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, 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 November 2, 2012 there were 3,838,289 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	3

Consolidated Balance Sheet (Unaudited) as of September 30, 2012 and December 31, 2011		3

Consolidated Statement of Income (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011		4

Consolidated Statement of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011		5

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2012 and 2011		5

Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended September 30, 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	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

Part II	Other Information	34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	34

Signatures		35

Exhibit Index and Exhibits		36

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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)	2012			2011
ASSETS:
Noninterest-bearing balances	$	13,243		$	13,829
Interest-bearing deposits in other financial institutions	7,901			56
Total cash and cash equivalents	21,144			13,885

Investment securities, available for sale, at fair value	296,255			270,097
Investment securities, held to maturity, (fair value of $0 and $55)	—			54
Loans held for sale	2,285			3,787
Loans	485,051			435,959
Allowance for loan losses	(7,521		)	(7,154		)
Loans, net	477,530			428,805
Premises and equipment, net	8,247			7,707
Accrued interest receivable	4,255			3,905
Bank-owned life insurance	16,238			16,065
Investment in limited partnerships	3,048			3,544
Goodwill	3,032			3,032
Deferred tax asset	3,878			7,991
Other assets	4,694			5,081
TOTAL ASSETS	$	840,606		$	763,953

LIABILITIES:
Interest-bearing deposits	$	525,825		$	470,310
Noninterest-bearing deposits	115,285			111,354
Total deposits	641,110			581,664

Short-term borrowings	17,932			29,598
Long-term borrowings, Federal Home Loan Bank (FHLB)	76,278			61,278
Accrued interest payable	501			536
Other liabilities	11,006			10,417
TOTAL LIABILITIES	746,827			683,493

SHAREHOLDERS’ EQUITY:
Preferred stock, no par value, 3,000,000 shares authorized; no shares issued	—			—
Common stock, par value $8.33, 15,000,000 shares authorized; 4,018,777 and 4,017,677 shares issued	33,489			33,480
Additional paid-in capital	18,148			18,115
Retained earnings	41,737			36,394
Accumulated other comprehensive gain (loss):
Net unrealized gain on available for sale securities	10,848			2,914
Defined benefit plan	(4,133		)	(4,133		)
Treasury stock at cost, 180,596 shares	(6,310		)	(6,310		)
TOTAL SHAREHOLDERS’ EQUITY	93,779			80,460
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	840,606		$	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				Nine Months Ended
	September 30,				September 30,
(In Thousands, Except Per Share Data)	2012		2011		2012		2011

INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	6,346	$	6,327	$	18,954	$	18,759
Investment securities:
Taxable	1,486		1,445		4,477		4,231
Tax-exempt	1,339		1,336		4,127		3,875
Dividend and other interest income	96		65		274		174
TOTAL INTEREST AND DIVIDEND INCOME	9,267		9,173		27,832		27,039

INTEREST EXPENSE:
Deposits	902		1,154		2,797		3,530
Short-term borrowings	38		58		100		157
Long-term borrowings, FHLB	637		751		1,877		2,227
TOTAL INTEREST EXPENSE	1,577		1,963		4,774		5,914

NET INTEREST INCOME	7,690		7,210		23,058		21,125

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

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	7,090		6,610		21,258		19,325

NON-INTEREST INCOME:
Service charges	489		508		1,394		1,538
Securities gains, net	447		8		1,206		142
Earnings on bank-owned life insurance	138		148		539		461
Gain on sale of loans	527		359		1,053		850
Insurance commissions	295		241		1,053		630
Brokerage commissions	239		241		698		797
Other	636		485		1,872		1,390
TOTAL NON-INTEREST INCOME	2,771		1,990		7,815		5,808

NON-INTEREST EXPENSE:
Salaries and employee benefits	2,939		2,621		8,806		7,728
Occupancy, net	317		313		963		962
Furniture and equipment	355		354		1,058		1,011
Pennsylvania shares tax	169		172		505		516
Amortization of investment in limited partnerships	165		165		496		496
Federal Deposit Insurance Corporation deposit insurance	111		43		349		416
Other	1,402		1,300		4,088		3,683
TOTAL NON-INTEREST EXPENSE	5,458		4,968		16,265		14,812

INCOME BEFORE INCOME TAX PROVISION	4,403		3,632		12,808		10,321
INCOME TAX PROVISION	736		482		2,054		1,354
NET INCOME	$	3,667	$	3,150	$	10,754	$	8,967

EARNINGS PER SHARE - BASIC	$	0.96	$	0.82	$	2.80	$	2.34

EARNINGS PER SHARE - DILUTED	$	0.96	$	0.82	$	2.80	$	2.34

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC	3,837,925		3,836,244		3,837,570		3,835,778

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED	3,837,925		3,836,244		3,837,570		3,835,778

DIVIDENDS PER SHARE	$	0.47	$	0.46	$	1.41	$	1.38

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 September 30,						Nine Months Ended September 30,
(In Thousands)	2012			2011			2012			2011

Net Income	$	3,667		$	3,150		$	10,754		$	8,967
Other comprehensive income:
Change in unrealized gain on available for sale securities	6,190			4,950			13,228			12,605
Tax effect	(2,105		)	(1,683		)	(4,498		)	(4,285		)
Net realized gain included in net income	(447		)	(8		)	(1,206		)	(142		)
Tax effect	152			3			410			48
Total other comprehensive income	3,790			3,262			7,934			8,226
Comprehensive income	$	7,457		$	6,412		$	18,688		$	17,193

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						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

									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						10,754									10,754
Other comprehensive income									7,934						7,934
Dividends declared, ($1.41 per share)						(5,411		)							(5,411		)
Common shares issued for employee stock purchase plan	1,100	9		33											42
Balance, September 30, 2012	4,018,777	$	33,489	$	18,148	$	41,737		$	6,715		$	(6,310	)	$	93,779

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)	2012			2011
OPERATING ACTIVITIES:
Net Income	$	10,754		$	8,967
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	569			526
Provision for loan losses	1,800			1,800
Accretion and amortization of investment security discounts and premiums	(816		)	(1,320		)
Securities gains, net	(1,206		)	(142		)
Originations of loans held for sale	(32,116		)	(28,756		)
Proceeds of loans held for sale	34,671			32,641
Gain on sale of loans	(1,053		)	(850		)
Earnings on bank-owned life insurance	(539		)	(461		)
Decrease in prepaid federal deposit insurance	315			337
Other, net	(1,189		)	(412		)
Net cash provided by operating activities	11,190			12,330
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales	35,847			11,992
Proceeds from calls and maturities	17,259			9,601
Purchases	(64,965		)	(58,272		)
Investment securities held to maturity:
Proceeds from sales	—			5
Proceeds from calls and maturities	55			25
Net increase in loans	(50,513		)	(17,275		)
Acquisition of bank premises and equipment	(1,109		)	(394		)
Proceeds from the sale of foreclosed assets	700			388
Purchase of bank-owned life insurance	(33		)	(39		)
Proceeds from bank-owned life insurance death benefit	383			—
Proceeds from redemption of regulatory stock	1,034			985
Net cash used for investing activities	(61,342		)	(52,984		)
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits	55,515			42,356
Net increase in noninterest-bearing deposits	3,931			15,436
Proceeds of long-term borrowings, FHLB	15,000			—
Net decrease in short-term borrowings	(11,666		)	(9,715		)
Dividends paid	(5,411		)	(5,293		)
Issuance of common stock	42			52
Net cash provided by financing activities	57,411			42,836
NET INCREASE IN CASH AND CASH EQUIVALENTS	7,259			2,182
CASH AND CASH EQUIVALENTS, BEGINNING	13,885			9,493
CASH AND CASH EQUIVALENTS, ENDING	$	21,144		$	11,675

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	4,809		$	6,048
Income taxes paid	2,350			1,790
Transfer of loans to foreclosed real estate	—			2,008

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 December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU is not expected to have a significant impact on the Company’s financial statements.

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Weighted average common shares issued	4,018,521		4,016,840		4,018,166		4,016,374
Average treasury stock shares	(180,596	)	(180,596	)	(180,596	)	(180,596	)
Weighted average common shares and common stock equivalents used to calculate basic and diluted earnings per share	3,837,925		3,836,244		3,837,570		3,835,778

Note 4. Investment Securities

The amortized cost and fair values of investment securities at September 30, 2012 and December 31, 2011 are as follows:

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	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(In Thousands)	Cost		Gains		Losses			Value
Available for sale (AFS)
U.S. Government and agency securities	$	26,136	$	1,693	$	(21	)	$	27,808
State and political securities	174,782		13,753		(1,328		)	187,207
Other debt securities	68,792		1,468		(310		)	69,950
Total debt securities	269,710		16,914		(1,659		)	284,965
Financial institution equity securities	7,768		1,234		(26		)	8,976
Other equity securities	2,340		63		(89		)	2,314
Total equity securities	10,108		1,297		(115		)	11,290
Total investment securities AFS	$	279,818	$	18,211	$	(1,774	)	$	296,255

	December 30, 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 September 30, 2012 and December 31, 2011.

	September 30, 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

U.S. Government and agency securities	$	968	$	(21	)	$	—	$	—		$	968	$	(21	)
State and political securities	5,013		(137		)	7,396		(1,191		)	12,409		(1,328		)
Other debt securities	7,751		(101		)	8,027		(209		)	15,778		(310		)
Total debt securities	13,732		(259		)	15,423		(1,400		)	29,155		(1,659		)
Financial institution equity securities	65		(2		)	195		(24		)	260		(26		)
Other equity securities	821		(83		)	66		(6		)	887		(89		)
Total equity securities	886		(85		)	261		(30		)	1,147		(115		)
Total	$	14,618	$	(344	)	$	15,684	$	(1,430	)	$	30,302	$	(1,774	)

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	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

U.S. Government and agency securities	$	—	$	—		$	—	$	—		$	—	$	—
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 September 30, 2012 there were a total of 19 and 31 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 September 30, 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. 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, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands)	Amortized Cost		Fair Value
Due in one year or less	$	5,129	$	5,157
Due after one year to five years	42,516		43,308
Due after five years to ten years	37,652		38,729
Due after ten years	184,413		197,771
Total	$	269,710	$	284,965

Total gross proceeds from sales of securities available for sale were $35,848,000 and $11,992,000, for the nine months ended September 30, 2012 and 2011, respectively. The following table represents gross realized gains and losses on those transactions:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2012		2011		2012		2011
Gross realized gains:
U.S. Government and agency securities	$	—	$	—	$	138	$	4
State and political securities	52		109		103		114
Other debt securities	142		—		219		8
Financial institution equity securities	144		—		605		—
Other equity securities	397		—		523		131
Total gross realized gains	$	735	$	109	$	1,588	$	257

Gross realized losses:
U.S. Government and agency securities	$	—	$	—	$	—	$	—
State and political securities	144		100		146		100
Other debt securities	53		1		53		15
Financial institution equity securities	—		—		67		—
Other equity securities	91		—		116		—
Total gross realized losses	$	288	$	101	$	382	$	115

There were no impairment charges included in gross realized losses for the three or nine months ended September 30, 2012 and 2011, respectively.

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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 the year ended December 31, 2011 and has declared a 0.10 percent annualized dividend to its shareholders during each of the first three quarters 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 September 30, 2012 and December 31, 2011:

	September 30, 2012
			Past Due		Past Due 90
			30 To 89		Days Or More		Non-
(In Thousands)	Current		Days		& Still Accruing		Accrual		Total
Commercial and agricultural	$	51,280	$	65	$	—	$	—	$	51,345
Real estate mortgage:
Residential	222,637		1,164		654		647		225,102
Commercial	165,888		39		—		4,272		170,199
Construction	22,249		2		—		6,468		28,719
Installment loans to individuals	10,873		82		—		—		10,955
	472,927		$	1,352	$	654	$	11,387	486,320
Less: Net deferred loan fees and discounts	1,269								1,269
Allowance for loan losses	7,521								7,521
Loans, net	$	464,137							$	477,530

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	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 September 30, 2012 and September 30, 2011:

	Three Months Ended September 30,
	2012				2011
(In Thousands)	Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis		Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis
Real estate mortgages - residential	$	13	$	4	$	7	$	1
Real estate mortgages - commercial	92		43		36		3
Real estate mortgages - construction	77		11		290		4
	$	182	$	58	$	333	$	8

	Nine Months Ended September 30,
	2012				2011
(In Thousands)	Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis		Interest Income That Would Have Been Recorded Based on Original Term and Rate		Interest Income Recorded on a Cash Basis
Real estate mortgages - residential	$	25	$	17	$	31	$	20
Real estate mortgages - commercial	135		51		65		5
Real estate mortgages - construction	298		67		562		4
	$	458	$	135	$	658	$	29

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.

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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, 2012 and December 31, 2011:

	September 30, 2012
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Real estate mortgages - residential	$	84	$	84	$	—
Real estate mortgages - commercial	330		330		—
Real estate mortgages - construction	553		553		—
	967		967		—
With an allowance recorded:
Real estate mortgages - residential	1,287		1,371		290
Real estate mortgages - commercial	6,329		6,348		1,615
Real estate mortgages - construction	5,928		8,746		806
	13,544		16,465		2,711
Total:
Real estate mortgages - residential	1,371		1,455		290
Real estate mortgages - commercial	6,659		6,678		1,615
Real estate mortgages - construction	6,481		9,299		806
	$	14,511	$	17,432	$	2,711

	December 31, 2011
	Recorded		Unpaid Principal		Related
(In Thousands)	Investment		Balance		Allowance
With no related allowance recorded:
Real estate mortgages - residential	$	742	$	751	$	—
Real estate mortgages - commercial	382		382		—
Real estate mortgages - construction	815		1,113		—
	1,939		2,246		—
With an allowance recorded:
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
	15,940		17,467		3,737
Total:
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
	$	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 and nine months ended for September 30, 2012 and 2011:

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	Three Months Ended September 30,
	2012						2011
(In Thousands)	Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans		Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans
Commercial and agricultural	$	—	$	—	$	—	$	41	$	1	$	—
Real estate mortgages - residential	1,253		10		4		1,448		16		6
Real estate mortgages - commercial	6,576		63		6		5,537		35		3
Real estate mortgages - construction	6,822		1		11		10,540		23		4
	$	14,651	$	74	$	21	$	17,566	$	75	$	13

	Nine Months Ended September 30,
	2012						2011
(In Thousands)	Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans		Average Investment in Impaired Loans		Interest Income Recognized on an Accrual Basis on Impaired Loans		Interest Income Recognized on a Cash Basis on Impaired Loans
Commercial and agricultural	$	—	$	—	$	—	$	125	$	5	$	—
Real estate mortgages - residential	1,382		35		33		1,477		42		22
Real estate mortgages - commercial	6,541		224		14		4,657		105		5
Real estate mortgages - construction	8,266		1		67		9,551		77		4
	$	16,189	$	260	$	114	$	15,810	$	229	$	31

There is approximately $287,000 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, 2012 and 2011 were as follows:

	Three Months Ended September 30,
	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	100		100		2	161		161
Real estate mortgages - commercial	—	—		—		7	3,902		3,902
Real estate mortgages - construction	—	—		—		4	11,888		11,888
Installment loans to individuals