JSSB1004_CVR1_2012.pdf 1 3/26/13 11:47 AM
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PENNS WOODS BANCORP, INC.
Parent Company of Jersey Shore State Bank
Penns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17703-0967
2012 Annual Report & Form 10-K
JSSB1004_CVR2_2012.pdf 1 3/26/13 11:42 AM
Jersey Shore State Bank Locations
CLINTON COUNTY
LYCOMING COUNTY
MISSION
to be the most significant regional community bank
JERSEY
SHORE
LOCK HAVEN
•
• MILL HALL
CENTRE COUNTY
• ZION
• SPRING MILLS
• CENTRE HALL
• STATE COLLEGE
• MONTOURSVILLE
• WILLIAMSPORT
• DUBOISTOWN
• MONTGOMERY
Y
MONTOUR COUNTY
• DANVILLE
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TABLE OF CONTENTS
Letter to Shareholders ...............................................................................................................
Three Year Financial Highlights................................................................................................
Consolidated Balance Sheet......................................................................................................
Consolidated Statement of Income ...........................................................................................
Consolidated Statement of Comprehensive Income .................................................................
Consolidated Statement of Changes in Shareholders’ Equity...................................................
Consolidated Statement of Cash Flows ....................................................................................
Notes to Consolidated Financial Statements.............................................................................
2
3
4
5
6
6
7
8
Report of Independent Auditors................................................................................................
32
Management’s Discussion and Analysis ...................................................................................
33
Form 10-K.................................................................................................................................
48
Management and Board of Directors........................................................................................
68
Offices of Jersey Shore State Bank ...........................................................................................
69
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Dear Shareholders,
The past year was a record year for Penns Woods Bancorp, Inc. in large part due to our focus on building core deposits and
acquiring high quality loans. This has not only allowed us to achieve enormous success financially but also enabled us to
move forward with the company’s franchise expansion plans.
Financial Highlights
Penns Woods Bancorp, Inc. continued to return strong results in 2012. Highlights from the period ending December 31,
2012 include:
Twelve Months
Ended Dec 31, 2012
Twelve Months
Ended Dec 31, 2011
% Change
Net Income
Basic & Diluted EPS
Operating Earnings
Total Deposits
Core Deposits
Net Loans
Net Loans
Total Assets
Total Assets
$13,850
$3.61
$12,893
$642,026
$472,675
$
$504,615
$
$856,535
$12,362
$3.22
$11,952
$581,664
$409,143
$428,805
$763,953
12.0%
12.1%
7.9%
10.4%
15.5%
17.7%
12.1%
Mortgage D
Mortgage Division Reaches New Levels
The past ye
The past year saw the mortgage division of the company reach new heights. The division
realized n
realized new record volume levels with 674 units and $88,900,000 in closed mortgages,
while ach
while acheiveing its highest annual revenue since the division was established in 1981.
During 20
During 2012 the mortgage division was recognized with the Pennsylvania Housing
Finance A
Finance Agency Award of Excellence as a Top Performing Lender in Pennsylvania, the
Top Home
Top Homestead lender, and Top New Construction Lender in Pennsylvania. Plans are
in plac
in place to continue to strategically grow this division of the company by adding
new
new market areas, implementing technology improvements, as well as adding new
per
personnel.
Pe
Personnel a Top Priority
O
Our people are the reason we have realized record levels of success during the
la
last year. With this success we must continue to reward and recognize our
e
employees for their hard work and dedication. We have established improved
e
employee bonus and compensation programs, while working to launch
new training initiatives such as our new Leadership development program
Leadership Is!
We thank you for making Penns Woods Bancorp, Inc. your investment choice
and want you to also make JSSB, JSSB Financial Services, JSSB Insurance
Services, and JSSB Mortgage Services your choice to help you meet all your
financial needs.
Sincerely,
Richard A. Grafmyre, CFP®
President & CEO
2
Three Year Financial Highlights
DILUTED
EARNINGS PER
SHARE
$4.00
3.50
3.22
3.00
2.85
3.61
2.50
2.00
1.50
1.00
RETURN ON
AVERAGE EQUITY
(Percent)
20.00
17.00
16.60
15.30
15.36
14.00
11.00
8.00
5.00
DIVIDENDS
PER
SHARE
1.84
1.84
1.88
$2.00
1.75
1.50
1.25
1.00
’10
’11
’12
’10
’11
’12
’10
’11
’12
YEAR-END
DEPOSITS
(In Millions)
RETURN ON
AVERAGE ASSETS
(Percent)
YEAR-END
LOANS
(In Millions)
642
582
$675
600
525
518
450
1.69
1.70
1.56
2.00
1.70
1.40
1.10
0.80
0.50
505
436
416
$500
500
450
400
350
’10
’11
’12
’10
’11
’12
’10
’11
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Penns Woods Bancorp, Inc.
Consolidated Balance Sheet
(In Thousands, Except Share Data)
December 31,
2012
2011
ASSETS:
Noninterest-bearing balances............................................................................................
Interest-bearing deposits in other financial institutions ....................................................
Total cash and cash equivalents....................................................................................
Investment securities available for sale, at fair value........................................................
Investment securities held to maturity, (fair value of $0 and $55)....................................
Loans held for sale ............................................................................................................
Loans.................................................................................................................................
Allowance for loan losses .................................................................................................
Loans, net.....................................................................................................................
$ 12,695 $
2,447
15,142
289,316
-
3,774
512,232
(7,617)
504,615
13,829
56
13,885
270,097
54
3,787
435,959
(7,154)
428,805
Premises and equipment, net.............................................................................................
Accrued interest receivable ...............................................................................................
Bank-owned life insurance................................................................................................
Investment in limited partnerships....................................................................................
Goodwill ...........................................................................................................................
Deferred tax asset..............................................................................................................
Other assets .......................................................................................................................
TOTAL ASSETS..............................................................................................................
8,348
4,099
16,362
2,883
3,032
4,731
4,233
$ 856,535
7,707
3,905
16,065
3,544
3,032
7,991
5,081
$ 763,953
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:
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued .................
Common stock, par value $8.33, 15,000,000 shares authorized;
4,019,112 and 4,017,677 shares issued........................................................................
Additional paid-in capital .................................................................................................
Retained earnings..............................................................................................................
Accumulated other comprehensive gain (loss):
Net unrealized gain on available for sale securities .....................................................
Defined benefit plan .....................................................................................................
Treasury stock at cost, 180,596 shares..............................................................................
TOTAL SHAREHOLDERS’ EQUITY .........................................................................
$ 527,073
114,953
$ 470,310
111,354
642,026
33,204
76,278
366
10,935
762,809
-
33,492
18,157
43,030
10,164
(4,807)
(6,310)
93,726
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 ......................................
$ 856,535
$ 763,953
See accompanying notes to the consolidated financial statements.
4
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Penns Woods Bancorp, Inc.
Consolidated Statement of Income
(In Thousands, Except Per Share Data)
Year Ended December 31,
2011
2010
2012
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
FOR LOAN LOSSES.....................................................................................
NON-INTEREST INCOME:
Service charges ................................................................................................
Securities gains, net .........................................................................................
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........................................................................................................
Furniture and equipment..................................................................................
Pennsylvania shares tax....................................................................................
Amortization of investment in limited partnerships ........................................
Federal Deposit Insurance Corporation deposit insurance ..............................
Other ................................................................................................................
TOTAL NON-INTEREST EXPENSE.............................................................
INCOME BEFORE INCOME TAX PROVISION .....................................
INCOME TAX PROVISION ...........................................................................
$ 25,372
$ 25,187
$ 25,513
5,940
5,429
366
37,107
3,645
137
2,429
6,211
30,896
2,525
28,371
1,894
1,285
670
1,386
1,357
912
2,596
10,100
11,762
1,270
1,452
674
661
468
5,736
22,023
16,448
2,598
5,677
5,260
252
36,376
4,566
202
2,888
7,656
28,720
2,700
26,020
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
5,584
5,059
206
36,362
6,055
265
3,548
9,868
26,494
2,150
24,344
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
NET INCOME ...............................................................................................
$ 13,850
$ 12,362
$ 10,929
EARNINGS PER SHARE - BASIC .............................................................
$ 3.61
$ 3.22
$ 2.85
EARNINGS PER SHARE - DILUTED .......................................................
$ 3.61
$ 3.22
$ 2.85
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC ................
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED ..........
3,837,751
3,837,751
3,836,036
3,836,036
3,834,255
3,834,394
DIVIDENDS PER SHARE ...........................................................................
$ 1.88
$ 1.84
$ 1.84
See accompanying notes to the consolidated financial statements.
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Penns Woods Bancorp, Inc.
Consolidated Statement of Comprehensive Income
(In Thousands)
2012
Net Income ....................................................................................................... $ 13,850
Other comprehensive income (loss):
Year Ended December 31,
2011
$ 12,362
2010
$ 10,929
Change in unrealized gain (loss) on available
for sale securities ......................................................................................
Tax effect ...........................................................................................
Net realized gain included in net income .................................................
Tax effect ...........................................................................................
12,270
(4,172)
(1,285)
437
Amortization (accretion) of unrecognized pension
and postretirement items ...........................................................................
Tax effect ...........................................................................................
347
Total other comprehensive income (loss) ........................................................
6,576
Comprehensive income .................................................................................... $ 20,426
(1,021)
16,060
(5,460)
(621)
211
(2,606)
(5,444)
1,851
(173)
59
(747)
886
8,470
$ 20,832
254
(4,200)
$ 6,729
See accompanying notes to the consolidated financial statements.
Penns Woods Bancorp, Inc.
Consolidated Statement of Changes In Shareholders’ Equity
(In Thousands, Except Per Share Data)
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 .....................................
Balance, December 31, 2011 ........................
Comprehensive income:
Net income ..................................................
Other comprehensive income......................
Dividends declared, ($1.88 per share)...........
Common shares issued for employee
stock purchase plan .....................................
Balance, December 31, 2012 ........................
TOTAL
TREASURY
STOCK
$ (6,264)
SHAREHOLDERS’
EQUITY
$ 66,916
COMMON
STOCK
SHARES
4,013,142
AMOUNT
$ 33,443
ADDITIONAL
PAID-IN
CAPITAL
$ 18,008
RETAINED
EARNINGS
$ 27,218
10,929
(7,056)
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
$ (5,489)
(4,200)
441
2,170
3
18
7
49
4,015,753
33,464
18,064
31,091
(9,689)
(46)
(6,310)
12,362
(7,059)
8,470
1,924
4,017,677
16
33,480
51
18,115
36,394
(1,219)
(6,310)
13,850
(7,214)
6,576
10,929
(4,200)
(7,056)
10
67
(46)
66,620
12,362
8,470
(7,059)
67
80,460
13,850
6,576
(7,214)
1,435
4,019,112
12
$ 33,492
42
$ 18,157
$ 43,030
$ 5,357
$ (6,310)
54
$ 93,726
See accompanying notes to the consolidated financial statements.
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Penns Woods Bancorp, Inc.
Consolidated Statement of Cash Flows
(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, net .................................................................................
Originations of loans held for sale ...........................................................
Proceeds of loans held for sale.................................................................
Gain on sale of loans................................................................................
Earnings on bank-owned life insurance ...................................................
Increase in deferred tax asset ...................................................................
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 ...................................
Proceeds from redemption of regulatory stock............................................
Purchases of regulatory stock ......................................................................
Net cash used for investing activities .........................................
Year Ended December 31,
2011
2010
2012
$ 13,850
$ 12,362
$ 10,929
762
2,525
(989)
(1,285)
(44,571)
45,970
(1,386)
(670)
(128)
(112)
13,966
48,460
19,995
(74,791)
-
55
(78,323)
(1,403)
765
(33)
383
-
1,171
(796)
(84,517)
701
2,700
(1,702)
(621)
(36,702)
40,703
(1,130)
(599)
(457)
1,238
16,493
13,454
12,226
(63,733)
5
25
(24,049)
(743)
508
(39)
-
-
1,282
-
(61,064)
731
2,150
(2,017)
(173)
(43,659)
42,013
(949)
(636)
(243)
1,715
9,861
3,700
15,628
(29,918)
-
26
(11,026)
(401)
194
(80)
82
134
364
-
(21,297)
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits .....................................................
Net increase in noninterest-bearing deposits ...............................................
Proceeds from long-term borrowings, FHLB ..............................................
Repayment of long-term borrowings, FHLB...............................................
Net 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 .........................................
56,763
3,599
30,000
(15,000)
3,606
(7,214)
54
-
-
71,808
1,257
13,885
$ 15,142
42,149
22,007
-
(10,500)
2,299
(7,059)
67
-
-
48,963
4,392
9,493
$ 13,885
10,773
9,448
-
(15,000)
8,945
(7,056)
67
10
(46)
7,141
(4,295)
13,788
$ 9,493
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid....................................................................................................
Income taxes paid...........................................................................................
Transfer of loans to foreclosed real estate .....................................................
$ 6,381
2,950
-
$ 7,870
2,290
2,066
$ 10,191
2,550
226
See accompanying notes to the consolidated financial statements.
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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, valuation of net deferred tax assets, impairment of 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.
8
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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 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, 2012, 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:
(cid:0)
(cid:0)
(cid:0)
(cid:0)
(cid:0)
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.
(cid:115)(cid:0) (cid:77)(cid:65)(cid:78)(cid:65)(cid:71)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)(cid:74)(cid:85)(cid:68)(cid:71)(cid:69)(cid:83)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:65)(cid:83)(cid:83)(cid:69)(cid:84)(cid:0)(cid:84)(cid:79)(cid:0)(cid:66)(cid:69)(cid:0)(cid:85)(cid:78)(cid:67)(cid:79)(cid:76)(cid:76)(cid:69)(cid:67)(cid:84)(cid:73)(cid:66)(cid:76)(cid:69)(cid:27)
(cid:115)(cid:0) (cid:82)(cid:69)(cid:80)(cid:65)(cid:89)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)(cid:73)(cid:83)(cid:0)(cid:68)(cid:69)(cid:69)(cid:77)(cid:69)(cid:68)(cid:0)(cid:84)(cid:79)(cid:0)(cid:66)(cid:69)(cid:0)(cid:80)(cid:82)(cid:79)(cid:84)(cid:82)(cid:65)(cid:67)(cid:84)(cid:69)(cid:68)(cid:0)(cid:66)(cid:69)(cid:89)(cid:79)(cid:78)(cid:68)(cid:0)(cid:82)(cid:69)(cid:65)(cid:83)(cid:79)(cid:78)(cid:65)(cid:66)(cid:76)(cid:69)(cid:0)(cid:84)(cid:73)(cid:77)(cid:69)(cid:0)(cid:70)(cid:82)(cid:65)(cid:77)(cid:69)(cid:83)(cid:27)(cid:0)
(cid:115)(cid:0) (cid:84)(cid:72)(cid:69)(cid:0)(cid:65)(cid:83)(cid:83)(cid:69)(cid:84)(cid:0)(cid:72)(cid:65)(cid:83)(cid:0)(cid:66)(cid:69)(cid:69)(cid:78)(cid:0)(cid:67)(cid:76)(cid:65)(cid:83)(cid:83)(cid:73)(cid:108)(cid:69)(cid:68)(cid:0)(cid:65)(cid:83)(cid:0)(cid:65)(cid:0)(cid:76)(cid:79)(cid:83)(cid:83)(cid:0)(cid:66)(cid:89)(cid:0)(cid:69)(cid:73)(cid:84)(cid:72)(cid:69)(cid:82)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:78)(cid:65)(cid:76)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:0)(cid:82)(cid:69)(cid:86)(cid:73)(cid:69)(cid:87)(cid:0)(cid:80)(cid:82)(cid:79)(cid:67)(cid:69)(cid:83)(cid:83)(cid:0)(cid:79)(cid:82)(cid:0)(cid:69)(cid:88)(cid:84)(cid:69)(cid:82)(cid:78)(cid:65)(cid:76)(cid:0)(cid:69)(cid:88)(cid:65)(cid:77)(cid:73)(cid:78)(cid:69)(cid:82)(cid:83)(cid:27)
(cid:115)(cid:0) (cid:84)(cid:72)(cid:69)(cid:0)(cid:66)(cid:79)(cid:82)(cid:82)(cid:79)(cid:87)(cid:69)(cid:82)(cid:0)(cid:72)(cid:65)(cid:83)(cid:0)(cid:108)(cid:76)(cid:69)(cid:68)(cid:0)(cid:66)(cid:65)(cid:78)(cid:75)(cid:82)(cid:85)(cid:80)(cid:84)(cid:67)(cid:89)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:76)(cid:79)(cid:83)(cid:83)(cid:0)(cid:66)(cid:69)(cid:67)(cid:79)(cid:77)(cid:69)(cid:83)(cid:0)(cid:69)(cid:86)(cid:73)(cid:68)(cid:69)(cid:78)(cid:84)(cid:0)(cid:68)(cid:85)(cid:69)(cid:0)(cid:84)(cid:79)(cid:0)(cid:65)(cid:0)(cid:76)(cid:65)(cid:67)(cid:75)(cid:0)(cid:79)(cid:70)(cid:0)(cid:65)(cid:83)(cid:83)(cid:69)(cid:84)(cid:83)(cid:27)(cid:0)(cid:79)(cid:82)
(cid:115)(cid:0) (cid:84)(cid:72)(cid:69)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:0)(cid:73)(cid:83)(cid:0)(cid:17)(cid:24)(cid:16)(cid:0)(cid:68)(cid:65)(cid:89)(cid:83)(cid:0)(cid:80)(cid:65)(cid:83)(cid:84)(cid:0)(cid:68)(cid:85)(cid:69)(cid:0)(cid:85)(cid:78)(cid:76)(cid:69)(cid:83)(cid:83)(cid:0)(cid:66)(cid:79)(cid:84)(cid:72)(cid:0)(cid:87)(cid:69)(cid:76)(cid:76)(cid:0)(cid:83)(cid:69)(cid:67)(cid:85)(cid:82)(cid:69)(cid:68)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:73)(cid:78)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:80)(cid:82)(cid:79)(cid:67)(cid:69)(cid:83)(cid:83)(cid:0)(cid:79)(cid:70)(cid:0)(cid:67)(cid:79)(cid:76)(cid:76)(cid:69)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78)(cid:14)
JSSB1004.indd 9
9
3/20/13 2:15 PM
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
Land is carried at cost. 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 2012, 2011, or 2010.
Investments in Limited Partnerships
The Company is a limited partner in four partnerships at December 31, 2012 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 $2,883,000
at December 31, 2012 and $3,544,000 at December 31, 2011. One investment is fully amortized, while the other three are
being 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 2012, $661,000 in 2011, and $693,000 in 2010.
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
10
JSSB1004.indd 10
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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.
The components of accumulated other comprehensive income, net of tax, as of year-end were as follows:
(In Thousands)
Year Ended December 31,
2012
2011
2010
Net unrealized gain on available for sale securities .... $ 10,164 $ 2,914 $ (7,276)
Defined benefit plan ....................................................
(4,807)
(4,133)
(2,413)
Total ..................................................................... $ 5,357 $ (1,219) $ (9,689)
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.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and
Liabilities. The amendments in this update affect all entities that have financial instruments and derivative instruments that
are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master
netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-
20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting
arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain
financial instruments and derivative instruments in the scope of this update. An entity is required to apply the amendments
for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity
should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU
is not expected to have a significant impact on the Company’s financial statements.
In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities. The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for
in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements
and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in
accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar
agreement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim
periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative
periods presented. The effective date is the same as the effective date of Update 2011-11. This ASU is not expected to have
a significant impact on the Company’s financial statements.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified
Out of Accumulated Other Comprehensive Income. The amendments in this update require an entity to report the effect of
JSSB1004.indd 11
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significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the
amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its
entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net
income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that
provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting
periods beginning after December 15, 2012. The Company is currently evaluating the impact that these disclosures will have
on its 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
equivalents used to calculate basic earnings per share ...................
Additional common stock equivalents (stock options)
used to calculate diluted earnings per share ....................................
Weighted average common shares and common stock
equivalents used to calculate diluted earnings per share ................
2012
4,018,347
(180,596)
Year Ended December 31,
2011
4,016,632
(180,596)
2010
4,014,248
(179,993)
3,837,751
3,836,036
3,834,255
-
-
139
3,837,751
3,836,036
3,834,394
Options were outstanding during 2010; however, prior to December 31, 2010 all options were either exercised or forfeited. No
options were outstanding during 2011 or 2012.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at December 31, 2012 and 2011 are as follows:
(In Thousands)
2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
Available for sale (AFS)
U.S. Government and agency securities ..................................
State and political securities ....................................................
Other debt securities ................................................................
$ 24,475
168,843
70,108
$ 1,384
12,805
1,750
$ (19)
(1,424)
(259)
$ 25,840
180,224
71,599
Total debt securities .............................................................
263,426
15,939
(1,702)
277,663
Financial institution equity securities ......................................
Other equity securities .............................................................
8,422
2,068
Total equity securities ..........................................................
10,490
1,140
74
1,214
(14)
(37)
(51)
9,548
2,105
11,653
Total investment securities AFS .................................................
$ 273,916
$ 17,153
$ (1,753)
$ 289,316
12
JSSB1004.indd 12
3/20/13 2:15 PM
(In Thousands)
Amortized
Cost
2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available for sale (AFS)
U.S. Government and agency securities .............................. $ 26,755 $ 1,916 $ - $ 28,671
178,301
State and political securities ................................................
49,514
Other debt securities ............................................................
174,790
51,447
(4,887)
(2,066)
8,398
133
Total debt securities .........................................................
252,992
Financial institution equity securities ..................................
Other equity securities .........................................................
9,939
2,751
10,447
1,095
133
(6,953)
(232)
(75)
256,486
10,802
2,809
Total equity securities ......................................................
1,228
Total investment securities AFS ............................................. $ 265,682 $ 11,675
12,690
(307)
$ (7,260)
13,611
$ 270,097
Held to maturity (HTM)
Other debt securities ............................................................ $ 54 $ 1
Total investment securities HTM ............................................ $ 54 $ 1
$ -
$ 55
$ -
$ 55
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, 2012 and 2011.
(In Thousands)
2012
U.S. Government and agency securities ..............
State and political securities .................................
Other debt securities ............................................
Total debt securities..........................................
Financial institution equity securities ..................
Other equity securities .........................................
Total equity securities ......................................
Total ..............................................................
(In Thousands)
Less than Twelve Months Twelve Months or Greater
Total
Fair
Value
$ 910
8,882
11,250
21,042
66
701
767
$ 21,809
Gross
Unrealized
Losses
Fair
Value
$ (19) $ -
5,647
3,727
9,374
205
63
268
$ (553) $ 9,642
(316)
(189)
(524)
(1)
(28)
(29)
Gross
Unrealized
Losses
$ -
(1,108)
(70)
(1,178)
(13)
(9)
(22)
Fair
Value
$ 910
14,529
14,977
30,416
271
764
1,035
$ (1,200) $ 31,451
Gross
Unrealized
Losses
$ (19)
(1,424)
(259)
(1,702)
(14)
(37)
(51)
$ (1,753)
Less than Twelve Months Twelve Months or Greater
Total
2011
State and political securities .................................
Other debt securities ............................................
Total debt securities..........................................
Financial institution equity securities ..................
Other equity securities .........................................
Total equity securities ......................................
Total ..............................................................
Fair
Value
$ 1,142
35,858
37,000
1,140
263
1,403
$ 38,403
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
$ (6) $ 28,260
82
28,342
273
130
403
$ (2,235) $ 28,745
(2,048)
(2,054)
(116)
(65)
(181)
$ (4,881) $ 29,402
35,940
65,342
1,413
393
1,806
$ (5,025) $ 67,148
(18)
(4,899)
(116)
(10)
(126)
Gross
Unrealized
Losses
$ (4,887)
(2,066)
(6,953)
(232)
(75)
(307)
$ (7,260)
At December 31, 2012 and 2011 there were 29 and 50 individual securities in a continuous unrealized loss position for less than twelve
months and 21 and 71 individual securities in a continuous unrealized loss position for greater than twelve months, respectively.
The Company reviews its position quarterly and has asserted that at December 31, 2012 and 2011, 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, 2012, 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)
Due in one year or less ............................................
Due after one year to five years ..............................
Due after five years to ten years ..............................
Due after ten years ..................................................
Amortized Cost
$ 6,424
43,624
35,637
177,741
Fair Value
$ 6,465
44,746
36,605
189,847
Total .................................................................
$ 263,426
$ 277,663
JSSB1004.indd 13
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Total gross proceeds from sales of securities available for sale were $48,460,000, $13,454,000, and $3,700,000 for 2012, 2011, and
2010, respectively. The following table represents gross realized gains and losses on those transactions:
(In Thousands)
Gross realized gains:
U.S. Government and agency securities .......................................................
State and political securities .........................................................................
Other debt securities .....................................................................................
Financial institution equity 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 institution equity securities ...........................................................
Other equity securities ..................................................................................
Total gross realized losses ...................................................................................
Year Ended December 31,
2011
2012
2010
$ 138 $ 4 $ -
-
117
102
-
$ 2,087 $ 736 $ 219
114
8
316
294
327
426
609
587
$ - $ - $ -
3
15
28
-
$ 802 $ 115 $ 46
100
15
-
-
440
53
67
242
There were no impairment charges included in gross realized losses for the years ended December 31, 2012, 2011, and 2010.
Investment securities with a carrying value of approximately $137,870,000 and $113,611,000 at December 31, 2012 and 2011,
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, in 2009, 2010, and 2011 the FHLB had suspended the payment of dividends and
limited the amount of excess capital stock repurchases. However, the FHLB has reported net income for the year ended 2010, 2011,
and 2012 and paid dividends during 2012. 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 stress caused by
the extreme economic conditions in 2009 and 2010. 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 – LOAN 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, 2012 and 2011:
(In Thousands)
Commercial and agricultural ..................
Real estate mortgage:
Residential ......................................
Commercial .....................................
Construction ....................................
Installment loans to individuals .............
Net deferred loan fees
and discounts ...........................
Allowance for loan losses ........
Loans, net ...............................................
Current
$ 48,322
245,674
177,539
13,813
10,550
495,898
(1,122)
(7,617)
$ 487,159
14
JSSB1004.indd 14
Past Due
30 To 89
Days
$ 133
2012
Past Due 90
Days Or More
& Still Accruing
$ -
Non-
Accrual
$ -
Total
$ 48,455
4,888
443
177
109
$ 5,750
351
-
-
-
$ 351
1,229
4,049
6,077
-
$ 11,355
252,142
182,031
20,067
10,659
513,354
(1,122)
(7,617)
$ 504,615
3/20/13 2:15 PM
(In Thousands)
Commercial and agricultural ..................
Real estate mortgage:
Residential ..........................................
Commercial ........................................
Construction .......................................
Installment loans to individuals .............
Past Due
30 To 89
Days
$ 5
2011
Past Due 90
Days Or More
& Still Accruing
$ -
Current
$ 53,124
Non-
Accrual
$ -
Total
$ 53,129
176,875
162,977
19,605
11,180
423,761
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
Net deferred loan fees
and discounts ...........................
Allowance for loan losses ........
(7,154)
$ 428,805
Loans, net ...............................................
The following table presents the interest income if interest had been recorded based on the original loan agreement terms and rate of interest for
non-accrual loans and interest income recognized on a cash basis for non-accrual loans as of December 31, 2012, 2011, and 2010:
(In Thousands)
(7,154)
$ 415,012
(1,595)
(1,595)
2012
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
Year Ended December 31,
2011
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
2010
Interest Income That
Would Have Been
Recorded Based on
Original Term and Rate
Interest
Income
Recorded on
a Cash Basis
9
37
142
256
172
74
281
377
87
439
Real estate mortgage:
Residential ............. $ 67 $ 37 $ 42 $ 25 $ 39 $ 35
Commercial ...........
33
Construction ..........
57
$ 725 $ 283 $ 568 $ 71 $ 437 $ 125
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 non-accrual loans.
The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of December
31, 2012 and 2011:
(In Thousands)
Recorded
Investment
2012
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 .................................
With an allowance recorded:
Commercial and agricultural .............................................
Real estate mortgages - residential ....................................
Real estate mortgages - commercial ..................................
Real estate mortgages - construction .................................
Total:
Commercial and agricultural .............................................
Real estate mortgages - residential ....................................
Real estate mortgages - commercial ..................................
Real estate mortgages - construction .................................
JSSB1004.indd 15
$ -
410
324
2,894
3,628
$ -
487
324
4,599
5,410
$ -
-
-
-
-
485
1,146
8,515
3,196
13,342
485
1,255
8,611
4,696
15,047
46
237
2,018
234
2,535
485
1,556
8,839
6,090
$ 16,970
485
1,742
8,935
9,295
$ 20,457
46
237
2,018
234
$ 2,535
15
3/20/13 2:15 PM
(In Thousands)
With no related allowance recorded:
Real estate mortgages - residential .....................................
Real estate mortgages - commercial ...................................
Real estate mortgages - construction ..................................
With an allowance recorded:
Real estate mortgages - residential .....................................
Real estate mortgages - commercial ...................................
Real estate mortgages - construction ..................................
Total:
Real estate mortgages - residential .....................................
Real estate mortgages - commercial ...................................
Real estate mortgages - construction ..................................
Recorded
Investment
2011
Unpaid Principal
Balance
Related
Allowance
$ 742
382
815
1,939
$ 751
382
1,113
2,246
$ -
-
-
-
861
6,150
8,929
15,940
888
6,150
10,429
17,467
101
1,481
2,155
3,737
1,603
6,532
9,744
$ 17,879
1,639
6,532
11,542
$ 19,713
101
1,481
2,155
$ 3,737
The following table presents the average recorded investment in impaired loans and related interest income recognized for December
31, 2012, 2011, and 2010:
(In Thousands)
Commercial and agricultural ..........................................................................
Real estate mortgage:
Residential ..............................................................................................
Commercial .............................................................................................
Construction ............................................................................................
(In Thousands)
Commercial and agricultural ..........................................................................
Real estate mortgage:
Residential ..............................................................................................
Commercial .............................................................................................
Construction ............................................................................................
(In Thousands)
Commercial and agricultural ..........................................................................
Real estate mortgage:
Residential ..............................................................................................
Commercial .............................................................................................
Construction ............................................................................................
Installment loans to individuals .....................................................................
2012
Average
Investment in
Impaired Loans
$ 97
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
$ -
Interest Income
Recognized on
a Cash Basis on
Impaired Loans
$ -
1,417
7,001
7,831
$ 16,346
44
290
1
$ 335
49
146
74
$ 269
2011
Average
Investment in
Impaired Loans
$ 100
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
$ 5
Interest Income
Recognized on
a Cash Basis on
Impaired Loans
$ -
1,502
5,032
9,590
$ 16,224
54
180
77
$ 316
28
9
37
$ 74
2010
Average
Investment in
Impaired Loans
$ 146
Interest Income
Recognized on an
Accrual Basis on
Impaired Loans
$ 9
Interest Income
Recognized on
a Cash Basis on
Impaired Loans
$ -
1,635
1,954
4,686
3
$ 8,424
43
-
181
-
$ 233
35
22
-
-
$ 57
Additional funds totaling $287,000 are committed to be advanced in connection with impaired loans.
16
JSSB1004.indd 16
3/20/13 2:15 PM
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, 2012 and 2011 were as follows:
(In Thousands,
Except Number of Contracts)
Year Ended December 31,
2012
Pre-Modification
Outstanding
Recorded
Investment
$ 498
Post-Modification
Outstanding
Recorded
Investment
$ 498
Number of
Contracts
-
2011
Pre-Modification
Outstanding
Recorded
Investment
$ -
Post-Modification
Outstanding
Recorded
Investment
$ -
Commercial and agricultural .........
Real estate mortgage:
Number of
Contracts
1
Residential .............................
Commercial ............................
Construction ...........................
Installment loans to individuals ....
Total ................................
609
4,779
11,372
20
$ 16,780 $ 16,780
There were no loan modifications considered troubled debt restructurings made during the twelve months previous to December 31, 2012
that defaulted during the twelve month period ending December 31, 2012. 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)
254
2,403
26
-
$ 3,181
254
2,403
26
-
$ 3,181
609
4,779
11,372
20
Year Ended December 31, 2011
6
10
9
3
28
3
2
2
-
8
-
2
1
2
1
6
Number of Contracts
Recorded Investment
$ -
127
154
251
7
$ 539
Commercial and agricultural ........................................................
Real estate mortgages - residential ..............................................
Real estate mortgages - commercial ............................................
Real estate mortgages - construction ...........................................
Installment loans to individuals ...................................................
Total .........................................................................................
Troubled debt restructurings amounted to $16,217,000 and $17,478,000 as of December 31, 2012 and 2011.
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, 2012 and 2011:
(In Thousands)
Pass ...............................................
Special Mention ............................
Substandard ...................................
Total ..............................................
(In Thousands)
Pass ...............................................
Special Mention ............................
Substandard ...................................
Total ..............................................
Commercial and
Agricultural
$ 46,805
1,480
170
$ 48,455
Commercial and
Agricultural
$ 51,663
1,198
268
$ 53,129
JSSB1004.indd 17
2012
Real Estate Mortgages
Residential
$ 250,161
-
1,981
$ 252,142
Commercial Construction
$ 13,944
$ 167,463
1,630
-
6,123
12,938
$ 20,067
$ 182,031
Installment Loans
to Individuals
$ 10,659
-
-
$ 10,659
Totals
$ 489,032
3,110
21,212
$ 513,354
2011
Real Estate Mortgages
Residential
$ 177,916
89
1,378
$ 179,383
Commercial Construction
$ 19,652
$ 152,994
5,804
-
9,805
5,490
$ 29,457
$ 164,288
Installment Loans
to Individuals
$ 11,291
-
6
$ 11,297
Totals
$ 413,516
7,091
16,947
$ 437,554
17
3/20/13 2:15 PM
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, 2012 and 2011:
(In Thousands)
2012
Commercial and
Agricultural
Real Estate Mortgages
Residential
Commercial Construction
Installment Loans
to Individuals
Unallocated
Totals
Beginning Balance ......
$ 418
$ 939
$ 2,651 $ 2,775
$ 190
$ 181 $ 7,154
Charge-offs ..............
Recoveries ...............
Provision ..................
Ending Balance ...........
-
8
(65)
$ 361
(193)
7
1,201
$ 1,954
(95)
5
1,270
(1,747)
24
(102)
$ 3,831 $ 950
(114)
43
25
$ 144
(2,149)
87
2,525
$ 377 $ 7,617
-
-
196
(In Thousands)
2011
Commercial and
Agricultural
Real Estate Mortgages
Residential
Commercial Construction
Installment Loans
to Individuals
Unallocated
Totals
Beginning Balance ......
$ 443
$ 908
$ 1,435 $ 2,753
$ 179
$ 317 $ 6,035
Charge-offs ..............
Recoveries ...............
Provision ..................
Ending Balance ...........
(35)
10
-
$ 418
(46)
39
38
$ 939
-
24
1,192
(1,543)
8
1,557
$ 2,651 $ 2,775
(87)
49
49
$ 190
-
-
(136)
(1,711)
130
2,700
$ 181 $ 7,154
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, 2012 and 2011, 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, 2012 and 2011 as follows:
Owners of residential rental properties
Owners of commercial rental properties
2012
18.54%
13.80%
2011
13.86%
16.83%
18
JSSB1004.indd 18
3/20/13 2:15 PM
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, 2012 and 2011:
(In Thousands)
2012
Commercial and
Agricultural
Real Estate Mortgages
Residential Commercial Construction
Installment Loans
to Individuals Unallocated
Totals
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.........................
$ 46
$ 237
$ 2,018
$ 234
$ -
$ -
$ 2,535
315
1,717
1,813
716
144
377
5,082
$ 361
$ 1,954
$ 3,831
$ 950
$ 144
$ 377 $ 7,617
$ 485
$ 1,556
$ 8,839
$ 6,090
$ -
$ 16,970
47,970
250,586
173,192
13,977
10,659
496,384
$ 48,455
$ 252,142
$ 182,031
$ 20,067
$ 10,659
$ 513,354
(In Thousands)
2011
Commercial and
Agricultural
Real Estate Mortgages
Residential Commercial Construction
Installment Loans
to Individuals Unallocated
Totals
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
$ -
$ -
$ 3,737
418
838
1,170
620
190
181
3,417
$ 418
$ 939
$ 2,651
$ 2,775
$ 190
$ 181
$ 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
NOTE 6 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31, 2012 and 2011:
(In Thousands)
Land ............................................................................................................................................
Premises ......................................................................................................................................
Furniture and equipment .............................................................................................................
Leasehold improvements ............................................................................................................
Total .....................................................................................................................................
Less accumulated depreciation and amortization .......................................................................
Net premises and equipment ................................................................................................
2012
$ 1,505
7,574
7,073
1,061
17,213
8,865
$ 8,348
2011
$ 1,480
7,440
7,325
967
17,212
9,505
$ 7,707
Depreciation and amortization charged to operations for the years ended 2012, 2011, and 2010 was $762,000, $701,000, and
$731,000, respectively.
JSSB1004.indd 19
19
3/20/13 2:15 PM
NOTE 7 - GOODWILL
As of December 31, 2012 and 2011 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, 2012 or 2011.
NOTE 8 - TIME DEPOSITS
Time deposits of $100,000 or more totaled approximately $70,119,000 on December 31, 2012 and $62,130,000 on December
31, 2011. Interest expense related to such deposits was approximately $874,000, $965,000, and $1,461,000, for the years ended
December 31, 2012, 2011, and 2010, respectively.
At December 31, 2012, 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 .........................................................................................
2012
$ 15,479
11,063
16,105
27,472
$ 70,119
Total time deposit maturities are as follows at December 31, 2012:
(In Thousands)
2013.................................................................................................
2014.................................................................................................
2015.................................................................................................
2016.................................................................................................
2017.................................................................................................
Thereafter ........................................................................................
Total .........................................................................................
2012
$ 100,833
39,681
19,100
6,754
1,541
1,442
$ 169,351
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 $26,606,000 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, 2012, 2011, and 2010:
(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 ......................................................................................
2012
2011
2010
$ 16,968
21,609
16,951
$ 13,153
17,920
15,555
$ 13,289
20,815
14,305
0.65%
0.73%
1.02%
1.21%
1.58%
1.80%
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 ......................................................................................
$ 16,236
20,175
4,009
$ 16,445
16,445
2,480
$ 14,010
14,010
1,066
0.25%
0.31%
0.34%
0.57%
0.62%
0.65%
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 ......................................................................................
$ -
-
-
$ -
1,000
82
$ -
-
-
-
-
-
0.17%
-
-
20
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NOTE 10 – LONG-TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB by contractual maturities at December 31, 2012 and
2011:
(In Thousands)
Description
Variable
Variable
Variable
Variable
Variable
Total Variable
Fixed
Fixed
Fixed
Fixed
Total Fixed
Total
(In Thousands)
Year Ending
December 31,
2013
2014
2015
2016
2017
Thereafter
Maturity
2012
2013
2015
2017
2018
2013
2015
2016
2017
Weighted-
Average Interest
Rate 2012
-
3.74%
3.97%
4.22%
3.18%
3.88%
5.87%
6.92%
0.75%
0.91%
1.11%
2.74%
Weighted-
Average Interest
Rate 2011
4.18%
3.74%
3.97%
4.22%
3.18%
3.95%
5.87%
6.92%
-
-
6.49%
4.01%
Stated Interest
Rate Range
From
3.68%
3.74%
3.97%
4.15%
3.18%
5.87%
6.92%
0.75%
0.90%
To
4.43%
3.74%
3.97%
4.28%
3.18%
5.87%
6.92%
0.75%
0.97%
2012
$ -
5,000
10,000
20,000
10,000
45,000
528
750
5,000
25,000
31,278
$ 76,278
2011
$ 15,000
5,000
10,000
20,000
10,000
60,000
528
750
-
-
1,278
$ 61,278
Amount
$
5,528
-
10,750
5,000
45,000
10,000
$ 76,278
Weighted-
Average Rate
3.94%
-
4.18%
0.75%
2.38%
3.18%
2.74%
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 $156,438,000 at December 31, 2012, 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, 2012 and 2011:
(In Thousands)
Deferred tax assets:
Allowance for loan losses.......................................................................................................
Deferred compensation...........................................................................................................
Pension ...................................................................................................................................
Loan fees and discounts .........................................................................................................
Investment securities allowance .............................................................................................
Low income housing credit carryforward ..............................................................................
Capital loss carryforward ........................................................................................................
Other .......................................................................................................................................
Total ................................................................................................................................
2012
2011
$ 2,590
484
2,384
153
782
3,528
230
1,182
11,333
$ 2,432
477
2,258
409
1,292
3,250
-
963
11,081
Deferred tax liabilities:
Unrealized gain on available for sale securities .....................................................................
Bond accretion ........................................................................................................................
Depreciation ...........................................................................................................................
Amortization ...........................................................................................................................
Total ................................................................................................................................
Deferred tax asset, net ................................................................................................................
The current low income housing credit carryforward and capital loss carryforward will expire in ten and three years, respectively.
The Company fully anticipates being able to use the carryforwards.
5,236
170
369
827
6,602
$ 4,731
1,501
483
355
751
3,090
$ 7,991
JSSB1004.indd 21
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No valuation allowance was established at December 31, 2012 and 2011, 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, 2012, 2011, and 2010:
(In Thousands)
Currently payable .........................................................................................
Deferred provision .......................................................................................
Total provision ......................................................................................
2012
$ 2,726
(128)
$ 2,598
2011
$ 2,370
(457)
$ 1,913
2010
$ 1,625
(243)
$ 1,382
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, 2012, 2011, and 2010:
(In Thousands)
Provision at expected rate ...................................
Decrease in tax resulting from:
Tax-exempt income .....................................
Tax credits ...................................................
Other, net .....................................................
Effective income tax provision and rate .............
2012
2011
2010
Amount
$ 5,592
%
Amount
34.00% $ 4,854
%
Amount
34.00% $ 4,186
%
34.00%
(2,235)
(737)
(22)
$ 2,598
(13.59)
(2,141)
(4.48)
(737)
(0.13)
(63)
15.80% $ 1,913
(2,061)
(15.00)
(705)
(5.16)
(0.44)
(38)
13.40% $ 1,382
(16.74)
(5.73)
(0.31)
11.22%
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, 2012 and 2011:
(In Thousands)
(cid:38)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:191)(cid:87)(cid:3)(cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:29)
2012
2011
Benefit obligation at beginning of year ....................................................
Service cost ...............................................................................................
Interest cost ...............................................................................................
Actuarial loss (gain) ..................................................................................
Benefits paid .............................................................................................
Other, change in actuarial assumptions ....................................................
Benefit obligation at end of year ...............................................................
$ 16,165
542
746
726
(562)
1,456
19,073
$ 13,448
396
712
(262)
(370)
2,241
16,165
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 ............................................................................................
9,525
1,503
1,675
(644)
19
12,078
$ (6,995)
9,034
(109)
960
(398)
38
9,525
$ (6,640)
Accounts recognized on balance sheet as:
Total liabilities ..........................................................................................
$ (6,995)
$ (6,640)
Amounts not yet recognized as a component of net periodic pension cost:
Amounts recognized in accumulated other comprehensive
income consist of:
Net transition asset ....................................................................................
Prior service cost .......................................................................................
Net loss .....................................................................................................
Total .................................................................................................................
$ -
26
7,257
$ 7,283
$ (2)
51
6,213
$ 6,262
The accumulated benefit obligation for the Plan was $16,642,000 and $14,450,000 at December 31, 2012 and 2011, respectively.
22
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Components of Net Periodic Cost and Other Amounts Recognized in Other Comprehensive Income as of December 31, 2012, 2011,
and 2010 are as follows:
2012
2011
(In Thousands)
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 .................................................................................
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 $2,000 and $25,000, respectively.
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31, 2012, 2011, and 2010:
$ 624
746
(820)
(2)
25
436
$ 1,009
$ 424
712
(742)
(3)
26
164
$ 581
$ 527
682
(642)
(3)
25
146
$ 735
2010
Discount rate .........................................................................................................
Rate of compensation increase ..............................................................................
2012
4.00%
3.00%
2011
4.50%
3.00%
2010
5.50%
3.00%
Weighted-average assumptions used to determine net periodic cost for years ended December 31, 2012, 2011, and 2010:
Discount rate .........................................................................................................
Expected long-term return on plan assets .............................................................
Rate of compensation increase ..............................................................................
2012
4.50%
8.00%
3.00%
2011
5.50%
8.00%
3.00%
2010
6.00%
8.00%
3.00%
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, 2012 and 2011 by asset category are as follows:
Asset Category
Cash .............................................................................................................................................
Fixed income securities ...............................................................................................................
Equity ..........................................................................................................................................
Total .....................................................................................................................................
2012
2.27%
30.24%
67.49%
100.00%
2011
3.24%
36.30%
60.46%
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, 2012 and 2011:
(In Thousands)
Assets:
Cash and cash equivalents .............................................................
Mutual funds - taxable fixed income .............................................
Mutual funds - domestic equity .....................................................
Mutual funds - international equity ...............................................
Total assets at fair value ....................................................................
2012
Level I
$ 274
3,653
5,321
2,830
$ 12,078
Level II
$ -
-
-
-
$ -
Level III
$ -
-
-
-
$ -
Total
$ 274
3,653
5,321
2,830
$ 12,078
JSSB1004.indd 23
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(In Thousands)
Assets:
Cash and cash equivalents .............................................................
Mutual funds - taxable fixed income .............................................
Mutual funds - domestic equity .....................................................
Mutual funds - international equity ...............................................
Total assets at fair value ....................................................................
Level I
Level II
Level III
Total
2011
$ 304 $ - $ - $ 304
3,451
4,432
1,338
$ 9,525 $ - $ - $ 9,525
3,451
4,432
1,338
-
-
-
-
-
-
The following future benefit payments that reflect expected future service, as appropriate, are expected to be paid:
(In Thousands)
2013.................................................. $ 585
633
2014..................................................
644
2015..................................................
673
2016..................................................
701
2017..................................................
Thereafter .........................................
4,537
$ 7,773
The company expects to contribute a minimum of $400,000 to its Pension Plan in 2013.
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
$118,000, $101,000, and $117,000 for the years ended December 31, 2012, 2011, and 2010, 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 $84,000, $114,000, and $254,000 for the years ended December 31, 2012, 2011, and 2010, respectively. Benefits paid
under the plan were approximately $140,000, $160,000, and $160,000 in 2012, 2011, and 2010, respectively.
NOTE 13 - EMPLOYEE STOCK PURCHASE PLAN
The Company maintained 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 1,435 and 1,924 shares issued under
the plan for the years ended December 31, 2012 and 2011, 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 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.
24
JSSB1004.indd 24
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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, 2012 and 2011:
(In Thousands)
2012
2011
Beginning
Balance
$ 8,644
8,366
Additions
$ 1,764
3,877
Repayments
$ (926)
(3,599)
Resigned
$ (6,299)
-
Ending
Balance
$ 3,183
8,644
Deposits from related parties held by the Bank amounted to $3,525,000 at December 31, 2012 and $5,668,000 at December 31,
2011.
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, 2012:
(In Thousands)
2013....................................................................................
2014....................................................................................
2015....................................................................................
2016....................................................................................
2017....................................................................................
Thereafter ...........................................................................
Total ............................................................................
$ 439
444
408
352
358
1,186
$ 3,187
The Company’s operating lease obligations represent short and long-term lease and rental payments for facilities and equipment.
Total rental expense for all operating leases for the years ended December 31, 2012, 2011, and 2010 were $425,000, $399,000 and
$387,000.
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, 2012 and 2011:
(In Thousands)
Commitments to extend credit .............................................................
Standby letters of credit .......................................................................
2012
$ 90,503
3,768
2011
$ 80,320
1,180
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.
JSSB1004.indd 25
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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, 2012 and 2011, 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
Consolidated Company
2012
2011
Amount
Ratio
Amount
Ratio
(to Risk-weighted Assets)
Actual .............................................................
For Capital Adequacy Purposes .....................
To Be Well Capitalized ..................................
Tier I Capital
$ 85,377
45,641
57,051
(to Risk-weighted Assets)
Actual .............................................................
For Capital Adequacy Purposes .....................
To Be Well Capitalized ..................................
Tier I Capital
$ 77,717
22,820
34,231
(to Average Assets)
Actual .............................................................
For Capital Adequacy Purposes .....................
To Be Well Capitalized ..................................
$ 77,717
32,818
41,022
14.97%
8.00
10.00
13.62%
4.00
6.00
9.47%
4.00
5.00
$ 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
(In Thousands)
Total Capital
Bank
2012
2011
Amount
Ratio
Amount
Ratio
(to Risk-weighted Assets)
Actual .............................................................
For Capital Adequacy Purposes .....................
To Be Well Capitalized ..................................
Tier I Capital
$ 72,379
45,113
56,392
(to Risk-weighted Assets)
Actual .............................................................
For Capital Adequacy Purposes .....................
To Be Well Capitalized ..................................
Tier I Capital
$ 65,323
22,557
33,835
(to Average Assets)
Actual .............................................................
For Capital Adequacy Purposes .....................
To Be Well Capitalized ..................................
$ 65,323
32,570
40,713
12.84%
8.00
10.00
11.58%
4.00
6.00
8.02%
4.00
5.00
$ 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
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, 2012, 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,
2012, the regulatory lending limit amounted to approximately $10,941,000.
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district Federal Reserve Bank of $208,000 and $1,131,000 at
December 31, 2012 and 2011, 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.
26
JSSB1004.indd 26
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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.
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers
are unobservable.
Level III:
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, 2012
and 2011, 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)
2012
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 equity 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 equity securities ..................................
Other equity securities .........................................................
Total assets measured on a recurring basis ..........................
$ -
-
-
9,548
2,105
$ 11,653
$ 25,840
180,224
71,599
-
-
$ 277,663
$ -
-
-
-
-
$ -
$ 25,840
180,224
71,599
9,548
2,105
$ 289,316
Level I
Level II
Level III
Total
2011
$ -
-
-
10,802
2,809
$ 13,611
$ 28,671
178,301
49,514
-
-
$ 256,486
$ -
-
-
-
-
$ -
$ 28,671
178,301
49,514
10,802
2,809
$ 270,097
The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of December 31,
2012 and 2011, 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)
Level I
Level II
Level III
Total
2012
Assets measured on a non-recurring basis:
Impaired loans ...................................................................... $ -
Other real estate owned ........................................................
-
Total assets measured on a non-recurring basis ................... $ -
$ -
-
$ -
$ 14,435
1,449
$ 15,884
$ 14,435
1,449
$ 15,884
(In Thousands)
Level I
Level II
Level III
Total
2011
Assets measured on a non-recurring basis:
Impaired loans ...................................................................... $ -
Other real estate owned ........................................................
-
Total assets measured on a non-recurring basis ................... $ -
The following table provides a listing of significant unobservable inputs used in the fair value measurement process for items valued
utilizing level III techniques as of December 31, 2012:
$ -
-
$ -
$ 14,142
2,144
$ 16,286
$ 14,142
2,144
$ 16,286
(In Thousands)
Impaired loans
Quantitative Information About Level III Fair Value Measurements
Fair Value Valuation Technique(s)
$ 14,435 Discounted cash flow Temporary reduction in payment amount 0 to -55%
Unobservable Inputs
Range Weighted Average
Appraisal of collateral
Probability of default
Appraisal adjustments (1)
0%
0 to -20%
-27%
-11%
Other real estate owned $ 1,449 Appraisal of collateral (1)
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
JSSB1004.indd 27
27
3/20/13 2:15 PM
The significant unobservable inputs used in the fair value measurement of the Company’s impaired loans using the discounted
cash flow valuation technique include temporary changes in payment amounts and the probability of default. Significant increases
(decreases) in payment amounts would result in significantly higher (lower) fair value measurements. The probability of default is
0% for impaired loans using the discounted cash flow valuation technique because all defaulted impaired loans are valued using the
appraisal of collateral valuation technique.
The significant unobservable input used in the fair value measurement of the Company’s impaired loans using the appraisal of
collateral valuation technique include appraisal adjustments, which are adjustments to appraisals by management for qualitative
factors such as economic conditions and estimated liquidation expenses. The significant unobservable input used in the fair value
measurement of the Company’s other real estate owned are the same inputs used to value impaired loans using the appraisal of
collateral valuation technique.
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, 2012 and 2011:
(In Thousands)
Fair Value Measurements at December 31, 2012
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 ......................
Financial liabilities:
Interest-bearing deposits ..........................
Noninterest-bearing deposits ...................
Short-term borrowings .............................
Long-term borrowings, FHLB .................
Accrued interest payable ..........................
(In Thousands)
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 ......................
Financial liabilities:
Interest-bearing deposits ..........................
Noninterest-bearing deposits ...................
Short-term borrowings .............................
Long-term borrowings, FHLB .................
Accrued interest payable ..........................
28
JSSB1004.indd 28
Carrying
Value
Fair
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level I)
Significant Other
Observable Inputs
(Level II)
Significant
Unobservable Inputs
(Level III)
$ 15,142
$ 15,142
$ 15,142
$ -
$ -
289,316
-
3,774
504,615
16,362
4,099
289,316
-
3,774
506,406
16,362
4,099
11,653
-
3,774
-
16,362
4,099
277,663
-
-
-
-
-
-
-
-
506,406
-
-
$ 527,073
114,953
33,204
76,278
366
$ 530,485
114,953
33,204
80,772
366
$ 359,979
114,953
33,204
-
366
$ -
-
-
-
-
$ 170,506
-
-
80,772
-
December 31, 2011
Fair
Value
Carrying
Value
$ 13,885
$ 13,885
270,097
54
3,787
428,805
16,065
3,905
270,097
55
3,787
424,586
16,065
3,905
$ 470,310
111,354
29,598
61,278
536
$ 471,212
111,354
29,598
65,848
536
3/20/13 2:15 PM
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, 2012 and 2011. 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, 2012 and
2011. The contractual amounts of unfunded commitments and letters of credit are presented in Note 17.
JSSB1004.indd 29
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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 ............................................................................................
2012
2011
$ 207
$ 69
79,653
13,575
388
67,770
12,475
272
Total Assets ........................................................................................
$ 93,823
$ 80,586
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Other liabilities ......................................................................................
Shareholders’ equity ..............................................................................
$ 97
93,726
$ 126
80,460
Total liability and shareholders’ equity..............................................
$ 93,823
$ 80,586
CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
Operating income:
2012
2011
2010
Dividends from subsidiaries ..................................................................
Security gains .........................................................................................
Equity in undistributed earnings of subsidiaries ....................................
Operating expenses .......................................................................................
$ 8,034
4
6,407
(595)
$ 7,266
-
5,414
(318)
$ 7,365
-
3,892
(328)
Net income .............................................................................................
$ 13,850
$ 12,362
$ 10,929
Comprehensive income .................................................................................
$ 20,426
$ 20,832
$ 6,729
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 ......................................
INVESTING ACTIVITIES:
2012
2011
2010
$ 13,850
$ 12,362
$ 10,929
(6,407)
(145)
7,298
(5,414)
23
6,971
(3,892)
(25)
7,012
Investment in subsidiaries ......................................................................
-
-
-
FINANCING ACTIVITIES:
Dividends paid .......................................................................................
Issuance of common stock .....................................................................
Stock options exercised .........................................................................
Purchase of treasury stock .....................................................................
Net cash used for financing activities .............................................
NET INCREASE (DECREASE) IN CASH .................................................
CASH, BEGINNING OF YEAR ..................................................................
(7,214)
54
-
-
(7,160)
138
69
(7,059)
67
-
-
(6,992)
(21)
90
(7,056)
67
10
(46)
(7,025)
(13)
103
CASH, END OF YEAR ................................................................................
$ 207
$ 69
$ 90
30
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NOTE 23 – CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands, Except Per Share Data)
2012
Interest income .....................................................................
Interest expense ....................................................................
Net interest income ..............................................................
Provision for loan losses ......................................................
Non-interest income, excluding securities gains .................
Securities gains, net .............................................................
Non-interest expense ............................................................
Income before income tax provision ....................................
Income tax provision ............................................................
Net income ...........................................................................
March 31,
$ 9,285
1,615
7,670
600
2,174
589
5,464
4,369
680
$ 3,689
For the Three Months Ended
Sept. 30,
$ 9,267
1,577
7,690
600
2,324
447
5,458
4,403
736
$ 3,667
June 30,
$ 9,280
1,582
7,698
600
2,111
170
5,343
4,036
638
$ 3,398
Dec. 31,
$ 9,275
1,437
7,838
725
2,206
79
5,758
3,640
544
$ 3,096
Earnings per share - basic ....................................................
$ 0.96
$ 0.89
$ 0.95
$ 0.81
Earnings per share - diluted .................................................
$ 0.96
$ 0.89
$ 0.95
$ 0.81
(In Thousands, Except Per Share Data)
2011
Interest income .....................................................................
Interest expense ....................................................................
Net interest income ..............................................................
Provision for loan losses ......................................................
Non-interest income, excluding securities gains .................
Securities gains, net .............................................................
Non-interest expense ............................................................
Income before income tax provision ....................................
Income tax provision ............................................................
Net income ...........................................................................
March 31,
$ 8,982
1,985
6,997
600
1,820
125
4,988
3,354
501
$ 2,853
For the Three Months Ended
Sept. 30,
$ 9,173
1,963
7,210
600
1,982
8
4,968
3,632
482
$ 3,150
June 30,
$ 8,884
1,966
6,918
600
1,864
9
4,856
3,335
371
$ 2,964
Dec. 31,
$ 9,337
1,742
7,595
900
1,932
479
5,152
3,954
559
$ 3,395
Earnings per share - basic ....................................................
$ 0.74
$ 0.78
$ 0.82
$ 0.88
Earnings per share - diluted .................................................
$ 0.74
$ 0.78
$ 0.82
$ 0.88
NOTE 24 – PENDING ACQUISITION
On October 18, 2012, the Company entered into a definitive merger agreement with Luzerne National Bank Corporation (“Luzerne”)
under which the Company will acquire Luzerne in a stock and cash transaction. Under the terms of the merger agreement, the
Company will acquire all of the outstanding shares of Luzerne for a total purchase price of approximately $44.5 million as of the date
of the agreement. Luzerne shareholders will have the opportunity to elect to receive for each outstanding share of Luzerne common
stock either 1.5534 shares of the Company’s common stock, $61.86 in cash or a combination of cash or stock. All shareholder
elections will be subject to allocation and proration procedures set forth in the merger agreement that are designed to ensure that no
more than 10% of the outstanding Luzerne shares are exchanged for cash. The transaction is expected to be a tax-free exchange to
the extent that shareholders of Luzerne receive stock in exchange for their shares. The transaction is expected to close in the second
quarter of 2013 subject to customary closing conditions, including receipt of regulatory approvals and approvals by shareholders of
both the Company and Luzerne.
JSSB1004.indd 31
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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. and subsidiaries (the “Company”) as of
December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2012. 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 as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2012, 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 internal control over financial reporting as of December 31, 2012, 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 12, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Wexford, Pennsylvania
March 12, 2013
32
JSSB1004.indd 32
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Management’s Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
NET INTEREST INCOME
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 2012, 2011, and
2010 were $3,203,000, $3,122,000, and $3,018,000, respectively.
2012 vs 2011
Reported net interest income increased $2,176,000 or 7.58% to $30,896,000 for the year ended December 31, 2012 compared to
the year ended December 31, 2011, although the yield on earning assets decreased to 5.25% from 5.82%. On a tax equivalent
basis, the change in net interest income was an increase of $2,257,000 or 7.09% to $34,099,000 for the year ended December 31,
2012 compared to the year ended December 31, 2011. Total interest income increased $731,000 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
increased $185,000 due to a $44,768,000 increase in the average balance in the loan portfolio which was partially offset by interest
rates repricing downward. Interest and dividend income generated from the investment portfolio and interest bearing cash deposits
increased $546,000. The increase was driven by portfolio growth, which more than compensated for a decrease in yield of 70 basis
points (“bp”).
Interest expense decreased $1,445,000 to $6,211,000 for the year ended December 31, 2012 compared to 2011. Leading the
decrease in interest expense was a decline of 20.17% or $921,000 related to deposits. The FOMC actions noted previously together
with a strategic focus on core deposits led to a 28 bp decline in the rate paid on interest-bearing deposits from 0.99% for the year
ended December 31, 2011 to 0.71% for the year ended December 31, 2012. Leading the significant decline in interest-bearing
deposit expense was a decline in the cost of time deposits of 33 bp’s and a decline in the cost of money market deposits of 37
bp’s. The overall growth in average deposit balances of $69,838,000 allowed for a reduction in average long-term borrowings of
$4,885,000 while funding the growth in the average loans of $44,768,000.
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.
JSSB1004.indd 33
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3/20/13 2:15 PM
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
2012
Interest
Average
Rate
Assets:
Tax-exempt loans ...........................................................................
All other loans ................................................................................
Total loans ......................................................................................
$ 23,857
446,569
470,426
$ 1,195
24,583
25,778
Taxable securities ...........................................................................
Tax-exempt securities ....................................................................
Total securities ...............................................................................
158,765
131,637
290,402
Interest-bearing deposits ................................................................
6,621
6,298
8,226
14,524
8
Total interest-earning assets ...........................................................
767,449
40,310
Other assets ....................................................................................
49,070
Total assets .....................................................................................
$ 816,519
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Savings ...........................................................................................
Super Now deposits .......................................................................
Money market deposits ..................................................................
Time deposits .................................................................................
Total interest-bearing deposits .......................................................
$ 78,724
118,515
145,339
173,274
515,852
Short-term borrowings ...................................................................
Long-term borrowings, FHLB .......................................................
Total borrowings ............................................................................
20,961
64,994
85,955
Total interest-bearing liabilities .....................................................
601,807
Demand deposits ............................................................................
Other liabilities ...............................................................................
Shareholders’ equity ......................................................................
113,431
11,126
90,155
65
610
734
2,236
3,645
137
2,429
2,566
6,211
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest rate spread .........................................................................
Net interest income/margin ............................................................
$ 816,519
$ 34,099
5.01%
5.50%
5.48%
3.97%
6.25%
5.00%
0.12%
5.25%
0.08%
0.51%
0.51%
1.29%
0.71%
0.65%
3.68%
2.94%
1.03%
4.22%
4.45%
(cid:0)
(cid:0)
(cid:0)
(cid:0)
(cid:115)(cid:0) (cid:38)(cid:69)(cid:69)(cid:83)(cid:0)(cid:79)(cid:78)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:83)(cid:0)(cid:65)(cid:82)(cid:69)(cid:0)(cid:73)(cid:78)(cid:67)(cid:76)(cid:85)(cid:68)(cid:69)(cid:68)(cid:0)(cid:87)(cid:73)(cid:84)(cid:72)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:69)(cid:83)(cid:84)(cid:0)(cid:79)(cid:78)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:83)(cid:0)(cid:65)(cid:83)(cid:0)(cid:70)(cid:79)(cid:76)(cid:76)(cid:79)(cid:87)(cid:83)(cid:26)(cid:0)(cid:18)(cid:16)(cid:17)(cid:18)(cid:0)(cid:13)(cid:0)(cid:4)(cid:19)(cid:21)(cid:22)(cid:12)(cid:16)(cid:16)(cid:16)(cid:27)(cid:0)(cid:18)(cid:16)(cid:17)(cid:17)(cid:0)(cid:13)(cid:0)(cid:4)(cid:19)(cid:16)(cid:22)(cid:12)(cid:16)(cid:16)(cid:16)(cid:27)(cid:0)(cid:18)(cid:16)(cid:17)(cid:16)(cid:0)(cid:13)(cid:0)(cid:4)(cid:20)(cid:19)(cid:25)(cid:12)(cid:16)(cid:16)(cid:16)(cid:14)(cid:0)
(cid:115)(cid:0) (cid:41)(cid:78)(cid:70)(cid:79)(cid:82)(cid:77)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:79)(cid:78)(cid:0)(cid:84)(cid:72)(cid:73)(cid:83)(cid:0)(cid:84)(cid:65)(cid:66)(cid:76)(cid:69)(cid:0)(cid:72)(cid:65)(cid:83)(cid:0)(cid:66)(cid:69)(cid:69)(cid:78)(cid:0)(cid:67)(cid:65)(cid:76)(cid:67)(cid:85)(cid:76)(cid:65)(cid:84)(cid:69)(cid:68)(cid:0)(cid:85)(cid:83)(cid:73)(cid:78)(cid:71)(cid:0)(cid:65)(cid:86)(cid:69)(cid:82)(cid:65)(cid:71)(cid:69)(cid:0)(cid:68)(cid:65)(cid:73)(cid:76)(cid:89)(cid:0)(cid:66)(cid:65)(cid:76)(cid:65)(cid:78)(cid:67)(cid:69)(cid:0)(cid:83)(cid:72)(cid:69)(cid:69)(cid:84)(cid:83)(cid:0)(cid:84)(cid:79)(cid:0)(cid:79)(cid:66)(cid:84)(cid:65)(cid:73)(cid:78)(cid:0)(cid:65)(cid:86)(cid:69)(cid:82)(cid:65)(cid:71)(cid:69)(cid:0)(cid:66)(cid:65)(cid:76)(cid:65)(cid:78)(cid:67)(cid:69)(cid:83)(cid:14)(cid:0)
(cid:115)(cid:0) (cid:46)(cid:79)(cid:78)(cid:65)(cid:67)(cid:67)(cid:82)(cid:85)(cid:65)(cid:76)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:83)(cid:0)(cid:72)(cid:65)(cid:86)(cid:69)(cid:0)(cid:66)(cid:69)(cid:69)(cid:78)(cid:0)(cid:73)(cid:78)(cid:67)(cid:76)(cid:85)(cid:68)(cid:69)(cid:68)(cid:0)(cid:87)(cid:73)(cid:84)(cid:72)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:83)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:80)(cid:85)(cid:82)(cid:80)(cid:79)(cid:83)(cid:69)(cid:0)(cid:79)(cid:70)(cid:0)(cid:65)(cid:78)(cid:65)(cid:76)(cid:89)(cid:90)(cid:73)(cid:78)(cid:71)(cid:0)(cid:78)(cid:69)(cid:84)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:69)(cid:83)(cid:84)(cid:0)(cid:69)(cid:65)(cid:82)(cid:78)(cid:73)(cid:78)(cid:71)(cid:83)(cid:14)(cid:0)
(cid:115)(cid:0) (cid:41)(cid:78)(cid:67)(cid:79)(cid:77)(cid:69)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:82)(cid:65)(cid:84)(cid:69)(cid:83)(cid:0)(cid:79)(cid:78)(cid:0)(cid:65)(cid:0)(cid:70)(cid:85)(cid:76)(cid:76)(cid:89)(cid:0)(cid:84)(cid:65)(cid:88)(cid:65)(cid:66)(cid:76)(cid:69)(cid:0)(cid:69)(cid:81)(cid:85)(cid:73)(cid:86)(cid:65)(cid:76)(cid:69)(cid:78)(cid:84)(cid:0)(cid:66)(cid:65)(cid:83)(cid:73)(cid:83)(cid:0)(cid:73)(cid:78)(cid:67)(cid:76)(cid:85)(cid:68)(cid:69)(cid:0)(cid:65)(cid:78)(cid:0)(cid:65)(cid:68)(cid:74)(cid:85)(cid:83)(cid:84)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:68)(cid:73)(cid:70)(cid:70)(cid:69)(cid:82)(cid:69)(cid:78)(cid:67)(cid:69)(cid:0)(cid:66)(cid:69)(cid:84)(cid:87)(cid:69)(cid:69)(cid:78)(cid:0)(cid:65)(cid:78)(cid:78)(cid:85)(cid:65)(cid:76)(cid:0)(cid:73)(cid:78)(cid:67)(cid:79)(cid:77)(cid:69)(cid:0)(cid:70)(cid:82)(cid:79)(cid:77)(cid:0)
tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.
34
JSSB1004.indd 34
3/20/13 2:15 PM
Average
Balance
2011
Interest
Average
Rate
Average
Balance
2010
Interest
Average
Rate
$ 20,267
405,391
425,658
$ 1,213
24,386
25,599
5.99% $ 18,287
397,766
6.02%
416,053
6.01%
$ 1,212
24,713
25,925
5,926
7,970
13,896
3
39,498
121
473
1,063
2,909
4,566
202
2,888
3,090
7,656
130,647
113,184
243,831
9,074
678,563
53,207
$ 731,770
$ 70,178
88,556
121,458
179,336
459,528
18,117
69,879
87,996
547,524
99,917
9,852
74,477
$ 731,770
$ 31,842
4.54%
7.04%
5.70%
0.03%
5.82%
113,714
108,658
222,372
8,782
647,207
53,734
$ 700,941
0.17% $ 64,477
65,080
0.53%
100,112
0.88%
208,274
1.62%
437,943
0.99%
15,371
83,901
99,272
537,215
84,158
8,118
71,450
1.11%
4.08%
3.47%
1.39%
4.43%
4.70%
5,784
7,665
13,449
6
39,380
183
385
1,167
4,320
6,055
265
3,548
3,813
9,868
$ 700,941
$ 29,512
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%
4.25%
4.57%
(In Thousands)
Reconcilement of Taxable Equivalent Net Interest Income
2012
2011
2010
Total interest income ............................................. $ 37,107
Total interest expense ...........................................
6,211
$ 36,376
7,656
$ 36,362
9,868
Net interest income ...............................................
Tax equivalent adjustment ....................................
30,896
3,203
28,720
3,122
26,494
3,018
Net interest income
(fully taxable equivalent) ...................................... $ 34,099
$ 31,842
$ 29,512
JSSB1004.indd 35
35
3/20/13 2:15 PM
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,
Interest income:
Loans, tax-exempt .........................................
Loans .............................................................
Taxable investment securities .......................
Tax-exempt investment securities .................
Interest-bearing deposits ...............................
Total interest-earning assets ......................
Interest expense:
Savings deposits ............................................
Super Now deposits ......................................
Money market deposits .................................
Time deposits ................................................
Short-term borrowings ..................................
Long-term borrowings, FHLB ......................
Total interest-bearing liabilities.................
Change in net interest income .......................
2012 vs. 2011
Increase (Decrease)
Due To
Rate
Volume
Net
2011 vs. 2010
Increase (Decrease)
Due To
Rate
Volume
Net
$ 93
1,236
701
677
-
2,707
$ (111)
(1,039)
(329)
(421)
5
(1,895)
$ (18)
197
372
256
5
812
$ 124
457
807
318
-
1,706
$ (123) $ 1
(327)
142
305
(3)
118
(784)
(665)
(13)
(3)
(1,588)
1
139
138
(95)
2
(100)
85
(56)
137
(329)
(673)
(65)
(459)
(1,445)
$ 2,622 $ (365) $ 2,257
(57)
(2)
(467)
(578)
(67)
(359)
(1,530)
15
127
221
(369)
39
(592)
(559)
$ 2,265
(77)
(39)
(325)
(1,042)
(102)
(68)
(1,653)
$ 65
(62)
88
(104)
(1,411)
(63)
(660)
(2,212)
$ 2,330
PROVISION FOR LOAN LOSSES
2012 vs 2011
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, 2012, 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 $7,154,000 at December 31, 2011 to $7,617,000 at December 31, 2012. At December
31, 2012, the allowance for loan losses was 1.49% of total loans compared to 1.64% of total loans at December 31, 2011.
The provision for loan losses totaled $2,525,000 for the year ended December 31, 2012 compared to $2,700,000 for the year ended
December 31, 2011. The decrease in the provision was appropriate when considering the gross loan growth of $76,273,000 was
concentrated in well collateralized real estate backed loans with the borrowers having strong underlying financial positions. In
addition, many of our loan customers are being positively impacted by the economic stimulus being provided by the Marcellus Shale
natural gas exploration. Net charge-offs of $2,062,000 represented 0.44% of average loans for the year ended December 31, 2012
compared to $1,581,000 and 0.37% for the year ended December 31, 2011. In addition, nonperforming loans decreased $303,000
to $11,706,000 at December 31, 2012 as charge-offs outpaced an increase in construction nonperforming loans. The nonperforming
loans are in a secured position and have sureties with a strong underlying financial position and/or a specific allowance within
the allowance for loan losses. Internal loan review and analysis, coupled with the ratios noted previously, dictated a decrease in
the provision 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
JSSB1004.indd 36
3/20/13 2:15 PM
2011 vs 2010
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.
NON-INTEREST INCOME
2012 vs. 2011
Total non-interest income increased $1,881,000 from the year ended December 31, 2011 to December 31, 2012. Excluding net
security gains, non-interest income increased $1,217,000 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 and a change in the maximum number of overdrafts a customer could incur per day. Earnings on bank-owned
life insurance increased due to a non-recurring gain on death benefit recognized in 2012. Insurance commissions increased as
the distribution channel continued to expand. 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 and an increasing number of merchants
use our merchant card services.
(In Thousands)
Service charges ...................................................
Securities gains, net ............................................
Bank owned life insurance ..................................
Gain on sale of loans ...........................................
Insurance commissions .......................................
Brokerage commissions ......................................
Other ...................................................................
Total non-interest income ................................
2012
Amount % Total
$ 1,894
1,285
670
1,386
1,357
912
2,596
$ 10,100
18.75%
12.72
6.63
13.72
13.44
9.03
25.71
100.00%
2011
Amount % Total
$ 2,021
621
599
1,130
933
997
1,918
$ 8,219
24.59%
7.56
7.29
13.75
11.35
12.13
23.33
100.00%
Change
Amount
$ (127)
664
71
256
424
(85)
678
$ 1,881
%
(6.28)%
106.92
11.85
22.65
45.44
(8.53)
35.35
22.89 %
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.
2010
Amount % Total
2011
Amount % Total
$ 2,021
621
599
1,130
933
997
1,918
$ 8,219
24.59% $ 2,177
173
7.56
636
7.29
949
13.75
970
11.35
965
12.13
23.33
1,589
$ 7,459
100.00%
29.19%
2.32
8.53
12.72
13.00
12.94
21.30
100.00%
(In Thousands)
Service charges ...................................................
Securities gains, net ............................................
Bank owned life insurance ..................................
Gain on sale of loans ...........................................
Insurance commissions .......................................
Brokerage commissions ......................................
Other ...................................................................
Total non-interest income ................................
JSSB1004.indd 37
Change
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%
37
3/20/13 2:15 PM
NON-INTEREST EXPENSE
2012 vs. 2011
Total non-interest expenses increased $2,059,000 from the year ended December 31, 2011 to December 31, 2012. The increase
in salaries and employee benefits was attributable to increases in health insurance, bonus accrual, routine annual salary increases,
and the addition of our Danville branch. Increased furniture and equipment expense was driven by the additional branch and
improvements to existing branches. Other expenses increased primarily due to expenses, such as advertising, associated with the
opening of a branch during 2012 and expenses incurred related to the announced plan to acquire Luzerne.
(In Thousands)
Salaries and employee benefits ...................................
Occupancy ...................................................................
Furniture and equipment .............................................
Pennsylvania shares tax ..............................................
Amortization of investment in limited partnerships ...
FDIC deposit insurance ...............................................
Other ...........................................................................
Total non-interest expense.......................................
2012
Amount % Total
$ 11,762
1,270
1,452
674
661
468
5,736
$ 22,023
53.41%
5.77
6.59
3.06
3.00
2.13
26.04
100.00%
2011
Amount % Total
$ 10,479
1,262
1,379
689
661
525
4,969
$ 19,964
52.49%
6.32
6.91
3.45
3.31
2.63
24.89
100.00%
Change
Amount
$ 1,283
8
73
(15)
-
(57)
767
$ 2,059
%
12.24%
0.63
5.29
(2.18)
-
(10.86)
15.44
10.31%
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)
Salaries and employee benefits ...................................
Occupancy ...................................................................
Furniture and equipment .............................................
Pennsylvania shares tax ..............................................
Amortization of investment in limited partnerships ...
FDIC deposit insurance ...............................................
Other ...........................................................................
Total non-interest expense.......................................
2011
Amount % Total
$ 10,479
1,262
1,379
689
661
525
4,969
$ 19,964
52.49%
6.32
6.91
3.45
3.31
2.63
24.89
100.00%
2010
Amount % Total
$ 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%
Change
Amount
$ 265
22
115
12
(32)
(212)
302
$ 472
%
2.59%
1.77
9.10
1.77
(4.62)
(28.77)
6.47
2.42%
INCOME TAXES
2012 vs. 2011
The provision for income taxes for the year ended December 31, 2012 resulted in an effective income tax rate of 15.8% compared
to 13.4% for 2011. This increase is primarily the result of increased net income.
The Company currently is in a deferred tax asset position due to the low income housing tax credits earned both currently and
previously. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate
carry forward period and therefore does not require a valuation allowance.
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.
38
JSSB1004.indd 38
3/20/13 2:15 PM
FINANCIAL CONDITION
INVESTMENTS
2012
The fair value of the investment portfolio increased $19,164,000 from December 31, 2011 to December 31, 2012. The increase
was split between an increase in unrealized gain and additions to the portfolio during 2012. 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.
The municipal portfolio had the largest change in unrealized gains as the portfolio moved from an unrealized gain of $3,511,000 at
December 31, 2011 to an unrealized gain of $11,381,000 at December 31, 2012 as municipal defaults remained low and the supply
of new issues also remained low.
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.
The carrying amounts of investment securities are summarized as follows for the years ended December 31, 2012, 2011, and 2010:
(In Thousands)
U.S. Government agencies:
2012
2011
Balance % Portfolio Balance % Portfolio Balance % Portfolio
2010
Held to maturity ................................................... $ -
25,840
Available for sale .................................................
-% $ -
28,671
8.93
-% $ 5
26,613
10.61
-%
12.34
State and political subdivisions (tax-exempt):
Available for sale .................................................
128,804
44.52
127,678
47.26
101,492
47.06
State and political subdivisions (taxable):
Available for sale .................................................
51,420
17.77
50,623
18.74
53,295
24.71
Other bonds, notes and debentures:
Held to maturity ...................................................
Available for sale .................................................
Total bonds, notes and debentures ...............
Financial institution equity securities - available for sale ....
Other equity securities - available for sale ..................
Total equity securities ...................................
-
71,599
277,663
9,548
2,105
11,653
-
24.75
95.97
3.30
0.73
4.03
54
49,514
256,540
10,802
2,809
13,611
0.02
18.33
94.96
4.00
1.04
5.04
78
20,608
202,091
13,191
366
13,557
0.04
9.56
93.71
6.12
0.17
6.29
Total ...................................................... $ 289,316
100.00% $ 270,151
100.00% $ 215,648
100.00%
JSSB1004.indd 39
39
3/20/13 2:15 PM
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, 2012:
(In Thousands)
U.S. Government agencies:
Within
One
Year
After One
But Within
Five Years
After Five
But Within
Ten Years
After
Ten
Years
Amortized
Cost
Total
AFS Amount ........................................... $ -
-
Yield .......................................................
$ -
-
$ 5,836
$ 18,639
$ 24,475
2.43%
4.53%
4.03%
State and political subdivisions (tax-exempt):
AFS Amount ...........................................
Yield .......................................................
State and political subdivisions (taxable):
AFS Amount ...........................................
Yield .......................................................
Other bonds, notes and debentures:
241
1.98%
-
-
975
4.34%
940
3.04%
5,211
5.71%
5,580
5.48%
115,988
122,415
9.51%
9.29%
39,908
6.03%
46,428
5.90%
AFS Amount ...........................................
Yield .......................................................
Total Amount .................................................
8.12%
Total Yield .....................................................
Equity Securities ........................................................................................................................................................
Total Investment Portfolio Value ...............................................................................................................................
Total Investment Portfolio Yield ...............................................................................................................................
$ 6,424
$ 177,741
$ 35,637
$ 43,624
41,709
19,010
6,183
3,206
5.04%
1.97%
4.15%
2.58%
3.86%
2.52%
1.97%
70,108
2.95%
263,426
6.52%
10,490
$ 273,916
6.27%
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, 2012
follows:
(In Thousands)
A- to AAA
Fair
Value
Amortized
Cost
B- to BBB+
Fair
Value
Amortized
Cost
C to CCC+
Fair
Value
Amortized
Cost
Not Rated
Total
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Available for sale (AFS)
U.S. Government and
agency securities................. $ 24,475 $ 25,840 $ - $ - $ - $ - $ - $ - $ 24,475 $ 25,840
180,224
State and political securities ...
Other debt securities ..............
71,599
Total debt securities AFS ....... $ 248,696 $ 263,396 $ 6,647 $ 6,235 $ - $ - $ 8,083 $ 8,032 $ 263,426 $ 277,663
167,594
69,962
155,749
68,472
168,843
70,108
5,589
646
6,008
639
7,086
997
7,041
991
-
-
-
-
40
JSSB1004.indd 40
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LOAN PORTFOLIO
2012
Gross loans of $512,232,000 at December 31, 2012 represented an increase of $76,273,000 from December 31, 2011. The continued
emphasis on well collateralized real estate loans accounted for the majority of the overall increase in loans outstanding with home
equity loan and lines leading the way. The success in carrying out this long term strategy played a significant role in limiting net
charge-offs for 2012 to 0.44% of average loans. Successful campaigns to increase home equity, multifamily residential, and auto
loans were undertaken during 2012 with the increase in residential and commercial being directly correlated to the campaigns.
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.
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan at December 31,
2012, 2011, 2010, 2009, and 2008:
(In Thousands)
2010
Amount % Total Amount % Total Amount % Total Amount % Total Amount % Total
10.64%
12.19% $ 50,853
12.23% $ 46,647
11.50% $ 40,602
9.46% $ 53,129
2011
2012
2009
2008
49.22
35.54
3.92
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
Commercial and agricultural ... $ 48,455
Real estate mortgage:
Residential ......................
Commercial ....................
Construction ...................
Installment loans to
252,142
182,031
20,067
individuals ......................
10,659
2.08
11,297
2.59
9,432
2.27
11,549
2.85
12,487
3.27
Net deferred loan fees
and discounts ..................
(1,122)
Gross loans ......................... $ 512,232
(0.22)
(1,595)
100.00% $ 435,959
(0.37)
(1,040)
100.00% $ 415,557
(0.25)
(1,017)
100.00% $ 405,529
(0.25)
(1,013)
100.00% $ 381,478
(0.27)
100.00%
The amounts of domestic loans at December 31, 2012 are presented below by category and maturity:
(In Thousands)
Commercial
and
Real Estate
Agricultural Residential Commercial Construction Individuals
Total
Installment
Loans to
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 ...............
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 ......................................................
Net deferred loan fees and discounts ..................
$ 6,957 $ 9,236 $ 13,679 $ 5,746 $ 1,564 $ 37,182
10,863
29,965
348,508
426,518
2,014
10,035
193,466
214,751
5,240
18,371
130,316
167,606
1,960
344
6,900
14,950
1,623
1,190
16,606
26,376
26
25
1,220
2,835
970
15,114
3,442
2,553
22,079
622
6,610
373
219
7,824
$ 48,455 $ 252,142 $ 182,031 $ 20,067 $ 10,659
2,219
9,265
12,938
12,969
37,391
308
1,038
4,591
8,488
14,425
1,259
3,469
-
389
5,117
5,378
35,496
21,344
24,618
86,836
513,354
(1,122)
$ 512,232
(cid:0) (cid:115)(cid:0) (cid:52)(cid:72)(cid:69)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:0)(cid:77)(cid:65)(cid:84)(cid:85)(cid:82)(cid:73)(cid:84)(cid:89)(cid:0)(cid:73)(cid:78)(cid:70)(cid:79)(cid:82)(cid:77)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:73)(cid:83)(cid:0)(cid:66)(cid:65)(cid:83)(cid:69)(cid:68)(cid:0)(cid:85)(cid:80)(cid:79)(cid:78)(cid:0)(cid:79)(cid:82)(cid:73)(cid:71)(cid:73)(cid:78)(cid:65)(cid:76)(cid:0)(cid:76)(cid:79)(cid:65)(cid:78)(cid:0)(cid:84)(cid:69)(cid:82)(cid:77)(cid:83)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0)(cid:73)(cid:83)(cid:0)(cid:78)(cid:79)(cid:84)(cid:0)(cid:65)(cid:68)(cid:74)(cid:85)(cid:83)(cid:84)(cid:69)(cid:68)(cid:0)(cid:70)(cid:79)(cid:82)(cid:0)(cid:104)(cid:82)(cid:79)(cid:76)(cid:76)(cid:79)(cid:86)(cid:69)(cid:82)(cid:83)(cid:14)(cid:118)(cid:0)(cid:0)(cid:41)(cid:78)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:79)(cid:82)(cid:68)(cid:73)(cid:78)(cid:65)(cid:82)(cid:89)(cid:0)(cid:67)(cid:79)(cid:85)(cid:82)(cid:83)(cid:69)(cid:0)(cid:79)(cid:70)(cid:0)(cid:0)
business, loans maturing within one year may be renewed, in whole or in part, at interest rates prevailing at the date of renewal.
(cid:0) (cid:115)(cid:0) (cid:51)(cid:67)(cid:72)(cid:69)(cid:68)(cid:85)(cid:76)(cid:69)(cid:68)(cid:0)(cid:82)(cid:69)(cid:80)(cid:65)(cid:89)(cid:77)(cid:69)(cid:78)(cid:84)(cid:83)(cid:0)(cid:65)(cid:82)(cid:69)(cid:0)(cid:82)(cid:69)(cid:80)(cid:79)(cid:82)(cid:84)(cid:69)(cid:68)(cid:0)(cid:73)(cid:78)(cid:0)(cid:77)(cid:65)(cid:84)(cid:85)(cid:82)(cid:73)(cid:84)(cid:89)(cid:0)(cid:67)(cid:65)(cid:84)(cid:69)(cid:71)(cid:79)(cid:82)(cid:73)(cid:69)(cid:83)(cid:0)(cid:73)(cid:78)(cid:0)(cid:87)(cid:72)(cid:73)(cid:67)(cid:72)(cid:0)(cid:84)(cid:72)(cid:69)(cid:0)(cid:80)(cid:65)(cid:89)(cid:77)(cid:69)(cid:78)(cid:84)(cid:0)(cid:73)(cid:83)(cid:0)(cid:68)(cid:85)(cid:69)(cid:14)(cid:0)
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, 2012.
The following table shows the amount of accrual and nonaccrual TDRs at December 31, 2012 and 2011:
(In Thousands)
2012
Nonaccrual
$ -
Total
$ 485
Accrual
$ -
2011
Nonaccrual
$ - $ -
Total
Commercial and agricultural ........................ $ 485
Real estate mortgage:
Accrual
Residential ............................................
Commercial ...........................................
Construction ..........................................
Installment loans to individuals ...................
710
5,172
13
15
321
3,424
6,077
-
$ 6,395 $ 9,822
1,031
8,596
6,090
15
$ 16,217
913
5,356
-
28
249
1,175
9,757
-
$ 6,297 $ 11,181
1,162
6,531
9,757
28
$ 17,478
JSSB1004.indd 41
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ALLOWANCE FOR LOAN LOSSES
2012
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 $7,154,000 at December 31, 2011 to $7,617,000 at December 31, 2012. At December
31, 2012, the allowance for loan losses was 1.49% of total loans compared to 1.64% of total loans at December 31, 2011. The
decrease in the allowance for loan losses to total loans was appropriate when considering the gross loan growth of $76,273,000
was concentrated in well collateralized real estate backed loans with the borrowers having strong underlying financial positions.
In addition, many of our loan customers are being positively impacted by the economic stimulus being provided by the Marcellus
Shale natural gas exploration. This percentage has decreased due to the increase in the loan portfolio and several large charge-offs
during 2012 that amounted to net charge-offs of $2,062,000. Management concluded 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.
2011
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.
Allocation of the Allowance for Loan Losses
(In Thousands)
December 31, 2012:
Balance at end of period applicable to:
Commercial and agricultural ......................................................................................
Real estate mortgage:
Residential .............................................................................................................
Commercial ...........................................................................................................
Construction ..........................................................................................................
Installment loans to individuals ..................................................................................
Unallocated .................................................................................................................
Total .................................................................................................................
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 .................................................................................................................
Amount
% Total
$ 361
4.74%
1,954
3,831
950
144
377
$ 7,617
25.65
50.30
12.47
1.89
4.95
100.00%
$ 418
5.84%
939
2,651
2,775
190
181
$ 7,154
13.12
37.06
38.79
2.66
2.53
100.00%
42
JSSB1004.indd 42
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(In Thousands)
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 .................................................................................................................
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 .................................................................................................................
Amount
% Total
$ 443
7.34%
908
1,435
2,753
179
317
$ 6,035
15.04
23.78
45.62
2.97
5.25
100.00%
$ 566
12.15%
968
1,484
1,396
221
22
$ 4,657
20.79
31.87
29.98
4.74
0.47
100.00%
$ 580
13.31%
659
1,326
1,471
250
70
$ 4,356
15.13
30.44
33.77
5.74
1.61
100.00%
NONPERFORMING LOANS
Nonaccrual loans decreased as several commercial real estate relationships were charged off partially or in total. These loans were
primarily development loans and had 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)
2012................................................
2011................................................
2010................................................
2009................................................
2008................................................
Total Nonperforming Loans
Nonaccrual
90 Days Past Due
$ 351 $ 11,355 $ 11,706
12,009
6,215
4,456
1,735
11,625
5,658
1,891
1,476
384
557
2,565
259
Total
JSSB1004.indd 43
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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
2012 vs. 2011
Total average deposits increased $69,838,000 or 12.48% from 2011 to 2012. 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 $75,900,000 or 19.97%, while time deposits decreased $6,062,000 or 3.38% from 2011 to 2012. 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.
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.
The average amount and the average rate paid on deposits are summarized below for the years ended December 31, 2012, 2011,
and 2010:
(In Thousands)
2011
2012
2010
Noninterest-bearing ...................................
Savings ......................................................
Super Now ................................................
Money Market ...........................................
Time ..........................................................
Total average deposits .........
Average
Amount
Rate
$ 113,431 0.00%
78,724
118,515
145,339
173,274
$ 629,283
0.08
0.51
0.51
1.29
0.58%
Average
Amount
Rate
$ 99,917 0.00%
70,178
88,556
121,458
179,336
$ 559,445
0.17
0.53
0.88
1.62
0.82%
Average
Amount
Rate
$ 84,158 0.00%
64,477
65,080
100,112
208,274
$ 522,101
0.28
0.59
1.17
2.07
1.16%
SHAREHOLDERS’ EQUITY
2012
Shareholders’ equity increased $13,266,000 to $93,726,000 at December 31, 2012 compared to December 31, 2011. The accumulated
other comprehensive gain of $5,357,000 at December 31, 2012 is a result of an increase in unrealized gains on available for sale
securities from an unrealized gain of $2,914,000 at December 31, 2011 to an unrealized gain of $10,164,000 at December 31, 2012.
However, the level of accumulated other comprehensive gain at December 31, 2012 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 $674,000. The current level of shareholders’ equity equates to a book value per share of $24.42 at December 31,
2012 compared to $20.97 at December 31, 2011 and an equity to asset ratio of 10.94% at December 31, 2012 compared to 10.53%
at December 31, 2011. Excluding accumulated other comprehensive gain/loss, book value per share was $23.02 at December 31,
2012 compared to $21.29 at December 31, 2011. Dividends paid to shareholders were $1.88 for the twelve months ended December
31, 2012 compared to $1.84 for the twelve months ended December 31, 2011, an increase of 2.17%.
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.
44
JSSB1004.indd 44
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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, 2012, 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
9.47%
14.97%
Bank
8.02%
12.84%
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 .....................................
1.70%
15.36%
52.08%
11.04%
1.69%
16.60%
57.10%
10.18%
1.56%
15.30%
64.56%
10.19%
2012
2011
2010
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, 2012:
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 $248,952,000 with $92,514,000 utilized, leaving $156,438,000 available. In addition to this credit arrangement, the
Company has additional lines of credit with correspondent banks of $26,606,000. 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.
JSSB1004.indd 45
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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, 2013 assuming a static balance sheet as of
December 31, 2012.
(In Thousands)
Net interest income
Change from static
Percent change from static
-100
-200
Parallel Rate Shock in Basis Points
+100
$ 28,867 $ 29,394 $ 29,838 $ 29,858 $ 29,855 $ 29,776 $ 29,479
(359)
-1.20%
(62)
-0.21%
(444)
-1.49%
(971)
-3.25%
20
0.07%
17
0.06%
Static
+400
+300
+200
-
-
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.”
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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, 2012, 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)
Deposits without a stated maturity .......................................
Time deposits .......................................................................
Repurchase agreements ........................................................
Short-term borrowings, FHLB .............................................
Long-term borrowings, FHLB .............................................
Operating leases ...................................................................
One Year
or Less
$ 472,675
100,833
16,968
16,236
5,528
439
Payments Due In
Three to
Five
Years
One to
Three
Years
Over
Five
Years
Total
$ - $ - $ - $ 472,675
169,351
16,968
16,236
76,278
3,187
1,442
-
-
10,000
1,186
58,781
-
-
10,750
852
8,295
-
-
50,000
710
The Company’s operating lease obligations represent short and long-term lease and rental payments for branch facilities and
equipment. 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; (v) the effect of changes in the business cycle and downturns in the local, regional or national economies;
and (vi) the successful completion of the Company’s pending acquisition of Luzerne National Bank Corporation and integration of
the business and operations of Luzerne with those of the Company.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-K
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
(cid:134) 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
23-2226454
(I.R.S. Employer
Identification No.)
17703-0967
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)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:134) Yes (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:134) Yes (cid:95)
No
No
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 (cid:95) No (cid:134)
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 (cid:95) No (cid:134)
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 company. 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 (cid:134)
Non-accelerated filer (cid:134)
Accelerated filer (cid:95)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:134) Yes (cid:95) No
State the aggregate market value of the voting stock held by non-affiliates of the registrant $152,782,420 at June 30, 2012.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $8.33 Par Value
Outstanding at March 1, 2013
3,838,807 Shares
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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 24, 2013 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.
Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Item 12.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
50
54
55
56
56
56
57
59
59
59
60
60
60
62
62
62
62
62
62
62
63
63
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PART I
BUSINESS
ITEM 1
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 194 persons as of December 31, 2012 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.
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
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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 and Securities. 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 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 Deposit Insurance Fund 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
$812,000 at December 31, 2012.
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, 2012, the Bank had $92,514,000 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, 2012, the Bank had $5,251,000 in stock of the FHLB which was in
compliance with this requirement.
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Other 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 increased the maximum amount of deposit insurance for banks, savings
institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.
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.
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.
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
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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, 2012, the Bank had total assets of $848,446,000; total shareholders’ equity of $79,653,000; and total deposits
of $647,814,000. 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 three principal categories. These are commercial and agricultural, real estate,
and consumer. Real estate loans can be further segmented into residential, commercial, and construction. Qualified borrowers are
defined by policy and our underwriting standards. Owner provided equity requirements range from 0% to 30% with a first lien status
required. Terms are generally restricted to between 10 and 30 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. Agricultural
loans made for the purchase of equipment are usually payable in five years, but never more than ten, depending upon the useful life
of the purchased asset. Minimum borrower equity ranges from 0% to 20% depending on the purpose. 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 ten years. 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 may vary but often includes
the pledge of inventory and/or receivables. Drawing availability is usually 50% of inventory and 80% 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 specified basis. In addition, the guaranty of the principals
is usually obtained.
Letter of Credit availability is usually limited to standbys where the customer is well known to the Bank. The credit criteria is the
same as that utilized in making a direct loan. Collateral is obtained in most cases.
Consumer loan products include residential mortgages, home equity loans and lines, automobile financing, personal loans and lines
of credit, 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 fifteen years or less and rates
are fixed. Loan to collateral value criteria is 90% 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 debt consolidation or the purchase of small
appliances. Overdraft check lines are usually limited to $5,000 or less.
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 tax-exempt municipal bonds, taxable 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 15% 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.
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RISK FACTORS
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
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 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
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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 (including through the implementation of
the capital standards of Basel III) 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, 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.
The merger agreement with Luzerne National Bank Corporation may be terminated in accordance with its terms and the
merger may be terminated, or we may fail to realize all of the anticipated benefits of the merger.
The merger agreement with respect to the pending merger with Luzerne National Bank Corporation is subject to a number of
conditions which must be fulfilled in order to complete the merger. Those conditions include the approval of the merger agreement
by shareholders of both the Company and Luzerne, regulatory approvals, absence of orders prohibiting the completion of the
merger, and the continued accuracy of the representations and warranties by both parties and the performance by both parties of
their covenants and agreements as of the closing date, and completion of the merger by July 31, 2013. The conditions to closing
of the merger may not be fulfilled and the merger may not be completed. If completed, the success of the merger will depend, in
part, on the Company’s ability to realize the anticipated benefits and cost savings from combining the businesses of the Company
and Luzerne. To realize these anticipated benefits and cost savings, however, the businesses of the Company and Luzerne must
be successfully combined. If the Company is not able to achieve these objectives, the anticipated benefits and cost savings of the
merger may not be realized fully or at all, or may take longer to realize than expected. If the merger is not completed or if the
Company fails to realize the anticipated benefits of the merger, the Company’s results of operations could be adversely affected.
ITEM 1B
None.
UNRESOLVED STAFF COMMENTS
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ITEM 2
The Company owns and leases its properties. Listed herewith are the locations of properties owned or leased as of December 31,
2012, in which the banking offices are located; all properties are in good condition and adequate for the Bank’s purposes:
PROPERTIES
Office
Main
Bridge Street
DuBoistown
Williamsport
Montgomery
Lock Haven
Mill Hall
Spring Mills
Centre Hall
Zion
State College
Montoursville
Danville
The M Group, Inc.
D/B/A The Comprehensive
Financial Group
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
705 Washington Boulevard
Williamsport, Pennsylvania 17701
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
Not applicable.
MINE SAFETY DISCLOSURES
56
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PART II
MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED
ITEM 5
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
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, 2010. 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.
Price Range
High
Low
2012
First quarter ............................................................................................. $ 41.67
39.90
Second quarter ........................................................................................
44.60
Third quarter ...........................................................................................
Fourth quarter .........................................................................................
45.27
2011
First quarter ............................................................................................. $ 40.08
39.30
Second quarter ........................................................................................
36.56
Third quarter ...........................................................................................
Fourth quarter .........................................................................................
39.30
2010
First quarter ............................................................................................. $ 34.03
34.50
Second quarter ........................................................................................
33.15
Third quarter ...........................................................................................
41.26
Fourth quarter .........................................................................................
$ 36.20
36.72
37.78
37.16
$ 35.46
33.33
31.07
32.01
$ 30.04
26.76
29.41
31.97
Dividends
Declared
$ 0.47
0.47
0.47
0.47
$ 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, 2013, the Company had approximately 1,247 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 2012.
Period
Month #1 (October 1 - October 31, 2012)
Month #2 (November 1 - November 30, 2012)
Month #3 (December 1 - December 31, 2012)
Total
Number of
Shares (or
Units)
Purchased
-
-
-
Average
Price Paid
per Share
(or Units)
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
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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, 2007 and assuming the reinvestment of dividends.
The shareholder return shown on the graph below is not necessarily indicative of future performance.
Total Return Performance
175 –
150 –
125 –
100 –
(cid:132)
75 –
50 –
e
u
l
a
V
x
e
d
n
I
(cid:141)
(cid:132)
(cid:99)
(cid:122)
Penns Woods Bancorp,Inc.
S&P 500
NASDAQ Composite
NASDAQ Bank
(cid:141)
(cid:99)
(cid:132)
(cid:122)
(cid:122)
(cid:141)
(cid:132)
(cid:99)
(cid:141)
(cid:99)
(cid:132)
(cid:122)
(cid:141)
(cid:99)
(cid:132)
(cid:122)
(cid:141)
(cid:99)
(cid:132)
(cid:122)
25 –
|
12/31/07
|
12/31/08
|
12/31/09
|
12/31/10
|
12/31/11
|
12/31/12
Index
Penns Woods Bancorp, Inc.................
S&P 500 .............................................
NASDAQ Composite .........................
NASDAQ Bank ..................................
12/31/07
100.00
100.00
100.00
100.00
12/31/08
75.37
63.00
60.02
78.46
12/31/09
113.04
79.68
87.24
65.67
12/31/10
146.59
91.68
103.08
74.97
12/31/11
150.26
93.61
102.26
67.10
12/31/12
152.18
108.59
120.42
79.64
Period Ending
58
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ITEM 6
The following table sets forth certain financial data for each of the years in the five-year period ended December 31, 2012:
SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data Amounts)
2012
2011
2010
2009
2008
Consolidated Statement of
Income Data:
Interest income ......................................................... $ 37,107
Interest expense ........................................................
6,211
30,896
Net interest income ..................................................
Provision for loan losses ..........................................
2,525
Net interest income after provision
28,371
for loan losses ...................................................
10,100
Noninterest income ..................................................
Noninterest expense .................................................
22,023
16,448
Income before income tax provision (benefit) .........
Income tax provision (benefit) .................................
2,598
Net income ............................................................... $ 13,850
$ 36,376
7,656
28,720
2,700
$ 36,362
9,868
26,494
2,150
$ 36,191
12,398
23,793
917
$ 36,108
14,832
21,276
375
26,020
8,219
19,964
14,275
1,913
$ 12,362
24,344
7,459
19,492
12,311
1,382
$ 10,929
22,876
2,287
19,812
5,351
(742)
$ 6,093
20,901
5,456
17,949
8,408
405
$ 8,003
Consolidated Balance Sheet at
End of Period:
Total assets ............................................................... $ 856,535
512,232
Loans ........................................................................
Allowance for loan losses ........................................
(7,617)
642,026
Deposits ....................................................................
76,278
Long-term debt .........................................................
93,726
Shareholders’ equity ................................................
$ 763,953
435,959
(7,154)
581,664
61,278
80,460
$ 691,688
415,557
(6,035)
517,508
71,778
66,620
$ 676,204
405,529
(4,657)
497,287
86,778
66,916
$ 652,803
381,478
(4,356)
421,368
86,778
61,027
Per Share Data:
Earnings per share - basic ........................................ $ 3.61
3.61
Earnings per share - diluted .....................................
Cash dividends declared ..........................................
1.88
Book value ...............................................................
24.42
Number of shares outstanding, at
$ 3.22
3.22
1.84
20.97
$ 2.85
2.85
1.84
17.37
$ 1.59
1.59
1.84
17.45
$ 2.07
2.07
1.84
15.93
end of period .....................................................
3,838,516
3,837,081
3,835,157
3,834,114
3,831,500
Average number of shares
outstanding - basic ............................................
3,837,751
3,836,036
3,834,255
3,832,789
3,859,724
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 ..........................
15.36%
1.70%
4.45%
52.08%
11.04%
79.78%
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%
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A
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.
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ITEM 8
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.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
ITEM 9A
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, 2012 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, 2012.
There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2012 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, 2012.
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, 2012, 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, 2012.
Date: March 12, 2013
Chief Executive Officer
Chief Financial Officer
(Principal Financial Officer)
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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’ (the “Company”) internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Penns Woods Bancorp, Inc.’s 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 (a) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (b) 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 (c) 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, 2012, 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. and subsidiaries as of December 31, 2012 and 2011, and the related
consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2012, and our opinion dated March 12, 2013, expressed an unqualified opinion.
Wexford, Pennsylvania
March 12, 2013
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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 for the Company’s 2013 annual meeting of shareholders (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.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
PART IV
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
(a)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:
(2)
(3)
(3)
(i) Agreement and Plan of Merger, dates as of October 18, 2012, between Penns Woods Bancorp, Inc. and
Luzerne National Bank Corporation.
(i) 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).
(10) (i)
(ii) Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) of the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2011).
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).
(10) (ii) 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) (iii) 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).*
(10) (iv) 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).*
(10) (v) Amendment to Employment Agreement, dated June 12, 2012, among Penns Woods Bancorp, Inc., Jersey
Shore State Bank and Richard A. Grafmyre (incorporated by reference to Exhibit 10(ii) of the Registrant’s
Current Report on Form 8-K filed on June 14, 2012).*
62
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(10) (vi) Employment Agreement, dated February 28, 2011, among Penns Woods Bancorp, Inc., Jersey Shore State
Bank and Ann M. Riles (incorporated by reference to Exhibit 10.6 of the Registrant’s Annual Report on Form
10-K filed for the year ended December 31, 2011).*
(10) (vii) Employment Agreement, dated February 28, 2011, among Penns Woods Bancorp, Inc., Jersey Shore State
Bank and Robert J. Glunk (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on
Form 10-Q filed for the quarter ended March 31, 2012).*
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
(21)
(23)
(31) (i)
(31) (ii) Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer.
(32) (i)
(32) (ii) Section 1350 Certification of Principal Financial Officer.
Exhibit 101
Section 1350 Certification of Chief Executive Officer.
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business
Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2012 and December 31, 2011;
(ii) the Consolidated Statement of Income for the years ended December 31, 2012, 2011 and 2010; (iii) the
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012,2011, and 2010;
(iv) the Consolidated Statement of Comprehensive Income for the years ended December 31, 2012, 2011 and
2010; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011, and 2010;
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
Subsidiaries of the Registrant.
Consent of Independent Certified Public Accountants.
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.
(21)
(23)
(31) (i)
(31) (ii) Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer.
(32) (i)
(32) (ii) Section 1350 Certification of Principal Financial Officer.
Exhibit 101
Section 1350 Certification of Chief Executive Officer.
Interactive data file containing the following financial statements formatted in XBRL (Extensible Business
Reporting Language): (i) the Consolidated Balance Sheet at December 31, 2012 and December 31, 2011;
(ii) the Consolidated Statement of Income for the years ended December 31, 2012, 2011 and 2010; (iii) the
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012,2011, and 2010;
(iv) the Consolidated Statement of Comprehensive Income for the years ended December 31, 2012, 2011 and
2010; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2012, 2011, and 2010;
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.
Exhibit 21
Subsidiaries of the Registrant
State or Jurisdiction Under the
Law of Which Organized
Jersey Shore State Bank........................................
Woods Real Estate Development Company, Inc...
Woods Investment Company, Inc..........................
The M Group (subsidiary of the Bank).................
Pennsylvania
Pennsylvania
Delaware
Pennsylvania
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
The Board of Directors
Penns Woods Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statements (Nos. 333-134585 and 333-58682) on Form S-8 of
Penns Woods Bancorp, Inc. of our reports dated March 12, 2013, relating to our audits of the consolidated financial statements and
internal control over financial reporting, included in and incorporated by reference in the Annual Report on Form 10-K of Penns
Woods Bancorp, Inc. for the year ended December 31, 2012.
Wexford, Pennsylvania
March 12, 2013
Exhibit 31(i)
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer
I, Richard A. Grafmyre, certify that:
1.
I have reviewed this annual report on Form 10-K of Penns Woods Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information;
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2013
64
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Richard A. Grafmyre
Chief Executive Officer
(Principal Executive Officer)
3/20/13 2:15 PM
Exhibit 31(ii)
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer
I, Brian L. Knepp, certify that:
1.
I have reviewed this annual report on Form 10-K of Penns Woods Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information;
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2013
Brian L. Knepp
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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3/20/13 2:15 PM
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Penns Woods Bancorp, Inc. (the “Company”) on Form 10-K for the period ended December
31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard A. Grafmyre, Chief
Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
Exhibit 32 (i)
Richard A. Grafmyre
Chief Executive Officer
March 12, 2013
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Penns Woods Bancorp, Inc. (the “Company”) on Form 10-K for the period ended December
31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian L. Knepp, Chief Financial
Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
Exhibit 32 (ii)
Brian L. Knepp
Chief Financial Officer
March 12, 2013
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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 12, 2013
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 12, 2013
Brian L. Knepp,
Chief Financial Officer (Principal Financial Officer)
March 12, 2013
Ronald A. Walko, Chairman of the Board
March 12, 2013
Daniel K. Brewer, Director
March 12, 2013
Michael J. Casale, Jr., Director
March 12, 2013
William J. Edwards, Director
March 12, 2013
James M. Furey, II, Director
March 12, 2013
D. Michael Hawbaker, Director
March 12, 2013
Leroy H. Keiler, III, Director
March 12, 2013
R. Edward Nestlerode, Jr., Director
March 12, 2013
William H. Rockey, Director
March 12, 2013
Hubert A. Valencik, Director
March 12, 2013
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Management & Board of Directors
(Penns Woods Bancorp, Inc. & Jersey Shore State Bank)
Officers
Richard A. Grafmyre............................................................................. President & Chief Executive Officer
Robert J. Glunk ................................................................. Senior Vice President & Chief Operating Officer
Brian L. Knepp.................................................. Senior Vice President, Chief Financial Officer & Secretary
Ann M. Riles........................... Senior Vice President, Chief Credit Officer & Chief Administrative Officer
Stephen M. Tasselli ..................................................... Senior Vice President & Commercial Loan Manager
G. David Gundy ............................................................. Senior Vice President & Commercial Loan Officer
Gerald J. Seman ................................................................................................President Mortgage Services
John R. Frey .............................................................................. Vice President & Chief Compliance Officer
Michelle M. Karas ..........................................................Vice President Head of Institutional Advancement
Tammy L. Gunsallus ................................................................................. Vice President Regional Manager
Elizabeth A. Hittle..................................................................................... Vice President Regional Manager
David R. Palski.......................................................................................... Vice President Regional Manager
Craig A. Russell ........................................................................................ Vice President Regional Manager
Mark A. Beatty.................................................... Vice President Network, Telecommunications & Security
Kelley C. Bellomo.................................................................................Vice President Mortgage Operations
Leslie K. Benshoff ............................................................................... Vice President Bank Secrecy Officer
Roxanna M. Chapman.................................................................................... Vice President Loan Servicing
Aaron J. Cunningham................................................................. Vice President Credit & Risk Management
Larry G. Garverick.................................................. Vice President Loan Documentation & Review Officer
Christine M. Magyar............................................................ Vice President Sales, Training & Development
William V. Mauck........................................................................ Vice President Retail Operations Manager
Michael A. Musto.......................................................................... Vice President Commercial Loan Officer
Stephanie A. Oakes ............................................................... Vice President Commercial Services Manager
Lori A. Strimple ..................................................................................................... Vice President Marketing
Kevin Weinhoffer ....................................................................................Vice President Commercial Lender
Registered Representatives for The Comprehensive Financial Group
Stephen D. Lowe ........................................................................................................... Williamsport Branch
Directors
Daniel K. Brewer ...............................................................Principal & Owner of Brewer & Company, LLC
Michael J. Casale, Jr.....................................................................................Michael J. Casale, Jr. Esq., LLC
William J. Edwards ....................................... President & Owner of JEB Environmental Technologies, 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
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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
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
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
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
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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
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
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
SPRING MILLS OFFICE
Bonnie H. Ripka, Manager
3635 Penns Valley Road, Spring Mills, PA 16875
Phone (814) 422-8836
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
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STATE COLLEGE OFFICE
Patricia K. Stauffer, Manager
2050 North Atherton Street, State College, PA 16803
Phone (814) 235-1710
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
ZION OFFICE
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
THE M GROUP, INC.
D/B/A THE COMPREHENSIVE FINANCIAL GROUP
Timothy E. Benner, 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
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JSSB1004_CVR2_2012.pdf 1 3/26/13 11:42 AM
Jersey Shore State Bank Locations
CLINTON COUNTY
LYCOMING COUNTY
MISSION
to be the most significant regional community bank
JERSEY
SHORE
LOCK HAVEN
•
• MILL HALL
CENTRE COUNTY
• ZION
• SPRING MILLS
• CENTRE HALL
• STATE COLLEGE
• MONTOURSVILLE
• WILLIAMSPORT
• DUBOISTOWN
• MONTGOMERY
Y
MONTOUR COUNTY
• DANVILLE
C
M
Y
CM
MY
CY
CMY
K
JSSB1004_CVR1_2012.pdf 1 3/26/13 11:47 AM
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PENNS WOODS BANCORP, INC.
Parent Company of Jersey Shore State Bank
Penns Woods Bancorp, Inc.
P.O. Box 967
300 Market Street
Williamsport, PA 17703-0967
2012 Annual Report & Form 10-K