Edgar Filing: PENNS WOODS BANCORP INC

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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 September 30, 2011.

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 November 2, 2011 there were 3,836,396 shares of the Registrant’s common stock outstanding.

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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 September 30, 2011 and December 31, 2010		3

Consolidated Statement of Income (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010		4

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2011 and 2010		5

Consolidated Statement of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010		5

Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010		6

Notes to Consolidated Financial Statements (Unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

Part II	Other Information

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	(Removed and Reserved)	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signatures		38
Exhibit Index and Exhibits		39

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

	September 30,			December 31,
(In Thousands, Except Share Data)	2011			2010
ASSETS:
Noninterest-bearing balances	$	11,658		$	9,467
Interest-bearing deposits in other financial institutions	17			26
Total cash and cash equivalents	11,675			9,493

Investment securities, available for sale, at fair value	266,637			215,565
Investment securities, held to maturity, (fair value of $54 and $83)	54			83
Loans held for sale	3,623			6,658
Loans	429,344			415,557
Less: Allowance for loan losses	6,355			6,035
Loans, net	422,989			409,522
Premises and equipment, net	7,533			7,658
Accrued interest receivable	3,802			3,765
Bank-owned life insurance	15,929			15,436
Investment in limited partnerships	3,709			4,205
Goodwill	3,032			3,032
Deferred tax asset	8,087			11,897
Other assets	5,580			4,374
TOTAL ASSETS	$	752,650		$	691,688

LIABILITIES:
Interest-bearing deposits	$	470,517		$	428,161
Noninterest-bearing deposits	104,783			89,347
Total deposits	575,300			517,508

Short-term borrowings	17,584			27,299
Long-term borrowings, Federal Home Loan Bank (FHLB)	71,778			71,778
Accrued interest payable	616			750
Other liabilities	8,800			7,733
TOTAL LIABILITIES	674,078			625,068

SHAREHOLDERS’ EQUITY
Common stock, par value $8.33, 10,000,000 shares authorized; 4,017,251 and 4,015,753 shares issued	33,477			33,464
Additional paid-in capital	18,103			18,064
Retained earnings	34,765			31,091
Accumulated other comprehensive loss:
Net unrealized gain (loss) on available for sale securities	950			(7,276		)
Defined benefit plan	(2,413		)	(2,413		)
Less: Treasury stock at cost, 180,596 shares	(6,310		)	(6,310		)
TOTAL SHAREHOLDERS’ EQUITY	78,572			66,620
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	752,650		$	691,688

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands, Except Per Share Data)	2011		2010		2011		2010

INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	6,327	$	6,434	$	18,759	$	19,162
Investment securities:
Taxable	1,445		1,428		4,231		4,182
Tax-exempt	1,336		1,266		3,875		3,794
Dividend and other interest income	65		54		174		157
TOTAL INTEREST AND DIVIDEND INCOME	9,173		9,182		27,039		27,295

INTEREST EXPENSE:
Deposits	1,154		1,458		3,530		4,719
Short-term borrowings	58		77		157		197
Long-term borrowings, FHLB	751		889		2,227		2,733
TOTAL INTEREST EXPENSE	1,963		2,424		5,914		7,649

NET INTEREST INCOME	7,210		6,758		21,125		19,646

PROVISION FOR LOAN LOSSES	600		700		1,800		1,400

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	6,610		6,058		19,325		18,246

NON-INTEREST INCOME:
Service charges	508		562		1,538		1,609
Securities gains, net	8		109		142		162
Earnings on bank-owned life insurance	148		143		461		442
Gain on sale of loans	359		202		850		714
Insurance commissions	241		230		630		767
Brokerage commissions	241		208		797		716
Other	485		416		1,390		1,164
TOTAL NON-INTEREST INCOME	1,990		1,870		5,808		5,574

NON-INTEREST EXPENSE:
Salaries and employee benefits	2,621		2,427		7,728		7,779
Occupancy, net	313		303		962		947
Furniture and equipment	354		296		1,011		922
Pennsylvania shares tax	172		170		516		508
Amortization of investment in limited partnerships	165		200		496		483
FDIC deposit insurance	43		180		416		556
Other	1,300		1,128		3,683		3,485
TOTAL NON-INTEREST EXPENSE	4,968		4,704		14,812		14,680

INCOME BEFORE INCOME TAX PROVISION	3,632		3,224		10,321		9,140
INCOME TAX PROVISION	482		376		1,354		1,072
NET INCOME	$	3,150	$	2,848	$	8,967	$	8,068

NET INCOME PER SHARE - BASIC	$	0.82	$	0.74	$	2.34	$	2.10

NET INCOME PER SHARE - DILUTED	$	0.82	$	0.74	$	2.34	$	2.10

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	3,836,244		3,833,850		3,835,778		3,834,101

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	3,836,244		3,833,990		3,835,778		3,834,241

DIVIDENDS PER SHARE	$	0.46	$	0.46	$	1.38	$	1.38

See accompanying notes to the unaudited consolidated financial statements.

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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, 2009	4,013,142	$	33,443	$	18,008	$	27,218		$	(5,489	)	$	(6,264	)	$	66,916

Comprehensive income:
Net income						8,068									8,068
Other comprehensive income									5,626						5,626
Dividends declared, ($1.38 per share)						(5,292		)							(5,292		)
Common shares issued for employee stock purchase plan	1,729	14		37											51
Purchase of treasury stock (1,568 shares)												(46		)	(46		)
Balance, September 30, 2010	4,014,871	$	33,457	$	18,045	$	29,994		$	137		$	(6,310	)	$	75,323

									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						8,967									8,967
Other comprehensive income									8,226						8,226
Dividends declared, ($1.38 per share)						(5,293		)							(5,293		)
Common shares issued for employee stock purchase plan	1,498	13		39											52
Balance, September 30, 2011	4,017,251	$	33,477	$	18,103	$	34,765		$	(1,463	)	$	(6,310	)	$	78,572

See accompanying notes to the unaudited consolidated financial statements.

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2011			2010			2011			2010

Net Income		$	3,150		$	2,848		$	8,967		$	8,068
Other comprehensive income:
Change in unrealized gain on available for sale securities	4,950			5,591			12,605			8,686
Net realized gain included in net income	8			109			142			162
Other comprehensive income before tax expense	4,942			5,482			12,463			8,524
Income tax expense related to other comprehensive income	1,680			1,864			4,237			2,898
Other comprehensive income, net of tax		3,262			3,618			8,226			5,626
Comprehensive income		$	6,412		$	6,466		$	17,193		$	13,694

See accompanying notes to the unaudited consolidated financial statements.

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PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
(In Thousands)	2011			2010

OPERATING ACTIVITIES:
Net Income	$	8,967		$	8,068
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	526			558
Provision for loan losses	1,800			1,400
Accretion and amortization of investment security discounts and premiums	(1,320		)	(1,557		)
Securities gains, net	(142		)	(162		)
Originations of loans held for sale	(28,756		)	(31,557		)
Proceeds of loans held for sale	32,641			30,974
Gain on sale of loans	(850		)	(714		)
Earnings on bank-owned life insurance	(461		)	(442		)
Decrease in prepaid federal deposit insurance	337			508
Other, net	(412		)	648
Net cash provided by operating activities	12,330			7,724
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales	11,992			3,446
Proceeds from calls and maturities	9,601			12,424
Purchases	(58,272		)	(28,918		)
Investment securities held to maturity:
Proceeds from sales	5			—
Proceeds from calls and maturities	25			26
Net increase in loans	(17,275		)	(8,148		)
Acquisition of bank premises and equipment	(394		)	(384		)
Proceeds from the sale of foreclosed assets	388			193
Purchase of bank-owned life insurance	(39		)	(47		)
Proceeds from bank-owned life insurance death benefit	—			82
Proceeds from redemption of regulatory stock	985			—
Net cash used for investing activities	(52,984		)	(21,326		)
FINANCING ACTIVITIES
Net increase in interest-bearing deposits	42,356			24,654
Net increase in noninterest-bearing deposits	15,436			12,229
Repayment of long-term borrowings, FHLB	—			(5,000		)
Net decrease in short-term borrowings	(9,715		)	(3,725		)
Dividends paid	(5,293		)	(5,292		)
Issuance of common stock	52			51
Purchase of treasury stock	—			(46		)
Net cash provided by financing activities	42,836			22,871
NET INCREASE IN CASH AND CASH EQUIVALENTS	2,182			9,269
CASH AND CASH EQUIVALENTS, BEGINNING	9,493			13,788
CASH AND CASH EQUIVALENTS, ENDING	$	11,675		$	23,057

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Interest paid	$	6,048		$	7,890
Income taxes paid	1,790			1,950
Transfer of loans to foreclosed real estate	2,008			226

See accompanying notes to the unaudited consolidated financial statements.

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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, 2010.

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 39 through 46 of the Annual Report on Form 10-K for the year ended December 31, 2010.

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 FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has provided the necessary disclosures in Note 6. Credit Quality and Related Allowance for Loan Losses.

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

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial statements.

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In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this update should be applied retrospectively, and early adoption is permitted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial statements.

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

In September 2011, the FASB issued ASU 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80). The amendments in this update will require additional disclosures about an employer’s participation in a multiemployer pension plan to enable users of financial statements to assess the potential cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods of fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. This ASU is not expected to 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.

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010

Weighted average common shares issued	4,016,840		4,014,446		4,016,374		4,013,891

Average treasury stock shares	(180,596	)	(180,596	)	(180,596	)	(179,790	)

Weighted average common shares and common stock equivalents used to calculate basic earnings per share	3,836,244		3,833,850		3,835,778		3,834,101

Additional common stock equivalents (stock options) used to calculate diluted earnings per share	—		140		—		140

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share	3,836,244		3,833,990		3,835,778		3,834,241

Options to purchase 990 shares of common stock at a strike price of $24.72 were outstanding during the three and nine months ended September 30, 2010 and were included in the computation of diluted earnings per share. The average market price of the Company’s stock was $31.47 for the nine months ended September 30, 2010. There were no options outstanding during the nine months ended September 30, 2011.

Note 4. Investment Securities

The amortized cost and fair values of investment securities at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In Thousands)	Cost		Gains		Losses			Value
Available for sale (AFS)
U.S. Government and agency securities	$	28,330	$	2,006	$	—		$	30,336
State and political securities	174,372		6,051		(5,499		)	174,924
Other debt securities	48,978		208		(1,570		)	47,616
Total debt securities	251,680		8,265		(7,069		)	252,876
Financial institution securities	10,574		881		(505		)	10,950
Other equity securities	2,944		59		(192		)	2,811
Total equity securities	13,518		940		(697		)	13,761
Total investment securities AFS	$	265,198	$	9,205	$	(7,766	)	$	266,637

Held to maturity (HTM)
U.S. Government and agency securities	$	—	$	—	$	—		$	—
Other debt securities	54		—		—			54
Total investment securities HTM	$	54	$	—	$	—		$	54

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	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In Thousands)	Cost		Gains		Losses			Value
Available for sale (AFS)
U.S. Government and agency securities	$	24,759	$	1,854	$	—		$	26,613
State and political securities	169,844		282		(15,339		)	154,787
Other debt securities	20,141		503		(36		)	20,608
Total debt securities	214,744		2,639		(15,375		)	202,008
Financial institution securities	11,549		1,686		(44		)	13,191
Other equity securities	296		70		—			366
Total equity securities	11,845		1,756		(44		)	13,557
Total investment securities AFS	$	226,589	$	4,395	$	(15,419	)	$	215,565

Held to maturity (HTM)
U.S. Government and agency securities	$	5	$	—	$	—		$	5
Other debt securities	78		—		—			78
Total investment securities HTM	$	83	$	—	$	—		$	83

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at September 30, 2011 and December 31, 2010.

	September 30, 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

U.S. Government and agency securities	$	—	$	—	$	—	$	—	$	—	$	—
State and political securities	3,708		32		35,463		5,467		39,171		5,499
Other debt securities	33,157		1,551		81		19		33,238		1,570
Total debt securities	36,865		1,583		35,544		5,486		72,409		7,069
Financial institution securities	1,905		389		115		116		2,020		505
Other equity securities	1,301		192		—		—		1,301		192
Total equity securities	3,206		581		115		116		3,321		697
Total	$	40,071	$	2,164	$	35,659	$	5,602	$	75,730	$	7,766

	December 31, 2010
	Less than Twelve Months				Twelve Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In Thousands)	Value		Losses		Value		Losses		Value		Losses

U.S. Government and agency securities	$	—	$	—	$	—	$	—	$	—	$	—
State and political securities	105,826		5,883		32,847		9,456		138,673		15,339
Other debt securities	2,501		19		282		17		2,783		36
Total debt securities	108,327		5,902		33,129		9,473		141,456		15,375
Financial institution securities	859		41		59		3		918		44
Other equity securities	—		—		—		—		—		—
Total equity securities	859		41		59		3		918		44
Total	$	109,186	$	5,943	$	33,188	$	9,476	$	142,374	$	15,419

At September 30, 2011 there were a total of 66 and 80 individual securities that were in a continuous unrealized loss position for less than twelve months and greater than twelve months, respectively.

The Company reviews its position quarterly and has determined that, at September 30, 2011, 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

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required to sell these securities before recovery of their cost basis, which may be at maturity. There were 146 positions that were temporarily impaired at September 30, 2011. The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or company-specific ratings changes that are not expected to result in the non-collection of principal and interest during the period.

The amortized cost and fair value of debt securities at September 30, 2011, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized				Amortized
(In Thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	10,134	$	10,289	$	54	$	54
Due after one year to five years	25,854		25,099		—		—
Due after five years to ten years	22,609		21,976		—		—
Due after ten years	193,083		195,512		—		—
Total	$	251,680	$	252,876	$	54	$	54

Total gross proceeds from sales of securities available for sale were $11,992,000 and $3,446,000, for the nine months ended September 30, 2011 and 2010, respectively. The following table represents gross realized gains and losses on those transactions:

	Nine Months Ended September 30,
(In Thousands)	2011		2010
Gross realized gains:
U.S. Government and agency securities	$	4	$	—
State and political securities	114		—
Other debt securities	8		117
Financial institutions securities	—		56
Other equity securities	131		—
Total gross realized gains	$	257	$	173

Gross realized losses:
U.S. Government and agency securities	$	—	$	—
State and political securities	100		—
Other debt securities	15		11
Financial institutions securities	—		—
Other equity securities	—		—
Total gross realized losses	$	115	$	11

There were no impairment charges included in gross realized losses for the nine months ended September 30, 2011 and 2010, respectively.

Note 5. Federal Home Loan Bank Stock

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLB”), which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. As a member, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to the sum of 0.35% of the membership asset value at December 31, 2010, 4.60% of advances, and 1.60% of letters of credit. At September 30, 2011, the Bank held $5,922,000 in stock of the FHLB, which was in compliance with this requirement.

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The Company evaluated its holding of FHLB stock for impairment and deemed the stock to not be impaired due to the expected recoverability of the par value, which equals the value reflected within the Company’s financial statements. The decision was based on several items ranging from the estimated true economic losses embedded within the FHLB’s mortgage portfolio to the FHLB’s liquidity position and credit rating.

The following factors were evaluated to determine the ultimate recoverability of the par value of the Company’s FHLB stock holding; (i) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v) whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock based on (a) the materiality of the carrying amount to the member institution and (b) whether an assessment of the institution’s operational needs for the foreseeable future allow management to dispose of the stock.

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 September 30, 2011 and December 31, 2010:

	September 30, 2011
					Past Due
					90 Days
			Past Due		Or More
			30 To 89		& Still		Non-
(In Thousands)	Current		Days		Accruing		Accrual		Total
Commercial and agricultural	$	51,533	$	34	$	—	$	—	$	51,567
Real estate mortgage:
Residential	172,937		916		—		755		174,608
Commercial	164,026		90		2,459		1,200		167,775
Construction	17,998		—		—		9,930		27,928
Installment loans to individuals	9,049		50		—		—		9,099
	415,543		$	1,090	$	2,459	$	11,885	430,977
Less: Net deferred loan fees and discounts	1,633								1,633
Allowance for loan losses	6,355								6,355
Loans, net	$	407,555							$	422,989

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	December 31, 2010
					Past Due
					90 Days
			Past Due		Or More
			30 To 90		& Still		Non-
(In Thousands)	Current		Days		Accruing		Accrual		Total
Commercial and agricultural	$	50,208	$	426	$	215	$	4	$	50,853
Real estate mortgage:
Residential	166,354		6,356		259		609		173,578
Commercial	157,764		438		60		1,927		160,189
Construction	13,836		5,592		—		3,117		22,545
Installment loans to individuals	9,199		209		23		1		9,432
	397,361		$	13,021	$	557	$	5,658	416,597
Less: Net deferred loan fees	1,040								1,040
Allowance for loan losses	6,035								6,035
Loans, net	$	390,286							$	409,522

If interest had been recorded based on the original loan agreement terms and rate of interest for non-accrual loans, interest income on non-accrual loans would have approximated $333,000 and $658,000, and $102,000 and $342,000 for the three and nine months ended September 30, 2011 and 2010, respectively. Interest income recognized on such loans amounted to approximately $8,000 and $29,000 and $31,000 and $118,000, for the three and nine months ended September 30, 2011 and 2010, respectively.

Impaired Loans

Impaired loans are loans for which it is probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Bank 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, 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 September 30, 2011 and December 31, 2010:

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	September 30, 2011
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	—	$	—	$	—
Real estate mortgages - residential	478		487		—
Real estate mortgages - commercial	1,879		1,879		—
Real estate mortgages - construction	633		633		—
Installment loans to individuals	—		—		—
	2,990		2,999		—
With an allowance recorded:
Commercial and agricultural	—		—		—
Real estate mortgages - residential	1,034		1,059		110
Real estate mortgages - commercial	5,570		5,570		508
Real estate mortgages - construction	9,346		11,114		2,120
Installment loans to individuals	—		—		—
	15,950		17,743		2,738
Total:
Commercial and agricultural	—		—		—
Real estate mortgages - residential	1,512		1,546		110
Real estate mortgages - commercial	7,449		7,449		508
Real estate mortgages - construction	9,979		11,747		2,120
Installment loans to individuals	—		—		—
	$	18,940	$	20,742	$	2,738

	December 31, 2010
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	90	$	90	$	—
Real estate mortgages - residential	888		888		—
Real estate mortgages - commercial	2,498		2,498		—
Real estate mortgages - construction	260		260		—
Installment loans to individuals	—		—		—
	3,736		3,736		—
With an allowance recorded:
Commercial and agricultural	—		—		—
Real estate mortgages - residential	572		572		80
Real estate mortgages - commercial	1,889		1,889		158
Real estate mortgages - construction	9,860		10,128		2,518
Installment loans to individuals	—		—		—
	12,321		12,589		2,756
Total:
Commercial and agricultural	90		90		—
Real estate mortgages - residential	1,460		1,460		80
Real estate mortgages - commercial	4,387		4,387		158
Real estate mortgages - construction	10,120		10,388		2,518
Installment loans to individuals	—		—		—
	$	16,057	$	16,325	$	2,756

The following table presents the average recorded investment in impaired loans and related interest income recognized for the three and nine months ended for September 30, 2011 and 2010:

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	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2011		2010		2011		2010
Average investment in impaired loans	$	17,566	$	8,486	$	15,810	$	8,453
Interest income recognized on an accrual basis on impaired loans	75		39		229		205
Interest income recognized on a cash basis on impaired loans	13		30		31		117

There is approximately $300,000 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 and nine months ended September 30, 2011 and 2010 were as follows:

	Three Months Ended September 30,
	2011					2010
(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	2	161		161		2	187		187