UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
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| for the Quarterly Period Ended September 30, 2008. |
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o | Transition report pursuant to Section 13 or 15 (d) of the Exchange Act |
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| 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, P.O. Box 967 Williamsport, Pennsylvania |
| 17703-0967 |
(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 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 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):
|
| Large accelerated filer ¨ |
| Accelerated filer x |
|
| Non-accelerated filer ¨ |
| Small reporting company ¨ |
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 October 27, 2008 there were 3,850,518 shares of the Registrant’s common stock outstanding.
PENNS WOODS BANCORP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
2
PENNS WOODS BANCORP, INC.
(UNAUDITED)
|
| September 30, |
| December 31, |
| ||
(In Thousands, Except Share Data) |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
| ||
Noninterest-bearing balances |
| $ | 12,538 |
| $ | 15,417 |
|
Interest-bearing deposits in other financial institutions |
| 16 |
| 16 |
| ||
Total cash and cash equivalents |
| 12,554 |
| 15,433 |
| ||
|
|
|
|
|
| ||
Investment securities, available for sale, at fair value |
| 201,220 |
| 214,455 |
| ||
Investment securities held to maturity (fair value of $136 and $279) |
| 135 |
| 277 |
| ||
Loans held for sale |
| 4,987 |
| 4,214 |
| ||
Loans |
| 371,547 |
| 360,478 |
| ||
Less: Allowance for loan losses |
| 4,268 |
| 4,130 |
| ||
Loans, net |
| 367,279 |
| 356,348 |
| ||
Premises and equipment, net |
| 7,835 |
| 6,774 |
| ||
Accrued interest receivable |
| 3,451 |
| 3,343 |
| ||
Bank-owned life insurance |
| 13,457 |
| 12,375 |
| ||
Investment in limited partnerships |
| 4,905 |
| 5,439 |
| ||
Goodwill |
| 3,032 |
| 3,032 |
| ||
Other assets |
| 13,389 |
| 6,448 |
| ||
TOTAL ASSETS |
| $ | 632,244 |
| $ | 628,138 |
|
|
|
|
|
|
| ||
LIABILITIES |
|
|
|
|
| ||
Interest-bearing deposits |
| $ | 356,985 |
| $ | 314,351 |
|
Noninterest-bearing deposits |
| 73,586 |
| 74,671 |
| ||
Total deposits |
| 430,571 |
| 389,022 |
| ||
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|
|
|
|
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Short-term borrowings |
| 48,429 |
| 55,315 |
| ||
Long-term borrowings, Federal Home Loan Bank (FHLB) |
| 86,778 |
| 106,378 |
| ||
Accrued interest payable |
| 1,371 |
| 1,744 |
| ||
Other liabilities |
| 5,534 |
| 5,120 |
| ||
TOTAL LIABILITIES |
| 572,683 |
| 557,579 |
| ||
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|
|
|
|
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SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
Common stock, par value $8.33, 10,000,000 shares authorized; 4,009,546 and 4,006,934 shares issued |
| 33,413 |
| 33,391 |
| ||
Additional paid-in capital |
| 17,944 |
| 17,888 |
| ||
Retained earnings |
| 27,680 |
| 27,707 |
| ||
Accumulated other comprehensive loss: |
|
|
|
|
| ||
Net unrealized loss on available for sale securities |
| (12,347 | ) | (2,159 | ) | ||
Defined benefit plan |
| (1,375 | ) | (1,375 | ) | ||
Less: Treasury stock at cost, 159,028 and 131,302 shares |
| (5,754 | ) | (4,893 | ) | ||
TOTAL SHAREHOLDERS’ EQUITY |
| 59,561 |
| 70,559 |
| ||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 632,244 |
| $ | 628,138 |
|
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 |
| ||||||||
(In Thousands, Except Per Share Data) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INTEREST AND DIVIDEND INCOME |
|
|
|
|
|
|
|
|
| ||||
Loans including fees |
| $ | 6,311 |
| $ | 6,621 |
| $ | 18,936 |
| $ | 19,560 |
|
Investment Securities: |
|
|
|
|
|
|
|
|
| ||||
Taxable |
| 1,391 |
| 964 |
| 3,857 |
| 2,711 |
| ||||
Tax-exempt |
| 1,205 |
| 1,108 |
| 3,641 |
| 3,271 |
| ||||
Dividend and other interest income |
| 201 |
| 284 |
| 658 |
| 907 |
| ||||
TOTAL INTEREST AND DIVIDEND INCOME |
| 9,108 |
| 8,977 |
| 27,092 |
| 26,449 |
| ||||
|
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|
|
|
|
|
|
| ||||
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
| ||||
Deposits |
| 2,410 |
| 2,835 |
| 7,502 |
| 8,215 |
| ||||
Short-term borrowings |
| 310 |
| 368 |
| 996 |
| 1,100 |
| ||||
Long-term borrowings, FHLB |
| 875 |
| 909 |
| 3,044 |
| 2,735 |
| ||||
TOTAL INTEREST EXPENSE |
| 3,595 |
| 4,112 |
| 11,542 |
| 12,050 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INTEREST INCOME |
| 5,513 |
| 4,865 |
| 15,550 |
| 14,399 |
| ||||
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| ||||
PROVISION FOR LOAN LOSSES |
| 110 |
| 10 |
| 230 |
| 60 |
| ||||
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|
|
|
|
|
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
| 5,403 |
| 4,855 |
| 15,320 |
| 14,339 |
| ||||
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|
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NON-INTEREST INCOME |
|
|
|
|
|
|
|
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| ||||
Service charges |
| 594 |
| 546 |
| 1,704 |
| 1,654 |
| ||||
Securities (losses) gains, net |
| (1,504 | ) | — |
| (1,717 | ) | 619 |
| ||||
Bank-owned life insurance |
| 121 |
| 109 |
| 367 |
| 310 |
| ||||
Gain on sale of loans |
| 314 |
| 282 |
| 678 |
| 654 |
| ||||
Insurance commissions |
| 416 |
| 625 |
| 1,482 |
| 1,613 |
| ||||
Other |
| 531 |
| 444 |
| 1,493 |
| 1,316 |
| ||||
TOTAL NON-INTEREST INCOME |
| 472 |
| 2,006 |
| 4,007 |
| 6,166 |
| ||||
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|
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NON-INTEREST EXPENSE |
|
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|
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Salaries and employee benefits |
| 2,355 |
| 2,330 |
| 7,275 |
| 6,912 |
| ||||
Occupancy, net |
| 315 |
| 319 |
| 967 |
| 987 |
| ||||
Furniture and equipment |
| 304 |
| 267 |
| 876 |
| 850 |
| ||||
Pennsylvania shares tax |
| 105 |
| 160 |
| 315 |
| 482 |
| ||||
Amortization of investment in limited partnerships |
| 178 |
| 220 |
| 534 |
| 503 |
| ||||
Other |
| 1,194 |
| 1,134 |
| 3,440 |
| 3,164 |
| ||||
TOTAL NON-INTEREST EXPENSE |
| 4,451 |
| 4,430 |
| 13,407 |
| 12,898 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
INCOME BEFORE INCOME TAX (BENEFIT) PROVISION |
| 1,424 |
| 2,431 |
| 5,920 |
| 7,607 |
| ||||
INCOME TAX (BENEFIT) PROVISION |
| (128 | ) | 109 |
| 180 |
| 669 |
| ||||
NET INCOME |
| $ | 1,552 |
| $ | 2,322 |
| $ | 5,740 |
| $ | 6,938 |
|
|
|
|
|
|
|
|
|
|
| ||||
EARNINGS PER SHARE - BASIC |
| $ | 0.40 |
| $ | 0.60 |
| $ | 1.49 |
| $ | 1.78 |
|
|
|
|
|
|
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EARNINGS PER SHARE - DILUTED |
| $ | 0.40 |
| $ | 0.60 |
| $ | 1.49 |
| $ | 1.78 |
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WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC |
| 3,855,348 |
| 3,881,488 |
| 3,865,317 |
| 3,889,310 |
| ||||
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WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED |
| 3,855,458 |
| 3,881,676 |
| 3,865,463 |
| 3,889,573 |
| ||||
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DIVIDENDS PER SHARE |
| $ | 0.46 |
| $ | 0.45 |
| $ | 1.38 |
| $ | 1.33 |
|
See accompanying notes to the unaudited consolidated financial statements.
4
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
|
| COMMON |
| ADDITIONAL |
| RETAINED |
| ACCUMULATED |
| TREASURY |
| TOTAL |
| ||||||||
(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 |
|
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|
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|
|
|
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| ||||||
Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
| 5,740 |
|
|
|
|
| 5,740 |
| ||||||
Unrealized loss on investments available for sale, net of reclassification adjustment, net of income tax benefit of $5,248 |
|
|
|
|
|
|
|
|
| (10,188 | ) |
|
| (10,188 | ) | ||||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
| (4,448 | ) | ||||||
Dividends declared, ($1.38 per share) |
|
|
|
|
|
|
| (5,330 | ) |
|
|
|
| (5,330 | ) | ||||||
Purchase of treasury stock (27,726 shares) |
|
|
|
|
|
|
|
|
|
|
| (861 | ) | (861 | ) | ||||||
Cumulative effect of change in accounting for postretirement benefits |
|
|
|
|
|
|
| (437 | ) |
|
|
|
| (437 | ) | ||||||
Stock options exercised |
| 330 |
| 3 |
| 8 |
|
|
|
|
|
|
| 11 |
| ||||||
Common shares issued for employee stock purchase plan |
| 2,282 |
| 19 |
| 48 |
|
|
|
|
|
|
| 67 |
| ||||||
Balance, September 30, 2008 |
| 4,009,546 |
| $ | 33,413 |
| $ | 17,944 |
| $ | 27,680 |
| $ | (13,722 | ) | $ | (5,754 | ) | $ | 59,561 |
|
|
| COMMON |
| ADDITIONAL |
| RETAINED |
| ACCUMULATED |
| TREASURY |
| TOTAL |
| ||||||||
(In Thousands, Except Per Share Data) |
| SHARES |
| AMOUNT |
| CAPITAL |
| EARNINGS |
| INCOME (LOSS) |
| STOCK |
| EQUITY |
| ||||||
Balance, December 31, 2006 |
| 4,003,514 |
| $ | 33,362 |
| $ | 17,810 |
| $ | 25,783 |
| $ | 1,560 |
| $ | (3,921 | ) | $ | 74,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
| 6,938 |
|
|
|
|
| 6,938 |
| ||||||
Unrealized loss on investments available for sale, net of reclassification adjustment, net of income tax benefit of $2,061 |
|
|
|
|
|
|
|
|
| (4,000 | ) |
|
| (4,000 | ) | ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
| 2,938 |
| ||||||
Dividends declared, ($1.33 per share) |
|
|
|
|
|
|
| (5,169 | ) |
|
|
|
| (5,169 | ) | ||||||
Purchase of treasury stock (26,030 shares) |
|
|
|
|
|
|
|
|
|
|
| (892 | ) | (892 | ) | ||||||
Stock options exercised |
| 330 |
| 3 |
| 5 |
|
|
|
|
|
|
| 8 |
| ||||||
Common shares issued for employee stock purchase plan |
| 2,240 |
| 19 |
| 54 |
|
|
|
|
|
|
| 73 |
| ||||||
Balance, September 30, 2007 |
| 4,006,084 |
| $ | 33,384 |
| $ | 17,869 |
| $ | 27,552 |
| $ | (2,440 | ) | $ | (4,813 | ) | $ | 71,552 |
|
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
(In Thousands) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income |
| $ | 1,552 |
| $ | 2,322 |
| $ | 5,740 |
| $ | 6,938 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
| ||||
Change in net unrealized (losses) gains on available for sale securities |
| (8,301 | ) | 2,415 |
| (17,153 | ) | (5,442 | ) | ||||
Less: Reclassification adjustment for net (losses) gains included in net income |
| (1,504 | ) | — |
| (1,717 | ) | 619 |
| ||||
Other comprehensive (loss) income before tax |
| (6,797 | ) | 2,415 |
| (15,436 | ) | (6,061 | ) | ||||
Income tax (benefit) provision related to other comprehensive (loss) income |
| (2,311 | ) | 821 |
| (5,248 | ) | (2,061 | ) | ||||
Other comprehensive (loss) gain, net of tax |
| (4,486 | ) | 1,594 |
| (10,188 | ) | (4,000 | ) | ||||
Comprehensive (loss) income |
| $ | (2,934 | ) | $ | 3,916 |
| $ | (4,448 | ) | $ | 2,938 |
|
See accompanying notes to the unaudited consolidated financial statements.
5
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
| Nine Months Ended |
| ||||
(In Thousands) |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
OPERATING ACTIVITIES |
|
|
|
|
| ||
Net Income |
| $ | 5,740 |
| $ | 6,938 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 490 |
| 523 |
| ||
Provision for loan losses |
| 230 |
| 60 |
| ||
Accretion and amortization of investment security discounts and premiums |
| (982 | ) | (738 | ) | ||
Securities losses (gains), net |
| 1,717 |
| (619 | ) | ||
Originations of loans held for sale |
| (31,276 | ) | (33,903 | ) | ||
Proceeds of loans held for sale |
| 31,181 |
| 31,770 |
| ||
Gain on sale of loans |
| (678 | ) | (654 | ) | ||
Increases in bank-owned life insurance |
| (367 | ) | (310 | ) | ||
Other, net |
| (1,445 | ) | 303 |
| ||
Net cash provided by operating activities |
| 4,610 |
| 3,370 |
| ||
INVESTING ACTIVITIES |
|
|
|
|
| ||
Investment securities available for sale: |
|
|
|
|
| ||
Proceeds from sales |
| 39,994 |
| 39,226 |
| ||
Proceeds from calls and maturities |
| 5,905 |
| 4,290 |
| ||
Purchases |
| (49,733 | ) | (67,067 | ) | ||
Investment securities held to maturity: |
|
|
|
|
| ||
Proceeds from calls and maturities |
| 179 |
| 11 |
| ||
Net (increase) decrease in loans |
| (11,458 | ) | 2,516 |
| ||
Acquisition of bank premises and equipment |
| (1,551 | ) | (627 | ) | ||
Proceeds from the sale of foreclosed assets |
| 79 |
| 66 |
| ||
Purchase of bank-owned life insurance |
| (715 | ) | (619 | ) | ||
Proceeds from redemption of regulatory stock |
| 3,663 |
| 3,045 |
| ||
Purchases of regulatory stock |
| (2,802 | ) | (3,620 | ) | ||
Net cash used for investing activities |
| (16,439 | ) | (22,779 | ) | ||
FINANCING ACTIVITIES |
|
|
|
|
| ||
Net increase in interest-bearing deposits |
| 42,634 |
| 9,833 |
| ||
Net decrease in noninterest-bearing deposits |
| (1,085 | ) | (170 | ) | ||
Proceeds of long-term borrowings, FHLB |
| 10,000 |
| 20,000 |
| ||
Repayment of long-term borrowings, FHLB |
| (29,600 | ) | (16,500 | ) | ||
Net (decrease) increase in short-term borrowings |
| (6,886 | ) | 10,096 |
| ||
Dividends paid |
| (5,330 | ) | (5,169 | ) | ||
Issuance of common stock |
| 67 |
| 73 |
| ||
Stock options exercised |
| 11 |
| 8 |
| ||
Purchase of treasury stock |
| (861 | ) | (892 | ) | ||
Net cash provided by financing activities |
| 8,950 |
| 17,279 |
| ||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
| (2,879 | ) | (2,130 | ) | ||
CASH AND CASH EQUIVALENTS, BEGINNING |
| 15,433 |
| 15,373 |
| ||
CASH AND CASH EQUIVALENTS, ENDING |
| $ | 12,554 |
| $ | 13,243 |
|
|
|
|
|
|
| ||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
| ||
|
|
|
|
|
| ||
Interest paid |
| $ | 11,915 |
| $ | 11,744 |
|
Income taxes paid |
| 1,425 |
| 1,185 |
|
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, 2007.
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 41 through 47 of the Annual Report on Form 10-K for the year ended December 31, 2007.
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 December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The Standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, 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
7
Classification or Measurement under Statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. Also in February 2008, the FASB issued Staff Position No.157-2, Partial Deferral of the Effective Date of Statement 157, which deferred the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted FAS No. 157 which did not have a material effect on the Company’s results of operations or financial position, see Note 8.
In September 2006, the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires that employers measure plan assets and obligations as of the balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of the Statement were effective as of the end of the fiscal year ending after December 15, 2006, for public companies. The complete adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. On January 31, 2008, the Company adopted FAS No. 159 which did not have a material effect on the Company’s results of operations or financial position.
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. FAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the
8
employer owns and controls the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. On January 1, 2008, the Company adopted EITF 06-04 which resulted in an adjustment to retained earnings and an associated liability in the amount of $437,000.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. On January 1, 2008, the Company adopted EITF 06-10 which did not have a material effect on the Company’s results of operations or financial position.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. On January 1, 2008, the Company adopted EITF 06-11 which did not have a material effect on the Company’s results of operations or financial position.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, to require enhanced disclosures about derivative instruments and hedging activities. The new standard has revised financial reporting for derivative instruments and hedging activities by requiring more transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires entities to provide more information about their liquidity by requiring disclosure of derivative features that are credit risk-related. Further, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. FAS No. 161 is effective for
9
financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encourage. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In May 2008, the FASB issued FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. FAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). FAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of FAS No. 162 to have a material effect on its results of operations and financial position.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No.��141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after the effective date.
In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. This FSP clarifies the application of FAS Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FAS Statement No. 154, Accounting Changes and Error Corrections). The disclosure provisions of Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The adoption of this
10
FSP is not expected to have a material effect on the Company’s results of operations or financial position.
Note 3. Per Share Data
The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation. There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the consolidated statement of income will be used as the numerator.
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
| 4,009,070 |
| 4,005,583 |
| 4,008,094 |
| 4,004,778 |
|
|
|
|
|
|
|
|
|
|
|
Average treasury stock shares |
| (153,722 | ) | (124,095 | ) | (142,777 | ) | (115,468 | ) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock equivalents used to calculate basic earnings per share |
| 3,855,348 |
| 3,881,488 |
| 3,865,317 |
| 3,889,310 |
|
|
|
|
|
|
|
|
|
|
|
Additional common stock equivalents (stock options) used to calculate diluted earnings per share |
| 110 |
| 188 |
| 146 |
| 263 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share |
| 3,855,458 |
| 3,881,676 |
| 3,865,463 |
| 3,889,573 |
|
Options to purchase 8,273 and 9,593 shares of common stock were outstanding during the three and nine months ended September 30, 2008 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike prices range of $31.82 to $40.29 being greater than the market price of $29.00 at September 30, 2008. Options to purchase 8,276 and 9,002 shares of common stock were outstanding during the three and nine months ended September 30, 2007 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price of $40.29 being greater than the market price of $31.99 at September 30, 2007.
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, 2007.
The following sets forth the components of the net periodic benefit cost of the domestic non-contributory defined benefit plan for the three and nine months ended September 30, 2008 and 2007, respectively:
11
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
(In Thousands) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 137 |
| $ | 117 |
| $ | 410 |
| $ | 350 |
|
Interest cost |
| 152 |
| 121 |
| 456 |
| 364 |
| ||||
Expected return on plan assets |
| (161 | ) | (140 | ) | (481 | ) | (421 | ) | ||||
Amortization of transition obligation |
| (1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||
Amortization of prior service cost |
| 6 |
| 6 |
| 19 |
| 19 |
| ||||
Amortization of net loss |
| 14 |
| — |
| 42 |
| — |
| ||||
Net periodic cost |
| $ | 147 |
| $ | 103 |
| $ | 444 |
| $ | 310 |
|
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, 2007, that it expected to contribute $450,000 to its defined benefit plan in 2008. As of September 30, 2008, a contribution in the amount of $500,000 was made for the 2007 plan year with no additional contributions anticipated during 2008.
Note 5. Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily comprised of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate, or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Outstanding financial instruments with off balance sheet risk are as follows:
(In Thousands) |
| September 30, |
| December 31, |
| ||
Commitments to extend credit |
| $ | 93,999 |
| $ | 74,349 |
|
Standby letters of credit |
| 961 |
| 974 |
| ||
12
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
The Company issues shares under the Penns Woods Bancorp, Inc. 2006 Employee Stock Purchase Plan (“Plan”) which is intended to encourage employee participation in the ownership and economic progress of the Company. The Plan allows for up to 1,000,000 shares to be purchased by employees. The purchase price of the shares is 95% of market value with an employee eligible to purchase up to the lesser of 15% of base compensation or $12,000 in market value annually. During the nine months ended September 30, 2008 and 2007, there were 2,282 and 2,240 shares issued under the plan, respectively.
Note 8. Fair Value Measurements
Effective January 1, 2008, the Company adopted FAS 157, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. 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 and liabilities reported on the consolidated statements of financial condition at their fair value as of September 30, 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.
13
|
| September 30, 2008 |
| ||||||||||
(In Thousands) |
| Level I |
| Level II |
| Level III |
| Total |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Investment Securities, available-for-sale |
| $ | — |
| $ | 201,220 |
| $ | — |
| $ | 201,220 |
|
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.
14
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, 2008 and 2007
Summary Results
Net income for the three months ended September 30, 2008 was $1,552,000 compared to $2,322,000 for the same period of 2007 as after-tax securities gains decreased $993,000 (from $0 to a loss of $993,000). Included within the change in after-tax securities gains was an other than temporary impairment charge relating to certain equity securities held in the investment portfolio of $1,222,000. Basic and diluted earnings per share for the three months ended September 30, 2008 were $0.40 compared to $0.60 for the three months ended September 30, 2007. Return on average assets and return on average equity were 0.98% and 9.43% for the three months ended September 30, 2008 compared to 1.57% and 13.21% for the corresponding period of 2007. Net income from core operations (“operating earnings”) increased 9.6% to $2,545,000 for the three months ended September 30, 2008 compared to $2,322,000 for the same period of 2007. Operating earnings per share for the three months ended September 30, 2008 increased 10.0% to $0.66 basic and dilutive compared to $0.60 basic and dilutive for the three months ended September 30, 2007.
The nine months ended September 30, 2008 generated net income of $5,740,000 compared to $6,938,000 for the same period of 2007 due to a decline in after-tax securities gains of $1,542,000 (from a gain of $409,000 to a loss of $1,133,000). Included within the change in after-tax securities gains was an other than temporary impairment charge relating to certain equity securities held in the investment portfolio of $1,601,000. Earnings per share, basic and dilutive, for the nine months ended September 30, 2008 were $1.49 as compared to $1.78 for the comparable period of 2007. Return on average assets and return on average equity were 1.21% and 11.10% for the nine months ended September 30, 2008 compared to 1.57% and 12.63% for the corresponding period of 2007. Operating earnings increased 5.3% to $6,873,000 for the nine months ended September 30, 2008 compared to $6,529,000 for the comparable period of 2007 resulting in basic and dilutive operating earnings per share of $1.78 and $1.68 for the nine month periods ended September 30, 2008 and 2007, respectively.
(Management uses the non-GAAP measure of net income from core operations in its analysis of the Company’s performance. This measure, as used by the Company, adjusts net income by significant gains or losses that are unusual in nature. Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses. For purposes of this Quarterly Report on Form 10-Q, net income from core operations means net income adjusted to exclude after-tax net securities gains or losses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they
15
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 September 30, 2008 increased $131,000 to $9,108,000 compared to $8,977,000 for the same period of 2007. The increase in interest income was primarily the result of growth in average taxable investment securities of $15,963,000 coupled with a 48 basis point (“bp”) increase in the related securities yields for the three months ended September 30, 2008 over the same period of 2007. This combination resulted in a $345,000 increase in taxable investment securities interest income. Over the same time frame, the average balance of tax-exempt investment securities increased $8,048,000 with the portfolio yield remaining stable at 7.06% resulting in a $97,000 increase in tax-exempt interest income. On a taxable equivalent basis, the interest income from the investment portfolio increased $492,000 due to the portfolio composition and increase in taxable investment security balance and yield. The decrease in dividends received is the result of a decrease in equity investments coupled with a general decline in the dividends per share received from the equity holdings. Interest and fee income from the loan portfolio decreased $310,000 as the rate reduction actions of the Federal Reserve Board’s Federal Open Market Committee (“FOMC”) served as the foundation for the 54 bp decline in loan portfolio yield.
During the nine months ended September 30, 2008, interest and dividend income was $27,092,000, an increase of $643,000 over the same period of 2007. The reasons for the 2.4% growth in interest income for the nine month period are identical to those for the three month period ending September 30, 2008 discussed above. The growth in average loans of $6,972,000 coupled with a 37 bp decrease in the loan portfolio yield due to the decreasing prime rate resulted in a decrease of $624,000 in loan interest and fee income. Average investment securities and interest bearing deposit income increased $1,267,000 due to an increase in average balance of $27,636,000 and a 12 bp increase in yield. The increase in yield was due to an increase in yield on taxable and tax-exempt securities of 16 bp and 12 bp, respectively. The increased yield was primarily the result of approximately $30,000,000 in bonds that were added during the last half of 2007 as part of a leverage strategy. The asset allocation between loans and the investment portfolio composition resulted in taxable equivalent interest income increasing $849,000 for the nine months ended September 30, 2008 compared to the same period of 2007.
16
Interest and dividend income composition for the three and nine months ended September 30, 2008 and 2007 was as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Loans including fees |
| $ | 6,311 |
| 69.3 | % | $ | 6,621 |
| 73.8 | % | $ | (310 | ) | (4.7 | )% |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Taxable |
| 1,391 |
| 15.3 |
| 964 |
| 10.7 |
| 427 |
| 44.3 |
| |||
Tax-exempt |
| 1,205 |
| 13.2 |
| 1,108 |
| 12.3 |
| 97 |
| 8.8 |
| |||
Dividend and other interest income |
| 201 |
| 2.2 |
| 284 |
| 3.2 |
| (83 | ) | (29.2 | ) | |||
Total interest and dividend income |
| $ | 9,108 |
| 100.0 | % | $ | 8,977 |
| 100.0 | % | $ | 131 |
| 1.5 | % |
|
| For The Nine Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Loans including fees |
| $ | 18,936 |
| 69.9 | % | $ | 19,560 |
| 74.0 | % | $ | (624 | ) | (3.2 | )% |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Taxable |
| 3,857 |
| 14.2 |
| 2,711 |
| 10.2 |
| 1,146 |
| 42.3 |
| |||
Tax-exempt |
| 3,641 |
| 13.5 |
| 3,271 |
| 12.4 |
| 370 |
| 11.3 |
| |||
Dividend and other interest income |
| 658 |
| 2.4 |
| 907 |
| 3.4 |
| (249 | ) | (27.5 | ) | |||
Total interest and dividend income |
| $ | 27,092 |
| 100.0 | % | $ | 26,449 |
| 100.0 | % | $ | 643 |
| 2.4 | % |
Interest Expense
Interest expense for the three months ended September 30, 2008 decreased $517,000 to $3,595,000 compared to $4,112,000 for the same period of 2007. The decreased expense of $425,000 associated with deposits is primarily the result of a reduction in rate paid of 106 bp on time deposits. Factors that led to the rate decreases include, but are not limited to, FOMC interest rate actions over the past year, campaigns conducted to attract 8 to 12 month maturity CDs that have resulted in an increased repricing frequency, and decreased average utilization of $10,038,000 in brokered CDs. Short-term borrowings interest expense decreased $58,000 as the increase in average balance of $18,305,000 was countered by a decrease in the rate paid of 206 bp due to the FOMC rate actions over the past year. Long-term borrowings interest expense decreased $34,000 as the average balance of such borrowings increased $1,270,000 for the three months ended September 30, 2008 compared to the same period of 2007, while the average rate decreased 31 bp to 4.33% for the 2008 period. 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 for the nine months ended September 30, 2008 decreased $508,000 to $11,542,000 compared to $12,050,000 for the same period of 2007. Interest on deposits decreased $713,000 due to the reasons noted in the three month analysis discussed in the proceeding paragraph. Borrowing costs increased primarily due to the addition of borrowings during the latter portion of 2007 as part of a program to increase net interest income through the purchase of fixed rate investment securities.
17
Interest expense composition for the three and nine months ended September 30, 2008 and 2007 was as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Deposits |
| $ | 2,410 |
| 67.0 | % | $ | 2,835 |
| 68.9 | % | $ | (425 | ) | (15.0 | )% |
Short-term borrowings |
| 310 |
| 8.6 |
| 368 |
| 9.0 |
| (58 | ) | (15.8 | ) | |||
Long-term borrowings, FHLB |
| 875 |
| 24.4 |
| 909 |
| 22.1 |
| (34 | ) | (3.7 | ) | |||
Total interest expense |
| $ | 3,595 |
| 100.0 | % | $ | 4,112 |
| 100.0 | % | $ | (517 | ) | (12.6 | )% |
|
| For The Nine Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Deposits |
| $ | 7,502 |
| 65.0 | % | $ | 8,215 |
| 68.2 | % | $ | (713 | ) | (8.7 | )% |
Short-term borrowings |
| 996 |
| 8.6 |
| 1,100 |
| 9.1 |
| (104 | ) | (9.5 | ) | |||
Long-term borrowings, FHLB |
| 3,044 |
| 26.4 |
| 2,735 |
| 22.7 |
| 309 |
| 11.3 |
| |||
Total interest expense |
| $ | 11,542 |
| 100.0 | % | $ | 12,050 |
| 100.0 | % | $ | (508 | ) | (4.2 | )% |
Net Interest Margin
The net interest margin (“NIM”) for the three months ended September 30, 2008 was 4.23% compared to 3.98% for the corresponding period of 2007. The increase in the NIM was driven by a 74 bp decline in the rate paid on interest bearing liabilities that more than compensated for a 29 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 FOMC rate decreases over the past year offset in part by increases in yield and balance within the investment portfolio. The growth in the investment portfolio was driven by a strategic initiative in the third quarter of 2007 to increase tax equivalent net interest income by purchasing fixed rate instruments in anticipation of the decreasing rate environment that has continued to date. The decrease in the cost of interest bearing liabilities to 2.93% from 3.67% was driven primarily by a reduction in the rate paid on time deposits of 106 bp. The reduction was the result of a shortening of the time deposit portfolio initiated in the early stages of 2007 that has resulted in an increasing repricing frequency during this period of decreasing rates.
The NIM for the nine months ended September 30, 2008 and 2007 were 4.04% and 3.96%, respectively. The impact of the items mentioned in the three month discussion also applies to the nine month period. A 65 bp decline in the rate paid on time deposits served as the foundation for a 41 bp decline in rate paid on deposits, while the FOMC actions steered the yield on earning assets and cost of borrowings.
18
Following is a schedule of average balances and associated yields for the three and nine month periods ended September 30, 2008 and 2007:
|
| AVERAGE BALANCES AND INTEREST RATES |
| ||||||||||||||
|
| Three Months Ended |
| Three Months Ended |
| ||||||||||||
(In Thousands) |
| Average Balance |
| Interest |
| Average Rate |
| Average Balance |
| Interest |
| Average Rate |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Tax-exempt loans |
| $ | 9,108 |
| $ | 148 |
| 6.46 | % | $ | 7,652 |
| $ | 118 |
| 6.12 | % |
All other loans |
| 364,926 |
| 6,213 |
| 6.77 | % | 354,032 |
| 6,543 |
| 7.33 | % | ||||
Total loans |
| 374,034 |
| 6,361 |
| 6.77 | % | 361,684 |
| 6,661 |
| 7.31 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Taxable investment securities |
| 107,751 |
| 1,592 |
| 5.91 | % | 91,788 |
| 1,247 |
| 5.43 | % | ||||
Tax-exempt investment securities |
| 103,431 |
| 1,826 |
| 7.06 | % | 95,383 |
| 1,679 |
| 7.04 | % | ||||
Total securities |
| 211,182 |
| 3,418 |
| 6.47 | % | 187,171 |
| 2,926 |
| 6.25 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits |
| 34 |
| — |
| 0.00 | % | 40 |
| 1 |
| 9.92 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-earning assets |
| 585,250 |
| 9,779 |
| 6.66 | % | 548,895 |
| 9,588 |
| 6.95 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other assets |
| 50,225 |
|
|
|
|
| 43,706 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 635,475 |
|
|
|
|
| $ | 592,601 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Savings |
| $ | 62,792 |
| 120 |
| 0.76 | % | $ | 60,262 |
| 114 |
| 0.75 | % | ||
Super Now deposits |
| 52,970 |
| 175 |
| 1.31 | % | 46,531 |
| 153 |
| 1.30 | % | ||||
Money market deposits |
| 34,915 |
| 208 |
| 2.37 | % | 23,183 |
| 131 |
| 2.24 | % | ||||
Time deposits |
| 205,346 |
| 1,907 |
| 3.69 | % | 203,690 |
| 2,437 |
| 4.75 | % | ||||
Total deposits |
| 356,023 |
| 2,410 |
| 2.69 | % | 333,666 |
| 2,835 |
| 3.37 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 51,215 |
| 310 |
| 2.38 | % | 32,910 |
| 368 |
| 4.44 | % | ||||
Long-term borrowings, FHLB |
| 79,061 |
| 875 |
| 4.33 | % | 77,791 |
| 909 |
| 4.64 | % | ||||
Total borrowings |
| 130,276 |
| 1,185 |
| 3.57 | % | 110,701 |
| 1,277 |
| 4.58 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-bearing liabilities |
| 486,299 |
| 3,595 |
| 2.93 | % | 444,367 |
| 4,112 |
| 3.67 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 75,863 |
|
|
|
|
| 70,689 |
|
|
|
|
| ||||
Other liabilities |
| 7,467 |
|
|
|
|
| 7,249 |
|
|
|
|
| ||||
Shareholders’ equity |
| 65,846 |
|
|
|
|
| 70,296 |
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 635,475 |
|
|
|
|
| $ | 592,601 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate spread |
|
|
|
|
| 3.73 | % |
|
|
|
| 3.28 | % | ||||
Net interest income/margin |
|
|
| $ | 6,184 |
| 4.23 | % |
|
| $ | 5,476 |
| 3.98 | % |
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.
19
|
| AVERAGE BALANCES AND INTEREST RATES |
| ||||||||||||||
|
| Nine Months Ended |
| Nine Months Ended |
| ||||||||||||
(In Thousands) |
| Average Balance |
| Interest |
| Average Rate |
| Average Balance |
| Interest |
| Average Rate |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Tax-exempt loans |
| $ | 8,534 |
| $ | 411 |
| 6.43 | % | $ | 7,913 |
| $ | 365 |
| 6.17 | % |
All other loans |
| 359,570 |
| 18,665 |
| 6.93 | % | 353,219 |
| 19,320 |
| 7.31 | % | ||||
Total loans |
| 368,104 |
| 19,076 |
| 6.92 | % | 361,132 |
| 19,685 |
| 7.29 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Taxable securities |
| 104,604 |
| 4,514 |
| 5.75 | % | 85,930 |
| 3,600 |
| 5.59 | % | ||||
Tax-exempt securities |
| 108,877 |
| 5,517 |
| 6.76 | % | 99,497 |
| 4,956 |
| 6.64 | % | ||||
Total securities |
| 213,481 |
| 10,031 |
| 6.27 | % | 185,427 |
| 8,556 |
| 6.15 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest bearing deposits |
| 13 |
| 1 |
| 10.28 | % | 431 |
| 18 |
| 5.58 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-earning assets |
| 581,598 |
| 29,108 |
| 6.68 | % | 546,990 |
| 28,259 |
| 6.90 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other assets |
| 49,638 |
|
|
|
|
| 42,390 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
| $ | 631,236 |
|
|
|
|
| $ | 589,380 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Savings |
| $ | 60,857 |
| 343 |
| 0.75 | % | $ | 59,726 |
| 329 |
| 0.74 | % | ||
Super Now deposits |
| 51,228 |
| 513 |
| 1.34 | % | 46,309 |
| 455 |
| 1.31 | % | ||||
Money market deposits |
| 28,372 |
| 481 |
| 2.26 | % | 24,362 |
| 414 |
| 2.27 | % | ||||
Time deposits | �� | 201,950 |
| 6,165 |
| 4.08 | % | 198,401 |
| 7,017 |
| 4.73 | % | ||||
Total Deposits |
| 342,407 |
| 7,502 |
| 2.93 | % | 328,798 |
| 8,215 |
| 3.34 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
| 47,894 |
| 996 |
| 2.75 | % | 32,443 |
| 1,100 |
| 4.53 | % | ||||
Other borrowings |
| 90,088 |
| 3,044 |
| 4.44 | % | 78,818 |
| 2,735 |
| 4.64 | % | ||||
Total borrowings |
| 137,982 |
| 4,040 |
| 3.85 | % | 111,261 |
| 3,835 |
| 4.61 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total interest-bearing liabilities |
| 480,389 |
| 11,542 |
| 3.19 | % | 440,059 |
| 12,050 |
| 3.66 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
| 73,205 |
|
|
|
|
| 69,203 |
|
|
|
|
| ||||
Other liabilities |
| 8,672 |
|
|
|
|
| 6,866 |
|
|
|
|
| ||||
Shareholders’ equity |
| 68,970 |
|
|
|
|
| 73,252 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholders’ equity |
| $ | 631,236 |
|
|
|
|
| $ | 589,380 |
|
|
|
|
| ||
Interest rate spread |
|
|
|
|
| 3.49 | % |
|
|
|
| 3.24 | % | ||||
Net interest income/margin |
|
|
| $ | 17,566 |
| 4.04 | % |
|
| $ | 16,209 |
| 3.96 | % |
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.
20
Table of Contents
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, 2008 and 2007.
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
(In Thousands) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total interest income |
| $ | 9,108 |
| $ | 8,977 |
| $ | 27,092 |
| $ | 26,449 |
|
Total interest expense |
| 3,595 |
| 4,112 |
| 11,542 |
| 12,050 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
| 5,513 |
| 4,865 |
| 15,550 |
| 14,399 |
| ||||
Tax equivalent adjustment |
| 671 |
| 611 |
| 2,016 |
| 1,810 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net interest income (fully taxable equivalent) |
| $ | 6,184 |
| $ | 5,476 |
| $ | 17,566 |
| $ | 16,209 |
|
The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis for the three and nine month periods ended September 30, 2008 and 2007:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2008 vs 2007 |
| 2008 vs 2007 |
| ||||||||||||||
(In Thousands) |
| Volume |
| Rate |
| Net |
| Volume |
| Rate |
| Net |
| ||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans, tax-exempt |
| $ | 23 |
| $ | 7 |
| $ | 30 |
| $ | 30 |
| $ | 16 |
| $ | 46 |
|
Loans |
| 220 |
| (550 | ) | (330 | ) | 347 |
| (1,002 | ) | (655 | ) | ||||||
Taxable investment securities |
| 229 |
| 116 |
| 345 |
| 803 |
| 111 |
| 914 |
| ||||||
Tax-exempt investment securities |
| 142 |
| 5 |
| 147 |
| 474 |
| 87 |
| 561 |
| ||||||
Interest bearing deposits |
| — |
| (1 | ) | (1 | ) | (17 | ) | — |
| (17 | ) | ||||||
Total interest-earning assets |
| 614 |
| (423 | ) | 191 |
| 1,637 |
| (788 | ) | 849 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Savings deposits |
| 5 |
| 1 |
| 6 |
| 6 |
| 8 |
| 14 |
| ||||||
Super Now deposits |
| 21 |
| 1 |
| 22 |
| 50 |
| 8 |
| 58 |
| ||||||
Money market deposits |
| 69 |
| 8 |
| 77 |
| 68 |
| (1 | ) | 67 |
| ||||||
Time deposits |
| 21 |
| (551 | ) | (530 | ) | 128 |
| (980 | ) | (852 | ) | ||||||
Short-term borrowings |
| 522 |
| (580 | ) | (58 | ) | 1,501 |
| (1,605 | ) | (104 | ) | ||||||
Long-term borrowings, FHLB |
| 10 |
| (44 | ) | (34 | ) | 437 |
| (128 | ) | 309 |
| ||||||
Total interest-bearing liabilities |
| 648 |
| (1,165 | ) | (517 | ) | 2,190 |
| (2,698 | ) | (508 | ) | ||||||
Change in net interest income |
| $ | (34 | ) | $ | 742 |
| $ | 708 |
| $ | (553 | ) | $ | 1,910 |
| $ | 1,357 |
|
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
21
performed annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance for loan losses is determined by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards and trends with respect to non-performing loans and its knowledge and experience with specific lending segments.
Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at September 30, 2008, 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, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.
While determining the appropriate allowance level, management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.
The allowance for loan losses increased from $4,130,000 at December 31, 2007 to $4,268,000 at September 30, 2008. At September 30, 2008 and December 31, 2007, the allowance for loan losses to total loans was 1.15%.
The provision for loan losses totaled $110,000 and $230,000 for the three and nine months ended September 30, 2008, compared to $10,000 and $60,000 for the same periods in 2007. The amount of the increase in the provision was the result of several continuing positive factors, including but not limited to, an increase in gross loans of $11,069,000 since December 31, 2007, a ratio of annualized net charge offs to average loans of 0.03% for the nine months ended September 30, 2008, a ratio of nonperforming loans to total loans of 0.25%, and a ratio of the allowance for loan losses to nonperforming loans of 453.56% at September 30, 2008.
Non-interest Income
Total non-interest income for the three months ended September 30, 2008 compared to the same period in 2007 decreased $1,534,000 to $472,000 due to a $1,504,000 decrease in net securities gains and losses realized when comparing the three month periods ended September 30, 2008 and 2007. Excluding net securities gains and losses, non-interest income for the third quarter of 2008 would have decreased $30,000 as compared to the 2007 period. Deposit service charges increased $48,000 as overdraft fee income compensated for customers migrating to no service charge checking accounts that were introduced as part of a customer acquisition and retention
22
program. Other income increased due to increased revenue from electronic card (debit/credit) usage and title insurance.
Insurance commissions for the three months ended September 30, 2008 decreased $209,000 compared to the same period in 2007 due to a softening market and shift in product mix. Management of The M Group continues to pursue new and build upon current relationships. The sales call program continues to expand to other financial institutions, which results in additional revenue for The M Group. However, the addition of another sales outlet for The M Group can take up to a year or more to be completed.
Total non-interest income for the nine months ended September 30, 2008 compared to the same period in 2007 decreased $2,159,000. Excluding net securities gains, non-interest income would have increased $177,000 as compared to the 2007 period. The increase in non-interest income for the nine month period is the result of the same items noted in the three month discussion.
Non-interest income composition for the three and nine months ended September 30, 2008 and 2007 was as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Deposit service charges |
| $ | 594 |
| 125.8 | % | $ | 546 |
| 27.2 | % | $ | 48 |
| 8.8 | % |
Securities (losses) gains, net |
| (1,504 | ) | (318.6 | ) | — |
| — |
| (1,504 | ) | N/A |
| |||
Bank owned life insurance |
| 121 |
| 25.6 |
| 109 |
| 5.4 |
| 12 |
| 11.0 |
| |||
Gain on sale of loans |
| 314 |
| 66.5 |
| 282 |
| 14.1 |
| 32 |
| 11.3 |
| |||
Insurance commissions |
| 416 |
| 88.1 |
| 625 |
| 31.2 |
| (209 | ) | (33.4 | ) | |||
Other |
| 531 |
| 112.6 |
| 444 |
| 22.1 |
| 87 |
| 19.5 |
| |||
Total non-interest income |
| $ | 472 |
| 100.0 | % | $ | 2,006 |
| 100.0 | % | $ | (1,534 | ) | (76.5 | )% |
|
| For The Nine Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Deposit service charges |
| $ | 1,704 |
| 42.5 | % | $ | 1,654 |
| 26.8 | % | $ | 50 |
| 3.0 | % |
Securities (losses) gains, net |
| (1,717 | ) | (42.9 | ) | 619 |
| 10.0 |
| (2,336 | ) | (377.4 | ) | |||
Bank owned life insurance |
| 367 |
| 9.2 |
| 310 |
| 5.0 |
| 57 |
| 18.4 |
| |||
Gain on sale of loans |
| 678 |
| 16.9 |
| 654 |
| 10.6 |
| 24 |
| 3.7 |
| |||
Insurance commissions |
| 1,482 |
| 37.0 |
| 1,613 |
| 26.2 |
| (131 | ) | (8.1 | ) | |||
Other |
| 1,493 |
| 37.3 |
| 1,316 |
| 21.4 |
| 177 |
| 13.4 |
| |||
Total non-interest income |
| $ | 4,007 |
| 100.0 | % | $ | 6,166 |
| 100.0 | % | $ | (2,159 | ) | (35.0 | )% |
Non-interest Expense
Total non-interest expense increased $21,000 for the three months ended September 30, 2008 compared to the same period of 2007. The increase in salaries and employee benefits was attributable to several items including standard cost of living wage adjustments for employees, increased pension expense, and other benefit costs. Pennsylvania shares tax decreased $55,000 due to the use of Pennsylvania Enterprise Zone tax credits from a low income housing
23
partnership committed to during 2007. Other expenses increased primarily due to normal anticipated inflationary adjustments to ongoing business operating costs and the amortization related to the before mentioned low income housing.
Total non-interest expense increased $509,000 for the nine months ended September 30, 2008 compared to the same period of 2007. As noted above in the three month discussion, normal increases in general business expenses and the amortization of a low income housing partnership impacted the level of non-interest expenses.
Non-interest expense composition for the three and nine months ended September 30, 2008 and 2007 was as follows:
|
| For The Three Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Salaries and employee benefits |
| $ | 2,355 |
| 52.9 | % | $ | 2,330 |
| 52.6 | % | $ | 25 |
| 1.1 | % |
Occupancy, net |
| 315 |
| 7.1 |
| 319 |
| 7.2 |
| (4 | ) | (1.3 | ) | |||
Furniture and equipment |
| 304 |
| 6.8 |
| 267 |
| 6.0 |
| 37 |
| 13.9 |
| |||
Pennsylvania shares tax |
| 105 |
| 2.4 |
| 160 |
| 3.6 |
| (55 | ) | (34.4 | ) | |||
Amortization of investment in limited partnerships |
| 178 |
| 4.0 |
| 220 |
| 5.0 |
| (42 | ) | (19.1 | ) | |||
Other |
| 1,194 |
| 26.8 |
| 1,134 |
| 25.6 |
| 60 |
| 5.3 |
| |||
Total non-interest expense |
| $ | 4,451 |
| 100.0 | % | $ | 4,430 |
| 100.0 | % | $ | 21 |
| 0.5 | % |
|
| For The Nine Months Ended |
| |||||||||||||
|
| September 30, 2008 |
| September 30, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Salaries and employee benefits |
| $ | 7,275 |
| 54.3 | % | $ | 6,912 |
| 53.6 | % | $ | 363 |
| 5.3 | % |
Occupancy, net |
| 967 |
| 7.2 |
| 987 |
| 7.7 |
| (20 | ) | (2.0 | ) | |||
Furniture and equipment |
| 876 |
| 6.5 |
| 850 |
| 6.6 |
| 26 |
| 3.1 |
| |||
Pennsylvania shares tax |
| 315 |
| 2.3 |
| 482 |
| 3.7 |
| (167 | ) | (34.6 | ) | |||
Amortization of investment in limited partnerships |
| 534 |
| 4.0 |
| 503 |
| 3.9 |
| 31 |
| 6.2 |
| |||
Other |
| 3,440 |
| 25.7 |
| 3,164 |
| 24.5 |
| 276 |
| 8.7 |
| |||
Total non-interest expense |
| $ | 13,407 |
| 100.0 | % | $ | 12,898 |
| 100.0 | % | $ | 509 |
| 3.9 | % |
Provision for Income Taxes
Income taxes decreased $237,000 and $489,000 for the three and nine month periods ended September 30, 2008 compared to the same period of 2007. The effective tax rate for the three and nine months ended September 30, 2008 was (9.0%) and 3.0% as compared to 4.5% and 8.8% for the same periods of 2007. The decline in the effective tax rate is primarily the result of net securities losses of $1,504,000 and $1,717,000 for the three and nine months ended September 30, 2008 compared to net gains of $619,000 for the nine months ended September 30, 2007. The current effective tax rate has resulted in a deferred tax asset due to the low income housing tax credits. Management has reviewed the deferred tax asset and has determined that the asset will be utilized within the appropriate carry forward period and therefore does not require a valuation allowance.
24
Table of Contents
ASSET/LIABILITY MANAGEMENT
Cash and Cash Equivalents
Cash and cash equivalents decreased $2,879,000 from $15,433,000 at December 31, 2007 to $12,554,000 at September 30, 2008 primarily as a result of the following activities during the nine months ended September 30, 2008:
Loans Held for Sale
Activity regarding loans held for sale resulted in sale proceeds lagging loan originations, less $678,000 in realized gains, by $773,000 for the nine months ended September 30, 2008.
Loans
Gross loans increased $11,069,000 since December 31, 2007 due to the increase of residential mortgages coupled with increased competition for commercial loans and a softening of the market.
The allocation of the loan portfolio, by category, as of September 30, 2008 and December 31, 2007 is presented below:
|
| September 30, |
| December 31, |
| Change |
| |||||
(In Thousands) |
| 2008 |
| 2007 |
| Amount |
| % |
| |||
Commercial, financial and agricultural |
| $ | 35,365 |
| $ | 35,739 |
| $ | (374 | ) | (1.0 | )% |
Real estate mortgage: |
|
|
|
|
|
|
|
|
| |||
Residential |
| 174,009 |
| 163,268 |
| 10,741 |
| 6.6 |
| |||
Commercial |
| 134,232 |
| 132,943 |
| 1,289 |
| 1.0 |
| |||
Construction |
| 16,176 |
| 16,152 |
| 24 |
| 0.1 |
| |||
Installment loans to individuals |
| 12,759 |
| 13,317 |
| (558 | ) | (4.2 | ) | |||
Less: Net deferred loan fees |
| 994 |
| 941 |
| 53 |
| 5.6 |
| |||
Gross loans |
| $ | 371,547 |
| $ | 360,478 |
| $ | 11,069 |
| 3.1 | % |
The recorded investment in loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, amounted to $4,438,000 at September 30, 2008, compared to $1,477,000 at December 31, 2007. The valuation allowance related to impaired loans amounted to $97,000 at September 30, 2008 and $102,000 at December 31, 2007. The increase in impaired loans and valuation allowance is from a few commercial relationships.
A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical
25
effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.
Investments
The estimated fair value of the investment securities portfolio in total at September 30, 2008 has decreased $13,378,000 since December 31, 2007, while the amortized cost increased $2,059,000. The majority of the changes in value occurred within the agency securities and state and municipal segments of the portfolio. The amortized cost position in state and political securities increased $21,012,000 as the Bank continued its strategy to build call protection, maintain taxable equivalent yields, reduce the effective federal income tax rate, and invest in communities across the Commonwealth of Pennsylvania and the country. Over the same time period, this above strategy resulted in the amortized cost position of available for sale U.S. Government and agency securities to decrease by $15,080,000. The increased level of unrealized losses within the bond portfolio, which offset the increase in amortized cost, was the result of changes in the yield curve and virtual freeze of trading in the municipal market, not credit quality, as the credit quality of the portfolio remains sound.
The equity portfolio continues to feel the effects of the economic turbulence that is effecting the financial sector. This sector of the portfolio, as of September 30, 2008, held $1,906,000 in unrealized losses on an amortized cost basis of $15,743,000. The amount of the declines has caused several of our equity holdings to be deemed other than temporarily impaired resulting in a write down in value of these holdings of $1,851,000 and $2,425,000 for the three and nine months ended September 30, 2008. Certain positions may be liquidated, in whole or part, through the balance of 2008 so that the losses can be carried back for tax purposes and offset against gains that have been recognized over the past several years.
26
The amortized cost of investment securities and their estimated fair values are as follows:
|
| September 30, 2008 |
| ||||||||||
|
|
|
| Gross |
| Gross |
| Estimated |
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
(In Thousands) |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available for sale (AFS) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 47,302 |
| $ | 206 |
| $ | (33 | ) | $ | 47,475 |
|
State and political securities |
| 140,663 |
| 257 |
| (15,163 | ) | 125,757 |
| ||||
Other debt securities |
| 16,219 |
| — |
| (2,441 | ) | 13,778 |
| ||||
Total debt securities |
| 204,184 |
| 463 |
| (17,637 | ) | 187,010 |
| ||||
Equity securities |
| 15,743 |
| 373 |
| (1,906 | ) | 14,210 |
| ||||
Total investment securities AFS |
| $ | 219,927 |
| $ | 836 |
| $ | (19,543 | ) | $ | 201,220 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held to maturity (HTM) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 10 |
| $ | 1 |
| $ | — |
| $ | 11 |
|
Other debt securities |
| 125 |
| — |
| — |
| 125 |
| ||||
Total investment securities HTM |
| $ | 135 |
| $ | 1 |
| $ | — |
| $ | 136 |
|
|
| December 31, 2007 |
| ||||||||||
|
|
|
| Gross |
| Gross |
| Estimated |
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| ||||
(In Thousands) |
| Cost |
| Gains |
| Losses |
| Value |
| ||||
Available for sale (AFS) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 62,382 |
| $ | 522 |
| $ | — |
| $ | 62,904 |
|
State and political securities |
| 119,651 |
| 581 |
| (2,417 | ) | 117,815 |
| ||||
Other debt securities |
| 15,917 |
| 290 |
| (440 | ) | 15,767 |
| ||||
Total debt securities |
| 197,950 |
| 1,393 |
| (2,857 | ) | 196,486 |
| ||||
Equity securities |
| 19,776 |
| 496 |
| (2,303 | ) | 17,969 |
| ||||
Total investment securities AFS |
| $ | 217,726 |
| $ | 1,889 |
| $ | (5,160 | ) | $ | 214,455 |
|
|
|
|
|
|
|
|
|
|
| ||||
Held to maturity (HTM) |
|
|
|
|
|
|
|
|
| ||||
U.S. Government and agency securities |
| $ | 14 |
| $ | 1 |
| $ | — |
| $ | 15 |
|
Other debt securities |
| 263 |
| 1 |
| — |
| 264 |
| ||||
Total investment securities HTM |
| $ | 277 |
| $ | 2 |
| $ | — |
| $ | 279 |
|
27
Table of Contents
Financing Activities
Deposits
Total deposits increased 10.7% or $41,549,000 from December 31, 2007 to September 30, 2008. The growth was led by an 88.4% or $18,598,000 increase in money market accounts coupled with double digit growth in NOW, savings, and time deposits from December 31, 2007 to September 30, 2008. The increase in core deposits (deposits less time deposits) of 14.2% or $28,855,000 has allowed for a reduction in brokered time deposits of 55.8%. The increase in deposits is the result of a deposit gathering program coupled with customers coming back to their hometown bank in wake of the economic turbulence.
Deposit balances and their changes for the periods being discussed follow:
|
| September 30, 2008 |
| December 31, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Demand deposits |
| $ | 73,586 |
| 17.1 | % | $ | 74,671 |
| 19.2 | % | $ | (1,085 | ) | (1.5 | )% |
NOW accounts |
| 56,391 |
| 13.1 |
| 50,883 |
| 13.1 |
| 5,508 |
| 10.8 |
| |||
Money market deposits |
| 39,627 |
| 9.2 |
| 21,029 |
| 5.4 |
| 18,598 |
| 88.4 |
| |||
Savings deposits |
| 62,591 |
| 14.5 |
| 56,757 |
| 14.6 |
| 5,834 |
| 10.3 |
| |||
Time deposits |
| 194,469 |
| 45.2 |
| 176,851 |
| 45.4 |
| 17,618 |
| 10.0 |
| |||
Time deposits - brokered |
| 3,907 |
| 0.9 |
| 8,831 |
| 2.3 |
| (4,924 | ) | (55.8 | ) | |||
Total deposits |
| $ | 430,571 |
| 100.0 | % | $ | 389,022 |
| 100.0 | % | $ | 41,549 |
| 10.7 | % |
Borrowed Funds
Total borrowed funds decreased 16.4% or $26,486,000 at September 30, 2008 compared to $161,693,000 at December 31, 2007. The decrease in borrowed funds is primarily the result of the previously discussed deposit gathering campaigns that were utilized to provide funds to reduce the level of higher cost short-term borrowings and to assist in replacing long-term borrowing maturities. Long-term borrowings decreased $19,600,000 since December 31, 2007 due to the maturity of several borrowings that carried rates between 3.14% and 5.56%.
|
| September 30, 2008 |
| December 31, 2007 |
| Change |
| |||||||||
(In Thousands) |
| Amount |
| % Total |
| Amount |
| % Total |
| Amount |
| % |
| |||
Short-term borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
FHLB repurchase agreements |
| $ | 29,950 |
| 22.1 | % | $ | 38,160 |
| 23.6 | % | $ | (8,210 | ) | (21.5 | )% |
Securities sold under agreement to repurchase |
| 18,479 |
| 13.7 |
| 17,155 |
| 10.6 |
| 1,324 |
| 7.7 |
| |||
Total short-term borrowings |
| 48,429 |
| 35.8 | % | 55,315 |
| 34.2 | % | (6,886 | ) | (12.4 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Long-term borrowings, FHLB |
| 86,778 |
| 64.2 |
| 106,378 |
| 65.8 |
| (19,600 | ) | (18.4 | ) | |||
Total borrowed funds |
| $ | 135,207 |
| 100.0 | % | $ | 161,693 |
| 100.0 | % | $ | (26,486 | ) | (16.4 | )% |
28
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. 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.
The Emergency Economic Stabilization Act of 2008, signed into law on October 3, 2008, provides authority to the United States Department of Treasury (“Treasury”) to, among other things, purchase up to $700 billion of mortgages, mortgage backed securities and certain other financial instruments from financial institutions. On October 14, 2008, the Treasury announced it will offer to qualifying U.S. banking institutions the opportunity to issue and sell preferred stock, along with warrants to purchase common stock, to the Treasury on what may be considered attractive terms under the Troubled Asset Relief Program Capital Purchase Program (the “Program”). Although the Company’s capital ratios remain well above the minimum levels required for well capitalized status, it is currently evaluating the Program. In addition, the FDIC has initiated the Temporary Liquidity Guarantee Program that will provide a 100 percent guarantee for a limited period of time to newly issued senior unsecured debt and non-interest bearing transaction deposits. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing transaction deposits. Management is currently evaluating the Temporary Liquidity Guarantee Program.
29
Capital ratios as of September 30, 2008 and December 31, 2007 were as follows:
|
| 2008 |
| 2007 |
| ||||||
(In Thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||
Total Capital (to Risk-weighted Assets) |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Actual |
| $ | 68,678 |
| 16.8 | % | $ | 70,381 |
| 18.0 | % |
For Capital Adequacy Purposes |
| 32,713 |
| 8.0 |
| 31,280 |
| 8.0 |
| ||
To Be Well Capitalized |
| 40,891 |
| 10.0 |
| 39,100 |
| 10.0 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Tier I Capital (to Risk-weighted Assets) |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Actual |
| $ | 64,410 |
| 15.8 | % | $ | 66,251 |
| 16.9 | % |
For Capital Adequacy Purposes |
| 16,356 |
| 4.0 |
| 15,640 |
| 4.0 |
| ||
To Be Well Capitalized |
| 24,534 |
| 6.0 |
| 23,460 |
| 6.0 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Tier I Capital (to Average Assets) |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Actual |
| $ | 64,410 |
| 10.1 | % | $ | 66,251 |
| 10.8 | % |
For Capital Adequacy Purposes |
| 25,407 |
| 4.0 |
| 24,664 |
| 4.0 |
| ||
To Be Well Capitalized |
| 31,759 |
| 5.0 |
| 30,830 |
| 5.0 |
|
Liquidity and Interest Rate Sensitivity
The asset/liability committee addresses the liquidity needs of the Company to ensure that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook.
The following liquidity measures are monitored for compliance within the limits cited:
1. Net Loans to Total Assets, 85% maximum
2. Net Loans to Total Deposits, 100% maximum
3. Cumulative 90 day Maturity GAP %, +/- 20% maximum
4. Cumulative 1 Year Maturity GAP %, +/- 25% 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
30
and business opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates.
The Bank, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments and originations, and expenses. In order to control cash flow, the Bank estimates future flows of cash from deposits, loan payments, and investment security payments. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, FHLB borrowings, and brokered deposits. Management believes the Bank has adequate resources to meet its normal funding requirements.
Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit provides core ingredients to satisfy depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a current borrowing capacity at the FHLB of $209,525,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $28,797,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled $116,728,000 as of September 30, 2008.
Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company’s portfolio of assets and liabilities. Asset/liability management strives to match maturities and rates between loan and investment security assets with the deposit liabilities and borrowings that fund them. Successful asset/liability management results in a balance sheet structure which can cope effectively with market rate fluctuations. The matching process is affected by segmenting both assets and liabilities into future time periods (usually 12 months, or less) based upon when repricing can be effected. Repriceable assets are subtracted from repriceable liabilities, for a specific time period to determine the “gap”, or difference. Once known, the gap is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can enhance net interest income if market rates move as predicted. However, if market rates behave in a manner contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk and must be prudently managed. In addition to gap management, the Company has an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s balance sheet.
31
There have been no substantial changes in the Company’s gap analyses or simulation analyses compared to the information provided in the Company’s Form 10-K for the year ended December 31, 2007.
Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.
Inflation
The asset and liability structure of a financial institution is primarily monetary in nature. Therefore, interest rates rather than inflation have a more significant impact on the Company’s performance. Interest rates are not always affected in the same direction or magnitude as prices of other goods and services, but are reflective of fiscal policy initiatives or economic factors which are not measured by a price index.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk for the Company is comprised primarily of interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at the Bank level as well as the Company level. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party. There have been no substantial changes in the Company’s gap analyses or simulation analyses compared to the information provided in the Annual Report on Form 10-K for the period ended December 31, 2007. 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, 2008. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
32
Table of Contents
Part II. OTHER INFORMATION
There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period |
| Total |
| Average |
| Total Number of |
| Maximum Number (or |
| |
| ||||||||||
|
|
|
|
|
|
|
|
|
| |
Month #1 (July 1 - July 31, 2008) |
| — |
| — |
| — |
| — |
| |
|
|
|
|
|
|
|
|
|
| |
Month #2 (August 1 - August 31, 2008) |
| 9,210 |
| $ | 30.05 |
| 9,210 |
| 98,344 |
|
|
|
|
|
|
|
|
|
|
| |
Month #3 (September 1 - September 30, 2008) |
| — |
| — |
| — |
| — |
| |
On April 22, 2008, the Board of Directors extended the previously approved authorization to repurchase up to 197,000 shares, or approximately 5%, of the outstanding shares of the Company for an additional year to April 30, 2009. To date, there have been 98,656 shares repurchased under this plan.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
33
(3) | (i) | Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007). |
(3) | (ii) | Bylaws of the Registrant’s as presently in effect (incorporated by reference to Exhibit 3(ii) of the Registrant’s Current Report on Form 8-K filed June 17, 2005). |
(31) | (i) | Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer. |
(31) | (ii) | Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer. |
(32) | (i) | Section 1350 Certification of Chief Executive Officer. |
(32) | (ii) | Section 1350 Certification of Principal Financial Officer. |
34
Table of Contents
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) |
|
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Date: November 7, 2008 |
| /s/ Ronald A. Walko |
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| Ronald A. Walko, President and Chief Executive Officer |
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Date: November 7, 2008 |
| /s/ Brian L. Knepp |
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| Brian L. Knepp, Chief Financial Officer (Principal |
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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 |
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