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PENNS WOODS BANCORP INC - Quarter Report: 2007 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

 

Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange

 

 

Act of 1934

 

 

 

 

 

for the Quarterly Period Ended September 30, 2007.

 

 

 

o

 

Transition report pursuant to Section 13 or 15 (d) of the Exchange Act

 

 

 

 

 

for the Transition Period from                              to                             .

 

No. 0-17077

(Commission File Number)

 

PENNS WOODS BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA

 

23-2226454

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

300 Market Street, Williamsport, Pennsylvania

 

17701-0967

(Address of principal executive offices)

 

(Zip Code)

 

(570) 322-1111

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x        NO   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o              NO x

 

On November 1, 2007 there were 3,877,534 shares of the Registrant’s common stock outstanding.

 

 



 

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

 

 

Page

 

 

 

 

Number

 

 

 

 

 

Part I

 

Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheet (unaudited) as of September 30, 2007 and December 31, 2006

 

3

 

 

 

 

 

Consolidated Statement of Income (unaudited) for the Three and Nine Months ended September 30, 2007 and 2006

 

4

 

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Nine Months ended September 30, 2007 and 2006

 

5

 

 

 

 

 

Consolidated Statement of Comprehensive Income (unaudited) for the Three and Nine Months ended September 30, 2007 and 2006

 

5

 

 

 

 

 

Consolidated Statement of Cash Flows (unaudited) for the Nine Months ended September 30, 2007 and 2006

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

Item 2.

 

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

 

13

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

Item 4.

 

Controls and Procedures

 

31

 

 

 

 

 

Part II

 

Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

32

Item 1A.

 

Risk Factors

 

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

32

Item 3.

 

Defaults Upon Senior Securities

 

32

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

32

Item 5.

 

Other Information

 

32

Item 6.

 

Exhibits

 

33

Signatures

 

34

Exhibit Index and Exhibits

 

35

 

2



 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

September 30,

 

December 31,

 

(In Thousands, Except Share Data)

 

2007

 

2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Noninterest-bearing balances

 

$

13,228

 

$

15,348

 

Interest-bearing deposits in other financial institutions

 

15

 

25

 

Total cash and cash equivalents

 

13,243

 

15,373

 

 

 

 

 

 

 

Investment securities, available for sale, at fair value

 

204,758

 

185,200

 

Investment securities held to maturity (fair value of $278 and $286)

 

276

 

283

 

Loans held for sale

 

6,503

 

3,716

 

Loans

 

357,715

 

360,384

 

Less: Allowance for loan losses

 

4,092

 

4,185

 

Loans, net

 

353,623

 

356,199

 

Premises and equipment, net

 

6,841

 

6,737

 

Accrued interest receivable

 

3,274

 

2,939

 

Bank-owned life insurance

 

12,275

 

11,346

 

Investment in limited partnerships

 

4,447

 

4,950

 

Goodwill

 

3,032

 

3,032

 

Other assets

 

5,057

 

2,510

 

TOTAL ASSETS

 

$

613,329

 

$

592,285

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Interest-bearing deposits

 

$

331,864

 

$

322,031

 

Noninterest-bearing deposits

 

72,990

 

73,160

 

Total deposits

 

404,854

 

395,191

 

 

 

 

 

 

 

Short-term borrowings

 

44,793

 

34,697

 

Long-term borrowings, Federal Home Loan Bank (FHLB)

 

86,378

 

82,878

 

Accrued interest payable

 

1,838

 

1,532

 

Other liabilities

 

3,914

 

3,393

 

TOTAL LIABILITIES

 

541,777

 

517,691

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Common stock, par value $8.33, 10,000,000 shares authorized; 4,006,084 and 4,003,514 shares issued

 

33,384

 

33,362

 

Additional paid-in capital

 

17,869

 

17,810

 

Retained earnings

 

27,552

 

25,783

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

Net unrealized (loss) gain on available for sale securities

 

(1,861

)

2,139

 

Defined benefit plan

 

(579

)

(579

)

Less: Treasury stock at cost, 128,802 and 102,772 shares

 

(4,813

)

(3,921

)

TOTAL SHAREHOLDERS’ EQUITY

 

71,552

 

74,594

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

613,329

 

$

592,285

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In Thousands, Except Per Share Data)

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

Loans including fees

 

$

6,621

 

$

6,355

 

$

19,560

 

$

18,250

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

964

 

874

 

2,711

 

2,691

 

Tax-exempt

 

1,108

 

1,004

 

3,271

 

2,993

 

Dividend and other interest income

 

284

 

314

 

907

 

982

 

TOTAL INTEREST AND DIVIDEND INCOME

 

8,977

 

8,547

 

26,449

 

24,916

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

2,835

 

2,447

 

8,215

 

6,252

 

Short-term borrowings

 

368

 

306

 

1,100

 

1,221

 

Long-term borrowings, FHLB

 

909

 

954

 

2,735

 

2,844

 

TOTAL INTEREST EXPENSE

 

4,112

 

3,707

 

12,050

 

10,317

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

4,865

 

4,840

 

14,399

 

14,599

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

10

 

89

 

60

 

485

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

4,855

 

4,751

 

14,339

 

14,114

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

Deposit service charges

 

546

 

596

 

1,654

 

1,773

 

Securities gains, net

 

––

 

561

 

619

 

1,385

 

Bank-owned life insurance

 

109

 

94

 

310

 

272

 

Gain on sale of loans

 

282

 

264

 

654

 

624

 

Insurance commissions

 

625

 

502

 

1,613

 

1,732

 

Other

 

444

 

370

 

1,316

 

1,154

 

TOTAL NON-INTEREST INCOME

 

2,006

 

2,387

 

6,166

 

6,940

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,330

 

2,174

 

6,912

 

6,620

 

Occupancy, net

 

319

 

308

 

987

 

826

 

Furniture and equipment

 

267

 

309

 

850

 

894

 

Pennsylvania shares tax

 

160

 

151

 

482

 

447

 

Other

 

1,354

 

1,172

 

3,667

 

3,356

 

TOTAL NON-INTEREST EXPENSE

 

4,430

 

4,114

 

12,898

 

12,143

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX PROVISION

 

2,431

 

3,024

 

7,607

 

8,911

 

INCOME TAX PROVISION

 

109

 

560

 

669

 

1,558

 

NET INCOME

 

$

2,322

 

$

2,464

 

$

6,938

 

$

7,353

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

 

$

0.60

 

$

0.63

 

$

1.78

 

$

1.87

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - DILUTED

 

$

0.60

 

$

0.63

 

$

1.78

 

$

1.87

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC

 

3,881,488

 

3,927,261

 

3,889,310

 

3,942,533

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED

 

3,881,676

 

3,927,740

 

3,889,573

 

3,943,016

 

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PER SHARE

 

$

0.45

 

$

0.44

 

$

1.33

 

$

1.29

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

COMMON

 

ADDITIONAL

 

 

 

OTHER

 

 

 

TOTAL

 

 

 

STOCK

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

TREASURY

 

SHAREHOLDERS’

 

(In Thousands Except Per Share Data)

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME (LOSS)

 

STOCK

 

EQUITY

 

Balance, December 31, 2006

 

4,003,514

 

$

33,362

 

$

17,810

 

$

25,783

 

$

1,560

 

$

(3,921

)

$

74,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

6,938

 

 

 

 

 

6,938

 

Unrealized loss on investments available for sale, net of reclassification adjustment, net of income tax benefit of $2,061

 

 

 

 

 

 

 

 

 

(4,000

)

 

 

(4,000

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,938

 

Dividends declared, ($1.33 per share)

 

 

 

 

 

 

 

(5,169

)

 

 

 

 

(5,169

)

Purchase of treasury stock (26,030 shares)

 

 

 

 

 

 

 

 

 

 

 

(892

)

(892

)

Stock options exercised

 

330

 

3

 

5

 

 

 

 

 

 

 

8

 

Common shares issued for employee stock purchase plan

 

2,240

 

19

 

54

 

 

 

 

 

 

 

73

 

Balance, Septamber 30, 2007

 

4,006,084

 

$

33,384

 

$

17,869

 

$

27,552

 

$

(2,440

)

$

(4,813

)

$

71,552

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

COMMON

 

ADDITIONAL

 

 

 

OTHER

 

 

 

TOTAL

 

 

 

STOCK

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

TREASURY

 

SHAREHOLDERS’

 

(In Thousands Except Per Share Data)

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME

 

STOCK

 

EQUITY

 

Balance, December 31, 2005

 

4,002,159

 

$

33,351

 

$

17,772

 

$

22,938

 

$

850

 

$

(992

)

$

73,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

7,353

 

 

 

 

 

7,353

 

Unrealized gain on investments available for sale, net of reclassification adjustment, net of income tax of $424

 

 

 

 

 

 

 

 

 

824

 

 

 

824

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

8,177

 

Dividends declared, ($1.29 per share)

 

 

 

 

 

 

 

(5,083

)

 

 

 

 

(5,083

)

Purchase of treasury stock (60,000 shares)

 

 

 

 

 

 

 

 

 

 

 

(2,303

)

(2,303

)

Common shares issued for employee stock purchase plan

 

421

 

3

 

12

 

 

 

 

 

 

 

15

 

Balance, September 30, 2006

 

4,002,580

 

$

33,354

 

$

17,784

 

$

25,208

 

$

1,674

 

$

(3,295

)

$

74,725

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In Thousands)

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

$

2,322

 

 

 

$

2,464

 

 

 

$

6,938

 

 

 

$

7,353

 

Change in net unrealized gains (losses) on available for sale securities

 

2,415

 

 

 

5,026

 

 

 

(5,442

)

 

 

2,633

 

 

 

Less: Reclassification adjustment for net gains included in net income

 

––

 

 

 

561

 

 

 

619

 

 

 

1,385

 

 

 

Other comprehensive income (loss) before tax

 

 

 

2,415

 

 

 

4,465

 

 

 

(6,061

)

 

 

1,248

 

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

 

 

 

821

 

 

 

1,518

 

 

 

(2,061

)

 

 

424

 

Other comprehensive income (loss), net of tax

 

 

 

1,594

 

 

 

2,947

 

 

 

(4,000

)

 

 

824

 

Comprehensive income

 

 

 

$

3,916

 

 

 

$

5,411

 

 

 

$

2,938

 

 

 

$

8,177

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(In Thousands)

 

2007

 

2006

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net Income

 

$

6,938

 

$

7,353

 

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

 

 

 

 

 

Depreciation

 

523

 

549

 

Provision for loan losses

 

60

 

485

 

Accretion and amortization of investment security discounts and premiums

 

(738

)

(575

)

Securities gains, net

 

(619

)

(1,385

)

Originations of loans held for sale

 

(33,903

)

(28,031

)

Proceeds of loans held for sale

 

31,770

 

27,454

 

Gain on sale of loans

 

(654

)

(624

)

Earnings on bank-owned life insurance

 

(310

)

(272

)

Other, net

 

303

 

132

 

Net cash provided by operating activities

 

3,370

 

5,086

 

INVESTING ACTIVITIES

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

Proceeds from sales

 

39,226

 

35,879

 

Proceeds from calls and maturities

 

4,290

 

5,445

 

Purchases

 

(67,067

)

(31,938

)

Investment securities held to maturity:

 

 

 

 

 

Proceeds from calls and maturities

 

11

 

25

 

Purchases

 

––

 

(25

)

Net decrease (increase) in loans

 

2,516

 

(18,288

)

Acquisition of bank premises and equipment

 

(627

)

(767

)

Proceeds from the sale of foreclosed assets

 

66

 

83

 

Purchase of bank-owned life insurance

 

(619

)

(212

)

Investment in limited partnership

 

––

 

(1,535

)

Proceeds from redemption of regulatory stock

 

3,045

 

3,177

 

Purchases of regulatory stock

 

(3,620

)

(2,034

)

Net cash used for investing activities

 

(22,779

)

(10,190

)

FINANCING ACTIVITIES

 

 

 

 

 

Net increase in interest-bearing deposits

 

9,833

 

51,160

 

Net decrease in noninterest-bearing deposits

 

(170

)

(1,730

)

Proceeds of long-term borrowings, FHLB

 

20,000

 

––

 

Repayment of long-term borrowings, FHLB

 

(16,500

)

(1,600

)

Net increase (decrease) in short-term borrowings

 

10,096

 

(35,977

)

Dividends paid

 

(5,169

)

(5,083

)

Issuance of common stock

 

73

 

15

 

Stock options exercised

 

8

 

––

 

Purchase of treasury stock

 

(892

)

(2,303

)

Net cash provided by financing activities

 

17,279

 

4,482

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(2,130

)

(622

)

CASH AND CASH EQUIVALENTS, BEGINNING

 

15,373

 

14,090

 

CASH AND CASH EQUIVALENTS, ENDING

 

$

13,243

 

$

13,468

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

11,744

 

$

9,915

 

Income taxes paid

 

1,185

 

2,075

 

Transfer of loans to foreclosed real estate

 

––

 

51

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



 

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 on Form 10-K for the year ended December 31, 2006.

 

The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis.  These policies are presented on pages 40 thru 46 of the Annual Report on Form 10-K for the year ended December 31, 2006.

 

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

 

Note 2.   Recent Accounting Pronouncements

 

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 155, Accounting for Certain Hybrid Instruments, as an amendment of FASB Statements No. 133 and 140. FAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of Financial Assets. This Statement, which is an amendment to FAS No. 140, will simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. Specifically, FAS No. 156 addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like (offset) accounting. FAS No. 156 also clarifies when an obligation to service financial assets

 

7



 

should be separately recognized as a servicing asset or a servicing liability, requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable, and permits an entity with a separately recognized servicing asset or servicing liability to choose either of the amortization or fair value methods for subsequent measurement. The provisions of FAS No. 156 are effective as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

In September 2006, the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement  Plans, an amendment of FASB Statements  No. 87, 88, 106 and 132(R). FAS No. 158 requires that a company  recognize the overfunded or underfunded  status of its defined benefit post  retirement  plans (other than  multiemployer  plans) as an asset or liability in its statement of financial  position and that it recognize changes  in the funded  status in the year in which the  changes  occur  through other  comprehensive  income. FAS No. 158 also requires the  measurement  of defined  benefit  plan  assets and  obligations  as of the fiscal  year end,  in addition  to  footnote  disclosures. On December 31, 2006, the Company adopted FAS No. 158, except for the measurement provisions, which are effective for fiscal years ending after December 15, 2008. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal

 

8



 

years beginning after December 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations or financial condition.

 

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-5 (“EITF 06-5”), Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance. EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations or financial condition.

 

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the EITF will have on the Company’s results of operations or financial condition.

 

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was

 

9



 

reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The impact of the adoption of the EITF will not have an impact on the Company’s financial condition.

 

Note 3. 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 September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

4,005,583

 

4,002,340

 

4,004,778

 

4,002,220

 

 

 

 

 

 

 

 

 

 

 

Average treasury stock shares

 

(124,095

)

(75,079

)

(115,468

)

(59,687

)

 

 

 

 

 

 

 

 

 

 

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

 

3,881,488

 

3,927,261

 

3,889,310

 

3,942,533

 

 

 

 

 

 

 

 

 

 

 

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

 

188

 

479

 

263

 

483

 

 

 

 

 

 

 

 

 

 

 

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

 

3,881,676

 

3,927,740

 

3,889,573

 

3,943,016

 

 

Options to purchase 8,276 and 9,002 shares of common stock at the price of $40.29 were outstanding during the three and nine months ended September 30, 2007 and 2006, respectively, 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 September 30, 2007 and 2006, respectively.

 

Note 4.   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 Annual Report on Form 10-K for the year ended December 31, 2006.

 

The following sets forth the components of the net periodic benefit cost of the domestic non-contributory defined benefit plan for the three and nine months ended September 30, 2007 and 2006, respectively:

 

10



 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In Thousands)

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

117

 

$

117

 

$

350

 

$

350

 

Interest cost

 

121

 

108

 

364

 

325

 

Expected return on plan assets

 

(140

)

(121

)

(421

)

(364

)

Amortization of transition

 

(1

)

(1

)

(2

)

(2

)

Amortization of prior service cost

 

6

 

6

 

19

 

19

 

Amortization of net loss

 

 

6

 

 

17

 

Net periodic cost

 

$

103

 

$

115

 

$

310

 

$

345

 

 

Employer Contributions

 

The Company previously disclosed in its consolidated financial statements, included in the Annual Report on Form 10-K for the year ended December 31, 2006, that it expected to contribute $500,000 to its defined benefit plan in 2007.  As of September 30, 2007, a contribution in the amount of $580,000 was made for the 2006 plan year with no additional contributions anticipated.

 

Note 5.   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 are primarily comprised of 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.

 

Outstanding financial instruments with off balance sheet risk are as follows:

 

 

 

September 30,

 

December 31,

 

(In Thousands)

 

2007

 

2006

 

Commitments to extend credit

 

$

71,588

 

$

61,736

 

Standby letters of credit

 

1,345

 

1,033

 

 

11



 

Note 6.   Reclassification of Comparative Amounts

 

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

 

Note 7.   Employee Stock Purchase Plan

 

Effective April 26, 2006, the Company implemented the Penns Woods Bancorp, Inc. 2006 Employee Stock Purchase Plan (“Plan”). The Plan is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,000,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. During the nine months ended September 30, 2007 and 2006, there were 2,240 and 421 shares issued under the plan, respectively.

 

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, with 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.

 

12



 

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

 

EARNINGS SUMMARY

 

Comparison of the Three and Nine Months Ended September 30, 2007 and 2006

 

Summary Results

 

Net income for the three months ended September 30, 2007 was $2,322,000 compared to $2,464,000 for the same period of 2006. Basic and diluted earnings per share for the three months ended September 30, 2007 were $0.60 as compared to $0.63 for the three months ended September 30, 2006. Return on average assets and return on average equity were 1.57% and 13.21% for the three months ended September 30, 2007 as compared to 1.71% and 13.41% for the corresponding period of 2006. Net income from core operations (“operating earnings”) for the three months ended September 30, 2007 and 2006, which excludes net after-tax securities gains of $370,000 for the 2006 period, increased $228,000 to $2,322,000 for the three months ended September 30, 2007 as compared to $2,094,000 for the same period of 2006. Operating earnings per share for the three months ended September 30, 2007 increased 13.2% or $0.07 to $0.60 basic and dilutive as compared to the three months ended September 30, 2006. Operating earnings per share for the three months ended September 30, 2007 represent a $0.05 basic and dilutive increase from the previous three month period as core earnings continued to build upon the $0.02 increase from the first to second quarters of 2007.

 

The nine months ended September 30, 2007 generated net income of $6,938,000 compared to $7,353,000 for the same period of 2006. Earnings per share, basic and diluted, for the nine months ended September 30, 2007 were $1.78 as compared to $1.87 for the comparable period of 2006. Return on average assets and return on average equity were 1.57% and 12.63% for the nine months ended September 30, 2007 as compared to 1.71% and 13.20% for the corresponding period of 2006. Operating earnings for the nine months ended September 30, 2007 and 2006, which excludes net after-tax securities gains of $409,000 and $914,000, respectively, increased $90,000 to $6,529,000 for the 2007 period compared to $6,439,000 for the 2006 period. Operating earnings per share, basic and dilutive, increased 3.1% to $1.68 for the nine months ended September 30, 2007 as compared to $1.63 for the comparable period of 2006.

 

(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 by 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. For purposes of this Quarterly Report on Form 10-Q, net income from core operations means net income adjusted to exclude after-tax net securities gains. 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.)

 

13



 

Interest Income

 

Interest income for the three months ended September 30, 2007 increased $430,000 to $8,977,000 as compared to $8,547,000 for the same period of 2006. The increase in interest income was primarily the result of growth in average loans of $5,736,000 coupled with an 18 basis point (“bp”) increase in loan portfolio yields for the three months ended September 30, 2007 over the same period of 2006. Over the same time frame, the average balance of investment securities and interest bearing deposits increased $5,693,000 with the portfolio yield increasing 28 bp resulting in a $164,000 increase in interest income. On a taxable equivalent basis, the interest income from the investment portfolio and interest bearing deposits increased $218,000 due to the investment portfolio being strategically shifted toward tax-exempt instruments. The decrease in dividends received is the result of a decrease in equity investments.

 

During the nine months ended September 30, 2007, interest income was $26,449,000, an increase of $1,533,000 over the same period in 2006. The reasons for the 6.2% growth in interest income for the nine month period are identical to those for the three month period ending September 30, 2007 discussed above. The growth in average loans of $11,727,000 coupled with a 26 bp increase in the loan portfolio yield resulted in an increase of $1,310,000 in loan interest and fee income. Average investment securities and interest bearing deposits remained stable, however, interest income increased $223,000 due to a 24 bp increase in yield. The increase in yield was due to an increase in yield on taxable securities as portfolio cash flow was reinvested into higher yielding bonds over the past year. The asset allocation between loans and the investment portfolio composition resulted in taxable equivalent interest income increasing $1,673,000 for the nine months ended September 30, 2007 as compared to the same period of 2006.

 

Interest income composition for the three and nine months ended September 30, 2007 and 2006 was as follows:

 

14



 

 

 

 

For The Three Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Loans including fees

 

$

6,621

 

73.8

%

$

6,355

 

74.4

%

$

266

 

4.2

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

964

 

10.7

 

874

 

10.2

 

90

 

10.3

 

Tax-exempt

 

1,108

 

12.3

 

1,004

 

11.7

 

104

 

10.4

 

Dividend and other interest income

 

284

 

3.2

 

314

 

3.7

 

(30

)

(9.6

)

Total interest income

 

$

8,977

 

100.0

%

$

8,547

 

100.0

%

$

430

 

5.0

%

 

 

 

For The Nine Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Loans including fees

 

$

19,560

 

74.0

%

$

18,250

 

73.3

%

$

1,310

 

7.2

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

2,711

 

10.2

 

2,691

 

10.8

 

20

 

0.7

 

Tax-exempt

 

3,271

 

12.4

 

2,993

 

12.0

 

278

 

9.3

 

Dividend and other interest income

 

907

 

3.4

 

982

 

3.9

 

(75

)

(7.6

)

Total interest income

 

$

26,449

 

100.0

%

$

24,916

 

100.0

%

$

1,533

 

6.2

%

 

Interest Expense

 

Interest expense for the three months ended September 30, 2007 increased $405,000 to $4,112,000 as compared to $3,707,000 for the same period of 2006. The increased expense associated with deposits is primarily the result of rate increases for time deposits, which are comprised of various certificates of deposit (“CD”) accounts, from the three months ended September 30, 2006 to the corresponding period of 2007. Factors that led to the rate increases include, but are not limited to, competitive market pricing pressure and campaigns conducted to attract 8 to 12 month maturity CDs that provide greater funding flexibility. The increase in CD interest rates has exceeded the increase for other deposit accounts. This has led to a shift of a portion of the money market and savings deposit portfolios into higher yielding CDs. Borrowing interest expense on FHLB advances and customer repurchase accounts increased $17,000 as rates paid increased 4 bp, while the average balance of borrowed funds remained constant.

 

Interest expense for the nine months ended September 30, 2007 increased $1,733,000 to $12,050,000 from $10,317,000 for the comparable period of 2006. Interest on deposits accounted for $1,963,000 of the increase due to the reasons noted in the above three month analysis. Borrowing costs declined primarily due to the previously noted CD campaigns that allowed for average FHLB advances to be reduced for the nine months ended September 30, 2007 as compared to the same period of 2006.

 

Interest expense composition for the three and nine months ended September 30, 2007 and 2006 was as follows:

 

15



 

 

 

For The Three Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposits

 

$

2,835

 

68.9

%

$

2,447

 

66.0

%

$

388

 

15.9

%

Short-term borrowings

 

368

 

9.0

 

306

 

8.3

 

62

 

20.3

 

Long-term borrowings, FHLB

 

909

 

22.1

 

954

 

25.7

 

(45

)

(4.7

)

Total interest expense

 

$

4,112

 

100.0

%

$

3,707

 

100.0

%

$

405

 

10.9

%

 

 

 

For The Nine Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposits

 

$

8,215

 

68.2

%

$

6,252

 

60.6

%

$

1,963

 

31.4

%

Short-term borrowings

 

1,100

 

9.1

 

1,221

 

11.8

 

(121

)

(9.9

)

Long-term borrowings, FHLB

 

2,735

 

22.7

 

2,844

 

27.6

 

(109

)

(3.8

)

Total interest expense

 

$

12,050

 

100.0

%

$

10,317

 

100.0

%

$

1,733

 

16.8

%

 

Net Interest Margin

 

The net interest margin (“NIM”) for the three months ended September 30, 2007 was 3.98% as compared to 4.00% for the corresponding period of 2006 and increased slightly from 3.95% for the three months ended June 30, 2007. The decrease in the NIM for the three months ended September 30, 2007 compared to the same period in 2006 was due to the cost of interest bearing liabilities continuing to increase at a rate greater than the increase in the yield on earning assets as has been the trend over the past twelve months. The negative impact of the disparity between the asset yield increases and the liability rate increases, however, declined for the three months ended September 30, 2007 as compared to the same period of 2006. Average loan growth of $5,736,000 and a shift in the investment portfolio toward tax-exempt bonds paved the way for the increase in yield on earning assets of 21 bp for the three month period ended September 2007 as compared to 2006. The average investment securities portfolio increased by $6,088,000, as the tax-exempt segment increased to $95,383,000 at September 30, 2007 as compared to $91,234,000 at September 30, 2006. The growth in tax-exempt bonds was part of the Company’s tax strategy and was strategically undertaken to provide the cash flow and yield desired from the portfolio as a whole. The increase in the cost of interest bearing liabilities to 3.67% from 3.42% was driven primarily by the cost of time deposits increasing 48 bp for the three months ended September 30, 2007 as compared to the previous year, while the average balance of time deposits increased $17,503,000. The increase in cost of time deposits was impacted by the Federal Open Market Committee rate increases during 2006 of 100 bp, utilization of brokered deposits, and our strategic decision to gather time deposits as part of marketing campaigns associated with a branch opening and branch anniversaries in 2006 and 2007

 

The NIM for the nine months ended September 30, 2007 was 3.96% as compared to 4.06% for the corresponding period of 2006. The decrease in the NIM was the result of the previously mentioned growth and change in mix of the earnings assets offset by increased rates paid on interest bearing liabilities and growth in the average CD portfolio of $29,282,000.

 

16



 

Following is a schedule of average balances and associated yields for the three and nine month periods ended September 30, 2007 and 2006:

 

 

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

(In Thousands)

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

7,652

 

$

118

 

6.12

%

$

8,275

 

$

127

 

6.09

%

All other loans

 

354,032

 

6,543

 

7.33

%

347,673

 

6,271

 

7.16

%

Total loans

 

361,684

 

6,661

 

7.31

%

355,948

 

6,398

 

7.13

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

91,788

 

1,247

 

5.43

%

89,849

 

1,181

 

5.26

%

Tax-exempt investment securities

 

95,383

 

1,679

 

7.04

%

91,234

 

1,521

 

6.67

%

Total securities

 

187,171

 

2,926

 

6.25

%

181,083

 

2,702

 

5.97

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

40

 

1

 

9.92

%

435

 

7

 

6.38

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

548,895

 

9,588

 

6.95

%

537,466

 

9,107

 

6.74

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

43,706

 

 

 

 

 

42,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

592,601

 

 

 

 

 

$

579,508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

60,262

 

114

 

0.75

%

$

63,081

 

142

 

0.89

%

Super Now deposits

 

46,531

 

153

 

1.30

%

47,071

 

170

 

1.43

%

Money market deposits

 

23,183

 

131

 

2.24

%

23,300

 

131

 

2.23

%

Time deposits

 

203,690

 

2,437

 

4.75

%

186,187

 

2,004

 

4.27

%

Total deposits

 

333,666

 

2,835

 

3.37

%

319,639

 

2,447

 

3.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

32,910

 

368

 

4.44

%

27,255

 

306

 

4.45

%

Long-term borrowings, FHLB

 

77,791

 

909

 

4.64

%

82,878

 

954

 

4.57

%

Total borrowings

 

110,701

 

1,277

 

4.58

%

110,133

 

1,260

 

4.54

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

444,367

 

4,112

 

3.67

%

429,772

 

3,707

 

3.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

70,689

 

 

 

 

 

69,660

 

 

 

 

 

Other liabilities

 

7,249

 

 

 

 

 

6,596

 

 

 

 

 

Shareholders’ equity

 

70,296

 

 

 

 

 

73,480

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

592,601

 

 

 

 

 

$

579,508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.28

%

 

 

 

 

3.32

%

Net interest income/margin

 

 

 

$

5,476

 

3.98

%

 

 

$

5,400

 

4.00

%

 


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.

 

17



 

 

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

(In Thousands)

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

7,913

 

$

365

 

6.17

%

$

8,155

 

$

377

 

6.18

%

All other loans

 

353,219

 

19,320

 

7.31

%

341,250

 

18,001

 

7.05

%

Total loans

 

361,132

 

19,685

 

7.29

%

349,405

 

18,378

 

7.03

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

85,930

 

3,600

 

5.59

%

93,848

 

3,664

 

5.21

%

Tax-exempt securities

 

99,497

 

4,956

 

6.64

%

90,972

 

4,535

 

6.65

%

Total securities

 

185,427

 

8,556

 

6.15

%

184,820

 

8,199

 

5.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

431

 

18

 

5.58

%

161

 

9

 

7.47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

546,990

 

28,259

 

6.90

%

534,386

 

26,586

 

6.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

42,390

 

 

 

 

 

39,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

589,380

 

 

 

 

 

$

574,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

59,726

 

329

 

0.74

%

$

63,150

 

398

 

0.84

%

Super Now deposits

 

46,309

 

455

 

1.31

%

47,835

 

488

 

1.36

%

Money market deposits

 

24,362

 

414

 

2.27

%

24,190

 

367

 

2.03

%

Time deposits

 

198,401

 

7,017

 

4.73

%

169,119

 

4,999

 

3.95

%

Total Deposits

 

328,798

 

8,215

 

3.34

%

304,294

 

6,252

 

2.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

32,443

 

1,100

 

4.53

%

37,761

 

1,221

 

4.32

%

Other borrowings

 

78,818

 

2,735

 

4.64

%

83,359

 

2,844

 

4.56

%

Total borrowings

 

111,261

 

3,835

 

4.61

%

121,120

 

4,065

 

4.49

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

440,059

 

12,050

 

3.66

%

425,414

 

10,317

 

3.24

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

69,203

 

 

 

 

 

69,219

 

 

 

 

 

Other liabilities

 

6,866

 

 

 

 

 

5,245

 

 

 

 

 

Shareholders’ equity

 

73,252

 

 

 

 

 

74,255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

589,380

 

 

 

 

 

$

574,133

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.24

%

 

 

 

 

3.41

%

Net interest income/margin

 

 

 

$

16,209

 

3.96

%

 

 

$

16,269

 

4.06

%

 


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.

 

18



 

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine month periods ended September 30, 2007 and 2006.

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In Thousands)

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

8,977

 

$

8,547

 

$

26,449

 

$

24,916

 

Total interest expense

 

4,112

 

3,707

 

12,050

 

10,317

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

4,865

 

4,840

 

14,399

 

14,599

 

Tax equivalent adjustment

 

611

 

560

 

1,810

 

1,670

 

 

 

 

 

 

 

 

 

 

 

Net interest income (fully taxable equivalent)

 

$

5,476

 

$

5,400

 

$

16,209

 

$

16,269

 

 

The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and nine month periods ended September 30, 2007 and 2006:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2007 vs 2006

 

2007 vs 2006

 

 

 

Increase (Decrease)

 

Increase (Decrease)

 

 

 

Due to

 

Due to

 

(In Thousands)

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, tax-exempt

 

$

(10

)

$

1

 

$

(9

)

$

(11

)

$

(1

)

$

(12

)

Loans

 

118

 

154

 

272

 

642

 

677

 

1,319

 

Taxable investment securities

 

25

 

41

 

66

 

(419

)

355

 

(64

)

Tax-exempt investment securities

 

71

 

87

 

158

 

425

 

(4

)

421

 

Interest bearing deposits

 

(6

)

––

 

(6

)

15

 

(6

)

9

 

Total interest-earning assets

 

198

 

283

 

481

 

652

 

1,021

 

1,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

(6

)

(22

)

(28

)

(21

)

(48

)

(69

)

Super Now deposits

 

(2

)

(15

)

(17

)

(16

)

(17

)

(33

)

Money market deposits

 

(2

)

2

 

––

 

3

 

44

 

47

 

Time deposits

 

197

 

236

 

433

 

939

 

1,079

 

2,018

 

Short-term borrowings

 

63

 

(1

)

62

 

(184

)

63

 

(121

)

Long-term borrowings, FHLB

 

(59

)

14

 

(45

)

(159

)

50

 

(109

)

Total interest-bearing liabilities

 

191

 

214

 

405

 

562

 

1,171

 

1,733

 

Change in net interest income

 

$

7

 

$

69

 

$

76

 

$

90

 

$

(150

)

$

(60

)

 

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

 

19



 

performed annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.

 

The allowance for loan losses is determined 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 non-performing 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 September 30, 2007, 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, charge-offs, 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 decreased from $4,185,000 at December 31, 2006 to $4,092,000 at September 30, 2007. At September 30, 2007, the allowance for loan losses was 1.14% of total loans compared to 1.16% of total loans at December 31, 2006. Management’s conclusion is that the allowance for loan losses is adequate to provide for possible losses inherent in the loan portfolio as of the balance sheet date.

 

The provision for loan losses totaled $10,000 and $60,000 for the three and nine months ended September 30, 2007, respectively, as compared to $89,000 and $485,000 for the same periods in 2006. The decrease in the provision was the result of several continuing positive factors, including but not limited to, a ratio of annualized net charge offs to average loans of 0.06% for the nine months ended September 30, 2007, a ratio of nonperforming loans to total loans of 0.28% at September 30, 2007, and a ratio of the allowance for loan losses to nonperforming loans of 403.95% at September 30, 2007. In addition, gross loans have declined $2,669,000 since December 31, 2006 due to a softening of the loan market and the payoff of several commercial loans.

 

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

 

20



 

Non-interest Income

 

Total non-interest income for the three months ended September 30, 2007 compared to the same period in 2006 decreased $381,000 to $2,006,000 primarily as a result of the amount of net securities gains realized during the three month period ended September 30, 2006. Excluding net securities gains, non-interest income would have increased $180,000 as compared to the 2006 period. Deposit service charges declined $50,000 as overdraft protection fees declined and customers migrated to new checking accounts having reduced or no service charges. Other income increased due primarily to revenue generated from increased debit card transactions, merchant card commissions, and commissions generated by The M Group for securities transactions.

 

Insurance commissions for the three months ended September 30, 2007 increased $123,000 as compared to the same period in 2006 due to a shift in product mix. Management of The M Group continues to pursue new and build upon current relationships. The sales call program continues to expand to other financial institutions, which results in additional revenue for The M Group. However, the addition of another sales outlet for The M-Group can take up to a year or more to be completed.

 

Total non-interest income for the nine months ended September 30, 2007 compared to the same period in 2006 decreased $774,000. Excluding net securities gains, non-interest income would have remained stable as compared to the 2006 period. The decrease in non-interest income for the nine month period is the result of the same items noted in the three month discussion.

 

Non-interest income composition for the three and nine months ended September 30, 2007 and 2006 were as follows:

 

21



 

 

 

For The Three Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposit service charges

 

$

546

 

27.2

%

$

596

 

25.0

%

$

(50

)

(8.4

)%

Securities gains, net

 

 

 

561

 

23.5

 

(561

)

(100.0

)

Bank owned life insurance

 

109

 

5.4

 

94

 

3.9

 

15

 

16.0

 

Gain on sale of loans

 

282

 

14.1

 

264

 

11.1

 

18

 

6.8

 

Insurance commissions

 

625

 

31.2

 

502

 

21.0

 

123

 

24.5

 

Other

 

444

 

22.1

 

370

 

15.5

 

74

 

19.9

 

Total non-interest income

 

$

2,006

 

100.0

%

$

2,387

 

100.0

%

$

(381

)

(16.0

)%

 

 

 

For The Nine Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposit service charges

 

$

1,654

 

26.8

%

$

1,773

 

25.5

%

$

(119

)

(6.7

)%

Securities gains, net

 

619

 

10.0

 

1,385

 

20.0

 

(766

)

(55.3

)

Bank owned life insurance

 

310

 

5.0

 

272

 

3.9

 

38

 

14.0

 

Gain on sale of loans

 

654

 

10.6

 

624

 

9.0

 

30

 

4.8

 

Insurance commissions

 

1,613

 

26.2

 

1,732

 

25.0

 

(119

)

(6.9

)

Other

 

1,316

 

21.4

 

1,154

 

16.6

 

162

 

14.0

 

Total non-interest income

 

$

6,166

 

100.0

%

$

6,940

 

100.0

%

$

(774

)

(11.2

)%

 

Non-interest Expense

 

Total non-interest expense increased $316,000 for the three months ended September 30, 2007 compared to the same period of 2006. The increase in salaries and employee benefits was attributable to several items including standard cost of living wage adjustments for employees, new additions to our staff, and increased benefit costs. Occupancy expense increased due to the new branch in Montoursville, which opened in the third quarter of 2006, and increased cost of maintenance and property taxes. Other expenses increased primarily due to normal anticipated inflationary adjustments to ongoing business operating costs and the amortization related to a low income housing partnership that began operation during the fourth quarter of 2006.

 

Total non-interest expenses increased $755,000 for the nine months ended September 30, 2007 as compared to the same period of 2006. As noted above in the three month discussion, the new Montoursville branch in addition to normal increases in general business expenses and the amortization of a low income housing partnership, impacted the level of non-interest expenses.

 

Non-interest expense composition for the three and nine months ended September 30, 2007 and 2006 were as follows:

 

22



 

 

 

For The Three Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Salaries and employee benefits

 

$

2,330

 

52.6

%

$

2,174

 

52.8

%

$

156

 

7.2

%

Occupancy, net

 

319

 

7.2

 

308

 

7.5

 

11

 

3.6

 

Furniture and equipment

 

267

 

6.0

 

309

 

7.5

 

(42

)

(13.6

)

Pennsylvania shares tax

 

160

 

3.6

 

151

 

3.7

 

9

 

6.0

 

Other

 

1,354

 

30.6

 

1,172

 

28.5

 

182

 

15.5

 

Total non-interest expense

 

$

4,430

 

100.0

%

$

4,114

 

100.0

%

$

316

 

7.7

%

 

 

 

For The Nine Months Ended

 

 

 

September 30, 2007

 

September 30, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Salaries and employee benefits

 

$

6,912

 

53.6

%

$

6,620

 

54.5

%

$

292

 

4.4

%

Occupancy, net

 

987

 

7.7

 

826

 

6.8

 

161

 

19.5

 

Furniture and equipment

 

850

 

6.6

 

894

 

7.4

 

(44

)

(4.9

)

Pennsylvania shares tax

 

482

 

3.7

 

447

 

3.7

 

35

 

7.8

 

Other

 

3,667

 

28.4

 

3,356

 

27.6

 

311

 

9.3

 

Total non-interest expense

 

$

12,898

 

100.0

%

$

12,143

 

100.0

%

$

755

 

6.2

%

 

Provision for Income Taxes

 

Income taxes decreased $451,000 and $889,000 for the three and nine month periods ended September 30, 2007 compared to the same periods of 2006. The effective tax rates for the three and nine months ended September 30, 2007 were 4.48% and 8.79%, respectively, as compared to 18.52% and 17.48% for the same periods of 2006. The decline in the effective tax rate is consistent with management’s repositioning of the investment portfolio from taxable investment securities to tax-exempt investment securities, additional tax credits related to investments in low income housing projects, and greater than anticipated tax losses on the housing projects. The current effective tax rate has resulted in a deferred tax asset due to the low income housing tax credits. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate carry forward period and therefore does not require a valuation allowance.

 

ASSET/LIABILITY MANAGEMENT

 

Cash and Cash Equivalents

 

Cash and cash equivalents decreased $2,130,000 from $15,373,000 at December 31, 2006 to $13,243,000 at September 30, 2007 primarily as a result of the following activities during the nine months ended September 30, 2007:

 

Loans Held for Sale

 

Activity regarding loans held for sale resulted in loan originations exceeding sale proceeds, less $654,000 in realized gains, by $2,787,000 for the nine months ended September 30, 2007.

 

23



 

Loans

 

Gross loans decreased $2,669,000 since December 31, 2006 due to the early payoff of several large commercial loans coupled with increased competition for commercial loans and a softening of the market.

 

The allocation of the loan portfolio, by category, as of September 30, 2007 and December 31, 2006 is presented below:

 

 

 

September 30,

 

December 31,

 

Change

 

(In Thousands)

 

2007

 

2006

 

Amount

 

%

 

Commercial, financial, and agricultural

 

$

35,868

 

$

36,995

 

$

(1,127

)

(3.0

)%

Real estate mortgage:

 

 

 

 

 

 

 

 

 

Residential

 

162,163

 

158,219

 

3,944

 

2.5

 

Commercial

 

129,726

 

135,404

 

(5,678

)

(4.2

)

Construction

 

17,492

 

16,749

 

743

 

4.4

 

Installment loans to individuals

 

13,400

 

14,035

 

(635

)

(4.5

)

Less: Net deferred loan fees

 

934

 

1,018

 

(84

)

(8.3

)

Gross loans

 

$

357,715

 

$

360,384

 

$

(2,669

)

(0.7

)%

 

The recorded investment in loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, amounted to $1,195,000 at September 30, 2007, as compared to $574,000 at December 31, 2006. The valuation allowance related to impaired loans amounted to $98,000 at September 30, 2007 and $42,000 at December 31, 2006. The increase in impaired loans is primarily from a single commercial relationship that accounted for $523,000 of the increase, while the increase in valuation allowance is the result of a second commercial relationship that had a specific collateral weakness.

 

A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.

 

Investments

 

The estimated fair value of the investment securities portfolio in total has increased $19,550,000 since December 31, 2006, while the amortized cost increased $25,613,000. The majority of the changes in value incurred within the state and municipal segment of the portfolio. The amortized cost position in state and political securities increased $6,115,000 as the Bank continued its strategy to build call protection, maintain taxable equivalent yields, reduce the effective federal

 

24



 

income tax rate, and invest in communities across the Commonwealth of Pennsylvania and the country. The amortized cost position of other debt securities increased $13,806,000 as the Bank began a leverage transaction to enhance earning asset yields in a softening loan market. The increased level of unrealized losses, which offset the increase in amortized cost, was the result of changes in the yield curve, not credit quality, as the credit quality of the portfolio remains sound.

 

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

 

25



 

 

 

September 30, 2007

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

60,732

 

$

69

 

$

(714

)

$

60,087

 

State and political securities

 

110,773

 

561

 

(2,287

)

109,047

 

Other debt securities

 

15,799

 

36

 

(173

)

15,662

 

Total debt securities

 

187,304

 

666

 

(3,174

)

184,796

 

Equity securities

 

20,274

 

1,000

 

(1,312

)

19,962

 

Total investment securities AFS

 

$

207,578

 

$

1,666

 

$

(4,486

)

$

204,758

 

 

 

 

 

 

 

 

 

 

 

Held to maturity (HTM)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

14

 

$

1

 

$

 

$

15

 

Other debt securities

 

262

 

1

 

 

263

 

Total investment securities HTM

 

$

276

 

$

2

 

$

 

$

278

 

 

 

 

December 31, 2006

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

54,949

 

$

24

 

$

(821

)

$

54,152

 

State and political securities

 

104,658

 

1,646

 

(358

)

105,946

 

Other debt securities

 

1,998

 

37

 

(11

)

2,024

 

Total debt securities

 

161,605

 

1,707

 

(1,190

)

162,122

 

Equity securities

 

20,353

 

2,883

 

(158

)

23,078

 

Total investment securities AFS

 

$

181,958

 

$

4,590

 

$

(1,348

)

$

185,200

 

 

 

 

 

 

 

 

 

 

 

Held to maturity (HTM)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

26

 

$

2

 

$

 

$

28

 

Other debt securities

 

257

 

1

 

 

258

 

Total investment securities HTM

 

$

283

 

$

3

 

$

 

$

286

 

 

26



 

Financing Activities

 

Deposits

 

Total deposits increased 2.4% or $9,663,000 from December 31, 2006 to September 30, 2007. The mix of deposits has shifted from December 31, 2006 to September 30, 2007 as brokered deposits have decreased substantially and customer time deposits have increased. The shift is the result of the Bank strategically attracting short-term customer time deposits and utilizing the funds gathered to replace maturing brokered time deposits and higher cost short-term FHLB advances. The amount of brokered deposits is continuously monitored and is used to supplement deposits, not as a primary source of deposits.

 

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

 

 

 

September 30, 2007

 

December 31, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Demand deposits

 

$

72,990

 

18.0

%

$

73,160

 

18.5

%

$

(170

)

(0.2

)%

NOW accounts

 

47,129

 

11.6

 

46,156

 

11.7

 

973

 

2.1

 

Money market deposits

 

22,295

 

5.5

 

23,137

 

5.9

 

(842

)

(3.6

)

Savings deposits

 

59,883

 

14.8

 

59,289

 

15.0

 

594

 

1.0

 

Time deposits

 

189,313

 

46.8

 

168,420

 

42.6

 

20,893

 

12.4

 

Time deposits - brokered

 

13,244

 

3.3

 

25,029

 

6.3

 

(11,785

)

(47.1

)

Total deposits

 

$

404,854

 

100.0

%

$

395,191

 

100.0

%

$

9,663

 

2.4

%

 

Borrowed Funds

 

Total borrowed funds increased 11.6% to $131,171,000 at September 30, 2007 as compared to $117,575,000 at December 31, 2006. The increase in borrowed funds is primarily the result of an investment portfolio leverage strategy that was initiated during September 2007. The leverage program at September 30, 2007 accounted for $20,000,000 in borrowings split evenly between short-term and long-term FHLB borrowings. Off setting the increase related to the leverage strategy were the previously discussed time deposit gathering campaigns that were utilized to provide funds to reduce the level of higher cost short-term borrowings and to assist in replacing long-term borrowing maturities. Long-term borrowings increased due to the maturity of four borrowings totaling $16,500,000 that carried an average rate of 3.99% offset by two new $10,000,000 FHLB borrowings that mature in 2017 and carry a rate of 4.28% and 4.15%, respectively.

 

27



 

 

 

September 30, 2007

 

December 31, 2006

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB repurchase agreements

 

$

12,870

 

9.8

%

$

18,706

 

15.9

%

$

(5,836

)

(31.2

)%

Short-term borrowings, FHLB

 

15,000

 

11.4

 

 

 

15,000

 

 

Securities sold under agreement to repurchase

 

16,923

 

12.9

 

15,991

 

13.6

 

932

 

5.8

 

Total short-term borrowings

 

44,793

 

34.1

%

34,697

 

29.5

%

10,096

 

29.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings, FHLB

 

86,378

 

65.9

 

82,878

 

70.5

 

3,500

 

4.2

 

Total borrowed funds

 

$

131,171

 

100.0

%

$

117,575

 

100.0

%

$

13,596

 

11.6

%

 

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

 

28



 

Capital ratios as of September 30, 2007 and December 31, 2006 were as follows:

 

 

 

2007

 

2006

 

(In Thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital

 

 

 

 

 

 

 

 

 

(to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

72,574

 

18.6

%

$

73,098

 

20.5

%

For Capital Adequacy Purposes

 

31,149

 

8.0

 

28,515

 

8.0

 

To Be Well Capitalized

 

38,937

 

10.0

 

35,643

 

10.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital

 

 

 

 

 

 

 

 

 

(to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

68,482

 

17.6

%

$

67,869

 

19.0

%

For Capital Adequacy Purposes

 

15,575

 

4.0

 

14,257

 

4.0

 

To Be Well Capitalized

 

23,362

 

6.0

 

21,386

 

6.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital

 

 

 

 

 

 

 

 

 

(to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

68,482

 

11.6

%

$

67,869

 

12.0

%

For Capital Adequacy Purposes

 

23,714

 

4.0

 

22,591

 

4.0

 

To Be Well Capitalized

 

29,643

 

5.0

 

28,239

 

5.0

 

 

Liquidity and Interest Rate Sensitivity

 

The asset/liability committee addresses the liquidity needs of the Company to ensure 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 for compliance within the limits cited:

 

1. Net Loans to Total Assets, 85% maximum

2. Net Loans to Total Deposits, 100% maximum

3. Cumulative 90 day Maturity GAP %, +/- 20% maximum

4. Cumulative 1 Year Maturity GAP %, +/- 20% 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

 

29



 

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 originations, 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, FHLB borrowings, and brokered deposits. Management believes the Bank 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 FHLB of $218,872,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $29,535,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled $114,248,000 as of September 30, 2007.

 

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, 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 sheet.

 

30



 

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 year ended December 31, 2006.

 

Generally, management believes the Company is well positioned to respond in a timely manner 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk for the Company is comprised primarily of 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 Annual Report on Form 10-K for the period ended December 31, 2006. 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.

 

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 Financial 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 Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2007. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

31



 

Part II. OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.

 

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

 

 

 

Total

 

Average

 

Total Number of

 

Maximum Number (or

 

 

 

Number of

 

Price Paid

 

Shares (or Units)

 

Approximate Dollar Value)

 

 

 

Shares (or

 

per Share

 

Purchased as Part of

 

of Shares (or Units) that

 

 

 

Units)

 

(or Units)

 

Publicly Announced

 

May Yet Be Purchased

 

Period

 

Purchased

 

Purchased

 

Plans or Programs

 

Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

Month#1 (July 1-July 31, 2007)

 

6,000

 

$

34.06

 

6,000

 

133,570

 

 

 

 

 

 

 

 

 

 

 

Month#2 (August 1-August 31, 2007)

 

5,000

 

31.75

 

5,000

 

128,570

 

 

 

 

 

 

 

 

 

 

 

Month#3 (September 1-September 30, 2007)

 

 

 

 

128,570

 

 

On April 24, 2007, the Board of Directors extended the authorization to repurchase up to 197,000 shares, or approximately 5%, of the outstanding shares of the Company for an additional year to April 25, 2008. The repurchase plan was originally for a one year period expiring on April 25, 2007. To date, there have been 68,430 shares repurchased under this plan.

 

Item 3.    Defaults Upon Senior Securities

 

None

 

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

 

None

 

Item 5.    Other Information

 

None

 

32



 

Item 6.    Exhibits

 

(3)   (i)

 

Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006).

(3)   (ii)

 

Bylaws of the Registrant’s as presently in effect (incorporated by reference to Exhibit 3(ii) of the Registrant’s Current Report on Form 8-K filed June 17, 2005).

(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 Principal Financial Officer.

(32) (i)

 

Certification of Chief Executive Officer Section 1350.

(32) (ii)

 

Certification of Principal Financial Officer Section 1350.

 

33



 

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:       November 7, 2007

/s/ Ronald A. Walko

 

 

Ronald A. Walko, President and Chief Executive Officer

 

 

 

 

 

 

 

Date:       November 7, 2007

/s/ Brian L. Knepp

 

 

Brian L. Knepp, Vice President of Finance (Principal
Financial Officer)

 

 

34



 

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 Financial Officer

Exhibit 32(i)

 

Section 1350 Certification of Chief Executive Officer

Exhibit 32(ii)

 

Section 1350 Certification of Principal Financial Officer

 

35