SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended June 30, 2002,
( ) Transition report pursuant to Section 13 or 15 (d) of the
Exchange Act for the Transition Period from _______________
to _______________.
No. 0-17077
(Commission File Number)
PENNS WOODS BANCORP, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2226454
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
300 Market Street, Williamsport, Pennsylvania 17701
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
On August 7, 2002 there were 3,030,498 of the Registrant's
common stock outstanding.
PENNS WOODS BANCORP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
------
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of
June 30, 2002 And December 31, 2001
Consolidated Statement of Income (unaudited)
for the Three and Six Months ended June 30,
2002 and 2001
Consolidated Statement of Comprehensive
Income (unaudited) For the Three and Six
Months ended June 30, 2002 and 2001
Consolidated Statement of Changes in
Shareholders' Equity (unaudited) for the Six
Months ended June 30, 2002
Consolidated Statement of Cash Flows
(unaudited) for the Six Months ended
June 31, 2002 and 2001
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II Other Information
Signatures
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, December 31,
2002 2001
-------- ------------
(IN THOUSANDS)
ASSETS:
Cash and due from banks $ 12,887 $ 14,844
Investment securities available for
sale 152,318 131,985
Investment securities held to
maturity (market value of
$1,300,000 and $1,312,000) 1,252 1,302
Loans held for sale 1,940 3,993
Loans, net of unearned discount 251,806 251,623
Allowance for loan losses (3,000) (2,927)
-------- --------
Loans, net 248,806 248,696
Bank premises and equipment, net 4,514 4,478
Accrued interest receivable 2,605 2,685
Bank owned life insurance 8,327 8,126
Other assets 12,277 8,701
-------- --------
TOTAL ASSETS $444,926 $424,810
======== ========
LIABILITIES:
Demand deposits $ 50,572 $ 55,277
Interest-bearing demand deposits 72,244 58,139
Savings deposits 58,487 53,309
Time deposits 134,330 138,425
-------- --------
Total deposits 315,633 305,150
Short-term borrowings 20,869 19,105
Other borrowings 46,778 41,778
Accrued interest payable 1,134 1,190
Other liabilities 2,176 2,335
-------- --------
Total liabilities 386,590 369,558
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, par value $10;
10,000,000 shares authorized and
3,131,644 shares issued 31,316 31,316
Additional paid-in capital 18,230 18,230
Retained earnings 9,486 6,987
Accumulated other comprehensive
income 2,511 1,729
Less: Treasury stock at cost,
98,054 and 92,054 (3,207) (3,010)
-------- --------
Total shareholders' equity 58,336 55,252
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $444,926 $424,810
======== ========
See accompanying notes to the unaudited consolidated financial
statements.
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Six months ended Three months ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans $10,454 $10,866 $ 5,184 $ 5,477
Interest and dividends on investments:
Taxable interest 1,926 1,515 1,087 700
Nontaxable interest 1,569 1,468 784 792
Dividends 266 319 119 147
------- ------- ------- -------
Total interest and dividends on
investments 3,761 3,302 1,990 1,639
Other interest income 60 85 25 34
------- ------- ------- -------
Total interest income 14,275 14,253 7,199 7,150
------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits 4,007 5,084 1,970 2,519
Interest on short-term borrowings 276 495 159 220
Interest on other borrowings 1,176 911 611 458
------- ------- ------- -------
Total interest expense 5,459 6,490 2,740 3,197
------- ------- ------- -------
Net interest income 8,816 7,763 4,459 3,953
Provision for loan losses 185 186 80 93
------- ------- ------- -------
Net interest income after provision for
loan losses 8,631 7,577 4,379 3,860
------- ------- ------- -------
OTHER OPERATING INCOME:
Service charges 832 716 442 383
Securities gains (losses), net (191) 346 (72) 211
Other income 1,214 766 544 368
------- ------- ------- -------
Total other operating income 1,855 1,828 914 962
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 2,955 2,645 1,534 1,337
Occupancy expense, net 394 396 203 187
Furniture and equipment expense 411 382 204 191
Other expenses 1,576 1,669 784 869
------- ------- ------- -------
Total other operating expenses 5,336 5,092 2,725 2,584
------- ------- ------- -------
INCOME BEFORE TAXES 5,150 4,313 2,568 2,238
INCOME TAX PROVISION 1,013 823 528 432
------- ------- ------- -------
NET INCOME $ 4,137 $ 3,490 $ 2,040 $ 1,806
======= ======= ======= =======
EARNINGS PER SHARE - BASIC $ 1.36 $ 1.13 $ 0.67 $ 0.58
EARNINGS PER SHARE - DILUTED $ 1.36 $ 1.13 $ 0.67 $ 0.58
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,035,750 3,079,471 3,039,590 3,079,471
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 3,038,391 3,079,471 3,042,152 3,079,471
See accompanying notes to the unaudited consolidated financial
statements.
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
June 30,
------------------
2002 2001
------ -------
(IN THOUSANDS)
Net Income $2,040 $1,806
Other comprehensive income:
Unrealized gains (losses) on available
for sale securities $1,560 $ 214
Reclassification adjustment for (gain)
loss included in net income 72 (211)
------ ------
Other comprehensive income before tax 1,632 3
Income tax expense related to other
Comprehensive income 555 1
------ ------
Other comprehensive income, net of tax 1,077 2
------ ------
Comprehensive income $3,117 $1,808
====== ======
Six Months Ended
June 30,
-----------------
2002 2001
------ -------
(IN THOUSANDS)
Net Income $4,137 $3,490
Other comprehensive income:
Unrealized gains on available for sale
securities $ 994 $4,650
Reclassification adjustment for (gain)
loss included in net income 191 (346)
------ ------
Other comprehensive income before tax 1,185 4,304
Income tax expense related to other
Comprehensive income 403 1,463
------ ------
Other comprehensive income, net of tax 782 2,841
------ ------
Comprehensive income $4,919 $6,331
====== ======
See accompanying notes to the unaudited consolidated financial
statements.
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED
COMMON ADDITIONAL OTHER TOTAL
STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME STOCK EQUITY
--------- ------- ---------- -------- ------------- -------- -------------
Balance, December 31,
2001 3,131,644 $31,316 $18,230 $ 6,987 $1,729 $(3,010) $55,252
Net income for the
six months ended
June 30, 2002 4,137 4,137
Dividends declared,
$0.54 (1,638) (1,638)
Treasury Stock
acquired (6,000 shs) (197) (197)
Net change in unreal-
ized gain on invest-
ments available for
sale, net of tax
benefit $403 782 782
--------- ------- ------- ------- ------ ------- -------
Balance, June 30,
2002 3,131,644 $31,316 $18,230 $ 9,486 $2,511 $(3,207) $58,336
========= ======= ======= ======= ====== ======= =======
See accompanying notes to the unaudited consolidated financial
statements.
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2002 2001
---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income $ 4,137 $ 3,490
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation 275 324
Provision for loan losses 185 186
Accretion and amortization of
investment security discounts
and premiums (491) (394)
Securities losses (gains), net 191 (346)
Loss (gain) on sale of foreclosed
assets 10 (24)
Gross originations of loans held
for sale (8,778) (11,785)
Gross proceeds of loans held for
sale 10,831 9,323
Decrease (Increase) in all other
assets (856) 561
Increase in all other liabilities 188 120
-------- --------
Net cash provided by operating
activities $ 5,692 $ 1,455
-------- --------
INVESTING ACTIVITIES:
Investment securities available for
sale:
Proceeds from sales 25,009 16,122
Proceeds from calls and maturities 4,388 8,014
Purchases (51,793) (28,675)
Investment securities held to
maturity:
Proceeds from calls and maturities 90 1,346
Purchases (40) (25)
Net decrease (increase) in loans (495) 2,562
Acquisition of bank premises and
equipment (311) (158)
Proceeds from the sale of foreclosed
assets 91 368
-------- --------
Net cash used in investing
activities $(23,061) $ (446)
FINANCING ACTIVITIES:
Net increase in interest-bearing
deposits 15,188 12,950
Net increase (decrease) in
noninterest-bearing deposits (4,705) 580
Proceeds from long-term borrowings 5,000 -
Net increase (decrease) in short-term
borrowings 1,764 (13,535)
Dividends paid (1,638) (1,537)
Purchase of Treasury Stock (197) (853)
-------- --------
Net cash provided by (used in)
financing activities 15,412 (2,395)
-------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (1,957) (1,386)
CASH AND CASH EQUIVALENTS, BEGINNING 14,844 15,318
-------- --------
CASH AND CASH EQUIVALENTS, ENDING $ 12,887 $ 13,932
======== ========
The Company paid approximately $5,515,000 and $6,615,000
interest on deposits and other borrowings during the first half
of 2002 and 2001, respectively.
The Company made income tax payments of approximately $1,095,000
and $920,000 in the first half of 2002 and 2001, respectively.
See accompanying notes to the unaudited consolidated financial
statements.
PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Basis of Presentation
The consolidated financial statements include the accounts of
Penns Woods Bancorp, Inc. (the "Company") and its wholly-owned
subsidiaries Woods Investment Company, Inc., Woods Real Estate
Development Company, Inc., and Jersey Shore State Bank (the
"Bank") and its wholly-owned subsidiary The M Group, Inc. D/B/A
The Comprehensive Financial Group ("The M Group"). All
significant inter-company balances and transactions have been
eliminated in the consolidation.
The interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments necessary for the
fair presentation of results for such periods. All of those
adjustments are of a normal, recurring nature. The results of
operations for any interim period are not necessarily indicative
of results for the full year. These financial statements should
be read in conjunction with financial statements and notes
thereto contained in the Company's annual report for the year
ended December 31, 2001.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS)
No. 141, Business Combinations, effective for all business
combinations initiated after June 30, 2001, as well as all
business combinations accounted for by the purchase method that
are completed after June 30, 2001. The new statement requires
that the purchase method of accounting be used for all business
combinations and prohibits the use of the pooling-of-interests
method. FAS No. 141 also specifies criteria which must be met
for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill.
The adoption of FAS No. 141 did not have a material effect on
the Company's financial position or results of operations.
On January 1, 2002, the Company adopted FAS No. 142, Goodwill
and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. This statement changes the
accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill,
including goodwill recorded in past business combinations, will
cease upon adoption of this statement. However, this new
statement did not amend FAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, which requires
recognition and amortization of unidentified intangible assets
relating to the acquisition of financial institutions or
branches thereof. The FASB has undertaken a limited scope
project to reconsider the provisions of FAS No. 72 in 2002 and
has issued an exposure draft of a proposed statement,
Acquisitions of Certain Financial Institutions, that would
remove acquisitions of financial institutions from the scope of
FAS No. 72. The adoption of this proposed statement would
require all goodwill originating from acquisitions that meet the
definition of a business combination as defined in Emerging
Issues Task Force Issue ("EITF") No. 98-3 to be discontinued.
This statement, among other things, eliminates the regularly
scheduled amortization of goodwill and replaces this method with
a two-step process for testing the impairment of goodwill on at
least an annual basis. This approach could cause more
volatility in the Company's reported net income because
impairment losses, if any, could occur irregularly and in
varying amounts. Upon adoption of this statement on January 1,
2002, the Company stopped amortizing existing goodwill of
$3.0 million. In addition, the Company performed its initial
impairment analysis of goodwill noting that the estimated fair
value exceeded the carrying amount. Application of the non-
amortization provisions of FAS No. 142 resulted in an increase
in net income of $110,000, or $0.03 per share, during the first
half of 2002.
In August 2001, the FASB issued FAS No. 143, Accounting for
Asset Retirement Obligations, which requires that the fair value
of a liability be recognized when incurred for the retirement of
a long-lived asset and the value of the asset be increased by
that amount. The statement also requires that the liability be
maintained at its present value in subsequent periods and
outlines certain disclosures for such obligations. The new
statement takes effect for fiscal years beginning after June 15,
2002. The adoption of this statement, which is effective
January 1, 2003, is not expected to have a material effect on
the Company 's financial statements.
On January 1, 2002, the Company adopted FAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. FAS
No. 144 supercedes FAS No. 121 and applies to all long-lived
assets (including discontinued operations) and consequently
amends APB Opinion No. 30, Reporting Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business.
FAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or
fair value less costs to sell. The adoption of FAS No. 144 did
not have a material effect on the Company's financial
statements.
In April 2002, the FASB issued FAS No. 145, "Recission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". FAS No. 145 rescinds FAS No. 4,
which required all gains and losses from extinguishment of debt
to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a
result, the criteria in Opinion 30 will now be used to classify
those gains and losses. This statement also amends FASB FAS
No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be
accounted for in the same manner as sale-leaseback transactions.
This statement also makes technical corrections to existing
pronouncements, which are not substantive but in some cases may
change accounting practice. FAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of FAS
No. 145 did not have a material effect on the Company's
financial position or results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring). The new
statement will be effective for exit or disposal activities
initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial
statements.
Per Share Data
There are no convertible securities, which would affect the
numerator in calculating basis and dilutive earnings per share,
therefore, net income as presented on the consolidated statement
of income will be used as the numerator. The following table
sets forth the composition of the weighted average common shares
(denominator) used in the basic and dilutive per share
computation
Six Months Three Months
Ended Ended
June 30, June 30,
2002 2002
---------- ------------
Weighted average common shares
outstanding 3,131,644 3,131,644
Average treasury stock shares (95,894) (92,054)
--------- ---------
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share 3,035,750 3,039,590
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 2,641 2,562
--------- ---------
Weighted average common shares and
common stock equivalents used to
calculate diluted earnings per
share 3,038,391 3,042,152
========= =========
Options to purchase 20,350 shares of common stock at prices from
$42.00 to $53.18 were outstanding during the first half of 2002
and 30,350 shares at prices from $32.63 to $53.18 were
outstanding during the first half of 2001, but were not included
in the computation of diluted earnings per share because to do
so would have been anti-dilutive.
Reclassification of Comparative Amounts
Certain comparative amounts for the prior periods have been
reclassified to conform to current period presentations. Such
reclassifications had no effect on net income or stockholders'
equity.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Report contains certain "forward-looking statements"
including statements concerning plans, objectives, future events
or performance and assumptions and other statements which are
other than statements of historical fact. The Company wishes to
caution readers that the following important factors, among
others, may have affected and could in the future affect the
Company's actual results and could cause the Company's actual
results for subsequent periods to differ materially from those
expressed in any forward-looking statement made by or on behalf
of the Company herein: (i) the effect of changes in laws and
regulations, including federal and state banking laws and
regulations, which the Company must comply, and the associated
costs of compliance with such laws and regulations either
currently or in the future as applicable; (ii) the effect of
changes in accounting policies and practices, as may be adopted
by the regulatory agencies as well as by the Financial
Accounting Standards Board, or of changes in the Company's
organization, compensation and benefit plans; (iii) the effect
on the Company's competitive position within its market area of
the increasing consolidation within the banking and financial
services industries, including the increased competition from
larger regional and out-of-state banking organizations as well
as nonbank 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.
EARNINGS SUMMARY
Comparison of the Six Months Ended June 30, 2002 and 2001
Interest Income
For the six months ended June 30, 2002, total interest income
increased by $22,000 compared to the first half of 2001. Total
interest and dividends on investments increased $459,000 while
interest and fees on loans decreased $412,000 and Other interest
income decreased $25,000. Historically low interest rates
during the first half of 2002 have negatively effected interest
income. Investment opportunities that have generated additional
interest income to offset the decrease in loan interest,
resulting in a minimal total interest income increase of
$22,000.
Total interest and fees on loans decreased $412,000 in the first
two quarters 2002 compared to the same period in 2001. Prime
rates declined from a year ago, negatively impacting the
interest collected on variable rate loans and new loans
initiated over the past twelve months. Interest and dividends
on investments increased $459,000 due to the net effect of a
$411,000 increase in taxable interest, an increase of $101,000
in nontaxable interest and a $53,000 decrease in dividends. The
increase of taxable interest is due to the purchase of taxable
municipal securities over the past year. Taxable municipal
yields have remained favorable compared to other investing
alternatives. The decrease in dividend income of $53,000 is
partially the result of the sale of stocks that had previously
received dividends.
Interest Expense
For the six months ended June 30, 2002, total interest expense
decreased by $1,031,000 or 16% compared to the first half of
2001. The overall decrease in interest expense is the result of
a $1,077,000 decrease in interest paid on deposits and a
$219,000 decrease in interest expense paid on short-term
borrowings, offset by an increase of $265,000 on interest paid
on other borrowings. Although total deposits increased almost
$24 million over the past year, declining rates have had a
positive effect on interest expense. Average short-term
borrowings declined from a year ago mostly due to deposit
growth. Fewer borrowings and declining rates also reduced
interest expense on short-term borrowings. Favorable long-term
borrowing rates currently present an opportunity to reduce
interest expenses over the coming years. The Company borrowed
an additional $15 million in long term advances through the FHLB
to minimize future borrowing costs and to enhance asset and
liability positioning. The $265,000 in expense on other
borrowings is the result of the additional advances.
Provision for Loan Losses
The provision for loan losses is based upon management's
quarterly review of the loan portfolio. The purpose of the
review is to assess loan quality, identify impaired loans,
analyze delinquencies, ascertain loan growth, evaluate potential
charge-offs and recoveries, and assess general economic
conditions in the markets served. An external independent loan
review is also performed annually for the Bank. Management
remains committed to an aggressive program of problem loan
identification and resolution.
The allowance is calculated by applying loss factors to
outstanding loans by type, excluding loans for which a specific
allowance has been determined. Loss factors are based on
management's consideration of the nature of the portfolio
segments, changes in mix and volume of the loan portfolio, and
historical loan loss experience. In addition, management
considers industry standards and trends with respect to
nonperforming loans and its knowledge and experience with
specific lending segments.
Although management believes that it uses the best information
available to make such determinations and that the allowance for
loan losses is adequate at June 30, 2002, future adjustments
could be necessary if circumstances or economic conditions
differ substantially from the assumptions used in making the
initial determinations. A downturn in the local economy,
employment and delays in receiving financial information from
borrowers could result in increased levels of nonperforming
assets and charge-offs, increased loan loss provisions and
reductions in income. Additionally, as an integral part of the
examination process, bank regulatory agencies periodically
review the Bank's loan loss allowance. The banking agencies
could require the recognition of additions to the loan loss
allowance based on their judgement of information available to
them at the time of their examination.
The allowance for loan losses increased $73,000 from
December 31, 2001 compared to the allowance for loan losses of
$3,000,000 or 1.2% of total loans for June 30, 2002. This
percentage is consistent with the guidelines of regulators and
peer banks. Management's conclusion is that the provision for
loan losses is adequate.
The provision for loan losses totaled $185,000 for the six
months ended June 30, 2002. The provision for the same period
in 2001 was $186,000.
As of June 30, 2002, charge-offs exceeded recoveries by $112,000
compared to June 30, 2001, when charge-offs exceeded recoveries
by $155,000.
The ratio of the allowance to net loans for June 30, 2002 and
December 31, 2001 was 1.2%.
An overall decrease in non-performing loans from December 31,
2001, totaled $113,000. Non-performing commercial and
agricultural loans decreased $11,000, real estate secured loans
decreased by $102,000 and installment loans were unchanged.
Based upon this analysis as well as the others noted above,
senior management has concluded that the allowance for loan
losses is adequate.
Other Operating Income
Other operating income for the six months ended June 30, 2002
increased $27,000. Excluding security gains (losses), service
charges and other income increased $564,000. An increase in
service charges of $116,000 was mostly due to the revision of
the Bank's overdraft fee structure in May of 2001. Other income
increased $448,000.
The substantial increase in other income was mostly due to
commission income realized from the sale of various financial
products offered through the Bank's subsidiary, The M Group.
Income generated from The M Group, comprised $309,000 of the
increase in other income. Proceeds of $116,000 from a bank
owned life insurance policy also contributed to the increase in
other income.
Management has analyzed its equity portfolio for impairment that
would qualify as other than temporary. Impairment is determined
using factors such as length of time and the extent to which the
market value is less than cost; the financial condition and the
near-term prospects of the issuer; and the intent and ability of
the Company to retain its investment to allow for the market to
recover. In doing so, management has identified securities
within the equity portfolio that have an other than temporary
decline in market value. Management has reserved $1,516,000,
which was charged to security gains and losses, to provide for
this decline. Extracting the $1,516,000 charge, security gains
increased $1,325,000. The Company sold securities that were
determined to have attained their maximum long-term potential
value which thereby resulted in the substantial gains on
securities.
Other Operating Expense
For the six months ended June 30, 2002 total other operating
expenses increased $244,000 over the same period in 2001.
Employee salaries and benefits increased $310,000 as a result of
increased salaries that correspond with the growth in sales of
financial products offered by the M Group as well as normal
increases in salary levels.
Occupancy expense decreased $2,000 and furniture and equipment
expense increased $29,000. Occupancy experienced an overall
decline in normal expenses. The $16,000 increase in furniture
and equipment expense is explained by miscellaneous costs
associated with the new State College office build-out and Wide
Area Network preparation.
An overall decrease in other expenses totaled $93,000.
Excluding the decrease of $110,000 resulting from the
elimination of goodwill amortization as per the adoption of FAS
No. 142, other expenses increased $17,000. The remaining
$17,000 increase includes professional fees, pension costs, an
annual NASDAQ fee and expenses on foreclosed assets held for
sale.
Provision for Income Taxes
The provision for income taxes for the six months ended June 30,
2002 resulted in an effective income tax rate of 19.67% compared
to 19.08% for the corresponding
period in 2001.
Comparison of the Three Months Ended June 30, 2002 and 2001
Interest Income
During the second quarter of 2002 interest income earned was
$7,199,000 an increase of $49,000 over the same quarter in 2001.
Interest income on loans decreased $293,000 due to a decline in
average prime rates during 2002 relative to the second quarter
of 2001.
An increase of $351,000 occurred in interest and dividends on
investments. Taxable interest increased $387,000, non-taxable
interest decreased $8,000 and dividends decreased $28,000 due to
the same reasons noted for the six-month comparison.
Interest Expense
Interest expense during the second quarter of 2002 decreased by
$457,000 or 14.29% over interest expense incurred during the
second quarter of 2001.
Although interest bearing deposits grew $21,445,000 from the
second quarter 2001, time deposits declined by $15,928,000
during the same period. The shift from time deposits that are
offered at higher rates to interest bearing demand deposits
which are offered at lower rates explain the decrease in
interest rates. In addition, rates offer on time deposits
declined over the past twelve months, contributing to the
decrease of interest expense. Interest expense on short-term
borrowings decreased by $61,000 and interest expense on other
borrowings increased $153,000. The decrease in interest expense
paid on short-term borrowings was due to the reduction of FHLB
overnight borrowings. The increase of $153,000 in interest paid
on other borrowings was due to a net increase of $15,000,000 in
FHLB borrowings for reasons stated in the six month comparison.
Other Operating Income
Total other operating income decreased $48,000 to $914,000
during the three-month period in 2002 compared to $962,000 in
2001. Service charges and other income increased $59,000 and
$176,000, respectively, while security gains decreased by
$283,000. The substantial increase in other income was mostly
due to commission income realized during the second quarter of
2002 from the sale of various financial products. Such
financial products are offered through the Bank's subsidiary,
The M Group. The change in security gains is explained in the
six month comparison.
Other Operating Expense
Total other operating expenses increased $141,000. Salaries and
employee benefits increased $197,000 as a result of normal
increases in salary levels, commissions and salaries associated
with the opening of a new branch office inside Wal-Mart in State
College. Occupancy expense increased during the second quarter
of 2002 compared to the second quarter of 2001 by $16,000.
Furniture and equipment expense increased $13,000. Other
operating expenses decreased during the three-month period in
2002 when compared to the same period in 2001 by $85,000. This
reflects the elimination of goodwill amortization expense in
2002 relative to 2001.
Provision for Income Taxes
Income taxes increased $96,000 for the quarter ended June 30,
2002 compared to the second quarter of 2001. The effective tax
rates for the quarter ended June 30, 2002, and 2001 are 20.6%
and 19.3%, respectively.
ASSET/LIABILITY MANAGEMENT
Assets
At June 30, 2002, cash and investment securities totaled
$166,457,000 or a net increase of $18,326,000 over the
corresponding balance at December 31, 2001. Investment
securities increased $20,283,000 and cash decreased $1,957,000.
During this period, net loans increased by $110,000 to
$248,806,000. Loans held for resale decreased $2,053,000 to
$1,940,000. Other assets increased $3,576,000 mostly due to the
increase of accounts receivable relating to the sale and
maturity of securities that had not yet been paid to the
Company. Payment for the matured securities and proceeds of the
sales were subsequently received on the date of settlement.
At June 30, 2002 the balance of other real estate was $445,000
compared to $346,000 at December 31, 2001. Two of three
properties totaling $101,000 that was held in other real estate
at December 31, 2001 was sold during the first and second
quarters. An additional four properties were acquired in the
amount of $200,000 during the first half of 2002. Five
properties remain in other real estate at June 30, 2002.
Deposits
At June 30, 2002 total deposits amounted to $315,633,000
representing an increase of $10,483,000, from total deposits at
December 31, 2001. Deposits shifted during the first half from
non-interest bearing demand deposits and time deposits into
interest-bearing deposits and savings. Non-interest bearing
demand deposits decreased $4,705,000 while interest-bearing
demand deposits increased $14,105,000. Savings increased
$5,178,000 while time deposits decreased $4,095,000.
Capital
The adequacy of the Company's capital is reviewed on an ongoing
basis with reference to the size, composition and quality of the
Company's resources and regulatory guidelines. Management seeks
to maintain a level of capital sufficient to support existing
assets and anticipated asset growth, maintain favorable access
to capital markets and preserve high quality credit ratings.
Bank holding companies are required to comply with the Federal
Reserve Board's risk-based capital guidelines. The risk-based
capital rules are designed to make regulatory capital
requirements more sensitive to differences in risk profiles
among banks and bank holding companies and to minimize
disincentives for holding liquid assets. Specifically, each is
required to maintain certain minimum dollar amounts and ratios
of Total risk-based, Tier I risk-based and Tier I leverage
capital requirements. In addition to the capital requirements,
the Federal Deposit Insurance Corporation Improvements Act
(FDICIA) established five capital categories ranging from "well
capitalized" to "critically undercapitalized." To be classified
as "well capitalized, "Total risk-based, Tier I risked- based
and Tier I leverage capital ratios must be at least 10%, 6%, and
5% respectively.
At June 30, 2002 the Company was "well capitalized" with a total
capital ratio of 21.11%, a Tier I capital ratio of 19.81% and a
Tier I leverage ratio of 12.22%.
Liquidity and Interest Rate Sensitivity
The asset/liability committee addresses the liquidity needs of
the Bank to see that sufficient funds are available to meet
credit demands and deposit withdrawals as well as to the
placement of available funds in the investment portfolio. In
assessing liquidity requirements, equal consideration is given
to the current position as well as the future outlook.
The following liquidity measures are monitored and kept within
the limits cited.
1. Net Loans to Total Assets, 70% maximum
2. Net Loans to Total Deposits, 92.5% maximum
3. Net Loans to Core Deposits, 100% maximum
4. Investments to Total Assets, 40% maximum
5. Investments to Total Deposits, 50% maximum
6. Total Liquid Assets to Total Assets, 25% minimum
7. Total Liquid Assets to Total Liabilities, 25% minimum
8. Net Core Funding Dependence, 35% maximum
Fundamental objectives of the Company's asset/liability
management process are to maintain adequate liquidity while
minimizing interest rate risk. The maintenance of adequate
liquidity provides the Company with the ability to meet its
financial obligations to depositors, loan customers and
stockholders. Additionally, it provides funds for normal
operating expenditures and business opportunities as they arise.
The objective of interest rate sensitivity management is to
increase net interest income by managing interest sensitive
assets and liabilities in such a way that they can be repriced
in response to changes in market interest rates.
The Company, like other financial institutions, must have
sufficient funds available to meet its liquidity needs for
deposit withdrawals, loan commitments and expenses. In order
to control cash flow, the bank estimates future flows of cash
from deposits and loan payments. The primary sources of funds
are deposits, principal and interest payments on loans and
mortgage-backed securities, as well as Federal Home Loan Bank
borrowings. Funds generated are used principally to fund loans
and purchase investment securities. Management believes the
Company has adequate resources to meet its normal funding
requirements.
Management monitors the Company's liquidity on both a long and
short-term basis thereby, providing management necessary
information to react to current balance sheet trends. Cash flow
needs are assessed and sources of funds are determined. Funding
strategies consider both 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
mone{ market investments such as federal funds sold. The use of
these resources, in conjunction with access to credit provides
core ingredients to satisfy depositor, borrower and creditor
needs.
Management monitors and determines the desirable level of
liquidity. Consideration is given to loan demand, investment
opportunities, deposit pricing and growth potential as well as
the current cost of borrowing funds. The Company has a current
borrowing capacity at the Federal Home Loan Bank of
$152,214,000. In addition to this credit arrangement the
Company has additional lines of credit with correspondent banks
of $8,000,000. The Company's management believes that it has
sufficient liquidity to satisfy estimated short-term and long-
term funding needs. Federal Home Loan Bank advances totaled
$46,778,000 as of June 30, 2002.
Interest rate sensitivity, which is closely related to liquidity
management, is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities.
Asset/liability management strives to match maturities and rates
between loan and investment security assets with the deposit
liabilities and borrowings that fund them. Successful
asset/liability management results in a balance sheet structure
which can cope effectively with market rate fluctuations. The
matching process is affected by segmenting both assets and
liabilities into future time periods (usually 12 months, or
less) based upon when repricing can be effected. Repriceable
assets are subtracted from repriceable liabilities, for a
specific time period to determine the "gap", or difference.
Once known, the gap is managed based on predictions about future
market interest rates. Intentional mismatching, or gapping, can
enhance net interest income if market rates move as predicted.
However, if market rates behave in a manner contrary to
predictions, net interest income will suffer. Gaps, therefore,
contain an element of risk and must be prudently managed. In
addition to gap management, the Company has an asset liability
management policy which incorporates a market value at risk
calculation which is used to determine the effects of interest
rate movements on shareholders' equity and a simulation analysis
to monitor the effects of interest rate changes on the Company's
balance sheets.
There has been no substantial changes in the Company's GAP
analyses or simulation analyses compared to the information
provided in the Company's SEC 10k for the period ended
December 31, 2001.
Generally, management believes the Company is well positioned to
respond expeditiously 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
Corporation'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.
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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K.
(3)(i) Articles of Incorporation of the Registrant,
as presently in effect (incorporated by
reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form
S-4, No. 333-65821).
(3)(ii) Bylaws of the Registrant as presently in
effect (incorporated by reference to Exhibit
3.2 of the Registrant's Registration
Statement on Form S-4, No. 333-65821).
(99) Certification of Chief Executive Officer and
Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PENNS WOODS BANCORP, INC.
(Registrant)
Date: August 13, 2002 /s/Ronald A. Walko
----------------------------------
Ronald A. Walko,
President and
Chief Executive Officer
Date: August 13, 2002 /s/ Sonya E. Scott
----------------------------------
Sonya E. Scott, Secretary