UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

for the Quarterly Period Ended March 31, 2009.

 

 

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 the 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” 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 May 1, 2009 there were 3,832,572 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 March 31, 2009 and December 31, 2008				3
Consolidated Statement of Income (unaudited) for the Three Months ended March 31, 2009 and 2008				4
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months ended March 31, 2009 and 2008				5
Consolidated Statement of Comprehensive Income (unaudited) for the Three Months ended March 31, 2009 and 2008				5
Consolidated Statement of Cash Flows (unaudited) for the Three Months ended March 31, 2009 and 2008				6
Notes to Consolidated Financial Statements (unaudited)				7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		29
Item 4.		Controls and Procedures		29
Part II		Other Information
Item 1.		Legal Proceedings		30
Item 1A.		Risk Factors		30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.		Defaults Upon Senior Securities		30
Item 4.		Submission of Matters to a Vote of Security Holders		30
Item 5.		Other Information		30
Item 6.		Exhibits		31
Signatures				32
Exhibit Index and Exhibits				33

 

2

 

Part I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

		March 31,			December 31,
(In Thousands, Except Share Data)		2009			2008
ASSETS
Noninterest-bearing balances		$	12,886		$	16,563
Interest-bearing deposits in other financial institutions		23			18
Total cash and cash equivalents		12,909			16,581
Investment securities, available for sale, at fair value		201,651			208,251
Investment securities held to maturity (fair value of $111 and $136)		110			135
Loans held for sale		2,514			3,622
Loans		387,192			381,478
Less: Allowance for loan losses		4,441			4,356
Loans, net		382,751			377,122
Premises and equipment, net		7,733			7,865
Accrued interest receivable		3,370			3,614
Bank-owned life insurance		14,750			14,546
Investment in limited partnerships		5,286			4,727
Goodwill		3,032			3,032
Deferred tax asset		12,614			10,879
Other assets		2,892			2,429
TOTAL ASSETS		$	649,612		$	652,803
LIABILITIES
Interest-bearing deposits		$	376,844		$	345,333
Noninterest-bearing deposits		71,963			76,035
Total deposits		448,807			421,368
Short-term borrowings		45,268			73,946
Long-term borrowings, Federal Home Loan Bank (FHLB)		86,778			86,778
Accrued interest payable		1,193			1,317
Other liabilities		8,982			8,367
TOTAL LIABILITIES		591,028			591,776
SHAREHOLDERS’ EQUITY
Common stock, par value $8.33, 10,000,000 shares authorized; 4,011,251 and 4,010,528 shares issued		33,427			33,421
Additional paid-in capital		17,970			17,959
Retained earnings		27,254			28,177
Accumulated other comprehensive loss:
Net unrealized loss on available for sale securities		(10,023		)	(8,486		)
Defined benefit plan		(3,780		)	(3,780		)
Less:  Treasury stock at cost, 179,028 and 179,028 shares		(6,264		)	(6,264		)
TOTAL SHAREHOLDERS’ EQUITY		58,584			61,027
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	649,612		$	652,803

 

See accompanying notes to the unaudited consolidated financial statements.

 

3

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

		Three Months Ended March 31,
(In Thousands, Except Per Share Data)		2009			2008
INTEREST AND DIVIDEND INCOME
Loans including fees		$	6,219		$	6,380
Investment Securities:
Taxable		1,363			1,190
Tax-exempt		1,246			1,226
Dividend and other interest income		89			252
TOTAL INTEREST AND DIVIDEND INCOME		8,917			9,048
INTEREST EXPENSE
Deposits		2,005			2,541
Short-term borrowings		158			429
Long-term borrowings, FHLB		917			1,197
TOTAL INTEREST EXPENSE		3,080			4,167
NET INTEREST INCOME		5,837			4,881
PROVISION FOR LOAN LOSSES		126			60
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,711			4,821
NON-INTEREST INCOME
Service charges		525			570
Securities (losses) gains, net		(2,369		)	38
Bank-owned life insurance		162			155
Gain on sale of loans		118			152
Insurance commissions		354			580
Other		434			419
TOTAL NON-INTEREST INCOME		(776		)	1,914
NON-INTEREST EXPENSE
Salaries and employee benefits		2,482			2,451
Occupancy, net		339			338
Furniture and equipment		307			285
Pennsylvania shares tax		171			105
Amortization of investment in limited partnerships		142			178
Other		1,204			1,088
TOTAL NON-INTEREST EXPENSE		4,645			4,445
INCOME BEFORE INCOME TAX (BENEFIT) PROVISION		290			2,290
INCOME TAX (BENEFIT) PROVISION		(549		)	159
NET INCOME		$	839		$	2,131
EARNINGS PER SHARE - BASIC		$	0.22		$	0.55
EARNINGS PER SHARE - DILUTED		$	0.22		$	0.55
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC		3,831,747			3,874,741
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED		3,831,747			3,874,931
DIVIDENDS PER SHARE		$	0.46		$	0.46

 

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			LOSS			STOCK			EQUITY
Balance, December 31, 2008		4,010,528		$	33,421		$	17,959		$	28,177		$	(12,266	)	$	(6,264	)	$	61,027
Comprehensive loss:
Net income										839									839
Other comprehensive loss													(1,537		)				(1,537		)
Dividends declared ($0.46 per share)										(1,762		)							(1,762		)
Common shares issued for employee stock purchase plan		723		6			11												17
Balance, March 31, 2009		4,011,251		$	33,427		$	17,970		$	27,254		$	(13,803	)	$	(6,264	)	$	58,584

 

													ACCUMULATED
		COMMON					ADDITIONAL						OTHER						TOTAL
		STOCK					PAID-IN			RETAINED			COMPREHENSIVE			TREASURY			SHAREHOLDERS’
(In Thousands, Except Per Share Data)		SHARES		AMOUNT			CAPITAL			EARNINGS			LOSS			STOCK			EQUITY
Balance, December 31, 2007		4,006,934		$	33,391		$	17,888		$	27,707		$	(3,534	)	$	(4,893	)	$	70,559
Cumulative effect of change in accounting for postretirement benefits										(437		)							(437		)
Comprehensive income:
Net income										2,131									2,131
Other comprehensive loss													(1,207		)				(1,207		)
Dividends declared, ($0.46 per share)										(1,781		)							(1,781		)
Common shares issued for employee stock purchase plan		718		6			16												22
Purchase of treasury stock (4,297 shares)																(133		)	(133		)
Balance, March 31, 2008		4,007,652		$	33,397		$	17,904		$	27,620		$	(4,741	)	$	(5,026	)	$	69,154

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended March 31,
(In Thousands)		2009					2008
Net Income				$	839				$	2,131
Other comprehensive loss:
Change in net unrealized losses on available for sale securities		(4,697	)				(1,791	)
Less: Reclassification adjustment for net (losses) gains included in net income		(2,369	)				38
Other comprehensive loss before tax benefit				(2,328		)			(1,829		)
Income tax benefit related to other comprehensive loss				(791		)			(622		)
Other comprehensive loss, net of tax				(1,537		)			(1,207		)
Comprehensive (loss) income				$	(698	)			$	924

 

See accompanying notes to the unaudited consolidated financial statements.

 

5

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended March 31,
(In Thousands)		2009			2008
OPERATING ACTIVITIES
Net Income		$	839		$	2,131
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		181			157
Provision for loan losses		126			60
Accretion and amortization of investment security discounts and premiums		(23		)	(284		)
Securities losses (gains), net		2,369			(38		)
Originations of loans held for sale		(3,797		)	(6,400		)
Proceeds of loans held for sale		5,023			7,512
Gain on sale of loans		(118		)	(152		)
Increases in bank-owned life insurance		(162		)	(155		)
Other, net		(398		)	(702		)
Net cash provided by operating activities		4,040			2,129
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales		17			17,737
Proceeds from calls and maturities		2,178			1,887
Purchases		(100		)	(23,912		)
Investment securities held to maturity:
Proceeds from calls and maturities		25			—
Net (increase) decrease in loans		(5,886		)	2,833
Acquisition of bank premises and equipment		(49		)	(764		)
Proceeds from the sale of foreclosed assets		—			11
Purchase of bank-owned life insurance		(42		)	(679		)
Investment in limited partnership		(701		)	—
Proceeds from redemption of regulatory stock		—			1,161
Purchases of regulatory stock		(170		)	(1,446		)
Net cash used for investing activities		(4,728		)	(3,172		)
FINANCING ACTIVITIES
Net increase in interest-bearing deposits		31,511			10,112
Net decrease in noninterest-bearing deposits		(4,072		)	(3,009		)
Repayment of long-term borrowings, FHLB		—			(9,600		)
Net (decrease) increase in short-term borrowings		(28,678		)	6,451
Dividends paid		(1,762		)	(1,781		)
Issuance of common stock		17			22
Purchase of treasury stock		—			(133		)
Net cash (used for) provided by financing activities		(2,984		)	2,062
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(3,672		)	1,019
CASH AND CASH EQUIVALENTS, BEGINNING		16,581			15,433
CASH AND CASH EQUIVALENTS, ENDING		$	12,909		$	16,452
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid		$	3,204		$	4,285
Income taxes paid		150			150

 

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.  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, 2008.

 

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 38 through 44 of the Annual Report on Form 10-K for the year ended December 31, 2008.

 

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 April 2009, the FASB issued FASB Staff Position (“FSP”) No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FAS 141(R)-1”).  This FSP requires companies acquiring contingent assets or assuming contingent liabilities in business combination to either (a) if the assets’ or liabilities’ fair value can be determined, recognize them at fair value, at the acquisition date, or (b) if the assets’ or liabilities’ fair value cannot be determined, but (i) it is probable that an asset existed or that a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated, recognize them at their estimated amount, at the acquisition date.   If the fair value of these contingencies cannot be determined and they are not probable or cannot be reasonably estimated, then companies should not recognize these contingencies as of the acquisition date and instead should account for them in subsequent periods by following other applicable GAAP.  This FSP also eliminates the FAS 141(R)-1 requirement of disclosing in the footnotes to the financial statements the range of expected outcomes for a recognized contingency.  This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The adoption of this FSP has

 

7

 

not and is not expected to have a material effect on the Company’s results of operations or financial position.

 

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FAS 157-4”).  This FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales.  It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

 

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FAS 107-1 and APB 28-1”), which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value.  Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.  FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009.  The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

 

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FAS 115-2 and FAS 124-2”), which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.  FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009.  The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

 

Note 3. Per Share Data

 

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

 

8

 

		Three Months Ended March 31,
		2009		2008
Weighted average common shares issued		4,010,775		4,007,176
Average treasury stock shares		(179,028	)	(132,435	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share		3,831,747		3,874,741
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		—		190
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		3,831,747		3,874,931

 

Options to purchase 1,980 shares of common stock were outstanding during the three months ended March 31, 2009 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike prices range of $24.72 to $31.82 being greater than the average market price of $24.62 for the three months ended March 31, 2009.  Options to purchase 8,273 shares of common stock were outstanding during the three months ended March 31, 2008 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 average market price for the three months ended March 31, 2008.

 

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, 2008.

 

The following sets forth the components of the net periodic benefit cost of the domestic non-contributory defined benefit plan for the three months ended March 31, 2009 and 2008, respectively:

 

9

 

		Three Months Ended March 31,
(In Thousands)		2009			2008
Service cost		$	136		$	137
Interest cost		170			152
Expected return on plan assets		(127		)	(157		)
Amortization of transition obligation		(1		)	(1		)
Amortization of prior service cost		6			6
Amortization of net loss		85			14
Net periodic cost		$	269		$	151

 

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, 2008, that it expected to contribute a minimum of $325,000 to its defined benefit plan in 2009.  As of March 31, 2009, there were no contributions made to the plan.

 

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.

 

Financial instruments whose contract amounts represent credit risk are as follows at March 31, 2009 and December 31, 2008:

 

		March 31,			December 31,
(In Thousands)		2009			2008
Commitments to extend credit		$	84,833		$	85,871
Standby letters of credit		883			841

 

10

 

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

 

Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  These instruments are issued primarily to support bid or performance related contracts.  The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management.  Fees earned from the issuance of these letters are recognized upon expiration of the coverage period.  For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

 

Note 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 three months ended March 31, 2009 and 2008, there were 723 and 718 shares issued under the plan, respectively.

 

Note 8.  Fair Value Measurements

 

Effective January 1, 2008, the Company adopted the provisions of FAS No. 157, Fair Value Measurements (“FAS 157”), for financial assets and financial liabilities.  FAS 157 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.  The FASB issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS 13 and related guidance from the scope of FAS No. 157.  The FASB also issued Staff Position No. 157-2, Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

 

11

 

FAS 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by FAS 157 hierarchy are as follows:

 

Level I:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:		Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

The following table presents the assets reported on the balance sheet at their fair value on a recurring basis as of March 31, 2009 and December 31, 2008, by level within the fair value hierarchy. As required by FAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

		March 31, 2009
(In Thousands)		Level I			Level II			Level III			Total
Assets Measured on a Recurring Basis:
Investment Securities, available-for-sale		$	11,339		$	190,312		$	—		$	201,651

 

		December 31, 2008
(In Thousands)		Level I			Level II			Level III			Total
Assets Measured on a Recurring Basis:
Investment Securities, available-for-sale		$	13,269		$	194,982		$	—		$	208,251

 

The following table presents the assets reported on the balance sheet at their fair value on a non-recurring basis as of March 31, 2009 and December 31, 2008, by level within the fair value hierarchy. As required by FAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

		March 31, 2009
(In Thousands)		Level I			Level II			Level III			Total
Assets Measured on a Non-recurring Basis:
Impaired Loans		$	—		$	6,001		$	—		$	6,001

 

		December 31, 2008
(In Thousands)		Level I			Level II			Level III			Total
Assets Measured on a Non-recurring Basis:
Impaired Loans		$	—		$	4,876		$	—		$	4,876

 

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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.

 

You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by the Company on its website or otherwise.  The Company undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

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

 

EARNINGS SUMMARY

 

Comparison of the Three Months Ended March 31, 2009 and 2008

 

Summary Results

 

Net income for the three months ended March 31, 2009 was $839,000 compared to $2,131,000 for the same period of 2008 as after-tax securities losses increased $1,589,000 (from a gain of $25,000 to a loss of $1,564,000).  Included within the change in after-tax securities losses was an other than temporary impairment charge relating to certain equity securities held in the investment portfolio of $2,333,000. Basic and diluted earnings per share for the three months ended March 31, 2009 were $0.22 compared to $0.55 for the three months ended March 31, 2008.  Return on average assets and return on average equity were 0.52% and 5.64% for the three months ended March 31, 2009 compared to 1.36% and 12.01% for the corresponding period of 2008.  Net income from core operations (“operating earnings”) increased 14.1% to $2,403,000 for the three months ended March 31, 2009 compared to $2,106,000 for the same period of 2008.  Operating earnings per share for the three months ended March 31, 2009 increased 16.7% to $0.63 basic and dilutive compared to $0.54 basic and dilutive for the three months ended March 31, 2008.

 

(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 excluding 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 or losses.  These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.)

 

Interest And Dividend Income

 

Interest and dividend income for the three months ended March 31, 2009 decreased $131,000 to $8,917,000 compared to $9,048,000 for the same period of 2008.  The decrease in interest income was the result of a decline in loan interest of $161,000 offset by an increase in investment securities income of $30,000.  The decline in loan interest is the result of the low interest rate environment that has existed over the past year.  This has caused the interest rate of new loans to be at a lower rate, resulting in a 56 basis point (“bp”) decline in loan portfolio yield.  Dividend income decreased as a direct result of the current status of the economy that has caused many of the equity holdings in our portfolio to decrease their dividend.  In addition, the Federal

 

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Home Loan Bank of Pittsburgh (“FHLB”) has suspended payment of dividends on shares of its common stock, which has resulted in a decrease of approximately $75,000 in dividend income.  Offsetting the decreased dividend income was an increase in taxable investment securities income of $173,000.  On a taxable equivalent basis, the decline in total interest income was limited to $73,000.  Average loan portfolio growth of $27,202,000 limited the impact of the decline in loan portfolio yield.  In addition, the investment portfolio yield increased 43 bp resulting in increased taxable equivalent income of $41,000.

 

Interest and dividend income composition for the three months ended March 31, 2009 and 2008 was as follows:

 

		For The Three Months Ended
		March 31, 2009					March 31, 2008					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			%
Loans including fees		$	6,219		69.7	%	$	6,380		70.5	%	$	(161	)	(2.5	)%
Investment securities:
Taxable		1,363			15.3		1,190			13.2		173			14.5
Tax-exempt		1,246			14.0		1,226			13.5		20			1.6
Dividend and other interest income		89			1.0		252			2.8		(163		)	(64.7	)
Total interest and dividend income		$	8,917		100.0	%	$	9,048		100.0	%	$	(131	)	(1.4	)%

 

Interest Expense

 

Interest expense for the three months ended March 31, 2009 decreased $1,087,000 to $3,080,000 compared to $4,167,000 for the same period of 2008.  The decreased expense of $536,000 associated with deposits is primarily the result of a reduction of 138 bp in rate paid on time deposits.  Factors that led to the rate decreases include, but are not limited to, Federal Open Market Committee (“FOMC”) interest rate actions and campaigns conducted by the Company during the past two years to attract 12 month or shorter maturity CDs resulting in an increased repricing frequency.  Short-term borrowings interest expense decreased $271,000 as the increase in average balance of $10,374,000 was countered by a decrease in the rate paid of 231 bp due to the FOMC rate actions and overall decline in the treasury security market.  Long-term borrowing interest expense decreased $280,000 as the average balance of such borrowings decreased $18,756,000, while the average rate decreased 26 bp to 4.23%.  The change in average balance and rate is reflective of $29,600,000 in long-term borrowing maturities during the first half of 2008 at an average rate of 4.77% offset by the acquisition of $10,000,000 in long-term borrowings at a rate of 3.18% during the third quarter of 2008.

 

Interest expense composition for the three months ended March 31, 2009 and 2008 was as follows:

 

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		For The Three Months Ended
		March 31, 2009					March 31, 2008					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			%
Deposits		$	2,005		65.1	%	$	2,541		61.0	%	$	(536	)	(21.1	)%
Short-term borrowings		158			5.1		429			10.3		(271		)	(63.2	)
Long-term borrowings, FHLB		917			29.8		1,197			28.7		(280		)	(23.4	)
Total interest expense		$	3,080		100.0	%	$	4,167		100.0	%	$	(1,087	)	(26.1	)%

 

Net Interest Margin

 

The net interest margin (“NIM”) for the three months ended March 31, 2009 was 4.47% compared to 3.87% for the corresponding period of 2008.  The increase in the NIM was driven by a 105 bp decline in the rate paid on interest bearing liabilities that more than compensated for a 19 bp decline in the yield on earning assets.  The decrease in earning asset yield is due to the impact on the loan portfolio of the current low rate environment offset in part by an increase in yield for the investment portfolio.  The increase in the investment portfolio yield was driven by a strategic initiative to increase tax equivalent net interest income by purchasing tax-exempt and taxable municipal bonds in anticipation of the decreasing rate environment that has continued to date.  The decrease in the cost of interest bearing liabilities to 2.45% from 3.50% was driven primarily by a reduction in the rate paid on time deposits of 138 bp and total borrowings of 121 bp.  The reduction in the rate paid on time deposits was the result of a shortening of the time deposit portfolio that has resulted in an increasing repricing frequency during this period of decreasing rates.

 

The following is a schedule of average balances and associated yields for the three months ended March 31, 2009 and 2008:

 

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		AVERAGE BALANCES AND INTEREST RATES
		Three Months Ended March 31, 2009								Three Months Ended March 31, 2008
(In Thousands)		Average Balance			Interest			Average Rate		Average Balance			Interest			Average Rate
Assets:
Tax-exempt loans		$	16,052		$	265		6.70	%	$	8,013		$	126		6.32	%
All other loans		373,878			6,044			6.56	%	354,715			6,297			7.14	%
Total loans		389,930			6,309			6.56	%	362,728			6,423			7.12	%
Taxable investment securities		101,890			1,452			5.70	%	100,730			1,442			5.73	%
Tax-exempt investment securities		101,654			1,888			7.43	%	114,590			1,857			6.48	%
Total securities		203,544			3,340			6.56	%	215,320			3,299			6.13	%
Interest bearing deposits		23			—			0.00	%	38			—			0.00	%
Total interest-earning assets		593,497			9,649			6.56	%	578,086			9,722			6.75	%
Other assets		55,256								48,692
Total assets		$	648,753							$	626,778
Liabilities:
Savings		$	59,642		78			0.53	%	$	58,561		109			0.75	%
Super Now deposits		53,890			129			0.97	%	46,367			155			1.34	%
Money market deposits		41,276			212			2.08	%	23,324			127			2.18	%
Time deposits		205,110			1,586			3.14	%	190,927			2,150			4.52	%
Total deposits		359,918			2,005			2.26	%	319,179			2,541			3.20	%
Short-term borrowings		61,487			158			1.03	%	51,113			429			3.34	%
Long-term borrowings, FHLB		86,778			917			4.23	%	105,534			1,197			4.49	%
Total borrowings		148,265			1,075			2.90	%	156,647			1,626			4.11	%
Total interest-bearing liabilities		508,183			3,080			2.45	%	475,826			4,167			3.50	%
Demand deposits		71,321								70,243
Other liabilities		9,760								9,726
Shareholders’ equity		59,489								70,983
Total liabilities and shareholders’ equity		$	648,753							$	626,778
Interest rate spread								4.12	%							3.25	%
Net interest income/margin					$	6,569		4.47	%				$	5,555		3.87	%

 

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.

 

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