Annual Statements Open main menu

PENNS WOODS BANCORP INC - Annual Report: 2003 (Form 10-K)

 

FORM 10-K

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

ý                                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended            December 31, 2003

 

OR

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

 

For the transition period from                                  to                                 

 

Commission file number            0-17077

 

PENNS WOODS BANCORP, INC.

(exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-2226454

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

300 Market Street, P.O. Box 967

Williamsport, Pennsylvania 17703-0967

(Address of principal executive offices)

 

Registrant’s telephone number, including area code        (570) 322-1111

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange
which registered

None

 

None

 

Securities to be registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $10 per share

(Title of Class)

 

 



 

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    ý     No    o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

 

Indicate by check marke whether the registrant is an accelerated filer as of defined in Rule 12b-2 of the Act.     Yes   ý  No   o

State the aggregate market value of the voting stock held by non-affiliates of the registrant $117,137,176 at June 30, 2003.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at March 5, 2004

Common Stock, $10 Par Value

 

3,322,420 Shares

 

2



 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held on April 28, 2004 are incorporated by reference in Part III hereof.

 

INDEX

 

PART I

ITEM

 

 

Item 1.

Business.

 

Item 2.

Properties.

 

Item 3.

Legal Proceedings

 

Item 4.

Submission of Matters to a Vote of Security Holders.

 

 

 

 

PART II

Item 5.

Market for the Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchase of Equity Securities

 

Item 6.

Selected Financial Data

 

Item 7.

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

 

Item 7.A

Quantitative and Qualitative Disclosure About Market Risk

 

Item 8.

Financial Statements and Supplementary Data

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Item 9A.

Controls and Procedures

 

 

 

 

PART III

Item 10.

Directors and Executive Officers of the Registrant.

 

Item 11.

Executive Compensation.

 

Item 12.

Security Ownership and Certain Beneficial Owners and Management

 

Item 13.

Certain Relationships and Related Transactions.

 

Item 14.

Principal Accountant Fees and Services.

 

 

 

 

PART IV

Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

Index to Exhibits

 

Signatures and Certifications

 

 

3



 

PART I

 

ITEM 1   BUSINESS

 

A.  General Development of Business and History

 

On January 7, 1983, Penns Woods Bancorp, Inc. (the “Company”) was incorporated under the laws of the Commonwealth of Pennsylvania as a bank holding company.  The Jersey Shore State Bank (the “Bank”) became a wholly owned subsidiary of the Company, and each outstanding share of Bank common stock was converted into one share of Company common stock.  This transaction was approved by the shareholders of the Bank on April 11, 1983 and was officially effective on July 12, 1983.  The Company’s business has consisted primarily of managing and supervising the Bank, and its principal source of income has been dividends paid by the Bank.  The Company’s two other wholly-owned subsidiaries are Woods Real Estate Development Co, Inc. and Woods Investment Co., Inc.

 

The Bank is engaged in commercial and retail banking and the taking of time and regular savings and demand deposits, the making of commercial and consumer loans and mortgage loans, and safe deposit services.  Auxiliary services, such as cash management, are provided to commercial customers.  The Bank operates full banking services with eleven branch offices and a Mortgage/Loan Center in Northcentral Pennsylvania.

 

In October 2000, the Bank acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M Group, which operates as a subsidiary of the Bank, offers insurance and securities brokerage services. Securities are offered by The M Group through ING Financial Partners, Inc., a registered broker-dealer.

 

Neither the Company nor the Bank anticipates that compliance with environmental laws and regulations will have any material effect on capital expenditures, earnings, or on its competitive position.  The Bank is not dependent on a single customer or a few customers, the loss of whom would have a material effect on the business of the Bank.

 

The Bank employed approximately 150 persons as of December 31, 2003.  The Company does not have any employees.  The principal officers of the Bank also serve as officers of the Company.

 

A copy of the Code of Ethics and Code of Conduct for the Corporation can be requested from Sonya E. Scott, the Secretary of the Corporation, at 300 Market Street, Williamsport, PA  17701.  A link with access to the Corporation’s SEC 10K filings, annual reports, and quarterly filings cand be found at www.jssb.com.

 

B.  Regulation and Supervision

 

The Company is also subject to the provisions of the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”).  The Bank is subject to the supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”), as its primary federal regulator and as the insurer of the Bank’s deposits.  The Bank is also regulated and examined by the Pennsylvania Department of Banking (the “Department”).

 

The insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The M Group conducts business including principally the Pennsylvania Department of Insurance. The securities brokerage activities of The M Group are subject to regulation by federal and state securities commissions.

 

The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks.  As a result, the FRB, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity.  The BHCA requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of 5% or more of any voting shares of any bank.  Such a transaction would also require approval of the Department.

 

4



 

A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5% of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the FRB’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

 

Bank holding companies are required to comply with the FRB’s risk-based capital guidelines.  The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.  Currently, the required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%.  At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders’ equity, less certain intangible assets.  The remainder (“Tier 2 capital”) may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, 45% of net unrealized gains on marketable equity securities and a limited amount of the general loan loss allowance.  The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.

 

In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio, under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion.  All other bank holding companies are expected to maintain a leverage ratio of at least 4% to 5%.  The Bank is subject to similar capital requirements adopted by the FDIC.

 

C.  Regulation of the Bank

 

From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions of, the business of the Bank.  It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank.  As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.

 

Prompt Corrective Action - The FDIC has specified the levels at which an insured institution will be considered “well- capitalized,” “adequately capitalized,” “undercapitalized,” and “critically undercapitalized.” In the event an institution’s capital deteriorates to the “undercapitalized” category or below, the Federal Deposit Insurance Act (the “FDIA”) and FDIC regulations prescribe an increasing amount of regulatory intervention, including: (1)  the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver.  For well-capitalized institutions, the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity.

 

Deposit Insurance - There are two deposit insurance funds administered by the FDIC - the Savings Association Insurance Fund (“SAIF”) and the Bank Insurance Fund (“BIF”).  The Bank’s deposits are insured under the BIF; however, the deposits assumed by the Bank in connection with the merger of Lock Haven Savings Bank are treated and assessed as SAIF-insured deposits.  The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and

 

5



 

supervisory measure.  Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, each institution to one of three capital groups (well-capitalized, adequately capitalized or undercapitalized) and further assigns such institution to one of three subgroups within a capital group. The institution’s subgroup assignment is based upon the FDIC’s judgment of the institution’s strength in light of supervisory evaluations, including examination reports, statistical analyses and other information relevant to gauging the risk posed by the institution.  Only institutions with a total capital to risk-adjusted assets ratio of 10.0% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized group.   As of December 31, 2003, the Bank’s ratios were well above required minimum ratios.

 

Both the BIF and SAIF are presently fully funded at more than the minimum amount required by law. Accordingly, the BIF and SAIF assessment rates range from zero for those institutions with the least risk, to $0.27 for every $100 of insured deposits for institutions deemed to have the highest risk.  The Bank is in the category of institutions that presently pay nothing for deposit insurance.  The FDIC adjusts the rates every six months.  The FDIC indicated that all banks may again be required to pay deposit insurance premiums in the future if the current trend of the size of the deposit insurance funds relative to all insured deposits continues.

 

While the Bank presently pays no premiums for deposit insurance, it is subject to assessments to pay the interest on Financing Corporation (“FICO”) bonds.  FICO was created by Congress to issue bonds to finance the resolution of failed thrift institutions.  The current annual FICO assessment for the Bank (and all banks) is $.0154 $100 of BIF deposits.

 

Other Legislation

 

The Fair and Accurate Credit Transactions Act (“FACT”) was signed into law on December 4, 2003.  This law extends the previously existing Fair Credit Reporting Act.  New provisions added by FACT address the growing problem of identifying theft.  Consumers will be able to initiate a fraud alert when they are victims of identity theft, and credit reporting agencies will have additional duties.  Consumers will also be entitled to obtain free credit reports, and will be granted certain additional privacy rights.  Regulators will be issuing rules to implement FACT over the next year, and some of these rules will likely impose additional duties on the Bank, although the Company does not believe that the application of these new rules will have a material effect on its operations.

 

The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws.  The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act.  The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and chief financial officer to certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control and ethics standards for accounting firms.  In response to the legislation, the national securities exchanges and NASDAQ have adopted new rules relating to certain matters, including the independence of members of a company’s audit committee as a condition to listing or continued listing.  The Company does not believe that the application of these new rules to the Company will have a material effect on its results of operations.

 

In addition, Congress is often considering some financial industry legislation. The Company cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business in the future.

 

In addition to federal banking law, the Bank is subject to the Pennsylvania Banking Code. The Banking Code was amended in late 2000 to provide more complete “parity” in the powers of state-chartered institutions compared to national banks and federal savings banks doing business in Pennsylvania. Pennsylvania banks have all the same ability to form financial subsidiaries authorized by the Gramm-Leach-Bliley Act, as do national banks.

 

Environmental Laws

 

Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their loans.  Environmentally contaminated

 

6



 

properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental clean up costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs, and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management of the borrower.  The Company is not aware of any borrower who is currently subject to any environmental investigation or clean up proceeding which is likely to have a material adverse effect on the financial condition or results of operations of the Company.

 

Effect of Government Monetary Policies

 

The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies.   The monetary policies of the FRB have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The FRB has a major effect upon the levels of bank loans, investments and deposits through its open market operations in the United States Government securities and through its regulation of, among other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits.  It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

 

DESCRIPTION OF BANK
 

a.  History and Business

 

Jersey Shore State Bank “(“Bank”)” was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934 and became a wholly owned subsidiary of the Company on July 12, 1983.

 

As of December 31, 2003, the Bank had total assets of $511,634,000; total shareholders’ equity of $54,130,000 and total deposits of $334,828,000.  The Bank’s deposits are insured by the Federal Deposit Insurance Corporation for the maximum amount provided under current law.

 

The Bank engages in business as a commercial bank, doing business at several locations in Lycoming, Clinton and Centre Counties, Pennsylvania.  The Bank offers insurance and securities brokerage services        through its wholly owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group.

 

Services offered by the Bank include accepting time, demand and savings deposits including Super NOW accounts, regular savings accounts, money market accounts, investment certificates, fixed rate certificates of deposit and club accounts.  Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans and the renting of safe deposit facilities.  Additional services include making residential mortgage loans, revolving credit loans with overdraft protection, small business loans, etc.  Business loans include seasonal credit collateral loans and term loans.

 

The Bank’s loan portfolio mix can be classified into four principal categories of real estate, agricultural, commercial and consumer.

 

Real estate loans can be further segmented into construction and land development, farmland, one-to-four family residential, multi-family and commercial or industrial.  Qualified borrowers are defined by policy or by industry underwriting standards.   Owner provided equity requirements range from 20% to 30% with a first lien status required.  Terms are restricted to between 10 and 20 years with the exception of construction and land development, which is limited to one to five years.  Appraisals, verifications and visitations comply with industry standards.

 

Financial information that is required on all commercial mortgages includes the most current three years’ balance sheets and income statements and projections on income to be developed through the project.  In the case of corporations and partnerships, the principals are often asked to indebt themselves personally as well.  Residential mortgages, repayment ability

 

7



 

is determined from information contained in the application and recent income tax returns.   Emphasis is on credit, employment, income and residency verification.  Broad hazard insurance is always required and flood insurance where applicable.  In the case of construction mortgages, builders risk insurance is requested.

 

Agricultural loans for the purchase or improvement of real estate must meet the Bank’s real estate underwriting criteria.  The only permissible exception is when a Farmers Home Loan Administration guaranty is obtained.  Agricultural loans made for the purchase of equipment are usually payable in five years, but never more than seven, depending upon the useful life of the purchased asset.  Minimum borrower equity required is 20%.  Livestock financing criteria depends upon the nature of the operation.  A dairy herd could be financed over three years, but a feeder operation would require cleanup in intervals of less than one year.  Agricultural loans are also made for crop production purposes.  Such loans are structured to repay within the production cycle and not carried over into a subsequent year.   General purpose working capital loans are also a possibility with repayment expected within one year.  It is also a general policy to collateralize non-real estate loans with not only the asset purchased but also junior liens on all other available assets.  Insurance and credit criteria is the same as mentioned previously.  In addition, annual visits are made to our agricultural customers to determine the general condition of assets.   Personal credit requirements are handled as consumer loans.

 

Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment and for working capital purposes on a seasonal or revolving basis.  Criteria was discussed under real estate financing for such loans, but it is important to note that such loans may be made in conjunction with the Pennsylvania Industrial Development Authority.  Caution is also exercised in taking industrial property for collateral by requiring, on a selective basis, environmental audits.

 

Equipment loans are generally amortized over three to seven years, with an owner equity contribution required of at least 20% of the purchase price.  Unusually expensive pieces may be financed for a longer period depending upon the asset’s useful life.  The increased cash flow resulting from the additional piece, through improved income or greater depreciation expense, serves in establishing the terms.  Insurance coverage with the Bank as loss payee is required, especially in the case where the equipment is rolling stock.

 

Seasonal and revolving lines of credit are offered for working capital purposes.  Collateral for such a loan includes the pledge of inventory and/or receivables.  Drawing availability is usually 50% of inventory and 75% of eligible receivables.  Eligible receivables are defined as invoices less than 90 days delinquent.  Exclusive reliance is very seldom placed on such collateral, therefore, other lienable assets are also taken into the collateral pool.  Where reliance is placed on inventory and accounts receivable, the applicant must provide financial information including agings on a monthly basis.  In addition, the guaranty of the principals is usually obtained.

 

It is unusual for the Bank to make unsecured commercial loans.  But when such a loan is a necessity, credit information in the file must support that decision.

 

Letter of Credit availability is limited to standbys where the customer is well known to the Bank.  Credit criteria is the same as that utilized in making a direct loan and collateral is obtained in most cases, and whenever the expiration date is for more than one year.

 

Consumer loan products include second mortgages, automobile financing, small loan requests, overdraft check lines and PHEAA referral loans.  Our policy includes standards used in the industry on debt service ratios and terms are consistent with prudent underwriting standards and the use of proceeds.   Verifications are made of employment and residency, along with credit history.  Second mortgages are confined to equity borrowing and home improvements.  Terms are generally ten years or less and rates are fixed.  Loan to collateral value criteria is 80% or less and verifications are made to determine values.   Automobile financing is generally restricted to five years and done on a direct basis.  The Bank, as a practice, does not floor plan and therefore does not discount dealer paper.  Small loan requests are to accommodate personal needs such as the purchase of small appliances or for

 

8



 

the payment of taxes.  Overdraft check lines are limited to $5,000 or less.

 

The Bank’s investment portfolio is analyzed and priced on a      monthly basis. Investments are made in U.S. Treasuries, U.S. Agency issues, bank qualified municipal bonds, corporate bonds and corporate stocks which consist of Pennsylvania bank stocks.  Bonds with BAA or better ratings are used, unless a local issue is purchased that has a lesser or no rating.

 

Factors taken into consideration when investments are made include liquidity, the Company’s tax position and the policies of the Asset/Liability Committee.

 

The Bank has experienced deposit growth in the range of .96% to 11.37% over the last five years.  This growth has primarily come in the form of core deposits.  Although the Bank has regular opportunities to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals and others, it does not rely on these monies to fund loans on intermediate or longer-term investments.  Minor seasonal growth in deposits is experienced at or near the year-end.

 

It is the policy of the Bank to generally maintain a rate sensitive asset (RSA) to rate sensitive liability (RSL) ratio of 150% of equity for a 6-month time horizon, 150% of equity for a 2-year time horizon and 150% of equity for a 5-year time horizon.

 

The Bank operates eleven full service offices in Lycoming, Clinton, and Centre Counties, Pennsylvania, and a Mortgage/Loan Center in Centre County, Pennsylvania.  The economic base of the region is developed around service, light manufacturing industries and agriculture.  The banking environment in Lycoming, Clinton and Centre Counties, Pennsylvania is highly competitive.  The Bank competes for loans and deposits with commercial banks, savings and loan associations and other financial institutions.

 

The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including federal, state and local governments).  The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits.

 

b.  Supervision and Regulation

 

The earnings of the Bank are affected by the policies of regulatory authorities including the FDIC and the FRB. An important function of the FRB is to regulate the money supply and interest rates.  Among the instruments used to implement these objectives are open market operations in U.S. Government Securities, changes in reserve requirements against member bank deposits and limitations on interest rates that member banks may pay on time and savings deposits.  These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments on deposits, and their use may also affect interest rates charged on loans or paid for deposits.

 

The policies and regulations of the FRB have had and will probably continue to have a significant effect on the Bank’s deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank’s operation in the future.  The effect of such policies and regulations upon the future business and earnings of the Bank cannot accurately be predicted.

 

9



 

EXECUTIVE OFFICERS OF THE REGISTRANT:

 

NAME

 

AGE

 

FIVE-YEAR ANALYSIS OF DUTIES

Ronald A. Walko

 

57

 

President and Chief Executive Officer of the Company; the Bank; The M Group; and Woods Investment Company, Inc.; Vice President of Woods Real Estate Development Co, Inc.; and Federal Bank examiner prior to 1986 for an eighteen-year period.

 

 

 

 

 

Hubert A. Valencik

 

62

 

Senior Vice President of the Company; Senior Vice President and Operations Officer of the Bank; Vice President of Woods Real Estate Development Co, Inc.; Vice President - Operations of The M Group; Vice President with another bank prior to 1985 for a fourteen-year period.

 

 

 

 

 

Sonya E. Scott

 

44

 

Secretary of the Company; Senior Vice President and Chief Financial Officer of the Bank; Secretary and Treasurer of Woods Real Estate Development Co, Inc.; Woods Investment Co.,Inc.; and The M Group.

 

10



 

ITEM  2    PROPERTIES

 

The Company owns and leases its properties.  Listed herewith are the locations of properties owned or leased, in which the banking offices and Financial Center are located; all properties are in good condition and adequate for the Bank’s purposes:

 

Office

 

Address

 

 

Main

 

115 South Main Street

 

Owned

 

 

P.O. Box 5098

 

 

 

 

Jersey Shore, Pennsylvania 17740

 

 

 

 

 

 

 

Bridge Street

 

112 Bridge Street

 

Owned

 

 

Jersey Shore, Pennsylvania 17740

 

 

 

 

 

 

 

DuBoistown

 

2675 Euclid Avenue

 

Under Lease

 

 

DuBoistown, Pennsylvania 17702

 

 

 

 

 

 

 

Williamsport

 

300 Market Street

 

Owned

 

 

P.O. Box 967

 

 

 

 

Williamsport, Pennsylvania  17703-0967

 

 

 

11



 

Montgomery

 

9094 Rt 405 Highway

 

Under Lease

 

 

Montgomery, Pennsylvania 17752

 

 

 

 

 

 

 

Lock Haven

 

4 West Main Street

 

Owned

 

 

Lock Haven, Pennsylvania 17745

 

 

 

 

 

 

 

Mill Hall

 

(Inside Wal-Mart), 167 Hogan Boulevard

 

Under Lease

 

 

Mill Hall, Pennsylvania 17751

 

 

 

 

 

 

 

Spring Mills

 

Ross Hill Road, P.O. Box 66

 

Owned

 

 

Spring Mills, Pennsylvania 16875

 

 

 

 

 

 

 

Centre Hall

 

2842 Earlystown Road

 

Land Under Lease

 

 

Centre Hall, Pennsylvania 16828

 

 

 

 

 

 

 

Zion

 

100 Cobblestone Road

 

Under Lease

 

 

Bellefonte, Pennsylvania 16823

 

 

 

 

 

 

 

Jersey Shore State Bank

 

1952 Waddle Road, Suite 106

 

Under Lease

Financial Center

 

State College, Pennsylvania 16803

 

 

State College

 

 

 

 

 

 

 

 

 

The M Group, Inc.
D/B/A The
Comprehensive
Financial Group

 

705 Washington Boulevard
Williamsport, Pennsylvania 17701

 

Under Lease

 

 

 

 

 

State College

 

(Inside Wal-Mart), 1665 North Atherton Place

 

Under Lease

 

 

State College, Pennsylvania 16803

 

 

 

ITEM  3    LEGAL PROCEEDINGS

 

In the normal course of business, various lawsuits and claims arise against the Company and its subsidiary.  There are no such legal proceedings or claims currently pending or threatened.

 

12



 

ITEM  4    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

 

PART II

 

ITEM  5    MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASE OF EQUITY SECURITIES

 

 

 

HIGH

 

LOW

 

Dividends
Declared

 

2001

 

 

 

 

 

 

 

First quarter

 

$

30.45

 

$

24.77

 

$

0.23

 

Second quarter

 

30.00

 

24.77

 

0.23

 

Third quarter

 

29.09

 

27.95

 

0.23

 

Fourth quarter

 

32.27

 

28.32

 

0.42

 

2002

 

 

 

 

 

 

 

First quarter

 

$

31.82

 

$

29.39

 

$

0.25

 

Second quarter

 

33.06

 

30.00

 

0.25

 

Third quarter

 

32.45

 

29.27

 

0.25

 

Fourth quarter

 

33.50

 

30.00

 

0.49

 

2003

 

 

 

 

 

 

 

First quarter

 

$

41.27

 

$

32.86

 

$

0.27

 

Second quarter

 

47.43

 

37.71

 

0.27

 

Third quarter

 

42.32

 

38.64

 

0.27

 

Fourth quarter

 

47.91

 

40.85

 

0.68

 

 

The Common Stock is listed on the Nasdaq National Market under symboe “PWOD”.  The following table sets forth (1) the quarterly high and low prices for a share of the Company’s Common Stock during the periods indicated, and (2) quarterly dividends on a share of the Common Stock with respect to each quarter since January 1, 2001.  The following quotations represent prices between buyers and sellers and do not include retail markup, markdown or commission.  They may not necessarily represent actual transactions.

 

The Bank has paid cash dividends since 1941.  The Company has paid dividends since the effective date of its formation as a bank holding company.  It is the present intention of the Registrant’s Board of Directors to continue the dividend payment policy; however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant at the time the Board of Directors of the Registrant considers dividend policy.  Cash available for dividend distributions to shareholders of the Registrant must initially come from dividends paid by the Bank to the Company.  Therefore, the restrictions on the Bank’s dividend payments are directly applicable to the Company.

 

Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto, the corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto the total assets of the corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders whose preferential rights are superior to those receiving the dividend.

 

As of March 5, 2004, the Registrant had approximately 1,224 shareholders of record.

 

13



 
ITEM  6    SELECTED FINANCIAL DATA

 

The following table sets forth certain financial data as of and for each of the years in the five-year period ended December 31, 2003.

 

14



 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

29,052

 

$

29,104

 

$

28,736

 

$

28,454

 

$

26,030

 

Interest expense

 

9,265

 

10,846

 

12,481

 

12,778

 

10,518

 

Net interest income

 

19,787

 

18,258

 

16,255

 

15,676

 

15,512

 

Provision for loan losses

 

255

 

365

 

372

 

286

 

286

 

Net interest income after provision for loan losses

 

19,532

 

17,893

 

15,883

 

15,390

 

15,226

 

Other income

 

8,634

 

5,453

 

5,109

 

2,615

 

3,527

 

Other expense

 

13,289

 

12,213

 

11,272

 

9,820

 

9,339

 

Income before income taxes

 

14,877

 

11,133

 

9,720

 

8,185

 

9,414

 

Applicable income taxes

 

3,703

 

2,247

 

1,978

 

1,619

 

2,224

 

Net Income

 

$

11,174

 

$

8,886

 

$

7,742

 

$

6,566

 

$

7,190

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet at End of Period:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

527,381

 

$

472,206

 

$

424,810

 

$

394,913

 

$

373,742

 

Loans

 

275,828

 

257,845

 

251,623

 

244,798

 

231,815

 

Allowance for loan losses

 

(3,069

)

(2,953

)

(2,927

)

(2,879

)

(2,823

)

Deposits

 

334,318

 

339,848

 

305,150

 

278,134

 

255,573

 

Long-term debt — other

 

70,878

 

51,778

 

41,778

 

31,778

 

27,278

 

Shareholders’ equity

 

69,769

 

63,142

 

55,252

 

50,514

 

46,085

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Basic

 

$

3.35

 

$

2.66

 

$

2.30

 

$

1.91

 

$

2.09

 

Earnings per share - Diluted

 

3.35

 

2.66

 

2.30

 

1.91

 

2.09

 

Cash dividends declared

 

1.49

 

1.24

 

1.11

 

1.00

 

0.92

 

Adjusted Book value

 

21.00

 

18.94

 

16.53

 

14.83

 

13.41

 

Number of shares outstanding, at end of period

 

3,321,560

 

3,031,329

 

3,039,590

 

3,097,293

 

3,123,372

 

Average number of shares outstanding

 

3,330,585

 

3,336,312

 

3,371,845

 

3,431,494

 

3,433,554

 

Selected financial ratios:

 

 

 

 

 

 

 

 

 

 

 

Return on average shareholders’ equity

 

16.60

%

15.00

%

14.38

%

13.77

%

14.96

%

Return on average total assets

 

2.24

%

2.01

%

1.95

%

1.74

%

1.99

%

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income to average interest earning assets

 

4.28

%

4.45

%

4.39

%

4.35

%

4.63

%

Dividend payout ratio

 

44.76

%

46.40

%

48.17

%

52.18

%

44.20

%

Average shareholders’ equity to average total assets

 

13.51

%

13.39

%

13.54

%

12.62

%

13.81

%

Loans to deposits, at end of period

 

83.94

%

76.65

%

83.77

%

88.62

%

90.39

%

 

Per share data and number of shares outstanding have been adjusted in each reporting period to give retroactive effect to a stock split effected in the form of a 10% stock dividend issued October 30,2003.

 

15



 

ITEM 7     MANAGEMENT’S DISCUSSIONA AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

RESULTS OF OPERATIONS

 

NET INTEREST INCOME

 

Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities.  To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to pretax equivalents based on the marginal corporate federal tax rate of 34%.  The tax equivalent adjustment to net interest income for 2003, 2002, and 2001 were $1,367,000, $1,739,000, and $1,689,000, respectively.

 

2003 vs 2002

 

Reported net interest income increased $1,529,000 or 8.4% from year end 2002 to year end 2003.  The decrease in total interest income of $52,000 is the result of an increase of $44,185,000 in the average balance of investment securities held for the current period relative to the same period a year ago offset by a decrease in the return on loans of approximately 62 basis points.  Overall, interest income generated from the net increase in volume of interest earning assets was offset by a decline in rates of approximately 94 basis points.

 

On a tax equivalent basis, net interest income increased 5.8% or $1,157,000, to $21,154,000 in a period when both average interest earning assets and average interest-bearing liabilities increased.  The increase of taxable security income of $2,646,000 is due to the significant purchase of U.S. Government securities over the past year, with the average of these securities increasing $70,159,000, while the decrease in the average of tax-exempt State & Political securities decreased tax equivalent interest income $2,082,000.  The investment portfolio has been repositioned from longer term assets to shorter term assets to take advantage of the cash flow opportunities for reinvestment in anticipation of rising rates.  The net growth in the volume of investment holdings has generated additional interest income that has offset the 111 basis point decline in the overall portfolios weighted average interest rates.

 

Within the loan portfolio, a 62 basis point decrease of the tax equivalent return on loans was partially offset by an increase of $7,612,000 in the average balance of loans when comparing the year 2003 to the year 2002.  Variable rate loans within the portfolio and other new loan originations at lower effective rates aided in the reduction of new income compared to a year ago because of the historically low rates.

 

For the year ended December 31, 2003, reported interest expense decreased $1,581,000 or 14.6% over the same period of 2002.  Lower rates for all deposit accounts contribute the most substantial decrease in interest expense.  The weighted average rate on interest paid on deposits declined 92 basis points for the year 2003 since the year end 2002.  The overall average balance of savings deposits increased $17,925,000, offset by a decrease in the weighted average rate for a net decrease in the related interest expense of $997,000. Interest expense on time deposits decreased  $1,204,000 due to both the 76 basis point decline in the weighted average rate and the decrease in the average balance of $5,453,000.

 

Favorable long-term borrowing rates offer opportunities to reduce interest expenses over the coming years.  Throughout 2003, the Company borrowed an additional $19.1 million in long term advances through the FHLB to minimize future borrowing costs and to enhance liability positioning.  These additional borrowings were utilized by management to take advantage of current investment opportunities while minimizing interest rate risk.  The $693,000 increase in expense on long-term borrowings is the result of these additional advances with average balances of $20,986,000 partially offset by the 64 basis point decline in the resulting weighted average interest rate for the year ending December 31, 2003 compared to the same period in 2002.  Interest paid on short-term borrowings decreased $73,000 as a result of an overall decline in the weighted average interest rate of 131 basis points while the average balances outstanding during the year increased $8,322,000.  The increase in short-term borrowings is the result of taking advantage of the opportunity to borrow from Federal Home Loan Bank at historically low rates.

 

16



 

2002 vs 2001

 

Fully taxable equivalent net interest income increased $2,053,000 or 11.44% to $19,997,000 during the year 2002. The net interest income growth was the result of an increase in interest income of $418,000 and a decrease in interest expense of $1,635,000.

 

The effective interest differential increased 3 basis points to 4.87% from December 31, 2001 to December 31, 2002.  Prime rates and federal funds rates held steady most of the year declining 50 basis points in November.  The low rates had a greater impact on the repricing of deposits than they had on loans and investment securities.  The Company’s assets and liabilities were positioned to benefit from the rate environment.  Overall, rates had a positive impact on earnings.  Although interest-earning assets suffered a reduction in income due to rates of $2,033,000, interest expense relating to interest-bearing liabilities also declined by $2,326,000.  The net effect was an increase in income of $293,000 due to rates.

 

Total average interest earning assets increased $39,805,000 during 2002 which contributed $2,451,000 to net interest income.

 

Interest income on loans decreased during 2002 by $1,055,000.  This was the result of a decrease in interest income of $1,669,000 due to rate offset by an increase in interest income of $614,000 due to volume.  Total average loans increased from 2001 to 2002 by $7,021,000 which contributed to the volume increase.  Although the volume increased, as loans were paid off and new loans originated, low prime rates caused a reduction in interest income.  Bank prime rates remained relatively low in 2002 compared to historical standards and were directly responsible for the decline in interest income of $1,669,000.  This is evident by the decline of the average rate on total loans from 8.92% in 2001 to 8.26% in 2002.

 

Investment securites interest income contributed $1,473,000 of additional income in 2002 relative to 2001.  Taxable securities income represented the majority of the increase at $1,390,000 while tax-exempt investment securities added $83,000.  Together, an increase of investment securities income of $1,837,000 due to volume more than offset a decrease of $364,000 due to rates.  Total average securities increased $32,784,000 or 26.53% from 2001 to 2002.  This increase explains the substantial increase in income related to volume.

 

Total average interest-bearing liabilities increased $35,898,000 or 12.26% during 2002.  The interest expense related to volume increased $691,000 while rates subtracted interest expenses totaling $2,326,000.

 

Due to successful marketing strategies and market penetration in the Centre County region, the bank increased total average deposits by $31,166,000.  Average savings deposits increased $35,893,000 while average time deposits decreased $9,010,000.  Non-interest-bearing demand deposits increased $4,283,000.  Deposit rates held steady through most of 2002.  Savings deposits had little change in average rate while other time deposits repriced throughout the year into the current low rates.  The average rate on other time deposits declined from 5.28% in 2001 to 3.77% in 2002.

 

The increase in funding due to deposits added to an increase in average other borrowings of $12,672,000 and offset the reduction of average short-term borrowings of $3,657,000.   The bank had less need for overnight borrowings to fund assets with the increase of deposits and other borrowings.  The bank acquired two loans totaling $10,000,000 with the Federal Home Loan Bank that are reflected in the increase of other borrowings.  The Federal Home Loan Bank borrowings were intended to match investment security purchases that generate long-term interest income with minimal risk.

 

17



 

AVERAGE BALANCES AND INTEREST RATES

 

The following tables set forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

 

AVERAGE BALANCES AND INTEREST RATES

(INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS)

(IN THOUSANDS)

 

 

 

2003

 

2002

 

2001

 

 

 

AVERAGE
BALANCE(2)

 

INTEREST

 

AVERAGE
RATE

 

AVERAGE
BALANCE(2)

 

INTEREST

 

AVERAGE
RATE

 

AVERAGE
BALANCE

 

INTEREST

 

AVERAGE
RATE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and federal agency

 

$

124,849

 

$

5,584

 

4.47

%

$

54,690

 

$

2,923

 

5.34

%

$

22,877

 

$

1,466

 

6.41

%

State and political subdivisions(4)

 

50,822

 

3,952

 

7.78

%

77,216

 

6,034

 

7.81

%

75,556

 

5,951

 

7.88

%

Other

 

24,872

 

897

 

3.61

%

24,452

 

912

 

3.73

%

25,141

 

979

 

3.89

%

Total securities

 

200,543

 

10,433

 

5.20

%

156,358

 

9,869

 

6.31

%

123,574

 

8,396

 

6.79

%

LOANS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans(4)

 

1,008

 

68

 

6.75

%

2,309

 

185

 

8.01

%

3,935

 

322

 

8.18

%

All other loans, net of discount where applicable

 

260,532

 

19,918

 

7.65

%

251,619

 

20,789

 

8.26

%

242,972

 

21,707

 

8.93

%

Total loans(1),(3)

 

261,540

 

19,986

 

7.64

%

253,928

 

20,974

 

8.26

%

246,907

 

22,029

 

8.92

%

Total interest-earning assets

 

462,083

 

$

30,419

 

6.58

%

410,286

 

$

30,843

 

7.52

%

370,481

 

$

30,425

 

8.21

%

Other assets

 

36,297

 

 

 

 

 

31,977

 

 

 

 

 

27,081

 

 

 

 

 

TOTAL ASSETS

 

$

498,380

 

 

 

 

 

$

442,263

 

 

 

 

 

$

397,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

147,169

 

$

1,704

 

1.16

%

$

129,244

 

$

2,701

 

2.09

%

$

93,351

 

$

1,961

 

2.10

%

Other time

 

131,360

 

3,952

 

3.01

%

136,813

 

5,156

 

3.77

%

145,823

 

7,696

 

5.28

%

Total interest-bearing deposits

 

278,529

 

5,656

 

2.03

%

266,057

 

7,857

 

2.95

%

239,174

 

9,657

 

4.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

24,787

 

428

 

1.73

%

16,465

 

501

 

3.04

%

20,122

 

903

 

4.49

%

Other borrowings

 

67,285

 

3,181

 

4.73

%

46,299

 

2,488

 

5.37

%

33,627

 

1,921

 

5.71

%

Total interest-bearing liabilities

 

370,601

 

$

9,265

 

2.50

%

328,821

 

$

10,846

 

3.30

%

292,923

 

$

12,481

 

4.26

%

Demand deposits

 

56,672

 

 

 

 

 

50,877

 

 

 

 

 

46,594

 

 

 

 

 

Other liabilities

 

3,780

 

 

 

 

 

3,334

 

 

 

 

 

4,214

 

 

 

 

 

Shareholders’ equity

 

67,327

 

 

 

 

 

59,231

 

 

 

 

 

53,831

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

498,380

 

 

 

 

 

$

442,263

 

 

 

 

 

$

397,562

 

 

 

 

 

Interest rate margin

 

 

 

 

 

4.08

%

 

 

 

 

4.22

%

 

 

 

 

3.95

%

Effective interest differential

 

 

 

$

21,154

 

4.58

%

 

 

$

19,997

 

4.87

%

 

 

$

17,944

 

4.84

%

 


(1).  Fees on loans are included with interest on loans.  Loan fees are included in interest income as follows:  2003 $1,032,000, $, 2002, $803,000, 2001, $668,000

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

(3).  Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

(4).  Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate (derived by dividing tax-exempt interest by 66%).

 

 

18



 

(IN THOUSANDS)

 

Rate/Volume Analysis

 

The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume). Increases and decreases due to both rate and volume, which cannot be separated, have been allocated proportionally to the change due to volume and the change due to rate.

 

 

 

Year Ended December 31,

 

 

 

2003 vs 2002
Increase (Decrease)
Due to

 

2002 vs 2001
Increase (Decrease)
Due to

 

 

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

$

3,223

 

$

(577

)

$

2,646

 

$

1,707

 

$

(317

)

$

1,390

 

Tax-exempt investment securities

 

(2,054

)

(28

)

(2,082

)

130

 

(47

)

83

 

Loans

 

616

 

(1,604

)

(988

)

614

 

(1,669

)

(1,055

)

Total interest-earning assets

 

$

1,785

 

$

(2,209

)

$

(424

)

$

2,451

 

$

(2,033

)

$

418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

335

 

$

(1,332

)

$

(997

)

$

750

 

$

(10

)

$

740

 

Other time deposits

 

(216

)

(988

)

(1,204

)

(514

)

(2,026

)

(2,540

)

Short-term borrowings

 

194

 

(267

)

(73

)

(232

)

(170

)

(402

)

Other borrowings

 

1,021

 

(328

)

693

 

687

 

(120

)

567

 

Total interest-bearing liabilities

 

$

1,334

 

$

(2,915

)

$

(1,581

)

$

691

 

$

(2,326

)

$

(1,635

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net interest income

 

$

451

 

$

706

 

$

1,157

 

$

1,760

 

$

293

 

$

2,053

 

 

PROVISION FOR LOAN LOSSES

 

2003 vs 2002

 

The provision for loan losses is based upon management’s quarterly review of the loan portfolio.  The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served.  An external independent loan review is also performed annually for the Bank.  Management remains committed to an aggressive program of problem loan identification and resolution.

 

The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined.  Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience.  In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.

 

Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses was adequate at December 31, 2003, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations.  A downturn in the local economy, employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss

 

19



 

provisions and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgement of information available to them at the time of their examination.

 

The allowance for loan losses increased 3.9% or $116,000 from fiscal 2002 after net charge-offs of $139,000 contributing to a year-end allowance for loan losses of  $3,069,000 or 1.1% of total loans.

 

2002 vs 2001

 

The allowance for loan losses increased 0.9% or $26,000 from fiscal 2001 after net charge-offs of $339,000 contributing to a year-end allowance for loan losses of  $2,953,000 or 1.1% of total loans.  This percentage is consistent with the guidelines of regulators and peer banks.  Management’s conclusion is that the provision for loan loss is adequate.

 

 

 

YEAR ENDED DECEMBER 31,
(IN THOUSANDS)

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

Balance at beginning of period

 

$

2,953

 

$

2,927

 

$

2,879

 

$

2,823

 

$

2,681

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

63

 

262

 

154

 

165

 

50

 

Commercial and industrial.

 

37

 

80

 

122

 

38

 

28

 

Installment loans to individuals.

 

116

 

60

 

82

 

66

 

98

 

Total charge-offs.

 

216

 

402

 

358

 

269

 

176

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

42

 

25

 

9

 

8

 

4

 

Commercial and industrial.

 

16

 

21

 

8

 

20

 

11

 

Installment loans to individuals.

 

19

 

17

 

17

 

11

 

17

 

Total recoveries.

 

77

 

63

 

34

 

39

 

32

 

Net charge-offs

 

139

 

339

 

324

 

230

 

144

 

Additions charged to operations.

 

255

 

365

 

372

 

286

 

286

 

Balance at end of period.

 

$

3,069

 

$

2,953

 

$

2,927

 

$

2,879

 

$

2,823

 

Ratio of net charge-offs during the period to average loans outstanding during the period.

 

0.05

%

0.13

%

0.13

%

0.10

%

0.06

%

 

OTHER INCOME

 

2003 vs 2002

 

Total other income for 2003 was $8,634,000, an increase of $3,181,000 from the prior year.  Excluding security gains of $3,659,000 in 2003 and $233,000 in 2002, other income decreased $245,000.  Service charges increased 4.58% or $84,000 to $1,917,000 in 2003.

 

Decreases in commission income from the sale of financial products sold by the Bank’s subsidiary, The M Group,  accounted for $209,000 of the total decrease of other operating income. Other operating income decreased $108,000 primarily due to a non-recurring life insurance income item included in 2002, but not in 2003, resulting in a $116,00 decrease.

 

2002 vs 2001

 

Total other income for 2002 was $5,453,000, an increase of $344,000 from the prior year.  Excluding security gains of $233,000 in 2002 and $1,033,000 in 2001, other income increased $1,144,000.  Service charges increased 17.12% or $268,000 to $1,833,000 in 2002. 

 

20



 

The rate charged for overdraft fees was increased in 2002 which resulted in $229,000 additional service charge income.

 

Other operating income increased $876,000 from 2001 to 2002.  Commission income growth from the sale of financial products sold by the Bank’s subsidiary, The M Group,  account for $401,000 of the total increase of other operating income.  Income on cash surrender value adjustments on bank owned life insurance increased $242,000.  The year 2002 was the first full year the life insurance policies were in effect, resulting in a greater adjustment.  Life insurance proceeds also added $102,000.  The remaining contributors were credit card merchant machine processing fees, debit card fees and ATM surcharge revenue.

 

OTHER EXPENSES

 

2003 vs 2002

 

Total other expenses increased $1,076,000 or 8.81% from the year ended December 31, 2002 to December 31, 2003. Salaries and employee benefits increased of $318,000.  This change was the result of the decline in commission earned by the M Group and the retirement of an executive officer offset by the standard cost of living salary increases and an extra pay paid in 2003 when compared to 2002.  Expenses such as rent, maintenance, and utilities for the new State College Wal-Mart Branch caused the majority of the $46,000 increase to occupancy expense.  The depreciation of a new Wide Area Network has resulted in most of the  $162,000 increase to furniture and equipment expense.  Advertising expense increased $16,000 due to a decrease in normal advertising expenses offset by the purchase of new brochures for $22,000.  Other operating expenses increased $490,000 consistent with the addition of the aforementioned branch.

 

2002 vs 2001

 

Total other expenses increased $941,000 or 8.35% from the year ended December 31, 2001 to December 31, 2002.  Salaries and employee benefits increased $1,152,000, the most substantial of the other expenses category.  Employee salaries and benefits increased more than $500,000 as a result of increased salaries that correspond with the growth in sales of financial products offered by The M Group and the cost of staff at the new State College Wal-Mart Branch.  The Bank’s pension expense increased $320,000 in 2002.  The remaining expenses were due to normal wage increases. The new branch also caused the majority of the $44,000  increase to occupancy expense.  The Bank has substantially upgraded its computer networking capabilities which has resulted in most of the  $98,000 increase to furniture and equipment expense.  Other operating expenses decreased $353,000.  The elimination of goodwill amortization as per the adoption of FAS No. 142 represents $221,000 of the decrease in expenses.  Bookkeeping expenses increased due to securities transactions and maintenance.  The other miscellaneous operating expenses decrease was additionally offset by a $55,000 expense as a result of a check kiting incident.

 

INCOME TAXES

 

2003 vs 2002

 

The provision for income taxes for the year ended December 31, 2003 resulted in an effective income tax rate of 24.9% compared to 20.2% for 2002.  This increase is the result of management’s current investment strategy of reinvesting proceeds from tax-exempt portfolio into other U.S. Government securities.

 

2002 vs 2001

 

The provision for income taxes for the year ended December 31, 2002 resulted in an effective income tax rate of 20.2% compared to 20.3% for 2001.

 

21



 

FINANCIAL CONDITION

 

INVESTMENTS

 

2003

 

The investment portfolio increased $33,680,000 or 19% in 2003.  The growth is largely attributed to management’s strategic plan to benefit from the low borrowing rates by taking advantage of over a 200 basis point interest rate spread of investments with similar maturity periods. The bank borrowed $19,100,000 in long-term FHLB advances to purchase securities and take advantage of interest rate imbalances in the market.  Short-term borrowing funded the balance of the additional investment securities purchased.  Most of the increase is attributable to an increase of $61,980,000 in U.S. Government agencies category, and a $10,331,000 increase in the equity securities category.  There was a $185,000 decrease in other bonds, notes and debentures, $1,168,000 decrease in U.S. Treasury securities category, and State and Political subdivisions catergory decreased $37,278,000.  The investment portfolio at year-end 2003 was comprised of 70.9% U.S. Government agency and Treasury securities, 16.2% state and political subdivisions, 12.0% equity securities, and .9% other bonds, notes and debentures.  Held to maturity securities had a carrying value of $686,000.  Available for sale securities occupied 99.66% of the total portfolio and had an amoritized cost of $201,321,000 with an estimated market value of $210,611,000.  The unrealized gain of $9,290,000 effected shareholders’ equity by $6,132,000, net of deferred taxes.

 

2002

 

The investment portfolio increased $44,330,000 or 33.3% in 2002.  Deposits grew faster than loan demand with the excess funding the purchase of additional investment securities.  Most of the increase is attributable to an increase of  $62,906,000 in U.S. Government agencies category, $975,000 in other bonds, notes and debentures and $170,000 in U.S. Treasury securities category.  State and Political subdivisions category decreased $12,575,000 and a $7,146,000 decrease was also found in the equity securities category.  The investment portfolio at year-end 2002 comprised of 50.2% U.S. Government agency and Treasury securities, 40.2% state and political subdivisions, 8.4% equity securities, and 1.2% other bonds, notes and debentures.  Held to maturity securities had a carrying value of $1,181,000. Available for sale securities occupied 99% of the total portfolio and had an amortized cost of $168,641,000 with an estimated market value of $176,436,000.  The unrealized gain of $7,795,000 effected shareholders’ equity by $5,145,000, net of deferred taxes.

 

22



 

The carrying amounts of investment securities at the dates indicated are summarized as follows (in thousands):

 

 

 

DECEMBER 31,

 

 

 

2003

 

2002

 

2001

 

U.S. Treasury securities:

 

 

 

 

 

 

 

Available for Sale

 

$

3,128

 

$

4,296

 

$

4,126

 

U.S. Government agencies:

 

 

 

 

 

 

 

Held to Maturity

 

75

 

94

 

196

 

Available for Sale

 

146,701

 

84,702

 

21,694

 

State and political subdivisions:

 

 

 

 

 

 

 

Held to Maturity

 

347

 

796

 

796

 

Available for Sale

 

33,852

 

70,681

 

83,256

 

Other bonds, notes and debentures:

 

 

 

 

 

 

 

Held to Maturity

 

264

 

291

 

310

 

Available for Sale

 

1,652

 

1,810

 

816

 

Total bonds, notes and debentures

 

186,019

 

162,670

 

111,194

 

Corporate stock - Available for Sale

 

25,278

 

14,947

 

22,093

 

Total

 

$

211,297

 

$

177,617

 

$

133,287

 

 

The following table shows the maturities and repricing of investment securities at December 31, 2003 and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of such securities (in thousands):

 

 

 

WITHIN
ONE
YEAR

 

AFTER ONE
BUT WITHIN
FIVE YEARS

 

AFTER FIVE
BUT WITHIN
TEN YEARS

 

AFTER
TEN
YEARS

 

U.S. Treasury securities:

 

 

 

 

 

 

 

 

 

AFS Amount

 

$

2,061

 

$

1,067

 

$

 

$

 

Yield

 

4.37

%

3.43

%

%

%

U.S. Government agencies:

 

 

 

 

 

 

 

 

 

HTM Amount

 

 

 

 

75

 

Yield

 

%

%

%

8.80

%

AFS Amount

 

1,026

 

3,718

 

44,372

 

97,585

 

Yield

 

4.96

%

4.00

%

4.43

%

5.25

%

State and political subdivisions:

 

 

 

 

 

 

 

 

 

HTM Amount

 

 

 

 

347

 

Yield

 

%

%

%

8.26

%

AFS Amount

 

 

 

15

 

33,837

 

Yield

 

%

%

6.58

%

7.67

%

Other bonds, notes and debentures:

 

 

 

 

 

 

 

 

 

HTM Amount

 

 

125

 

139

 

 

Yield

 

%

7.05

%

7.04

%

%

AFS Amount

 

 

 

 

1,652

 

Yield

 

%

%

%

7.36

%

Total Amount

 

$

3,087

 

$

4,910

 

$

44,526

 

$

133,496

 

Total Yield

 

4.57

%

3.95

%

4.44

%

5.90

%

 

All yields represent weighted average yields expressed on a tax equivalent basis.  They are calculated on the basis of the cost, adjusted for amortization of premium and accretion of discount and effective yields weighted for the scheduled maturity of each security.  The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate (derived by dividing tax-exempt interest by 66%).

 

23



 

LOAN PORTFOLIO

 

2003

 

Gross loans for the year ended December 31, 2003, were $275,828,000 or $17,983,000 (6.97%) more than the prior year.  Real estate mortgages increased $ 18,103,000 as a whole with residential, commercial and conuction real estate loans increasing $6,902,000, $6,905,000, and $4,296,000 respectively.  Commercial and agricultural loans decreased $185,000,  while installment loans to individuals increased $65,000.  Given the current market conditions, management has directed its conservative lending approach toward well collateralized real estate loans.

 

2002

 

Gross loans for the year ended December 31, 2002, were $257,845,000 or $6,222,000 (2.47%) more than the prior year.  Real estate mortgages increased $8,128,000 as a whole with residential and commercial real estate loans increasing $49,000 and $8,800,000, respectively.  Construction real estate mortgages decreased $721,000.  Commercial and agricultural loans increased $1,079,000,  while installment loans to individuals decreased $2,985,000.

 

The amount of loans outstanding at the indicated dates are shown in the following table according to type of loan (in thousands):

 

 

 

December 31,

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

Domestic:

 

 

 

 

 

 

 

 

 

 

 

Commercial and agricultural

 

$

23,523

 

$

23,708

 

$

22,629

 

$

26,471

 

$

31,735

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

147,697

 

140,724

 

140,614

 

131,761

 

121,734

 

Commercial

 

82,896

 

75,892

 

67,038

 

60,856

 

51,641

 

Construction

 

7,652

 

3,356

 

4,077

 

4,748

 

3,732

 

Installment loans to individuals

 

15,000

 

14,934

 

17,896

 

21,503

 

23,470

 

Less: Net deferred loan fees

 

940

 

769

 

631

 

541

 

497

 

Gross loans

 

$

275,828

 

$

257,845

 

$

251,623

 

$

244,798

 

$

231,815

 

 

The amount of domestic loans at December 31, 2003 are presented below by category and maturity (in thousands):

 

 

 

REAL ESTATE

 

COMMERCIAL
AND
OTHER

 

INSTALLMENT
LOANS TO
INDIVIDUALS

 

TOTAL

 

Loans with floating interest rates:

 

 

 

 

 

 

 

 

 

1 year or less

 

$

11,859

 

$

8,145

 

$

1,526

 

$

21,530

 

1 through 5 years

 

6,180

 

2,799

 

18

 

8,997

 

5 through 10 years

 

26,730

 

3,088

 

208

 

30,026

 

After 10 years

 

112,351

 

672

 

6

 

113,029

 

Sub Total

 

157,120

 

14,704

 

1,758

 

173,582

 

Loans with predetermined interest rates:

 

 

 

 

 

 

 

 

 

1 year or less

 

3,822

 

867

 

1,146

 

5,835

 

1 through 5 years

 

22,060

 

7,295

 

10,532

 

39,887

 

5 through 10 years

 

23,488

 

111

 

1,561

 

25,160

 

After 10 years

 

30,804

 

546

 

14

 

31,364

 

Sub Total

 

80,174

 

8,819

 

13,253

 

102,246

 

Total

 

$

237,294

 

$

23,523

 

$

15,011

 

$

275,828

 

 


(1)          The loan maturity information is based upon original loan terms and is not adjusted for “rollovers.”  In the ordinary course of business, loans maturing within one year may be

 

24



 

renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal.

(2) Scheduled repayments are reported in maturity categories in which the payment is due.

 

The Bank does not make loans that provide for negative amortization nor do any loans contain conversion features. The Bank does not have any foreign loans outstanding at December 31, 2003.

 

ALLOWANCE FOR LOAN LOSSES

2003

 

The allowance for loan losses represents the amount that management estimates is adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date.  Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it.  The allowance for loan losses is established through a provision for loan losses, which is charged to operations.  The provision is based on management’s quarterly evaluation of the adequacy of the allowance for loan losses, taking into account the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors.  Underwriting continues to emphasize the need for security and adequate collateral margins.  The total allowance for loan losses is a combination of a specific allowance for identified problem loans, and a homogeneous pool allowance.

 

At December 31, 2003, the allowance for loan losses as a percent of gross loans remained the same as December 31, 2002 at 1.1%.  Gross loans increased by $17,983,000 from $257,845,000 at December 31, 2002 to $275,828,000 at December 31, 2003.

 

Nonaccruing loans decreased $44,000 from year-end 2002. Overall nonperforming loans decreased $840,000 to $1,256,000 from fiscal year end 2002.

 

Based on management’s loan-by-loan review, the past performance of the borrowers and current economic conditions, including recent business closures and bankruptcy levels, management does not anticipate any current losses related to nonaccrual, nonperforming, or classified loans above that have already been considered in its overall judgment of the adequacy of the reserve.

 

2002

 

At December 31, 2002, the allowance for loan losses as a percent of gross loans declined from December 31, 2001 to 1.1%.  Gross loans increased by $6,222,000 from $251,623,000 at December 31, 2001 to $257,845,000 at December 31, 2002.

 

Nonaccruing loans increased $590,000 to $871,000 from year-end 2001. Overall nonperforming loans increased $1,477,000 to $2,096,000 from fiscal 2001.

 

The following table presents information concerning nonperforming loans.  The accrual of interest will be discontinued when the principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured and in the process of collection.  Consumer loans and residential real estate loans secured by 1 to 4 family dwellings shall ordinarily not be subject to those guidelines.  The reversal of previously accrued but uncollected interest applicable to any loan placed in a nonaccrual status and the treatment of subsequent payments of either principal or interest will be handled in accordance with accounting principles generally accepted in the United States of America.  These principles do not require a write-off of previously accrued interest if principal and interest are ultimately protected by sound collateral values.  A nonperforming loan may be restored to an accruing status when:

 

1.  Principal and interest is no longer due and unpaid.

2.  It becomes well secured and in the process of collection.

3.  Prospects for future contractual payments are no longer in doubt.

 

25


 

 

 

TOTAL NONPERFORMING LOANS

 

 

 

(IN THOUSANDS)

 

 

 

NONACCRUAL

 

90 DAYS
PAST DUE

 

2003

 

$

827

 

$

429

 

2002

 

$

871

 

$

1,225

 

2001

 

$

281

 

$

338

 

2000

 

$

777

 

$

27

 

1999

 

$

284

 

$

241

 

 

If interest had been recorded at the original rate on those loans, such income would have approximated $55,000, $24,000, and $28,000 for the years ended December 31, 2003, 2002, and 2001, respectively.  Interest income on such loans, which is recorded as received, amounted to approximately $7,000, $17,000 and $19,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

The level of nonaccruing loans continues to fluctuate annually and is attributed to the various economic factors experienced both regionally and nationally.  Overall the portfolio is well secured with a majority of the balance making regular payments or scheduled to be satisfied in the near future.  Presently there are no significant amounts of loans where serious doubts exist as to the ability of the borrower to comply with the current loan payment terms which are not included in the nonperforming categories as indicated above.

 

Management’s judgment in determining the amount of the additions to the allowance charged to operating expense considers the following factors:

 

1.  Economic conditions and the impact on the loan portfolio.

2.  Analysis of past loan charge-offs experienced by category and comparison to outstanding loans.

3.  Problem loans on overall portfolio quality.

4.  Reports of examination of the loan portfolio by the Pennsylvania State Banking Department and the Federal Deposit Insurance Corporation.

 

26



 

ALLOCATION IN THE ALLOWANCE FOR LOAN LOSSES

(IN THOUSANDS)

 

 

 

AMOUNT

 

PERCENT OF
LOANS IN
EACH
CATEGORY TO
TOTAL LOANS

 

DECEMBER 31, 2003:

 

 

 

 

 

Balance at end of period applicable to:

 

 

 

 

 

Domestic:

 

 

 

 

 

Commercial and agricultural

 

$

353

 

8.5

%

Real estate mortgage:

 

 

 

 

 

Residential

 

1,483

 

53.4

%

Commercial

 

916

 

29.9

%

Construction

 

77

 

2.8

%

Installment loans to individuals

 

240

 

5.4

%

Total

 

$

3,069

 

100.0

%

 

 

 

 

 

 

DECEMBER 31, 2002:

 

 

 

 

 

Balance at end of period applicable to:

 

 

 

 

 

Domestic:

 

 

 

 

 

Commercial and agricultural

 

$

471

 

9.2

%

Real estate mortgage:

 

 

 

 

 

Residential

 

1,162

 

54.4

%

Commercial

 

1,082

 

29.3

%

Construction

 

66

 

1.3

%

Installment loans to individuals

 

172

 

5.8

%

Total

 

$

2,953

 

100.0

%

 

 

 

 

 

 

DECEMBER 31, 2001:

 

 

 

 

 

Balance at end of period applicable to:

 

 

 

 

 

Domestic:

 

 

 

 

 

Commercial and agricultural

 

$

414

 

9.0

%

Real estate mortgage:

 

 

 

 

 

Residential

 

1,379

 

55.8

%

Commercial

 

763

 

26.5

%

Construction

 

74

 

1.6

%

Installment loans to individuals

 

271

 

7.1

%

Unallocated general allowance

 

26

 

 

Total

 

$

2,927

 

100.0

%

 

 

 

 

 

 

DECEMBER 31, 2000:

 

 

 

 

 

Balance at end of period applicable to:

 

 

 

 

 

Domestic:

 

 

 

 

 

Commercial and agricultural

 

$

541

 

10.8

%

Real estate mortgage:

 

 

 

 

 

Residential

 

1,211

 

53.7

%

Commercial

 

723

 

24.8

%

Construction

 

71

 

1.9

%

Installment loans to individuals

 

306

 

8.8

%

Unallocated general allowance

 

27

 

 

Total

 

$

2,879

 

100.0

%

 

 

 

 

 

 

DECEMBER 31, 1999:

 

 

 

 

 

Balance at end of period applicable to:

 

 

 

 

 

Domestic:

 

 

 

 

 

Commercial and agricultural

 

$

531

 

13.7

%

Real estate mortgage:

 

 

 

 

 

Residential

 

1,186

 

52.4

%

Commercial

 

710

 

22.2

%

Construction

 

70

 

1.6

%

Installment loans to individuals

 

300

 

10.1

%

Unallocated general allowance

 

26

 

 

Total

 

$

2,823

 

100.0

%

 

27



 

DEPOSITS

 

2003

 

Total average deposits were $335,201,000 for 2003, an increase of $18,267,000 or 5.76%.  Total demand deposits increased $16,517,000.  Noninterest-bearing demand deposits increased $5,795,000 and interest-bearing demand deposits increased $10,722,000.  Savings deposits increased $7,203,000 while time deposits decreased $5,453,000.  Historically low rate levels have influenced investors away from longer term commitments which has resulted in an increase in more liquid accounts such as demand deposits and savings and a decrease in time deposit accounts.  The shift from time deposits to demand and savings deposits have also had a positive impact on earnings.  More details pertaining to the changes in interest expense are stated in the Net Interest Income discussion.

 

2002

 

Total average deposits were $316,934,000 for 2002, an increase of $31,166,000 or 10.9%.  Unlike the previous year, the majority of the increase was in the demand deposit category.  Total demand deposits increased $29,903,000.  Noninterest-bearing demand deposits increased $4,283,000 and interest-bearing demand deposits increased $25,620,000.  Savings deposits increased $10,273,000 while time deposits decreased $9,010,000.  The Bank continues to penetrate into the Centre County market with the opening of a new branch office inside the State College Wal-Mart on North Atherton Street.  Historically low rate levels have influenced investors away from longer term commitments which has resulted in a decrease in time deposits and a significant increase in more liquid accounts such as demand deposits and savings.  The shift from time deposits to demand and savings deposits have also had a positive impact on earnings.  More details pertaining to the changes in interest expense are stated in the Net Interest Income discussion.

 

28



 

The average amount and the average rate paid on deposits are summarized below (in thousands):

 

 

 

2003
AVERAGE
AMOUNT

 

RATE

 

2002
AVERAGE
AMOUNT

 

RATE

 

2001
AVERAGE
AMOUNT

 

RATE

 

DEPOSITS IN DOMESTIC BANK OFFICES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

56,672

 

0.00

%

$

50,877

 

0.00

%

$

46,594

 

0.00

%

Interest-bearing

 

82,496

 

1.15

%

71,774

 

2.13

%

46,154

 

2.17

%

Savings deposits

 

64,673

 

1.17

%

57,470

 

2.04

%

47,197

 

2.03

%

Time deposits

 

131,360

 

2.25

%

136,813

 

3.77

%

145,823

 

5.28

%

Total average deposits . .

 

$

335,201

 

 

 

$

316,934

 

 

 

$

285,768

 

 

 

 
SHAREHOLDERS’ EQUITY

 

2003

 

Shareholders’ equity is evaluated in relation to total assets and the risks associated with those assets.  A company is more likely to meet its cash obligations and absorb unforeseen losses when the capital resources are greater.  Total shareholders’ equity at December 31, 2003 was $69,769,000, increasing $6,627,000 from the balance at December 31, 2002 of $63,142,000.  Net income and the exercising of stock options contributed $11,174,000 and $87,000, respectively, to shareholders’ equity.  The unrealized appreciation on securities also added $987,000 to total equity.  Shareholders’ equity was reduced by  $5,001,000 that was paid out in dividends.

 

2002

 

Total shareholders’ equity at December 31, 2002 was $63,142,000, increasing $7,890,000 from the balance at December 31, 2001 of $55,252,000.  Net income and the exercising of stock options contributed $8,886,000 and $113,000, respectively, to shareholders’ equity.  The unrealized appreciation on securities also added $3,416,000 to total equity.  Reductions to shareholders’ equity included $4,124,000 that was paid out in dividends and $401,000 for the purchase of treasury stock.

 

2001

 

Total shareholders’ equity at December 31, 2001 was $55,252,000, increasing $4,738,000 from the balance at December 31, 2000 of $50,514,000.  Net income and the exercising of stock options contributed $7,742,000 and $24,000, respectively, to shareholders’ equity.  The unrealized appreciation on securities also added $2,539,000 to total equity.  Reductions to shareholders’ equity included $3,729,000 that was paid out in dividends and $1,838,000 for the purchase of treasury stock.

 

Bank regulators have risk based capital guidelines.  Under these guidelines, banks are required to maintain minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet items.  At December 31, 2003, the Company’s required ratios were well above the minimum ratios as follows:

 

 

 

Company

 

2003
Minimum
Standards

 

Tier 1 capital ratio

 

20.9

%

4.0

%

Total capital ratio

 

23.0

%

8.0

%

 

For a more comprehensive discussion of these requirements, see “Regulations and Supervision” on the Form 10-K.  Management believes that the Company will continue to exceed regulatory capital requirements.

 

29



 

RETURN ON EQUITY AND ASSETS

 

The ratio of net income to average total assets and average shareholders’ equity and certain ratios are presented as follows:

 

 

 

2003

 

2002

 

2001

 

Percentage of net income to:

 

 

 

 

 

 

 

Average total assets

 

2.24

%

2.01

%

1.95

%

Average shareholders’ equity

 

16.60

%

15.00

%

14.38

%

Percentage of dividends declared per common share

 

44.76

%

46.40

%

48.17

%

Percentage of average shareholders’ equity to average total assets

 

13.51

%

13.39

%

13.54

%

 

LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK

 

Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk.  The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to depositors, loan customers and stockholders.  Additionally, it provides funds for normal operating expenditures and business opportunities as they arise.  The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.

 

The Company, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments and expenses.   In order to control cash flow, the bank estimates future flows of cash from deposits and loan payments.  The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, as well as Federal Home Loan Bank borrowings.  Funds generated are used principally to fund loans and purchase investment securities.  Management believes the Company has adequate resources to meet its normal funding requirements.

 

Management monitors the Company’s liquidity on both a long and short-term basis thereby, providing management necessary information to react to current balance sheet trends.  Cash flow needs are assessed and sources of funds are determined.  Funding strategies consider both customer needs and economical cost.  Both short and long term funding needs are addressed by maturities and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold.  The use of these resources, in conjunction with access to credit provides core ingredients to satisfy depositor, borrower and creditor needs.

 

Management monitors and determines the desirable level of liquidity.  Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential as well as the current cost of borrowing funds.  The Company has a current borrowing capacity at the Federal Home Loan Bank of $166,870,000.  In addition to this credit arrangement the Company has additional lines of credit with correspondent banks of $10,500,000. The Company’s management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.  Federal Home Loan Bank advances totaled $107,918,000 as of December 31, 2003.

 

Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities.  Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them.  Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected.  Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or difference. Once known, the gap is managed based on predictions about future market interest rates.  Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted.  However, if market rates behave in a manner contrary to predictions, net interest income will suffer.  Gaps, therefore, contain an element of risk and must be prudently managed.  In addition to gap management,

 

30



 

the Company has an asset liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s balance sheets.

 

INTEREST RATE SENSITIVITY

 

The following table sets forth the Company’s interest rate sensitivity as of December 31, 2003:

 

 

 

WITHIN
ONE YEAR

 

AFTER ONE
BUT WITHIN
TWO YEARS

 

AFTER TWO
BUT WITHIN
FIVE YEARS

 

AFTER
FIVE
YEARS

 

Earning assets:

 

 

 

 

 

 

 

 

 

Investment securities (1)

 

$

42,246

 

$

81,433

 

$

26,870

 

$

58,056

 

Loans (2)

 

70,067

 

40,471

 

123,384

 

46,709

 

Total earning assets

 

112,313

 

121,904

 

150,254

 

104,765

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

Deposits (3)

 

94,565

 

47,829

 

84,027

 

43,022

 

Borrowings

 

47,225

 

1,400

 

37,728

 

31,790

 

Total interest-bearing liabilities

 

141,790

 

49,229

 

121,755

 

74,812

 

 

 

 

 

 

 

 

 

 

 

Net noninterest-bearing funding (4)

 

10,165

 

10,165

 

30,495

 

50,825

 

Total net funding sources

 

$

151,955

 

$

59,394

 

$

152,250

 

$

125,637

 

Excess assets (liabilities)

 

(39,642

)

62,510

 

(1,996

)

(20,872

)

Cumulative excess assets (liabilities)

 

(39,642

)

22,868

 

20,872

 

 

 


(1) Investment balances reflect estimated prepayments on mortgage-backed securities and are inclusive of FHLB stock.

(2) Loan balances include annual repayment assumptions based on projected cash flow from the loan portfolio.            The cash flow projections are based on the terms of the credit facilities and estimated prepayments on fixed rate mortgage loans.  Loans include loans held for sale.

(3) Adjustments to the interest sensitivity of Savings, NOW and MMDA account balances reflect managerial assumptions based on historical experience, expected behavior in future rate environments and the Company’s positioning for these products.

(4) Net noninterest-bearing funds are the sum of noninterest-bearing liabilities and shareholders’ equity minus noninterest-earning assets and reflect managerial assumptions as to the appropriate investment maturity categories.

 

In this analysis the Company examines the result of a 100 and 200 basis point change in market interest rates and the effect on net interest income.  It is assumed that the change is instantaneous and that all rates move in a parallel manner.  Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities.  The following is a rate shock analysis for the period indicated:

 

Changes in
Rates

 

December 31, 2003
Net Interest
Income Change (After Tax)

 

 

 

(in thousands)

 

-200

 

$

(1,172

)

-100

 

$

(397

)

+100

 

$

356

 

+200

 

$

598

 

 

31



 

The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and or call activity on investment securities.  Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change.  In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.  Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

 

INFLATION

 

The asset and liability structure of a financial institution is primarily monetary in nature, therefore, interest rates rather than inflation have a more significant impact on the Company’s performance.  Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors that are not measured by a price index.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s accounting policies are intergral to understanding the results reported.  The accounting policies are described in detail in Note A of the consolidated financial statements.  Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies.  We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period.  In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.  The following is a brief description or our current accounting policies involving significant management valuation judgments.

 

Other Than Temporary Impairment of Equity Securities

 

Equity securities are evaluated periodically to determine whether a decline in their value is other than temporary, management utilized criteria such as the magnitude and duration of the decline, in addition to the reason underlying the decline, to determine whether the loss in value is other than temporary,  The term “other than temporary” is not intended to indicate that the decline is permanent.  It indicates that the prospects for a near tem recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment.  Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

 

Allowance for Loan Losses

 

Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment.  The Company’s allowance for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio.

 

Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways curreltly unforeseen.  The allowance is increased by provisions for loan losses and by recoveries of loans previously chared-off and reduced by loans charged-off.  For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note D of  “Notes and Consolidated Finanical Statements” commencing on page 13 of the Form 10-K.

 

32



 

Goodwill and Other Intangible Assets

 

As discussed in Note F of the consolidated financial statements, the Company must assess goodwill and other intangible assets each year for impairment.  This assessment involves estimating cash flows for future periods.  If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be required to take a charege against earnings to write down the assets to the lower value.

 

Deferred Tax Assets

 

We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized.  If future income should prove non-existent or less than the amount of the dererred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.  Our deferred tax assets are described further in Note J of the consolidated financial statements.

 

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABLITIES, AND OFF-BALANCE SHEET ARRANGEMENTS

 

The Corporation has various financial obligations, including contractual obligations and commitments, which may require future cash payments.

 

Contractual Obligations:  The following table presents in thousands, as of December 31, 2003, significant fixed and determinable contractual obligations to third parties by payment date.   Further discussion of the nature of each obligations is included in the referenced note to be consolidated financial statements.

 

 

 

Payments Due in

 

 

 

 

 

One Year
or Less

 

One to
Three
Years

 

Three to
Five
Years

 

Over
Five
Years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits without a stated maturity

 

$

209,418

 

 

 

 

$

209,418

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

75,977

 

38,216

 

9,658

 

1,049

 

124,900

 

 

 

 

 

 

 

 

 

 

 

 

 

Security repurchase agreements

 

10,225

 

 

 

 

10,225

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowed funds

 

37,040

 

 

 

 

37,040

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

3,000

 

31,100

 

36,778

 

70,878

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

262

 

469

 

278

 

53

 

1,062

 

 

The Corporation’s operating lease obligations represent short and long-temn lease and rental payment for facilities, certain software and data processing and other equipment.

 

Commitments:  The following table details the amounts and expected maturities of significant commitments as of December 31, 2003, in thousands.  Further discussion of these commitments is included in Note O to the consolidated financial statements.

 

 

 

One Year
or Less

 

One to
Three
Years

 

Three to
Five
Years

 

Over
Five
Years

 

Total

 

Commitments to extend credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

10,589

 

$

 

$

 

$

 

$

10,589

 

Commercial real estate

 

29,139

 

167

 

549

 

4,455

 

34,310

 

Home Equity

 

59

 

 

83

 

2,413

 

2,555

 

Standby letters letters of credit

 

258

 

 

 

 

258

 

 

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

 

33



 

CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact.

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company’s business include the following: general economic conditions and changes in interest rates including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; the effect of changes in accounting policies and practices, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; changes in the Company’s organization, compensation and benefit plans; and similar items.

 

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

 

Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk.  Interest rate risk and liquidity risk management is performed at the Bank level as well as the Company level.  The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced internally.  Additional information and details are provided in the Interest Sensitivity section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.

 

ITEM  8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT AUDITORS

 

Board of Directors and Shareholders

Penns Woods Bancorp, Inc.

 

We have audited the accompanying consolidated balance sheet of Penns Woods Bancorp, Inc. and subsidiaries, as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each

 

34



 

of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

 

 

 

December 31,

 

 

 

2003

 

2002

 

 

 

(in thousands)

 

ASSETS:

 

 

 

 

 

Cash and due from banks

 

$

10,230

 

$

11,731

 

Securities available for sale

 

210,611

 

176,436

 

Securities held to maturity (fair value of $701 and $1,289)

 

686

 

1,181

 

Loans held for sale

 

4,803

 

2,651

 

Loans, net of unearned discount of $940 and $769

 

275,828

 

257,845

 

Less: Allowance for loan losses

 

3,069

 

2,953

 

Loans, net

 

272,759

 

254,892

 

Premises and equipment, net

 

4,625

 

4,856

 

Accrued interest receivable

 

2,242

 

2,460

 

Bank-owned life insurance

 

8,908

 

8,537

 

Goodwill

 

3,032

 

3,032

 

Other assets

 

9,485

 

6,430

 

 

 

 

 

 

 

TOTAL

 

$

527,381

 

$

472,206

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Interest-bearing deposits

 

$

269,443

 

$

272,787

 

Noninterest-bearing deposits

 

64,875

 

67,061

 

TOTAL DEPOSITS

 

334,318

 

339,848

 

 

 

 

 

 

 

Short-term borrowings

 

47,265

 

13,563

 

Other borrowings

 

70,878

 

51,778

 

Accrued interest payable

 

836

 

1,092

 

Other liabilities

 

4,315

 

2,783

 

TOTAL LIABILITIES

 

457,612

 

409,064

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Common stock, par value $10; 10,000,000 shares authorized 3,326,560 and 3,136,832 shares issued

 

33,265

 

31,368

 

Additional paid-in capital

 

17,559

 

18,291

 

Retained earnings

 

13,022

 

11,749

 

Accumulated other comprehensive income

 

6,132

 

5,145

 

Treasury stock, at cost (5,000 and 105,503 shares)

 

(209

)

(3,411

)

TOTAL SHAREHOLDERS’ EQUITY

 

69,769

 

63,142

 

 

 

 

 

 

 

TOTAL

 

$

527,381

 

$

472,206

 

 

See Accompanying Notes to the Consolidated Financial Statements.

 

 

Wexford, PA

February 13, 2004

 

35



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands, except per share data)

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

 

 

Interest and fees on loans

 

$

19,963

 

$

20,911

 

$

21,919

 

Interest and dividends on investments:

 

 

 

 

 

 

 

Taxable interest

 

6,370

 

4,314

 

3,112

 

Tax-exempt interest

 

2,608

 

3,252

 

3,066

 

Other dividend income

 

111

 

627

 

639

 

TOTAL INTEREST AND DIVIDEND INCOME

 

29,052

 

29,104

 

28,736

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Interest on deposits

 

5,656

 

7,857

 

9,657

 

Interest on short-term borrowings

 

428

 

501

 

903

 

Interest on other borrowings

 

3,181

 

2,488

 

1,921

 

TOTAL INTEREST EXPENSE

 

9,265

 

10,846

 

12,481

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

19,787

 

18,258

 

16,255

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

255

 

365

 

372

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

19,532

 

17,893

 

15,883

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

Service charges

 

1,917

 

1,833

 

1,565

 

Securities gains, net

 

3,659

 

233

 

1,033

 

Earnings on bank-owned life insurance

 

404

 

416

 

174

 

Insurance commissions

 

1,598

 

1,807

 

1,416

 

Other operating income

 

1,056

 

1,164

 

921

 

TOTAL OTHER INCOME

 

8,634

 

5,453

 

5,109

 

 

 

 

 

 

 

 

 

OTHER EXPENSES:

 

 

 

 

 

 

 

Salaries and employee benefits

 

7,262

 

6,944

 

5,792

 

Occupancy expense, net

 

877

 

831

 

787

 

Furniture and equipment expense

 

999

 

837

 

739

 

Advertising Expense

 

388

 

372

 

344

 

Pennsylvania shares tax expense

 

455

 

411

 

370

 

Other operating expenses

 

3,308

 

2,818

 

3,240

 

TOTAL OTHER EXPENSES

 

13,289

 

12,213

 

11,272

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX PROVISION

 

14,877

 

11,133

 

9,720

 

 

 

 

 

 

 

 

 

INCOME TAX PROVISION

 

3,703

 

2,247

 

1,978

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

11,174

 

$

8,886

 

$

7,742

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

 

$

3.35

 

$

2.66

 

$

2.30

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - DILUTED

 

$

3.35

 

$

2.66

 

$

2.30

 

 

See accompanying notes to the consolidated financial statements.

 

36



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

Common Stock
Shares

 

Amount

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Treasury
Stock

 

Total
Shareholders’
Equity

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2000

 

3,130,844

 

$

31,308

 

$

18,214

 

$

2,974

 

$

(810

)

$

(1,172

)

$

50,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

7,742

 

 

 

 

 

7,742

 

Unrealized gain on available for sale securities, net of reclassification adjustments and tax of $1,308

 

 

 

 

 

 

 

 

 

2,539

 

 

 

2,539

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

10,281

 

Dividends declared, ($1.11 per share)

 

 

 

 

 

 

 

(3,729

)

 

 

 

 

(3,729

)

Stock options exercised

 

800

 

8

 

16

 

 

 

 

 

 

 

24

 

Treasury stock acquired, 58,503 shares

 

 

 

 

 

 

 

 

 

 

 

(1,838

)

(1,838

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2001

 

3,131,644

 

31,316

 

18,230

 

6,987

 

1,729

 

(3,010

)

55,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

8,886

 

 

 

 

 

8,886

 

Unrealized gain on available for sale securities, net of reclassification adjustments and tax of $1,760

 

 

 

 

 

 

 

 

 

3,416

 

 

 

3,416

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

12,302

 

Dividends declared, ($1.24 per share)

 

 

 

 

 

 

 

(4,124

)

 

 

 

 

(4,124

)

Stock options exercised

 

5,188

 

52

 

61

 

 

 

 

 

 

 

113

 

Treasury stock acquired, 13,449 shares

 

 

 

 

 

 

 

 

 

 

 

(401

)

(401

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2002

 

3,136,832

 

31,368

 

18,291

 

11,749

 

5,145

 

(3,411

)

63,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock split effected in the form of a 10% dividend

 

187,143

 

1,871

 

(793

)

(4,900

)

 

 

3,822

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

11,174

 

 

 

 

 

11,174

 

Unrealized gain on available for sale securities, net of reclassification adjustments and tax of $508

 

 

 

 

 

 

 

 

 

987

 

 

 

987

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

12,161

 

Dividends declared, ($1.49 per share)

 

 

 

 

 

 

 

(5,001

)

 

 

 

 

(5,001

)

Stock options exercised

 

2,585

 

26

 

61

 

 

 

 

 

 

 

87

 

Treasury stock acquired, 14,787 shares

 

 

 

 

 

 

 

 

 

 

 

(620

)

(620

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

3,326,560

 

$

33,265

 

$

17,559

 

$

13,022

 

$

6,132

 

$

(209

)

$

69,769

 

 

Components of comprehensive income:

 

 

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain on investments available for sale

 

 

 

 

 

$

3,402

 

$

3,570

 

$

3,221

 

 

 

 

 

Realized gains included in net income, net of tax $1,244, $79, and $351

 

 

 

 

 

(2,415

)

(154

)

(682

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

987

 

$

3,416

 

$

2,539

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

37



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

 

$

11,174

 

$

8,886

 

$

7,742

 

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

 

 

 

 

 

 

 

Depreciation

 

631

 

526

 

489

 

Provision for loan losses

 

255

 

365

 

372

 

Accretion and amortization of investment security discounts and premiums

 

(194

)

(906

)

(843

)

Securities gains, net

 

(3,659

)

(233

)

(1,033

)

Loss (gain) on sale of foreclosed assets

 

 

 

 

Originations of loans held for sale

 

(15,983

)

(16,597

)

(24,311

)

Proceeds of loans held for sale

 

13,831

 

17,939

 

22,006

 

Earnings on bank-owned life insurance

 

(404

)

(416

)

(174

)

Increase in all other assets

 

(490

)

(1,465

)

(577

)

Increase in all other liabilities

 

1,276

 

473

 

59

 

Net cash provided by operating activities

 

6,437

 

8,572

 

3,730

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

Proceeds from sales

 

82,489

 

79,022

 

22,156

 

Proceeds from calls and maturities

 

48,046

 

13,047

 

12,765

 

Purchases

 

(159,363

)

(130,328

)

(48,151

)

Investment securities held to maturity:

 

 

 

 

 

 

 

Proceeds from calls and maturities

 

520

 

137

 

1,963

 

Purchases

 

(24

)

(41

)

(25

)

Net increase in loans

 

(18,390

)

(6,800

)

(7,148

)

Acquisition of bank premises and equipment

 

(400

)

(992

)

(323

)

Proceeds from the sale of foreclosed assets

 

341

 

344

 

592

 

Purchase of bank-owned life insurance

 

 

 

(5,589

)

Gross proceeds from redemption of regulatory stock

 

1,507

 

1,262

 

943

 

Gross purchases of regulatory stock

 

(4,402

)

(2,080

)

(941

)

Net cash used for investing activities

 

(49,676

)

(46,429

)

(23,758

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Net increase (decrease) in interest-bearing deposits

 

(3,344

)

22,914

 

19,208

 

Net increase (decrease) in noninterest-bearing deposits

 

(2,186

)

11,784

 

7,808

 

Net increase (decrease) in short-term borrowings

 

33,702

 

(5,542

)

(11,916

)

Proceeds from other borrowings

 

19,100

 

10,000

 

10,000

 

Dividends paid

 

(5,001

)

(4,124

)

(3,729

)

Stock options exercised

 

87

 

113

 

21

 

Purchase of treasury stock

 

(620

)

(401

)

(1,838

)

Net cash provided by financing activities

 

41,738

 

34,744

 

19,554

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(1,501

)

(3,113

)

(474

)

CASH AND CASH EQUIVALENTS, BEGINNING

 

11,731

 

14,844

 

15,318

 

CASH AND CASH EQUIVALENTS, ENDING

 

$

10,230

 

$

11,731

 

$

14,844

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

The Company paid approximately $9,521,000, $10,944,000, and $12,743,000 in interest on deposits and other borrowings during 2003, 2002, and 2001, respectively.

The Company made income tax payments of approximately $3,500,000, $3,394,000, and $2,136,000 during 2003, 2002, and 2001, respectively.

 

See accompanying notes to the consolidated financial statements.

 

38



 

PENNS WOODS BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

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

 

Nature of Business

 

The Bank engages in a full-service commercial banking business, making available to the community a wide range of financial services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction financing, farm loans, community development loans, loans to nonprofit entities and local government loans and various types of time and demand deposits including, but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit and IRAs.  Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law.

 

The financial services are provided by the bank to individuals, partnerships, non-profit organizations and corporations through its eleven offices and Financial Center located in Clinton, Lycoming, and Centre Counties, Pennsylvania.

 

Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Bank.

 

Woods Investment Company, Inc. is engaged in investing activities.

 

The M Group engages in securities brokerage and insurance activities.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results may differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.

 

Investment Securities

 

Investment securities are classified as held to maturity, trading, or available for sale.

 

Securities held to maturity include bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost.

 

Trading account securities are recorded at their fair values.  Unrealized gains and losses on trading account securities are included in other income.  The Company has no trading account securities as of December 31, 2003 or 2002.

 

Available for sale securities consist of bonds, notes, debentures, and certain equity securities not classified as trading securities nor as held to maturity securities.  Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of shareholders’ equity until realized.

 

Gains and losses on the sale of equity securities are determined using the average cost method, while all other investment securities use the specific cost method.

 

Declines in the fair value of individual securities held to maturity and available for sale below their cost that are other than temporary result in write-downs of the individual securities to their fair value and are included in earnings as realized losses.

 

Premiums and discounts on all securities are recognized in interest income using the interest method over the period to maturity.

 

The fair value of investments and mortgage-backed securities, except certain state and political securities, is estimated based on bid prices published in financial newspapers, quotations received from securities dealers, or, in the case of equity securities, the closing price of the day as listed on the Internet.  The fair value of certain state and political securities is not readily available through market sources other than dealer quotations, therefore these fair value estimates are then based on

 

39



 

quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.

 

Loans

 

Loans are stated at the principal amount outstanding, net of unearned discount, unamortized loan fees and costs, and the allowance for loan losses.  Interest on loans is recognized as income when earned on the accrual method.  The Company’s general policy has been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectibility of additional interest.  Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in payment and, in management’s judgment, the borrower has the ability and intent to make future principal payments.

 

Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and the net amount amortized as an adjustment to the related loan’s yield.  These amounts are being amortized over the contractual lives of the related loans.

 

Allowance for Loan Losses

 

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio, as of the balance sheet date.  The allowance method is used in providing for loan losses.  Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it.  The allowance for loan losses is established through a provision for loan losses charged to operations.  The provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors.  The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term.

 

Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement.  The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications.  The definition of “impaired loans” is not the same as the definition of  “nonaccrual loans,” although the two categories overlap.  The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan.  Factors considered by management in determining impairment include payment status and collateral value.  The amount of impairment for these types of impaired 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 loans.  When foreclosure is probable, impairment is measured based on the fair value of the collateral.

 

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.

 

Loans Held for Sale

 

In general, fixed rate residential mortgage loans originated by the Bank are held for sale and are carried at the aggregate lower of cost or market.  Such loans sold are not serviced by the Bank.

 

Foreclosed Assets Held for Sale

 

Foreclosed assets held for sale are carried at the lower of cost or fair value minus estimated costs to sell.  Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary.  Any subsequent write-downs are charged against operating expenses.  Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.

 

Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation.  Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets, which range from five to seven years for furniture, fixtures and equipment and thirty-one and a half years for buildings and improvements.  Costs incurred for

 

40



 

routine maintenance and repairs are charged to operations as incurred.  Costs of major additions and improvements are capitalized.

 

Goodwill

 

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“FAS”) No. 142, Goodwill and Other Intangible Assets. This statement changed the accounting for goodwill from an amortization method to an impairment-only approach.  Thus, amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this statement.

 

This statement, among other things, eliminates the regularly scheduled amortization of goodwill and replaces this method with a two-step process for testing the impairment of goodwill on at least an annual basis.  This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur regularly and in varying amounts.  The Company, upon adoption of this statement at the beginning fo its fiscal year, immediately stopped amortizing goodwill with a carrying value of $3.0 million.  In addition, the Company performs an annual impairment analysis of goodwill.  Based on fair value fo the reporting unit, estimated using the expected present value of future cash flows, no impairment of goodwill was recognized in 2003 and 2002.

 

Advertising Costs

 

Advertising costs are generally expensed as incurred.

 

Income Taxes

 

Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

Earnings Per Share

 

The Company provides dual presentation of basic and diluted earnings per share.  Basic earnings per share is calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator.  The computation of diluted earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator.

 

Employee Benefits

 

Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the eligible employees of the Bank.  The plan is funded on a current basis to the extent that it is deductible under existing federal tax regulations.  Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees.  Contributions matching those made by eligible employees and an elective contributions are made annually at the discretion of the Board of Directors.

 

Stock Options

 

The Company maintains a stock option plan for the directors, officers and employees. When the exercise price of the Company’s stock options is greater than or equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company’s financial statements.  Pro forma net income and earnings per share are presented to reflect the impact of the stock option plan assuming compensation expense had been recognized based on the fair value of the stock options granted under the plan.

 

The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for these options.  Accordingly, compensation expense is recognized on the grant date, in the amount equivalent to the intrinsic value of the options (stock price less exercise price, at measurement date).

 

Had compensation costs for these options been determined based on the fair values at the grant dates for awards consistent with the method of FAS No. 123, there would be no effect on the Company’s net income and earnings per share for 2003, 2002, and 2001.

 

Comprehensive Income

 

The Company is required to present comprehensive income in a full set of general-purpose financial statements for all periods presented.  Other comprehensive income is comprised exclusively of unrealized holding gains (losses) on the available for sale securities portfolio.  The Company has elected to report the effects of other comprehensive income as part of the Consolidated Statement of Changes in Shareholders’ Equity.

 

Cash Flows

 

The Company utilizes the net reporting of cash receipts and cash payments for deposit and lending activities.

 

The Company considers amounts due from banks as cash equivalents.

 

Reclassification of Comparative Amounts

 

Certain items previously reported have been reclassified to conform to the current year’s reporting format.  Such reclassifications did not affect net income or shareholders’ equity.

 

41



 

Recent Accounting Pronouncements

 

In December 2003, the Financial Accounting Standards Board (“FASB”) revised FAS No. 132, Employers’ Disclosures about Pension and Other Postretirement Benefit.  This statement retains the disclosures required by FAS No. 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable and requires additional information on changes in the benefit obligations and fair value of plan assets.  Additional disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods.  This statement retains reduced disclosure requirements for nonpublic entities from FAS No. 132, and it includes reduced disclosure for certain of the new requirements.  This statement is effective for financial statements with fiscal years ending after December 15, 2003.  The interim disclosures required by this statement are effective for interim periods beginning after December 15, 2003.

 

In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount.  The statement also requires that the liability be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations.  The adoption of this statement, which was effective January 1, 2003, did not have a material effect on the Company’s financial position or results of operations.

 

In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  This statement replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).  The new statement is effective for exit or disposal activities initiated after December 31, 2002.  The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

 

On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation.  FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation.  Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards.  This contributed to a “ramp-up” effect on stock-based compensation expense in the first few years following adoption, which caused concern for companies and investors because of the lack of consistency in reported results.  To address that concern, FAS No. 148 provides two additional methods of transition that reflect an entity’s full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect.  FAS No. 148 also improves the clarity and prominence of disclosures about the pro forma effects of using the fair value based method of accounting for stock-based compensation for all companies—regardless of the accounting method used—by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements.  In addition, the statement improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. The transition guidance and annual disclosure provisions of FAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances.  The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.

 

In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.  This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133.  The amendments set forth in FAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in FAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS No.149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting.   This statement is effective for contracts entered into or modified after September 30, 2003, except as stated below and for hedging relationships designated after September 30, 2003. The guidance should be applied prospectively.  The provisions of this statement that relate to FAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to September 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after September 30, 2003.   The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.

 

42



 

In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003.  The adoption of this statement did not have a material effect on the Company’s reported equity.

 

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.  This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  This interpretation clarifies that a guarantor is required to disclose (a) the nature of the guarantee, including the approximate term of the guarantee, how the guarantee arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability, if any, for the guarantor’s obligations under the guarantee; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee.  This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur.  The objective of the initial measurement of that liability is the fair value of the guarantee at its inception.  The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.  The adoption of this interpretation did not have a material effect on the Company’s financial position or results of operations.

 

In December 2003, the FASB issued a revision to Interpretation No. 46, Consolidation of Variable Interest Entities, which established standards for identifying a variable interest entity (“VIE”) and for determining under what circumstances a VIE should be consolidated with its primary beneficiary.  Application of this Interpretation is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003.  Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004.  Small business issuers must apply this Interpretation to all other types of VIEs at the end of the first reporting period ending after December 15, 2004.  The adoption of this Interpretation has not and is not expected to have a material effect on the Company’s financial position or results of operations.

 

NOTE B - PER SHARE DATA

 

There are no convertible securities, which would affect the numerator in calculating basic and dilutive earnings per share, therefore, 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 per share computation.

 

43



 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

3,430,302

 

3,445,477

 

3,443,930

 

 

 

 

 

 

 

 

 

Average treasury stock shares

 

(99,717

)

(109,165

)

(72,085

)

 

 

 

 

 

 

 

 

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

 

3,330,585

 

3,336,312

 

3,371,845

 

 

 

 

 

 

 

 

 

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

 

3,213

 

2,937

 

2,241

 

 

 

 

 

 

 

 

 

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

 

3,333,798

 

3,339,249

 

3,374,086

 

 

Options to purchase 10,890 shares of common stock at a price of $48.35 were outstanding during 2003 and 22,385 shares of common stock at prices from $38.18 to $48.35 were outstanding during 2002 and 2001, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

 

NOTE C - INVESTMENT SECURITIES

 

The amortized cost of investment securities and their approximate fair values are as follows (in thousands):

 

 

 

2003

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

150,218

 

$

626

 

$

(1,015

)

$

149,829

 

State and political securities

 

31,364

 

2,510

 

(22

)

33,852

 

Other debt securities

 

1,581

 

75

 

(4

)

1,652

 

Total debt securities

 

183,163

 

3,211

 

(1,041

)

185,333

 

Equity securities

 

18,158

 

7,146

 

(26

)

25,278

 

 

 

$

201,321

 

$

10,357

 

$

(1,067

)

$

210,611

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

75

 

$

 

$

(1

)

$

74

 

State and political securities

 

347

 

16

 

 

363

 

Other debt securities

 

264

 

 

 

264

 

 

 

$

686

 

$

16

 

$

(1

)

$

701

 

 

44



 

 

 

2002

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

87,142

 

$

1,856

 

$

 

$

88,998

 

State and political securities

 

67,319

 

3,596

 

(234

)

70,681

 

Other debt securities

 

1,766

 

46

 

(2

)

1,810

 

Total debt securities

 

156,227

 

5,498

 

(236

)

161,489

 

Equity securities

 

12,414

 

2,989

 

(456

)

14,947

 

 

 

$

168,641

 

$

8,487

 

$

(692

)

$

176,436

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

94

 

$

 

$

 

$

94

 

State and political securities

 

796

 

109

 

 

905

 

Other debt securities

 

291

 

 

(1

)

290

 

 

 

$

1,181

 

$

109

 

$

(1

)

$

1,289

 

 

The following table shows 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 December 31, 2003.

 

 

 

Less than Twelve Months

 

Twelve Months or Greater

 

Total

 

 

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency Securities

 

$

80,605

 

$

1,015

 

$

62

 

$

1

 

$

80,667

 

$

1,016

 

State and political securities

 

198

 

22

 

0

 

0

 

198

 

22

 

Other debt securities

 

196

 

4

 

0

 

0

 

196

 

4

 

Total debt securities

 

80,999

 

1,041

 

62

 

1

 

81,061

 

1,042

 

Equity securities

 

203

 

3

 

405

 

23

 

608

 

26

 

Total

 

$

81,202

 

$

1,044

 

$

467

 

$

24

 

$

81,669

 

$

1,068

 

 

The Company’s investment securities portfolio contains unrealized losses of direct obligations of the U.S.  government, including mortgage-related instruments issued or backed by the full faith and credit of the United States government or are generally viewed as having the implied guarantee of the U.S. government, debt obligations of U.S. states and political subdivisions, corporate entities, and equity securities of common stock in publicly traded companies.

 

45



 

On a monthly basis the Company evaluates the severity and duration of impairment for its investment securities portfolio unless the Company has the ability to hold the security to maturity without incurring a loss.  Generally, impairment is considered other than temporary when an investment security has sustained a declined of ten percent or more for one year.

 

The Company has concluded that any impairment of its investment securities portfolio is not other than temporary as of December 31, 2003 but is the result of interest rate changes that are not expected to result in the noncollection of principal and interest, during the period.

 

The amortized cost and fair value of debt securities at December 31, 2003, by contractual maturity, are shown below (in thousands).  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Held to Maturity

 

Available for Sale

 

 

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

Due in one year or less

 

$

 

 

$

3,032

 

$

3,087

 

Due after one year to five years

 

125

 

125

 

4,779

 

4,785

 

Due after five years to ten years

 

139

 

139

 

44,538

 

44,387

 

Due after ten years

 

422

 

437

 

130,814

 

133,074

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

686

 

$

701

 

$

183,163

 

$

185,333

 

 

Total gross proceeds from sales of securities available for sale were $82,489,000, $79,022,000 and $22,156,000 for 2003, 2002 and 2001, respectively.  The following table represents gross realized gains and gross realized losses on those transactions (in thousands):

 

 

 

2003

 

2002

 

2001

 

Gross realized gains:

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

254

 

$

204

 

$

133

 

State and political securities

 

3,345

 

2,234

 

20

 

Other debt securities

 

27

 

6

 

 

Equity securities

 

1,195

 

1,803

 

1,226

 

 

 

$

4,821

 

$

4,247

 

$

1,379

 

 

 

 

 

 

 

 

 

Gross realized losses:

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

742

 

$

125

 

$

13

 

State and political securities

 

50

 

67

 

149

 

Other debt securities

 

2

 

 

 

 

 

Equity securities

 

368

 

3,822

 

184

 

 

 

$

1,162

 

$

4,014

 

$

346

 

 

In 2003, the Company recorded an investment security gain of $24,000 resulting from a business combination where the Company received the common stock of the acquirer in a non-monetary exchange.  This gain is included in the above table.

 

A charge of $292,000 was recorded in 2003 and $2,083,000 was recorded in 2002 to recognize other than temporary declines in the value of marketable equity securities.  This loss is included in the above table.

 

46



 

Investment securities with a carrying value of approximately $34,059,000 and $34,914,000 at December 31, 2003 and 2002, respectively, were pledged to secure certain deposits, security repurchase agreements, and for other purposes as required by law.

 

There is no concentration of investments that exceed ten percent of shareholders’ equity for any individual issuer, excluding those guaranteed by the U.S. Government.

 

NOTE D - LOANS

 

Major loan classifications loans are summarized as follows (in thousands):

 

 

 

2003

 

 

 

Current

 

Past Due
30 to 90
Days

 

Past Due
90 Days
or More
& Still
Accruing

 

Non-
Accrual

 

Total

 

Commercial and agricultural

 

$

23,105

 

$

215

 

$

21

 

$

182

 

$

23,523

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

144,102

 

2,625

 

383

 

587

 

147,697

 

Commercial

 

82,156

 

667

 

15

 

58

 

82,896

 

Construction

 

7,637

 

15

 

 

 

7,652

 

Installment loans to individuals

 

14,738

 

252

 

10

 

 

15,000

 

 

 

271,738

 

$

3,774

 

$

429

 

$

827

 

276,768

 

Less: Net deferred loan fees

 

940

 

 

 

 

 

 

 

940

 

Allowance for loan losses

 

3,069

 

 

 

 

 

 

 

3,069

 

Loans, net

 

$

267,729

 

 

 

 

 

 

 

$

272,759

 

 

 

 

2002

 

 

 

Current

 

Past Due
30 to 90
Days

 

Past Due
90 Days
or More
& Still
Accruing

 

Non-
Accrual

 

Total

 

Commercial and agricultural

 

$

22,652

 

$

769

 

$

7

 

$

280

 

$

23,708

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

137,271

 

2,752

 

175

 

526

 

140,724

 

Commercial

 

74,317

 

504

 

1,006

 

65

 

75,892

 

Construction

 

3,335

 

21

 

 

 

3,356

 

Installment loans to individuals

 

14,581

 

316

 

37

 

 

14,934

 

 

 

252,156

 

$

4,362

 

$

1,225

 

$

871

 

258,614

 

Less: Net deferred loan fees

 

769

 

 

 

 

 

 

 

769

 

Allowance for loan losses

 

2,953

 

 

 

 

 

 

 

2,953

 

Loans, net

 

$

248,434

 

 

 

 

 

 

 

$

254,892

 

 

Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $827,000 and $871,000 at December 31, 2003 and 2002, respectively.  If interest had been recorded at the original rate on those loans, such income would have approximated $55,000, $24,000, and $28,000 for the years ended December 31, 2003, 2002 and

 

47



 

2001, respectively.  Interest income on such loans, which is recorded as received, amounted to approximately $7,000, $17,000, and $19,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

Changes in the allowance for loan losses for the years ended December 31, are as follows (in thousands):

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

2,953

 

$

2,927

 

$

2,879

 

Provision charged to operations

 

255

 

365

 

372

 

Loans charged off

 

(216

)

(402

)

(358

)

Recoveries

 

77

 

63

 

34

 

Balance, end of year

 

$

3,069

 

$

2,953

 

$

2,927

 

 

The Company had no concentration of loans to borrowers engaged in similar businesses or activities which exceed five percent of total assets at December 31, 2003 or December 31, 2002.

 

The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central Pennsylvania.  Although the Company has a diversified loan portfolio at December 31, 2003 and 2002, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.

 

NOTE E - PREMISES AND EQUIPMENT

 

Major classifications of premises and equipment are summarized as follows at December 31, (in thousands):

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Land

 

$

566

 

$

566

 

Premises

 

4,883

 

4,855

 

Furniture and equipment

 

6,348

 

6,001

 

Leasehold improvements

 

867

 

842

 

Total

 

12,664

 

12,264

 

Less accumulated depreciation

 

8,039

 

7,408

 

Net

 

$

4,625

 

$

4,856

 

 

Depreciation charges to operations for the years ended 2003, 2002 and 2001 was $631,000, $526,000, and $489,000, respectively.

 

NOTE F – GOODWILL

 

As of December 31, 2003 and 2002, goodwill has a gross carrying value amount of $3,308,000 and an accumulated amortization amount of $276,000 resulting in a net carrying amount of $3,032,000.  The goodwill amortization for 2001 was $221,000 with a net income of $146,000 or $.04 per share resulting in an adjusted diluted earnings per share of $2.34.

 

The gross carrying amount of goodwill is tested for impairment in the third quarter.  Based on fair value of the reporting unit, estimated using the expected present value of future cash flows, no goodwill impairment loss was recognized in the current year.

 

48



 

NOTE G - DEPOSITS

 

Time deposits of $100,000 or more totaled approximately $27,386,000 on December 31, 2003 and $29,126,000 on December 31, 2002.  Interest expense related to such deposits was approximately  $829,000, $1,098,000, and $1,913,000, for the years ended December 31, 2003, 2002 and 2001, respectively.

 

Maturities on time deposits of $100,000 or more are as follows (in thousands):

 

 

 

2003

 

 

 

 

 

Three months or less

 

$

5,891

 

Three months to six months

 

4,960

 

Six months to twelve months

 

5,427

 

Over twelve months

 

11,108

 

 

 

 

 

Total

 

$

27,386

 

 

Time deposits at December 31, 2003 mature as follows: 2004 - $75,977,000; 2005 - $25,794,000; 2006 - $12,422,000; 2007 - $8,312,000; 2008 – $1,346,000; thereafter - $1,049,000.

 

NOTE H - SHORT-TERM BORROWINGS

 

Short-term borrowings consist of securities sold under agreements to repurchase and FHLB advances which generally represent overnight or less than 30-day borrowings.  The outstanding balances and related information for short-term borrowings are summarized as follows (in thousands):

 

 

 

2003

 

2002

 

Repurchase Agreements:

 

 

 

 

 

Balance at year end

 

$

10,225

 

$

11,723

 

Maximum amount outstanding at any month end

 

15,665

 

20,870

 

Average balance outstanding during the year

 

13,214

 

14,819

 

Weighted-average interest rate:

 

 

 

 

 

At year end

 

1.91

%

2.68

%

Paid during the year

 

2.07

%

3.17

%

 

 

 

 

 

 

Open Repo Plus:

 

 

 

 

 

Balance at year end

 

$

36,140

 

$

1,840

 

Maximum amount outstanding at any month end

 

36,140

 

8,510

 

Average balance outstanding during the year

 

11,537

 

1,646

 

Weighted-average interest rate:

 

 

 

 

 

At year end

 

1.06

%

1.31

%

Paid during the year

 

1.16

%

1.96

%

 

 

 

 

 

 

Short-Term FHLB:

 

 

 

 

 

Balance at year end

 

$

900

 

$

 

Maximum amount outstanding at any month end

 

900

 

 

Average balance outstanding during the year

 

695

 

 

Weighted-average interest rate:

 

 

 

 

 

At year end

 

1.40

%

0.00

%

Paid during the year

 

1.42

%

0.00

%

 

49


NOTE I - OTHER BORROWINGS

 

Other borrowings are comprised of advances from the FHLB.  A schedule of other borrowings as of December 31, 2003 and 2002 is summarized as follows (in thousands):

 

 

 

Maturity Range

 

Weighted
Int Rate

 

Stated Interest Rate

 

 

 

 

 

Description

 

from

 

to

 

 

from

 

to

 

2003

 

2002

 

Convertible

 

4/30/2007

 

3/25/2013

 

4.71

%

3.14

%

6.65

%

$

64,600

 

$

40,000

 

Bullet Fixed

 

3/24/2005

 

3/26/2007

 

2.59

%

2.02

%

3.13

%

4,500

 

 

Fixed

 

10/17/2011

 

5/26/2015

 

6.61

%

5.87

%

6.92

%

1,778

 

11,778

 

 

 

 

 

 

 

 

 

 

 

 

 

$

70,878

 

$

51,778

 

 

Maturities of other borrowings at December 31, 2003 are summarized as follows (in thousands) :

 

Year Ending

 

Amount

 

Weighted
Yield

 

2005

 

$

1,400

 

2.02

%

2006

 

1,600

 

2.58

%

2007

 

6,500

 

4.18

%

2008

 

29,600

 

4.77

%

2009 and after

 

31,778

 

4.79

%

 

 

 

 

 

 

 

 

$

70,878

 

4.72

%

 

The terms of the convertible borrowings allow the Federal Home Loan Bank (“FHLB”) to convert the interest rate to an adjustable rate based on the three month London Interbank Offered Rate (“LIBOR”) at a predetermined anniversary date of the borrowing’s origination, ranging from three months to five years.  These remaining conversion dates range from February 2004 through August 2005.

 

The Bank maintains a credit arrangement, which includes a revolving line of credit with FHLB.  Under this credit arrangement, the Bank has a remaining borrowing capacity of approximately $166.9 million at December 31, 2003, is subject to annual renewal, and typically incurs no service charges.  Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by certain qualifying assets of the Bank which consist principally of first mortgage loans.

 

50



 

NOTE J - INCOME TAXES

 

The following temporary differences gave rise to the net deferred tax liability at December 31, 2003 and 2002 (in thousands):

 

 

 

2003

 

2002

 

Deferred tax asset:

 

 

 

 

 

Allowance for loan losses

 

$

716

 

$

693

 

Deferred compensation

 

346

 

337

 

Contingencies

 

22

 

20

 

Pension

 

429

 

371

 

Loan fees and costs

 

320

 

261

 

Investment securities allowance

 

119

 

92

 

Total

 

1,952

 

1,774

 

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

 

Bond accretion

 

28

 

31

 

Depreciation

 

260

 

192

 

Amortization

 

150

 

 

 

Unrealized gains on available for sale securities

 

3,159

 

2,650

 

Total

 

3,597

 

2,873

 

 

 

 

 

 

 

Deferred tax liability, net

 

$

(1,645

)

$

(1,099

)

 

No valuation allowance was established at December 31, 2003 and 2002, in the view of the Company’s ability to carry back taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earning potential.

 

The provision for income taxes is comprised of the following (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Currently payable

 

$

3,665

 

$

2,363

 

$

2,117

 

Deferred expense (benefit)

 

38

 

(116

)

(139

)

 

 

 

 

 

 

 

 

Total provision

 

$

3,703

 

$

2,247

 

$

1,978

 

 

The effective federal income tax rate for the years ended December 31, 2003, 2002, and 2001 was 24.9 percent, 20.2 percent, and 20.3 percent, respectively.  A reconciliation between the expected income tax  and the effective income tax rate on income before income tax provision follows (in thousands):

 

 

 

2003

 

2002

 

2001

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision at expected rate

 

$

5,058

 

34.0

%

$

3,785

 

34.0

%

$

3,305

 

34.0

%

Decrease in tax resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt income

 

(964

)

(6.4

)

(1,367

)

(12.3

)

(1,103

)

(11.4

)

Other, net

 

(391

)

(2.7

)

(171

)

(1.5

)

(224

)

(2.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective income tax and rates

 

$

3,703

 

24.9

%

$

2,247

 

20.2

%

$

1,978

 

20.3

%

 

51



 

NOTE K - EMPLOYEE BENEFIT PLANS

 

Defined Benefit Pension Plan

 

The Company has a noncontributory defined benefit pension plan (the “Plan”) for all employees meeting certain age and length of service requirements.  Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten years of employment.

 

The following tables show the funded status and components of net periodic benefit cost from this defined benefit plan (in thousands):

 

 

 

2003

 

2002

 

Change in benefit obligation

 

 

 

 

 

Benefit obligation at beginning of year

 

$

6,473

 

$

4,976

 

Service cost

 

443

 

381

 

Interest cost

 

384

 

342

 

Amendments

 

 

97

 

Actuarial loss

 

43

 

753

 

Benefits paid

 

(198

)

(76

)

Benefit obligation at end of year

 

7,145

 

6,473

 

 

 

 

 

 

 

Change in plan assets

 

 

 

 

 

Fair value of plan assets at beginning of year

 

3,131

 

3,115

 

Actual return on plan assets

 

620

 

(384

)

Employer contribution

 

506

 

499

 

Benefits paid

 

(198

)

(76

)

Expenses paid

 

(17

)

(23

)

Fair value of plan assets at end of year

 

4,042

 

3,131

 

Funded status

 

(3,103

)

(3,342

)

Unrecognized net actuarial loss

 

1,609

 

1,996

 

Unrecognized prior service cost

 

255

 

280

 

Unrecognized tranisition asset

 

(22

)

(24

)

Net Accrued Benefit Cost Recognized

 

$

(1,261

)

$

(1,090

)

 

The accumulated benefit obligation for the defined benefit pension plan was $4,913,000 and $4,409,000 at December 31, 2003 and 2002, respectively.  Amounts recognized in the Statement of Income consist of (in thousands):

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Service cost

 

443

 

381

 

298

 

Interest cost

 

384

 

342

 

271

 

Expected return on plan assets

 

(256

)

(246

)

(286

)

Amortization of transition asset

 

(3

)

(3

)

(3

)

Amortization of prior service cost

 

26

 

26

 

20

 

Recognized net actuarial (gain) loss

 

83

 

19

 

(15

)

Net periodic benefit cost

 

677

 

519

 

285

 

 

52



 

The following information relates to the Plan’s projected benefit obligation, accumulated benefit obligation, and Plan assets at December 31, (in thousands):

 

Projected benefit obligation

 

$

7,145

 

$

6,473

 

Accumulative benefit obligation

 

4,913

 

4,409

 

Fair vlaue of plan assets

 

4,042

 

3,131

 

 

Assumptions

 

Weighted-average assumptions used to determine benefit obligations at December 31:

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Discount rate

 

6.00

%

6.00

%

7.00

%

Rate of compensation increase

 

5.00

 

5.00

 

5.00

 

 

Weighted-average assumptions used to determine net periodic cost for years ended December 31:

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Discount rate

 

6.00

%

6.50

%

7.00

%

Expected long-term return on plan assets

 

8.00

 

8.00

 

8.00

 

Rate of compensation increase

 

5.00

 

5.00

 

5.00

 

 

The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower future returns on similar investments compared to past periods.

 

Plan Assets

 

The Company’s pension plan weighted-average asset allocations at December 31 by asset category are as follows:

 

Asset Category

 

2003

 

2002

 

 

 

 

 

 

 

Cash

 

0.6

%

0.3

%

Fixed Income securities

 

38.7

%

40.6

%

Equity

 

60.7

%

59.1

%

Total

 

100.0

%

100.0

%

 

The investment objective for the defined pension plan is to maximize total return with tolerance for slightly above average risk, meaning the fund is able to tolerate short-term volatility to achieve above-average returns over the long term.  The portfolio’s target exposure to equities is 60%, primarily invested in mid and large capitalization domestic equities. Exposure to small capitalization and international stocks may be allowed.

 

Asset allocation favors equities, with target allocation of approximately 60% equity securities, 37.5% fixed income securities and 2.5% cash.  Due to violatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between the acceptable ranges.

 

It is management’s intent to give the investment managers flexibility within the overall guildlines with respect to investment decisions and their timing.  However, certain investments require specific review and approval by management.  Management is also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to execute investment strategies.

 

53



 

The following benefit payments, which reflect expected future cost, are expected to be paid during the year ended December 31, 2003 (in thousands):

 

2004

 

169

 

2005

 

194

 

2006

 

241

 

2007

 

274

 

2008

 

275

 

2009 - 2013

 

2,130

 

 

The company expects to contribute $560,000 to its Pension Plan in 2004.

 

401(k) Savings Plan

 

The Company also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415.  The Company may make matching contributions equal to a discretionary percentage to be determined by the Company.  Participants are at all times fully vested in their contributions and vest over a period of five years in the employer contribution.  Contribution expense was approximately $75,000, $80,000, and $65,000 for the years ended December 31, 2003, 2002, and 2001, respectively.

 

Deferred Compensation Plan

 

The Company has a deferred compensation plan whereby participating directors elected to forego directors’ fees for a period of five years.  Under this plan, the Company will make payments for a ten-year period beginning at age 65 in most cases or at death, if earlier, at which time payments would be made to their designated beneficiaries.

 

To fund benefits under the deferred compensation plan, the Company has acquired corporate-owned life insurance policies on the lives of the participating directors for which insurance benefits are payable to the Company.  The total expense charged to other expenses was $104,000, $98,000, and $67,000 for the years ended December 31, 2003, 2002 and 2001, respectively.  Benefits paid under the plan were approximately $132,000 in 2003, 51,000 in 2002 and 51,000 in 2001.

 

NOTE L - STOCK OPTIONS

 

Prior to 1998, the Company granted a select group of its officers options to purchase shares of its common stock.  These options, which are immediately exercisable, expire within three to ten years after having been granted.  Also, in 1998, the Company adopted the “1998 Stock Option Plan” for key employees and directors.  Incentive stock options and nonqualified stock options may be granted to eligible employees of the Bank and nonqualified options may be granted to directors of the Company.  In addition, non-employee directors are eligible to receive grants of nonqualified stock options.  Incentive nonqualified stock options granted under the 1998 Plan may be exercised not later than ten years after the date of grant.  Each option granted under the 1998 Plan shall be exercisable only after the expiration of six months following the date of grant of such options.

 

54



 

A summary of the status of the Company’s common stock option plans are presented below:

 

 

 

2003

 

2002

 

 

 

Shares

 

Weighted-
average
Exercise
Price

 

Shares

 

Weighted-
average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

Outstanding, beginning of year

 

33,385

 

$

38.69

 

45,651

 

$

35.09

 

Granted

 

 

 

 

 

Exercised

 

(2,778

)

30.93

 

(5,707

)

23.62

 

Forfeited

 

 

 

(6,559

)

23.62

 

 

 

 

 

 

 

 

 

 

 

Outstanding, end of year

 

30,607

 

$

39.39

 

33,385

 

$

38.69

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at year-end

 

30,607

 

$

39.39

 

33,385

 

$

38.69

 

 

The following table summarizes information about nonqualified and incentive stock options outstanding at December 31, 2003:

 

 

 

Outstanding

 

Exercisable

 

Exercise Price

 

Shares

 

Average
Life

 

Average
Exercise
Price

 

Shares

 

Average
Exercise
Price

 

$

48.35

 

10,890

 

5

 

$

48.35

 

10,890

 

$

48.35

 

$

38.18

 

11,082

 

6

 

$

38.18

 

11,082

 

$

38.18

 

$

29.66

 

8,635

 

7

 

$

29.66

 

8,635

 

$

29.66

 

 

NOTE M - RELATED PARTY TRANSACTIONS

 

Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which they are principal owners (more than ten percent), are indebted to the Company.  Such indebtedness was incurred in the ordinary course of business on the same terms and at those rates prevailing at the time for comparable transactions with others.

 

A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below for the year ended December 31, 2003 (in thousands):

 

 

 

Beginning
Balance

 

Additions

 

Payments

 

Retired/
Resigned

 

Ending
Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

$

6,785

 

$

2,374

 

$

1,791

 

$

141

 

$

7,227

 

 

55



 

NOTE N - COMMITMENTS AND CONTINGENT LIABILITIES

 

The following schedule of future minimum rental payments under operating leases with noncancellable terms in excess of one year as of December 31, 2003 (in thousands):

 

Year Ending December 31,

 

2004

 

$

168

 

2005

 

194

 

2006

 

241

 

2007

 

274

 

2008

 

275

 

Thereafter

 

53

 

Total

 

$

1,062

 

 

Total rental expense for all operating leases for the years ended December 31, 2003, 2002 and 2001 approximated $269,000, $258,000, and $270,000 respectively.

 

The Company is subject to lawsuits and claims arising out of its business.  In the opinion of management, after review and consultation with counsel, any proceedings that may be assessed will not have a material adverse effect on the consolidated financial position of the Company.

 

NOTE O - OFF-BALANCE SHEET RISK

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet.  The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments.  The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.

 

Financial instruments whose contract amounts represent credit risk are as follows at December 31 (in thousands):

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Commitments to extend credit

 

$

47,454

 

$

29,497

 

 

 

 

 

 

 

Standby letters of credit

 

$

258

 

$

741

 

 

Commitments to extend credit are legally binding agreements to lend to customers.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements.  The Company evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company, on extension of credit is based on management’s credit assessment of the counterparty.

 

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  These instruments are issued primarily to support bid or performance related contracts. The

 

56



 

coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management.  Fees earned from the issuance of these letters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

 

NOTE P - CAPITAL REQUIREMENTS

 

Federal regulations require the Company and the Bank to maintain minimum amounts of capital.  Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total assets.

 

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.”   Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.

 

As of December 31, 2003 and 2002, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based and Tier 1 leverage capital ratios must be at least 10%, 6%, and 5%, respectively.

 

The Company’s and the Bank’s actual capital ratios are presented in the following tables, which shows that both met all regulatory capital requirements.

 

57



 

The Company’s actual capital amounts and ratios are presented in the following table (in thousands):

 

 

 

2003

 

2002

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

66,820

 

23.0

%

$

58,953

 

22.2

%

For Capital Adequacy Purposes

 

23,225

 

8.0

 

21,236

 

8.0

 

To Be Well Capitalized

 

29,031

 

10.0

 

26,545

 

10.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

60,547

 

20.9

%

$

54,915

 

20.7

%

For Capital Adequacy Purposes

 

11,613

 

4.0

 

10,618

 

4.0

 

To Be Well Capitalized

 

17,419

 

6.0

 

15,927

 

6.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

60,547

 

11.6

%

$

54,915

 

12.0

%

For Capital Adequacy Purposes

 

20,922

 

4.0

 

18,310

 

4.0

 

To Be Well Capitalized

 

26,153

 

5.0

 

22,888

 

5.0

 

 

The Bank’s actual capital amounts and ratios are presented in the following table (in thousands):

 

 

 

2003

 

2002

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

52,161

 

18.8

%

$

47,232

 

18.3

%

For Capital Adequacy Purposes

 

22,155

 

8.0

 

20,616

 

8.0

 

To Be Well Capitalized

 

27,693

 

10.0

 

25,770

 

10.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

47,770

 

17.3

%

$

43,723

 

17.0

%

For Capital Adequacy Purposes

 

11,077

 

4.0

 

10,308

 

4.0

 

To Be Well Capitalized

 

16,616

 

6.0

 

15,462

 

6.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital (to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

47,770

 

9.6

%

$

43,723

 

9.7

%

For Capital Adequacy Purposes

 

19,982

 

4.0

 

17,970

 

4.0

 

To Be Well Capitalized

 

24,978

 

5.0

 

22,462

 

5.0

 

 

NOTE Q – REGULATORY RESTRICTIONS

 

The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividend by all state-chartered banks to the additional paid in capital of the Bank.  Accordingly, at December 31, 2003, the balance in the additional paid in capital account totaling approximately $11,700,000 is unavailable for dividends.

 

58



 

The Bank is subject to regulatory restrictions, which limit its ability to loan funds to Penns Woods Bancorp, Inc.  At December 31, 2003, the regulatory lending limit amounted to approximately $5,081,000.

 

Cash and Due from Banks

 

Included in cash and due from banks are reserves required by the district Federal Reserve Bank of $1,151,000 and  $1,152,000 at December 31, 2003 and 2002.  The required reserves are computed by applying prescribed ratios to the classes of average deposit balances.  These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve Bank.

 

NOTE R - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company is required to disclose estimated fair values for its financial instruments.  Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument.  Also, it is the Company’s general practice and intention to hold most of its financial instruments to maturity and not to engage in trading or sales activities.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions can significantly affect the estimates.

 

Estimated fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments.  The estimated fair value of the Company’s investment securities is described in Note A.  The Company’s fair value estimates, methods, and assumptions are set forth below for the Company’s other financial instruments.

 

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this estimated fair value of financial instruments would not represent the full market value of the Company.

 

The estimated fair values of the Company’s financial instruments are as follows:

 

 

 

2003

 

2002

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

10,230

 

$

10,230

 

$

11,731

 

$

11,731

 

Investment securitites:

 

 

 

 

 

 

 

 

 

Available for sale

 

210,611

 

210,611

 

176,436

 

176,436

 

Held to maturity

 

686

 

701

 

1,181

 

1,289

 

Loans held for sale

 

4,803

 

4,803

 

2,651

 

2,651

 

Loans, net

 

272,759

 

287,310

 

254,892

 

267,563

 

Bank-owned life insurance

 

8,908

 

8,908

 

8,537

 

8,537

 

Regulatory stock

 

6,588

 

6,588

 

3,963

 

3,963

 

Accrued interest receivable

 

2,242

 

2,242

 

2,460

 

2,460

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

269,443

 

$

271,200

 

$

272,787

 

$

276,881

 

Noninterest-bearing deposits

 

64,875

 

64,875

 

67,061

 

67,061

 

Short-term borrowings

 

47,265

 

47,265

 

13,563

 

13,563

 

Other borrowings

 

70,878

 

73,107

 

51,778

 

56,384

 

Accrued interest payable

 

836

 

836

 

1,092

 

1,092

 

 

59



 

Cash and due from banks, loans held for sale, regulatory stock, accrued interest receivable, short-term borrowings, and accrued interest payable:

 

The fair value is equal to the carrying value.

 

Investment securities:

 

The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price.  If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.

 

Loans:

 

Fair values are estimated for portfolios of loans with similar financial characteristics.  Loans are segregated by type such as commercial, commercial real estate, residential real estate, contruction real estate, and other consumer.  Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.

 

The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.  The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions.

 

Fair value for significant nonperforming loans is based on recent external appraisals.  If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.

 

Bank-Owned Life Insurance:

 

The fair value is equal to the Cash Surrender Value of life insurance policies.

 

Deposits:

 

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 2003 and 2002.  The fair value of certificates of deposit is based on the discounted value of contractual cash flows.

 

The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

 

Other Borrowings:

 

The fair value of other borrowings is based on the discounted value of contractual cash flows.

 

Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written:

 

There is no material difference between the notional amount and the estimated fair value of off-balance sheet items at December 31, 2003 and 2002 respectively.  The contractual amounts of unfunded commitments and letters of credit are presented in Note O.

 

NOTE S- PARENT COMPANY ONLY FINANCIAL STATEMENTS

 

Condensed financial information for Penns Woods Bancorp, Inc. follows:

 

60



 

CONDENSED BALANCE SHEET, DECEMBER 31,

 

 

 

2003

 

2002

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

Cash

 

$

369

 

$

481

 

Investment in subsidiaries:

 

 

 

 

 

Bank

 

54,133

 

51,019

 

Nonbank

 

15,307

 

11,760

 

Other assets

 

91

 

20

 

 

 

 

 

 

 

Total Assets

 

$

69,900

 

$

63,280

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Other liabilities

 

$

131

 

$

138

 

Shareholders’ equity

 

69,769

 

63,142

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

69,900

 

$

63,280

 

 

CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31,

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

OPERATING INCOME

 

 

 

 

 

 

 

Dividends from subsidiaries

 

$

6,651

 

$

4,878

 

$

5,984

 

Equity in undistributed net income of subsidiaries

 

4,649

 

4,121

 

1,899

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

(126

)

(113

)

(141

)

 

 

 

 

 

 

 

 

NET INCOME

 

$

11,174

 

$

8,886

 

$

7,742

 

 

CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

 

OPERATING  ACTIVITIES

 

 

 

 

 

 

 

Net income

 

$

11,174

 

$

8,886

 

$

7,742

 

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

 

 

 

 

 

 

 

Equity in undistributed net income of subsidiaries

 

(4,649

)

(4,121

)

(1,899

)

Other, net

 

(64

)

(23

)

(26

)

Net cash provided by operating activities

 

6,461

 

4,742

 

5,817

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Additional investment in subsidiaries

 

(1,039

)

 

(276

)

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Dividends paid

 

(5,001

)

(4,124

)

(3,729

)

Proceeds from exercise of stock options

 

87

 

113

 

21

 

Purchase/retirement of treasury stock

 

(620

)

(401

)

(1,838

)

Net cash used for financing activities

 

(5,534

)

(4,412

)

(5,546

)

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

(112

)

330

 

(5

)

CASH, BEGINNING OF YEAR

 

481

 

151

 

156

 

CASH, END OF YEAR

 

$

369

 

$

481

 

$

151

 

 

61



 

NOTE T - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

 

 

FOR THE THREE MONTHS ENDED
(in thoussands, except per share data)

 

2003

 

March
31

 

June
30

 

September
30

 

December
31

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

7,092

 

$

7,251

 

$

7,281

 

$

7,428

 

Interest expense

 

2,386

 

2,395

 

2,327

 

2,157

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

4,706

 

4,856

 

4,954

 

5,271

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

90

 

45

 

90

 

30

 

Other income

 

1,182

 

1,195

 

1,325

 

1,274

 

Securities gains, net

 

101

 

1,750

 

1,247

 

561

 

Other expenses

 

3,139

 

3,186

 

3,290

 

3,675

 

 

 

 

 

 

 

 

 

 

 

Income before income tax provision

 

2,760

 

4,570

 

4,146

 

3,401

 

Income tax provision

 

573

 

1,233

 

1,135

 

762

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,187

 

$

3,337

 

$

3,011

 

$

2,639

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

$

0.72

 

$

1.10

 

$

1.00

 

$

0.53

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

$

0.72

 

$

1.10

 

$

0.99

 

$

0.54

 

 

 

 

FOR THE THREE MONTHS ENDED
(in thoussands, except per share data)

 

2002

 

March
31

 

June
30

 

September
30

 

December
31

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

7,076

 

$

7,199

 

$

7,399

 

$

7,430

 

Interest expense

 

2,719

 

2,740

 

2,715

 

2,672

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

4,357

 

4,459

 

4,684

 

4,758

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

105

 

80

 

90

 

90

 

Other income

 

1,401

 

1,317

 

1,231

 

1,271

 

Securities gains (losses), net

 

(119

)

(72

)

281

 

143

 

Other expenses

 

2,952

 

3,056

 

3,070

 

3,135

 

 

 

 

 

 

 

 

 

 

 

Income before income tax provision

 

2,582

 

2,568

 

3,036

 

2,947

 

Income tax provision

 

485

 

528

 

660

 

574

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,097

 

$

2,040

 

$

2,376

 

$

2,373

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

$

0.62

 

$

0.61

 

$

0.71

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

$

0.62

 

$

0.61

 

$

0.71

 

$

0.72

 

 

ITEM  9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

62



 

ITEM 9A     CONTROLS AND PROCEDURES

 

The Company, under the supervision and with the participaton of the Company’s management, including the Company’s President and Chief Executive Officer along with the Company’s Chief Finanical Officer, has evaluated the effectiveness as of December 31, 2003 of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the Company’s President and Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2003 in timely alerting them to material information relating to the Company (including its’ consolidated subsidiaries) required to be included in the Company’s periodic SEC filing.  There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its’ evaluation.

 

PART III

 

ITEM 10    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Information appearing in the Proxy Statement under the caption “Election of Directors” is incorporated herein by reference.   (a) Identification of directors.  The information appearing under the caption “Election of Directors” in the Company’s Proxy Statement dated March 23, 2003 (at page 3 thereto) is incorporated herein by reference.

 

ITEM 11    EXECUTIVE COMPENSATION

 

Information appearing under the caption “Executive Compensation” in the Company’s Proxy Statement (at page 5 thereto) is incorporated herein by reference.

 

ITEM 12    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Proxy Statement (at page 2 thereto) is incorporated herein by reference.

 

Equity Compensation Plan Information

 

Plan Category

 

Number of
securities to be
issued upon
exercise of
outstanding options,
warrants and rights
(a)

 

Weighted-
average
exercise of
outstanding options,
warrants and rights
(b)

 

Number of
securities remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

30,607

 

$

39.39

 

0

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

0

 

0

 

0

 

 

 

 

 

 

 

 

 

Total

 

30,607

 

$

39.39

 

0

 

 

63



 

ITEM 13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

There have been no material transactions between the Company and the Bank, nor any material transactions proposed, with any Director or Executive Officer of the Company and the Bank, or any associate of the foregoing persons.  The Company and the Bank have had, and intend to continue to have, banking and financial transactions in the ordinary course of business with Directors and Officers of the Company and the Bank and their associates on comparable terms and with similar interest rates as those prevailing from time to time for other customers of the Company and the Bank.

 

Total loans outstanding from the Bank at December 31, 2003 to the Company’s and the Bank’s Officers and Directors as a group and members of their immediate families and companies in which they had an ownership interest of 10% or more was $7,227,000 or approximately 13.4% of the total equity capital of the Company.  Loans to such persons were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features.  See also the information appearing in footnote M to the Consolidated Financial Statements included elsewhere in the Annual Report.

 

ITEM 14     PRINCIPAL ACCOUNTANT FEES & SERVICES

 

The information appearing in the Proxy Statement under the captions, “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees,” and “Audit Committee Pre-Approval Policies and Procedures” (at page 9) is incorporated herein by reference.

 

PART IV

 

ITEM 15     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND  REPORTS ON FORM 8-K

 

(a) Financial Statements

1.  The following consolidated financial statements and reports are set forth in Item 8:

Report of Independent Auditors

Consolidated Balance Sheet

Consolidated Statement of Income

Consolidated Statement of Changes in Shareholders’ Equity

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements

2.  The following  schedules is submitted herewith:

I.  Indebtedness of Related Parties

 

The schedules not included are omitted because the required matter or conditions are not present, the data is insignificant or the required information is submitted as part of the consolidated financial statements and notes thereto.

 

(b) Reports on Form 8-K

 

None.

 

(c) Exhibits:

 

3(i)          Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3.1 of  the Registrant’s Registration Statement on Form S-4, No. 333-65821).

3(ii)         Bylaws of the Registrant as presently in effect (incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form S-4, No. 333-65821).

10(i)        Employment Agreement, dated August, 1991, between Jersey Shore State Bank and Ronald A. Walko (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on form S-4, No. 333-65821).*

10(ii)       Employment Agreement, dated November 5, 1984, between Jersey Shore State Bank and Hubert A. Valencik (incorporated by reference to Exhibit (10)(iii) of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).*

10(iii)      Employee Severance Benefit Plan, dated May 30, 1996, for Ronald A. Walko (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on form S-4, No. 333-65821).*

 

64



 

10(iv)      Employee Severance Benefit Plan, dated May 30, 1996, for Hubert A. Valencik (incorporated by reference to Exhibit (10)(v) of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).*

10(v)       Penns Woods Bancorp, Inc. 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on form S-4, No. 333-65821).*

 

21

 

Subsidiaries of the Registrant.

23

 

Consent of Independent Certified Public Accountants.

31(i)

 

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

31(ii)

 

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

32(i)

 

Section 1350  Certification of Chief Executive Officer

32(ii)

 

Section 1350  Certification of Chief Financial Officer

 


* Denotes compensatory plan or arrangement.

 

EXHIBIT INDEX

 

21

 

Subsidiaries of the Registrant.

23

 

Consent of Independent Certified Public Accountants.

31(i)

 

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

31(ii)

 

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

32(i)

 

Section 1350  Certification of Chief Executive Officer

32(ii)

 

Section 1350  Certification of Chief Financial Officer

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

/s/ Ronald A. Walko

March 4, 2004

PENNS WOODS BANCORP, INC.

 

BY:  RONALD A. WALKO, President & Chief Executive Officer

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

 

/s/ Ronald A. Walko

 

 

Ronald A. Walko, President, Chief Executive

 

March 4, 2004

Officer and Director

 

 

 

 

 

/s/ Sonya E. Scott

 

 

Sonya E. Scott, Principal Accounting Officer &

 

March 4, 2004

Principal Financial Officer

 

 

 

 

 

/s/ Phillip H. Bower

 

 

Phillip H. Bower, Director

 

March 4, 2004

 

 

 

/s/ Lynn S. Bowes

 

 

Lynn S. Bowes, Director

 

March 4, 2004

 

65



 

/s/ Michael J. Casale, Jr.

 

 

Michael J. Casale, Jr., Director

 

March 4, 2004

 

 

 

/s/ H. Thomas Davis, Jr.

 

 

H. Thomas Davis, Jr., Director

 

March 4, 2004

 

 

 

/s/ James M. Furey II

 

 

James M. Furey II, Director

 

March 4, 2004

 

 

 

/s/ Jay H. McCormick

 

 

Jay H. McCormick, Director

 

March 4, 2004

 

 

 

/s/ R. Edward Nestlerode, Jr.

 

 

R. Edward Nestlerode, Jr., Director

 

March 4, 2004

 

 

 

/s/ James E. Plummer

 

 

James E. Plummer, Director

 

March 4, 2004

 

 

 

/s/ William H. Rockey

 

 

William H. Rockey, Sr. Vice President &

 

March 4, 2004

Director

 

 

66