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 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.

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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 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

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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.

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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.

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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.

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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.

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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, 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

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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,

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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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	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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	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

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	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