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PENNS WOODS BANCORP INC - Quarter Report: 2012 March (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

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

 

for the Quarterly Period Ended March 31, 2012.

 

o         Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

 

for the Transition Period from                 to                 .

 

No. 0-17077

(Commission File Number)

 

PENNS WOODS BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA

 

23-2226454

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

300 Market Street, P.O. Box 967 Williamsport, Pennsylvania

 

17703-0967

(Address of principal executive offices)

 

(Zip Code)

 

(570) 322-1111

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Small reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

On May 2, 2012 there were 3,837,576 shares of the Registrant’s common stock outstanding.

 

 

 



Table of Contents

 

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

Page

 

 

Number

 

 

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

Consolidated Balance Sheet (Unaudited) as of March 31, 2012 and December 31, 2011

3

 

 

Consolidated Statement of Income (Unaudited) for the Three Months Ended March 31, 2012 and 2011

4

 

 

Consolidated Statement of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2012 and 2011

5

 

 

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2012 and 2011

5

 

 

Consolidated Statement of Cash Flows (Unaudited) for the Three Months Ended March 31, 2012 and 2011

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 3.

Defaults Upon Senior Securities

33

 

 

 

Item 4.

Mine Safety Disclosures

33

 

 

 

Item 5.

Other Information

33

 

 

 

Item 6.

Exhibits

33

 

 

 

Signatures

 

34

 

 

 

Exhibit Index and Exhibits

35

 

 

2



Table of Contents

 

Part I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

March 31,

 

December 31,

 

(In Thousands, Except Share Data)

 

2012

 

2011

 

ASSETS:

 

 

 

 

 

Noninterest-bearing balances

 

$

16,272

 

$

13,829

 

Interest-bearing deposits in other financial institutions

 

7,159

 

56

 

Total cash and cash equivalents

 

23,431

 

13,885

 

 

 

 

 

 

 

Investment securities, available for sale, at fair value

 

284,778

 

270,097

 

Investment securities, held to maturity, (fair value of $55)

 

55

 

54

 

Loans held for sale

 

2,065

 

3,787

 

Loans

 

443,577

 

435,959

 

Less: Allowance for loan losses

 

7,745

 

7,154

 

Loans, net

 

435,832

 

428,805

 

Premises and equipment, net

 

8,283

 

7,707

 

Accrued interest receivable

 

4,100

 

3,905

 

Bank-owned life insurance

 

15,973

 

16,065

 

Investment in limited partnerships

 

3,379

 

3,544

 

Goodwill

 

3,032

 

3,032

 

Deferred tax asset

 

6,416

 

7,991

 

Other assets

 

5,770

 

5,081

 

TOTAL ASSETS

 

$

793,114

 

$

763,953

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Interest-bearing deposits

 

$

505,271

 

$

470,310

 

Noninterest-bearing deposits

 

116,271

 

111,354

 

Total deposits

 

621,542

 

581,664

 

 

 

 

 

 

 

Short-term borrowings

 

14,768

 

29,598

 

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

 

61,278

 

61,278

 

Accrued interest payable

 

506

 

536

 

Other liabilities

 

9,741

 

10,417

 

TOTAL LIABILITIES

 

707,835

 

683,493

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Common stock, par value $8.33, 10,000,000 shares authorized; 4,018,068 and 4,017,677 shares issued

 

33,484

 

33,480

 

Additional paid-in capital

 

18,127

 

18,115

 

Retained earnings

 

38,279

 

36,394

 

Accumulated other comprehensive gain (loss):

 

 

 

 

 

Net unrealized gain on available for sale securities

 

5,832

 

2,914

 

Defined benefit plan

 

(4,133

)

(4,133

)

Less: Treasury stock at cost, 180,596 shares

 

(6,310

)

(6,310

)

TOTAL SHAREHOLDERS’ EQUITY

 

85,279

 

80,460

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

793,114

 

$

763,953

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



Table of Contents

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In Thousands, Except Per Share Data)

 

2012

 

2011

 

 

 

 

 

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

Loans, including fees

 

$

6,314

 

$

6,288

 

Investment securities:

 

 

 

 

 

Taxable

 

1,474

 

1,375

 

Tax-exempt

 

1,405

 

1,267

 

Dividend and other interest income

 

92

 

52

 

TOTAL INTEREST AND DIVIDEND INCOME

 

9,285

 

8,982

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

961

 

1,194

 

Short-term borrowings

 

34

 

57

 

Long-term borrowings, FHLB

 

620

 

734

 

TOTAL INTEREST EXPENSE

 

1,615

 

1,985

 

 

 

 

 

 

 

NET INTEREST INCOME

 

7,670

 

6,997

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

600

 

600

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

7,070

 

6,397

 

 

 

 

 

 

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

447

 

503

 

Securities gains, net

 

589

 

125

 

Bank-owned life insurance

 

268

 

174

 

Gain on sale of loans

 

183

 

249

 

Insurance commissions

 

442

 

209

 

Brokerage commissions

 

212

 

274

 

Other

 

622

 

411

 

TOTAL NON-INTEREST INCOME

 

2,763

 

1,945

 

 

 

 

 

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

3,017

 

2,632

 

Occupancy, net

 

328

 

348

 

Furniture and equipment

 

346

 

308

 

Pennsylvania shares tax

 

169

 

172

 

Amortization of investment in limited partnerships

 

165

 

166

 

FDIC deposit insurance

 

123

 

187

 

Other

 

1,316

 

1,175

 

TOTAL NON-INTEREST EXPENSE

 

5,464

 

4,988

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX PROVISION

 

4,369

 

3,354

 

INCOME TAX PROVISION

 

680

 

501

 

NET INCOME

 

$

3,689

 

$

2,853

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

 

$

0.96

 

$

0.74

 

 

 

 

 

 

 

EARNINGS PER SHARE - DILUTED

 

$

0.96

 

$

0.74

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC

 

3,837,204

 

3,835,295

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED

 

3,837,204

 

3,835,295

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.47

 

$

0.46

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



Table of Contents

 

PENNS WOODS BANCORP, INC.

 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

(In Thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Net Income

 

$

3,689

 

$

2,853

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized gain on available for sale securities

 

5,010

 

2,051

 

Tax Effect

 

(1,703

)

(697

)

Net realized gain included in net income

 

589

 

125

 

Tax Effect

 

(200

)

(42

)

Total other comprehensive income

 

2,918

 

1,271

 

Comprehensive income

 

$

6,607

 

$

4,124

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

COMMON

 

ADDITIONAL

 

 

 

OTHER

 

 

 

TOTAL

 

 

 

STOCK

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

TREASURY

 

SHAREHOLDERS’

 

(In Thousands, Except Per Share Data)

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME (LOSS)

 

STOCK

 

EQUITY

 

Balance, December 31, 2010

 

4,015,753

 

$

33,464

 

$

18,064

 

$

31,091

 

$

(9,689

)

$

(6,310

)

$

66,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

2,853

 

 

 

 

 

2,853

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

1,271

 

 

 

1,271

 

Dividends declared, ($0.46 per share)

 

 

 

 

 

 

 

(1,764

)

 

 

 

 

(1,764

)

Common shares issued for employee stock purchase plan

 

480

 

4

 

14

 

 

 

 

 

 

 

18

 

Balance, March 31, 2011

 

4,016,233

 

$

33,468

 

$

18,078

 

$

32,180

 

$

(8,418

)

$

(6,310

)

$

68,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

COMMON

 

ADDITIONAL

 

 

 

OTHER

 

 

 

TOTAL

 

 

 

STOCK

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

TREASURY

 

SHAREHOLDERS’

 

(In Thousands, Except Per Share Data)

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME (LOSS)

 

STOCK

 

EQUITY

 

Balance, December 31, 2011

 

4,017,677

 

$

33,480

 

$

18,115

 

$

36,394

 

$

(1,219

)

$

(6,310

)

$

80,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

3,689

 

 

 

 

 

3,689

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

2,918

 

 

 

2,918

 

Dividends declared, ($0.47 per share)

 

 

 

 

 

 

 

(1,804

)

 

 

 

 

(1,804

)

Common shares issued for employee stock purchase plan

 

391

 

4

 

12

 

 

 

 

 

 

 

16

 

Balance, March 31, 2012

 

4,018,068

 

$

33,484

 

$

18,127

 

$

38,279

 

$

1,699

 

$

(6,310

)

$

85,279

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



Table of Contents

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In Thousands)

 

2012

 

2011

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net Income

 

$

3,689

 

$

2,853

 

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

 

 

 

 

 

Depreciation and amortization

 

191

 

175

 

Provision for loan losses

 

600

 

600

 

Accretion and amortization of investment security discounts and premiums

 

(377

)

(459

)

Securities gains, net

 

(589

)

(125

)

Originations of loans held for sale

 

(4,301

)

(8,686

)

Proceeds of loans held for sale

 

6,206

 

10,775

 

Gain on sale of loans

 

(183

)

(249

)

Earnings on bank-owned life insurance

 

(268

)

(174

)

Decrease in prepaid federal deposit insurance

 

112

 

165

 

Other, net

 

(1,590

)

(693

)

Net cash provided by operating activities

 

3,490

 

4,182

 

INVESTING ACTIVITIES:

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

Proceeds from sales

 

9,765

 

2,728

 

Proceeds from calls and maturities

 

3,400

 

2,001

 

Purchases

 

(22,741

)

(7,876

)

Investment securities held to maturity:

 

 

 

 

 

Proceeds from sales

 

 

5

 

Proceeds from calls and maturities

 

 

25

 

Net (increase) decrease in loans

 

(7,627

)

2,892

 

Acquisition of bank premises and equipment

 

(767

)

(151

)

Proceeds from the sale of foreclosed assets

 

131

 

92

 

Purchase of bank-owned life insurance

 

(29

)

(32

)

Proceeds from bank-owned life insurance death benefit

 

383

 

 

Proceeds from redemption of regulatory stock

 

281

 

345

 

Net cash (used for) provided by investing activities

 

(17,204

)

29

 

FINANCING ACTIVITIES:

 

 

 

 

 

Net increase in interest-bearing deposits

 

34,961

 

5,278

 

Net increase in noninterest-bearing deposits

 

4,917

 

5,931

 

Net decrease in short-term borrowings

 

(14,830

)

(11,663

)

Dividends paid

 

(1,804

)

(1,764

)

Issuance of common stock

 

16

 

18

 

Net cash provided by (used for) financing activities

 

23,260

 

(2,200

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

9,546

 

2,011

 

CASH AND CASH EQUIVALENTS, BEGINNING

 

13,885

 

9,493

 

CASH AND CASH EQUIVALENTS, ENDING

 

$

23,431

 

$

11,504

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Interest paid

 

$

1,645

 

$

2,041

 

Income taxes paid

 

925

 

750

 

Transfer of loans to foreclosed real estate

 

 

577

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



Table of Contents

 

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 — Basis of Presentation

 

The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., and Jersey Shore State Bank (the “Bank”) and its wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”).  All significant inter-company balances and transactions have been eliminated in the consolidation.

 

The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for the fair presentation of results for such periods.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 37 through 43 of the Annual Report on Form 10-K for the year ended December 31, 2011.

 

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01(b) (8) of Regulation S-X.

 

Note 2 — Recent Accounting Pronouncements

 

In April 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-03, Transfers and Services (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.  The main objective in developing this update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion.  The amendments in this update apply to all entities, both public and nonpublic.  The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity.  The guidance in this update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted.  This ASU did not have a significant impact on the Company’s financial statements.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs.  Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  The amendments in this update are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  Early application by public entities is not permitted. The Company has provided the necessary disclosures in Note 10 — Fair Value Measurements.

 

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  The amendments in this update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income.  To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.  The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this update.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The amendments in this update should be applied retrospectively, and early adoption is permitted.  The Company has provided the necessary disclosure in the Consolidated Statement of Comprehensive Income.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment.  The objective of this update is to simplify how entities test goodwill for impairment.  The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this update apply to all entities, both public

 

7



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and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or have not yet been made available for issuance.  This ASU did not have a significant impact on the Company’s financial statements.

 

In December 2011, the FASB issued ASU 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate - a Scope Clarification.  The amendments in this update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. Under the amendments in this update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness.  That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt.  The amendments in this update should be applied on a prospective basis to deconsolidation events occurring after the effective date.  Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities.  For public entities, the amendments in this update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012.  Early adoption is permitted.  This ASU is not expected to have a significant impact on the Company’s financial statements.

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.  The amendments in this update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement.  The requirements amend the disclosure requirements on offsetting in Section 210-20-50.  This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this update.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  The Company is currently evaluating the impact the adoption of this ASU will have on the Company’s financial statements.

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  In order to defer only those changes in update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this update supersede certain pending paragraphs in update 2011-05.  Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before update 2011-05.  All other requirements in update 2011-05 are not affected by this update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011.  This ASU did not have a significant impact on the Company’s financial statements.

 

Note 3 — Per Share Data

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Weighted average common shares issued

 

4,017,800

 

4,015,891

 

 

 

 

 

 

 

Average treasury stock shares

 

(180,596

)

(180,596

)

 

 

 

 

 

 

Weighted average common shares and common stock equivalents used to calculate basic earnings per share

 

3,837,204

 

3,835,295

 

 

 

 

 

 

 

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

 

3,837,204

 

3,835,295

 

 

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There were no options outstanding during the three months ended March 31, 2011 and 2012.

 

Note 4 — Investment Securities

 

The amortized cost and fair values of investment securities at March 31, 2012 and December 31, 2011 are as follows:

 

 

 

March 31, 2012

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

21,801

 

$

1,698

 

$

 

$

23,499

 

State and political securities

 

175,921

 

9,570

 

(3,320

)

182,171

 

Other debt securities

 

66,170

 

284

 

(788

)

65,666

 

Total debt securities

 

263,892

 

11,552

 

(4,108

)

271,336

 

Financial institution equity securities

 

8,866

 

1,313

 

(22

)

10,157

 

Other equity securities

 

3,184

 

145

 

(44

)

3,285

 

Total equity securities

 

12,050

 

1,458

 

(66

)

13,442

 

Total investment securities AFS

 

$

275,942

 

$

13,010

 

$

(4,174

)

$

284,778

 

 

 

 

 

 

 

 

 

 

 

Held to maturity (HTM)

 

 

 

 

 

 

 

 

 

Other debt securities

 

$

55

 

$

 

$

 

$

55

 

Total investment securities HTM

 

$

55

 

$

 

$

 

$

55

 

 

 

 

December 31, 2011

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

26,755

 

$

1,916

 

$

 

$

28,671

 

State and political securities

 

174,790

 

8,398

 

(4,887

)

178,301

 

Other debt securities

 

51,447

 

133

 

(2,066

)

49,514

 

Total debt securities

 

252,992

 

10,447

 

(6,953

)

256,486

 

Financial institution equity securities

 

9,939

 

1,095

 

(232

)

10,802

 

Other equity securities

 

2,751

 

133

 

(75

)

2,809

 

Total equity securities

 

12,690

 

1,228

 

(307

)

13,611

 

Total investment securities AFS

 

$

265,682

 

$

11,675

 

$

(7,260

)

$

270,097

 

 

 

 

 

 

 

 

 

 

 

Held to maturity (HTM)

 

 

 

 

 

 

 

 

 

Other debt securities

 

$

54

 

$

1

 

$

 

$

55

 

Total investment securities HTM

 

$

54

 

$

1

 

$

 

$

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 March 31, 2012 and December 31, 2011.

 

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March 31, 2012

 

 

 

Less than Twelve Months

 

Twelve Months or Greater

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(In Thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political securities

 

$

9,513

 

$

(382

)

$

17,392

 

$

(2,938

)

$

26,905

 

$

(3,320

)

Other debt securities

 

41,084

 

(786

)

98

 

(2

)

41,182

 

(788

)

Total debt securities

 

50,597

 

(1,168

)

17,490

 

(2,940

)

68,087

 

(4,108

)

Financial institution equity securities

 

193

 

(7

)

142

 

(15

)

335

 

(22

)

Other equity securities

 

462

 

(7

)

125

 

(37

)

587

 

(44

)

Total equity securities

 

655

 

(14

)

267

 

(52

)

922

 

(66

)

Total

 

$

51,252

 

$

(1,182

)

$

17,757

 

$

(2,992

)

$

69,009

 

$

(4,174

)

 

 

 

December 31, 2011

 

 

 

Less than Twelve Months

 

Twelve Months or Greater

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(In Thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political securities

 

$

1,142

 

$

(6

)

$

28,260

 

$

(4,881

)

$

29,402

 

$

(4,887

)

Other debt securities

 

35,858

 

(2,048

)

82

 

(18

)

35,940

 

(2,066

)

Total debt securities

 

37,000

 

(2,054

)

28,342

 

(4,899

)

65,342

 

(6,953

)

Financial institution equity securities

 

1,140

 

(116

)

273

 

(116

)

1,413

 

(232

)

Other equity securities

 

263

 

(65

)

130

 

(10

)

393

 

(75

)

Total equity securities

 

1,403

 

(181

)

403

 

(126

)

1,806

 

(307

)

Total

 

$

38,403

 

$

(2,235

)

$

28,745

 

$

(5,025

)

$

67,148

 

$

(7,260

)

 

At March 31, 2012 there were a total of 54 and 51 individual securities that were in a continuous unrealized loss position for less than twelve months and twelve months or greater, respectively.

 

The Company reviews its position quarterly and has determined that, at March 31, 2012, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.  There were 105 positions that were temporarily impaired at March 31, 2012.  The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

 

The amortized cost and fair value of debt securities at March 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.

 

 

 

Available for Sale

 

Held to Maturity

 

 

 

Amortized

 

 

 

Amortized

 

 

 

(In Thousands)

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Due in one year or less

 

$

10,315

 

$

10,332

 

$

55

 

$

55

 

Due after one year to five years

 

41,905

 

41,709

 

 

 

Due after five years to ten years

 

21,569

 

21,560

 

 

 

Due after ten years

 

190,103

 

197,735

 

 

 

Total

 

$

263,892

 

$

271,336

 

$

55

 

$

55

 

 

Total gross proceeds from sales of securities available for sale were $9,765,000 and $2,728,000, for the three months ended March 31, 2012 and 2011, respectively.  The following table represents gross realized gains and losses on those transactions:

 

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Three Months Ended March 31,

 

(In Thousands)

 

2012

 

2011

 

Gross realized gains:

 

 

 

 

 

U.S. Government and agency securities

 

$

138

 

$

4

 

State and political securities

 

6

 

5

 

Other debt securities

 

55

 

6

 

Financial institutions equity securities

 

355

 

 

Other equity securities

 

126

 

121

 

Total gross realized gains

 

$

680

 

$

136

 

 

 

 

 

 

 

Gross realized losses:

 

 

 

 

 

U.S. Government and agency securities

 

$

 

$

 

State and political securities

 

 

 

Other debt securities

 

 

11

 

Financial institutions equity securities

 

66

 

 

Other equity securities

 

25

 

 

Total gross realized losses

 

$

91

 

$

11

 

 

There were no impairment charges included in gross realized losses for the three months ended March 31, 2012 and 2011, respectively.

 

Note 5 — Federal Home Loan Bank Stock

 

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

 

The FHLB had incurred losses in 2009 and for parts of 2010 due primarily to other-than-temporary impairment credit losses on its private-label mortgage-backed securities portfolio.  These securities were the most effected by the extreme economic conditions in place during the previous several years.  As a result, the FHLB had suspended the payment of dividends and limited the amount of excess capital stock repurchases.  The FHLB has reported net income for both the fourth quarter and the year ended December 31, 2011 and declared a 0.10 percent annualized dividend to its shareholders that was paid during the first quarter of 2012. While the FHLB has not committed to regular dividend payments or future limited repurchases of excess capital stock, it will continue to monitor the overall financial performance of the FHLB in order to determine the status of limited repurchases of excess capital stock or dividends in the future.  Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein.  More consideration was given to the long-term prospects for the FHLB as opposed to the recent stress caused by the extreme economic conditions the world is facing.  Management also considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears adequate, new shares of FHLB stock continue to change hands at the $100 par value, and the resumption of dividends.

 

Note 6 — 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 March 31, 2012 and December 31, 2011:

 

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March 31, 2012

 

 

 

 

 

Past Due

 

Past Due 90

 

 

 

 

 

 

 

 

 

30 To 89

 

Days Or More

 

Non-

 

 

 

(In Thousands)

 

Current

 

Days

 

& Still Accruing

 

Accrual

 

Total

 

Commercial and agricultural

 

$

53,479

 

$

71

 

$

 

$

 

$

53,550

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

184,662

 

1,190

 

 

517

 

186,369

 

Commercial

 

162,350

 

739

 

 

1,115

 

164,204

 

Construction

 

20,391

 

114

 

 

9,675

 

30,180

 

Installment loans to individuals

 

10,784

 

49

 

1

 

 

10,834

 

 

 

431,666

 

$

2,163

 

$

1

 

$

11,307

 

445,137

 

Less: Net deferred loan fees and discounts

 

(1,560

)

 

 

 

 

 

 

(1,560

)

Allowance for loan losses

 

7,745

 

 

 

 

 

 

 

7,745

 

Loans, net

 

$

425,481

 

 

 

 

 

 

 

$

438,952

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

Past Due

 

Past Due 90

 

 

 

 

 

 

 

 

 

30 To 89

 

Days Or More

 

Non-

 

 

 

(In Thousands)

 

Current

 

Days

 

& Still Accruing

 

Accrual

 

Total

 

Commercial and agricultural

 

$

53,124

 

$

5

 

$

 

$

 

$

53,129

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

176,875

 

1,438

 

378

 

692

 

179,383

 

Commercial

 

162,977

 

135

 

 

1,176

 

164,288

 

Construction

 

19,605

 

95

 

 

9,757

 

29,457

 

Installment loans to individuals

 

11,180

 

111

 

6

 

 

11,297

 

 

 

423,761

 

$

1,784

 

$

384

 

$

11,625

 

437,554

 

Less: Net deferred loan fees and discounts

 

1,595

 

 

 

 

 

 

 

1,595

 

Allowance for loan losses

 

7,154

 

 

 

 

 

 

 

7,154

 

Loans, net

 

$

415,012

 

 

 

 

 

 

 

$

428,805

 

 

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 March 31, 2012 and March 31, 2011:

 

 

 

Three Months Ended March 31,

 

(In Thousands)

 

2012

 

2011

 

Interest income if interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans

 

145

 

210

 

 

 

 

 

 

 

Interest income recognized on a cash basis for non-accrual loans

 

40

 

6

 

 

Impaired Loans

 

Impaired loans are loans for which it is probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Bank evaluates such loans for impairment individually and does not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of “non-accrual loans,” although the two categories overlap.  The Bank may choose to place a loan on non-accrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired. 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,

 

12


 


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generally are not classified as impaired.  Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.  Interest income for impaired loans is recorded consistent with the Bank’s policy on nonaccrual loans.

 

The following table presents the recorded investment, unpaid principal balance, and related allowance of impaired loans by segment as of March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

 

 

Recorded

 

Unpaid Principal

 

Related

 

(In Thousands)

 

Investment

 

Balance

 

Allowance

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

$

 

$

 

$

 

Real estate mortgages - residential

 

587

 

596

 

 

Real estate mortgages - commercial

 

342

 

342

 

 

Real estate mortgages - construction

 

797

 

1,095

 

 

Installment loans to individuals

 

 

 

 

 

 

1,726

 

2,033

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

 

 

 

Real estate mortgages - residential

 

833

 

858

 

98

 

Real estate mortgages - commercial

 

6,140

 

6,140

 

1,518

 

Real estate mortgages - construction

 

8,879

 

10,379

 

2,102

 

Installment loans to individuals

 

 

 

 

 

 

15,852

 

17,377

 

3,718

 

Total:

 

 

 

 

 

 

 

Commercial and agricultural

 

 

 

 

Real estate mortgages - residential

 

1,420

 

1,454

 

98

 

Real estate mortgages - commercial

 

6,482

 

6,482

 

1,518

 

Real estate mortgages - construction

 

9,676

 

11,474

 

2,102

 

Installment loans to individuals

 

 

 

 

 

 

$

17,578

 

$

19,410

 

$

3,718

 

 

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Table of Contents

 

 

 

December 31, 2011

 

 

 

Recorded

 

Unpaid Principal

 

Related

 

(In Thousands)

 

Investment

 

Balance

 

Allowance

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

$

 

$

 

$

 

Real estate mortgages - residential

 

742

 

751

 

 

Real estate mortgages - commercial

 

382

 

382

 

 

Real estate mortgages - construction

 

815

 

1,113

 

 

Installment loans to individuals

 

 

 

 

 

 

1,939

 

2,246

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial and agricultural

 

 

 

 

Real estate mortgages - residential

 

861

 

888

 

101

 

Real estate mortgages - commercial

 

6,150

 

6,150

 

1,481

 

Real estate mortgages - construction

 

8,929

 

10,429

 

2,155

 

Installment loans to individuals

 

 

 

 

 

 

15,940

 

17,467

 

3,737

 

Total:

 

 

 

 

 

 

 

Commercial and agricultural

 

 

 

 

Real estate mortgages - residential

 

1,603

 

1,639

 

101

 

Real estate mortgages - commercial

 

6,532

 

6,532

 

1,481

 

Real estate mortgages - construction

 

9,744

 

11,542

 

2,155

 

Installment loans to individuals

 

 

 

 

 

 

$

17,879

 

$

19,713

 

$

3,737

 

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three months ended for March 31, 2012 and 2011:

 

 

 

Three Months Ended March 31,

 

(In Thousands)

 

2012

 

2011

 

Average investment in impaired loans

 

$

17,728

 

$

10,005

 

Interest income recognized on an accrual basis on impaired loans

 

81

 

79

 

Interest income recognized on a cash basis on impaired loans

 

56

 

6

 

 

There is approximately $317,000 committed to be advanced in connection with impaired loans.

 

Modifications

 

The loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties.  These concessions typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

 

Loan modifications that are considered TDRs completed during the three months ended March 31, 2012 and 2011 were as follows:

 

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Table of Contents

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

(In Thousands, Except Number of Contracts)

 

Number of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Number of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Troubled debt restructurings

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural

 

 

$

 

$

 

 

$

 

$

 

Real estate mortgages - residential

 

1

 

104

 

104

 

2

 

123

 

123

 

Real estate mortgages - commercial

 

1

 

37

 

37

 

3

 

880

 

880

 

Real estate mortgages - construction

 

2

 

26

 

26

 

2

 

610

 

610

 

Installment loans to individuals

 

 

 

 

1

 

2

 

2

 

Total

 

4

 

$

167

 

$

167

 

8

 

$

1,615

 

$

1,615

 

 

Loan modifications considered troubled debt restructurings made during the twelve months previous to March 31, 2012, that have defaulted during the three months ended March 31, 2012 were as follows:

 

 

 

Three Months Ended March 31, 2012

 

(In Thousands, Except Number of Contracts)

 

Number of Contracts

 

Recorded Investment

 

Commercial and agricultural

 

 

$

 

Real estate mortgages - residential

 

1

 

104

 

Real estate mortgages - commercial

 

 

 

Real estate mortgages - construction

 

1

 

236

 

Installment loans to individuals

 

 

 

Total

 

2

 

$

340

 

 

Troubled debt restructurings amounted to approximately $17,361,000 and $5,362,000 as of March 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 March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Pass

 

$

52,236

 

$

185,459

 

$

153,037

 

$

20,457

 

$

10,834

 

$

422,023

 

Special Mention

 

1,150

 

 

1,775

 

 

 

2,925

 

Substandard

 

164

 

910

 

9,392

 

9,723

 

 

20,189

 

Doubtful

 

 

 

 

 

 

 

Total

 

$

53,550

 

$

186,369

 

$

164,204

 

$

30,180

 

$

10,834

 

$

445,137

 

 

15



Table of Contents

 

 

 

December 31, 2011

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Pass

 

$

51,663

 

$

177,916

 

$

152,994

 

$

19,652

 

$

11,291

 

$

413,516

 

Special Mention

 

1,198

 

89

 

5,804

 

 

 

7,091

 

Substandard

 

268

 

1,378

 

5,490

 

9,805

 

6

 

16,947

 

Doubtful

 

 

 

 

 

 

 

Total

 

$

53,129

 

$

179,383

 

$

164,288

 

$

29,457

 

$

11,297

 

$

437,554

 

 

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 three months ended March 31, 2012 and 2011:

 

 

 

March 31, 2012

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Beginning Balance

 

$

430

 

$

964

 

$

2,719

 

$

2,846

 

$

195

 

$

7,154

 

Charge-offs

 

 

 

 

 

(32

)

(32

)

Recoveries

 

1

 

2

 

1

 

3

 

16

 

23

 

Provision

 

(19

)

(48

)

686

 

(22

)

3

 

600

 

Ending Balance

 

$

412

 

$

918

 

$

3,406

 

$

2,827

 

$

182

 

$

7,745

 

 

 

 

March 31, 2011

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Beginning Balance

 

$

466

 

$

980

 

$

1,508

 

$

2,893

 

$

188

 

$

6,035

 

Charge-offs

 

 

(25

)

 

 

(19

)

(44

)

Recoveries

 

6

 

2

 

20

 

2

 

19

 

49

 

Provision

 

184

 

(66

)

56

 

445

 

(19

)

600

 

Ending Balance

 

$

656

 

$

891

 

$

1,584

 

$

3,340

 

$

169

 

$

6,640

 

 

16



Table of Contents

 

The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central Pennsylvania. Although the Company has a diversified loan portfolio at March 31, 2012, 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 March 31, 2012 and 2011 as follows:

 

 

 

March 31,

 

 

 

2012

 

2011

 

Owners of residential rental properties

 

13.99

%

13.91

%

Owners of commercial rental properties

 

16.51

%

16.77

%

 

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 March 31, 2012 and December 31, 2011:

 

 

 

March 31, 2012

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

98

 

$

1,518

 

$

2,102

 

$

 

$

3,718

 

Collectively evaluated for impairment

 

412

 

820

 

1,888

 

725

 

182

 

4,027

 

Total ending allowance balance

 

$

412

 

$

918

 

$

3,406

 

$

2,827

 

$

182

 

$

7,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

1,420

 

$

6,482

 

$

9,676

 

$

 

$

17,578

 

Collectively evaluated for impairment

 

53,550

 

184,949

 

157,722

 

20,504

 

10,834

 

427,559

 

Total ending loans balance

 

$

53,550

 

$

186,369

 

$

164,204

 

$

30,180

 

$

10,834

 

$

445,137

 

 

 

 

December 31, 2011

 

 

 

Commercial and

 

Real Estate Mortgages

 

Installment Loans

 

 

 

(In Thousands)

 

Agricultural

 

Residential

 

Commercial

 

Construction

 

to Individuals

 

Totals

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

101

 

$

1,481

 

$

2,155

 

$

 

$

3,737

 

Collectively evaluated for impairment

 

430

 

863

 

1,238

 

691

 

195

 

3,417

 

Total ending allowance balance

 

$

430

 

$

964

 

$

2,719

 

$

2,846

 

$

195

 

$

7,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

1,603

 

$

6,532

 

$

9,744

 

$

 

$

17,879

 

Collectively evaluated for impairment

 

53,129

 

177,780

 

157,756

 

19,713

 

11,297

 

419,675

 

Total ending loans balance

 

$

53,129

 

$

179,383

 

$

164,288

 

$

29,457

 

$

11,297

 

$

437,554

 

 

Note 7 — Net Periodic Benefit Cost-Defined Benefit Plans

 

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 12 of the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2011.

 

The following sets forth the components of the net periodic benefit cost of the domestic non-contributory defined benefit plan for the three months ended March 31, 2012 and 2011, respectively:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(In Thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Service cost

 

$

157

 

$

106

 

Interest cost

 

186

 

178

 

Expected return on plan assets

 

(196

)

(184

)

Amortization of transition obligation

 

(1

)

(1

)

Amortization of prior service cost

 

7

 

6

 

Amortization of net loss

 

109

 

41

 

Net periodic cost

 

$

262

 

$

146

 

 

17



Table of Contents

 

Employer Contributions

 

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2011, that it expected to contribute a minimum of $750,000 to its defined benefit plan in 2012.  As of March 31, 2012, there were contributions of $250,000 made to the plan.

 

Note 8 — Employee Stock Purchase Plan

 

The Company maintains 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.  During the three months ended March 31, 2012 and 2011, there were 391 and 480 shares issued under the plan, respectively.

 

Note 9 — 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 are primarily comprised of 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 March 31, 2012 and December 31, 2011:

 

 

 

March 31,

 

December 31,

 

(In Thousands)

 

2012

 

2011

 

Commitments to extend credit

 

$

92,116

 

$

80,320

 

Standby letters of credit

 

1,164

 

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.

 

Note 10 — 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.

 

Level I:

 

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

 

 

Level II:

 

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 include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

 

 

 

Level III:

 

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

This hierarchy requires the use of observable market data when available.

 

18



Table of Contents

 

The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of March 31, 2012 and December 31, 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.

 

 

 

March 31, 2012

 

(In Thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets measured on a recurring basis:

 

 

 

 

 

 

 

 

 

Investment securities, available for sale:

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

 

$

23,499

 

$

 

$

23,499

 

State and political securities

 

 

182,171

 

 

182,171

 

Other debt securities

 

 

65,666

 

 

65,666

 

Financial institution equity securities

 

10,157

 

 

 

10,157

 

Other equity securities

 

3,285

 

 

 

3,285

 

Total assets measured on a recurring basis

 

$

13,442

 

$

271,336

 

$

 

$

284,778

 

 

 

 

December 31, 2011

 

(In Thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets measured on a recurring basis:

 

 

 

 

 

 

 

 

 

Investment securities, available for sale:

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

 

$

28,671

 

$

 

$

28,671

 

State and political securities

 

 

178,301

 

 

178,301

 

Other debt securities

 

 

49,514

 

 

49,514

 

Financial institution equity securities

 

10,802

 

 

 

10,802

 

Other equity securities

 

2,809

 

 

 

2,809

 

Total assets measured on a recurring basis

 

$

13,611

 

$

256,486

 

$

 

$

270,097

 

 

The following table presents the assets reported on the consolidated balance sheet at their fair value on a non-recurring basis as of March 31, 2012 and December 31, 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.

 

 

 

March 31, 2012

 

(In Thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

13,859

 

$

13,859

 

Other real estate owned

 

 

 

2,034

 

2,034

 

Total assets measured on a non-recurring basis

 

$

 

$

 

$

15,893

 

$

15,893

 

 

 

 

December 31, 2011

 

(In Thousands)

 

Level I

 

Level II

 

Level III

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets measured on a non-recurring basis:

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

 

$

 

$

14,142

 

$

14,142

 

Other real estate owned

 

 

 

2,144

 

2,144

 

Total assets measured on a non-recurring basis

 

$

 

$

 

$

16,286

 

$

16,286

 

 

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 March 31, 2012.

 

19



Table of Contents

 

 

 

Quantitative Information About Level III Fair Value Measurements

 

(In Thousands) 

 

Fair Value

 

Valuation Technique(s)

 

Unobservable Inputs

 

Range

 

Impaired loans

 

13,859

 

Discounted cash flow

 

Temporary change in payment amount

 

0 to -30%

 

 

 

 

 

 

 

Probability of default

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appraisal of collateral

 

Appraisal adjustments (1)

 

0 to -20%

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

2,034

 

Appraisal of collateral

 

Appraisal adjustments (1)

 

0%

 

 


(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range of appraisal adjustments are presented as a percent of the appraisal.

 

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 11 — 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 value, 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, this estimated 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 March 31, 2012 and December 31, 2011:

 

20



Table of Contents

 

 

 

Fair Value Measurements at March 31, 2012

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

Carrying

 

Fair

 

Identical Assets

 

Observable Inputs

 

Unobservable Inputs

 

(In Thousands)

 

Value

 

Value

 

(Level I)

 

(Level II)

 

(Level III)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,431

 

$

23,431

 

$

23,431

 

$

 

$

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

284,778

 

284,778

 

13,442

 

271,336

 

 

Held to maturity

 

55

 

55

 

55

 

 

 

Loans held for sale

 

2,065

 

2,065

 

2,065

 

 

 

Loans, net

 

435,832

 

430,454

 

 

416,595

 

13,859

 

Bank-owned life insurance

 

15,973

 

15,973

 

15,973

 

 

 

Accrued interest receivable

 

4,100

 

4,100

 

4,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

505,271

 

$

503,592

 

$

 

$

503,592

 

 

Noninterest-bearing deposits

 

116,271

 

116,271

 

116,271

 

 

 

Short-term borrowings

 

14,768

 

14,768

 

14,768

 

 

 

Long-term borrowings, FHLB

 

61,278

 

66,304

 

 

66,304

 

 

Accrued interest payable

 

506

 

506

 

506

 

 

 

 

 

 

December 31, 2011

 

 

 

Carrying

 

Fair

 

(In Thousands)

 

Value

 

Value

 

Financial assets:

 

 

 

 

 

Cash and cash equivalents

 

$

13,885

 

$

13,885

 

Investment securities:

 

 

 

 

 

Available for sale

 

270,097

 

270,097

 

Held to maturity

 

54

 

55

 

Loans held for sale

 

3,787

 

3,787

 

Loans, net

 

428,805

 

424,586

 

Bank-owned life insurance

 

16,065

 

16,065

 

Accrued interest receivable

 

3,905

 

3,905

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

Interest-bearing deposits

 

$

470,310

 

$

471,212

 

Noninterest-bearing deposits

 

111,354

 

111,354

 

Short-term borrowings

 

29,598

 

29,598

 

Long-term borrowings, FHLB

 

61,278

 

65,848

 

Accrued interest payable

 

536

 

536

 

 

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 estimated using the quoted market price for similar securities.  Regulatory stocks’ fair value is equal to the carrying value.

 

Loans:

Fair values are estimated 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 installment loans to individuals.  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 estimated 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

 

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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.  The fair value of certificates of deposit is based on the discounted value of contractual cash flows.

 

The fair value estimates 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:

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 estimated fair value of off-balance sheet items.  The contractual amounts of unfunded commitments and letters of credit are presented in Note 9 (Off Balance Sheet Risk).

 

Note 12 — Reclassification of Comparative Amounts

 

Certain comparative amounts for the prior period have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.

 

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 cautions readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein:  (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the  increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies.

 

You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise.  The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

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Table of Contents

 

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

 

EARNINGS SUMMARY

 

Comparison of the Three Months Ended March 31, 2012 and 2011

 

Summary Results

 

Net income for the three months ended March 31, 2012 was $3,689,000 compared to $2,853,000 for the same period of 2011 as after-tax securities gains increased $306,000 (from a gain of $83,000 to a gain of $389,000).  In addition, a gain of $109,000 on a death benefit related to bank owned life insurance was recorded during the three months ended March 31, 2012.  Basic and diluted earnings per share for the three months ended March 31, 2012 were $0.96 compared to $0.74 for the three months ended March 31, 2011.  Return on average assets and return on average equity were 1.91% and 17.39% for the three months ended March 31, 2012 compared to 1.65% and 16.62% for the corresponding period of 2011.  Net income from core operations (“operating earnings”) increased to $3,191,000 for the three months ended March 31, 2012 compared to $2,770,000 for the same period of 2011.  Operating earnings per share for the three months ended March 31, 2012 were $0.83 basic and dilutive compared to $0.72 basic and dilutive for the three months ended March 31, 2011.

 

Management uses the non-GAAP measure of net income from core operations, or operating earnings, in its analysis of the Company’s performance.  This measure, as used by the Company, adjusts net income by excluding significant gains or losses that are unusual in nature.  Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses.  For purposes of this Quarterly Report on Form 10-Q, net income from core operations, or operating earnings, means net income adjusted to exclude after-tax net securities gains or losses.  These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

 

Reconciliation of GAAP and Non-GAAP Income

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in Thousands, Except Per Share Data)

 

2012

 

2011

 

GAAP net income

 

$

3,689

 

$

2,853

 

Less: net securities and bank-owned life insurance gains, net of tax

 

498

 

83

 

Non-GAAP operating earnings

 

$

3,191

 

$

2,770

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Return on average assets (ROA)

 

1.91

%

1.65

%

Less: net securities and bank-owned life insurance gains, net of tax

 

0.26

%

0.05

%

Non-GAAP operating ROA

 

1.65

%

1.60

%

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Return on average equity (ROE)

 

17.39

%

16.62

%

Less: net securities and bank-owned life insurance gains, net of tax

 

2.35

%

0.48

%

Non-GAAP operating ROE

 

15.04

%

16.14

%

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Basic earnings per share (EPS)

 

$

0.96

 

$

0.74

 

Less: net securities and bank-owned life insurance gains, net of tax

 

0.13

 

0.02

 

Non-GAAP basic operating EPS

 

$

0.83

 

$

0.72

 

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Dilutive EPS

 

$

0.96

 

$

0.74

 

Less: net securities and bank-owned life insurance gains, net of tax

 

0.13

 

0.02

 

Non-GAAP dilutive operating EPS

 

$

0.83

 

$

0.72

 

 

Interest and Dividend Income

 

Interest and dividend income increased to $9,285,000 for the three months ended March 31, 2012 compared to $8,982,000 for the same period of 2011.  Loan interest including fees remained flat as the impact of portfolio growth was offset by a yield that decreased 35 basis points (“bp”) due to the downward pressure on current loan offerings and the downward repricing of the variable rate segment of the loan portfolio.  Investment portfolio interest increased due to growth in the average investment portfolio of $59,942,000 primarily from the addition of corporate and municipal bonds to the portfolio, which offset a decline in the average taxable equivalent yield of 83 bp.  Dividend and other interest income increased due to a focus on purchasing dividend-yielding investments.

 

Interest and dividend income composition for the three months ended March 31, 2012 and 2011 was as follows:

 

 

 

For The Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Loans including fees

 

$

6,314

 

68.00

%

$

6,288

 

70.00

%

$

26

 

0.41

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,474

 

15.88

 

1,375

 

15.31

 

99

 

7.20

 

Tax-exempt

 

1,405

 

15.13

 

1,267

 

14.11

 

138

 

10.89

 

Dividend and other interest income

 

92

 

0.99

 

52

 

0.58

 

40

 

76.92

 

Total interest and dividend income

 

$

9,285

 

100.00

%

$

8,982

 

100.00

%

$

303

 

3.37

%

 

Interest Expense

 

Interest expense for the three months ended March 31, 2012 decreased $370,000 to $1,615,000 compared to $1,985,000 for the same period of 2011.  The substantial decrease associated with deposits is primarily the result of a reduction of 37 bp in the rate paid on time deposits and a shift from higher cost time deposits to core deposits, with emphasis on money market and NOW accounts.  Factors that led to the rate decreases include, but are not limited to, Federal Open Market Committee (“FOMC”) interest rate actions and campaigns conducted by the Company to focus on core deposit growth (non-time deposits) as the building block to solid customer relationships.  In addition, during the past two years the time deposit portfolio has been shortened in order to increase repricing frequency.  The time deposit portfolio is now being lengthened to build protection when interest rates begin to increase with a focus on maturities of 36 months and greater.  Borrowing interest expense decreased as the significant growth in deposits has allowed for a reduction in the average balance of total borrowings.

 

Interest expense composition for the three months ended March 31, 2012 and 2011 was as follows:

 

 

 

For The Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposits

 

$

961

 

59.50

%

$

1,194

 

60.15

%

$

(233

)

(19.51

)%

Short-term borrowings

 

34

 

2.11

 

57

 

2.87

 

(23

)

(40.35

)

Long-term borrowings, FHLB

 

620

 

38.39

 

734

 

36.98

 

(114

)

(15.53

)

Total interest expense

 

$

1,615

 

100.00

%

$

1,985

 

100.00

%

$

(370

)

(18.64

)%

 

Net Interest Margin

 

The net interest margin (“NIM”) for the three months ended March 31, 2012 was 4.72% compared to 4.89% for the corresponding period of 2011.  While the net interest margin has decreased year over year, net interest income on a fully taxable equivalent basis has increased $743,000 to $8,498,000 for the three months ended March 31, 2012 compared to the corresponding period of 2011.  Driving this increase is the continued emphasis on core deposit growth.  These deposits represent a lower cost funding source than time deposits and comprise 71.5% of total deposits at March 31, 2012 compared to 64.9% at March 31, 2011.  The average rate paid on total interest-bearing deposits decreased 33 bp for the three months ended March 31, 2012 compared to the same period of 2011.  The decrease was led by the rate paid on time deposits decreasing 37 bp for the three months ended March 31, 2012 compared to the same period of 2011.  The duration of the time deposit portfolio, which was shortened over the past several years, is now being slowly lengthened due to the apparent bottoming or near bottoming of deposit rates.  FHLB long-term borrowings have been reduced by

 

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Table of Contents

 

$10,500,000 since March 31, 2011 as borrowings carrying an average rate of 4.60% matured during the three months ended December 31, 2011.

 

The following is a schedule of average balances and associated yields for the three months ended March 31, 2012 and 2011:

 

 

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

(In Thousands)

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

21,591

 

$

309

 

5.76

%

$

20,377

 

$

308

 

6.13

%

All other loans

 

422,098

 

6,110

 

5.82

%

399,599

 

6,085

 

6.18

%

Total loans

 

443,689

 

6,419

 

5.82

%

419,976

 

6,393

 

6.17

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

147,200

 

1,566

 

4.26

%

114,740

 

1,427

 

4.97

%

Tax-exempt securities

 

130,590

 

2,128

 

6.52

%

103,108

 

1,920

 

7.45

%

Total securities

 

277,790

 

3,694

 

5.32

%

217,848

 

3,347

 

6.15

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

2,037

 

 

0.00

%

2,002

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

723,516

 

10,113

 

5.61

%

639,826

 

9,740

 

6.14

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

50,914

 

 

 

 

 

53,883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

774,430

 

 

 

 

 

$

693,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

73,628

 

11

 

0.06

%

$

66,510

 

35

 

0.21

%

Super Now deposits

 

108,369

 

142

 

0.53

%

69,177

 

83

 

0.49

%

Money market deposits

 

127,387

 

205

 

0.65

%

109,196

 

265

 

0.98

%

Time deposits

 

177,083

 

603

 

1.37

%

188,561

 

811

 

1.74

%

Total interest-bearing deposits

 

486,467

 

961

 

0.79

%

433,444

 

1,194

 

1.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

22,058

 

34

 

0.62

%

19,207

 

57

 

1.20

%

Long-term borrowings, FHLB

 

61,278

 

620

 

4.00

%

71,778

 

734

 

4.09

%

Total borrowings

 

83,336

 

654

 

3.11

%

90,985

 

791

 

3.48

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

569,803

 

1,615

 

1.13

%

524,429

 

1,985

 

1.53

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

108,081

 

 

 

 

 

91,473

 

 

 

 

 

Other liabilities

 

11,669

 

 

 

 

 

9,155

 

 

 

 

 

Shareholders’ equity

 

84,877

 

 

 

 

 

68,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

774,430

 

 

 

 

 

$

693,709

 

 

 

 

 

Interest rate spread

 

 

 

 

 

4.48

%

 

 

 

 

4.61

%

Net interest income/margin

 

 

 

$

8,498

 

4.72

%

 

 

$

7,755

 

4.89

%

 


1.               Information on this table has been calculated using average daily balance sheets to obtain average balances.

 

2.               Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

 

3.               Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.

 

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three months ended March 31, 2012 and 2011.

 

25



Table of Contents

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

(In Thousands)

 

2012

 

2011

 

Total interest income

 

$

9,285

 

$

8,982

 

Total interest expense

 

1,615

 

1,985

 

Net interest income

 

7,670

 

6,997

 

Tax equivalent adjustment

 

828

 

758

 

Net interest income (fully taxable equivalent)

 

$

8,498

 

$

7,755

 

 

The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three months ended March 31, 2012 and 2011:

 

 

 

Three Months Ended March 31,

 

 

 

2012 vs. 2011

 

 

 

Increase (Decrease) Due to

 

(In Thousands)

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

Loans, tax-exempt

 

$

38

 

$

(37

)

$

1

 

Loans

 

708

 

(683

)

25

 

Taxable investment securities

 

365

 

(226

)

139

 

Tax-exempt investment securities

 

468

 

(260

)

208

 

Interest bearing deposits

 

 

 

 

Total interest-earning assets

 

1,579

 

(1,206

)

373

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Savings deposits

 

9

 

(33

)

(24

)

Super Now deposits

 

52

 

7

 

59

 

Money market deposits

 

98

 

(158

)

(60

)

Time deposits

 

(46

)

(162

)

(208

)

Short-term borrowings

 

21

 

(44

)

(23

)

Long-term borrowings, FHLB

 

(99

)

(15

)

(114

)

Total interest-bearing liabilities

 

35

 

(405

)

(370

)

Change in net interest income

 

$

1,544

 

$

(801

)

$

743

 

 

Provision for Loan Losses

 

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 for loan losses is determined 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 non-performing loans and its knowledge and experience with specific lending segments.

 

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at March 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, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance.  The banking agencies 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.

 

When 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 $7,745,000 at March 31, 2012.  At March 31, 2012 and December 31, 2011, the allowance for loan losses to total loans was 1.75% and 1.64%, respectively.

 

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Table of Contents

 

The provision for loan losses totaled $600,000 for the three months ended March 31, 2012 and 2011.  The amount of the provision was the result of several factors, including but not limited to, a ratio of nonperforming loans to total loans of 2.55% at March 31, 2012 and a ratio of the allowance for loan losses to nonperforming loans of 68.49% at March 31, 2012.  Nonperforming loans decreased to $11,308,000 at March 31, 2012 from $12,900,000 at March 31, 2011 due to primarily to a partial charge-off of $1,500,000 during the second quarter of 2011.  The nonperforming loan portfolio is centered on several loans that are either in a secured position and have sureties with a strong underlying financial position or have a specific allocation for any impairment recorded within the allowance for loan losses.  Internal loan review and analysis and the continued uncertainty surrounding the economy, coupled with the ratios noted previously, dictated the level of provision for loan losses for the three month period despite the decrease in nonperforming loans.

 

The following is a table showing total nonperforming loans as of:

 

 

 

Total Nonperforming Loans

 

 

 

 

 

90 Days

 

 

 

(In Thousands)

 

Nonaccrual

 

Past Due

 

Total

 

March 31, 2012

 

$

11,307

 

$

1

 

$

11,308

 

December 31, 2011

 

11,625

 

384

 

12,009

 

September 30, 2011

 

11,885

 

2,459

 

14,344

 

June 30, 2011

 

10,911

 

 

10,911

 

March 31, 2011

 

12,797

 

103

 

12,900

 

 

Non-interest Income

 

Total non-interest income for the three months ended March 31, 2012 compared to the same period in 2011 increased $818,000 to $2,763,000.  Excluding net securities gains, non-interest income for the three months ended March 31, 2012 would have increased $354,000 compared to the 2011 period.  Deposit service charges decreased due to a change in the overdraft program that allows for a de minimus overdraft prior to any fees being charged.  Bank owned life insurance income increased due to a gain on death benefit of $109,000.  Gain on sale of loans decreased primarily due to a shift in product mix.  Other income increased as debit and credit card related income continues to build as debit cards continue to gain in popularity, while an increasing number of merchants utilize our merchant card services.

 

Insurance and brokerage commissions for the three months ended March 31, 2012 increased due to continued efforts to add sales representatives.  Management of The M Group continues to pursue new and build upon current relationships.  The sales call program continues to expand to other financial institutions, which results in additional revenue for The M Group if an additional sales outlet is added.  However, the addition of a sales outlet for The M Group can take up to a year or more to be completed.

 

Non-interest income composition for the three months ended March 31, 2012 and 2011 was as follows:

 

 

 

For the Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposit service charges

 

$

447

 

16.18

%

$

503

 

25.85

%

$

(56

)

(11.13

)%

Securities gains, net

 

589

 

21.32

 

125

 

6.43

 

464

 

371.20

 

Bank owned life insurance

 

268

 

9.70

 

174

 

8.95

 

94

 

54.02

 

Gain on sale of loans

 

183

 

6.62

 

249

 

12.80

 

(66

)

(26.51

)

Insurance commissions

 

442

 

16.00

 

209

 

10.75

 

233

 

111.48

 

Brokerage commissions

 

212

 

7.67

 

274

 

14.09

 

(62

)

(22.63

)

Other

 

622

 

22.51

 

411

 

21.13

 

211

 

51.34

 

Total non-interest income

 

$

2,763

 

100.00

%

$

1,945

 

100.00

%

$

818

 

42.06

%

 

Non-interest Expense

 

Total non-interest expense increased $476,000 for the three months ended March 31, 2012 compared to the same period of 2011.  The increase in salaries and employee benefits was attributable to increases in health insurance, salaries, and bonus accrual.  FDIC deposit insurance decreased due to a change in the assessment base from a deposit to asset based calculation.  Other expenses increased primarily due to expenses associated with the opening of a new branch in Danville, Montour County with emphasis on marketing costs.

 

Non-interest expense composition for the three months ended March 31, 2012 and 2011 was as follows:

 

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Table of Contents

 

 

 

For the Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Salaries and employee benefits

 

$

3,017

 

55.22

%

$

2,632

 

52.76

%

$

385

 

14.63

%

Occupancy, net

 

328

 

6.00

 

348

 

6.98

 

(20

)

(5.75

)

Furniture and equipment

 

346

 

6.33

 

308

 

6.17

 

38

 

12.34

 

Pennsylvania shares tax

 

169

 

3.09

 

172

 

3.45

 

(3

)

(1.74

)

Amortization of investment in limited partnerships

 

165

 

3.02

 

166

 

3.33

 

(1

)

(0.60

)

FDIC deposit insurance

 

123

 

2.25

 

187

 

3.75

 

(64

)

(34.22

)

Other

 

1,316

 

24.09

 

1,175

 

23.56

 

141

 

12.00

 

Total non-interest expense

 

$

5,464

 

100.00

%

$

4,988

 

100.00

%

$

476

 

9.54

%

 

Provision for Income Taxes

 

Income taxes increased $179,000 for the three months ended March 31, 2012 compared to the same periods of 2011.  The primary cause of the increase in tax expense for the three month periods ended March 31, 2012 compared to 2011 is the impact of increased net interest income in addition to an increase in net security gains.  Excluding the impact of the net securities gains, the effective tax rate for the three months ended March 31, 2012 was 12.70% compared to 14.18% for the same period of 2011.  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.

 

ASSET/LIABILITY MANAGEMENT

 

Cash and Cash Equivalents

 

Cash and cash equivalents increased $9,546,000 from $13,885,000 at December 31, 2011 to $23,431,000 at March 31, 2012 primarily as a result of the following activities during the three months ended March 31, 2012:

 

Loans Held for Sale

 

Activity regarding loans held for sale resulted in loan originations trailing sale proceeds, less $183,000 in realized gains, by $1,722,000 for the three months ended March 31, 2012.

 

Loans

 

Gross loans increased $7,618,000 since December 31, 2011 due primarily to an increase of residential real estate loans.

 

The allocation of the loan portfolio, by category, as of March 31, 2012 and December 31, 2011 is presented below:

 

 

 

March 31, 2012

 

December 31, 2011

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Commercial and agricultural

 

$

53,550

 

12.07

%

$

53,129

 

12.19

%

$

421

 

0.79

%

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

186,369

 

42.02

 

179,383

 

41.15

 

6,986

 

3.89

 

Commercial

 

164,204

 

37.02

 

164,288

 

37.68

 

(84

)

(0.05

)

Construction

 

30,180

 

6.80

 

29,457

 

6.76

 

723

 

2.45

 

Installment loans to individuals

 

10,834

 

2.44

 

11,297

 

2.59

 

(463

)

(4.10

)

Less: Net deferred loan fees and discounts

 

(1,560

)

(0.35

)

(1,595

)

(0.37

)

35

 

(2.19

)

Gross loans

 

$

443,577

 

100.00

%

$

435,959

 

100.00

%

$

7,618

 

1.75

%

 

Investments

 

The fair value of the investment securities portfolio at March 31, 2012 increased $14,681,000 since December 31, 2011.  The change is primarily due to purchases of short-term other debt securities coupled with a net unrealized gain of $8,836,000 at March 31, 2012 compared to an unrealized gain of $4,415,000 at December 31, 2011.  The unrealized losses within the debt securities portfolio are the result of market activity, not credit issues/ratings, as approximately 93% of the debt securities portfolio on an amortized cost basis is currently rated A or higher by either S&P or Moody’s.

 

The Company considers various factors, which include examples from applicable accounting guidance, when analyzing the available for sale portfolio for possible other than temporary impairment.  The Company primarily considers the following factors in its analysis: length of time and severity of the market value being less than carrying value; reduction of dividend paid (equities);

 

28



Table of Contents

 

continued payment of dividend/interest, credit rating, and financial condition of an issuer; intent and ability to hold until anticipated recovery (which may be maturity); and general outlook for the economy, specific industry, and entity in question.

 

The bond portion of the portfolio review is conducted with emphases on several factors.  Continued payment of principal and interest is given primary importance with credit rating and financial condition of the issuer following as the next most important.  Credit ratings were reviewed with the ratings of the bonds being satisfactory.  Bonds that were not currently rated were discussed with a third party and/or underwent an internal financial review.  The Company also monitors whether each of the investments incurred a decline in market value from carrying value of at least 20% for twelve consecutive months or a similar decline of at least 50% for three consecutive months.  Each bond is reviewed to determine whether it is a general obligation bond, which is backed by the credit and taxing power of the issuing jurisdiction, or revenue bond, which is only payable from specified revenues.  Based on the review undertaken by the Company, the Company determined that the decline in value of the various bond holdings were temporary and were the result of the general market downturns and interest rate/yield curve changes, not credit issues.  The fact that almost all of such bonds are general obligation bonds further solidified the Company’s determination that the decline in the value of these bond holdings is temporary.

 

The fair value of the equity portfolio continues to fluctuate as the economic turbulence both domestic and global continues to impact financial sector stock pricing.  The amortized cost of the equity securities portfolio has decreased $640,000 to $12,050,000 at March 31, 2012 from $12,690,000 at December 31, 2011 as the Company sold certain holdings within the portfolio.  These holdings were sold due to the determination that their value was fully measured and as part of a strategy to shift the portfolio from a reliance on financial institution securities to a portfolio containing a greater amount of sector and geographic diversity as seen in the growth of non-financial institution holdings.

 

The equity portion of the portfolio is reviewed for possible other than temporary impairment in a similar manner to the bond portfolio with greater emphasis placed on the length of time the market value has been less than the carrying value and financial sector outlook.  The Company also reviews dividend payment activities and, in the case of financial institutions, whether or not such issuer was participating in the TARP Capital Purchase Program.  The starting point for the equity analysis is the length and severity of a market price decline.  The Company monitors two primary measures: 20% decline in market value from carrying value for twelve consecutive months and 50% decline for three consecutive months.

 

The distribution of credit ratings by amortized cost and fair values for the debt security portfolio at March 31, 2012 follows:

 

 

 

A- to AAA

 

B- to BBB+

 

C to CCC+

 

Not Rated

 

Total

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(In Thousands)

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

21,801

 

$

23,499

 

$

 

$

 

$

 

$

 

$

 

$

 

$

21,801

 

$

23,499

 

State and political securities

 

160,213

 

167,360

 

7,011

 

6,414

 

 

 

8,697

 

8,397

 

175,921

 

182,171

 

Other debt securities

 

64,574

 

64,171

 

600

 

601

 

 

 

996

 

894

 

66,170

 

65,666

 

Total debt securities AFS

 

$

246,588

 

$

255,030

 

$

7,611

 

$

7,015

 

$

 

$

 

$

9,693

 

$

9,291

 

$

263,892

 

$

271,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity (HTM)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other debt securities

 

$

55

 

$

55

 

$

 

$

 

$

 

$

 

$

 

$

 

$

55

 

$

55

 

Total debt securities HTM

 

$

55

 

$

55

 

$

 

$

 

$

 

$

 

$

 

$

 

$

55

 

$

55

 

 

Financing Activities

 

Deposits

 

Total deposits increased $39,878,000 from December 31, 2011 to March 31, 2012.  The growth was led by an increase in money market and NOW accounts from December 31, 2011 to March 31, 2012 of 14.07% and 6.97%, respectively.  The increase in core deposits (deposits less time deposits) has provided relationship driven funding for the loan and investment portfolios, while also reducing the utilization of FHLB borrowings.  The increase in deposits is the result of our focus on building relationships with money market accounts being the key building block.  Time deposits have increased as efforts to slowly lengthen the portfolio have begun; however, time deposits remain as complementary accounts to core deposits.  To facilitate this strategy we are actively working single product time deposit relationships to create a solid relationship through the addition of other products to the customer’s portfolio.

 

Deposit balances and their changes for the periods being discussed follow:

 

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Table of Contents

 

 

 

March 31, 2012

 

December 31, 2011

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Demand deposits

 

$

116,271

 

18.71

%

$

111,354

 

19.14

%

$

4,917

 

4.42

%

NOW accounts

 

108,904

 

17.52

 

101,808

 

17.50

 

7,096

 

6.97

 

Money market deposits

 

141,830

 

22.82

 

124,335

 

21.38

 

17,495

 

14.07

 

Savings deposits

 

77,253

 

12.43

 

71,646

 

12.32

 

5,607

 

7.83

 

Time deposits

 

177,284

 

28.52

 

172,521

 

29.66

 

4,763

 

2.76

 

Total deposits

 

$

621,542

 

100.00

%

$

581,664

 

100.00

%

$

39,878

 

6.86

%

 

Borrowed Funds

 

Total borrowed funds decreased 16.32% or $14,830,000 to $76,046,000 at March 31, 2012 compared to $90,876,000 at December 31, 2011.  The decrease in borrowed funds is primarily the result of growth in deposits as the deposit growth provided loan portfolio funding and funds to reduce the level of total borrowings.  FHLB repurchase agreements were utilized as their structure allowed for a reduction in interest expense, while providing the ability to reduce the borrowings at our discretion as deposit levels increased.

 

 

 

March 31, 2012

 

December 31, 2011

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB repurchase agreements

 

$

 

%

$

16,445

 

18.10

%

$

(16,445

)

(100.00

)%

Securities sold under agreement to repurchase

 

14,768

 

19.42

 

13,153

 

14.47

 

1,615

 

12.28

 

Total short-term borrowings

 

14,768

 

19.42

 

29,598

 

32.57

 

(14,830

)

(50.10

)

Long-term borrowings, FHLB

 

61,278

 

80.58

 

61,278

 

67.43

 

 

 

Total borrowed funds

 

$

76,046

 

100.00

%

$

90,876

 

100.00

%

$

(14,830

)

(16.32

)%

 

Capital

 

The adequacy of the Company’s capital is reviewed on an ongoing basis with reference to the size, composition, and quality of the Company’s resources and regulatory guidelines.  Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings.

 

Bank holding companies are required to comply with the Federal Reserve Board’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.  Specifically, each is required to maintain certain minimum dollar amounts and ratios of total risk-based, tier I risk-based, and tier I leverage capital. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act (FDICIA) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” To be classified as “well capitalized”, total risk-based, tier I risked-based, and tier I leverage capital ratios must be at least 10%, 6%, and 5%, respectively.

 

Capital ratios as of March 31, 2012 and December 31, 2011 were as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

(In Thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

Actual

 

$

80,200

 

15.11

%

$

77,863

 

15.27

%

For Capital Adequacy Purposes

 

42,458

 

8.00

 

40,796

 

8.00

 

To Be Well Capitalized

 

53,073

 

10.00

 

50,995

 

10.00

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

Actual

 

$

73,002

 

13.76

%

$

71,064

 

13.94

%

For Capital Adequacy Purposes

 

21,229

 

4.00

 

20,398

 

4.00

 

To Be Well Capitalized

 

31,844

 

6.00

 

30,597

 

6.00

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Average Assets)

 

 

 

 

 

 

 

 

 

Actual

 

$

73,002

 

9.66

%

$

71,064

 

9.57

%

For Capital Adequacy Purposes

 

30,217

 

4.00

 

29,688

 

4.00

 

To Be Well Capitalized

 

37,771

 

5.00

 

37,110

 

5.00

 

 

30



Table of Contents

 

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 March 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 Bank, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments and originations, and expenses.  In order to control cash flow, the Bank estimates future cash flows from deposits, loan payments, and investment security payments.  The primary sources of funds are deposits, principal and interest payments on loans and investment securities, FHLB borrowings, and brokered deposits.  Management believes the Bank 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 funding 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.  As of March 31, 2012, the Company has a current borrowing capacity at the FHLB of $209,690,000.  In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $27,317,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.  FHLB borrowings totaled $61,278,000 as of March 31, 2012.

 

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.

 

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, 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 emphases 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.

 

31



Table of Contents

 

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 ending March 31, 2013 assuming a static balance sheet as of March 31, 2012.

 

 

 

Parallel Rate Shock in Basis Points

 

(In Thousands)

 

-200

 

-100

 

Static

 

+100

 

+200

 

+300

 

+400

 

Net interest income

 

$

27,245

 

$

27,983

 

$

28,461

 

$

28,754

 

$

29,053

 

$

29,247

 

$

29,205

 

Change from static

 

(1,216

)

(478

)

 

293

 

592

 

786

 

744

 

Percent change from static

 

-4.27

%

-1.68

%

 

1.03

%

2.08

%

2.76

%

2.61

%

 

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 which are not measured by a price index.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Market risk for the Company is comprised primarily of 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 by an independent third party.  There have been no substantial changes in the Company’s gap analyses or simulation analyses compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2011.  Additional information and details are provided in the “Liquidity and Interest Rate Sensitivity” section of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.

 

Item 4.  Controls and Procedures

 

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012.  There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

Part II.  OTHER INFORMATION

 

Item 1.                             Legal Proceedings

 

None.

 

Item 1A.                    Risk Factors

 

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.

 

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

 

Period

 

Total Number
of Shares (or
Units)
Purchased

 

Average Price
Paid per Share
(or Unit)
Purchased

 

Total Number of Shares (or
Units) Purchased as Part of
Publicly Announced Plans
or Programs

 

Maximum Number (or Approximate
Dollar Value) of Shares (or Units)
that May Yet Be Purchased Under
the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

Month #1 (January 1 - January 31, 2012)

 

 

$

 

 

76,776

 

 

 

 

 

 

 

 

 

 

 

Month #2 (February 1 - February 29, 2012)

 

 

 

 

76,776

 

 

 

 

 

 

 

 

 

 

 

Month #3 (March 1 - March 31, 2012)

 

 

 

 

76,776

 

 

On April 24, 2012, the Board of Directors extended the previously approved authorization to repurchase up to 197,000 shares, or approximately 5%, of the outstanding shares of the Company for an additional year to April 30, 2013.  To date, there have been 120,224 shares repurchased under this plan.

 

On April 25, 2012, the Shareholders of the Corporation authorized an amendment to the Articles of Incorporation to increase the number of shares of common stock from 10,000,000 to 15,000,000 and authorized 3,000,000 shares of preferred stock.

 

Item 3.                             Defaults Upon Senior Securities

 

None.

 

Item 4.                             Mine Safety Disclosures

 

Not applicable.

 

Item 5.                             Other Information

 

None.

 

Item 6.                             Exhibits

 

3(i)

 

Articles of Incorporation of the Registrant, as presently in effect.

3(ii)

 

Bylaws of the Registrant’s as presently in effect (incorporated by reference to Exhibit 3(ii) of the Registrant’s Current Report on Form 8-K filed June 17, 2005).

10(i)

 

Employment Agreement, dated October 25, 2010, between Robert J. Glunk, Penns Woods Bancorp, Inc. and Jersey Shore State Bank.

31(i)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.

31(ii)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.

32(i)

 

Section 1350 Certification of Chief Executive Officer.

32(ii)

 

Section 1350 Certification of Chief Financial Officer.

101

 

Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at March 31, 2012 and December 31, 2011; (ii) the Consolidated Statement of Income for the three months ended March 31, 2012 and 2011; (iii) the Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2012 and 2011; (iv) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2012 and 2011; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2012 and 2011; 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.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

PENNS WOODS BANCORP, INC.

 

(Registrant)

 

 

 

 

Date: May 9, 2012

/s/ Richard A. Grafmyre

 

Richard A. Grafmyre, President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Date: May 9, 2012

/s/ Brian L. Knepp

 

Brian L. Knepp, Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting

 

Officer)

 

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Table of Contents

 

EXHIBIT INDEX

 

Exhibit 3(i)

 

Articles of Incorporation of the Registrant, as presently in effect.

Exhibit 10(i)

 

Employment Agreement, dated October 25, 2010, between Robert J. Glunk, Penns Woods Bancorp, Inc. and Jersey Shore State Bank.

Exhibit 31(i)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer

Exhibit 31(ii)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer

Exhibit 32(i)

 

Section 1350 Certification of Chief Executive Officer

Exhibit 32(ii)

 

Section 1350 Certification of Chief Financial Officer

Exhibit 101

 

Interactive data file containing the following financial statements formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheet at March 31, 2012 and December 31, 2011; (ii) the Consolidated Statement of Income for the three months ended March 31, 2012 and 2011; (iii) the Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2012 and 2011; (iv) Consolidated Statement of Comprehensive Income for the three months ended March 31, 2012 and 2011; (v) the Consolidated Statement of Cash Flows for the three months ended March 31, 2012 and 2011; 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.

 

35