Richard A. Grafmyre

President and Chief Executive Officer

Dated: March 26, 2014

This proxy statement is being furnished in connection with the solicitation by the board of directors of PENNS WOODS BANCORP, INC. (the “Corporation”), a Pennsylvania business corporation, of proxies to be voted at the Annual Meeting (the “Annual Meeting”) of holders of Common Stock (the “Common Stock”) of the Corporation to be held on Wednesday, April 30, 2014, at 1:00 P.M., at the Pine Barn Inn, 1 Pine Barn Place, Danville, PA 17821, and any adjournment or postponement thereof.

The principal executive office of the Corporation is located at 300 Market Street, Williamsport, PA 17701. All inquiries should be directed to Richard A. Grafmyre, President of the Corporation, at (570) 322-1111. Jersey Shore State Bank (“JSSB”) and Luzerne Bank ("Luzerne", together referred to as the "Banks") are wholly owned subsidiaries of the Corporation.

This proxy statement and enclosed proxy card are first being sent to shareholders of the Corporation on or about March 26, 2014. Shares represented by the proxy, if properly signed and returned, will be voted in accordance with the specifications made thereon by the shareholders. Any proxy not specifying to the contrary will be voted “FOR” the Class 3 nominees noted, “FOR” the amendment to the Articles of Incorporation to reduce shareholder vote necessary to approve acquisitions of other companies, "FOR" the 2014 Penns Woods Bancorp, Inc. Stock Incentive Plan, and “FOR” the ratification of the appointment of S.R. Snodgrass, A.C.P.C., Certified Public Accountants, as the independent registered public accounting firm of the Corporation for the year ending December 31, 2014. The execution and return of the enclosed proxy card will not affect the right of a shareholder of record to attend the Annual Meeting and to vote in person if such shareholder gives written notice to the Secretary of the Corporation.

The cost of assembling, printing, mailing, and soliciting proxies and any additional material that the Corporation may furnish shareholders in connection with the Annual Meeting will be borne by the Corporation. In addition to the solicitation of proxies by use of the mails, directors, officers, and employees of the Corporation and/or the Bank may solicit proxies by telephone, telegraph, or personal interview, with nominal expense to the Corporation. The Corporation has engaged AST Phoenix Advisors, a professional proxy solicitor (“AST”), to assist Penns Woods in connection with the solicitation of proxies for the Annual Meeting. The Corporation has agreed to pay AST a fee of $6,500 for its services and to reimburse AST for any out-of-pocket expenses incurred by AST in connection with such services. In the event AST is requested to implement a telephone solicitation of shareholders, AST will be entitled to a fee of $4.50 per call. In addition, the Corporation has agreed to indemnify AST from and against any and all claims, costs, damages, liabilities, judgments and expenses which result from claims and other proceedings brought against AST that directly relate to or arise out of the services performed by AST. The Corporation will also pay the standard charges and expenses of brokerage houses or other nominees or fiduciaries for forwarding proxy soliciting material to the beneficial owners of shares.

A shareholder of record who returns a proxy may revoke the proxy at any time before it is voted (1) by giving written notice of revocation to Richard A. Grafmyre, President and Chief Executive Officer, Penns Woods Bancorp, Inc., 300 Market Street, Williamsport, PA 17701, (2) by executing a later-dated proxy and giving written notice thereof to the Secretary of the Corporation, or (3) by voting in person after giving written notice to the President of the Corporation.

If your shares are held in “street name” (that is, through a broker, trustee, or other holder of record), you will receive a proxy card from your broker seeking instructions as to how your shares should be voted. If no voting instructions are given, your broker or nominee has discretionary authority to vote your shares on your behalf on certain routine matters. A “broker non-vote” results on a matter when your broker or nominee returns a proxy but does not vote on a particular proposal because it does not have discretionary authority to vote on that proposal and has not received voting instructions from you. Under the rules of The New York Stock Exchange, only Proposal No. 4 (the ratification of the appointment of the Corporation’s independent registered public accounting firm) is a routine matter, and therefore is the only proposal for which your broker or nominee has discretionary authority to vote. Your broker or nominee does not have discretionary authority to vote on Proposal No. 1 (the election of the four Class 3 directors), Proposal No. 2 (amendment to the Articles of Incorporation to reduce supermajority shareholder vote necessary to approve acquisitions of other

acquisitions of other companies), and Proposal No. 3 (2014 Penns Woods Bancorp, Inc. Stock Incentive Plan). You may not vote shares held in “street name” at the Annual Meeting unless you obtain a legal proxy from your broker or holder of record.

Under the Corporation’s bylaws, the presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast will constitute a quorum for transaction of business at the Annual Meeting.

Holders of record of the common stock at the close of business on March 3, 2014 will be entitled to notice of and to vote at the Annual Meeting. On March 3, 2014 there were 4,819,367 shares of common stock outstanding. Each share of the common stock outstanding as of the close of business on March 3, 2014, is entitled to one vote on each matter that comes before the meeting and holders do not have cumulative voting rights with respect to the election of directors.

Under Pennsylvania law and the Bylaws of the Corporation, the presence of a quorum is required for each matter to be acted on at the Annual Meeting. For purposes of the Annual Meeting, a quorum consists of the presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast. Votes withheld, abstentions and broker non-votes will be counted in determining the presence of a quorum for each matter.

Assuming the presence of a quorum, the four nominees for director receiving the highest number of votes cast by shareholders entitled to vote for the election of directors shall be elected. Votes withheld from a particular nominee and broker non-votes will not constitute or be counted as votes cast for such nominee.

Assuming the presence of a quorum, the affirmative vote of holders of 66-2/3% of the Corporation’s outstanding common stock is required for approval of the proposal to amend the Corporation’s articles of incorporation. The affirmative vote of a majority of votes cast by shareholders at the Annual Meeting is required for the other non-election matters to be considered at the Annual Meeting. Abstentions will not constitute or be counted as votes cast, and therefore, will act as negative votes on the proposal to amend the Corporation’s articles of incorporation, but will not affect the outcome on the other non-election matters.

All proxies properly executed and not revoked will be voted as specified.

Committee also is responsible for, among other things, reporting to the board of directors on the results of the annual audit and reviewing the financial statements

and related financial and non-financial disclosures included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Importantly, from a corporate governance perspective, the Audit Committee regularly evaluates the independent auditors’ independence, including approving consulting and other legally permitted, non-audit services provided by the auditors and the potential impact of the services on the auditors’ independence. The Audit Committee meets periodically with the independent auditors and the internal auditors outside of the presence of management, and possesses the authority to retain professionals to assist it in meeting its responsibilities without consulting with management. The Audit Committee reviews and discusses with management earnings releases, including the use of pro forma information. The Audit Committee also discusses with management and the independent auditors the effect of accounting initiatives. The Audit Committee also is responsible for receiving and retaining complaints and concerns relating to accounting and auditing matters.

The board of directors of the Corporation met fourteen (14) times during 2013. The board of directors of JSSB met twenty-four (24) times during 2013, while the Luzerne board of directors met eight (8) times. All of the Directors attended at least 75% of the aggregate of all meetings of the board of directors and the Committees of which they were members.

Board Leadership Structure

Our board of directors maintains the freedom to choose whether the roles of Chairman of the Board and Chief Executive Officer should be combined or separated, based on what it believes is best for the Corporation and its shareholders at any given time. The board of directors has determined that it is appropriate to separate the roles of Chief Executive Officer and Chairman of the Board for both the Corporation and its banking subsidiaries. Accordingly, R. Edward Nestlerode, Jr. serves as Chairman of the Board of the Corporation, Hubert A. Valencik serves as Chairman of the Board of JSSB, and Joseph E. Kluger serves as Chairman of the Board of Luzerne while Richard A. Grafmyre serves as Chief Executive Officer of the Corporation and JSSB and Robert J. Glunk serves as Chief Executive Officer of Luzerne. The board of directors believes this arrangement provides stronger corporate governance and conforms to industry best practices.

 

Board Risk Oversight

Each member of the board of directors has a responsibility to monitor and manage risks faced by the Corporation. At a minimum, this requires the members of the board of directors to be actively engaged in board discussions, review materials provided to them, and know when it is appropriate to request further information from management and/or engage the assistance of outside advisors. Furthermore, because the banking industry is highly regulated, certain risks to the Corporation are monitored by the board of directors through its review of the Corporation’s, JSSB's, and Luzerne's compliance with regulations set forth by the banking regulatory authorities. Because risk oversight is a responsibility for each member of the board of directors, the board’s responsibility for risk oversight is not concentrated into a single committee. Instead, oversight is delegated, to a large degree, to the various board committees with an independent director serving in the capacity of committee chairman. These committees meet formally, as needed, to discuss risks and monitor specific areas of the Corporation’s performance with their findings reported at the next scheduled full meeting of the board of directors. In addition, the composition of the board of directors and normal agenda allow for the continuous oversight of risk by providing an environment which encourages the directors to ask specific questions or raise concerns and allots them sufficient time and materials to do so effectively. The overlap of committee membership provides a broad perspective of various risks and the actions undertaken to manage risks in today’s environment.

Director Independence

considered on the basis of diversity of experience, skills, qualifications, occupations, education, and backgrounds, and whether

the candidate’s skills and experience are complementary to the skills and experience of other board members. Candidates recommended by shareholders will be evaluated on the same basis as candidates recommended by the independent directors.

Nominations for director to be made at the Annual Meeting by shareholders entitled to vote for the election of directors must be submitted to the Secretary of the Corporation not less than ninety (90) days or more than one hundred fifty (150) days prior to the Annual Meeting, which notice must contain certain information specified in the Bylaws. No notice of nomination for election as a director has been received from any shareholder as of the date of this proxy statement. If a nomination is attempted at the Annual Meeting that does not comply with the procedures required by the Bylaws or if any votes are cast at the Annual Meeting for any candidate not duly nominated, then such nomination and/or such votes may be disregarded.

In connection with his retirement, Mr. Valencik and the Corporation entered into a consulting letter agreement, effective August 1, 2005.  Under the agreement, Mr. Valencik will continue to perform certain consulting services for the Corporation, principally in the area of business development.  The agreement renews on each August 1, subject to either party’s right to terminate the agreement upon 45 days’ prior written notice.  During the term of the consulting agreement, Mr. Valencik will be required to devote not more than 20 hours per week to the provision of consulting services.  In consideration of the consulting services, he will be paid $1,400 per month and will be reimbursed for the after-tax cost of health insurance if he is then ineligible for coverage under the Corporation’s health insurance programs. 

The Corporation paid a $15,000 retainer fee to each director of the Corporation during 2013 (prorated for directors Kluger, Nackley, and Schwartz for 2013 from the date of the acquisition of Luzerne). Mr. Nestlerode and Mr. Valencik each received $1,500 for serving as Chairman of the Board for the Corporation and JSSB, respectively. All directors of JSSB received $1,200 for each meeting of the board of directors of JSSB, $500 for each Audit or Asset Liability Committee meeting, and $400 for all other committee meetings of the board of directors of JSSB that the director attended during 2013. In addition, directors of JSSB receive compensation for accompanying an officer on property appraisals at a rate of $20 for the first hour and $10 for each subsequent hour. The director serving as the Secretary of the board of directors for JSSB receives $200 per meeting. Mr. Kluger served as the Chairman of the Board of Luzerne and was paid a monthly retainer of $1,833 for his services as such. Mr. Nackley, and Ms. Schwartz served on the board of directors of Luzerne and received a monthly retainer of $667 for their service. In addition, the board members of Luzerne received $800 per board meeting and $400 per committee meeting attended. In the aggregate, the

existing board of directors of the Corporation earned $572,017 for all board and committee meetings of the Corporation and the

Bank attended. This total also includes the total received for appraisals and the secretarial function. A portion of fees earned are used to fund a deferred compensation plan for the directors who participate in this plan.

JSSB and Directors Casale, Furey, Rockey, and Walko have entered into director fee agreements pursuant to which each participating director may defer payment of all or a portion of his director’s fees earned for service on the boards of directors of the Corporation and JSSB. JSSB has established a deferral account for each participating director on its books. Benefits are funded by each director’s fees and JSSB’s general assets and are payable upon retirement, early termination, disability, death, or the occurrence of a change in control of the Corporation or JSSB. Interest is credited to each deferral account at an annual rate equal to 50% of the Corporation’s return on equity for the immediately prior year, compounded monthly. Following termination of service, interest is credited to a deferral account at a rate based on the yield of the 10-year treasury note. A participating director may receive a benefit if the board of directors has determined that, following a request by a participating director, such director has suffered a severe unforeseeable financial hardship and becomes payable at the board of directors discretion. Generally, the payments are payable, at the participating director’s prior election, in a lump sum or in 60 equal monthly installments. Following the occurrence of a triggering event, payments will commence within 30 days after, at the participating director’s prior election, his retirement or termination of service, or the occurrence of a change in control of the Corporation or JSSB. If payments were not triggered until the participating director’s death, the benefits will be paid within 90 days following receipt of the director’s death certificate.

Mr. Grafmyre did not receive any director fees during 2013. Commencing in 2011, employee directors elected to the board for the first time during 2010 and in any year thereafter (including Mr. Grafmyre) will not receive any separate compensation for serving as a director of the Corporation, JSSB, or Luzerne.

The Bylaws provide that the board of directors shall consist of not less than five (5) nor more than twenty-five (25) directors who are shareholders, the exact number to be fixed and determined from time to time by resolution of the full board of directors or by resolution of the shareholders at any annual or special meeting with the number currently set at fourteen (14). The Articles of Incorporation and Bylaws further provide that the directors shall be divided into three (3) classes, as nearly equal in number as possible, known as Class 1, Class 2, and Class 3. The directors of each class serve for a term of three (3) years and until their successors are elected and qualified. Under Pennsylvania law, directors of the Corporation can be removed from office by a vote of shareholders only for cause. The directors of the Corporation serve as follows:

The board of directors has affirmatively determined that all of the directors are independent within the meaning of the NASDAQ listing standards, except for Ronald A. Walko former President and Chief Executive Officer of the Corporation and JSSB and Richard A. Grafmyre, President and Chief Executive Officer of the Corporation and JSSB. The board categorically determined that a lending relationship resulting from a loan made by the BankBanks to a director would not affect the determination of independence if the loan complies with Regulation O under the federal banking laws. The board also categorically determined that maintaining with the BankBanks a deposit, savings, or similar account by a director or any of the director’s affiliates would not affect the determination of independence if the account is maintained on the same terms and conditions as those available to similarly situated customers.

The proxies solicited hereunder will be voted “FOR” (unless otherwise directed) the four (4) director nominees of the board of directors listed previously for election as Class 3 directors. Each nominee has agreed to serve if elected and qualified. The Corporation does not contemplate that any nominee will be unable to serve as a director for any reason. However, in the event one or more of the nominees should be unable to stand for election, proxies will be voted for the remaining nominees and such other persons selected by the board of directors, in accordance with the best judgment of the proxy holders.

Set forth below is the principal occupation and certain other information regarding the nominees and other directors whose terms of office will continue after the annual meeting. In addition, below we provide the particular experience, qualification, attributes, or skills that led the board of directors to conclude that each director and nominee should serve as a director. Share ownership information for each director and nominee is included under “Beneficial Ownership and Other Information Regarding Directors and Management.”

 

 

John G. Nackley is President & CEO, InterMetro Industries Corporation, a division of Emerson, after serving as Vice President and Executive Vice President. Mr. Nackley has served as a director since 2013 and has served on Luzerne’s board of directors since 2007. Mr. Nackley’s experience in a Fortune 500 company provides the board with leadership in the business climate, financial reporting, strategic planning, marketing, and governance.

 

 

to avoid knowledge and experience voids as older board members retire. In addition, Mr. Edwards’ business involvement in various communities provides insight into the economic health of the communities, while also providing insight into potential customer relationships.

experience as an attorney is helpful to the board in reviewing the Bank’s legal matters and documentation related to residential lending matters.  Additionally, Mr. Keiler’s relatively younger age adds to the diversity of the board and helps to ensure that the board will develop board members with a depth of knowledge of the Corporation, and the Bank, in order to promote continuity in the board.

 

 

 

 

Biographical information for Mr. Grafmyre is set forth above under the caption “Information as to Nominees and Directors.”

 

Mr. Knepp joined JSSB in 2005 as Vice President — Finance and became the Chief Financial Officer of the Corporation and JSSB

in April 2008 and Senior Vice President in 2012.

 

Mr. Glunk joined the Bank in 1985 as a teller, was appointed Assistant Vice President in 1992, Vice President - Branch Administration in 2000, and was appointed Senior Vice President and Chief Operating Officer of the Corporation and JSSB in 2012. Mr. Glunk was appointed President and Chief Executive Officer of Luzerne in 2013.

 

PRINCIPAL OWNERS

 

As of March 3, 2014, there were no persons who owned of record or who are known by the board of directors to be beneficial owners of more than 5% of the Corporation’s common stock.

BENEFICIAL OWNERSHIP AND OTHER INFORMATION REGARDING DIRECTORS AND MANAGEMENT

 

The following table sets forth, as of March 3, 2014, information regarding the number of shares and percentage of the outstanding shares of common stock beneficially owned by each director, executive officer, and as a group.  Unless otherwise indicated in a footnote, shares of our common stock have not been pledged as security.

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our officers and directors, and any persons owning ten percent or more of our common stock, to file in their personal capacities initial statements of beneficial ownership on Form 3, statements of changes in beneficial ownership on Form 4, and annual statements of beneficial ownership on Form 5 with the Securities and Exchange Commission (the “SEC”).  Persons filing such beneficial ownership statements are required by SEC regulation to furnish us with copies of all such statements filed with the SEC.  The rules of the SEC regarding the filing of such statements require that “late filings” be disclosed in the Corporation’s proxy statement.  Based solely on the reports received by us or filed with the SEC and on written representations from reporting persons, we believe all such persons complied with all applicable filing requirements during 2013.

 

The Compensation Discussion and Analysis addresses the following issues: members of the Compensation and Benefits Committee (the “Committee”) and their role, compensation-setting process, philosophy regarding executive compensation, and components of executive compensation.

The Committee is comprised of three (3) independent directors under the requirements set forth in the NASDAQ listing standards. The members of the Committee are: Michael J. Casale, Jr., D. Michael Hawbaker, and R. Edward Nestlerode, Jr.

The Committee’s focus is to establish a compensation policy and philosophy that will enable the Corporation to attract, retain, motivate, and reward executive officers that are critical to the success of the Corporation. In doing so, the Committee:

The Committee meets as often as necessary. During 2013, the Committee held one meeting at which it determined and approved certain wage and benefit changes for the 2014 fiscal year. The Committee maintains a written charter. The Committee works with the President and Chief Executive Officer to determine the meeting agenda and material to be reviewed. The materials and inputs utilized may include, but are not limited to, the following:

The Committee set the compensation of the executive officers and other employees during the fourth quarter of 2012 for 2013 and during the first quarter of 2013 for the period covering the remainder of 2013 and first part of 2014. The committee set the 2014 compensation for the Chief Executive Officer and Chief Financial Officer during the fourth quarter of 2013 for the 2014 fiscal

year. Although the decisions are made at a point in time, the Committee continuously monitors the performance of the Corporation and executives throughout the year as part of the routine full board of directors meetings.

The Committee utilizes the input and assistance of management when making compensation decisions. Management input includes:

The President and Chief Executive Officer has direct involvement with the Committee during the meetings in order to provide status updates on the attainment of strategic goals, discuss performance evaluations, and make recommendations on executive officer compensation packages, for the named executive officers other than himself.

Annually, the Committee meets to evaluate the performance of the executive officers, set the compensation for the fiscal year, and to determine their cash bonus to be paid.

The Committee believes that the base salary of the named executive officers is the cornerstone of the compensation package and is the primary source of compensation to the executive. The base salary provides a consistent level of pay to the executive, which the Committee feels decreases the amount of executive turnover, promotes the long-term goals of the Corporation, and is a tax deductible expense. The factors used in determining the level of base salary include the executive’s qualifications and experience, tenure with the Corporation, responsibilities, attainment of goals and objectives, past performance, and peer practices. A review of past performance and the attainment of goals and objectives are reviewed annually as part of the formal annual performance review. During the review, which occurred during the fourth quarter of 2013 and covered the 2013 fiscal year, objectives and goals for the year and upcoming milestones related to the corporate strategic plan were discussed. Peers for the Corporation are bank holding companies headquartered within Pennsylvania, Maryland, New Jersey, New York, Ohio, and West Virginia with assets between $1 billion and $2 billion and include the following:

Data for these peers is gathered from various sources including, but not limited to, SEC filings, Federal Reserve filings, and other information publicly released by the peer companies. The Committee utilizes such comparative information as one component solely for determining base salary for such executives. Other components considered by the Committee include the factors described above. The Committee does not assign relative weights to any one component but considers the entire mix of information. The Committee does not consider such comparative information in connection with other elements of the overall compensation of such executives.

The Committee administers a Performance-Based Cash Incentive Plan originally adopted in March 2010 in which certain executive officers of the Corporation, including the named executive officers, participate. The plan provides at-risk compensation awards to eligible employees, which include full-time employees of JSSB (except employees whose compensation is commission based) and part-time employees who are eligible to participate in the JSSB's Pension Plan and/or 401(k) Plan. In addition, the employee must receive an overall rating of “Good” or higher on his or her most recent individual performance appraisal for the fiscal year covered by the performance appraisal. The plan is designed to support organizational objectives and financial goals set forth in

the JSSB’s strategic business plan and financial plan. The plan further aligns the interests of the Corporation’s shareholders with employees and assists JSSB in attracting, retaining, and motivating high-quality personnel, who contribute to the success and profitability of JSSB.

The Committee by resolution establishes six target results criteria on an annual basis. Target results are the annual goals of JSSB, which are consistent with JSSB’s strategic business plan and financial plan, which must be met in order to receive a cash award under the plan. The target results integrate industry peer group standards with the goals set forth in JSSB’s strategic business plan and financial plan. Targets are weighted to reflect the relative importance of each goal to JSSB’s goals under its strategic business plan and financial plan. Target measures that may be used by the Committee include, but are not limited to, return on equity, gross loan growth, growth in deposits (excluding brokered deposits), growth in core deposits, net interest margin, and net overhead as a percent of average assets. Target results are set at levels intended to be challenging, but more likely than not to be achieved, or come substantially close to being achieved.

The Committee has the discretion to exclude nonrecurring or extraordinary items of income, gain, expense, or loss, or any other factor it may deem relevant in its determination as to whether the target results have been satisfied. The Committee must conclude that an award, in such a circumstance, would ensure that the best interests of JSSB and the Corporation’s shareholders are protected and are not in conflict with the interests of the plan’s participants.

Cash awards are based upon a percentage of eligible compensation, which will be the employee’s Form W-2 gross wages net of any amount included as a payment for any prior year bonus awards. The higher the eligible employee’s position, the greater the percentage of the employee’s eligible compensation may be received as a cash award. This reflects the JSSB’s belief that the performance of our named executive officers and other members of upper management has relatively greater impact on the performance of JSSB.

If the plan participants’ employment is terminated with JSSB, other than retirement (which generally will be attaining the age of 65) or death during the plan year, the participant will not be eligible to receive a bonus award even if the target results are reached. If plan participant is terminated as a result of death or retirement and the participant worked at least six months during the plan year, the participant, or in the case of death, the participant’s beneficiary, will be eligible to receive a pro-rated bonus at the same time and manner as cash bonuses are paid to the other participants in the plan.

The plan is administered by the Committee, but annual awards determined by the Committee under the plan are subject to the approval of the board of directors of JSSB. The Committee may only make awards when it deems such awards are in the best interests of JSSB, the Corporation’s shareholders, and the plan participants. The Committee or the board may take action to amend,

modify, suspend, reinstate, or terminate the plan at any time. Such amendments, modifications, suspensions, reinstatements, or terminations may apply retroactively.

For 2013, the Committee established six weighted performance targets to be satisfied as a condition to the payment of any bonuses under the plan for 2013. The performance factors and weightings for each factor for 2013, all of which exclude securities gains or losses where applicable, were as follows: Return on Equity (target: 14.68%; weighting: 30%); Gross Loan Growth (target: $22.595 million; weighting: 20%); Deposit Growth, excluding brokered deposits (target: $32.565 million; weighting: 5%); Core Deposit Growth (target: $23.677 million; weighting: 15%); Net Interest Margin (target: 4.38%; weighting: 15%); and Net Overhead as a Percentage of Average Assets (target: 1.67%; weighting: 15%). The Bank’s actual performance measured against the weighted target performance factors resulted in performance of 145% of targeted goals and resulted in potential cash awards for Tier 1 participants of up to 31.0% of base salary, and cash awards for Tier 2 participants of up to 22.8% of base salary. Based on these factors bonuses for 2013 were paid as follows: Mr. Grafmyre - $108,545; Mr. Knepp - $40,479; Ms. Riles - $33,177; and Mr. Glunk - $40,800.

The Committee has not in the recent past used stock options or other equity-based awards as part of the compensation package for its named executive officers. The Committee, however, has recommended to the board that an equity incentive plan be put into place. The committee feels this tool is needed in order to continue to be able to attract top talent, retain management, and to provide a long-term compensation component. The board of directors has approved the 2014 Penns Woods Bancorp, Inc. Equity Incentive Plan and is submitting the Plan for approval by shareholders at the Annual Meeting (see Proposal No. 4).

The named executive officers may participate in other employee benefit programs that are generally available to the other employees of the Corporation. Other perquisites received by the named executive officers are either included in the Summary Compensation Table in this proxy statement or do not exceed $10,000 in the aggregate annually.

Employment and Change in Control Agreements

We have entered into employment agreements with Messrs. Grafmyre, Knepp, and Glunk. A discussion of these agreements follows.

The amended agreement may be terminated by the Corporation and JSSB for cause (as defined in the agreement), in which case the parties’ obligations under the agreement will cease. If the agreement is terminated without cause and there has not been a change-in-control (as defined in the agreement), then the Corporation and JSSB will continue to pay Mr. Grafmyre’s then current annual base salary for the greater of six months or the number of months remaining in the term of his employment agreement and provide Mr. Grafmyre, at no cost to him, with continuation of health and medical benefits for the period during which he is receiving continued payments of base salary. If, following a change-in-control, the agreement is terminated by the Corporation and JSSB without cause or Mr. Grafmyre voluntarily terminates his employment for good reason (as defined in the agreement), the Corporation or JSSB will pay Mr. Grafmyre, in cash, within 30 days of termination, an aggregate amount equal to two times the sum of Mr. Grafmyre’s then base salary and the average of his bonus amounts over the prior three years; provided, however, that in the event the lump sum payment described above, when added to all other amounts or benefits provided to Mr. Grafmyre upon termination, would result in the imposition of an excise tax under Section 4999 of the Internal Revenue Code of 1986 (the “Code”), the payment will be reduced to the extent necessary to avoid imposition of the tax. If during the term of the agreement, Mr. Grafmyre voluntarily terminates employment, retires, dies, or becomes disabled (as defined in the agreement), the obligations of the parties under the agreement will cease, unless Mr. Grafmyre dies or becomes disabled after providing notice of termination for good reason following a change in control, in which case, Mr. Grafmyre, or his estate, as the case may be, will be entitled to the amounts described above.

The agreement contains noncompete covenants which generally prohibit Mr. Grafmyre from engaging in banking activities within twenty-five miles of 300 Market Street, Williamsport, Pennsylvania. These covenants generally extend for a period of one year after Mr. Grafmyre’s termination of employment unless his employment terminates as a result of a delivery of a notice of nonrenewal by the Corporation and JSSB, in which case these covenants end on the date the agreement terminates.

The agreement may be terminated by the Corporation and JSSB for cause (as defined in the agreement), in which case the parties’ obligations under the agreement will cease. If the agreement is terminated without cause and there has not been a change-in-control (as defined in the agreement), then the Corporation and JSSB will continue to pay Mr. Knepp’s then current annual base salary for the greater or six months or the number of months remaining in the term of his employment agreement and provide Mr. Knepp, at no cost to him, with continuation of health and medical benefits for the period during which he is receiving continued payments of base salary. If, following a change-in-control, the agreement is terminated by the Corporation or JSSB without cause or Mr. Knepp voluntarily terminates his employment for good reason (as defined in the agreement), the Corporation and JSSB will pay Mr. Knepp, in cash, within 30 days of termination, an aggregate amount equal to two times the sum of Mr. Knepp’s then base salary and the average of his bonus amounts over the prior three years; provided, however, that in the event the lump sum payment described above when added to all other amounts or benefits provided to Mr. Knepp upon termination would result in the imposition of an excise tax under Section 4999 of the Code, the payment will be reduced to the extent necessary to avoid imposition of the tax. If during the term of the agreement, Mr. Knepp voluntarily terminates employment, retires, dies, or becomes disabled (as defined in the agreement), the obligations of the parties under the agreement will cease, unless Mr. Knepp dies or becomes disabled after providing notice of termination for good reason following a change in control, in which case, Mr. Knepp, or his estate, as the case may be, will be entitled to the amounts described above.

The agreement contains noncompete covenants which generally prohibit Mr. Knepp from engaging in banking activities within twenty-five miles of 300 Market Street, Williamsport, Pennsylvania. These covenants generally extend for a period of one year

after Mr. Knepp’s termination of employment unless his employment terminates as a result of a delivery of a notice of nonrenewal by Penns Woods and Jersey Shore State Bank, in which case these covenants end on the date the agreement terminates.

The agreement may be terminated by the Corporation and JSSB for cause (as defined in the agreement), in which case the obligations under the agreement will cease. If the agreement is terminated without cause and there has not been a change-in-control (as defined in the agreement), then Jersey Shore State Bank will continue to pay Mr. Glunk’s then current annual base salary for the number of months remaining in the term of his employment agreement and provide Mr. Glunk, at no cost to him, with continuation of health and medical benefits for a period of two years following the termination of employment. In the event that health and medical benefits cannot be provided, a dollar amount equal to the after-tax cost of obtaining such benefits will be provided to Mr. Glunk. If, following a change-in-control, the agreement is terminated by JSSB without cause or Mr. Glunk voluntarily terminates his employment for good reason (as defined in the agreement), JSSB will pay Mr. Glunk, in cash, within 30 days of termination, two times the sum of Mr. Glunk’s then base salary and the average of his bonus amounts over the last three years; provided, however, that in the event the lump sum payment described above when added to all other amounts or benefits provided to Mr. Glunk upon termination would result in the imposition of an excise tax under Section 4999 of the Code, the payment will be reduced to the extent necessary to avoid imposition of the tax. If during the term of the agreement, Mr. Glunk voluntarily terminates employment, retires, dies or becomes disabled (as defined in the agreement), the obligations of the parties under the agreement will cease, unless Mr. Glunk dies or becomes disabled after providing notice of termination for good reason following a change in control, in which case, Mr. Glunk, or his estate, as the case may be, will be entitled to the amounts described above.

The agreement contains noncompete covenants which generally prohibit Mr. Glunk from engaging in banking activities within a county within the Commonwealth of Pennsylvania, or any contiguous county, in which a branch officer or other facility of Jersey Shore State Bank is located. These covenants generally extend for a period of one year after Mr. Glunk’s termination of employment

unless his termination of employment terminates as a result of delivery of a notice of termination by JSSB, in which case these covenants end on the date the agreement terminates.

The Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management.  Based on the Committee’s review and discussion with management, the Committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement and in, through incorporation by reference from this proxy statement, our Annual Report on Form 10-K for the year ended December 31, 2013.

 

The following table sets forth the annual compensation for services in all capacities to the Corporation, JSSB, and Luzerne for the year ended December 31, 2013 for those persons who served as the principal executive officer or principal financial officer at any time during the last completed fiscal year and the other executive officers for the last completed fiscal year (collectively, the “named executive officers”).

There were no grants of equity plan-based awards to our named executive officers during the 2013 fiscal year.

 

The following table shows information regarding non-equity incentive awards under the Corporation’s Performance-Based Bonus Plan for 2013 for Mr. Grafmyre, Mr. Knepp, Ms. Riles and Mr. Glunk.

Awards were paid for 2013 under the Performance-Based Bonus Plan because actual performance measured against weighted performance factors resulted in performance of 145% of targeted performance goals. Cash payments made under the Plan for 2013 are included in the Summary Compensation Table under the column labeled “Non-Equity Incentive Plan Compensation.”   For further information on the Performance-Based Bonus Plan, see the “Compensation Discussion & Analysis” section of this proxy statement.

JSSB maintains a noncontributory defined benefit pension plan for all employees hired prior to January 1, 2004, who meet certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation earned by an employee, which is the employee’s annual compensation averaged over the five highest paid consecutive calendar years within the final ten years of employment. Annual compensation is based upon the employee’s W-2 wages, which includes base salary, bonus, personal vehicle mileage for certain executive officers, and life insurance coverage that exceeds $50,000. JSSB's funding policy is consistent with the funding requirements of federal law and regulations. Plan assets are primarily comprised of common stocks and U.S. Government and corporate debt securities. The plan was amended, effective January 1, 2004, to cease eligibility for employees with a hire date of January 1, 2004 or later. Because Messrs. Grafmyre and Knepp joined the BankJSSB in 2010 and 2005, respectively, they are not eligible to participate in the pension plan and are, therefore, excluded from the table below. Employees with a hire date of January 1, 2004 or later are eligible to receive, after one year of service, an annual contribution by JSSB equal to a discretionary percentage of an employee’s base compensation into an account established for the employee under the JSSB’s 401(k) plan. The accrued normal retirement benefit under the plan is determined by the following formula: 1.4% of the average annual compensation up to social security covered compensation multiplied by the credited service, plus 2% of the average annual compensation that is in excess of the Social Security covered compensation multiplied by the number of years of credited service.

The following table sets forth the total number of years of credited service and the present value of the accumulated benefit as of December 31, 2013 for the named executive officer who participates in the defined benefit pension plan.

Each of the named executive officers would be entitled to certain contractual benefits if their employment terminates under certain circumstances preceding or following a change in control. The agreements are described under the caption “Employment and Change-in-Control Agreements” included in the Compensation Discussion and Analysis. We calculated the potential post-employment payments due to each of these named executive officers assuming each named executive officer terminated employment or a change in control occurred on December 31, 2013. Actual amounts payable can only be determined at the time of such executive’s termination. The following table summarizes the potential payments to Messrs. Grafmyre, Knepp, and Glunk. Ms. Riles is not included in the table because she retired effective December 31, 2013.

The Audit Committee has reviewed our audited financial statements for the fiscal year ended December 31, 2013, and discussed them with management and our independent registered public accounting firm, S.R. Snodgrass, A.C.P.C. The Audit Committee also has discussed with our independent auditor the matters required to be discussed by the U.S. Statement on Auditing Standards No. 61, as amended.

The Audit Committee has received from our independent auditor the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence and the Audit Committee has discussed with management and the independent accountant the accountant’s independence.

Based on the review and discussions described above, the Audit Committee recommended to the Board of Directors that our audited financial statements for the fiscal year ended December 31, 2013 be included in our Annual Report on Form 10-K for that fiscal year for filing with the SEC.

In connection with standards for independence of our external auditors issued by the Public Company Accounting Oversight Board, during the 2014 fiscal year, the Audit Committee will undertake to consider in advance of the provision of any non‑audit services by our independent accountant whether the provision of such services is compatible with maintaining the independence of our external auditors.

This report is not intended to be incorporated by reference into any filing made by Penns Woods Bancorp, Inc. with the SEC under the Securities Act or the Exchange Act.

 

The Boardboard of Directorsdirectors has approved an amendment to the Company’sCorporation’s Articles of Incorporation that, if also approved by shareholders, would decrease the supermajority shareholder vote necessary to approve acquisitions of other companies by the Company.Corporation. The amendment would not change the existing 66-2/3% supermajority shareholder vote now necessary to approve any merger or similar transaction resulting in the sale of the Company.Corporation. The Boardboard of Directorsdirectors recommends that shareholders approve this amendment.

Article 13 of the Company’sCorporation’s Articles of Incorporation presently requires any merger or consolidation to which the CompanyCorporation is a party be approved by the affirmative vote of holders of at least 66-2/3% of the outstanding shares of common stock of the Company.Corporation. This super majority vote is required even if the CompanyCorporation is the acquiring company in the transaction. Obtaining approval of 66-2/3% of the Company’sCorporation’s outstanding shares in a transaction in which the CompanyCorporation is the acquiring company may result in unnecessary cost and expense to the company.Corporation. For example, brokers holding shares in street name are not permitted to vote shares held by their clients on mergers or similar transactions unless they receive direction on how to vote the shares from such clients.

Because broker “non-votes” (shares as to which brokers do not receive instructions from their clients) are effectively votes against a proposal covered by the current Article 13, the CompanyCorporation would in all likelihood need to engage a proxy solicitation firm at additional cost and expense to ensure that shareholders respond in a timely manner.

Under the proposed amendment, the super majority voting provisions of Article 13 would not apply in any merger, consolidation, share exchange or similar transaction if members of the Company’s BoardCorporation’s board of Directorsdirectors continued to constitute at least a majority of the Boardboard of Directorsdirectors of the resulting company after the transaction, and if shareholders of the CompanyCorporation continued to hold at least a majority of the outstanding voting securities of the resulting company after the transaction. For any transaction in which the Company’s BoardCorporation’s board of Directorsdirectors and shareholders would not continue to control at least a majority of the Board seats and a majority of outstanding voting securities, the 66-2/3% super majority vote of the Company’sCorporation’s shareholders would continue to apply.

The proposed change to Article 13 is consistent with the voting requirements for mergers set forth in the Pennsylvania Business Corporation Law. Under the Business Corporation Law, a shareholder vote is not required in a merger if the transaction will not result in any change to a corporation’s Articles of Incorporation, and shareholders immediately prior to the transaction will continue to own at least a majority of the outstanding voting shares. The rules of the NASD, however, which are applicable to the Company,Corporation, presently require shareholder approval in any transaction which would result in the issuance of 20% or more of the Company’s outstanding shares regardless of whether the CompanyCorporation is the acquiring company. In cases in which the NASD rules require shareholder approval, the vote requirement presently applicable to the CompanyCorporation would be a majority of votes cast at the meeting of shareholders to consider the transaction.

The Boardboard of Directorsdirectors of the CompanyCorporation believes that the proposed changes to Article 13 of the Company’sCorporation’s Articles of Incorporation will permit the CompanyCorporation the flexibility to pursue smaller acquisitions at considerably less cost and expense, while retaining the requirement that shareholders consider and vote on all transactions that would result in a sale of the Company (requiringCorporation

(requiring a 66-2/3% affirmative vote of outstanding shares) and on larger acquisition transactions by the CompanyCorporation that would result in the CompanyCorporation issuing 20% or more of its outstanding shares (which would require the affirmative vote of a majority of all votes cast if proposed revision to the Articles of Incorporation is approved).

The CompanyCorporation has no present plan, agreement or understanding involving any merger or consolidation. It is possible, however, that other merger or consolidation opportunities may occur in which the lower shareholder approval requirement will enhance its ability to take advantage of such opportunities without reducing shareholder protection against a non-negotiated or hostile attempted takeover of the Company.Corporation.

The amendment of the Articles of Incorporation to reduce the percentage of votes required to approve certain mergers and consolidations will consist of a revision of Article 13 of the Articles of Incorporation to provide as follows:

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS AMENDMENT. The affirmative vote of 66-2/3% of outstanding shares of the Corporation's common stock is required to approve this amendment. Abstentions and broker nonvotes will, in effect, constitute “votes” against the proposed amendment. All proxies will be voted “FOR” approval of this amendment unless a shareholder specifies to the contrary on such shareholder’s proxy card.

The Penns Woods Bancorp, Inc. 2014 Equity Incentive Plan is intended to provide selected employees and non‑employee directors of the Corporation and its Subsidiaries with an opportunity to acquire the Corporation’s common stock. The 2014 Plan is designed to help the Corporation attract, retain and motivate employees and non‑employee directors to make substantial contributions to the success of the Corporation’s business and the businesses of its subsidiaries. Awards will be granted under the Plan based on, among other things, the individual’s level of responsibility and performance.

The Plan is designed to reflect prevailing corporate governance and executive compensation best practices. The following is a summary of its key provisions:

 

Employees and non-employee directors of the Corporation and its subsidiaries and affiliates are eligible to receive awards under the 2014 Plan. The Committee will determine which employees and non-employee directors will be eligible to receive awards under the 2014 Plan.

Administration

The 2014 Plan will be administered by the compensation committee of the board of directors (the “Committee”), consisting of two or more members of the board who are non-employee directors within the meaning of Section 16 fo the Securities Exchange Act of 1934 and “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code. The Committee will select the employees and non-employee directors who will receive awards, determine the number of shares covered by any award, and establish the terms, conditions and other provisions of the grants. The Committee may interpret the 2014 Plan and establish, amend and rescind any rules relating to the 2014 Plan.

Shares Authorized

Subject to Plan limits, the Committee has the discretionary authority to determine the size of an award, any vesting requirement and any performance-based requirements. All awards must contain a minimum one-year vesting requirement but may be subject to such longer vesting period and/or one or more performance goals as the Committee may determine. The size of the awards made under the 2014 Plan (both stock options and restricted stock) will be directly impacted by Penns Woods’ performance. The 2014 Plan permits the Committee to authorize Penns Woods’ Chief Executive Officer to make limited awards under the 2014 Plan pursuant to a policy to be approved by the Committee. The Chief Executive Office may not make any awards to, or alter any awards previously made to, him or herself or any person who is subject to Rule 16b-3 of the Securities Exchange Act of 1934, as amended.

The exercise price of an option to purchase a share of common stock shall be, in the case of an incentive stock option, not less than 100% of the fair market value of a share of common stock on the date the option is granted, except that the exercise price shall be not less than 110% of such fair market value in the case of an incentive stock option granted to an owner of more than 10% of the voting power of the Corporation’s outstanding voting securities. The exercise price of an option to purchase a share of common stock shall be, in the case of a non-qualified stock option, not less than 100% of the fair market value of a share of common stock on the date the option is granted. Fair market value shall be determined under the provisions of Code Section 409A and the regulations and guidance promulgated thereunder. The exercise price shall be subject to adjustment pursuant to limited circumstances relating to stock dividends, stock splits and similar transactions.

Each stock option or restricted stock award shall be subject to such terms and conditions, including vesting requirements, as may be specified in the agreement issued to a participant to evidence the grant of such award. A restricted stock award shall be subject to a vesting schedule and one or more performance goals. The board of directors presently intends to grant awards of both stock options and restricted stock that vest over a five-year period.

Stock options and restricted stock awarded under the 2014 Plan will become exercisable and fully vested upon the occurrence of a change in control of the Corporation as defined in the 2014 Plan.

Stock options generally expire upon termination of employment.  In certain instances after an optionee terminates employment or service, the Committee may extend the exercise period of a vested nonqualified stock option up to the remaining term of the option.  A vested incentive stock option must be exercised within three months from the date of termination of employment. The Committee may provide that any service requirement may be accelerated or waived upon death, disability or retirement of an option holder. Performance goals cannot be accelerated or waived by the Committee for any option holder except if a change in control occurs or upon death, disability or retirement.

The Board may at any time terminate, amend, modify or suspend the Plan, provided that, without the approval of the shareholders of the Corporation, no amendment or modification shall be made solely by the Board which:

The following is a general description of the federal income tax consequences to the participant and the Corporation with regard to awards granted under the 2014 Plan under present law. This discussion is intended for the information of shareholders in connection with the Annual Meeting and not as tax guidance to participants in the 2014 Plan, as the consequences may vary with the types of awards made, the identity of the recipients and the method of payment or settlement. The summary does not address the effects of other federal taxes (including possible “golden parachute” excise taxes) or taxes imposed under state, local, or foreign tax laws and does not purport to discuss all tax consequences related to awards under the 2014 Plan.

It is not possible to determine the number of options to purchase common stock or the number of shares of restricted stock that will be awarded under the 2014 Plan to any particular individual. No awards have been made under the 2014 Plan.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE PENNS WOODS BANCORP, INC. 2014 EQUITY INCENTIVE PLAN. The affirmative vote of a majority of all votes cast at the Annual Meeting is required to approve the Plan. All proxies will be voted “FOR” unless a shareholder specifies to the contrary on such shareholder’s proxy card.

The board of directors of the Corporation has appointed the firm of S.R. Snodgrass, A.C.P.C., Certified Public Accountants (the “Auditors”), of Wexford, Pennsylvania, as the Corporation’s independent registered public accounting firm for its 2014 fiscal year. The terms of the appointment were reviewed and recommended by the Audit Committee.

Although ratification by the Corporation’s shareholders is not required by our bylaws or otherwise, the board of directors is submitting the selection of the Auditors to shareholders for ratification because the Corporation values its shareholders’ views on the Corporation’s independent registered public accounting firm. If the Corporation’s shareholders fail to ratify the selection, it will be considered as notice to the board of directors and the Audit Committee to consider the selection of a different independent registered public accounting firm. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Corporation.

A representative from the Auditors is expected to be present at the Annual Meeting. The representative will be given an opportunity to make a statement if he or she desires to do so, and will be available to answer appropriate questions from shareholders.

The Auditors served as the Corporation’s independent registered public accounting firm for the 2013 and 2012 fiscal years, provided assistance to the Corporation, JSSB, and Luzerne in connection with regulatory matters, charging the Corporation for such services at its customary hourly billing rates. The fees paid by the Corporation, JSSB, and Luzerne are summarized below. The non-audit services were approved by the Corporation’s, JSSB's, and Luzerne’s Audit Committee after due consideration of the effect of the performance thereof on the independence of the Auditors and after the conclusions by the Corporation’s, JSSB's, and Luzerne's board of directors that there was no effect on the independence of the Auditors. The Auditors have advised the Corporation that none of its members have any financial interest in the Corporation.

The fees for professional services incurred by the Corporation for services rendered by the Corporation’s independent auditors in connection with the audit of the Corporation’s financial statements for the years ended December 31, 2013 and December 31, 2012, and the review of the Corporation’s Forms 10-Q for such fiscal years were $190,901 and $124,622, respectively. All such services were performed by permanent, full-time employees of S.R. Snodgrass, A.C.P.C.

Audit-Related fees for the performance of the audits of the Corporation's employee benefit plans’ financial statements for the years ended December 31, 2013 and December 31, 2012, were $20,500 and $20,775, respectively.

Tax fees for the years ended December 31, 2013 and December 31, 2012 resulting from services provided by the Corporation’s independent registered public accounting firm totaled $21,950 and $13,750, respectively.

There were other fees billed to the Corporation by S.R. Snodgrass, A.C.P.C. for other services for the years ended December 31, 2013 and December 31, 2012 that totaled $2,500 and $9,600, respectively.

The Audit Committee of the Board of Directors pre-approves all audit and permissible non-audit services provided by the Corporation’s independent registered public accounting firm. All of the services provided by S.R. Snodgrass, A.C.P.C. set forth above were pre-approved by the Audit Committee.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR RATIFICATION FOR THE APPOINTMENT OF S.R. SNODGRASS, A.C.P.C., AS THE CORPORATION’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE 2014 FISCAL YEAR. The affirmative vote of a majority of all votes cast at the Annual Meeting is required to ratify the appointment. All proxies will be voted “FOR” ratification appointment unless a shareholder specifies to the contrary on such shareholder’s proxy card.

Applicable SEC regulations permit shareholders to submit proposals for consideration at annual meetings of shareholders. Any such proposals for Penns Woods’ Annual Meeting of Shareholders to be held in 2015 must be submitted in writing to the President of Penns Woods Bancorp, Inc., at its principal executive office, 300 Market Street, Williamsport, PA 17701, on or before November 26, 2014, and must follow the procedures required by SEC Rule 14a-8 in order to be included in proxy materials relating to that meeting.

A shareholder proposal submitted after November 26, 2014, or which does not otherwise meet the requirements of the SEC, will not be included in Penns Woods’ proxy statement for the annual meeting to be held in 2015, but may be presented for consideration at the annual meeting, if submitted to the Secretary of the Corporation not less than ninety (90) days or more than one hundred fifty (150) days prior to the annual meeting, which proposal must contain certain information required by the bylaws. If the shareholder intending to present such a proposal has not provided Penns Woods written notice of the matter on or before January 30, 2015, the proxy holders of the board of directors will have discretionary authority to vote on such proposal at the meeting. However, if the date of the 2015 annual meeting is changed more than 30 days from April 30, 2015, the anniversary of the 2014 annual meeting, the deadline for delivery notice to the Corporation which would restrict the proxy holders of the Board of Directors from exercising discretion would be a reasonable time before Penns Woods sends its proxy materials, assuming the notice complies with the requirements of the bylaws.

NASDAQ rules require that we conduct an appropriate review of related party transactions for potential conflict of interest situations on an ongoing basis, and all such transactions must be approved by our Audit Committee or another independent body of the Board of Directors.

Our Code of Ethics and Conflicts of Interest Policy requires all directors, officers, and employees who may have a potential or apparent conflict of interest to notify our Human Resource Director. A potential conflict exists whenever an individual has an outside interest - direct or indirect - which conflicts with the individual’s duty to the Corporation or any of its affiliates or adversely

affects the individual’s judgment in the discharge of his or her responsibilities. Prior to consideration, full disclosure of all material facts concerning the relationship and financial interest of the relevant individuals in the transaction is required The Code of Ethics and Conflict of Interest Policy is available for review by contacting the President.

To identify related party transactions, each year, we submit and require our directors and officers to complete Director and Officer Questionnaires identifying any transaction with us or any of our subsidiaries in which the officer or director or their family members have an interest.

There have been no material transactions between the Corporation and the Bank,Banks, or any material transactions proposed, with any director or executive officer of the Corporation and the Bank,Banks, or any associate of the foregoing persons. The Corporation and the BankBanks have had, and intend to continue to have, banking and financial transactions in the ordinary course of business with directors and officers of the Corporation and the BankBanks and their associates on comparable terms and with similar interest rates as those prevailing from time to time for persons not related to or associated with the Corporation and the Bank.

A copy of the Corporation’s Annual Report and Form 10-K for its fiscal year ended December 31, 2013 is enclosed with this proxy statement.

You may access the following proxy materials at http://www.cfpproxy.com/4823:

The Boardboard of Directorsdirectors of the Corporation is not aware that any other matters are to be presented for action, other than the matters described in the accompanying Notice of Annual Meeting of Shareholders. Because the Corporation has not received notice of any other matters to be presented for action at the meeting; if any other matters properly come before the Meeting, or any adjournments thereof, the proxy holders are authorized to vote thereon at their discretion.

All directors of the Corporation are expected to attend the Corporation’s Annual Meeting of Shareholders. In 2013, eleven directors attended the Annual Meeting of Shareholders.

Shareholders may communicate directly with the Board of Directors of the Corporation by contacting the Corporation’s President & Chief Executive Officer, Richard A. Grafmyre, 300 Market Street, Williamsport, PA 17701 (570-322-1111). All bona fide communications received by the Corporation’s President & Chief Executive Officer will be relayed to the applicable member of the Boardboard of Directorsdirectors or, if no specific director is designated to receive the communication, the appropriate board member.

UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE CORPORATION’S REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2013 INCLUDING THE FINANCIAL STATEMENTS AND THE SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE SEC PURSUANT TO RULE 13a-1 UNDER THE EXCHANGE ACT MAY BE OBTAINED, WITHOUT CHARGE, FROM RICHARD A. GRAFMYRE, PRESIDENT, PENNS WOODS BANCORP, INC.

1.2 Authorized Plan Awards. Incentive Stock Options, Nonqualified Stock Options and Restricted Stock may be awarded within the limitations of the Plan herein described.

Notwithstanding Clause (a), a Change in Control shall not be deemed to have occurred if a Person becomes the beneficial owner, directly or indirectly, of the Corporation’s securities representing 25% or more of the combined voting power of the Corporation’s then outstanding securities solely as a result of an acquisition by the Corporation of its voting securities which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 25% or more of the combined voting power of the Corporation’s then outstanding securities; provided, however, that if a Person becomes a beneficial owner of 25% or more of the combined voting power of the Corporation’s then outstanding securities by reason of share purchases by the Corporation and shall, after such share purchases by the Corporation, become the beneficial owner, directly or indirectly, of any additional voting securities of the Corporation (other than as a result of a stock split, stock dividend or similar transaction), then a Change in Control of the Corporation shall be deemed to have occurred with respect to such Person under Clause (a). In no event shall a Change in Control of the Corporation be deemed to occur under Clause (a) with respect to Benefit Plans.

3.1 The Committee. The Plan shall be administered by the Compensation Committee of the Board (the “Committee”) composed of two or more members of the Board, all of whom are (a) ”non-employee directors” as such term is defined under the rules and regulations adopted from time to time by the Securities and Exchange Commission pursuant to Section 16(b) of the Exchange Act, and (b) ”outside directors” within the meaning of Code Section 162(m). The Board may from time to time remove members from, or add members to, the Compensation Committee. Vacancies on the Compensation Committee, however caused, shall be filled by the Board.

3.2 Powers of the Committee.

3.3 Liability. No member of the Board, the Committee or its designee shall be liable for any action or determination made in good faith by the Board or the Committee with respect to this Plan or any Awards granted under this Plan.

3.4 Establishment and Certification of Performance Goals. The Committee shall establish, prior to grant, Performance Goals with respect to each Award intended to constitute a Performance Grant. Notwithstanding anything herein to the contrary, no Option that is intended to constitute a Performance Grant may be exercised until the Performance Goal or Goals applicable thereto is or are satisfied, nor shall any share of Restricted Stock that is intended to constitute a Performance Grant be released to a Participant until, the Performance Goal or Goals applicable thereto is or are satisfied.

3.5 No Waiver of Performance Goals. Under no circumstances shall the Committee or the Board waive any Performance Goals with respect to the grant of any Award hereunder that is intended to constitute a Performance Grant.

3.6 Performance Grants Not Mandatory. Nothing herein shall be construed as requiring that any Award be made a Performance Grant; provided, however, that any Award may be subject to a one or more Performance Goals.

4.1 Common Stock Authorized.

4.2 Shares Available. The Common Stock to be issued under the Plan shall be the Corporation’s Common Stock which shall be made available at the discretion of the Board, either from authorized but unissued Common Stock or from Common Stock acquired by the Corporation, including shares purchased in the open market. In the event that any outstanding Award under the Plan for any reason expires, terminates, or is forfeited, the shares of Common Stock allocable to such expiration, termination, or forfeiture may thereafter again be made subject to an Award under the Plan.

5.1 Participation. Awards shall be granted by the Committee only to persons who are Employees and Non‑Employee Directors.

5.2 Incentive Stock Option Eligibility. Incentive Stock Options may only be granted to Employees of the Corporation or a Subsidiary. Notwithstanding any other provision of the Plan to the contrary, a person who owns more than ten percent of the total combined voting power of all classes of outstanding stock of the Corporation shall not be eligible for the grant of an Incentive Stock Option, unless the special requirements set forth in Sections 6.1 and 7.1 are satisfied. For purposes of this section, in determining stock ownership, a person shall be considered as owning the stock owned, directly or indirectly, by or for the person’s brothers and sisters (whether by the whole or half blood), spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by or for its shareholders, partners or beneficiaries. “Outstanding stock” shall include all stock actually issued and outstanding immediately before the grant of the Option. “Outstanding stock” shall not include shares authorized for issue under outstanding Options held by the Optionee or by any other person.

6.1 Exercise Price. The exercise price of an Option to purchase a share of Common Stock shall be, in the case of an Incentive Stock Option, not less than 100% of the fair market value of a share of Common Stock on the date the Option is granted, except that the exercise price shall be not less than 110% of such fair market value in the case of an Incentive Stock Option granted to any person described in Section 5.2. The exercise price of an Option to purchase a share of Common Stock shall be, in the case of a Nonqualified Stock Option, not less than 100% of the fair market value of a share of Common Stock on the date the Option is granted. Fair market value shall be determined under the provisions of Code Section 409A and the regulations and guidance promulgated thereunder. The exercise price shall be subject to adjustment pursuant to the limited circumstances set forth in Article 10.

6.2 Limitation on Incentive Stock Options. The aggregate fair market value (determined as of the date an Option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Employee in any calendar year (under the Plan and all other plans maintained by the Corporation and any Subsidiary) shall not exceed $100,000. With respect to all or any portion of any Option granted under this Plan not qualifying as an Incentive Stock Option, such Option shall be considered as a Nonqualified Stock Option granted under this Plan for all purposes. In

6.3 Determination of Fair Market Value.

6.4 Transferability of Options.

7.1 Term and Vesting. Each Option granted under the Plan shall terminate on the date determined by the Committee, and specified in the Agreement; provided, however, that:

8.1 Retirement; Other Termination by Corporation or Subsidiary; Change in Control. In the event of an Optionee’s termination of employment or service as a Non‑Employee Director (i) due to Retirement, (ii) by the Corporation or a Subsidiary other than Termination for Cause, or (iii) due to a Change in Control, such Optionee’s right to exercise such Option, to the extent vested, shall lapse:

8.2 Death or Disability. In the event of an Optionee’s termination of employment or service as a Non‑Employee Director due to death or being “disabled” (within the meaning of Code Section 22(e)(3)), such Optionee’s right to exercise such Option, to the extent vested, shall lapse:

8.3 Termination For Cause; Other Termination by Optionee. In the event of an Optionee’s Termination For Cause, or in the event of the Optionee’s termination of employment or service as a Non‑Employee Director at the election of an Optionee, such Optionee’s right to exercise such Option shall lapse:

8.4 Special Termination Provisions.

9.1 In General. Each Restricted Stock Award shall be subject to such terms and conditions as may be specified in the Agreement issued to a Participant to evidence the grant of such Award. A Restricted Stock Award shall be subject to a vesting schedule and one or more Performance Goals.

9.2 Minimum Vesting Period for Restricted Stock Awards. Each Restricted Stock Award granted to a Participant shall be fully exercisable (i.e., become 100% vested) only after the earlier of the date on which (i) the Participant has completed one year of continuous employment or service as a Non‑Employee Director with the Corporation or a Subsidiary immediately following the date that the Restricted Stock was awarded (or such later date as may be specified in an Agreement, including a date that may be tied to the satisfaction of one or more Performance Goals); (ii) unless otherwise provided in an Agreement, a Change in Control occurs; (iii) unless otherwise provided in an Agreement, the Participant’s Retirement, death, or being “disabled” (within the meaning of Code Section 22(e)(3)) or (iv) unless otherwise provided in an Agreement, the Participant terminates employment or Service as a Non-Employee Director due to Retirement.

9.3 Waiver of Vesting Period for Certain Restricted Stock Awards. In the event that a Participant’s employment as an Employee or services as a Non‑Employee Director are terminated and the Committee deems it equitable to do so, the Committee may, in its discretion and subject to the approval of a majority of the disinterested members of the Board, waive any minimum vesting period (but not any Performance Goal or Goals) with respect to a Restricted Stock Award held by such Participant. Any such waiver may be made with retroactive effect, provided it is made within 60 days following such Participant’s termination of employment.

9.4 Issuance and Retention of Share Certificates By Corporation. One or more share certificates shall be issued upon the grant of a Restricted Stock Award; but until such time as the Restricted Stock shall vest or otherwise become distributable by reason of satisfaction of a continuous service requirement and/or one or more Performance Goals, the Corporation shall retain such share certificates.

9.5 Stock Powers. At the time of the grant of a Restricted Stock Award, the Participant to whom the grant is made shall deliver such stock powers, endorsed in blank, as may be requested by the Corporation.

9.6 Release of Shares. Within 30 days following the date on which a Participant becomes entitled under an Agreement to receive shares of previously Restricted Stock, the Corporation shall deliver to him or her a certificate evidencing the ownership of such shares, together with an amount of cash (without interest) equal to the dividends that have been paid on such shares with respect to record dates occurring on and after the date of the related Award.

9.7 Forfeiture of Restricted Stock Awards. In the event of the forfeiture of a Restricted Stock Award, by reason of the termination of employment or service as a Non-Employee Director prior to vesting, the failure to achieve a Performance Goal or otherwise, the Corporation shall take such steps as may be necessary to cancel the affected shares and return the same to its treasury.

9.8 Assignment, Transfer, Etc. of Restricted Stock Rights. The potential rights of a Participant to shares of Restricted Stock may not be assigned, transferred, sold, pledged, hypothecated, or otherwise encumbered or disposed of until such time as unrestricted certificates for such shares are received by him or her.

11.11Gender; Number. Words of one gender, wherever used herein, shall be construed to include each other gender, as the context requires. Words used herein in the singular form shall include the plural form, as the context requires, and vice versa.

THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSALS LISTED ABOVE. THIS PROXY WILL BE VOTED IN THE DISCRETION OF THE PROXY HOLDERS ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.