SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2005,
o Transition report pursuant to Section 13 or 15 (d) of the Exchange Act for the Transition Period from to .
No. 0-17077
(Commission File Number)
PENNS WOODS BANCORP, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA |
| 23-2226454 |
(State or other jurisdiction of |
| (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 ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
YES ý NO 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 ý
On October 27, 2005 there were 3,320,414 of the Registrant’s common stock outstanding.
PENNS WOODS BANCORP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
2
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
|
| September 30, |
| December 31, |
| ||
(In Thousands, Except Share Data) |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
ASSETS: |
|
|
|
|
| ||
Noninterest-bearing balances |
| $ | 13,113 |
| $ | 12,602 |
|
Interest-bearing deposits in other financial institutions |
| 27 |
| 24 |
| ||
Total cash and cash equivalents |
| 13,140 |
| 12,626 |
| ||
|
|
|
|
|
| ||
Investment securities, available for sale, at fair value |
| 192,039 |
| 184,163 |
| ||
Investment securities held to maturity (fair value of $241 and $561) |
| 266 |
| 558 |
| ||
Loans held for sale |
| 3,908 |
| 4,624 |
| ||
Loans, net of unearned discount of $1,025 and $1,096 |
| 330,651 |
| 324,505 |
| ||
Less: Allowance for loan and lease losses |
| 3,492 |
| 3,338 |
| ||
Loans, net |
| 327,159 |
| 321,167 |
| ||
|
|
|
|
|
| ||
Premises and equipment, net |
| 6,141 |
| 4,882 |
| ||
Accrued interest receivable |
| 2,520 |
| 2,246 |
| ||
Bank-owned life insurance |
| 10,627 |
| 10,976 |
| ||
Goodwill |
| 3,032 |
| 3,032 |
| ||
Other assets |
| 11,587 |
| 2,429 |
| ||
TOTAL ASSETS |
| $ | 570,419 |
| $ | 546,703 |
|
|
|
|
|
|
| ||
LIABILITIES: |
|
|
|
|
| ||
Interest-bearing deposits |
| $ | 291,137 |
| $ | 282,786 |
|
Noninterest-bearing deposits |
| 72,053 |
| 74,050 |
| ||
Total deposits |
| 363,190 |
| 356,836 |
| ||
|
|
|
|
|
| ||
Short-term borrowings |
| 40,410 |
| 36,475 |
| ||
Long-term borrowings, Federal Home Loan Bank(FHLB) |
| 84,478 |
| 75,878 |
| ||
Accrued interest payable |
| 1,118 |
| 850 |
| ||
Other liabilities |
| 6,733 |
| 3,499 |
| ||
TOTAL LIABILITIES |
| 495,929 |
| 473,538 |
| ||
|
|
|
|
|
| ||
SHAREHOLDERS’ EQUITY: |
|
|
|
|
| ||
Common stock, par value $10.00, 10,000,000 shares authorized; 3,332,399 and 3,331,837 shares issued |
| 33,324 |
| 33,318 |
| ||
Additional paid-in capital |
| 17,711 |
| 17,700 |
| ||
Retained earnings |
| 22,102 |
| 18,262 |
| ||
Accumulated other comprehensive gain |
| 1,914 |
| 4,331 |
| ||
Less: Treasury stock at cost, 12,810 and 10,310 shares |
| (561 | ) | (446 | ) | ||
TOTAL SHAREHOLDERS’ EQUITY |
| 74,490 |
| 73,165 |
| ||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 570,419 |
| $ | 546,703 |
|
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) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INTEREST AND DIVIDEND INCOME: |
|
|
|
|
|
|
|
|
| ||||
Loans including fees |
| $ | 5,899 |
| $ | 5,550 |
| $ | 17,070 |
| $ | 15,578 |
|
Investment Securities: |
|
|
|
|
|
|
|
|
| ||||
Taxable |
| 967 |
| 1,698 |
| 3,445 |
| 5,278 |
| ||||
Tax-exempt |
| 969 |
| 422 |
| 2,246 |
| 1,133 |
| ||||
Dividend |
| 278 |
| 254 |
| 873 |
| 794 |
| ||||
TOTAL INTEREST AND DIVIDEND INCOME |
| 8,113 |
| 7,924 |
| 23,634 |
| 22,783 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
| ||||
Deposits |
| 1,537 |
| 1,227 |
| 4,151 |
| 3,544 |
| ||||
Short-term borrowings |
| 199 |
| 131 |
| 545 |
| 367 |
| ||||
Long-term borrowings |
| 965 |
| 871 |
| 2,711 |
| 2,584 |
| ||||
TOTAL INTEREST EXPENSE |
| 2,701 |
| 2,229 |
| 7,407 |
| 6,495 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INTEREST INCOME |
| 5,412 |
| 5,695 |
| 16,227 |
| 16,288 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
PROVISION FOR LOAN LOSSES |
| 180 |
| 165 |
| 540 |
| 315 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
| 5,232 |
| 5,530 |
| 15,687 |
| 15,973 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NON-INTEREST INCOME: |
|
|
|
|
|
|
|
|
| ||||
Service charges |
| 612 |
| 499 |
| 1,603 |
| 1,497 |
| ||||
Securities gains, net |
| 556 |
| 407 |
| 1,854 |
| 1,535 |
| ||||
Bank-owned life insurance |
| 288 |
| 90 |
| 475 |
| 270 |
| ||||
Insurance commissions |
| 507 |
| 637 |
| 1,802 |
| 1,796 |
| ||||
Other operating income |
| 321 |
| 322 |
| 964 |
| 944 |
| ||||
TOTAL NON-INTEREST INCOME |
| 2,284 |
| 1,955 |
| 6,698 |
| 6,042 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NON-INTEREST EXPENSES: |
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
| 2,130 |
| 1,948 |
| 6,323 |
| 5,813 |
| ||||
Occupancy expense, net |
| 261 |
| 231 |
| 838 |
| 704 |
| ||||
Furniture and equipment expense |
| 262 |
| 226 |
| 717 |
| 721 |
| ||||
Pennsylvania shares tax expense |
| 138 |
| 131 |
| 417 |
| 377 |
| ||||
Other operating expenses |
| 1,031 |
| 973 |
| 3,035 |
| 2,820 |
| ||||
TOTAL NON-INTEREST EXPENSES |
| 3,822 |
| 3,509 |
| 11,330 |
| 10,435 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INCOME BEFORE INCOME TAX PROVISION |
| 3,694 |
| 3,976 |
| 11,055 |
| 11,580 |
| ||||
INCOME TAX PROVISION |
| 746 |
| 1,150 |
| 2,632 |
| 3,277 |
| ||||
NET INCOME |
| $ | 2,948 |
| $ | 2,826 |
| $ | 8,423 |
| $ | 8,303 |
|
|
|
|
|
|
|
|
|
|
| ||||
EARNINGS PER SHARE - BASIC |
| $ | 0.89 |
| $ | 0.85 |
| $ | 2.54 |
| $ | 2.50 |
|
|
|
|
|
|
|
|
|
|
| ||||
EARNINGS PER SHARE - DILUTED |
| $ | 0.89 |
| $ | 0.85 |
| $ | 2.54 |
| $ | 2.50 |
|
|
|
|
|
|
|
|
|
|
| ||||
WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC |
| 3,310,719 |
| 3,319,457 |
| 3,311,213 |
| 3,320,249 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED |
| 3,312,464 |
| 3,323,608 |
| 3,313,141 |
| 3,323,908 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
DIVIDNEDS PER SHARE |
| $ | 0.47 |
| $ | 0.35 |
| $ | 1.38 |
| $ | 1.05 |
|
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 |
| STOCK |
| EQUITY |
| ||||||
Balance, December 31, 2004 |
| 3,331,837 |
| $ | 33,318 |
| $ | 17,700 |
| $ | 18,262 |
| $ | 4,331 |
| $ | (446 | ) | $ | 73,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
| 8,423 |
|
|
|
|
| 8,423 |
| ||||||
Dividends declared, $1.38 |
|
|
|
|
|
|
| (4,583 | ) |
|
|
|
| (4,583 | ) | ||||||
Treasury Stock acquired (2,500 shares) |
|
|
|
|
|
|
|
|
|
|
| (115 | ) | (115 | ) | ||||||
Net change in unrealized gain on investments available for sale, net of reclassification adjustment, net of income tax benefit of $1,245 |
|
|
|
|
|
|
|
|
| (2,417 | ) |
|
| (2,417 | ) | ||||||
Stock options exercised |
| 562 |
| 6 |
| 11 |
|
|
|
|
|
|
| 17 |
| ||||||
Balance, September 30, 2005 |
| 3,332,399 |
| $ | 33,324 |
| $ | 17,711 |
| $ | 22,102 |
| $ | 1,914 |
| $ | (561 | ) | $ | 74,490 |
|
|
|
|
|
|
|
|
|
|
| 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, 2003 |
| 3,326,560 |
| $ | 33,265 |
| $ | 17,559 |
| $ | 13,022 |
| $ | 6,132 |
| $ | (209 | ) | $ | 69,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| 8,303 |
|
|
|
|
| 8,303 |
| |||||||
Dividends declared, $1.05 |
|
|
|
|
|
|
| (3,486 | ) |
|
|
|
| (3,486 | ) | ||||||
Treasury Stock acquired (3,000 shares) |
|
|
|
|
|
|
|
|
|
|
| (130 | ) | (130 | ) | ||||||
Net change in unrealized gain on investments available for sale, net of tax benefit of $1,084 |
|
|
|
|
|
|
|
|
| (2,105 | ) |
|
| (2,105 | ) | ||||||
Stock options exercised |
| 897 |
| 9 |
| 22 |
|
|
|
|
|
|
| 31 |
| ||||||
Balance, September 30, 2004 |
| 3,327,457 |
| $ | 33,274 |
| $ | 17,581 |
| $ | 17,839 |
| $ | 4,027 |
| $ | (339 | ) | $ | 72,382 |
|
See accompanying notes to the unaudited consolidated financial statements.
5
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| Three Months Ended September 30, |
| ||||
(In Thousands) |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Net Income |
| $ | 2,948 |
| $ | 2,826 |
|
Other comprehensive income: |
|
|
|
|
| ||
Net unrealized (losses) gains on available for sale securities |
| (3,350 | ) | 4,165 |
| ||
Less: Reclassification adjustment for gain included in net income |
| 556 |
| 407 |
| ||
Other comprehensive (loss) income before tax |
| (3,906 | ) | 3,758 |
| ||
Income tax (benefit) expense related to other comprehensive (loss) income |
| (1,328 | ) | 1,278 |
| ||
Other comprehensive (loss) income, net of tax |
| (2,578 | ) | 2,480 |
| ||
Comprehensive income |
| $ | 370 |
| $ | 5,306 |
|
|
| Nine Months Ended September 30, |
| ||||
(In Thousands) |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Net Income |
| $ | 8,423 |
| $ | 8,303 |
|
Other comprehensive income: |
|
|
|
|
| ||
Net unrealized losses on available for sale securities |
| (1,808 | ) | (1,654 | ) | ||
Less: Reclassification adjustment for gain included in net income |
| 1,854 |
| 1,535 |
| ||
Other comprehensive loss before tax |
| (3,662 | ) | (3,189 | ) | ||
Income tax benefit related to other comprehensive (loss) |
| (1,245 | ) | (1,084 | ) | ||
Other comprehensive loss, net of tax |
| (2,417 | ) | (2,105 | ) | ||
Comprehensive income |
| $ | 6,006 |
| $ | 6,198 |
|
See accompanying notes to the unaudited consolidated financial statements.
6
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
(In Thousands) |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net Income |
| $ | 8,423 |
| $ | 8,303 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation |
| 377 |
| 407 |
| ||
Provision for loan losses |
| 540 |
| 315 |
| ||
Accretion and amortization of investment security discounts and premiums |
| (319 | ) | (28 | ) | ||
Securities gains, net |
| (1,854 | ) | (1,535 | ) | ||
Originations of loans held for sale |
| (21,562 | ) | (27,785 | ) | ||
Proceeds of loans held for sale |
| 22,278 |
| 25,913 |
| ||
Earnings on bank-owned life insurance |
| (475 | ) | (270 | ) | ||
Other, net |
| 200 |
| 718 |
| ||
Net cash provided by operating activities |
| 7,608 |
| 6,038 |
| ||
INVESTING ACTIVITIES: |
|
|
|
|
| ||
Investment securities available for sale: |
|
|
|
|
| ||
Proceeds from sales |
| 109,889 |
| 131,196 |
| ||
Proceeds from calls and maturities |
| 10,697 |
| 22,104 |
| ||
Purchases |
| (130,575 | ) | (138,020 | ) | ||
Investment securities held to maturity: |
|
|
|
|
| ||
Proceeds from calls and maturities |
| 327 |
| 42 |
| ||
Purchases |
| (35 | ) | (14 | ) | ||
Net increase in loans |
| (6,918 | ) | (41,145 | ) | ||
Acquisition of bank premises and equipment |
| (1,636 | ) | (474 | ) | ||
Proceeds from the sale of foreclosed assets |
| 67 |
| 177 |
| ||
Proceeds from redemption of regulatory stock |
| 3,118 |
| 2,100 |
| ||
Purchases of regulatory stock |
| (3,112 | ) | (1,895 | ) | ||
Investment in limited partnership |
| (3,124 | ) | — |
| ||
Net cash used in investing activities |
| (21,302 | ) | (25,929 | ) | ||
FINANCING ACTIVITIES: |
|
|
|
|
| ||
Net increase in interest-bearing deposits |
| 8,351 |
| 33,598 |
| ||
Net (decrease) increase in noninterest-bearing deposits |
| (1,997 | ) | 5,171 |
| ||
Proceeds of long-term borrowings |
| 10,000 |
| 5,000 |
| ||
Repayment of long-term borrowings |
| (1,400 | ) | — |
| ||
Net increase (decrease) in short-term borrowings |
| 3,935 |
| (13,596 | ) | ||
Dividends paid |
| (4,583 | ) | (3,486 | ) | ||
Stock options exercised |
| 17 |
| 31 |
| ||
Purchase of treasury stock |
| (115 | ) | (130 | ) | ||
Net cash provided by financing activities |
| 14,208 |
| 26,588 |
| ||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
| 514 |
| 6,697 |
| ||
CASH AND CASH EQUIVALENTS, BEGINNING |
| 12,626 |
| 10,230 |
| ||
CASH AND CASH EQUIVALENTS, ENDING |
| $ | 13,140 |
| $ | 16,927 |
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Interest paid |
| $ | 7,139 |
| $ | 6,452 |
|
Income taxes paid |
| $ | 2,475 |
| $ | 3,250 |
|
Transfer of loans to foreclosed assets |
| $ | 386 |
| $ | 106 |
|
See accompanying notes to the unaudited consolidated financial statements.
7
PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Basis of Presentation
The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., and Jersey Shore State Bank (the “Bank”) and its wholly-owned subsidiary The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). All significant inter-company balances and transactions have been eliminated in the consolidation.
The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for the fair presentation of results for such periods. All of those adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with financial statements and notes thereto contained in the Company’s annual report for the year ended December 31, 2004.
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 9 thru 11 of the 2004 Annual Report and Form 10K with additional policies listed below in Note 2, Significant Accounting Policies.
NOTE 2. Significant Accounting Policies
The M Group (d/b/a Comprehensive Financial Group) Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from life insurance sales are commission only as The M Group does not underwrite the policies. Life insurance sales include permanent and term policies with the majority of the policies written being permanent. Term life insurance policies are written for 10, 15, 20, and 30 year terms with the majority of the policies being written for 20 years. None of these products are offered as an integral part of lending activities.
Commissions from the sale of annuities is recognized at the time notice is received from the broker/dealer or an insurance company that the transaction is final, which is also the time a commission check is received. Until this notice is received, the completion of the sale is on hold as the broker/dealer or an insurance company may choose to not accept the application.
Life insurance commissions are recognized at varying points based on the payment option chosen by the consumer. Commissions from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete. For example, semi-annual payments on the first of January and July would result in commission recognition on the first of January and July, while payments on the first of January, April, July,
8
and October would result in commission recognition on those dates. The potential for chargebacks only exists for those policies on a monthly payment plan due to the income being recognized at the beginning of the annual period versus at the time of each monthly payment. No liability is maintained for chargebacks as any chargeback is removed from income at the time of the chargeback.
NOTE 3. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123R). FAS No. 123R revised FAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statement (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recogniz ed over the period that an employee provides service in exchange for the award.
In April, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for FAS No. 123R. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.
In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of FAS No. 123R, and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s financial condition, results of operations, and cash flows.
In December 2004, FASB issued FAS No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply
9
the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impractical. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS No.154 improves the financial reporting because its requirements enhance the consistency of financial reporting between periods. The provisions of FAS No. 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
NOTE 4. 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, |
| ||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
| 3,322,089 |
| 3,327,457 |
| 3,321,880 |
| 3,327,406 |
|
|
|
|
|
|
|
|
|
|
|
Average treasury stock shares |
| (11,370 | ) | (8,000 | ) | (10,667 | ) | (7,157 | ) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock equivalents used to calculate basic earnings per share |
| 3,310,719 |
| 3,319,457 |
| 3,311,213 |
| 3,320,249 |
|
|
|
|
|
|
|
|
|
|
|
Additional common stock equivalents (stock options) used to calculate diluted earnings per share |
| 1,745 |
| 4,151 |
| 1,928 |
| 3,659 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share |
| 3,312,464 |
| 3,323,608 |
| 3,313,141 |
| 3,323,908 |
|
Options to purchase 8,107 shares of common stock at the price of $48.35 were outstanding during the three and nine months ended September 30, 2005 and 8,713 shares of common stock at the price of $48.35 were outstanding for the three and nine months ended September 30, 2004, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of the end of the quarter.
10
Note 5. Net Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 11 of the Company’s Consolidated Financial Statements included in the 2004 Annual Report on Form 10-K.
The following sets forth the components of net periodic benefit cost of the domestic non-contributory defined benefit plans for the three and nine months ended September 30, 2005 and 2004, respectively.
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(In Thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 125 |
| $ | 116 |
| $ | 379 |
| $ | 349 |
|
Interest cost |
| 110 |
| 100 |
| 335 |
| 299 |
| ||||
Expected return on plan assets |
| (112 | ) | (81 | ) | (302 | ) | (245 | ) | ||||
Amortization of transition obligation |
| (1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||
Amortization of prior service cost |
| 6 |
| 6 |
| 19 |
| 19 |
| ||||
Amortization of net (gain) loss |
| 16 |
| 10 |
| 49 |
| 31 |
| ||||
Net periodic cost |
| $ | 144 |
| $ | 150 |
| $ | 478 |
| $ | 451 |
|
Employer Contributions
The Company previously disclosed in its consolidated financial statements included in the 2004 Annual Report on Form 10-K that it expected to contribute $575,000 to its defined benefit plan in 2005. However, as of September 30, 2005, contributions of $1,420,000 have been made as the Company determined that contributing an amount above the minimum required was beneficial from a current tax and future financial perspective. Of the contribution $1,100,000 was related to the 2004 pension period. The Company is evaluating the amount, if any, of additional funds to contribute in the final quarter of 2005.
Note 6. Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
11
Financial instruments whose contract amounts represent credit risk are as follows:
|
| September 30, |
| ||||
(In Thousands) |
| 2005 |
| 2004 |
| ||
Commitments to extend credit |
| $ | 74,483 |
| $ | 54,313 |
|
Standby letters of credit |
| 1,537 |
| 760 |
| ||
Note 7. Reclassification of Comparative Amounts
Certain comparative amounts for the prior periods have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies.
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, 2005 and 2004
Summary Results
Net income for the three months ended September 30, 2005 was $2,948,000 compared to $2,826,000 for the same period of 2004. Basic and diluted earnings per share for the three months ended September 30, 2005 were $0.89 as compared to $0.85 for the three months ended September 30, 2004. Return on average assets and return on average equity were 2.12% and 16.54% for the three months ended September 30, 2005 as compared to 2.06% and 16.07% for the corresponding period of 2004. Net income from core operations for the three months ended September 30, 2005, excluding after-tax securities gains of $367,000, increased to $2,581,000 from $2,557,000 for the three months ended September 30, 2004.
The nine months ended September 30, 2005 generated net income of $8,423,000 compared to $8,303,000 for the same period of 2004. Earnings per share, basic and diluted, for the nine months ended September 30, 2005 were $2.54 as compared to $2.50 for the comparable period of 2004. Return on average assets and return on average equity were 2.05% and 14.94% for the nine months ended September 30, 2005 as compared to 2.07% and 15.62% for the corresponding period of 2004. Net income from core operations for the nine months ended September 30, 2005, excluding after-tax securities gains of $1,224,000, declined to $7,199,000 from $7,290,000 for the nine months ended September 30, 2004. (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. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.)
Interest Income
During the third quarter of 2005, interest and dividend income was $8,113,000, an increase of $189,000 over the same quarter of 2004. The increase in total interest income was primarily the result of growth in average loans of $18,671,000 for the third quarter of 2005 as compared to 2004. Over this time frame the average balance of investment securities declined $10,503,000, while the investment portfolio continued to shift from taxable mortgage-backed securities to tax-exempt municipal bonds. The shift in earning assets increased loan interest and fee income by $349,000 while decreasing interest and dividend income on investment securities by $160,000. On a taxable equivalent basis, the shift in the investment portfolio resulted in an increase of $122,000 in interest and dividend income despite a decline in average balance of $10,503,000.
13
This shift within the investment securities portfolio was undertaken to ladder cash flows, maintain the interest margin, and to invest at the community level. The increase in dividends received is the result of an increase in the level of dividends from the Federal Home Loan Bank of Pittsburgh coupled with an emphasis on purchasing stocks consistently having an above average dividend yield.
During the nine months ended September 30, 2005, interest and dividend income was $23,634,000, an increase of $851,000 over the same period in 2004. The reasons for the 3.7% growth in interest income for the nine month period are identical to those for the three month period discussed above. The growth in average loans of $32,089,000 offset a 7 basis point (bp) decline in the loan yield resulting in an increase of $1,492,000 in loan interest and fee income. Average investment securities declined $21,682,000 causing total investment security interest and dividend income to decline $641,000. The change in the mix of investment securities offset the effect on interest income of the average balance decrease as taxable equivalent interest remained flat at $7,721,000 for the nine month period ended September 30, 2005.
Interest income composition for the three and nine months ended September 30, 2005 and 2004 were as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Loans including fees |
| $ | 5,899 |
| 72.8 | % | $ | 5,550 |
| 70.1 | % | $ | 349 |
| 6.3 | % |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Taxable |
| 967 |
| 11.9 |
| 1,698 |
| 21.4 |
| (731 | ) | (43.1 | ) | |||
Tax-exempt |
| 969 |
| 11.9 |
| 422 |
| 5.3 |
| 547 |
| 129.6 |
| |||
Dividend |
| 278 |
| 3.4 |
| 254 |
| 3.2 |
| 24 |
| 9.4 |
| |||
Total interest income |
| $ | 8,113 |
| 100.0 | % | $ | 7,924 |
| 100.0 | % | $ | 189 |
| 2.4 | % |
|
| For The Nine Months Ended |
| |||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Loans including fees |
| $ | 17,070 |
| 72.2 | % | $ | 15,578 |
| 68.3 | % | $ | 1,492 |
| 9.6 | % |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Taxable |
| 3,445 |
| 14.6 |
| 5,278 |
| 23.2 |
| (1,833 | ) | (34.7 | ) | |||
Tax-exempt |
| 2,246 |
| 9.5 |
| 1,133 |
| 5.0 |
| 1,113 |
| 98.2 |
| |||
Dividend |
| 873 |
| 3.7 |
| 794 |
| 3.5 |
| 79 |
| 9.9 |
| |||
Total interest income |
| $ | 23,634 |
| 100.0 | % | $ | 22,783 |
| 100.0 | % | $ | 851 |
| 3.7 | % |
Interest Expense
Interest expense during the third quarter of 2005 increased $472,000 to $2,701,000 from $2,229,000 for the third quarter of 2004. The increased expense associated with deposits is primarily the result of rate increases for time deposit accounts from the third quarter of 2004 to the corresponding period of 2005. Factors that led to the rate increases include, but are not limited to, prime rate increases, competitive pressure, attracting municipal deposits, and a CD campaign run in conjunction with the opening of the North Atherton Street, State College branch. The increase in CD rates has been greater than the increase in rates related to non-
14
maturity deposits. This has led to some non-maturity accounts being transferred into higher rate CDs. For example, the CD campaign related to the North Atherton Street branch opening witnessed approximately a third of the funds being transferred from non-maturity deposit accounts held with the Company. Short-term borrowing costs increased despite a decrease of $3,218,000 in average balances due to the 200 basis point increase in the prime rate over the past year. This increase affected the rate paid on FHLB overnight borrowings, FHLB short-term borrowings, and the rate paid to cash management customers. Long-term FHLB borrowing expense increased slightly as during the second quarter of 2005 $10 million was borrowed from the FHLB at a fixed rate of 3.97% for 5 years with a final maturity of 10 years. This borrowing replaced the debt that matured at the end of the first quarter of 2005 and was used to pay off a portion of the short-term borrowings.
Interest expense for the nine months ended September 30, 2005 increased $912,000 to $7,407,000 from $6,495,000 for the comparable period of 2004. The majority of the increase, $787,000, occurred during the second ($315,000 increase) and third quarters ($472,000 increase) as discussed above. Total deposits accounted for $607,000 of the increase due to the reasons noted in the above three month analysis. Borrowing costs increased due to the rate increases over the past year as the borrowing average balance remained table for the 2005 and 2004 nine month periods.
Interest expense composition for the three and nine months ended September 30, 2005 and 2004 is as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Deposits |
| $ | 1,537 |
| 56.9 | % | $ | 1,227 |
| 55.0 | % | $ | 310 |
| 25.3 | % |
Short-term borrowings |
| 199 |
| 7.4 |
| 131 |
| 5.9 |
| 68 |
| 51.9 |
| |||
Long-term borrowings |
| 965 |
| 35.7 |
| 871 |
| 39.1 |
| 94 |
| 10.8 |
| |||
Total interest expense |
| $ | 2,701 |
| 100.0 | % | $ | 2,229 |
| 100.0 | % | $ | 472 |
| 21.2 | % |
|
| For The Nine Months Ended |
| |||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Deposits |
| $ | 4,151 |
| 56.0 | % | $ | 3,544 |
| 54.6 | % | $ | 607 |
| 17.1 | % |
Short-term borrowings |
| 545 |
| 7.4 |
| 367 |
| 5.6 |
| 178 |
| 48.5 |
| |||
Long-term borrowings |
| 2,711 |
| 36.6 |
| 2,584 |
| 39.8 |
| 127 |
| 4.9 |
| |||
Total interest expense |
| $ | 7,407 |
| 100.0 | % | $ | 6,495 |
| 100.0 | % | $ | 912 |
| 14.0 | % |
Net Interest Margin
The net interest margin (NIM) for the three months ended September 30, 2005 was 4.49% as compared to 4.54% for the corresponding period of 2004. The decrease in the NIM was the result of the yield on earning assets increasing 28 basis points (bp) to 6.52% for the three months ended September 30, 2005 as compared to 2004 offset by a 44 bp increase in interest bearing liabilities over the same period. The increase in the yield on earning assets is attributable to a change in the mix of earning assets from taxable investment securities to loans and tax-exempt investment securities. Over the time periods being compared, total average loans, yielding
15
7.10%, increased $18,671,000, while the lower yielding investment securities portfolio, yielding 5.54%, average balance declined $10,503,000. In addition, within the investment portfolio, average tax-exempt investment securities accounted for 46.3% of the portfolio for the three months ended September 30, 2005 as compared to 16.9% during the comparable period of 2004. The NIM impact of the earning asset mix improvement and volume increase in total loans was reduced by rate increases on interest bearing liabilities. The rates paid on deposit accounts increased to 2.04% as compared to 1.62% for the 2004 period. This increase was driven by growth in time deposits of $23,565,000 and an increase in the rate paid on time deposits to 3.06% from 2.58% for the three months ended September 30, 2004. A portion of the increase in volume and rate is due to a CD campaign that was run in conjunction with the opening of the North Atherton Street, State College branch. The campaign was centered on 13 and 17 month term CD’s with rates slightly above market. Short-term borrowings incurred a rate increase of 120 bp to 2.92% for the three months ended September 30, 2005 as the prime rate increased to 6.75% at September 30, 2005.
The NIM for the nine months ended September 30, 2005 was 4.52% as compared to 4.47% for the corresponding period of 2004. The increase in the NIM was the result of the before mentioned growth and change in mix of the earnings assets along with the growth in demand deposits. The NIM increased for the time periods being compared despite the rate paid on interest bearing liabilities increasing 29 bp, while the yield on earning assets increased 25 bp. Offsetting the spread compression was an increase in demand deposits that funded $5,658,000 of the $10,407,000 increase in earning assets.
Following is a schedule of average balances and associated yields for the three and nine month periods ended September 30, 2005 and 2004:
16
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 |
| ||||||||||||
|
| 9/30/2005 |
| 9/30/2004 |
| ||||||||||||
(In Thousands) |
| Average Balance |
| Interest |
| Average Rate |
| Average Balance |
| Interest |
| Average Rate |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Tax-exempt loans |
| $ | 4,500 |
| $ | 186 |
| 5.53 | % | $ | 1,385 |
| $ | 85 |
| 8.21 | % |
All other loans |
| 323,151 |
| 16,947 |
| 7.01 | % | 294,177 |
| 15,522 |
| 7.05 | % | ||||
Total Loans |
| 327,651 |
| 17,133 |
| 6.99 | % | 295,562 |
| 15,607 |
| 7.06 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Taxable securities |
| 120,425 |
| 4,318 |
| 4.78 | % | 177,572 |
| 6,072 |
| 4.56 | % | ||||
Tax-exempt securitites |
| 67,226 |
| 3,403 |
| 6.75 | % | 31,761 |
| 1,717 |
| 7.21 | % | ||||
Total securities |
| 187,651 |
| 7,721 |
| 5.49 | % | 209,333 |
| 7,789 |
| 4.96 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-earning assets |
| 515,302 |
| 24,854 |
| 6.44 | % | 504,895 |
| 23,396 |
| 6.19 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other assets |
| 33,361 |
|
|
|
|
| 29,393 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 548,663 |
|
|
|
|
| $ | 534,288 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Savings |
| $ | 65,868 |
| 382 |
| 0.78 | % | $ | 69,776 |
| 432 |
| 0.83 | % | ||
Super Now deposits |
| 51,680 |
| 324 |
| 0.84 | % | 53,868 |
| 276 |
| 0.69 | % | ||||
Money market deposits |
| 30,398 |
| 306 |
| 1.35 | % | 35,264 |
| 292 |
| 1.11 | % | ||||
Time deposits |
| 144,159 |
| 3,139 |
| 2.91 | % | 130,293 |
| 2,544 |
| 2.61 | % | ||||
Total Deposits |
| 292,105 |
| 4,151 |
| 1.90 | % | 289,201 |
| 3,544 |
| 1.64 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 28,268 |
| 545 |
| 2.58 | % | 31,683 |
| 367 |
| 1.55 | % | ||||
Long-term borrowings |
| 79,587 |
| 2,711 |
| 4.55 | % | 75,403 |
| 2,584 |
| 4.58 | % | ||||
Total borrowings |
| 107,855 |
| 3,256 |
| 4.04 | % | 107,086 |
| 2,951 |
| 3.68 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest bearing liabilities |
| 399,960 |
| 7,407 |
| 2.48 | % | 396,287 |
| 6,495 |
| 2.19 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 68,547 |
|
|
|
|
| 62,889 |
|
|
|
|
| ||||
Other liabilities |
| 4,988 |
|
|
|
|
| 4,252 |
|
|
|
|
| ||||
Shareholders’ equity |
| 75,168 |
|
|
|
|
| 70,860 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | 548,663 |
|
|
|
|
| $ | 534,288 |
|
|
|
|
| ||
Interest rate spread |
|
|
|
|
| 3.97 | % |
|
|
|
| 4.00 | % | ||||
Net interest income/margin |
|
|
| $ | 17,447 |
| 4.52 | % |
|
| $ | 16,901 |
| 4.47 | % | ||
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, 2005 and 2004.
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(In Thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total interest income |
| $ | 8,113 |
| $ | 7,924 |
| $ | 23,634 |
| $ | 22,783 |
|
Total interest expense |
| 2,701 |
| 2,229 |
| 7,407 |
| 6,495 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| $ | 5,412 |
| $ | 5,695 |
| $ | 16,227 |
| $ | 16,288 |
|
Tax equivalent adjustment |
| 542 |
| 224 |
| 1,220 |
| 613 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income (fully taxable equivalent) |
| $ | 5,954 |
| $ | 5,919 |
| $ | 17,447 |
| $ | 16,901 |
|
The following table sets forth the respective impact that both volume and rate changes have had on net interest income and the net interest margin for the three and nine month periods ended September 30, 2005 and 2004:
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||||||||||||
|
| 2005 vs 2004 |
| 2005 vs 2004 |
| ||||||||||||||
|
| Increase (Decrease) |
| Increase (Decrease) |
| ||||||||||||||
|
| Due to |
| Due to |
| ||||||||||||||
(In Thousands) |
| Volume |
| Rate |
| Net |
| Volume |
| Rate |
| Net |
| ||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans |
| $ | 328 |
| $ | 57 |
| $ | 385 |
| $ | 1,651 |
| $ | (124 | ) | $ | 1,527 |
|
Taxable investment securities |
| (781 | ) | 74 |
| (707 | ) | (2,037 | ) | 283 |
| (1,754 | ) | ||||||
Tax-exempt investment securities |
| 913 |
| (83 | ) | 830 |
| 1,802 |
| (116 | ) | 1,686 |
| ||||||
Total interest-earning assets |
| 460 |
| 48 |
| 508 |
| 1,416 |
| 43 |
| 1,459 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Savings deposits |
| (9 | ) | (13 | ) | (22 | ) | (36 | ) | (13 | ) | (49 | ) | ||||||
Super Now deposits |
| (27 | ) | 8 |
| (19 | ) | (11 | ) | 60 |
| 49 |
| ||||||
Money Market deposits |
| (20 | ) | 31 |
| 11 |
| (43 | ) | 58 |
| 15 |
| ||||||
Time deposits |
| (576 | ) | 915 |
| 339 |
| (113 | ) | 708 |
| 595 |
| ||||||
Short-term borrowings |
| (15 | ) | 84 |
| 69 |
| (44 | ) | 221 |
| 177 |
| ||||||
Long-term borrowings |
| 99 |
| (4 | ) | 95 |
| 142 |
| (16 | ) | 126 |
| ||||||
Total interest-bearing liabilities |
| (548 | ) | 1,021 |
| 473 |
| (105 | ) | 1,018 |
| 913 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Change in net interest income |
| $ | 1,008 |
| $ | (973 | ) | $ | 35 |
| $ | 1,521 |
| $ | (975 | ) | $ | 546 |
|
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 performed annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers
19
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, 2005, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, employment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.
While determining the appropriate allowance level management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.
The allowance for loan losses increased from $3,338,000 at December 31, 2004 to $3,492,000 at September 30, 2005. At September 30, 2005, the allowance for loan losses was 1.06% of total loans compared to 1.03% of total loans at December 31, 2004. Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.
The provision for loan losses totaled $180,000 and $540,000 for the three and nine months ended September 30, 2005 as compared to $165,000 and $315,000 the same periods in 2004. The increases were the result of gross loan growth of $13,920,000, primarily in the commercial category, from September 2004 to September 2005.
An overall decrease of $669,000 was experienced in non-performing loans (non-accrual and 90 days past due) from December 31, 2004 to $1,056,000 at September 30, 2005. The decrease is the result of several commercial loans being brought to current status due to collection efforts along with other commercial loans being reclassified to other real estate owned, which is presented within other assets on the balance sheet.
Based upon this analysis, as well as the others noted above, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in its loan portfolio.
Non-interest Income
Total non-interest income for the quarter ended September 30, 2005 compared to the same period in 2004 increased $329,000. Excluding net security gains, the increase from period to period was $180,000. Bank-owned life insurance income increased $198,000 due to a gain on death benefit of $196,000. The gain is the result of the difference between the cash value of the insurance policy and the actual benefit received. Service charge on deposit accounts increased
20
due to the implementation of Bounce Protection during May 2005. This product provides overdraft protection up to a predetermined amount to non-commercial customers for a per event fee. The approximate 50% increase in overdraft charges over the 2004 period is attributable to the Bounce Protection program. Insurance commissions decreased as The M Group enters the slower portion of its sales year. The management of The M Group continued to gather new and build upon current relationships during the third quarter of 2005, however, the sales cycle for insurance products can take time to complete. The relationship gathering and building has been facilitated by The M Group’s continued ability to align with other banks and credit unions to serve the needs of their customers. In addition, The M Group has been able to hire additional sales representatives to better cover and expand the current geographic area.
Total non-interest income for the nine months ended September 30, 2005 compared to the same period in 2004 increased $656,000. Excluding net security gains, the increase from period to period was $337,000. Insurance commissions represented the majority of the increase as The M Group continued to expand in terms of customer base and geographic area. The increase in service charge on deposit accounts was driven by the implementation of Bounce Protection during May 2005 as noted above. The increase in bank-owned life insurance was the result of the previously noted gain on death benefit recognized during the third quarter of 2005.
Non-interest income composition for the three and nine months ended September 30, 2005 and 2004 were as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Service charge on deposit accounts |
| $ | 612 |
| 26.8 | % | $ | 499 |
| 25.5 | % | $ | 113 |
| 22.6 | % |
Net security gains |
| 556 |
| 24.3 |
| 407 |
| 20.8 |
| 149 |
| 36.6 |
| |||
Bank owned life insurance |
| 288 |
| 12.6 |
| 90 |
| 4.6 |
| 198 |
| 220.0 |
| |||
Insurance commissions |
| 507 |
| 22.2 |
| 637 |
| 32.6 |
| (130 | ) | (20.4 | ) | |||
Other income |
| 321 |
| 14.1 |
| 322 |
| 16.5 |
| (1 | ) | (0.3 | ) | |||
Total non-interest income |
| $ | 2,284 |
| 100.0 | % | $ | 1,955 |
| 100.0 | % | $ | 329 |
| 16.8 | % |
|
| For The Nine Months Ended | ||||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Service charge on deposit accounts |
| $ | 1,603 |
| 23.9 | % | $ | 1,497 |
| 24.8 | % | $ | 106 |
| 7.1 | % |
Net security gains |
| 1,854 |
| 27.7 |
| 1,535 |
| 25.4 |
| 319 |
| 20.8 |
| |||
Bank owned life insurance |
| 475 |
| 7.1 |
| 270 |
| 4.5 |
| 205 |
| 75.9 |
| |||
Insurance commissions |
| 1,802 |
| 26.9 |
| 1,796 |
| 29.7 |
| 6 |
| 0.3 |
| |||
Other income |
| 964 |
| 14.4 |
| 944 |
| 15.6 |
| 20 |
| 2.1 |
| |||
Total non-interest income |
| $ | 6,698 |
| 100.0 | % | $ | 6,042 |
| 100.0 | % | $ | 656 |
| 10.9 | % |
Non-interest Expenses
Total non-interest expenses increased $313,000 from the three months ended September 30, 2004 as compared to the same period of 2005. The increase in salaries and employee benefits was attributable to several items including; standard cost of living salary increases for employees, staffing for the new State College branch, and increased accruals related to incentive
21
and bonus payments. Occupancy expenses increased due to the new branch opened in May 2005 and due to general increases in utility costs, property taxes, and depreciation. Other expenses increased primarily due to normal increases in business expenses and expenses surrounding the opening of the new branch.
Total non-interest expenses increased $895,000 from the nine months ended September 30, 2004 as compared to the same period of 2005. As noted in the three month discussion, the new State College branch impacted the level of non-interest expenses. In addition, normal increases in business expenses aided the increase in occupancy and other expenses. Furniture and equipment expenses declined as amortization of software and maintenance on equipment declined as compared to the 2004 period.
Non-interest expense composition for the three and nine months ended September 30, 2005 and 2004 was as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Salaries and employee benefits |
| $ | 2,130 |
| 55.7 | % | $ | 1,948 |
| 55.5 | % | $ | 182 |
| 9.3 | % |
Occupancy expense, net |
| 261 |
| 6.8 |
| 231 |
| 6.6 |
| 30 |
| 13.0 |
| |||
Furniture and equipment expenses |
| 262 |
| 6.9 |
| 226 |
| 6.4 |
| 36 |
| 15.9 |
| |||
Pennsylvania shares tax |
| 138 |
| 3.6 |
| 131 |
| 3.7 |
| 7 |
| 5.3 |
| |||
Other expense |
| 1,031 |
| 27.0 |
| 973 |
| 27.7 |
| 58 |
| 6.0 |
| |||
Total non-interest expense |
| $ | 3,822 |
| 100.0 | % | $ | 3,509 |
| 100 | % | $ | 313 |
| 8.9 | % |
|
| For The Nine Months Ended |
| ||||||||||||||||
|
| September 30, 2005 |
| September 30, 2004 |
| Change |
| ||||||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| ||||||
Salaries and employee benefits |
| $ | 6,323 |
| 55.8 | % | $ | 5,813 |
| 55.8 | % | $ | 510 |
| 8.8 | % | |||
Occupancy expense, net |
| 838 |
| 7.4 |
| 704 |
| 6.7 |
| 134 |
| 19.0 |
| ||||||
Furniture and equipment expenses |
| 717 |
| 6.3 |
| 721 |
| 6.9 |
| (4 | ) | (0.6 | ) | ||||||
Pennsylvania shares tax |
| 417 |
| 3.7 |
| 377 |
| 3.6 |
| 40 |
| 10.6 |
| ||||||
Other expense |
| 3,035 |
| 26.8 |
| 2,820 |
| 27.0 |
| 215 |
| 7.6 |
| ||||||
Total non-interest expense |
| $ | 11,330 |
| 100.0 | % | $ | 10,435 |
| 100.0 | % | $ | 895 |
| 8.6 | % | |||
Provision for Income Taxes
Income taxes decreased $404,000 and $645,000 for the three and nine month periods ended September 30, 2005 compared to the same periods of 2004. The effective tax rate for the three months ended September 30, 2005 and 2004 were 20.2% and 28.9%, respectively. The nine months ended September 30, 2005 had an effective tax rate of 23.8% as compared to 28.3% for the comparable period of 2004. The decreasing effective tax rate is consistent with management’s repositioning of the investment portfolio from taxable investment securities to tax-exempt investment securities. In addition, increased bank-owned life insurance related to a gain on death benefit aided in reducing the effective tax rate for the three and nine month periods of 2005.
22
ASSET/LIABILITY MANAGEMENT
Cash
Cash and cash equivalents increased $514,000 from $12,626,000 at December 31, 2004. The increase was the result of an increase in the cash letter (items in process of clearing between the bank and other financial institutions).
Loans
Total gross loans increased $6,146,000 to $330,651,000 at September 30, 2005 from December 31, 2004. The increase is primarily a result of continued emphasis in obtaining commercial loans as commercial and agricultural loans increased $4,990,000 since December 31, 2004.
The allocation of the loan portfolio, by category, as of September 30, 2005 and December 31, 2004 are presented below:
|
| September 30, |
| December 31, |
| ||
(In Thousands) |
| 2005 |
| 2004 |
| ||
Commercial and agricultural |
| $ | 35,093 |
| $ | 30,103 |
|
Real estate mortgage: |
|
|
|
|
| ||
Residential |
| 149,150 |
| 147,461 |
| ||
Commercial |
| 120,410 |
| 123,757 |
| ||
Construction |
| 10,040 |
| 8,364 |
| ||
Installment loans to individuals |
| 16,983 |
| 15,915 |
| ||
Less: Net deferred loan fees |
| 1,025 |
| 1,096 |
| ||
Gross loans |
| $ | 330,651 |
| $ | 324,504 |
|
Investments
Total investment securities increased $7,584,000 as deposit growth in excess of loan growth was invested in tax-exempt investment securities. Since December 31, 2004, tax-exempt bond holdings have increased $44,394,000 as the cash flows from mortgage-backed investment securities funded the increase. The growth in tax-exempt investment securities was undertaken to maintain tax equivalent yield, liquidity, provide call option protection, reduce the overall corporate effective tax rate, and to invest in communities across the Commonwealth of Pennsylvania and the country.
During the nine months ended September 30, 2005, $1,854,000 in net security gains were recognized from the $6,563,000 in net unrealized gains at December 31, 2004 for the available for sale investment portfolio. The bond portfolio incurred a net realized gain of $45,000 as the portfolio was shifted slightly in light of the current rising rate environment and the desire to increase the use of the investment portfolio as a vehicle to manage the corporate tax rate. The equity portfolio had recognized gains of $1,809,000 during the nine months ended September 30,
23
2005. The gains were the result of management’s intention to diversify, increase dividend yield, or to reduce ownership in companies that management felt had reached their full potential.
The amortized cost of investment securities and their approximate fair values are as follows:
|
| September 30, 2005 |
| ||||||||||
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
(In Thousands) |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available for Sale (AFS) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 66,947 |
| $ | 24 |
| $ | (1,063 | ) | $ | 65,908 |
|
State and political securities |
| 94,951 |
| 1,929 |
| (490 | ) | 96,390 |
| ||||
Other debt securities |
| 1,381 |
| 24 |
| (12 | ) | 1,393 |
| ||||
Total debt securities |
| 163,279 |
| 1,977 |
| (1,565 | ) | 163,691 |
| ||||
Equity securities |
| 25,860 |
| 3,070 |
| (582 | ) | 28,348 |
| ||||
Total Investment Securities AFS |
| $ | 189,139 |
| $ | 5,047 |
| $ | (2,147 | ) | $ | 192,039 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held to Maturity (HTM) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 29 |
| $ | 2 |
| $ | — |
| $ | 31 |
|
Other debt securities |
| 237 |
| — |
| (27 | ) | 210 |
| ||||
Total Investment Securities HTM |
| $ | 266 |
| $ | 2 |
| $ | (27 | ) | $ | 241 |
|
|
| December 31, 2004 |
| ||||||||||
|
|
|
| Gross |
| Gross |
|
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
(In Thousands) |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available for Sale (AFS) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 104,248 |
| $ | 207 |
| $ | (430 | ) | $ | 104,025 |
|
State and political securities |
| 46,829 |
| 766 |
| (527 | ) | 47,068 |
| ||||
Other debt securities |
| 1,302 |
| 47 |
| (7 | ) | 1,342 |
| ||||
Total debt securities |
| 152,379 |
| 1,020 |
| (964 | ) | 152,435 |
| ||||
Equity securities |
| 25,221 |
| 6,579 |
| (72 | ) | 31,728 |
| ||||
Total Investment Securities AFS |
| $ | 177,600 |
| $ | 7,599 |
| $ | (1,036 | ) | $ | 184,163 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held to Maturity (HTM) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 32 |
| $ | — |
| $ | — |
| $ | 32 |
|
State and political securities |
| 248 |
| 3 |
| — |
| 251 |
| ||||
Other debt securities |
| 278 |
| — |
| — |
| 278 |
| ||||
Total Investment Securities HTM |
| $ | 558 |
| $ | 3 |
| $ | — |
| $ | 561 |
|
24
Other Assets
The increase in other assets of $9,158,000 since December 31, 2004 is the result of two events. During September 2004, an investment in a low income housing complex was undertaken as part of the company’s reinvestment into the community and for corporate tax planning purposes. The $3,124,000 investment will generate federal income tax credits for 10 years beginning when the complex reaches 95% occupancy. The majority of the remaining increase is the result of a receivable in the amount $4,960,000 related to investment portfolio trades that were initiated during September 2005 but did not settle until October 2005.
Deposits
At September 30, 2005, total deposits were $363,190,000, an increase of $6,354,000 from December 31, 2004. Non-time deposits decreased $20,895,000 from December 31, 2004 with the decrease occurring in all non-time deposit account categories. The increase in time deposits of $27,249,000 is the result of a combination of a CD gathering campaign run in conjunction with the Atherton Street, State College branch opening, transfer of funds from non-time to time deposit accounts, and the obtainment of municipal funds which mature in under a year.
Deposit balances and their changes for the periods being discussed follow:
|
| September 30, 2005 |
| December 31, 2004 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % Total |
| |||
Demand deposits |
| $ | 72,053 |
| 19.8 | % | $ | 74,050 |
| 20.8 | % | $ | (1,997 | ) | (2.7 | )% |
NOW Accounts |
| 49,064 |
| 13.5 |
| 55,211 |
| 15.5 |
| (6,147 | ) | (11.1 | ) | |||
Insured MMDA |
| 26,757 |
| 7.4 |
| 32,377 |
| 9.1 |
| (5,620 | ) | (17.4 | ) | |||
Savings deposits |
| 62,676 |
| 17.3 |
| 69,807 |
| 19.6 |
| (7,131 | ) | (10.2 | ) | |||
Time deposits |
| 152,640 |
| 42.0 |
| 125,391 |
| 35.0 |
| 27,249 |
| 21.7 |
| |||
Total deposits |
| $ | 363,190 |
| 100.0 | % | $ | 356,836 |
| 100.0 | % | $ | 6,354 |
| 1.8 | % |
Borrowed Funds
Total borrowed funds increased to $124,888,000 at September 30, 2005 as compared to December 31, 2004. The increase in short-term borrowings are being utilized to supplement deposits in the day to day funding of the loan portfolio and normal operations. Long-term borrowings were utilized to replace maturing long-term advances, while locking in a competitive rate in advance of projected rate increases.
|
| September 30 |
| December 31 |
| ||
(In Thousands) |
| 2005 |
| 2004 |
| ||
Short-term borrowings: |
|
|
|
|
| ||
FHLB repurchase agreements |
| $ | 5,465 |
| $ | 22,630 |
|
Short-term borrowings, FHLB |
| 19,855 |
| — |
| ||
Securities sold under agreement to repurchase |
| 15,090 |
| 13,845 |
| ||
Total short-term borrowings |
| 40,410 |
| 36,475 |
| ||
|
|
|
|
|
| ||
Long-term borrowings, FHLB |
| 84,478 |
| 75,878 |
| ||
Total borrowed funds |
| $ | 124,888 |
| $ | 112,353 |
|
25
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.
Capital ratios as of September 30, 2005 and 2004 were as follows:
|
| 2005 |
| 2004 |
| ||||||
(In Thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||
Total Capital |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Actual |
| $ | 73,683 |
| 21.0 | % | $ | 71,225 |
| 22.1 | % |
For Capital Adequacy Purposes |
| 28,130 |
| 8.0 |
| 25,768 |
| 8.0 |
| ||
To Be Well Capitalized |
| 35,162 |
| 10.0 |
| 32,210 |
| 10.0 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Tier I Capital |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Actual |
| $ | 69,071 |
| 19.6 | % | $ | 65,286 |
| 20.3 | % |
For Capital Adequacy Purposes |
| 14,065 |
| 4.0 |
| 12,884 |
| 4.0 |
| ||
To Be Well Capitalized |
| 21,097 |
| 6.0 |
| 19,326 |
| 6.0 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Tier I Capital |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Actual |
| $ | 69,071 |
| 12.6 | % | $ | 65,286 |
| 12.1 | % |
For Capital Adequacy Purposes |
| 22,008 |
| 4.0 |
| 21,655 |
| 4.0 |
| ||
To Be Well Capitalized |
| 27,510 |
| 5.0 |
| 27,068 |
| 5.0 |
| ||
26
Liquidity and Interest Rate Sensitivity
The asset/liability committee addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance within the limits cited.
1. Net Loans to Total Assets, 70% maximum
2. Net Loans to Total Deposits, 92.5% maximum
3. Net Loans to Core Deposits, 100% maximum
4. Investments to Total Assets, 40% maximum
5. Investments to Total Deposits, 50% maximum
6. Total Liquid Assets to Total Assets, 25% minimum
7. Total Liquid Assets to Total Liabilities, 25% minimum
8. Net Core Funding Dependence, 35% maximum
Fundamental objectives of the Company’s asset/liability management process are to maintain adequate liquidity while minimizing interest rate risk. The maintenance of adequate liquidity provides the Company with the ability to meet its financial obligations to depositors, loan customers, and shareholders. Additionally, it provides funds for normal operating expenditures and business opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.
The Bank, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments, and expenses. In order to control cash flow, the Bank estimates future flows of cash from deposits, loan payments, and investment security payments. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, as well as Federal Home Loan Bank borrowings. Funds generated are used principally to fund loans and purchase investment securities. Management believes the Company has adequate resources to meet its normal funding requirements.
Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both
27
customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit provides core ingredients to satisfy depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a current borrowing capacity at the Federal Home Loan Bank of $206,685,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $25,500,000. Management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. Federal Home Loan Bank advances totaled $109,798,000 as of September 30, 2005.
Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap management, the Company has an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s balance sheets.
There have been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s Form 10-K for the period ended December 31, 2004.
Generally, management believes the Company is well positioned to respond 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.
28
In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01 (b) (8) of Regulation S-X.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at the Bank level as well as the Company level. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party. There have been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s SEC 10-K for the period ended December 31, 2004. Additional information and details are provided in the Liquidity and Interest Rate Sensitivity section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.
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, 2005. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. OTHER INFORMATION
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company announced a repurchase program on August 10, 2000 which was approved by the Board of Directors on August 8, 2000 for the repurchase of 171,600 shares which was set to expire on August 8, 2005. However, on July 27, 2005, the Company announced that the Board of Directors had elected to extend the terms of the repurchase program by one year with a new expiration date of August 8, 2006. During the three months ended September 30, 2005 there were 2,500 shares repurchased as part of the repurchase program.
29
|
| 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 |
| |
July 1, 2005 to July 31, 2005 |
| — |
| — |
| — |
| 49,809 |
| |
|
|
|
|
|
|
|
|
|
| |
August 1, 2005 to August 31, 2005 |
| 2,500 |
| $ | 46.00 |
| 2,500 |
| 49,809 |
|
|
|
|
|
|
|
|
|
|
| |
September 1, 2005 to September 30, 2005 |
| — |
| — |
| — |
| 49,809 |
| |
|
|
|
|
|
|
|
|
|
| |
Total |
| 2,500 |
| $ | 46.00 |
| 2,500 |
| 49,809 |
|
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On October 25, 2005 the Board of Directors declared a 6 for 5 stock split. The split will increase shares outstanding by 20% or approximately 663,917 shares. Total outstanding shares after the split will total approximately 3,983,506. The split is payable November 18, 2005 to shareholders of record November 4, 2005. Cash will be paid in lieu of fractional shares.
|
| |
|
|
|
(3) (i) |
| Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-4, No. 333-65821). |
(3) (ii) |
| Bylaws of the Registrant as presently in effect (incorporated by reference to Exhibit 3 (ii) of the Registrant’s current report on Form 8-K filed June 17, 2005. |
(10) (i) |
| Consulting Agreement, dated July 15, 2005, between Hubert A. Valencik and the Registrant (incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed on July 18, 2005). |
(31) (i) |
| Rule 13a-14(a) Certification of Chief Executive Officer |
(31) (ii) |
| Rule 13a-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 |
30
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 8, 2005 |
| /s/ Ronald A. Walko |
| ||
|
| Ronald A. Walko, President and Chief Executive Officer | ||||
|
|
| ||||
|
|
| ||||
Date: | November 8, 2005 |
| /s/ Brian L. Knepp |
| ||
|
| Brian L. Knepp, Vice President of Finance (Principal | ||||
31
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 |
32