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)

 

 

 

(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):

 

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:

 

 

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