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PENNS WOODS BANCORP INC - Quarter Report: 2005 March (Form 10-Q)

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý     Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2005,

 

o     Transition report pursuant to Section 13 or 15 (d) of the Exchange Act for the Transition Period from                                         to                                        .

 

No. 0-17077

(Commission File Number)

 

PENNS WOODS BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA

 

23-2226454

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

300 Market Street, Williamsport, Pennsylvania

 

17701

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(570) 322-1111

Registrant’s telephone number, including area code

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that 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 whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act)

 

YES  ý          NO  o

 

On April 25, 2005 there were 3,321,869 of the Registrant’s common stock outstanding.

 

 



 

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

Part I Financial Information

 

 

 

Item I Financial Information

 

 

 

 

Consolidated Balance Sheet (unaudited) as of March 31, 2005 and December 31, 2004

 

 

 

 

 

Consolidated Statement of Income (unaudited) for the Three Months ended March 31, 2005 and 2004

 

 

 

 

 

Consolidated Statement of Comprehensive Income (unaudited) For the Three Months
ended March 31, 2005 and 2004

 

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months
ended March 31, 2005 and 2004

 

 

 

 

 

Consolidated Statement of Cash Flows (unaudited) for the Three Months ended
March 31, 2005 and 2004

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

 

Item 4. Controls and Procedures

 

 

 

Part II Other Information

 

 

 

Item 1. Legal Proceedings

 

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

 

Item 3. Defaults Upon Senior Securities

 

Item 4. Submission of Matters to a Vote of Security Holders

 

Item 5. Other Information

 

Item 6. Exhibits

 

Signatures

 

Exhibit Index and Exhibits

 

 

2



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

(In Thousands, Except Share Data)

 

March 31,
2005

 

December 31,
2004

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

Cash and noninterest-bearing balances in other financial institutions

 

$

17,314

 

$

12,602

 

Interest-bearing deposits in other financial institutions

 

30

 

24

 

Total cash and cash equivalents

 

17,344

 

12,626

 

 

 

 

 

 

 

Investment securities, available for sale, at fair value

 

178,071

 

184,163

 

Investment securities held to maturity (fair value of $307 and $561)

 

309

 

558

 

Loans held for sale

 

2,575

 

4,624

 

Loans, net of unearned discount of $1,060 and $1,096

 

323,140

 

324,505

 

Allowance for loan and lease losses

 

(3,399

)

(3,338

)

Loans, net

 

319,741

 

321,167

 

 

 

 

 

 

 

Premises and equipment, net

 

5,588

 

4,882

 

Accrued interest receivable

 

2,208

 

2,246

 

Bank-owned life insurance

 

11,070

 

10,976

 

Goodwill

 

3,032

 

3,032

 

Other assets

 

4,055

 

2,429

 

TOTAL ASSETS

 

$

543,993

 

$

546,703

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Interest-bearing deposits

 

$

281,593

 

$

282,786

 

Noninterest-bearing deposits

 

72,708

 

74,050

 

Total deposits

 

354,301

 

356,836

 

 

 

 

 

 

 

Short-term borrowings

 

37,262

 

36,475

 

Long-term borrowings, Federal Home Loan Bank

 

74,478

 

75,878

 

Accrued interest payable

 

862

 

850

 

Other liabilities

 

5,179

 

3,499

 

TOTAL LIABILITIES

 

472,082

 

473,538

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Common stock par value $10.00, 10,000,000 shares authorized; 3,332,179 and 3,331,837 shares issued

 

33,322

 

33,318

 

Additional paid-in capital

 

17,707

 

17,700

 

Retained earnings

 

19,481

 

18,262

 

Accumulated other comprehensive gain

 

1,847

 

4,331

 

Less: Treasury stock at cost, 10,310 shares

 

(446

)

(446

)

TOTAL SHAREHOLDERS’ EQUITY

 

71,911

 

73,165

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

543,993

 

$

546,703

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended
March 31,

 

(In Thousands, Except Per Share Data)

 

2005

 

2004

 

 

 

 

 

 

 

INTEREST AND DIVIDEND INCOME:

 

 

 

 

 

Loans including fees

 

$

5,500

 

$

4,891

 

Investment securities:

 

 

 

 

 

Taxable

 

1,264

 

1,803

 

Tax-exempt

 

589

 

391

 

Dividend

 

298

 

242

 

TOTAL INTEREST AND DIVIDEND INCOME

 

7,651

 

7,327

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

1,194

 

1,135

 

Short-term borrowings

 

202

 

137

 

Long-term borrowings

 

853

 

852

 

TOTAL INTEREST EXPENSE

 

2,249

 

2,124

 

 

 

 

 

 

 

NET INTEREST INCOME

 

5,402

 

5,203

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

180

 

75

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

5,222

 

5,128

 

 

 

 

 

 

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

455

 

476

 

Securities gains, net

 

611

 

545

 

Bank-owned life insurance

 

94

 

90

 

Insurance commissions

 

643

 

614

 

Other income

 

314

 

312

 

TOTAL NON-INTEREST INCOME

 

2,117

 

2,037

 

 

 

 

 

 

 

NON-INTEREST EXPENSES:

 

 

 

 

 

Salaries and employee benefits

 

2,020

 

1,979

 

Occupancy expense, net

 

291

 

243

 

Furniture and equipment expense

 

221

 

265

 

Advertising expense

 

94

 

94

 

Pennsylvania shares tax expense

 

139

 

116

 

Other operating expenses

 

856

 

776

 

TOTAL NON-INTEREST EXPENSES

 

3,621

 

3,473

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX PROVISION

 

3,718

 

3,692

 

INCOME TAX PROVISION

 

1,003

 

1,019

 

NET INCOME

 

$

2,715

 

$

2,673

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

 

$

0.82

 

$

0.80

 

EARNINGS PER SHARE - DILUTED

 

$

0.82

 

$

0.80

 

DIVIDENDS PER SHARE

 

$

0.45

 

$

0.35

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC

 

3,311,272

 

3,321,853

 

WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED

 

3,313,422

 

3,325,395

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

 

(In Thousands Except Per Share Data)

 


COMMON
STOCK

 

ADDITIONAL
PAID-IN
CAPITAL

 

RETAINED
EARNINGS

 

ACCUMULATED
OTHER
COMPREHENSIVE
INCOME

 

TREASURY
STOCK

 

TOTAL
SHAREHOLDERS’
EQUITY

 

SHARES

 

AMOUNT

Balance, December 31, 2004

 

3,331,837

 

$

33,318

 

$

17,700

 

$

18,262

 

$

4,331

 

$

(446

)

$

73,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

2,715

 

 

 

 

 

2,715

 

Dividends declared, $0.45

 

 

 

 

 

 

 

(1,496

)

 

 

 

 

(1,496

)

Net change in unrealized gain on investments available for sale, net of tax benefit of $1,280

 

 

 

 

 

 

 

 

 

(2,484

)

 

 

(2,484

)

Stock options exercised

 

342

 

4

 

7

 

 

 

 

 

 

 

11

 

Balance, March 31, 2005

 

3,332,179

 

$

33,322

 

$

17,707

 

$

19,481

 

$

1,847

 

$

(446

)

$

71,911

 

 

5



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

(In Thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Net Income

 

$

2,715

 

$

2,673

 

Other comprehensive income:

 

 

 

 

 

Unrealized gains (losses) on available for sale securities

 

(3,155

)

737

 

Less: Reclassification adjustment for gain included in net income

 

611

 

545

 

Other comprehensive income (loss) before tax

 

(3,766

)

192

 

Income tax expense (benefit) related to other comprehensive income (loss)

 

(1,280

)

65

 

Other comprehensive income (loss), net of tax

 

(2,486

)

127

 

Comprehensive income

 

$

229

 

$

2,800

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended
March 31,

 

(In Thousands)

 

2005

 

2004

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net Income

 

$

2,715

 

$

2,673

 

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

 

 

 

 

 

Depreciation

 

143

 

158

 

Provision for loan losses

 

180

 

75

 

Accretion and amortization of investment security discounts and premiums

 

(105

)

3

 

Securities gains, net

 

(611

)

(545

)

Originations of loans held for sale

 

(4,838

)

(2,056

)

Proceeds of loans held for sale

 

6,887

 

3,165

 

Earnings on bank-owned life insurance

 

(94

)

(90

)

Other, net

 

1,010

 

1,572

 

Net cash provided by operating activities

 

5,287

 

4,955

 

INVESTING ACTIVITIES:

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

Proceeds from sales

 

63,594

 

35,792

 

Proceeds from calls and maturities

 

3,517

 

5,364

 

Purchases

 

(64,153

)

(36,890

)

Investment securities held to maturity:

 

 

 

 

 

Proceeds from calls and maturities

 

249

 

1

 

Purchases

 

 

(14

)

Net decrease (increase) in loans

 

1,169

 

(2,804

)

Acquisition of bank premises and equipment

 

(849

)

(108

)

Proceeds from the sale of foreclosed assets

 

28

 

134

 

Proceeds from redemption of regulatory stock

 

1,286

 

1,718

 

Purchases of regulatory stock

 

(777

)

(1,252

)

Net cash provided by investing activities

 

4,064

 

1,941

 

FINANCING ACTIVITIES:

 

 

 

 

 

Net (decrease) increase in interest-bearing deposits

 

(1,193

)

9,073

 

Net decrease in noninterest-bearing deposits

 

(1,342

)

(1,154

)

Proceeds of long-term borrowings

 

 

5,000

 

Repayment of long-term borrowings

 

(1,400

)

 

Net increase (decrease) in short-term borrowings

 

787

 

(16,671

)

Dividends paid

 

(1,496

)

(1,163

)

Stock options exercised

 

11

 

31

 

Purchase of treasury stock

 

 

(130

)

Net cash provided used in financing activities

 

(4,633

)

(5,014

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

4,718

 

1,882

 

CASH AND CASH EQUIVALENTS, BEGINNING

 

12,626

 

10,230

 

CASH AND CASH EQUIVALENTS, ENDING

 

$

17,344

 

$

12,112

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

2,237

 

$

2,131

 

Transfer of loans to foreclosed assets

 

$

77

 

$

39

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

7



 

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.  Basis of Presentation

 

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

 

The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for the fair presentation of results for such periods.  All of those adjustments are of a normal, recurring nature.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with financial statements and notes thereto contained in the Company’s annual report for the year ended December 31, 2004.

 

Recent Accounting Pronouncements

 

In April, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123R).  The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued.  FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

 

In December 2004, FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply

 

8



 

the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

NOTE 2. Per Share Data

 

The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.  There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share, therefore, net income as presented on the consolidated statement of income will be used as the numerator.

 

 

 

Three Months Ended March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

3,321,582

 

3,327,315

 

 

 

 

 

 

 

Average treasury stock shares

 

(10,310

)

(5,462

)

 

 

 

 

 

 

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

 

3,311,272

 

3,321,853

 

 

 

 

 

 

 

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

 

2,150

 

3,542

 

 

 

 

 

 

 

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

 

3,313,422

 

3,325,395

 

 

Options to purchase 8,410 shares of common stock at the price of $48.35 were outstanding during the three months ended March 31, 2005 and 10,890 shares of common stock at the price of $48.35 were outstanding for the three months ended March 31, 2004, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of the end of the quarter.

 

Note 3.  Net Periodic Benefit Cost-Defined Benefit Plans

 

For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 11 of the Company’s Consolidated Financial Statements included in the 2004 Annual Report on Form 10-K.

 

9



 

The following sets forth the components of net periodic benefit cost of the domestic non-contributory defined benefit plans for the three months ended March 31, 2005 and 2004,  respectively.

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Service cost

 

$

127

 

$

113

 

Interest cost

 

112

 

106

 

Expected return on plan assets

 

(95

)

(84

)

Amortization of transition obligation

 

(1

)

(1

)

Amortization of prior service cost

 

6

 

6

 

Amortization of net (gain) loss

 

16

 

14

 

Net periodic cost

 

$

165

 

$

154

 

 

Employer Contributions

 

The Company previously disclosed in its consolidated financial statements included in the 2004 Annual Report on Form 10-K that it expected to contribute $575,000 to its defined benefit plan in 2005.  As of March 31, 2005, contributions of $206,000 have been made.  The Company presently anticipates contributing an additional $369,000 to fund its pension plan in 2005 for a total of $575,000.

 

Note 4.  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.

 

10



 

Financial instruments whose contract amounts represent credit risk are as follows:

 

 

 

March 31,

 

 

 

2005

 

2004

 

Commitments to extend credit

 

$

41,361

 

$

48,822

 

Standby letters of credit

 

1,705

 

816

 

 

Note 5.  Reclassification of Comparative Amounts

 

Certain comparative amounts for the prior periods have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.

 

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 Company wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein:  (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies.

 

11



 

ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

EARNINGS SUMMARY

 

Comparison of the Three Months Ended March 31, 2005 and 2004

 

Summary Results

 

Net income for the three months ended March 31, 2005 was $2,715,000 compared to $2,673,000 for the same period of 2004.  Basic and diluted earnings per share for the three months ended March 31, 2005 were $0.82 as compared to $0.80 for the three months ended March 31, 2004.  Return on average assets and return on average equity were 2.01% and 14.56% for the three months ended March 31, 2005 as compared to 2.04% and 14.99% for the corresponding period of 2004.  Net income from core operations for the three months ended March 31, 2005, excluding after-tax securities gains of $403,000, remained stable at $2,312,000. (Management uses the non-GAAP measure of net income from core operations in its analysis of the Company’s performance.  This measure, as used by the Company, adjusts net income significant gains or losses that are unusual in nature.  Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses.  These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.)

 

Interest Income

 

During the first quarter of 2005, interest and dividend income was $7,651,000, an increase of $324,000 over the same quarter in 2004.  The increase in total interest income was primarily the result of a change in the mix of earning assets from March 31, 2004 to March 31,2005.  Over this time frame cash flows from the investment portfolio have been reinvested into the higher yielding loan portfolio, principally commercial products.  The shift in earning assets increased loan interest and fee income by $609,000 while decreasing interest and dividend income on investment securities by $285,000.  The decrease in taxable investment security interest income was also the effect of a portfolio reallocation from the taxable investment portfolio to tax-free municipal bonds.  This shift within the investment securities portfolio was undertaken to ladder cash flows, maintain the interest margin, and to invest at the community level.  The increase in dividends received is the result of an increase in the level of dividends from the Federal Home Loan Bank of Pittsburgh coupled with an emphasis on purchasing stocks consistently having an above average dividend yield.

 

Interest income composition for the three months ended March 31, 2005 and 2004 is as follows:

 

12



 

 

 

For The Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

% Total

 

Loans including fees

 

$

5,500

 

71.9

%

$

4,891

 

66.8

%

$

609

 

12.5

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,264

 

16.5

 

1,803

 

24.6

 

(539

)

(29.9

)

Tax-exempt

 

589

 

7.7

 

391

 

5.3

 

198

 

50.6

 

Dividend

 

298

 

3.9

 

242

 

3.3

 

56

 

23.1

 

Total interest income

 

$

7,651

 

100.0

%

$

7,327

 

100.0

%

$

324

 

4.4

%

 

Interest Expense

 

Interest expense during the first quarter of 2005 increased $125,000 to $2,249,000 from $2,124,000 for the first quarter of 2004.  The increased expense associated with deposits is the result of both rate and volume increases from the first quarter of 2004 to the corresponding period of 2005.  During this time frame an emphasis was placed on building and retaining strong customer relationships by providing needed deposit products at a competitive rate.  This emphasis along with the current rising rate environment led to both the rate and volume increases that occurred from period to period.  Short-term borrowing costs also increased do to the 175 basis point increase in the Fed Funds rate over the past year.  This increase affected the rate paid on FHLB overnight borrowings, FHLB short-term borrowings, and the rate paid to cash management customers.  Long-term FHLB borrowing expense remained constant as there were no new long-term borrowings and a maturity of $1,400,000 at a rate of 2.02% at the end of the quarter.

 

Interest expense composition for the three months ended March 31, 2005 and 2004 is as follows:

 

 

 

For The Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

% Total

 

Deposits

 

$

1,194

 

53.1

%

$

1,135

 

53.4

%

$

59

 

5.2

%

Short-term borrowings

 

202

 

9.0

 

137

 

6.5

 

65

 

47.4

 

Long-term borrowings

 

853

 

37.9

 

852

 

40.1

 

1

 

0.1

 

Total interest expense

 

$

2,249

 

100.0

%

$

2,124

 

100.0

%

$

125

 

5.9

%

 

Net Interest Margin

 

The net interest margin (NIM) for the three months ended March 31, 2005 was 4.58% as compared to 4.48% for the corresponding period of 2004.  The increase in the NIM was the result of the yield on earning assets increasing 14 basis points (bp) to 6.39% for the three months ended March 31, 2005 as compared to 2004 offset by a 9 bp increase in interest bearing liabilities over the same period.  The increase in the yield on earning assets is attributable to a change in the mix of earning assets.  Over the time periods being compared, total average loans increased $47,759,000, while the lower yielding investment securities portfolio average balance decreased $31,228,000.  In addition, within the investment portfolio, average tax-exempt investment securities accounted for 27.3% of the portfolio for the three months ended March 31, 2005 as compared to 14.9% during the comparable period of 2004.  The NIM impact of the earning asset mix improvements and volume increase in total loans were reduced by rate increases on interest bearing liabilities.  The rates paid on deposit accounts remained relatively constant at 1.72% as

 

13



 

compared to 1.68% for the 2004 period.  Short-term borrowings, the majority of which is Federal Home Loan Bank (FHLB) advances, incurred a rate increase of 83 bp to 2.25% for the three months ended March 31, 2005.  The increase in the FHLB rate can be associated with the increase in prime rate from 4.00% during the three months ended March 31, 2004 to 5.75% at March 31, 2005.

 

Following is a schedule of average balances and associated yields for the three month periods ended March 31, 2005 and 2004:

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

3/31/2005

 

3/31/2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans(4)

 

$

1,421

 

$

21

 

6.05

%

$

1,446

 

$

21

 

5.95

%

All other loans

 

325,426

 

5,486

 

6.84

%

277,642

 

4,877

 

7.12

%

Total loans(1),(3)

 

326,847

 

5,507

 

6.83

%

279,088

 

4,898

 

7.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury

 

101,738

 

1,235

 

4.86

%

150,007

 

1,768

 

4.71

%

State & Political(4)

 

48,279

 

892

 

7.39

%

30,910

 

592

 

7.67

%

Other

 

26,546

 

326

 

4.91

%

26,874

 

276

 

4.11

%

Total securities

 

176,563

 

2,453

 

5.56

%

207,791

 

2,636

 

5.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

503,410

 

7,961

 

6.39

%

486,879

 

7,535

 

6.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

37,715

 

 

 

 

 

37,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

541,125

 

 

 

 

 

$

524,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

66,930

 

131

 

0.79

%

$

68,108

 

140

 

0.83

%

Super Now deposits

 

53,505

 

107

 

0.81

%

42,867

 

54

 

0.51

%

Money market deposits

 

32,560

 

91

 

1.13

%

35,439

 

97

 

1.11

%

Time deposits

 

128,968

 

865

 

2.72

%

127,957

 

844

 

2.68

%

Total Deposits

 

281,963

 

1,194

 

1.72

%

274,371

 

1,135

 

1.68

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

36,398

 

202

 

2.25

%

39,050

 

137

 

1.42

%

Other borrowings

 

75,754

 

853

 

4.57

%

74,449

 

852

 

4.64

%

Total interest bearing liabilities

 

394,115

 

$

2,249

 

2.31

%

387,870

 

$

2,124

 

2.22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

68,205

 

 

 

 

 

60,165

 

 

 

 

 

Other liabilities

 

4,200

 

 

 

 

 

5,050

 

 

 

 

 

Shareholders’ equity

 

74,605

 

 

 

 

 

71,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

541,125

 

 

 

 

 

$

524,419

 

 

 

 

 

Interest rate spread

 

 

 

 

 

4.07

%

 

 

 

 

4.03

%

Net interest income/margin

 

 

 

$

5,712

 

4.57

%

 

 

$

5,411

 

4.48

%

 


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

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

(3).  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.

 

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended March 31, 2005 and 2004.

 

14



 

 

 

For the Three Months Ended
March 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Total interest income

 

$

7,651

 

$

7,327

 

Total interest expense

 

2,249

 

2,124

 

 

 

 

 

 

 

Net interest income

 

$

5,402

 

$

5,203

 

Tax equivalent adjustment

 

310

 

208

 

 

 

 

 

 

 

Net interest income (fully taxable equivalent)

 

$

5,712

 

$

5,411

 

 

The following table sets forth the respective impact that both volume and rate changes have had on net interest income and the net interest margin for the three month periods ended March 31, 2005 and 2004:

 

 

 

For the Three Months Ended March 31,

 

 

 

2005 vs 2004
Increase (Decrease)
Due to

 

(In Thousands)

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

Loans

 

$

810

 

$

(201

)

$

609

 

Taxable investment securities

 

(588

)

105

 

(483

)

Tax-exempt investment securities

 

322

 

(22

)

300

 

Total interest-earning assets

 

544

 

(118

)

426

 

 

 

 

 

 

 

 

 

Interest expenses:

 

 

 

 

 

 

 

Savings deposits

 

(2

)

(7

)

(9

)

Super Now deposits

 

8

 

45

 

53

 

Money Market deposits

 

(8

)

2

 

(6

)

Time deposits

 

7

 

14

 

21

 

Short-term borrowings

 

(10

)

75

 

65

 

Long-term borrowings

 

15

 

(14

)

1

 

Total interest-bearing liabilities

 

10

 

115

 

125

 

 

 

 

 

 

 

 

 

Change in net interest income

 

$

534

 

$

(233

)

$

301

 

 

Provision for Loan Losses

 

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

 

15



 

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 it uses the best information available to make such determinations and that the allowance for loan losses is adequate at March 31, 2005, 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 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 judgment of information available to them at the time of their examination.

 

While determining the appropriate allowance level management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

 

The allowance for loan losses increased from $3,338,000 at December 31, 2004 to $3,399,000 at March 31, 2005.  At March 31, 2005, the allowance for loan losses was 1.04% of total loans compared to 1.01% of total loans at December 31, 2004.  Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.

 

The provision for loan losses totaled $180,000 for the three months ended March 31, 2005 as compared to $75,000 the same period in 2004.  The increase of $105,000 was the result of gross loan growth of $45,711,000, primarily in the commercial category, from March 2004 to March 2005.

 

An overall decrease of $382,000 was experienced in non-performing loans from December 31, 2004 to $1,343,000 on March 31, 2005 as a result of a 41% decrease of non-performing loans secured by 1-4 family residential properties.

 

Based upon this analysis, as well as the others noted above, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in its loan portfolio.

 

16



 

Non-interest Income

 

Total non-interest income for the quarter ended March 31, 2005 compared to the same period in 2004 increased $80,000.  Excluding net security gains, the increase from period to period was $14,000.  Insurance commissions increased as the Comprehensive Financial Group (d/b/a M Group) continued to gather new and build upon current relationships.  In addition, The M Group continues to add sales representatives to better cover and expand their foot print.  The decrease in service charge on deposit accounts is primarily the result of a decrease in insufficient fund charges.

 

Non-interest income composition for the three months ended March 31, 2005 and 2004 is as follows:

 

 

 

For The Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

% Total

 

Service charge on deposit accounts

 

$

455

 

21.5

%

$

476

 

23.4

%

$

(21

)

(4.4

)%

Net security gains

 

611

 

28.9

 

545

 

26.8

 

66

 

12.1

 

Bank owned life insurance

 

94

 

4.4

 

90

 

4.4

 

4

 

4.4

 

Insurance commissions

 

643

 

30.4

 

614

 

30.1

 

29

 

4.7

 

Other income

 

314

 

14.8

 

312

 

15.3

 

2

 

0.6

 

Total non-interest income

 

$

2,117

 

100.0

%

$

2,037

 

100.0

%

$

80

 

3.9

%

 

Non-interest Expenses

 

Total non-interest expenses increased $148,000 from the quarter ended March 31, 2004 as compared to the same period of 2005.  The increase in salaries and employee benefits was attributable to standard cost of living salary increases for employees.  Occupancy expenses increased do to increased utility costs, property taxes, and depreciation.  Other expenses increased primarily do to normal increases in business expenses and nonrecurring consultant fees related to employee recruitment. The decrease in furniture and equipment expenses was the result of decreased depreciation.

 

Non-interest expense composition for the three months ended March 31, 2005 and 2004 is as follows:

 

 

 

For The Three Months Ended

 

 

 

March 31, 2005

 

March 31, 2004

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

% Total

 

Salaries and employee benefits

 

$

2,020

 

55.9

%

$

1,979

 

57.1

%

$

41

 

2.1

%

Occupancy expense, net

 

291

 

8.0

 

243

 

7.0

 

48

 

19.8

 

Furniture and equipment expenses

 

221

 

6.1

 

265

 

7.6

 

(44

)

(16.6

)

Advertising expense

 

94

 

2.6

 

94

 

2.7

 

 

 

Pennsylvania shares tax

 

139

 

3.8

 

116

 

3.3

 

23

 

19.8

 

Other expense

 

856

 

23.6

 

776

 

22.3

 

80

 

10.3

 

Total non-interest expense

 

$

3,621

 

100.0

%

$

3,473

 

100.0

%

$

148

 

4.3

%

 

Provision for Income Taxes

 

Income taxes decreased $16,000 for the quarter ended March 31, 2005 compared to the same period of 2004.  The effective tax rates for the quarter ended March 31, 2005 and 2004 were

 

17



 

27.0% and 27.6%, respectively.  This decreasing effective tax rate is consistent with management’s repositioning of the investment portfolio from taxable investment securities to tax-exempt investment securities.

 

ASSET/LIABILITY MANAGEMENT

 

Cash

 

Cash and due from other financial institutions increased $4,718,000 from $12,626,000 at December 31, 2004.  The increase was the result of an increase in the cash letter (items in process of clearing between the bank and other financial institutions).

 

Loans

 

Total gross loans decreased $1,365,000 to $323,140,000 at March 31, 2005 from December 31, 2004.  The decrease is the result of residential and commercial real estate mortgages each declining approximately $2,000,000 and an increase of real estate construction loans of $2,522,000.

 

The allocation of the loan portfolio, by category, as of March 31, 2005 and December 31, 2004 are presented below:

 

(In Thousands)

 

March 31
2005

 

December 31
2004

 

Commercial and agricultural

 

$

30,154

 

$

30,103

 

Real estate mortgage:

 

 

 

 

 

Residential

 

145,479

 

147,461

 

Commercial

 

121,721

 

123,757

 

Construction

 

10,887

 

8,365

 

Installment loans to individuals

 

15,959

 

15,915

 

Subtotal

 

324,200

 

325,601

 

Less: Net deferred loan fees

 

1,060

 

1,096

 

Gross loans

 

$

323,140

 

$

324,505

 

 

Investments

 

Total investment securities decreased $6,341,000 as the principal cash flows from the portfolio at the end of March 2005 were not immediately reinvested as investment alternatives for the current rising rate environment were discussed.  Since December 31, 2004, tax-exempt bond holdings have increased as the portfolio is managed to maintain tax equivalent yield and liquidity, reduce

 

18



 

the overall corporate effective tax rate, and to invest in communities across the Commonwealth of Pennsylvania and the country.

 

During the three months ended March 31, 2005, $611,000 in net security gains were recognized from the $6,563,000 in net unrealized gains at December 31, 2004 for the entire investment portfolio.  The bond portfolio incurred a net realized loss of $7,000 as the portfolio was shifted slightly in light of the current rising rate environment.  The equity portfolio had recognized gains of $618,000 during the three months ended March 31, 2005.  The gains were the result of management’s intention to diversify, increase dividend yield, or to reduce ownership in companies that management felt had reached their full potential.

 

The amortized cost of investment securities and their approximate fair values are as follows:

 

19



 

 

 

March 31, 2005

 

(In Thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Available for Sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

96,971

 

$

85

 

$

(2,036

)

$

95,020

 

State and political securities

 

52,452

 

1,163

 

(347

)

53,268

 

Other debt securities

 

1,302

 

22

 

(52

)

1,272

 

Total debt securities

 

150,725

 

1,270

 

(2,435

)

149,560

 

Equity securities

 

24,547

 

4,244

 

(280

)

28,511

 

Total Investment Securities AFS

 

$

175,272

 

$

5,514

 

$

(2,715

)

$

178,071

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity (HTM)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

31

 

$

 

$

 

$

31

 

Other debt securities

 

278

 

 

(2

)

276

 

Total Investment Securities HTM

 

$

309

 

$

 

$

(2

)

$

307

 

 

 

 

December 31, 2004

 

(In Thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Available for Sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

104,248

 

$

207

 

$

(430

)

$

104,025

 

State and political securities

 

46,829

 

766

 

(527

)

47,068

 

Other debt securities

 

1,302

 

47

 

(7

)

1,342

 

Total debt securities

 

152,379

 

1,020

 

(964

)

152,435

 

Equity securities

 

25,221

 

6,579

 

(72

)

31,728

 

Total Investment Securities AFS

 

$

177,600

 

$

7,599

 

$

(1,036

)

$

184,163

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity (HTM)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

32

 

$

 

$

 

$

32

 

State and political securities

 

248

 

3

 

 

251

 

Other debt securities

 

278

 

 

 

278

 

Total Investment Securities HTM

 

$

558

 

$

3

 

$

 

$

561

 

 

Deposits

 

At March 31, 2005, total deposits were $354,301,000, a decrease of $2,535,000 from December 31, 2004.  Non time deposits decreased $6,499,000 from December 31, 2004 with half of the decrease occurring in the NOW account category.  The increase in time deposits of $3,964,000 is the result of an emphasis to obtain fixed rate customer funding, with a maturity of two to four years, ahead of future rate increases.

 

20



 

Deposit balances and their changes for the periods being discussed follow:

 

 

 

March 31, 2005

 

December 31, 2004

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

% Total

 

Demand deposits

 

$

72,708

 

20.5

%

$

74,050

 

20.8

%

$

(1,342

)

(1.8

)%

NOW Accounts

 

51,831

 

14.6

 

55,211

 

15.5

 

(3,380

)

(6.1

)

Insured MMDA

 

31,310

 

8.8

 

32,377

 

9.1

 

(1,067

)

(3.3

)

Savings deposits

 

69,097

 

19.5

 

69,807

 

19.6

 

(710

)

(1.0

)

Time deposits

 

129,355

 

36.6

 

125,391

 

35.0

 

3,964

 

3.2

 

Total deposits

 

$

354,301

 

100.0

%

$

356,836

 

100.0

%

$

(2,535

)

(0.7

)%

 

Borrowed Funds

 

Total borrowed funds decreased slightly to $111,740,000 at March 31, 2005 as compared to December 31, 2004.  The decrease of $613,000 was the result of long term borrowings decreasing $1,400,000, due to maturity, offset by an increase in short-term FHLB borrowings.   Short-term borrowings are being utilized to supplement deposits in the day to day funding of the loan portfolio and normal operations.

 

(In Thousands)

 

March 31
2005

 

December 31
2004

 

 

 

 

 

 

 

Short-term borrowings:

 

 

 

 

 

FHLB repurchase agreements

 

$

23,740

 

$

22,630

 

Securities sold under agreement to repurchase

 

13,522

 

13,845

 

Total short-term borrowings

 

37,262

 

36,475

 

 

 

 

 

 

 

Long-term borrowings, FHLB

 

74,478

 

75,878

 

Total borrowed funds

 

$

111,740

 

$

112,353

 

 

Capital

 

The adequacy of the Company’s capital is reviewed on an ongoing basis with reference to the size, composition and quality of the Company’s resources and regulatory guidelines.  Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets and preserve high quality credit ratings.

 

Bank holding companies are required to comply with the Federal Reserve Board’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.  Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total risk-based, Tier I risk-based and Tier I leverage capital requirements. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act (FDICIA) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” To be classified as “well capitalized”,

 

21



 

Total risk-based, Tier I risked-based and Tier I leverage capital ratios must be at least 10%, 6%, and 5%, respectively.

 

Capital ratios as of March 31, 2005 and 2004 were as follows:

 

 

 

2005

 

2004

 

(In Thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital

 

 

 

 

 

 

 

 

 

(to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

72,991

 

22.0

%

$

68,069

 

23.3

%

For Capital Adequacy Purposes

 

26,523

 

8.0

 

23,385

 

8.0

 

To Be Well Capitalized

 

33,154

 

10.0

 

29,232

 

10.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital

 

 

 

 

 

 

 

 

 

(to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

67,809

 

20.5

%

$

61,981

 

21.2

%

For Capital Adequacy Purposes

 

13,261

 

4.0

 

11,693

 

4.0

 

To Be Well Capitalized

 

19,892

 

6.0

 

17,539

 

6.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital

 

 

 

 

 

 

 

 

 

(to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

67,809

 

12.8

%

$

61,981

 

12.1

%

For Capital Adequacy Purposes

 

21,231

 

4.0

 

20,482

 

4.0

 

To Be Well Capitalized

 

26,538

 

5.0

 

27,153

 

5.0

 

 

Liquidity and Interest Rate Sensitivity

 

The asset/liability committee addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio.  In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.

 

The following liquidity measures are monitored and kept within the limits cited.

 

1.  Net Loans to Total Assets,  70% maximum

 

2.  Net Loans to Total Deposits, 92.5% maximum

 

3.  Net Loans to Core Deposits, 100% maximum

 

4.  Investments to Total Assets, 40% maximum

 

5.  Investments to Total Deposits, 50% maximum

 

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6.  Total Liquid Assets to Total Assets, 25% minimum

 

7.  Total Liquid Assets to Total Liabilities, 25% minimum

 

8.     Net Core Funding Dependence, 35% maximum

 

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 shareholders.  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 Bank, 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, loan payments, and investment security payments.  The primary sources of funds are deposits, principal and interest payments on loans and investment 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 $237,657,000.  In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $10,500,000. Management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs.  Federal Home Loan Bank advances totaled $98,218,000 as of March 31, 2005.

 

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

 

23



 

(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, 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.

 

There have been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s Form 10-K for the period ended December 31, 2004.

 

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 which are not measured by a price index.

 

In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01 (b) (8) of Regulation S-X.

 

Item 3.  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 by an independent third party.  There have been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s SEC 10-K for the period ended December 31, 2004.  Additional information and details are provided in the Liquidity and Interest Rate 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 in a timely manner when the market interest rate outlook changes.

 

24



 

Item 4.  Controls and Procedures

 

An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Principal Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Principal Accounting Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

None.

 

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

 

The Company announced a repurchase program on August 10, 2000 which was approved by the Board of Directors on August 8, 2000 for the repurchase of 171,600 shares which will expire on August 8, 2005.  There were no repurchases of the Company’s common stock during the quarter ended March 31, 2005.

 

Item 3.  Defaults Upon Senior Securities

 

None

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None

 

Item 5.  Other Information

 

None

 

Item 6.  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).

(31) (i)

 

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

(31) (ii)

 

Rule 13a-14(a) Certification of Principal Accounting Officer

(32) (i)

 

Certification of Chief Executive Officer Section 1350

(32) (ii)

 

Certification of Principal Accounting Officer Section 1350

 

25



 

SIGNATURES

 

Pursuant to the requirements 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.

 

PENNS WOODS BANCORP, INC.

(Registrant)

 

 

 

 

Date: May 10, 2005

/s/ Ronald A. Walko

 

 

Ronald A. Walko, President and Chief Executive Officer

 

 

 

 

Date: May 10, 2005

/s/ Brian L. Knepp

 

 

Brian L. Knepp, Vice President of Finance

 

26



 

EXHIBIT INDEX

 

Exhibit 31(i)

 

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

Exhibit 31(ii)

 

Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Accounting Officer

Exhibit 32(i)

 

Section 1350 Certification of Chief Executive Officer

Exhibit 32(ii)

 

Section 1350 Certification of Principal Accounting Officer

 

27