares issued . . . . . . . . . . . . . . . . . .
Average treasury stock shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares and common stock
Year Ended December 31,
2011
4,016,632
(180,596)
2010
4,014,248
(179,993)
2009
4,011,817
(179,028)
equivalents used to calculate basic earnings per share . . . .
3,836,036
3,834,255
3,832,789
Additional common stock equivalents (stock options)
used to calculate diluted earnings per share . . . . . . . . . . . .
–
139
97
Weighted average common shares and common stock
equivalents used to calculate diluted earnings per share . . .
3,836,036
3,834,394
3,832,886
Options to purchase 990 shares of common stock at a range in price of $24.72 to $31.82 were outstanding at December 31, 2009.
The options were included in the computation of diluted earnings per share on a weighted average basis determined by the length
of time during each period that the market value exceeded the strike price. Options were outstanding during 2010; however, prior
to December 31, 2010 all options were either exercised or forfeited. No options were outstanding during 2011.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at December 31, 2011 and 2010 are as follows:
(In Thousands)
2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available for sale (AFS)
U.S. Government and agency securities . . . . . . . . . . . . . . . . . $
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution securities . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities AFS . . . . . . . . . . . . . . . . . . . . . . . . . $
Held to maturity (HTM)
U.S. Government and agency securities . . . . . . . . . . . . . . . . . $
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities HTM . . . . . . . . . . . . . . . . . . . . . . . . $
26,755
174,790
51,447
252,992
9,939
2,751
12,690
265,682
–
54
54
$
$
$
$
1,916
8,398
133
10,447
1,095
133
1,228
11,675
–
1
1
$
$
$
$
$
–
(4,887)
(2,066)
(6,953)
(232)
(75)
(307)
(7,260) $
28,671
178,301
49,514
256,486
10,802
2,809
13,611
270,097
–
–
–
$
$
–
55
55
12
(In Thousands)
Available for sale (AFS)
U.S. Government and agency securities . . . . . . . . . . . . $
State and political securities . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution securities . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities AFS . . . . . . . . . . . . . . . . . . . . $
Held to maturity (HTM)
U.S. Government and agency securities . . . . . . . . . . . . $
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities HTM . . . . . . . . . . . . . . . . . . . $
Amortized
Cost
2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
24,759
169,844
20,141
214,744
11,549
296
11,845
226,589
5
78
83
$
$
$
$
1,854
282
503
2,639
1,686
70
1,756
4,395
–
–
–
$
$
$
$
–
(15,339)
(36)
(15,375)
(44)
–
(44)
(15,419)
–
–
–
$
$
$
$
Fair
Value
26,613
154,787
20,608
202,008
13,191
366
13,557
215,565
5
78
83
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 December 31, 2011 and 2010.
(In Thousands)
2011
Less than Twelve Months Twelve Months or Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
U.S. Government and agency securities . . . . . . . . . . . $
State and political securities . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution securities . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
– $
1,142
35,858
37,000
1,140
263
1,403
38,403 $
– $
(6)
(2,048)
(2,054)
(116)
(65)
(181)
(2,235) $
(In Thousands)
– $
(4,881)
(18)
(4,899)
(116)
(10)
(126)
(5,025) $
– $
29,402
35,940
65,342
1,413
393
1,806
67,148 $
–
(4,887)
(2,066)
(6,953)
(232)
(75)
(307)
(7,260)
– $
28,260
82
28,342
273
130
403
28,745 $
2010
Less than Twelve Months Twelve Months or Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
U.S. Government and agency securities . . . . . . . . . . . $
State and political securities . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution securities . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
– $
105,826
2,501
108,327
859
–
859
109,186 $
– $
(5,883)
(19)
(5,902)
(41)
–
(41)
(5,943) $
– $
32,847
282
33,129
59
–
59
33,188 $
– $
(9,456)
(17)
(9,473)
(3)
–
(3)
(9,476) $
– $
138,673
2,783
141,456
918
–
918
142,374 $
–
(15,339)
(36)
(15,375)
(44)
–
(44)
(15,419)
At December 31, 2011 and 2010 there were 50 and 160 individual securities in a continuous unrealized loss position for less than twelve
months and 71 and 84 individual securities in a continuous unrealized loss position for greater than twelve months, respectively.
There are 121 and 244 positions that are considered temporarily impaired as of December 31, 2011 and 2010, respectively. The Company
reviews its position quarterly and has asserted that at December 31, 2011 and 2010, the declines outlined in the above table represent temporary
declines and the Company does not intend to sell and does not believe they will be required to sell these securities before recovery of their cost
basis, which may be at maturity. The Company has concluded that any impairment of its investment securities portfolio is not other than
temporary but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2011, 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)
Available for Sale
Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . .
Due after one year to five years . . . . . . . . . . . . . . .
Due after five years to ten years . . . . . . . . . . . . . . .
Due after ten years. . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
10,239
29,105
22,175
191,473
252,992
$
$
10,276
28,017
21,563
196,630
256,486
$
$
54
–
–
–
54
$
$
55
–
–
–
55
13
Total gross proceeds from sales of securities available for sale were $13,454,000, $3,700,000, and $14,757,000 for 2011, 2010, and
2009, respectively. The following table represents gross realized gains and losses on those transactions in addition to impairment
charges in 2009 related to the equity and other debt security portfolios:
(In Thousands)
Gross realized gains:
2010
2011
2009
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institutions securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross realized losses:
U.S. Government and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and political securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institutions securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4 $
114
8
316
294
736 $
– $
100
15
–
–
115 $
–
–
117
102
–
219
–
3
15
28
–
46
$
$
$
$
–
–
575
22
–
597
–
–
1,062
4,381
–
5,443
Gross realized losses for the equity and other debt security portfolios include impairment charges of $4,614,000 for the year ended
December 31, 2009. There were no impairment charges for the years ended December 31, 2010 and 2011.
Investment securities with a carrying value of approximately $113,611,000 and $88,468,000 at December 31, 2011 and 2010,
respectively, were pledged to secure certain deposits, repurchase agreements, and for other purposes as required by law.
There is no concentration of investments that exceed ten percent of shareholders’ equity for any individual issuer, excluding those
guaranteed by the U.S. Government.
NOTE 4 - FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and as such, is 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.
The FHLB had incurred losses in 2009 and for parts of 2010 due primarily to other-than-temporary impairment credit losses on
its private-label mortgage-backed securities portfolio. These securities were the most effected by the extreme economic conditions
in place during the previous several years. As a result, the FHLB had suspended the payment of dividends and limited the amount
of excess capital stock repurchases. The FHLB has reported net income for both the fourth quarter and the year ended December
31, 2011 and has declared a 0.10 percent annualized dividend to its shareholders effective February 23, 2012. While the FHLB has
not committed to regular dividend payments or future limited repurchases of excess capital stock, it will continue to monitor the
overall financial performance of the FHLB in order to determine the status of limited repurchases of excess capital stock or
dividends in the future. 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 5 - 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 December 31, 2011 and 2010:
(In Thousands)
Commercial and agricultural. . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . .
Construction. . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . .
Less: Net deferred loan fees
and discounts
Allowance for loan losses
Loans, net
$
14
Current
Past Due
30 to 89
Days
2011
Past Due
90 Days
or More
& Still
Accruing
Non-
Accrual
Total
$
53,124
$
5
$
–
$
–
$
53,129
176,875
162,977
19,605
11,180
423,761
1,595
7,154
415,012
$
1,438
135
95
111
1,784
$
378
–
–
6
384
$
692
1,176
9,757
–
11,625
179,383
164,288
29,457
11,297
437,554
1,595
7,154
428,805
$
(In Thousands)
Commercial and agricultural. . . . . . . . . .
Real estate mortgage:
Residential . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . .
Construction. . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . .
Less: Net deferred loan fees
Allowance for loan losses
Loans, net
$
Current
Past Due
30 to 89
Days
2010
Past Due
90 Days
or More
& Still
Accruing
Non-
Accrual
Total
$
50,208
$
426
$
215
$
4
$
50,853
166,354
157,764
13,836
9,199
397,361
1,040
6,035
390,286
$
6,356
438
5,592
209
13,021
$
259
60
–
23
557
$
609
1,927
3,117
1
5,658
173,578
160,189
22,545
9,432
416,597
1,040
6,035
409,522
$
If interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans, income would
have approximated $568,000, $368,000, and $134,000 for the years ended December 31, 2011, 2010, and 2009, respectively.
Interest income on such loans amounted to approximately $71,000, $56,000, and $48,000, for the years ended December 31, 2011,
2010, and 2009, respectively.
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 individually evaluates such loans for impairment 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. 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 to 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 December 31, 2011 and 2010:
(In Thousands)
Recorded
Investment
2011
Unpaid Principal
Balance
Related
Allowance
With no related allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . $
Real estate mortgages - residential. . . . . . . . . . . . . . . . . . .
Real estate mortgages - commercial . . . . . . . . . . . . . . . . .
Real estate mortgages - construction . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgages - residential. . . . . . . . . . . . . . . . . . .
Real estate mortgages - commercial . . . . . . . . . . . . . . . . .
Real estate mortgages - construction . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . .
Total:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgages - residential. . . . . . . . . . . . . . . . . . .
Real estate mortgages - commercial . . . . . . . . . . . . . . . . .
Real estate mortgages - construction . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . .
$
– $
– $
742
382
815
–
1,939
–
861
6,150
8,929
–
15,940
–
1,603
6,532
9,744
–
17,879 $
751
382
1,113
–
2,246
–
888
6,150
10,429
–
17,467
–
1,639
6,532
11,542
–
19,713 $
–
–
–
–
–
–
–
101
1,481
2,155
–
3,737
–
101
1,481
2,155
–
3,737
15
(In Thousands)
Recorded
Investment
2010
Unpaid Principal
Balance
Related
Allowance
With no related allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . $
Real estate mortgages - residential. . . . . . . . . . . . . . . . . . .
Real estate mortgages - commercial . . . . . . . . . . . . . . . . .
Real estate mortgages - construction . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . .
With an allowance recorded:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgages - residential. . . . . . . . . . . . . . . . . . .
Real estate mortgages - commercial . . . . . . . . . . . . . . . . .
Real estate mortgages - construction . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . .
Total:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgages - residential. . . . . . . . . . . . . . . . . . .
Real estate mortgages - commercial . . . . . . . . . . . . . . . . .
Real estate mortgages - construction . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . .
$
90 $
90 $
888
2,498
260
–
3,736
–
572
1,889
9,860
–
12,321
90
1,460
4,387
10,120
–
16,057 $
888
2,498
260
–
3,736
–
572
1,889
10,128
–
12,589
90
1,460
4,387
10,388
–
16,325 $
–
–
–
–
–
–
–
80
158
2,518
–
2,756
–
80
158
2,518
–
2,756
The following table presents the average recorded investment in impaired loans and related interest income recognized for
December 31, 2011, 2010, and 2009:
(In Thousands)
Year Ended December 31,
2010
2009
2011
Average investment in impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income recognized on an accrual basis on impaired loans . . . . . . . .
Interest income recognized on a cash basis on impaired loans . . . . . . . . . . .
16,224 $
316
74
8,424 $
233
57
6,699
242
36
Additional funds totaling $200,000 are committed to be advanced in connection with impaired loans.
Modifications
The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic
concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These
concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions,
forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and
may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable
period, generally six months.
Loan modifications that are considered TDRs completed during the twelve months ended December 31, 2011 and 2010 were as
follows:
(In Thousands, Except
Number of Contracts)
Year Ended December 31,
2011
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
2010
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
Troubled debt restructurings:
Commercial and agricultural . . . . . . . .
Real estate mortgages - residential . . . .
Real estate mortgages - commercial. . .
Real estate mortgages - construction . .
Installment loans to individuals . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
– $
6
10
9
3
28 $
– $
609
4,779
11,372
20
16,780 $
–
609
4,779
11,372
20
16,780
1 $
11
12
4
3
31 $
5 $
1,215
7,352
10,353
23
18,948 $
5
1,215
7,352
10,353
23
18,948
16
Loan modifications considered troubled debt restructurings made during the twelve months previous to December 31, 2011, that
have defaulted during the twelve month period ending December 31, 2011 were as follows:
(In Thousands, Except Number of Contracts)
Year Ended December 31, 2011
Number of Contracts
Record Investment
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgages - residential . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgages - commercial . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgages - construction . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
–
2
1
2
1
6
–
127
154
251
7
539
Troubled debt restructurings amounted to approximately $17,478,000 and $19,037,000 as of December 31, 2011 and 2010.
Internal Risk Ratings
Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six
categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management
generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are
potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.
Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct
possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are
considered Substandard. Loans in the Doubtful category exhibit the same weaknesses found in the Substandard loans, however,
the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet
rated as loss because certain events may occur which would salvage the debt. Loans classified Loss are considered uncollectible
and charge-off is imminent.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the
Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential
mortgage loans are included in the pass category unless a specific action, such as bankruptcy, repossession, or death occurs to raise
awareness of a possible credit event. An external annual loan review of all commercial relationships $800,000 or greater is
performed, as well as a sample of smaller transactions. Confirmation of the appropriate risk category is included in the review.
Detailed reviews, including plans for resolution, are performed on loans classified as Substandard, Doubtful, or Loss on a quarterly
basis.
The following table presents the credit quality categories identified above as of December 31, 2011 and 2010:
(In Thousands)
2011
Commercial and
Agricultural
Residential
Real Estate Mortgages
Commercial
Construction
Installment Loans
to Individuals
Pass . . . . . . . . . . . . . . . . . . . . . . . . . $
Special Mention . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . $
51,663 $
1,198
268
–
53,129 $
177,916 $
89
1,378
–
179,383 $
152,994 $
5,804
5,490
–
164,288 $
19,652 $
11,291 $
–
9,805
–
–
6
–
29,457 $
11,297 $
(In Thousands)
2010
Commercial and
Agricultural
Residential
Real Estate Mortgages
Commercial
Construction
Installment Loans
to Individuals
Pass . . . . . . . . . . . . . . . . . . . . . . . . . $
Special Mention . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . .
Doubtful . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . $
49,702 $
565
586
–
50,853 $
171,588 $
526
1,464
–
173,578 $
145,887 $
9,195
5,107
–
160,189 $
11,840 $
–
10,705
–
22,545 $
9,408 $
–
24
–
9,432 $
Totals
413,516
7,091
16,947
–
437,554
Totals
388,425
10,286
17,886
–
416,597
17
Allowance for Loan Losses
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL is based on management’s
continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions,
diversification and size of the portfolio, adequacy of collateral, past and anticipated future loss experience, and the amount of non-
performing loans.
The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35 for loans individually
evaluated for impairment (previously discussed) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well
as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total
of the two components represents the Bank’s ALL.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. Allowances
are segmented based on collateral characteristics previously disclosed, and consistent with credit quality monitoring. Loans that
are collectively evaluated for impairment are grouped into two classes for evaluation. A general allowance is determined for “Pass”
rated credits, while a separate pool allowance is provided for “Criticized” rated credits that are not individually evaluated for
impairment.
For the general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss
amounts are modified by other qualitative factors. A historical charge-off factor is calculated utilizing a twelve quarter moving
average. Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-
off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from
historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from
internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in
delinquency rates and non-accrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience,
ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry, and/or
geographic standpoint.
Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are
closely monitored by management and subject to additional qualitative factors. Management also monitors industry loss factors
by loan segment for applicable adjustments to actual loss experience.
Management reviews the loan portfolio on a quarterly basis in order to make appropriate and timely adjustments to the ALL. When
information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
Activity in the allowance is presented for the twelve months ended December 31, 2011 and 2010:
(In Thousands)
2011
Commercial and
Agricultural
Residential
Real Estate Mortgages
Commercial
Construction
Installment Loans
to Individuals
Beginning Balance . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . .
Ending Balance . . . . . . . . . . . . . . $
466 $
(35)
10
(11)
430 $
980 $
(46)
39
(9)
964 $
(In Thousands)
2,893 $
(1,543)
8
1,488
2,846 $
188
$
(87)
49
45
195
$
1,508 $
–
24
1,187
2,719 $
2010
Totals
6,035
(1,711)
130
2,700
7,154
Commercial and
Agricultural
Residential
Real Estate Mortgages
Commercial
Construction
Installment Loans
to Individuals
Totals
Beginning Balance . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . .
Ending Balance . . . . . . . . . . . . . . $
569 $
(266)
18
145
466 $
972 $
(149)
15
142
980 $
1,491 $
(82)
–
99
1,508 $
1,403 $
(268)
9
1,749
2,893 $
222
$
(137)
88
15
188
$
4,657
(902)
130
2,150
6,035
The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central Pennsylvania.
Although the Company has a diversified loan portfolio at December 31, 2011 and 2010, a substantial portion of its debtors’ ability
to honor their contracts is dependent on the economic conditions within this region.
The Company has a concentration of loans at December 31, 2011 and 2010 as follows:
Owners of residential rental properties . . . . . . . . . . . . . . . . . . .
Owners of commercial rental properties . . . . . . . . . . . . . . . . . .
December 31,
2011
13.86%
16.83%
2010
14.21%
16.66%
18
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment
and based on impairment method as of December 31, 2011 and 2010:
(In Thousands)
Commercial and
Agricultural
Residential
Real Estate Mortgages
Commercial
Construction
Installment Loans
to Individuals
Totals
2011
Allowance for Loan Losses:
Ending allowance balance
attributable to loans:
Individually evaluated
for impairment. . . . . . . . . . . . $
Collectively evaluated for
impairment . . . . . . . . . . . . . .
Total ending allowance
balance . . . . . . . . . . . . . . . . $
Loans:
Individually evaluated for
impairment . . . . . . . . . . . . . . . . $
Collectively evaluated for
impairment . . . . . . . . . . . . . . . .
Total ending loans
balance . . . . . . . . . . . . . . . . $
– $
101 $
1,481 $
2,155 $
– $
430
863
1,238
691
195
3,737
3,417
430 $
964 $
2,719 $
2,846 $
195 $
7,154
– $
1,603 $
6,532 $
9,744 $
– $
17,879
53,129
177,780
157,756
19,713
11,297
419,675
53,129 $
179,383 $
164,288 $
29,457 $
11,297 $
437,554
(In Thousands)
Commercial and
Agricultural
Residential
Real Estate Mortgages
Commercial
Construction
Installment Loans
to Individuals
Totals
2010
Allowance for Loan Losses:
Ending allowance balance
attributable to loans:
Individually evaluated
for impairment. . . . . . . . . . . . $
Collectively evaluated for
impairment . . . . . . . . . . . . . .
Total ending allowance
balance . . . . . . . . . . . . . . . . $
Loans:
Individually evaluated for
impairment . . . . . . . . . . . . . . . . $
Collectively evaluated for
impairment . . . . . . . . . . . . . . . .
Total ending loans
balance . . . . . . . . . . . . . . . . $
– $
80 $
158 $
2,518 $
– $
466
900
1,350
375
188
2,756
3,279
466 $
980 $
1,508 $
2,893 $
188 $
6,035
90 $
1,460 $
4,387 $
10,120 $
– $
16,057
50,763
172,118
155,802
12,425
9,432
400,540
50,853 $
173,578 $
160,189 $
22,545 $
9,432 $
416,597
NOTE 6 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31, 2011 and 2010:
(In Thousands)
2011
2010
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,480
7,440
7,325
967
__________________
17,212
9,505
__________________
7,707
__________________
__________________
$
1,480
7,350
6,809
885
________________
16,524
8,866
________________
$
7,658
________________
________________
Depreciation and amortization charged to operations for the years ended 2011, 2010, and 2009 was $701,000, $731,000, and
$724,000, respectively.
19
NOTE 7 - GOODWILL
As of December 31, 2011 and 2010, goodwill had a gross carrying value of $3,308,000 and accumulated amortization of $276,000
resulting in a net carrying amount of $3,032,000.
The gross carrying amount of goodwill is tested for impairment in the third quarter of each fiscal year. Based on the fair value of
the reporting unit, estimated using the expected present value of future cash flows, there was no evidence of impairment of the
carrying amount at December 31, 2011 and 2010, respectively.
NOTE 8 - TIME DEPOSITS
Time deposits of $100,000 or more totaled approximately $62,130,000 on December 31, 2011 and $63,610,000 on December 31,
2010. Interest expense related to such deposits was approximately $965,000, $1,461,000, and $2,336,000, for the years ended
December 31, 2011, 2010, and 2009, respectively.
At December 31, 2011, the scheduled maturities on time deposits of $100,000 or more are as follows:
(In Thousands)
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Three months to six months . . . . . . . . . . . . . . . . . . . . . . . . . .
Six months to twelve months. . . . . . . . . . . . . . . . . . . . . . . . . .
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total time deposit maturities are as follows at December 31, 2011:
(In Thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
13,189
7,916
15,234
25,791
62,130
2011
99,913
34,999
27,889
6,429
1,710
1,581
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
172,521
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase and primarily FHLB advances, which generally
represent overnight or less than six month borrowings. In addition to the outstanding balances noted below, the Bank also had
additional lines of credit totaling $27,554,000 available from correspondent banks other than the FHLB. The outstanding balances
and related information for short-term borrowings are summarized as follows at December 31, 2011, 2010, and 2009:
(In Thousands)
Repurchase Agreements:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Maximum amount outstanding at any month end. . . . . . . . . . . . . . . . . . .
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate:
At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Open Repo Plus:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Maximum amount outstanding at any month end. . . . . . . . . . . . . . . . . . .
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate:
At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-Term FHLB:
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Maximum amount outstanding at any month end. . . . . . . . . . . . . . . . . . .
Average balance outstanding during the year . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate:
At year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
13,153 $
17,920
15,555
1.02%
1.21%
16,445 $
16,445
2,480
0.34%
0.57%
– $
1,000
82
–
0.17%
13,289 $
20,815
14,305
1.58%
1.80%
14,010 $
14,010
1,066
0.62%
0.65%
– $
–
–
–
–
13,199
16,008
13,664
2.01%
2.21%
5,155
40,330
11,772
0.62%
0.71%
–
15,000
2,205
–
0.42%
20
NOTE 10 - LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2011 and
2010:
(In Thousands)
Weighted-
Average Interest
Rate 2011
Weighted-
Average Interest
Rate 2010
Stated Interest
Rate Range
From
4.25%
3.68%
3.74%
3.97%
4.15%
3.18%
6.92%
5.87%
6.92%
To
4.72%
4.43%
3.74%
3.97%
4.28%
3.18%
6.92%
5.87%
6.92%
2011
–
15,000
5,000
10,000
20,000
10,000
60,000
–
528
750
1,278
$ 61,278
2010
10,000
15,000
5,000
10,000
20,000
10,000
70,000
500
528
750
1,778
$ 71,778
Description
Maturity
Variable
Variable
Variable
Variable
Variable
Variable
Total Variable
Fixed
Fixed
Fixed
Total Fixed
Total
(In Thousands)
Year ending
December 31,
2012
2013
2014
2015
2016
Thererafter
2011
2012
2013
2015
2017
2018
2011
2013
2015
–
4.18%
3.74%
3.97%
4.22%
3.18%
3.95%
–
5.87%
6.92%
6.49%
4.01%
4.49%
4.18%
3.74%
3.97%
4.22%
3.18%
4.03%
6.92%
5.87%
6.92%
6.61%
4.09%
Amount
Weighted-
Average Rate
$
$
15,000
5,528
–
10,750
–
30,000
61,278
4.18%
3.94%
–
4.18%
–
3.87%
4.01%
The terms of the convertible borrowings allow the FHLB to convert the interest rate to an adjustable rate based on the three month
London Interbank Offered Rate (“LIBOR”) at a predetermined anniversary date of the borrowing’s origination, ranging from three
months to five years. If the FHLB converts the interest rate on one of the predetermined dates, the Bank has the ability to pay off
the debt on the conversion date and quarterly thereafter without incurring the customary pre-payment penalty.
The Bank maintains a credit arrangement which includes a revolving line of credit with the FHLB. Under this credit arrangement,
the Bank has a remaining borrowing capacity of $127,390,000 at December 31, 2011, which is subject to annual renewal, and
typically incurs no service charges. Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by
certain qualifying assets of the Bank which consist principally of first mortgage loans and mortgage-backed securities.
NOTE 11 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset position at December 31, 2011 and 2010:
(In Thousands)
Deferred tax assets:
Allowance for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2011
2010
$
2,432
477
2,258
409
1,292
–
3,250
963
2,001
462
1,501
353
1,495
3,748
2,876
803
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,081
13,239
Deferred tax liabilities:
Unrealized gain on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bond accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,501
483
355
751
3,090
7,991
–
334
332
676
1,342
$
11,897
21
No valuation allowance was established at December 31, 2011 and 2010, because of the Company’s ability to carry back capital
losses to recover taxes paid in previous years and certain tax strategies, together with the anticipated future taxable income as
evidenced by the Company’s earning potential.
The provision or benefit for income taxes is comprised of the following for the year ended December 31, 2011, 2010, and 2009:
(In Thousands)
Currently payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2011
2010
2009
2,370
(457)
1,913
$
$
1,625
(243)
1,382
$
$
1,360
(2,102)
(742)
A reconciliation between the expected income tax or benefit and the effective income tax rate on income before income tax
provision or benefit follows for the year ended December 31, 2011, 2010, and 2009:
(In Thousands)
2011
2010
2009
Provision at expected rate. . . . . . . . . . . . . . . . . . $
Decrease in tax resulting from:
Tax-exempt income . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Effective income tax provision
(benefit) and rate . . . . . . . . . . . . . . . . . . . $
Amount
4,854
%
34.00%
Amount
4,186
$
%
34.00% $
Amount
1,819
%
34.00%
(2,141)
(737)
(63)
(15.00)
(5.16)
(0.44)
(2,061)
(705)
(38)
(16.74)
(5.73)
(0.31)
(2,005) (37.47)
(560) (10.47)
0.07
4
1,913
13.40%
$
1,382
11.22% $
(742) (13.87)%
NOTE 12 - EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age and length of
service requirements that were hired prior to January 1, 2004, at which time entrance into the Plan was frozen. Benefits are based
primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten
years of employment.
The following table sets forth the obligation and funded status as of December 31, 2011 and 2010:
(In Thousands)
Change in benefit obligation:
2011
2010
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, change in actuarial assumptions . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets:
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts recognized on balance sheet as:
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,448
396
712
(262)
(370)
2,241
16,165
9,034
(109)
960
(398)
38
9,525
(6,640)
(6,640)
Amounts not yet recognized as a component of net periodic pension cost:
Amounts recognized in accumulated other comprehensive
income (loss) consist of:
Net transition asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2)
51
6,213
6,262
$
$
$
$
$
11,329
498
682
238
(249)
950
13,448
7,954
915
443
(278)
–
9,034
(4,414)
(4,414)
(4)
77
3,583
3,656
22
The accumulated benefit obligation for the Plan was $14,450,000 and $11,803,000 at December 31, 2011 and 2010, respectively.
Components of Net Periodic Cost and Other Amounts Recognized in other Comprehensive Income as of December 31, 2011, 2010,
and 2009 are as follows:
(In Thousands)
2011
2010
2009
Net periodic pension cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
424
712
(742)
(3)
26
164
581
$
$
527
682
(642)
(3)
25
146
735
$
$
544
679
(508)
(3)
25
339
1,076
The estimated net transition asset and prior service cost for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $3,000 and $25,000,
respectively.
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31, 2011, 2010, and 2009:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
4.50%
3.00%
2010
5.50%
3.00%
2009
6.00%
3.00%
Weighted-average assumptions used to determine net periodic cost for years ended December 31, 2011, 2010, and 2009:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
5.50%
8.00%
3.00%
2010
6.00%
8.00%
3.00%
2009
5.75%
8.00%
4.75%
The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the
market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower
future returns on similar investments compared to past periods.
Plan Assets
The Plan’s weighted-average asset allocations at December 31, 2011 and 2010 by asset category are as follows:
Asset Category
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.30
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.46
2010
2.59%
35.95
61.46
2011
3.24%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00% 100.00%
The investment objective for the Plan is to maximize total return with tolerance for slightly above average risk, meaning the fund
is able to tolerate short-term volatility to achieve above-average returns over the long term.
Asset allocation favors equities, with target allocation of approximately 60% equity securities, 37.5% fixed income securities and
2.5% cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between
the acceptable ranges. The equity portfolio’s exposure is primarily in mid and large capitalization domestic equities with limited
exposure to small capitalization and international stocks.
It is management’s intent to give the investment managers flexibility, within the overall guidelines, with respect to investment
decisions and their timing. However, certain investments require specific review and approval by management. Management is
also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to
execute investment strategies.
The following table sets forth by level, within the fair value hierarchy detailed in Note 20 - Fair Value Measurements, the Plan’s
assets at fair value as of December 31, 2011 and 2010:
(In Thousands)
Assets:
Level I
Level II
Level III
Total
2011
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mutual funds - taxable fixed income . . . . . . . . . . . . . . . . . . . . .
Mutual funds - domestic equity. . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds - international equity. . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
304 $
3,451
4,432
1,338
9,525 $
– $
–
–
–
– $
– $
–
–
–
– $
304
3,451
4,432
1,338
9,525
23
(In Thousands)
Assets:
Level I
Level II
Level III
Total
2010
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mutual funds - taxable fixed income . . . . . . . . . . . . . . . . . . . . .
Mutual funds - domestic equity. . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds - international equity. . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
202 $
3,257
4,200
1,375
9,034 $
– $
–
–
–
– $
– $
–
–
–
– $
202
3,257
4,200
1,375
9,034
The following future benefit payments that reflect expected future service, as appropriate, are expected to be paid:
(In Thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . $
2013 . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . .
2017-2021 . . . . . . . . . . . . . . . . . . . .
563
560
607
616
644
4,055
$ 7,045
The company expects to contribute a minimum of $750,000 to its Pension Plan in 2012.
401(k) Savings Plan
The Company also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum
percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The Company may make matching
contributions equal to a discretionary percentage that is determined by the Board of Directors. Participants are at all times fully
vested in their contributions and vest over a period of five years regarding the employer contribution. Contribution expense was
approximately $101,000, $117,000, and $112,000 for the years ended December 31, 2011, 2010, and 2009, respectively.
Deferred Compensation Plan
The Company has a deferred compensation plan whereby participating directors elect to forego directors’ fees paid in cash. Under
this plan, the Company will make payments for a ten-year period beginning at the later of age 65 or ceasing to be a director in
most cases or at death, if earlier, at which time payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Company has acquired bank-owned life insurance policies on the lives
of the participating directors for which insurance benefits are payable to the Company. The Company incurred expenses related to
the plan of $114,000, $254,000, and $96,000 for the years ended December 31, 2011, 2010, and 2009, respectively. Benefits paid
under the plan were approximately $160,000, $160,000, and $161,000 in 2011, 2010, and 2009, respectively.
NOTE 13 - EMPLOYEE STOCK PURCHASE PLAN
The Company implemented the Penns Woods Bancorp, Inc. 2006 Employee Stock Purchase Plan (“Plan”). The Plan is intended to
encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,000,000
shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to
purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. There were 1,924 and 2,170 shares
issued under the plan for the years ended December 31, 2011 and 2010, respectively.
NOTE 14 - STOCK OPTIONS
The Company maintained the 1998 Stock Option Plan (“1998 Plan”) for key employees and directors. Incentive stock options and
nonqualified stock options were granted to eligible employees of the Bank and nonqualified options were granted to directors of
the Company. Incentive nonqualified stock options granted under the 1998 Plan were exercisable not later than ten years after the
date of grant. Each option granted under the 1998 Plan was exercisable only after the expiration of six months following the date
of grant of such options. All options issued under the 1998 Plan were either forfeited or exercised as of December 31, 2010.
A summary of the status of the Company’s common stock option plans are presented below:
Outstanding, beginning of year . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, end of year . . . . . . . . . . .
Options exercisable at year-end. . . . . .
Shares
2011
–
–
_
–
–
–
$
$
$
Weighted-
Average
Exercise
Price
Shares
–
–
–
–
–
–
2010
990
–
(441)
(549)
–
–
$
$
$
Weighted-
Average
Exercise
Price
24.72
–
24.72
24.72
–
–
24
NOTE 15 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which
they are principal owners (more than ten percent), are indebted to the Company. Such indebtedness was incurred in the ordinary
course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below
for the years ended December 31, 2011 and 2010:
(In Thousands)
Beginning
Balance
Additions
Payments
Ending
Balance
2011
2010
$
8,366
8,744
$
3,877
816
$
(3,599)
(1,194)
$
8,644
8,366
Deposits from related parties held by the Bank amounted to $5,668,000 at December 31, 2011 and $7,281,000 at December 31,
2010.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES
The following schedule shows future minimum rental payments under operating leases with noncancellable terms in excess of one
year as of December 31, 2011:
(In Thousands)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
422
352
307
274
220
1,303
2,878
The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities. Total rental
expense for all operating leases for the years ended December 31, 2011, 2010, and 2009 were $399,000, $387,000 and $392,000.
The Company is subject to lawsuits and claims arising out of its business. There are no such legal proceedings or claims currently
pending or threatened other than those encountered during the normal course of business.
NOTE 17 - OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the
consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in
particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company
may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows at December 31, 2011 and 2010:
(In Thousands)
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2011
2010
80,320
1,180
$
82,124
1,228
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company
evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company, on an extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer
to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for
these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees
earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the
collateral is typically Bank deposit instruments or customer business assets.
25
NOTE 18 - CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to
maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five
capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the
requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory
actions.
As of December 31, 2011 and 2010, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 leverage
capital ratios must be at least 10%, 6%, and 5%, respectively.
The Company’s and the Bank’s actual capital ratios are presented in the following tables, which shows that both met all regulatory
capital requirements.
(In Thousands)
Total Capital
(to Risk-weighted Assets)
Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital
(to Risk-weighted Assets)
Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital
(to Average Assets)
Actual
For Capital Adequacy Purposes
To Be Well Capitalized
(In Thousands)
Total Capital
(to Risk-weighted Assets)
Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital
(to Risk-weighted Assets)
Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Tier 1 Capital
(to Average Assets)
Actual
For Capital Adequacy Purposes
To Be Well Capitalized
Consolidated Company
2011
2010
Amount
Ratio
Amount
Ratio
$
$
$
$
$
$
77,863
40,796
50,995
71,064
20,398
30,597
71,064
29,688
37,110
15.27%
8.00
10.00
13.94%
4.00
6.00
9.57%
4.00
5.00
Bank
2011
Amount
Ratio
66,734
40,074
50,093
60,454
20,037
30,056
60,454
29,342
36,678
13.32%
8.00
10.00
12.07%
4.00
6.00
8.24%
4.00
5.00
$
$
$
$
$
$
72,855
36,544
45,680
66,371
18,272
27,408
66,371
27,790
34,738
15.95%
8.00
10.00
14.53%
4.00
6.00
9.55%
4.00
5.00
2010
Amount
Ratio
61,860
35,924
44,906
56,199
17,962
26,943
56,199
27,515
34,394
13.78%
8.00
10.00
12.51%
4.00
6.00
8.17%
4.00
5.00
NOTE 19 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividends by all state-chartered banks.
Accordingly, at December 31, 2011, the balance in the additional paid in capital account totaling $11,657,000 is unavailable for
dividends.
The Bank is subject to regulatory restrictions, which limit its ability to loan funds to Penns Woods Bancorp, Inc. At December 31,
2011, the regulatory lending limit amounted to approximately $10,142,000.
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district Federal Reserve Bank of $1,131,000 and $1,129,000 at
December 31, 2011 and 2010, respectively. The required reserves are computed by applying prescribed ratios to the classes of
average deposit balances. These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve
Bank.
1226
NOTE 20 - FAIR VALUE MEASUREMENTS
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in
measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows:
Level I:
Level II:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of
the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but
traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can
be directly observed.
Level III: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
This hierarchy requires the use of observable market data when available.
The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of December 31,
2011 and 2010, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
(In Thousands)
2011
Level I
Level II
Level III
Total
Assets measured on a recurring basis:
Investment securities, available for sale:
U.S. Government and agency securities. . . . . . . . . . . . . . . . $
State and political securities. . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution securities . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a recurring basis . . . . . . . . . . . . . $
(In Thousands)
Assets measured on a recurring basis:
Investment securities, available for sale:
U.S. Government and agency securities. . . . . . . . . . . . . . . . $
State and political securities. . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial institution securities . . . . . . . . . . . . . . . . . . . . . . .
Other equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a recurring basis . . . . . . . . . . . . . $
–
–
–
10,802
2,809
13,611
Level I
–
–
–
13,191
366
13,557
$
$
$
$
28,671
178,301
49,514
–
–
256,486
$
$
2010
Level II
Level III
26,613
154,787
20,608
–
–
202,008
$
$
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
28,671
178,301
49,514
10,802
2,809
270,097
Total
26,613
154,787
20,608
13,191
366
215,565
The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of December
31, 2011 and 2010, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value measurement.
(In Thousands)
2011
Assets measured on a non-recurring basis:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a non-recurring basis. . . . . . . . . . $
(In Thousands)
Assets measured on a non-recurring basis:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets measured on a non-recurring basis. . . . . . . . . . $
Level I
Level II
Level III
Total
–
–
–
–
–
–
$
$
$
$
–
2,144
2,144
$
$
14,142
–
14,142
2010
Level II
Level III
–
609
609
$
$
13,301
–
13,301
$
$
$
$
14,142
2,144
16,286
Total
13,301
609
13,910
Level I
27
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair values for its financial instruments. Fair values are made at a specific point in time, based
on relevant market information and information about the financial instrument. These fair values do not reflect any premium or
discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.
Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in
trading or sales activities. Because no market exists for a significant portion of the Company’s financial instruments, fair values
are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These fair values are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the fair
values.
Fair values have been determined by the Company using historical data and an estimation methodology suitable for each category
of financial instruments. The Company’s fair values, methods, and assumptions are set forth below for the Company’s other
financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the
Company, are not considered financial instruments but have value, the fair value of financial instruments would not represent the
full market value of the Company.
The fair values of the Company’s financial instruments are as follows at December 31, 2011 and 2010:
(In Thousands)
2011
2010
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Financial assets:
Cash and cash equivalents. . . . . . . . . . . . . $
Investment securities:
Available for sale . . . . . . . . . . . . . . . . . .
Held to maturity . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . .
13,885 $
13,885
$
9,493 $
9,493
270,097
54
3,787
428,805
16,065
3,905
270,097
55
3,787
432,300
16,065
3,905
215,565
83
6,658
409,522
15,436
3,765
215,565
83
6,658
402,250
15,436
3,765
Financial liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . $ 470,310 $ 471,212
111,354
Noninterest-bearing deposits. . . . . . . . . . .
29,598
Short-term borrowings . . . . . . . . . . . . . . .
65,848
Long-term borrowings, FHLB . . . . . . . . .
536
Accrued interest payable . . . . . . . . . . . . . .
111,354
29,598
61,278
536
$ 428,161 $ 419,058
89,347
27,299
75,790
750
89,347
27,299
71,778
750
28
Cash and Cash Equivalents, Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and Accrued
Interest Payable:
The fair value is equal to the carrying value.
Investment Securities:
The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price. If no
quoted market price is available, fair value is determined by using the quoted market price for similar securities. Regulatory
stocks’ fair value is equal to the carrying value.
Loans:
Fair values are determined for portfolios of loans with similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential real estate, construction real estate, and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using market
discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s
historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current
economic and lending conditions.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower
information.
Bank-Owned Life Insurance:
The fair value is equal to the cash surrender value of the life insurance policies.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW, and money market
accounts, is equal to the amount payable on demand as of December 31, 2011 and 2010. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows.
The fair values above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared
to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
Long-Term Borrowings, FHLB:
The fair value of long-term borrowings is based on the discounted value of contractual cash flows.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the notional amount and the fair value of off-balance sheet items at December 31, 2011
and 2010. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.
29
NOTE 22 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp, Inc. follows:
CONDENSED BALANCE SHEET, DECEMBER 31,
(In Thousands)
ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries:
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonbank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
$
69
$
90
67,770
12,475
272
53,969
12,392
259
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
80,586
$
66,710
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
Operating income:
Dividends from subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
126
80,460
$
90
66,620
80,586
$
66,710
2011
2010
2009
$
7,266
–
5,414
(318)
$
7,365
–
3,892
(328)
7,283
1
(897)
(294)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
12,362
$
10,929
$
6,093
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . .
2011
2010
2009
$
12,362
$
10,929
$
6,093
(5,414)
23
6,971
(3,892)
(25)
7,012
INVESTING ACTIVITIES:
Investment in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
–
FINANCING ACTIVITIES:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . .
NET (DECREASE) INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,059)
67
–
–
(6,992)
(21)
90
(7,056)
67
10
(46)
(7,025)
(13)
103
CASH, END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
69
$
90
$
30
897
–
6,990
–
(7,052)
71
–
–
(6,981)
9
94
103
NOTE 23 - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands, Except Per Share Data)
For the Three Months Ended
2011
March 31,
June 30,
Sept. 30,
Dec. 31,
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax provision . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . .
(In Thousands, Except Per Share Data)
2010
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax provision . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
8,982
1,985
6,997
600
1,820
125
4,988
3,354
501
2,853
0.74
0.74
$
$
$
$
8,884
1,966
6,918
600
1,864
9
4,856
3,335
371
2,964
0.78
0.78
$
$
$
$
9,173
1,963
7,210
600
1,982
8
4,968
3,632
482
3,150
0.82
0.82
For the Three Months Ended
March 31,
June 30,
Sept. 30,
8,989
2,691
6,298
300
1,699
(3)
4,986
2,708
260
2,448
0.64
0.64
$
$
$
$
9,124
2,534
6,590
400
1,952
56
4,990
3,208
436
2,772
0.72
0.72
$
$
$
$
9,182
2,424
6,758
700
1,761
109
4,704
3,224
376
2,848
0.74
0.74
$
$
$
$
$
$
$
$
9,337
1,742
7,595
900
1,932
479
5,152
3,954
559
3,395
0.88
0.88
Dec. 31,
9,067
2,219
6,848
750
1,874
11
4,812
3,171
310
2,861
0.75
0.75
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Penns Woods Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Penns Woods Bancorp, Inc. (the “Company”) and subsidiaries
as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity, comprehensive
income, and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated March 13, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Wexford, PA
March 13, 2012
32
Management’s Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations
NET INTEREST INCOME
RESULTS OF OPERATIONS
Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates
paid on interest-bearing liabilities. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable
equivalents based on the marginal corporate federal tax rate of 34%. The tax equivalent adjustments to net interest income for
2011, 2010, and 2009 were $3,122,000, $3,018,000, and $2,952,000, respectively.
2011 vs 2010
Reported net interest income increased $2,226,000 or 8.40% to $28,720,000 for the year ended December 31, 2011 compared to
the year ended December 31, 2010, although the yield on earning assets decreased to 5.82% from 6.08% respectively. On a tax
equivalent basis, the change in net interest income was an increase of $2,330,000 or 7.90% to $31,842,000 for the year ended
December 31, 2011 compared to the year ended December 31, 2010. Total interest income remained steady as the impact of
growth in the average balance of the loan and investment portfolios was offset by a decline in the portfolio yields caused by the
prolonged low interest rate cycle enacted by the Federal Open Markets Committee (“FOMC”). Interest income recognized on the
loan portfolio decreased $326,000 as a portion of the portfolio repriced downward due to the FOMC actions that have maintained
the prime rate at 3.25% dictating that new loan generation occurred at lower rates than the existing portfolio. Interest and dividend
income generated from the investment portfolio and interest bearing cash deposits increased $340,000. The increase was driven
by portfolio growth, which more than compensated for a decrease in yield of 35 basis points (“bp”).
Interest expense decreased $2,212,000 to $7,656,000 for the year ended December 31, 2011 compared to 2010. Leading the
decrease in interest expense was a decline of 24.59% or $1,489,000 related to deposits. The FOMC actions noted previously
together with a strategic focus on core deposits led to a 39 bp decline in the rate paid on interest-bearing deposits from 1.38% for
the year ended December 31, 2010 to 0.99% for the year ended December 31, 2011. Leading the significant decline in interest-
bearing deposit expense was a decline in the cost of time deposits of 45 bp’s. The overall growth in average deposit balances of
$37,344,000 allowed for a reduction in average long-term borrowings of $14,022,000 leading to a reduction in borrowed funds
interest expense of $723,000.
2010 vs 2009
Reported net interest income increased $2,701,000 or 11.35% to $26,494,000 for the year ended December 31, 2010 compared to
the year ended December 31, 2009, although the yield on earning assets decreased to 6.08% from 6.43% respectively. On a tax
equivalent basis, the change in net interest income was an increase of $2,767,000 or 10.35% to $29,512,000 for the year ended
December 31, 2010 compared to the year ended December 31, 2009. Total interest income increased $171,000 due to growth in the
average balance of the loan and investment portfolios. The increase in earning asset volume compensated for the negative impact
on earning asset yields caused by the prolonged low interest rate cycle enacted by the FOMC. Interest income recognized on the
loan portfolio decreased $55,000 as a portion of the portfolio repriced downward due to the FOMC actions that have maintained the
prime rate at 3.25% for the past year coupled with the market dictating that new loan generation occurred at lower rates than during
2009. Interest and dividend income generated from the investment portfolio and interest bearing cash deposits increased $226,000.
The increase was driven by portfolio growth, which more than compensated for a decrease in yield of 29 bp.
Interest expense decreased $2,530,000 to $9,868,000 for the year ended December 31, 2010 compared to 2009. Leading the
decrease in interest expense was a decline of 26.91% or $2,229,000 related to deposits. The FOMC actions noted previously
together with a strategic shortening of the duration of the portfolio led to a 77 bp decline in the rate paid on time deposits from
2.84% for the year ended December 31, 2009 to 2.07% for the year ended December 31, 2010 resulting in a $1,917,000 decline
in expense, while the average balance of time deposits decreased $10,990,000. Growth in the average balance of money market
deposits of $37,206,000 was offset by a decline of 78 bp in rate resulting in a decrease in interest expense of $60,000. The overall
growth in average deposit balances of $36,367,000 allowed for a reduction in average short-term borrowings of $12,270,000 and
a reduction in average long-term borrowings of $2,877,000 leading to a reduction in borrowed funds interest expense of $170,000.
33
AVERAGE BALANCES AND INTEREST RATES
The following tables set forth certain information relating to the Company’s average balance sheet and reflect the average yield on
assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs
are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
(In Thousands)
Average
Balance
2011
Interest
Average
Rate
ASSETS:
Tax-exempt loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
20,267
405,391
425,658
130,647
113,184
243,831
9,074
678,563
53,207
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
731,770
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Super Now deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,178
88,556
121,458
179,336
459,528
18,117
69,879
87,996
Total interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . .
547,524
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99,917
9,852
74,477
1,213
24,386
25,599
5,926
7,970
13,896
3
39,498
121
473
1,063
2,909
4,566
202
2,888
3,090
7,656
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . .
$
731,770
Interest rate spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income/margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
31,842
5.99%
6.02
6.01
4.54
7.04
5.70
0.03
5.82
0.17
0.53
0.88
1.62
0.99
1.11
4.08
3.47
1.39
4.43%
4.70%
• Fees on loans are included with interest on loans as follows:
2011 - $306,000, 2010 - $439,000, 2009 - $349,000.
• Information on this table has been calculated using average daily balance sheets to obtain average balances.
• Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
• Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from
tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.
34
$
$
$
Average
Balance
2010
Interest
$
18,287
All other loans
397,766
Total loans
416,053
Taxable securities
Tax-exempt securities
113,714
108,658
Total securities
222,372
1,212
24,713
25,925
5,784
7,665
13,449
Interest-bearing deposits
8,782
6
Total interest-earning assets
647,207
39,380
Other assets
53,734
Total assets
700,941
Savings
Super Now deposits
64,477
65,080
100,112
208,274
Total deposits
437,943
15,371
83,901
99,272
537,215
84,158
8,118
71,450
183
385
1,167
4,320
6,055
265
3,548
3,813
9,868
Average
Rate
Average
Balance
2009
Interest
Average
Rate
6.63%
6.21
6.23
5.09
7.05
6.05
0.07
6.08
0.28
0.59
1.17
2.07
1.38
1.72
4.17
3.79
1.83
1,100
24,842
25,942
5,617
7,583
13,200
1
39,143
313
507
1,227
6,237
8,284
396
3,718
4,114
12,398
$
$
$
$
16,688
382,433
399,121
103,338
104,800
208,138
1,938
609,197
54,642
663,839
60,815
58,591
62,906
219,264
401,576
27,641
86,778
114,419
515,995
74,618
10,169
63,057
6.59%
6.50
6.50
5.44
7.24
6.34
0.05
6.43
0.51
0.87
1.95
2.84
2.06
1.42
4.23
3.55
2.39
$
700,941
$
663,839
$
29,512
4.25%
4.57%
$
26,745
4.03%
4.40%
Reconcilement of Taxable Equivalent Net Interest Income
(In Thousands)
2011
2010
2009
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . . $
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax equivalent adjustment . . . . . . . . . . . . . . . . . . . . .
Net interest income
(fully taxable equivalent) . . . . . . . . . . . . . . . . . . . . . . $
$
36,376
7,656
28,720
3,122
36,362
9,868
26,494
3,018
31,842
$
29,512
$
$
36,191
12,398
23,793
2,952
26,745
35
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated.
For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume).
Increases and decreases due to both interest rate and volume, which cannot be separated, have been allocated proportionally to the
change due to volume and the change due to interest rate. Income and interest rates are on a taxable equivalent basis.
(In Thousands)
Year Ended December 31,
2011 vs 2010
Increase (Decrease)
Due to
Rate
Volume
Net
2010 vs 2009
Increase (Decrease)
Due to
Rate
Volume
Net
Interest income:
Loans, tax-exempt. . . . . . . . . . . . . . . . . . . . . $
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxable investment securities . . . . . . . . . . . .
Tax-exempt investment securities . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . .
124 $
457
807
318
–
(123) $
(784)
(665)
(13)
(3)
Total interest-earning assets. . . . . . . . . . . .
1,706
(1,588)
Interest expense:
Savings deposits . . . . . . . . . . . . . . . . . . . . . .
Super Now deposits . . . . . . . . . . . . . . . . . . .
Money market deposits. . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . .
Long-term borrowings, FHLB . . . . . . . . . . .
Total interest-bearing liabilities . . . . . . . . .
15
127
221
(369)
39
(592)
(559)
(77)
(39)
(325)
(1,042)
(102)
(68)
(1,653)
1
(327)
142
305
(3)
118
(62)
88
(104)
(1,411)
(63)
(660)
(2,212)
$
105 $
989
469
219
3
1,785
18
51
552
(294)
(149)
(122)
56
7 $
(1,118)
(302)
(137)
2
(1,548)
(148)
(173)
(612)
(1,623)
18
(48)
(2,586)
112
(129)
167
82
5
237
(130)
(122)
(60)
(1,917)
(131)
(170)
(2,530)
Change in net interest income . . . . . . . . . . . $
2,265 $
65 $
2,330
$
1,729 $
1,038 $
2,767
PROVISION FOR LOAN LOSSES
2011 vs 2010
The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to
assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and
recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed
annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards
and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for
loan losses is adequate at December 31, 2011, future adjustments could be necessary if circumstances or economic conditions
differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy or
employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets
and charge-offs, increased loan loss provisions and reductions in interest income. Additionally, as an integral part of the
examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance adequacy. The banking
regulators could require the recognition of additions to the loan loss allowance based on their judgment of information available
to them at the time of their examination.
While determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio
segments; however, the allowance is available for the entire portfolio as needed.
The allowance for loan losses increased from $6,035,000 at December 31, 2010 to $7,154,000 at December 31, 2011. At December
31, 2011, the allowance for loan losses was 1.64% of total loans compared to 1.45% of total loans at December 31, 2010.
The provision for loan losses totaled $2,700,000 for the year ended December 31, 2011 compared to $2,150,000 for the year ended
December 31, 2010. The increase of the provision was appropriate when considering the gross loan growth experienced during
2011 of $20,402,000 coupled with net charge-offs of $1,581,000 to average loans for the year ended December 31, 2011 of 0.37%
compared to $771,000 and 0.16% for the year ended December 31, 2010. In addition, nonperforming loans increased $5,794,000
to $12,009,000 at December 31, 2011 primarily due to several commercial real estate loans that continued to have or developed
financial difficulties. The loans are in a secured position and have sureties with a strong underlying financial position. In addition,
a specific allowance within the allowance for loan losses has been established for these loans. Continued uncertainty surrounding
the economy, internal loan review and analysis, coupled with the ratios noted previously, dictated an increase in the provision for
loan losses. The increase did not equate to the increase in charge-offs and nonperforming loans due to the collateral status of the
nonperforming loans and overall loan portfolio in general, which limits the loan specific allocation of the allowance for loan losses.
Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for loan losses
remains at a level adequate to provide for probable losses inherent in the loan portfolio.
36
2010 vs 2009
The allowance for loan losses increased from $4,657,000 at December 31, 2009 to $6,035,000 at December 31, 2010. At December
31, 2010, the allowance for loan losses was 1.45% of total loans compared to 1.15% of total loans at December 31, 2009.
The provision for loan losses totaled $2,150,000 for the year ended December 31, 2010 compared to $917,000 for the year ended
December 31, 2009. The increase of the provision was appropriate when considering the gross loan growth experienced during
2010 of $10,028,000 coupled with net charge-offs of $771,000 to average loans for the year ended December 31, 2010 of 0.19%
compared to $616,000 and 0.16% for the year ended December 31, 2009. In addition, nonperforming loans increased to
$6,215,000 from $4,456,000 at December 31, 2009 primarily due to several commercial real estate loans. The loans are in a
secured position and have sureties with a strong underlying financial position. Continued uncertainty surrounding the economy
and internal loan review and analysis, coupled with the ratios noted previously, dictated an increase in the provision for loan losses.
The increase did not equate to the increase in charge-offs and nonperforming loans due to the collateral status of the nonperforming
loans and overall loan portfolio in general, which limits the loan specific allocation of the allowance for loan losses. Utilizing both
internal and external resources, as noted, senior management has concluded that the allowance for loan losses remains at a level
adequate to provide for probable losses inherent in the loan portfolio.
Following is a table showing the changes in the allowance for loan losses for the years ended December 31, 2011, 2010, 2009,
2008, and 2007:
(In Thousands)
2011
2010
2009
2008
2007
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . $
6,035 $
4,657 $
4,356 $
4,130 $
4,185
Charge-offs:
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and agricultural. . . . . . . . . . . . . . . . . . .
Installment loans to individuals. . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and agricultural. . . . . . . . . . . . . . . . . . .
Installment loans to individuals. . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions charged to operations . . . . . . . . . . . . . . . . . . . . .
1,589
35
87
1,711
71
10
49
130
1,581
2,700
499
266
137
902
24
18
88
130
772
2,150
374
133
225
732
14
10
92
116
616
917
48
51
214
313
17
60
87
164
149
375
–
103
201
304
13
1
85
99
205
150
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,154 $
6,035 $
4,657 $
4,356 $
4,130
Ratio of net charge-offs during the period to average loans
outstanding during the period . . . . . . . . . . . . . . . . . . . . . . .
0.37%
0.19%
0.16%
0.04%
0.06%
NON-INTEREST INCOME
2011 vs. 2010
Total non-interest income increased $760,000 from the year ended December 31, 2010 to December 31, 2011. Excluding net
security gains, non-interest income increased $312,000 year over year. Service charges decreased as customers continued to migrate
to checking accounts having reduced or no service charges, while overdraft income declined due to a decreased number of overdrafts.
Earnings on bank-owned life insurance decreased due to a non-recurring gain on death benefit recognized in 2010. Insurance and
brokerage commissions remained stable as the market for these products begins to rebound. Management of The M Group continues
to pursue new and build upon current relationships. However, the sales cycle for insurance and investment products can take
typically from six months to one year or more to complete. The increase in other income was primarily due to increases in revenues
from debit/credit card transactions and merchant card commissions as electronic payment methods continue to gain in popularity.
(In Thousands)
Change
2011
Amount % Total
2010
Amount % Total
Deposit service charges . . . . . . . . . . . . . . . . . . . . $ 2,021
621
Securities gains, net . . . . . . . . . . . . . . . . . . . . . . .
599
Bank-owned life insurance. . . . . . . . . . . . . . . . . .
1,130
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . .
933
Insurance commissions . . . . . . . . . . . . . . . . . . . .
997
Brokerage commissions . . . . . . . . . . . . . . . . . . . .
1,918
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income. . . . . . . . . . . . . . . . . $ 8,219
24.59 %
7.56
7.29
13.75
11.35
12.13
23.33
100.00 %
$ 2,177
173
636
949
970
965
1,589
$ 7,459
29.19 %
2.32
8.53
12.72
13.00
12.94
21.30
100.00 %
Amount
%
$
$
(156)
448
(37)
181
(37)
32
329
760
(7.17)%
258.96
(5.82)
19.07
(3.81)
3.32
20.70
10.19 %
2010 vs. 2009
Total non-interest income increased $5,172,000 from the year ended December 31, 2009 to December 31, 2010. Excluding net
security gains/losses, non-interest income increased $153,000 year over year. Service charges decreased as customers continued to
migrate to checking accounts having reduced or no service charges. Earnings on bank-owned life insurance decreased due to the
differential in non-recurring gains on death benefit recognized in 2010 and 2009. Insurance commissions decreased due to the
general economic downturn, which has led to a decrease in volume of sales. Management of The M Group continues to pursue new
and build upon current relationships. However, the sales cycle for insurance and investment products can take typically from six
37
months to one year or more to complete. The increase in other income was primarily due to increases in revenues from debit/credit
card transactions and merchant card commissions.
(In Thousands)
2010
Amount % Total
2009
Amount % Total
Deposit service charges . . . . . . . . . . . . . . . . . . . . $ 2,177
173
Securities gains (losses), net . . . . . . . . . . . . . . . .
636
Bank-owned life insurance. . . . . . . . . . . . . . . . . .
949
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . .
970
Insurance commissions . . . . . . . . . . . . . . . . . . . .
965
Brokerage commissions . . . . . . . . . . . . . . . . . . . .
1,589
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income. . . . . . . . . . . . . . . . . $ 7,459
29.19 %
2.32
8.53
12.72
13.00
12.94
21.30
100.00 %
$ 2,200
(4,846)
713
826
1,189
768
1,437
$ 2,287
96.20 %
(211.89)
31.18
36.12
51.99
33.58
62.82
100.00 %
Change
Amount
$
(23)
5,019
(77)
123
(219)
197
152
$ 5,172
%
(1.05)%
103.57
(10.80)
14.89
(18.42)
25.65
10.58
226.15 %
NON-INTEREST EXPENSE
2011 vs. 2010
Total non-interest expenses increased $472,000 from the year ended December 31, 2010 to December 31, 2011. Salaries and
employee benefits remained stable as a decrease in pension expense and an increase in deferred costs relating to loan generations
limited the impact of several factors including standard cost of living wage adjustments for employees and increased benefit costs.
Furniture and equipment expense increased due to an increase in general maintenance costs of technology related systems. FDIC
deposit insurance expense decreased due to a change in the FDIC assessment from a deposit to asset based calculation. Other
expenses increased primarily due to increases in other real estate expenses, donations, and training.
(In Thousands)
2011
Amount % Total
2010
Amount % Total
Change
Amount
%
Salaries and employee benefits . . . . . . . . . . . . . . $ 10,479
1,262
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,379
Furniture and equipment . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . .
689
Amortization of investment in
limited partnerships. . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
661
525
4,969
Total non-interest expense . . . . . . . . . . . . . . . . $ 19,964
52.49 %
6.32
6.91
3.45
3.31
2.63
24.89
100.00 %
$ 10,214
1,240
1,264
677
693
737
4,667
$ 19,492
52.41 %
6.36
6.48
3.47
3.56
3.78
23.94
100.00 %
$
$
265
22
115
12
(32)
(212)
302
472
2.59 %
1.77
9.10
1.77
(4.62)
(28.77)
6.47
2.42 %
2010 vs. 2009
Total non-interest expenses decreased $320,000 from the year ended December 31, 2009 to December 31, 2010. Salaries and
employee benefits remained stable as a decrease in pension expense limited the impact of several factors including standard cost
of living wage adjustments for employees and increased benefit costs. Amortization of investment in limited partnerships increased
due to a low income elderly housing partnership in our Williamsport market beginning to be amortized in conjunction with the
recognition of federal tax credits. Other expenses decreased primarily due to a decrease in FDIC insurance expense of $330,000.
(In Thousands)
2010
Amount % Total
2009
Amount % Total
Change
Amount
%
Salaries and employee benefits . . . . . . . . . . . . . . $ 10,214
1,240
Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,264
Furniture and equipment . . . . . . . . . . . . . . . . . . .
Pennsylvania shares tax . . . . . . . . . . . . . . . . . . . .
677
Amortization of investment in
limited partnerships. . . . . . . . . . . . . . . . . . . . . .
FDIC deposit insurance . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
693
737
4,667
Total non-interest expense . . . . . . . . . . . . . . . . $ 19,492
52.41 %
6.36
6.48
3.47
3.56
3.78
23.94
100.00 %
$ 10,189
1,266
1,212
685
567
1,067
4,826
$ 19,812
51.43 %
6.39
6.12
3.46
2.86
5.39
24.35
100.00 %
$
$
25
(26)
52
(8)
126
(330)
(159)
(320)
0.25 %
(2.05)
4.29
(1.17)
22.22
(30.93)
(3.29)
(1.62)%
INCOME TAXES
2011 vs 2010
The provision for income taxes for the year ended December 31, 2011 resulted in an effective income tax rate of 13.4% compared
to 11.2% for 2010. This increase is primarily the result of increased revenue from net interest income and net securities gains that
outpaced the increase in non-interest expense.
An analysis has been performed to determine if there is a need for a valuation allowance related to the deferred tax asset that has
been booked due to the investment losses. As of December 31, 2011, management determined that a valuation analysis was not
necessary.
2010 vs 2009
The provision for income taxes for the year ended December 31, 2010 resulted in an effective income tax rate of 11.2% compared
to (13.9)% for 2009. This increase is primarily the result of an increase in net securities gains of $5,019,000 (to a gain of $173,000
from a loss of $4,846,000) which accounted for an increase in tax expense of approximately $1,706,000.
38
FINANCIAL CONDITION
INVESTMENTS
2011
The fair value of the investment portfolio increased $54,504,000 from December 31, 2010 to December 31, 2011. The increase
was split between an increase in unrealized gain and additions to the amortized cost from purchases during 2011. The increase in
amortized cost was primarily the result of purchasing shorter-term other debt securities or corporate bonds. These bonds were
purchased due to their shorter maturity and ability to reduce the duration of the total investment portfolio during the continued
period of low interest rates. In addition, the growth in the other debt securities segment of the portfolio allowed for the
implementation of a barbell strategy with the current municipal portfolio serving as the other end of the barbell or long-term
maturity portion of the total investment portfolio. The municipal portfolio had the largest change in unrealized gains as the
portfolio moved from an unrealized loss of $15,057,000 at December 31, 2010 to an unrealized gain of $3,511,000 at December
31, 2011 as fewer defaults than predicted occurred and the supply of new issues decreased.
2010
The fair value of the investment portfolio increased $6,772,000 from December 31, 2009 to December 31, 2010 while the
amortized cost increased $12,390,000 over the same period. The increase in amortized value was primarily due to an increase in
the state and political securities and other debt securities segments of the portfolio. The state and political securities segment of
the aggregate portfolio was increased due to its ability to complement the shorter duration assets within the earning asset
composition. Other debt securities were utilized as short-term vehicles to utilize cash on hand, while minimizing interest rate risk.
The increase in carrying or fair value was the result of the previously noted increase in amortized cost offset by an increase in
aggregate net unrealized losses of $5,618,000 primarily related to the state and political securities segment of the portfolio.
The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2011, 2010, and 2009:
(In Thousands)
U.S. Government agencies:
2011
2010
2009
Balance
% Portfolio
Balance
% Portfolio
Balance
% Portfolio
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale . . . . . . . . . . . . . . . . . . . . . . .
$
–
28,671
State and political subdivisions (tax-exempt):
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale . . . . . . . . . . . . . . . . . . . . . . .
State and political subdivisions (taxable):
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale . . . . . . . . . . . . . . . . . . . . . . .
Other bonds, notes and debentures:
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale . . . . . . . . . . . . . . . . . . . . . . .
Total bonds, notes and debentures. . . . . . .
Financial institution securities - Available for sale . . .
Other equity securities - Available for sale . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . .
–
127,678
–
50,623
54
49,514
256,540
10,802
2,809
13,611
–% $
10.61
–
47.26
–
18.74
0.02
18.33
94.96
4.00
1.04
5.04
5
26,613
–
101,492
–
53,295
78
20,608
202,091
13,191
366
13,557
–% $
12.34
–
47.06
–
24.71
0.04
9.56
93.71
6.12
0.17
6.29
6
39,136
–
106,928
–
37,949
101
12,976
197,096
11,779
–
11,779
–%
18.74
–
51.19
–
18.17
0.05
6.21
94.36
5.64
–
5.64
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 270,151
100.00% $ 215,648
100.00% $ 208,875
100.00%
39
The following table shows the maturities and repricing of investment securities, at amortized cost and the weighted average yields
(for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) at December 31, 2011:
(In Thousands)
Within
One
Year
After One
But Within
Five Years
After Five
But Within
Ten Years
After
Ten
Years
Amortized
Cost
Total
U.S. Government agencies:
HTM Amount. . . . . . . . . . . . . . . . . . . $
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
AFS Amount . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political subdivisions (tax-exempt):
HTM Amount. . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
AFS Amount . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
State and political subdivisions (taxable):
HTM Amount. . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
AFS Amount . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
Other bonds, notes and debentures:
HTM Amount. . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
AFS Amount . . . . . . . . . . . . . . . . . . .
Yield . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Amount. . . . . . . . . . . . . . . . . . . . . . . $
–
–
–
–
–
–
–
–
–
–
–
–
54
6.11%
10,239
4.18%
$
$
–
–
–
–
–
–
1,218
2.76%
–
–
1,951
3.31%
–
–
25,936
2.73%
–
–
1,999
3.27%
–
–
2,653
5.27%
–
–
3,447
5.06%
–
–
14,076
3.62%
$
$
–
–
24,756
5.27%
–
–
123,193
6.56%
–
–
42,328
6.11%
–
–
1,196
6.81%
–
–
26,755
5.12%
–
–
127,064
6.50%
–
–
47,726
5.92%
54
6.11%
51,447
3.36%
10,293
$
29,105
$
22,175
$
191,473
253,046
Total Yield . . . . . . . . . . . . . . . . . . . . . . . . .
4.19%
2.77%
4.01%
6.30%
5.61%
Equity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total Investment Portfolio Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total Investment Portfolio Yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,690
265,736
5.34%
All yields represent weighted average yields expressed on a tax equivalent basis. They are calculated on the basis of the cost,
adjusted for amortization of premium and accretion of discount, and effective yields weighted for the scheduled maturity of each
security. The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and the
taxable equivalent of such income at the standard 34% tax rate (derived by dividing tax-exempt interest by 66%).
The distribution of credit ratings by amortized cost and estimated fair value for the debt security portfolio at December 31, 2011
follows:
(In Thousands)
Available for sale (AFS)
U.S. Government and
A- to AAA
Fair
Value
Amortized
Cost
B- to BBB+
Fair
Value
Amortized
Cost
C to CCC+
Fair
Value
Amortized
Cost
Not Rated
Fair
Value
Amortized
Cost
Total
Amortized
Cost
Fair
Value
agency securities . . . . . . . . . . . $ 26,755 $ 28,671
162,917
State and political securities . . . .
Other debt securities . . . . . . . . . .
48,982
Total debt securities AFS . . . . . . . $ 235,680 $ 240,570
158,053
50,872
Held to maturity (HTM)
U.S. Government and
agency securities . . . . . . . . . . . $
Other debt securities . . . . . . . . . .
Total debt securities HTM . . . . . . $
– $
54
54 $
–
55
55
$
$
$
$
– $
6,983
575
7,558 $
–
6,000
532
6,532
– $
–
– $
–
–
–
$
$
$
$
– $
–
–
– $
– $
–
– $
–
–
–
–
–
–
–
$
$
$
$
– $
9,754
–
9,754 $
–
9,384
–
9,384
174,790
51,447
$ 26,755 $ 28,671
178,301
49,514
$ 252,992 $ 256,486
– $
–
– $
–
–
–
$
$
– $
54
54 $
–
55
55
40
LOAN PORTFOLIO
2011
Gross loans of $435,959,000 at December 31, 2011 represented an increase of $20,402,000 from December 31, 2010. The
continued emphasis on well collateralized real estate loans accounted for the majority of the overall increase in loans outstanding.
The success in carrying out this long term strategy played a significant role in limiting net charge-offs for 2011 to 0.37% of average
loans. Successful campaigns to increase home equity and auto loans were undertaken during 2011 with the increase in residential
and installment loans to individuals being directly correlated to the campaigns.
2010
Gross loans of $415,557,000 at December 31, 2010 represented an increase of $10,028,000 from December 31, 2009. The
continued emphasis on well collateralized real estate loans resulted in commercial real estate secured loans increasing $8,108,000
from December 31, 2009 to 2010. The success in carrying out this long term strategy played a significant role in limiting net
charge-offs for 2010 to 0.19% of average loans. The composition of the portfolio has continued to shift toward commercial from
residential. This shift is the by-product of the majority of residential mortgages being sold into the secondary market versus being
added to the loan portfolio.
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan at December
31, 2011, 2010, 2009, 2008, and 2007:
(In Thousands)
Commercial and agricultural. . . . . .
Real estate mortgage:
Residental . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . .
Installment loans to
2011
Amount %Total
$ 53,129
12.19% $
2010
Amount %Total
2009
Amount %Total
2008
Amount %Total
50,853
12.23% $
46,647
11.50% $
40,602
10.64 % $
2007
Amount %Total
9.91%
35,739
179,383
164,288
29,457
41.15
37.68
6.76
173,578
160,189
22,545
41.77
38.55
5.43
174,346
152,209
21,795
43.00
37.53
5.37
177,406
136,158
15,838
46.51
35.69
4.16
163,268
132,943
16,152
45.30
36.88
4.48
individuals . . . . . . . . . . . . . . . . . .
11,297
2.59
9,432
2.27
11,549
2.85
12,487
3.27
13,317
3.69
Less: Net deferred loan fees
and discounts . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . .
1,595
(0.26)
$ 435,959 100.00% $ 415,557 100.00% $ 405,529 100.00% $ 381,478 100.00% $ 360,478 100.00%
(0.37)
(0.25)
(0.25)
(0.27)
1,040
1,013
1,017
941
The amounts of domestic loans at December 31, 2011 are presented below by category and maturity:
(In Thousands)
Commercial
and
Installment
Loans to
Real Estate
Agricultural Residential Commercial Construction Individuals
Loans with floating interest rates:
1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 through 5 years . . . . . . . . . . . . . . . . . . . . . .
5 through 10 years . . . . . . . . . . . . . . . . . . . . .
After 10 years . . . . . . . . . . . . . . . . . . . . . . . . .
Total floating interest rate loans . . . . . . . . .
8,104 $
2,091
2,760
13,104
26,059
7,889 $
3,066
10,804
131,774
153,533
10,573 $
6,094
14,819
120,835
152,321
Loans with predetermined interest rates:
1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . .
1 through 5 years . . . . . . . . . . . . . . . . . . . . . .
5 through 10 years . . . . . . . . . . . . . . . . . . . . .
After 10 years . . . . . . . . . . . . . . . . . . . . . . . . .
Total predetermined interest rate loans . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Net deferred loan fees. . . . . . . . . . . . . . . .
2,729
14,216
3,701
6,424
27,070
53,129 $ 179,383 $ 164,288 $
373
1,604
2,168
7,822
11,967
1,770
10,920
11,840
1,320
25,850
1,988 $
9,315
180
10,851
22,334
1,324
2,574
–
3,225
7,123
29,457 $
1,622 $
23
10
1,063
2,718
1,100
7,168
216
95
8,579
11,297
$
Total
30,176
20,589
28,573
277,627
356,965
7,296
36,482
17,925
18,886
80,589
437,554
1,595
435,959
• The loan maturity information is based upon original loan terms and is not adjusted for “rollovers.” In the ordinary course of
business, loans maturing within one year may be renewed, in whole or in part, at interest rates prevailing at the date of renewal.
• Scheduled repayments are reported in maturity categories in which the payment is due.
The Bank does not make loans that provide for negative amortization nor do any loans contain conversion features. The Bank does
not have any foreign loans outstanding at December 31, 2011.
41
ALLOWANCE FOR LOAN LOSSES
2011
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses
inherent in its loan portfolio, as of the consolidated balance sheet date. All loan losses are charged to the allowance and all
recoveries are credited to it per the allowance method of providing for loan losses. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision for loan losses is based upon management’s quarterly
review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies,
ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served.
An external independent loan review is also performed annually for the Bank. Management remains committed to an aggressive
program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance
has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in
mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards
and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
The allowance for loan losses increased from $6,035,000 at December 31, 2010 to $7,154,000 at December 31, 2011. At
December 31, 2011, the allowance for loan losses was 1.64% of total loans compared to 1.45% of total loans at December 31,
2010. This percentage is higher than the Bank’s historical experience. Management’s conclusion is that the allowance for loan
losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date as noted in the Provision
for Loan Losses discussion.
Based on management’s loan-by-loan review, the past performance of the borrowers, and current economic conditions, including
recent business closures and bankruptcy levels, management does not anticipate any current losses related to nonaccrual,
nonperforming, or classified loans above those that have already been considered in its overall judgment of the adequacy of the
allowance for loan losses.
2010
The allowance for loan losses increased from $4,657,000 at December 31, 2009 to $6,035,000 at December 31, 2010. At
December 31, 2010, the allowance for loan losses was 1.45% of total loans compared to 1.15% of total loans at December 31,
2009. This percentage is consistent with peer banks and higher than the Bank’s historical experience. Management’s conclusion is
that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet
date as noted in the Provision for Loan Losses discussion.
(In Thousands)
Allocation of the Allowance for Loan Losses
December 31, 2011:
Balance at end of period applicable to:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2010:
Balance at end of period applicable to:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Percent of
Loans in
Each
Category to
Total Loans
Amount
430
964
2,719
2,846
195
–
7,154
466
980
1,508
2,893
188
–
6,035
12.14%
41.00
37.55
6.73
2.58
–
100.00%
12.21%
41.67
38.45
5.41
2.26
–
100.00%
42
December 31, 2009:
Balance at end of period applicable to:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2008:
Balance at end of period applicable to:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2007:
Balance at end of period applicable to:
Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage:
$
Residential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment loans to individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Percent of
Loans in
Each
Category to
Total Loans
Amount
569
972
1,491
1,403
222
–
4,657
580
659
1,326
1,471
250
70
4,356
823
1,031
1,634
112
228
302
4,130
11.48%
42.88
37.44
5.36
2.84
–
100.00%
10.62%
46.38
35.60
4.14
3.26
–
100.00%
9.89%
45.18
36.78
4.47
3.68
–
100.00%
NONPERFORMING LOANS
Nonaccrual loans increased as several commercial real estate relationships deteriorated in quality over the past year. These loans
are primarily development loans and have a specific allowance within the allowance for loan losses.
The following table presents information concerning nonperforming loans. The accrual of interest will be discontinued when the
principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured
and in the process of collection. Consumer loans and residential real estate loans secured by 1 to 4 family dwellings are not
ordinarily subject to those guidelines. The reversal of previously accrued but uncollected interest applicable to any loan placed in
a nonaccrual status and the treatment of subsequent payments of either principal or interest will be handled in accordance with
GAAP. These principles do not require a write-off of previously accrued interest if principal and interest are ultimately protected
by sound collateral values. A nonperforming loan may be restored to accruing status when:
1. Principal and interest is no longer due and unpaid;
2. It becomes well secured and in the process of collection; and
3. Prospects for future contractual payments are no longer in doubt.
(In Thousands)
Total Nonperforming Loans
Nonaccrual
90 Days
Past Due
2011 . . . . . . . . . . . . . . . . . . . . . . . . $
2010 . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . .
$
11,625
5,658
1,891
1,476
955
$
384
557
2,565
259
365
Total
12,009
6,215
4,456
1,735
1,320
43
The level of nonaccruing loans continues to fluctuate annually and is attributed to the various economic factors experienced both
regionally and nationally. Overall, the portfolio is well secured with a majority of the balance making regular payments or
scheduled to be satisfied in the near future. Presently, there are no significant amounts of loans where serious doubts exist as to
the ability of the borrower to comply with the current loan payment terms which are not included in the nonperforming categories
as indicated above.
Management’s judgment in determining the amount of the additions to the allowance charged to operating expense considers the
following factors with no single factor being determinative:
1. Economic conditions and the impact on the loan portfolio.
2. Analysis of past loan charge-offs experienced by category and comparison to outstanding loans.
3. Effect of problem loans on overall portfolio quality.
4. Reports of examination of the loan portfolio by the Pennsylvania State Department of Banking and the FDIC.
DEPOSITS
2011 vs. 2010
Total average deposits increased $37,344,000 or 7.15% from 2010 to 2011. The growth is a result of an emphasis to increase and
solidify deposit relationships by focusing on core deposits, not time deposits. In fact, average core deposits, which exclude time
deposits, increased $66,282,000 or 21.12%, while time deposits decreased $28,938,000 or 13.89% from 2010 to 2011. In addition
to the emphasis on growing core deposits by utilizing marketing strategies, the core deposit growth is receiving a lift from the
natural gas exploration throughout our market footprint and municipal account gathering efforts. In addition, the Bank has
continued to capitalize on its reputation of safety and soundness during this prolonged economic downturn.
2010 vs. 2009
Total average deposits were $522,101,000 for 2010, an increase of $45,907,000 or 9.64% from 2009. Core deposits, which exclude
time deposits, increased due to growth in average money market accounts of $37,206,000 or 59.15%. This core deposit growth is
the result of the impact of natural gas exploration throughout our market footprint, shift in marketing strategies, and municipal
account gathering efforts. Time deposits decreased due to the reasons noted previously that resulted in a reduced need for higher
cost time deposit accounts. In addition, the Bank has continued to capitalize on its reputation of safety and soundness during this
prolonged economic downturn.
The average amount and the average rate paid on deposits are summarized below for the years ended December 31, 2011, 2010,
and 2009:
(In Thousands)
Noninterest-bearing . . . . . . . . . . . . . . . . .
Savings. . . . . . . . . . . . . . . . . . . . . . . . . . .
Super Now . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . .
Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2011
Average
Amount
Rate
99,917 0.00%
0.17%
70,178
0.53%
88,556
0.88%
121,458
1.62%
179,336
$
2010
Average
Amount
84,158
64,477
65,080
100,112
208,274
Rate
0.00%
0.28%
0.59%
1.17%
2.07%
$
2009
Average
Amount
Rate
74,618 0.00%
60,815 0.51%
58,591 0.87%
62,906 1.95%
219,264 2.84%
Total average deposits . . . .
$
559,445
0.82%
$
522,101
1.16%
$
476,194 1.74%
SHAREHOLDERS’ EQUITY
2011
Shareholders’ equity increased $13,840,000 to $80,460,000 at December 31, 2011 compared to December 31, 2010. The
accumulated other comprehensive loss of $1,219,000 at December 31, 2011 is a result of an increase in unrealized gains on
available for sale securities from an unrealized loss of $7,276,000 at December 31, 2010 to an unrealized gain of $2,914,000 at
December 31, 2011. However, the level of accumulated other comprehensive loss at December 31, 2011 was also impacted by the
change in net excess of the projected benefit obligation over the market value of the plan assets of the defined benefit pension plan
resulting in an increase in the net loss of $1,720,000. The current level of shareholders’ equity equates to a book value per share
of $20.97 at December 31, 2011 compared to $17.37 at December 31, 2010 and an equity to asset ratio of 10.53% at December
31, 2011 compared to 9.63% at December 31, 2010. Excluding accumulated other comprehensive loss, book value per share was
$21.29 at December 31, 2011 compared to $19.90 at December 31, 2010. Dividends paid to shareholders were $1.84 for each of
the twelve months ended December 31, 2011 and 2010.
2010
Shareholders’ equity decreased $296,000 to $66,620,000 at December 31, 2010 compared to December 31, 2009 as accumulated
other comprehensive loss increased to $9,689,000. The increase in accumulated other comprehensive loss is primarily a result of
a change in unrealized losses on available for sale securities from an unrealized loss of $3,569,000 at December 31, 2009 to an
unrealized loss of $7,276,000 at December 31, 2010. The other component in the increase of accumulated other comprehensive
loss is an increase of $493,000 in the net excess of the projected benefit obligation over the market value of the plan assets of the
defined benefit pension plan. The current level of shareholders’ equity equates to a book value per share of $17.37 at December
31, 2010 compared to $17.45 at December 31, 2009 and an equity to asset ratio of 9.63% at December 31, 2010. Book value per
share, excluding accumulated other comprehensive loss, was $19.90 at December 31, 2010 compared to $18.88 at December 31,
2009. Dividends paid to shareholders were $1.84 for each of the twelve months ended December 31, 2010 and 2009.
44
Bank regulators have risk based capital guidelines. Under these guidelines the Company and Bank are required to maintain
minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet
items. At December 31, 2011, both the Company’s and Bank’s required ratios were well above the minimum ratios as follows:
Tier 1 capital ratio . . . . . . . . . . . . . . . . .
Total capital ratio . . . . . . . . . . . . . . . . . .
Company
9.57%
15.27%
Bank
8.24%
13.32%
Minimum
Standards
4.00%
8.00%
For a more comprehensive discussion of these requirements, see “Regulations and Supervision” in Item 1 of the Annual Report on
Form 10-K. Management believes that the Company will continue to exceed regulatory capital requirements.
RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average shareholders’ equity, and other certain equity ratios are presented as
follows:
Percentage of net income to:
Average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of dividends declared to net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of average shareholders’ equity to average total assets . . . . . . . . . . . . . . . . . . .
1.69%
16.60%
57.10%
10.18%
1.56%
15.30%
64.56%
10.19%
0.92%
9.66%
115.74%
9.50%
2011
2010
2009
LIQUIDITY, INTEREST RATE SENSITIVITY, AND MARKET RISK
The asset/liability committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet
credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing
liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance and were within the limits cited at December 31, 2011:
1. Net Loans to Total Assets, 85% maximum
2. Net Loans to Total Deposits, 100% maximum
3. Cumulative 90 day Maturity GAP %, +/- 20% maximum
4. Cumulative 1 Year Maturity GAP %, +/- 25% maximum
Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing
interest rate risk. The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to
depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business
opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing
interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.
The Company, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit
withdrawals, loan commitments, and expenses. In order to control cash flow, the Bank estimates future flows of cash from deposits
and loan payments. The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed
securities, as well as FHLB borrowings. Funds generated are used principally to fund loans and purchase investment securities.
Management believes the Company has adequate resources to meet its normal funding requirements.
Management monitors the Company’s liquidity on both a long and short-term basis, thereby, providing management necessary
information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding
strategies consider both customer needs and economical cost. Both short and long term funding needs are addressed by maturities
and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments
such as federal funds sold. The use of these resources, in conjunction with access to credit, provides core ingredients to satisfy
depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment
opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a current
borrowing capacity at the FHLB of $212,068,000 with $77,723,000 utilized, leaving $127,390,000 available. In addition to this
credit arrangement, the Company has additional lines of credit with correspondent banks of $27,554,000. The Company’s
management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.
Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the
Company’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and
investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results
in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by
segmenting both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be
effected. Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or
difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or
gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary
to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In
addition to gap management, the Company has an asset liability management policy which incorporates a market value at risk
calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to
monitor the effects of interest rate changes on the Company’s balance sheet.
45
The Company currently maintains a gap position of being liability sensitive. The Company has strategically taken this position as
it has decreased the duration of the time deposit portfolio over the last several years, while continuing to maintain a primarily fixed
rate earning asset portfolio with a duration greater than the liabilities utilized to fund earning assets. Lengthening of the liability
portfolio coupled with the addition of limited short-term assets is being undertaken. These actions are expected to reduce, but not
eliminate, the liability sensitive structure of the balance sheet.
A market value at risk calculation is utilized to monitor the effects of interest rate changes on the Company’s balance sheet and
more specifically shareholders’ equity. The Company does not manage the balance sheet structure in order to maintain compliance
with this calculation. The calculation serves as a guideline with greater emphasis placed on interest rate sensitivity. Changes to
calculation results from period to period are reviewed as changes in results could be a signal of future events. As of the most recent
analysis, the results of the market value at risk calculation were outside of established guidelines due to the strategic direction being
taken.
INTEREST RATE SENSITIVITY
In this analysis the Company examines the result of various changes in market interest rates in 100 basis point increments and their
effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner.
Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.
The following is a rate shock forecast for the twelve month period ended December 31, 2012 assuming a static balance sheet as of
December 31, 2011.
(In Thousands)
Net interest income . . . . . . . . . . . $ 26,876
(900)
Change from static . . . . . . . . . . . .
-3.24%
Percent change from static . . . . . .
-200
-100
$ 27,416
(360)
-1.30%
Parallel Rate Shock in Basis Points
+100
$ 27,899
123
0.44%
+200
$ 27,981
205
0.74%
Static
$ 27,776
–
–
+300
$ 27,978
202
0.73%
$
+400
27,671
(105)
-0.38%
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash
flow from principal repayment on loans and mortgage-backed securities and/or call activity on investment securities. Actual results
could differ significantly from these estimates which would result in significant differences in the calculated projected change. In
addition, the limits stated above do not necessarily represent the level of change under which management would undertake
specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management believes the
Company is well positioned to respond expeditiously when the market interest rate outlook changes.
INFLATION
The asset and liability structure of a financial institution is primarily monetary in nature; therefore, interest rates rather than
inflation have a more significant impact on the Company’s performance. Interest rates are not always affected in the same direction
or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors that are not
measured by a price index.
CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in
detail in Note 1 of the “Notes to Consolidated Financial Statements.” Our most complex accounting policies require management’s
judgment to ascertain the valuation of assets, liabilities, commitments, and contingencies. We have established detailed policies
and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to
period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an
appropriate manner. The following is a brief description of our current accounting policies involving significant management
valuation judgments.
Other Than Temporary Impairment of Debt and Equity Securities
Debt and equity securities are evaluated periodically to determine whether a decline in their value is other than temporary.
Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reason underlying the decline,
to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the
decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there
is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value
is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
For a full discussion of the Company’s methodology of assessing impairment, refer to Note 3 of the “Notes to Consolidated
Financial Statements.”
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for
loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business
environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in
ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-
off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve
for allowance for loan losses, refer to Note 1 of the “Notes to Consolidated Financial Statements.”
46
Goodwill and Other Intangible Assets
As discussed in Note 7 of the “Notes to Consolidated Financial Statements,” the Company must assess goodwill and other
intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash
flows were less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against
earnings to write down the assets to the lower value.
Deferred Tax Assets
Management uses an estimate of future earnings to support their position that the benefit of their deferred tax assets will be
realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which
they may be applied, the asset may not be realized and the Company’s net income will be reduced. The Company’s deferred tax
assets are described further in Note 11 of the “Notes to Consolidated Financial Statements.”
Pension Benefits
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount
rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP,
actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect
recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future
expense. Our pension benefits are described further in Note 12 of the “Notes to Consolidated Financial Statements.”
CONTRACTUAL OBLIGATIONS
The Company has various financial obligations, including contractual obligations which may require future cash payments. The
following table presents, as of December 31, 2011, significant fixed and determinable contractual obligations to third parties by
payment date. Further discussion of the nature of each obligation is included in the “Notes to Consolidated Financial Statements.”
(In Thousands)
Payments Due In
Three to
Five
Years
Over
Five
Years
One to
Three
Years
One Year
or Less
Total
Deposits without a stated maturity . . . . . . . . . . . . . . . . . . . $ 409,143 $
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . .
Long-term borrowings, FHLB . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension obligations . . . . . . . . . . . . . . . . . .
99,913
13,153
16,445
15,000
422
563
$ 554,639 $
– $
62,888
–
–
5,528
659
1,167
70,242 $
– $
8,139
–
–
10,750
494
1,260
20,643 $
1,581
–
–
30,000
1,303
4,055
– $ 409,143
172,521
13,153
16,445
61,278
2,878
7,045
36,939 $ 682,463
The Company’s operating lease obligations represent short and long-term lease and rental payments for branch facilities. The Bank
leases certain facilities under operating leases which expire on various dates through 2024. Renewal options are available on the
majority of these leases.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or
performance and assumptions and other statements which are other than statements of historical fact. The Company wishes to
caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s
actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including
federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with
such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in
the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its
market area of the increasing consolidation within the banking and financial services industries, including the increased
competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial
services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local,
regional or national economies.
47
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-17077
PENNS WOODS BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction
of incorporation or organization)
300 Market Street, P.O. Box 967
Williamsport, Pennsylvania
(Address of principal executive offices)
23-2226454
(I.R.S. Employer
Identification No.)
17703-0967
(Zip code)
Registrant’s telephone number, including area code (570) 322-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $8.33 per share
Name of each exchange
which registered
The NASDAQ Stock Market LLC
Securities to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
x
X
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. r Yes r No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. r Yes r No
x
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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting com-
pany. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer r
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). r Yes r No
x
State the aggregate market value of the voting stock held by non-affiliates of the registrant $131,808,052 at June 30, 2011.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Accelerated filer r Non-accelerated filer r Smaller reporting company r
x
Class
Common Stock, $8.33 Par Value
Outstanding at March 1, 2012
3,837,322 Shares
48
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held on
April 25, 2012 are incorporated by reference in Part III hereof.
INDEX
PART I
ITEM
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A.
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B.
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . .
Item 9A.
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B.
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits and Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PART I
ITEM 1 BUSINESS
A. General Development of Business and History
On January 7, 1983, Penns Woods Bancorp, Inc. (the “Company”) was incorporated under the laws of the Commonwealth of
Pennsylvania as a bank holding company. The Jersey Shore State Bank, a Pennsylvania state-charted bank, (the “Bank”) became
a wholly owned subsidiary of the Company and each outstanding share of Bank common stock was converted into one share of
Company common stock. This transaction was approved by the shareholders of the Bank on April 11, 1983 and was effective on
July 12, 1983. The Company’s two other wholly-owned subsidiaries are Woods Real Estate Development Company, Inc. and
Woods Investment Company, Inc. The Company’s business has consisted primarily of managing and supervising the Bank, and its
principal source of income has been dividends paid by the Bank and Woods Investment Company, Inc.
The Bank is engaged in commercial and retail banking which includes the acceptance of time, savings, and demand deposits, the
funding of commercial, consumer, and mortgage loans, and safe deposit services. Utilizing a branch office network, ATMs, internet,
and telephone banking delivery channels, the Bank delivers its products and services to the communities it resides in.
In October 2000, the Bank acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M
Group, which operates as a subsidiary of the Bank, offers insurance and securities brokerage services. Securities are offered by
The M Group through ING Financial Partners, Inc., a registered broker-dealer.
Neither the Company nor the Bank anticipates that compliance with environmental laws and regulations will have any material
effect on capital expenditures, earnings, or on its competitive position. The Bank is not dependent on a single customer or a few
customers, the loss of whom would have a material effect on the business of the Bank.
The Bank employed 189 persons as of December 31, 2011 in either a full-time or part-time capacity. The Company does not have
any employees. The principal officers of the Bank also serve as officers of the Company.
Woods Investment Company, Inc., a Delaware holding company, maintains an investment portfolio that is managed for total return
and to fund dividend payments to the Company.
Woods Real Estate Development Company, Inc. serves the Company through its acquisition and ownership of certain properties
utilized by the Bank.
B. Regulation and Supervision
The Company is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to
supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Bank is also subject to
the supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as its primary federal regulator and
as the insurer of the Bank’s deposits. The Bank is also regulated and examined by the Pennsylvania Department of Banking (the
“Department”).
The insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The
M Group, conducts business including principally the Pennsylvania Department of Insurance. The securities brokerage activities
of The M Group are subject to regulation by federal and state securities commissions.
The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Company to stand
ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. The BHCA
requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank,
or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require approval
of the Department.
A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5%
of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA,
the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB’s risk-based capital guidelines. The risk-based capital rules are
designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding
companies and to minimize disincentives for holding liquid assets. Currently, the required minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total
capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, less certain intangible assets. The
remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital
instruments and other debt securities, 45% of net unrealized gains on marketable equity securities, and a limited amount of the
general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk,
concentration of credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio,
under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3%
for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% to 5%.
The Bank is subject to similar capital requirements adopted by the FDIC.
Dividends
Federal and state laws impose limitations on the payment of dividends by the Bank. The Pennsylvania Banking Code restricts the
availability of capital funds for payment of dividends by the Bank to its additional paid-in capital.
In addition to the dividend restrictions described above, the banking regulators have the authority to prohibit or to limit the payment
of dividends by the Bank if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound
practice in light of the financial condition of the Bank.
50
Under Pennsylvania law, the Company may not pay a dividend, if, after giving effect thereto, it would be unable to pay its debts as they
become due in the usual course of business and, after giving effect to the dividend, the total assets of the Company would be less than
the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time of distribution, to
satisfy the preferential rights upon dissolution of shareholders whose rights are superior to those receiving the dividend.
It is also the policy of the FRB that a bank holding company generally only pay dividends on common stock out of net income
available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with
a bank holding company’s capital needs, asset quality, and overall financial condition. In the current financial and economic
environment, the FRB has indicated that bank holding companies should carefully review their dividend policy and has
discouraged dividend pay-out ratios at the 100% level unless both asset quality and capital are very strong. A bank holding
company also should not maintain a dividend level that places undue pressure on the capital of such institution’s subsidiaries, or
that may undermine the bank holding company’s ability to serve as a source of strength for such subsidiaries.
C. Regulation of the Bank
The Bank is highly regulated by the FDIC and the Pennsylvania Department of Banking. The laws that such agencies enforce limit
the specific types of businesses in which the Bank may engage, and the products and services that the Bank may offer to customers.
Generally, these limitations are designed to protect the insurance fund of the FDIC and/or the customers of the Bank, and not the
Bank or its shareholders. From time to time, various types of new federal and state legislation have been proposed that could result
in additional regulation of, and restrictions of, the business of the Bank. It cannot be predicted whether any such legislation will
be adopted or how such legislation would affect business of the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business. Some of the major regulatory provisions that affect the business of the
Bank are discussed briefly below.
Prompt Corrective Action
The FDIC has specified the levels at which an insured institution will be considered “well-capitalized,” “adequately capitalized,”
“undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized”
category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of
regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent
institution and liability for civil money damages for failure to fulfill its commitment on that guarantee; and (2) the placement of a
hold on increases in assets, number of branches, or lines of business. If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts,
dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions,
the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound
practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.
Deposit Insurance
The FDIC maintains the Deposit Insurance Fund (“DIF”) by assessing depository institutions an insurance premium. The amount
each institution was assessed is based upon a variety of factors that included the balance of insured deposits as well as the degree
of risk the institution possessed to the insurance fund. As a result of the enactment of the Emergency Economic Stabilization Act
of 2008, the FDIC temporarily increased the amount of deposits it insures from $100,000 to $250,000. This increase has been made
permanent. The Bank paid an insurance premium into the DIF based on the quarterly average daily deposit liabilities net of certain
exclusions. The FDIC used a risk-based premium system that assessed higher rates on those institutions that posed a greater risk
to the DIF. The FDIC placed each institution in one of four risk categories using a two-step process based first on capital ratios
(the capital group assignment) and then on other relevant information (the supervisory group assignment). Subsequently, the rate
for each institution within a risk category was adjusted depending upon different factors that either enhance or reduce the risk the
institution poses to the DIF, including the unsecured debt, secured liabilities and brokered deposits related to each institution.
Finally, certain risk multipliers were applied to the adjusted assessment.
Beginning with the second quarter of 2011, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), the assessment base that the FDIC uses to calculate assessment premiums became a bank’s average assets
minus average tangible equity. As the asset base of the banking industry is larger than the deposit base, the range of assessment
rates will change to a low or 2.5 basis points to a high of 45 basis points, per $100 of assets; however, the dollar amount of the
actual premiums is expected to be roughly the same.
The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the DIF to achieve a reserve ratio of
1.35% of Insurance Fund insured deposits by September 2020. In addition, the FDIC has established a “designated reserve ratio”
of 2.0%, a target ratio that, until it is achieved, will not likely result in the FDIC reducing assessment rates. In attempting to achieve
the mandated 1.35% ratio, the FDIC is required to implement assessment formulas that charge banks over $10 billion in asset size
more than banks under that size. Those new formulas began in the second quarter of 2011, but did not affect the Bank. Under the
Dodd-Frank Act, the FDIC is authorized to make reimbursements from the insurance fund to banks if the reserve ratio exceeds
1.50%, but the FDIC has adopted the “designated reserve ratio” of 2.0% and has announced that any reimbursements from the fund
are indefinitely suspended.
On November 12, 2009, the FDIC approved a rule to require insured institutions to prepay their estimated quarterly risk-based
assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. An insured institution’s risk-based deposit
insurance assessments will continue to be calculated on a quarterly basis, but will be paid from the amount the institution prepaid
until the later of the date that amount is exhausted or June 30, 2013, at which point any remaining funds would be returned to the
insured institution. Consequently, the Company’s prepayment of DIF premiums made in December 2009 resulted in a prepaid asset
of $1,233,000 at December 31, 2011.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home
Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is
funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the
Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the Federal Home Loan Bank. At December 31, 2011, the Bank had $77,723,000 in FHLB
advances.
As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the greater of 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5%
of its outstanding advances from the FHLB. At December 31, 2011, the Bank had $5,626,000 million in stock of the FHLB which
was in compliance with this requirement.
51
Recent Legislation
The Dodd-Frank Act was enacted on July 21, 2010. This new law will significantly change the current bank regulatory structure
and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.
The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various
studies and reports for Congress. The federal agencies are given significant discretion in drafting such rules and regulations, and
consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for some time.
Certain provisions of the Dodd-Frank Act are expected to have a near term impact on the Company. For example, effective July
21, 2011, a provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus
allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to
existing law could have an adverse impact on the Company’s interest expense.
The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Under the Dodd-Frank Act, the assessment base will
no longer be an institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the
assessment period. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings
institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction
accounts have unlimited deposit insurance through December 31, 2013.
Bank and thrift holding companies with assets of less than $15 billion as of December 31, 2009, such as the Company, will be
permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital; however, trust preferred
securities issued by a bank or thrift holding company (other than those with assets of less than $500 million) after May 19, 2010,
will no longer count as Tier 1 capital. Trust preferred securities still will be entitled to be treated as Tier 2 capital.
The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote on executive compensation and
so-called “golden parachute” arrangements, and may allow greater access by shareholders to the company’s proxy material by
authorizing the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy
materials. The legislation also directs the FRB to promulgate rules prohibiting excessive compensation paid to bank holding
company executives, regardless of whether the company is publicly traded.
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer
protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer
protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive”
acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets such as
the Bank will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank
Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and
gives state attorneys general the ability to enforce federal consumer protection laws.
It is difficult to predict at this time the specific impact the Dodd-Frank Act and the yet to be written implementing rules and
regulations will have on community banks. Given the uncertainty associated with the manner in which the provisions of the Dodd-
Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such
requirements will have on financial institutions’ operations is presently unclear. The changes resulting from the Dodd-Frank Act
may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more
stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also
require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply
with new statutory and regulatory requirements.
Other Legislation
The Fair and Accurate Credit Transactions Act (“FACT”) was signed into law on December 4, 2003. This law extends the
previously existing Fair Credit Reporting Act. New provisions added by FACT address the growing problem of identity theft.
Consumers will be able to initiate a fraud alert when they are victims of identity theft, and credit reporting agencies will have
additional duties. Consumers will also be entitled to obtain free credit reports through the credit bureaus, and will be granted
certain additional privacy rights.
The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities
laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic
reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The
legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent
auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to
certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by
insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure
requirements relating to critical financial accounting policies and their application, increasing penalties for securities law
violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers
to set auditing, quality control, and ethics standards for accounting firms. In response to the legislation, the national securities
exchanges and NASDAQ have adopted new rules relating to certain matters, including the independence of members of a
company’s audit committee as a condition to listing or continued listing.
Congress is often considering some financial industry legislation, and the federal banking agencies routinely propose new
regulations. The Company cannot predict how any new legislation, or new rules adopted by federal or state banking agencies, may
affect the business of the Company and its subsidiaries in the future. Given that the financial industry remains under stress and
severe scrutiny, and given that the U.S. economy has not yet fully recovered to pre-crisis levels of activity, the Company expects
that there will be significant legislation and regulatory actions that may materially affect the banking industry for the foreseeable
future.
In addition to federal banking law, the Bank is subject to the Pennsylvania Banking Code. The Banking Code was amended in late
2000 to provide more complete “parity” in the powers of state-chartered institutions compared to national banks and federal
savings banks doing business in Pennsylvania. Pennsylvania banks have the same ability to form financial subsidiaries authorized
by the Gramm-Leach-Bliley Act, as do national banks.
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Environmental Laws
Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their
loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value
of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs,
and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the
management of the borrower. The Company is not aware of any borrower who is currently subject to any environmental
investigation or clean up proceeding which is likely to have a material adverse effect on the financial condition or results of
operations of the Company.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of
the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an
important impact on the operating results of commercial banks through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments,
and deposits through its open market operations in the United States Government securities and through its regulation of, among
other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits. It is
not possible to predict the nature and impact of future changes in monetary and fiscal policies.
DESCRIPTION OF BANK
History and Business
The Bank was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934 and became a wholly
owned subsidiary of the Company on July 12, 1983.
As of December 31, 2011, the Bank had total assets of $753,288,000; total shareholders’ equity of $67,770,000; and total deposits
of $583,569,000. The Bank’s deposits are insured by the FDIC for the maximum amount provided under current law.
The Bank engages in business as a commercial bank, doing business at locations in Lycoming, Clinton, Centre, and Montour
Counties, Pennsylvania. The Bank offers insurance, securities brokerage services, annuity and mutual fund investment products,
and financial planning through The M Group.
Services offered by the Bank include accepting time, demand and savings deposits including Super NOW accounts, statement
savings accounts, money market accounts, fixed rate certificates of deposit, and club accounts. Its services also include making
secured and unsecured business and consumer loans that include financing commercial transactions as well as construction and
residential mortgage loans and revolving credit loans with overdraft protection.
The Bank’s loan portfolio mix can be classified into four principal categories. These are real estate, agricultural, commercial, and
consumer. Real estate loans can be further segmented into construction and land development, farmland, one-to-four family
residential, multi-family, and commercial or industrial. Qualified borrowers are defined by policy and our underwriting standards.
Owner provided equity requirements range from 20% to 30% with a first lien status required. Terms are generally restricted to
between 10 and 20 years with the exception of construction and land development, which are limited to one to five years. Real
estate appraisals, property construction verifications, and site visitations comply with policy and industry regulatory standards.
Prospective residential mortgage customer’s repayment ability is determined from information contained in the application and
recent income tax returns. Emphasis is on credit, employment, income, and residency verification. Broad hazard insurance is
always required and flood insurance where applicable. In the case of construction mortgages, builders risk insurance is requested.
Agricultural loans for the purchase or improvement of real estate must meet the Bank’s real estate underwriting criteria. The only
permissible exception is when a Farmers Home Loan Administration guaranty is obtained. Agricultural loans made for the
purchase of equipment are usually payable in five years, but never more than seven, depending upon the useful life of the purchased
asset. Minimum borrower equity ranges from 20% to 30%. Livestock financing criteria depends upon the nature of the operation.
Agricultural loans are also made for crop production purposes. Such loans are structured to repay within the production cycle and
not carried over into a subsequent year.
Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment, and for working capital
purposes on a seasonal or revolving basis. General purpose working capital loans are also available with repayment expected
within one year. Equipment loans are generally amortized over three to seven years, with an owner equity contribution required
of at least 20% of the purchase price. Insurance coverage with the Bank as loss payee is required, especially in the case where the
equipment is rolling stock. It is also a general policy to collateralize non-real estate loans with the asset purchased and, dependant
upon loan terms, junior liens are filed on other available assets. Financial information required on all commercial mortgages
includes the most current three years balance sheets and income statements and projections on income to be developed through the
project. In the case of corporations and partnerships, the principals are often asked to personally guaranty the entity’s debt.
Seasonal and revolving lines of credit are offered for working capital purposes. Collateral for such a loan includes the pledge of
inventory and/or receivables. Drawing availability is usually 50% of inventory and 75% of eligible receivables. Eligible
receivables are defined as invoices less than 90 days delinquent. Exclusive reliance is very seldom placed on such collateral;
therefore, other lienable assets are also taken into the collateral pool. Where reliance is placed on inventory and accounts
receivable, the applicant must provide financial information including agings on a monthly basis. In addition, the guaranty of the
principals is usually obtained.
Letter of Credit availability is limited to standbys where the customer is well known to the Bank. Credit criteria is the same as that
utilized in making a direct loan. Collateral is obtained in most cases, and whenever the expiration date is beyond one year.
Consumer loan products include second mortgages, automobile financing, small loan requests, overdraft check lines, and PHEAA
referral loans. Our policy includes standards used in the industry on debt service ratios and terms are consistent with prudent
underwriting standards and the use of proceeds. Verifications are made of employment and residency, along with credit history.
Second mortgages are confined to equity borrowing and home improvements. Terms are generally ten years or less and rates are
fixed. Loan to collateral value criteria is 80% or less and verifications are made to determine values. Automobile financing is
generally restricted to five years and done on a direct basis. The Bank, as a practice, does not floor plan and therefore does not
discount dealer paper. Small loan requests are to accommodate personal needs such as the purchase of small appliances or for the
payment of taxes. Overdraft check lines are limited to $5,000 or less.
53
The Bank’s investment portfolio is analyzed and priced on a monthly basis. Investments are made in U.S. Treasuries, U.S. Agency
issues, bank qualified municipal bonds, corporate bonds, and corporate stocks which consist of Pennsylvania bank stocks. Bonds
with BAA or better ratings are used, unless a local issue is purchased that has a lesser or no rating. Factors taken into consideration
when investments are purchased include liquidity, the Company’s tax position, tax equivalent yield, third party investment ratings,
and the policies of the Asset/Liability Committee.
The banking environment in Lycoming, Clinton, Centre, and Montour Counties, Pennsylvania is highly competitive. The Bank
operates thirteen full service offices in these markets and competes for loans and deposits with numerous commercial banks,
savings and loan associations, and other financial institutions. The economic base of the region is developed around small business,
health care, educational facilities (college and public schools), light manufacturing industries, and agriculture.
The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of
depositors, excluding public entities that account for approximately 10% of total deposits. Although the Bank has regular
opportunities to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals, and others, it does not rely on
these monies to fund loans or intermediate or longer-term investments.
The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits.
Supervision and Regulation
As referenced elsewhere, the banking business is highly regulated, and the Bank is only able to engage in business activities, and
to provide products and services, that are permitted by applicable law and regulation. In addition, the earnings of the Bank are
affected by the policies of regulatory authorities including the FDIC and the FRB. An important function of the FRB is to regulate
the money supply and interest rates. Among the instruments used to implement these objectives are open market operations in U.S.
Government Securities, changes in reserve requirements against member bank deposits, and limitations on interest rates that
member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall
growth and distribution of bank loans, investments on deposits, and their use may also affect interest rates charged on loans or paid
for deposits.
The policies and regulations of the FRB have had and will probably continue to have a significant effect on the Bank’s deposits,
loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank’s operation in the
future. The effect of such policies and regulations upon the future business and earnings of the Bank cannot accurately be predicted.
ITEM 1A RISK FACTORS
The following sets forth several risk factors that are unique to the Company.
Changes in interest rates could reduce our income, cash flows and asset values.
Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn
on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such
as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general
economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of
the Federal Reserve System. Changes in monetary policy, including changes in interest rates, will influence not only the interest
we receive on our loans and investment securities and the amount of interest we pay on deposits and borrowings but will also affect
our ability to originate loans and obtain deposits and the value of our investment portfolio. If the rate of interest we pay on our
deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest
income, and therefore our earnings, could be adversely affected. Our earnings also could be adversely affected if the rates on our
loans and other investments fall more quickly than those on our deposits and other borrowings.
Economic conditions either nationally or locally in areas in which our operations are concentrated may adversely affect our
business.
Deterioration in local, regional, national, or global economic conditions could cause us to experience a reduction in deposits and
new loans, an increase in the number of borrowers who default on their loans, and a reduction in the value of the collateral securing
their loans, all of which could adversely affect our performance and financial condition. Unlike larger banks that are more
geographically diversified, we provide banking and financial services locally. Therefore, we are particularly vulnerable to adverse
local economic conditions.
Our financial condition and results of operations would be adversely affected if our allowance for loan losses is not
sufficient to absorb actual losses or if we are required to increase our allowance.
Despite our underwriting criteria, we may experience loan delinquencies and losses. In order to absorb losses associated with
nonperforming loans, we maintain an allowance for loan losses based on, among other things, historical experience, an evaluation
of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Determination of the allowance inherently
involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of
which may undergo material changes. At any time there are likely to be loans in our portfolio that will result in losses but that
have not been identified as nonperforming or potential problem credits. We cannot be sure that we will be able to identify
deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans that are
identified. We may be required to increase our allowance for loan losses for any of several reasons. Federal regulators, in reviewing
our loan portfolio as part of a regulatory examination, may request that we increase our allowance for loan losses. Changes in
economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and
other factors, both within and outside of our control, may require an increase in our allowance. In addition, if charge-offs in future
periods exceed our allowance for loan losses, we will need additional increases in our allowance for loan losses. Any increases in
our allowance for loan losses will result in a decrease in our net income and, possibly, our capital, and may materially affect our
results of operations in the period in which the allowance is increased.
Many of our loans are secured, in whole or in part, with real estate collateral which is subject to declines in value.
In addition to considering the financial strength and cash flow characteristics of a borrower, we often secure our loans with real
estate collateral. Real estate values and the real estate market are generally affected by, among other things, changes in local,
regional or national economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes
in tax laws and other governmental statutes, regulations and policies, and acts of nature. The real estate collateral provides an
alternate source of repayment in the event of default by the borrower. If real estate prices in our markets decline, the value of the
54
real estate collateral securing our loans could be reduced. If we are required to liquidate real estate collateral securing loans during
a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.
Competition may decrease our growth or profits.
We face substantial competition in all phases of our operations from a variety of different competitors, including commercial
banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, factoring companies,
leasing companies, insurance companies, and money market mutual funds. There is very strong competition among financial
services providers in our principal service area. Our competitors may have greater resources, higher lending limits, or larger
branch systems than we do. Accordingly, they may be able to offer a broader range of products and services as well as better pricing
for those products and services than we can.
In addition, some of the financial services organizations with which we compete are not subject to the same degree of regulation
as is imposed on federally insured financial institutions. As a result, those nonbank competitors may be able to access funding and
provide various services more easily or at less cost than we can, adversely affecting our ability to compete effectively.
The value of certain investment securities is volatile and future declines or other-than-temporary impairments could
materially adversely affect our future earnings and regulatory capital.
Continued volatility in the market value for certain of our investment securities, whether caused by changes in market perceptions
of credit risk, as reflected in the expected market yield of the security, or actual defaults in the portfolio could result in significant
fluctuations in the value of the securities. This could have a material adverse impact on our accumulated other comprehensive
income/loss and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults
in these securities could result in future classifications of investment securities as other than temporarily impaired. This could have
a material impact on our future earnings, although the impact on shareholders’ equity will be offset by any amount already included
in other comprehensive income/loss for securities where we have recorded temporary impairment.
We may be adversely affected by government regulation.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds
and depositors, not shareholders. Changes in the laws, regulations, and regulatory practices affecting the banking industry may
increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. Regulations
affecting banks and financial services companies undergo continuous change, and we cannot predict the ultimate effect of these
changes, which could have a material adverse effect on our profitability or financial condition.
In response to the financial crisis that commenced in 2008, Congress has taken actions that are intended to strengthen confidence
and encourage liquidity in financial institutions, and the FDIC has taken actions to increase insurance coverage on deposit
accounts. The Dodd-Frank Act provides for the creation of a consumer protection division at the Board of Governors of the Federal
Reserve System that will have broad authority to issue regulations governing the services and products we provide consumers. This
additional regulation could increase our compliance costs and otherwise adversely impact our operations. That legislation also
contains provisions that, over time, could result in higher regulatory capital requirements and loan loss provisions for the Bank,
and may increase interest expense due to the ability granted in July 2011 to pay interest on all demand deposits. In addition, there
have been proposals made by members of Congress and others that would reduce the amount delinquent borrowers are otherwise
contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.
These proposals could result in credit losses or increased expense in pursuing our remedies as a creditor. Recent regulatory
changes impose limits on our ability to charge overdraft fees, which may decrease our non-interest income as compared to more
recent prior periods.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting many aspects of our
operations, including capital levels, lending and funding practices, and liquidity standards. New laws and regulations may increase
our costs of regulatory compliance and of doing business and otherwise affect our operations, and may significantly affect the
markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing
operations, costs and profitability.
We rely on our management and other key personnel, and the loss of any of them may adversely affect our operations.
We are and will continue to be dependent upon the services of our executive management team. In addition, we will continue to
depend on our ability to retain and recruit key commercial loan officers. The unexpected loss of services of any key management
personnel or commercial loan officers could have an adverse effect on our business and financial condition because of their skills,
knowledge of our market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
Environmental liability associated with lending activities could result in losses.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances were
discovered on any of these properties, we could be liable to governmental entities or third parties for the costs of remediation of
the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of
whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic
substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site even if we
neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially
limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default
on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing
laws may increase our exposure to environmental liability.
Failure to implement new technologies in our operations may adversely affect our growth or profits.
The market for financial services, including banking services and consumer finance services is increasingly affected by advances
in technology, including developments in telecommunications, data processing, computers, automation, internet-based banking,
and telebanking. Our ability to compete successfully in our markets may depend on the extent to which we are able to exploit such
technological changes. However, we can provide no assurance that we will be able to properly or timely anticipate or implement
such technologies or properly train our staff to use such technologies. Any failure to adapt to new technologies could adversely
affect our business, financial condition, or operating results.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, commonly referred to as the FDIC,
any other deposit insurance fund or by any other public or private entity. Investment in our common stock is subject to the same
market forces that affect the price of common stock in any company.
55
ITEM 1B
None.
UNRESOLVED STAFF COMMENTS
ITEM 2 PROPERTIES
The Company owns and leases its properties. Listed herewith are the locations of properties owned or leased as of December 31,
2011, in which the banking offices are located; all properties are in good condition and adequate for the Bank’s purposes:
Office
Main
Bridge Street
DuBoistown
Williamsport
Montgomery
Lock Haven
Mill Hall
Spring Mills
Centre Hall
Zion
State College
Montoursville
Danville
Address
115 South Main Street
P.O. Box 5098
Jersey Shore, Pennsylvania 17740
112 Bridge Street
Jersey Shore, Pennsylvania 17740
2675 Euclid Avenue
Williamsport, Pennsylvania 17702
300 Market Street
P.O. Box 967
Williamsport, Pennsylvania 17703-0967
9094 Rt. 405 Highway
Montgomery, Pennsylvania 17752
4 West Main Street
Lock Haven, Pennsylvania 17745
(Inside Wal-Mart), 173 Hogan Boulevard
Mill Hall, Pennsylvania 17751
3635 Penns Valley Road, P.O. Box 66
Spring Mills, Pennsylvania 16875
2842 Earlystown Road
Centre Hall, Pennsylvania 16828
100 Cobblestone Road
Bellefonte, Pennsylvania 16823
2050 North Atherton Street
State College, Pennsylvania 16803
820 Broad Street
Montoursville, Pennsylvania 17754
606 Continental Boulevard
Danville, Pennsylvania 17821
The M Group, Inc.
D/B/A The Comprehensive Williamsport, Pennsylvania 17701
Financial Group
705 Washington Boulevard
Ownership
Owned
Owned
Owned
Owned
Owned
Owned
Under Lease
Owned
Land Under Lease
Under Lease
Land Under Lease
Under Lease
Under Lease
Under Lease
ITEM 3 LEGAL PROCEEDINGS
The Company is subject to lawsuits and claims arising out of its business. In the opinion of management, after review and
consultation with counsel, any proceedings that may be assessed will not have a material adverse effect on the consolidated
financial position of the Company.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
1256
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
The Company’s common stock is listed on the NASDAQ Global Select Market under the symbol “PWOD”. The following table
sets forth (1) the quarterly high and low close prices for a share of the Company’s Common Stock during the periods indicated,
and (2) quarterly dividends on a share of the common stock with respect to each quarter since January 1, 2009. The following
quotations represent prices between buyers and sellers and do not include retail markup, markdown or commission. They may not
necessarily represent actual transactions.
High
Low
Dividends
Declared
2011:
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010:
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009:
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40.08
39.30
36.56
39.30
34.03
34.50
33.15
41.26
25.61
31.81
34.25
33.24
$
$
$
35.46
33.33
31.07
32.01
30.04
26.76
29.41
31.97
23.00
24.89
29.89
30.37
$
$
$
0.46
0.46
0.46
0.46
0.46
0.46
0.46
0.46
0.46
0.46
0.46
0.46
The Bank has paid cash dividends since 1941. The Company has paid dividends since the effective date of its formation as a bank
holding company. It is the present intention of the Company’s Board of Directors to continue the dividend payment policy;
however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions, and other
factors relevant at the time the Board of Directors of the Company considers dividend policy. Cash available for dividend
distributions to shareholders of the Company primarily comes from dividends paid by the Bank to the Company. Therefore, the
restrictions on the Bank’s dividend payments are directly applicable to the Company. See also the information appearing in Note
19 to “Notes to Consolidated Financial Statements” for additional information related to dividend restrictions.
Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto, the
corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto the
total assets of the corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders
whose preferential rights are superior to those receiving the dividend.
As of March 1, 2012, the Company had approximately 1,255 shareholders of record.
Following is a schedule of the shares of the Company’s common stock purchased by the Company during the fourth quarter of
2011.
Total Number of
Shares (or Units)
Purchased
Average Price Paid
per Share (or Unit)
Purchased
Total Number of
Shares (or Units)
Purchased as Part
of Publicly Announced
Plans or Programs
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or Programs
$
–
–
–
–
–
–
–
–
–
76,776
76,776
76,776
Period
Month #1 (October 1-
October 31, 2011)
Month #2 (November 1-
November 30, 2011)
Month #3 (December 1-
December 31, 2011)
57
Set forth below is a line graph comparing the yearly dollar changes in the cumulative shareholder return on the Company’s common
stock against the cumulative total return of the S&P 500 Stock Index, NASDAQ Bank Index, and NASDAQ Composite for the
period of five fiscal years assuming the investment of $100.00 on December 31, 2006 and assuming the reinvestment of dividends.
The shareholder return shown on the graph below is not necessarily indicative of future performance.
Total Return Performance
150
125
100
n
75
50
25
e
u
l
a
V
x
e
d
n
I
n
u
l
n
u
l
u
n
l
Penns Woods Bancorp, Inc.
S&P 500
NASDAQ Composite
NASDAQ Bank
u
n
l
u
n
l
u
n
l
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Index
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Penns Woods Bancorp, Inc.
S&P 500
NASDAQ Composite
NASDAQ Bank
100.00
100.00
100.00
100.00
90.74
105.49
110.66
80.09
68.39
66.46
66.42
62.84
102.58
84.05
96.54
52.60
133.02
96.71
114.06
60.04
136.35
98.76
113.16
53.74
Period Ending
58
s
s
s
s
s
s
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth certain financial data as of and for each of the years in the five-year period ended December 31, 2011.
(In Thousands, Except Per Share Amounts)
2011
2010
2009
2008
2007
Consolidated Statement of
Income Data:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision
for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense. . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
36,376
7,656
28,720
2,700
26,020
8,219
19,964
14,275
1,913
12,362
Consolidated Balance Sheet at
End of Period:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .
763,953
435,959
(7,154)
581,664
61,278
80,460
Per Share Data:
Earnings per share - Basic. . . . . . . . . . . . . . . . . . . . . $
Earnings per share - Diluted . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . . . . . . . . . .
Book value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of shares outstanding, at
3.22
3.22
1.84
20.97
$
$
$
$
$
$
$
$
36,362
9,868
26,494
2,150
24,344
7,459
19,492
12,311
1,382
10,929
691,688
415,557
(6,035)
517,508
71,778
66,620
2.85
2.85
1.84
17.37
$
$
$
$
36,191
12,398
23,793
917
22,876
2,287
19,812
5,351
(742)
6,093
676,204
405,529
(4,657)
497,287
86,778
66,916
1.59
1.59
1.84
17.45
$
$
$
$
36,108
14,832
21,276
375
20,901
5,456
17,949
8,408
405
8,003
652,803
381,478
(4,356)
421,368
86,778
61,027
2.07
2.07
1.84
15.93
35,949
16,447
19,502
150
19,352
7,478
17,316
9,514
637
8,877
628,138
360,478
(4,130)
389,022
106,378
70,559
2.28
2.28
1.79
18.21
end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,837,081
3,835,157
3,834,114
3,831,500
3,875,632
Average number of shares
outstanding-basic . . . . . . . . . . . . . . . . . . . . . . . . .
3,836,036
3,834,255
3,832,789
3,859,724
3,886,277
Selected Financial Ratios:
Return on average shareholders’ equity . . . . . . . . . .
Return on average total assets . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . .
Average shareholders’ equity to
average total assets. . . . . . . . . . . . . . . . . . . . . . . .
Loans to deposits, at end of period . . . . . . . . . . . . . .
16.60%
1.69%
4.70%
57.10%
10.18%
74.95%
15.30%
1.56%
4.57%
64.56%
10.19%
80.30%
9.66%
0.92%
4.40%
115.74%
9.50%
81.55%
12.02%
1.27%
4.14%
88.67%
10.53%
90.53%
12.14%
1.49%
3.95%
78.33%
12.23%
92.66%
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Annual Report are incorporated
in their entirety by reference under this Item 7.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Interest rate risk and liquidity
risk management is performed at the Bank level as well as the Company level. The Company’s interest rate sensitivity is monitored
by management through selected interest rate risk measures produced internally. Additional information and details are provided in
the Interest Sensitivity section of Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook
changes.
59
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s Consolidated Financial Statements and notes thereto contained in the Annual Report are incorporated in their
entirety by reference under this Item 8.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company’s management, including the Company’s President
and Chief Executive Officer along with the Company’s Chief Financial Officer, conducted an evaluation of the effectiveness as of
December 31, 2011 of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Exchange Act. Based upon that evaluation, the Company’s President and Chief Executive
Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2011.
There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2011 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard
No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or
employees in the normal course of performing their assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011.
Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Because there were no material weaknesses discovered,
management believes that, as of December 31, 2011, the Company’s internal control over financial reporting was effective.
S.R. Snodgrass, A.C. an independent registered public accounting firm, has audited the consolidated financial statements included
in this Annual Report on Form 10-K, as part of the audit, has issued a report, which appears below, on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2011.
Date: March 13, 2012
Chief Executive Officer
Chief Financial Officer
(Principal Financial Officer)
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Penns Woods Bancorp, Inc.
We have audited Penns Woods Bancorp, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Penns Woods Bancorp, Inc. management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Penns Woods Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Penns Woods Bancorp, Inc. as of December 31, 2011 and 2010, and the related consolidated
statements of income, shareholders’ equity, comprehensive income, and cash flows for each of the three years in the period ended
December 31, 2011, and our opinion dated March 13, 2012, expressed an unqualified opinion.
Wexford, PA
March 13, 2012
61
ITEM 9B OTHER INFORMATION
None.
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information appearing under the captions “The Board of Directors and its Committees,” “Election of Directors,” “Information
as to Nominees and Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Principal Officers of the
Corporation,” and “Certain Transactions” in the Company's Proxy Statement dated March 21, 2012 (the “Proxy Statement”) is
incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
Information appearing under the captions “Compensation of Directors,” “Compensation Committee Interlocks and Insider
Participation,” “Compensation Discussion and Analysis,” “Compensation and Benefits Committee Report,” “Executive
Compensation,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards,” “Option Exercises and Stock Vested,”
“Nonqualified Deferred Compensation,” “Retirement Plan,” and “Potential Post-Employment Payments” in the Proxy Statement is
incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information appearing under the captions “Election of Directors” and “Certain Transactions” in the Proxy Statement is
incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The information appearing in the Proxy Statement under the captions, “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other
Fees,” and “Audit Committee Pre-Approval Policies and Procedures” is incorporated herein by reference.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
The following consolidated financial statements and reports are set forth in Item 8:
Report of Independent Auditors
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
Financial statement schedules are omitted because the required information is either not applicable, not required or is
shown in the respective financial statements or in the notes thereto.
(b) Exhibits:
(3)
(i)
(3)
(10)
(ii)
(i)
(10)
(ii)
Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i)
of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).
Bylaws of the Registrant.
Form of First Amendment to the Jersey Shore State Bank Amendment and Restatement of the Director Fee
Agreement, dated as of October 1, 2004 (incorporated by reference to Exhibit 10.7 of the Registrant’s
Current Report on Form 8-K filed on June 29, 2006).
Consulting Agreement, dated July 18, 2005 between Hubert A. Valencik and Penns Woods Bancorp, Inc.
(incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on July 18,
2005).
(10)
(10)
(10)
(10)
(21)
(23)
(31)
(iii) Consulting Agreement, dated September 28, 2010, among Penns Woods Bancorp, Inc., Jersey Shore State
Bank and William H. Rockey (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report
on 8-K filed on October 4, 2010).*
(iv) Employment Agreement, dated June 1, 2010, among Penns Woods Bancorp, Inc., Jersey Shore State Bank
and Brian L. Knepp (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form
8-K filed on June 3, 2010).*
Employment Agreement, dated October 29, 2010, among Penns Woods Bancorp, Inc., Jersey Shore State
Bank and Richard A. Grafmyre (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report
on Form 8-K filed on November 2, 2010).*
(v)
(vi) Employment Agreement, dated February 28, 2011, among Penns Woods Bancorp, Inc., Jersey Shore State
Bank and Ann M. Riles.*
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
(i)
62
(ii)
(i)
(ii)
Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Principal Financial Officer.
(31)
(32)
(32)
Exhibit 101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business
Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2011 and December 31, 2010; (ii)
the Consolidated Statement of Income for the years ended December 31, 2011, 2010 and 2009; (iii) the
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010
and 2009; (iv) the Consolidated Statement of Comprehensive Income for the years ended December 31, 2011,
2010 and 2009; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2011, 2010
and 2009; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text. As provided in
Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration
statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise
subject to liability under those sections.
* Denotes compensatory plan or arrangement.
EXHIBIT INDEX
(3)
(10)
Bylaws of the Registrant.
(ii)
(vi) Employment Agreement, dated February 28, 2011, among Penns Woods Bancorp, Inc., Jersey Shore State
(i)
(ii)
(i)
(ii)
Bank and Ann M. Riles.
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Principal Financial Officer.
(21)
(23)
(31)
(31)
(32)
(32)
Exhibit 101 Interactive data file containing the following financial statements formatted in XBRL (Extensible Business
Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2011 and December 31, 2010; (ii)
the Consolidated Statement of Income for the years ended December 31, 2011, 2010 and 2009; (iii) the
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010
and 2009; (iv) the Consolidated Statement of Comprehensive Income for the years ended December 31, 2011,
2010 and 2009; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2011, 2010
and 2009; and (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text. As provided in
Rule 406T of Regulation S-T, this interactive data file shall not be deemed to be “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934, and shall not be deemed “filed” or part of any registration
statement or prospectus for purposes of Section 11 or 12 under the Securities Act of 1933, or otherwise
subject to liability under those sections.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 13, 2012
PENNS WOODS BANCORP, INC.
BY: RICHARD A. GRAFMYRE,
President & Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:
Richard A. Grafmyre, President, Chief Executive
Officer and Director (Principal Executive Officer)
March 13, 2012
Brian L. Knepp,
Chief Financial Officer (Principal Financial Officer)
March 13, 2012
Ronald A. Walko, Chairman of the Board
March 13, 2012
Michael J. Casale, Jr., Director
March 13, 2012
H. Thomas Davis, Jr., Director
March 13, 2012
James M. Furey, II, Director
March 13, 2012
D. Michael Hawbaker, Director
March 13, 2012
Leroy H. Keiler, III, Director
March 13, 2012
R. Edward Nestlerode, Jr., Director
March 13, 2012
William H. Rockey, Director
March 13, 2012
Hubert A. Valencik, Director
March 13, 2012
64
Management & Board of Directors
(Penns Woods Bancorp, Inc. & Jersey Shore State Bank)
Officers
Richard A. Grafmyre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President & Chief Executive Officer
Ann M. Riles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Chief Credit Officer
Paul R. Mamolen. . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Operating Officer & Senior Vice President of
The Comprehensive Financial Group
Brian L. Knepp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Financial Officer & Assistant Secretary
Robert J. Glunk . . . . . . . . . . . . . . . . . Vice President of Branch Administration & Business Development
Stephen M. Tasselli . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Commercial Loan Manager
G. David Gundy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Commercial Loan Officer
Gerald J. Seman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Mortgage Officer
Leslie K. Benshoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Bank Secrecy Officer
John R. Frey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Chief Compliance Officer
Craig A. Russell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Regional Manager
David R. Palski . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Regional Manager
Larry G. Garverick. . . . . . . . . . . . . . . . . . . . . . . . Vice President Loan Documentation & Review Officer
William V. Mauck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Deposit Operations
Michael A. Musto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President and Commercial Loan Officer
Tammy L. Gunsallus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Regional Manager
Mark A. Beatty . . . . . . . . . . Vice President Network & Telecommunications/Security/Facilities Manager
Aaron J. Cunningham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Credit & Risk Management
Lori A. Strimple. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Marketing
Janine E. Packer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controller
Roxanna M. Chapman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President of Loan Servicing
Elizabeth A. Hittle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Regional Manager
Eric F. Kraytz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Lending – Centre Region
Registered Representatives For The Comprehensive Financial Group
Stephen D. Lowe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Williamsport Branch
Directors
Michael J. Casale, Jr.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael J. Casale, Jr. Esq., LLC
H. Thomas Davis, Jr. . . . . . . . . . . . . . . . . . . . . . . . . Chairman and CEO of Davis Insurance Agency, Inc.
James M. Furey, II . . . . . . . . . . . . . . . . . . . . . . . President & Owner of Eastern Wood Products Company
Richard A. Grafmyre . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President & Chief Executive Officer of
Penns Woods Bancorp, Inc. & Jersey Shore State Bank
D. Michael Hawbaker . . . . . . . . . . . . . . . . . . . . . . . Executive Vice President of Glenn O. Hawbaker, Inc.
Leroy H. Keiler, III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leroy H. Keiler, III, Attorney at Law
R. Edward Nestlerode, Jr. . . . . . . . . . . . . . . . . . . . . . . Vice President of Nestlerode Contracting Co., Inc.
William H. Rockey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retired, Former Senior Vice President of
Penns Woods Bancorp, Inc. & Jersey Shore State Bank
Hubert A. Valencik . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retired, Former Senior Vice President of
Penns Woods Bancorp, Inc. & Jersey Shore State Bank
Ronald A. Walko . . . . . . . . . . . . Chairman of the Board; Retired, Former President and Chief Executive
Officer of Penns Woods Bancorp, Inc. & Jersey Shore State Bank
Honorary Directors
Phillip H. Bower
Lynn S. Bowes
Robert H. Kauffeld
Allan W. Lugg
Jay H. McCormick
65
JERSEY SHORE MAIN STREET OFFICE
Tammy L. Gunsallus, Manager
115 South Main Street, P.O. Box 5098, Jersey Shore, PA 17740
Phone (570) 398-2213
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday Drive-In Only 8:30 am to 12:00 pm
Drive-up ATM Available
JERSEY SHORE BRIDGE STREET OFFICE
Tammy L. Gunsallus, Manager
112 Bridge Street, Jersey Shore, PA 17740
Phone (570) 398-4400
Monday - Wednesday 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
DUBOISTOWN OFFICE
Rebecca L. Frank, Manager
2675 Euclid Avenue, Williamsport, PA 17702
Phone (570) 326-3731
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM Available
WILLIAMSPORT OFFICE
David R. Palski, Manager
300 Market Street, Williamsport, PA 17701
Phone (570) 322-1111
Toll-Free within Pennsylvania 1-888-412-5772
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday Lobby 8:30 am to 1:00 pm
Wednesday Drive-In 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Walk-up ATM available
MONTGOMERY OFFICE
Beverly S. Rupert, Manager
9094 Rt. 405 Highway, Montgomery, PA 17752
Phone (570) 547-6642
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM Available
66
LOCK HAVEN OFFICE
Craig A. Russell, Manager
4 West Main Street, Lock Haven, PA 17745
Phone (570) 748-7785
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available
MILL HALL OFFICE
Craig A. Russell, Manager
(Inside WAL-MART)
173 Hogan Boulevard, Mill Hall, PA 17751
Phone (570) 748-8680
Monday - Wednesday 9:00 am to 6:00 pm
Thursday - Friday 9:00 am to 8:00 pm
Saturday 9:00 am to 4:00 pm
Walk-up ATM available
SPRING MILLS OFFICE
Bonnie H. Ripka, Manager
3635 Penns Valley Road, Spring Mills, PA 16875
Phone (814) 422-8836
Monday - Wednesday 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available
CENTRE HALL OFFICE
Bonnie H. Ripka, Manager
2842 Earlystown Road, Centre Hall, PA 16828
Phone (814) 364-1600
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Walk-up ATM available
ZION OFFICE
Diana M. Blazina, Asst. Manager
100 Cobblestone Road, Bellefonte, PA 16823
Phone (814) 383-2700
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available
1767
STATE COLLEGE OFFICE
Patricia K. Stauffer, Manager
2050 North Atherton Street, State College, PA 16803
Phone (814) 235-1710
Monday - Wednesday 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available
MONTOURSVILLE OFFICE
Michelle M. Lawson, Manager
820 Broad Street, Montoursville, PA 17754
Phone (570) 368-1200
Monday - Wednesday 8:30 am to 4:30 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available
DANVILLE OFFICE
Marilyn J. Olin, Manager
606 Continental Boulevard, Danville, PA 17821
Phone (570) 271-1700
Monday - Tuesday 8:30 am to 4:30 pm
Wednesday 8:30 am to 1:00 pm
Thursday 8:30 am to 5:00 pm
Friday 8:30 am to 6:00 pm
Saturday 8:30 am to 12:00 pm
Drive-up ATM available
THE M GROUP, INC.
D/B/A THE COMPREHENSIVE FINANCIAL GROUP
Paul R. Mamolen, COO
705 Washington Boulevard, Williamsport, PA 17701
Phone (570) 322-4627
INTERNET BANKING
www.jssb.com
TELEPHONE BANKING
Phone (570) 320-2029 or (877) 520-2265
Member of the Federal Deposit Insurance Corporation
68
Jersey Shore State Bank Locations
CLINTON COUNTY
LYCOMING COUNTY
JERSEY
SHORE
• MONTOURSVILLE
•• MONTOURSVILLE
MONTOURSVILLE
• WILLIAMSPORT
• DUBOISTOWN
• MONTGOMERY
•• MONTGOMER Y
MONTGOMERY
LOCK
HAVEN
•
• MILL HALL
CENTRE COUNTY
• ZION
• CENTRE HALL
• SPRING MILLS
• STATE COLLEGE
• DANVILLE
• DANVILLE
• DANVILLE
MONTOUR COUNTY
Penns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17703-0967