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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended September 30, 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 November 14, 2002 there were 3,028,478 of the Registrant's
common stock outstanding.
1
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 3
September 30, 2002 and December 31, 2001
Consolidated Statement of Income (unaudited) 4
for the Three and Nine Months ended
September 30, 2002 and 2001
Consolidated Statement of Comprehensive Income 5
(unaudited) For the Three and Nine Months ended
September 30, 2002 and 2001
Consolidated Statement of Changes in Shareholders' 6
Equity (unaudited) for the Nine Months ended
September 30, 2002
Consolidated Statement of Cash Flows (unaudited) 7-8
for the Nine Months ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial 14-25
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About 25
Market Risk
Item 4. Controls and Procedures 26
Part II Other Information 27
Signatures 28
2
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
2002 2001
------------- ------------
ASSETS:
Cash and due from banks $ 18,807 $ 14,844
Investment securities available for sale 167,426 131,985
Investment securities held to maturity (market value of 1,218 1,302
$1,263,000 and $1,312,000)
Loans held for sale 2,532 3,993
Loans, net of unearned discount 253,165 251,623
Allowance for loan losses (3,028) (2,927)
--------- ---------
Loans, net 250,137 248,696
Bank premises and equipment, net 4,788 4,478
Accrued interest receivable 2,224 2,685
Bank owned life insurance 8,437 8,126
Other assets 8,673 8,701
--------- ---------
TOTAL ASSETS $ 464,242 $ 424,810
========= =========
LIABILITIES:
Demand deposits $ 58,483 $ 55,277
Interest-bearing demand deposits 76,872 58,139
Savings deposits 58,213 53,309
Time deposits 140,470 138,425
--------- ---------
Total deposits $ 334,038 $ 305,150
Short-term borrowings 17,855 19,105
Other borrowings 46,778 41,778
Accrued interest payable 1,098 1,190
Other liabilities 3,045 2,335
--------- ---------
Total liabilities 402,814 369,558
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, par value $10; 10,000,000 shares
authorized; 3,131,752 and 3,131,644 shares issued $ 31,318 $ 31,316
Additional paid-in capital 18,232 18,230
Retained earnings 11,043 6,987
Accumulated other comprehensive gain 4,203 1,729
Less: Treasury stock at cost, 102,854 and 92,054 (3,368) (3,010)
--------- ---------
Total shareholders' equity $ 61,428 $ 55,252
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 464,242 $ 424,810
========= =========
See accompanying notes to the unaudited consolidated financial
statements.
3
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
------ ------ ------ ------
(In Thousands Except Per Share Data)
INTEREST INCOME:
Interest and fees on loans $ 5,231 $ 5,563 $ 15,685 $ 16,429
Interest and dividends on investments:
Taxable interest 1,140 675 3,066 2,190
Nontaxable interest 808 804 2,377 2,272
Dividends 205 150 471 467
-------- -------- -------- --------
Total interest and dividends
on investments 2,153 1,629 5,914 4,929
Other interest income 15 37 75 124
-------- -------- -------- --------
Total interest income 7,399 7,229 21,674 21,482
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 1,962 2,392 5,969 7,476
Interest on short-term borrowings 119 200 395 695
Interest on other borrowings 634 463 1,810 1,374
-------- -------- -------- --------
Total interest expense 2,715 3,055 8,174 9,545
-------- -------- -------- --------
Net interest income 4,684 4,174 13,500 11,937
Provision for loan losses 90 93 275 279
-------- -------- -------- --------
Net interest income after provision for
loan losses 4,594 4,081 13,225 11,658
-------- -------- -------- --------
OTHER OPERATING INCOME:
Service charges 469 412 1,301 1,128
Securities gains, net 281 369 90 715
Other income 480 448 1,694 1,214
-------- -------- -------- --------
Total other operating income 1,230 1,229 3,085 3,057
-------- -------- -------- --------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 1,569 1,327 4,524 3,972
Occupancy expense, net 224 192 618 588
Furniture and equipment expense 223 197 634 579
Other expenses 772 882 2,348 2,551
-------- -------- -------- --------
Total other operating expenses 2,788 2,598 8,124 7,690
-------- -------- -------- --------
INCOME BEFORE TAXES 3,036 2,712 8,186 7,025
INCOME TAX PROVISION 660 586 1,673 1,409
-------- -------- -------- --------
NET INCOME $ 2,376 $ 2,126 $ 6,513 $ 5,616
======== ======== ======== ========
EARNINGS PER SHARE - BASIC $ 0.78 $ 0.68 $ 2.15 $ 1.83
EARNINGS PER SHARE - DILUTED $ 0.78 $ 0.68 $ 2.14 $ 1.83
BASIC WEIGHTED AVERAGE 3,030,714 3,073,317 3,034,075 3,073,317
SHARES OUTSTANDING
DILUTED WEIGHTED AVERAGE 3,033,332 3,073,317 3,036,825 3,073,317
SHARES OUTSTANDING
See accompanying notes to the unaudited consolidated financial
statements.
4
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30,
2002 2001
------------- -----------
(In Thousands)
Net Income $ 2,376 $ 2,126
Other comprehensive income:
Unrealized gains on available for sale securities $ 2,844 $ 1,142
Reclassification adjustment for gain included in (281) (369)
-------- --------
net income
Other comprehensive income before tax 2,563 773
Income tax expense related to other
Comprehensive income 871 263
-------- --------
Other comprehensive income, net of tax 1,692 510
-------- --------
Comprehensive income $ 4,068 $ 2,636
======== ========
Nine Months Ended September 30,
2002 2001
------------- -----------
(In Thousands)
Net Income $ 6,513 $ 5,616
Other comprehensive income:
Unrealized gains on available for sale securities $ 3,838 $ 5,792
Reclassification adjustment for gain included in (90) (715)
-------- --------
net income
Other comprehensive income before tax 3,748 5,077
Income tax expense related to other
Comprehensive income 1,274 1,726
-------- --------
Other comprehensive income, net of tax 2,474 3,351
-------- --------
Comprehensive income $ 8,987 $ 8,967
======== ========
See accompanying notes to the unaudited consolidated financial
statements.
5
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 nine months
ended September 30, 2002 6,513 6,513
Dividends declared, $0.81 (2,457) (2,457)
Stock Options Exercised 108 2 2 4
Treasury Stock acquired
(10,800 shs) (358) (358)
Net change in unrealized gain on
investments available for sale,
net of tax benefit $1,274 2,474 2,474
Balance, September 30, 2002 3,131,752 $31,318 $18,232 $11,043 $ 4,203 $(3,368) $61,428
See accompanying notes to the unaudited consolidated financial
statements.
6
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net Income $ 6,513 $ 5,616
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 423 474
Provision for loan losses 275 279
Accretion and amortization of investment security discounts
and premiums (721) (602)
Securities gains, net (90) (715)
Loss (gain) on sale of foreclosed assets 6 (17)
Gross originations of loans held for sale (12,787) (19,760)
Gross proceeds of loans held for sale 14,248 16,691
Decrease (Increase) in all other assets (978) 254
Increase in all other liabilities 618 143
--------- ---------
Net cash provided by operating activities $ 7,507 $ 2,363
--------- ---------
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales 46,234 21,563
Proceeds from calls and maturities 7,092 10,888
Purchases (84,234) (37,709)
Investment securities held to maturity:
Proceeds from calls and maturities 124 1,353
Purchases (40) (25)
Net increase in loans (1,930) (2,635)
Acquisition of bank premises and equipment (733) (227)
Proceeds from the sale of foreclosed assets 116 444
Purchase of bank owned life insurance - (5,578)
--------- ---------
Net cash used in investing activities $ (33,371) $ (11,926)
--------- ---------
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits 25,682 9,699
Net increase in noninterest-bearing deposits 3,206 1,323
Proceeds from long-term borrowings 5,000 -
Net decrease in short-term borrowings (1,250) (235)
Dividends paid (2,457) (2,302)
Stock options exercised 4 -
Purchase of Treasury Stock (358) (1,538)
--------- ---------
Net cash provided by financing activities 29,827 6,947
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,963 (2,616)
CASH AND CASH EQUIVALENTS, BEGINNING 14,844 15,318
--------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 18,807 $ 12,702
========= =========
7
The Company paid approximately $8,266,000 and $9,689,000
interest on deposits and other borrowings during the first nine
months of 2002 and 2001, respectively.
The Company made income tax payments of approximately $2,154,000
and $1,430,000 in the first nine months of 2002 and 2001,
respectively.
See accompanying notes to the unaudited consolidated financial
statements.
8
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
9
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 $166,000, or $0.02 per share, during the first
nine months 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.
10
On January 1, 2002, the Company adopted FAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. FAS No.
144 supersedes 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, "Recision 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.
11
On October 1, 2002, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (FAS)
No. 147, Acquisitions of Certain Financial Institutions,
effective for all business combinations initiated after October
1, 2002. This Statement addresses the financial accounting and
reporting for the acquisition of all or part of a financial
institution, except for a transaction between two or more mutual
enterprises. This Statement removes acquisitions of financial
institutions, other than transactions between two or more mutual
enterprises, from the scope of FAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a
Savings and Loan Association or a Similar Institution Is
Acquired in a Business Combination Accounted for by the Purchase
Method. The acquisition of all or part of a financial
institution that meets the definition of a business combination
shall be accounted for by the purchase method in accordance with
FAS No. 141, Business Combinations, and FAS No. 142, Goodwill
and Other Intangible Assets. This Statement also provides
guidance on the accounting for the impairment or disposal of
acquired long-term customer-relationship intangible assets (such
as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets), including those acquired
in transactions between two or more mutual enterprises. The
adoption of FAS No. 147 did not have a material effect on the
Company's financial position or results of operations.
12
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
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Weighted average common shares
outstanding 3,131,732 3,130,844 3,131,674 3,130,844
Average treasury stock shares (101,018) (69,634) (97,599) (57,527)
--------- --------- --------- ---------
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share 3,030,714 3,061,210 3,034,075 3,073,317
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 2,618 - 2,750 -
--------- --------- --------- ---------
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per
share 3,033,332 3,061,210 3,036,825 3,073,317
========= ========= ========= =========
Options to purchase 20,350 shares of common stock at prices from
$42.00 to $53.18 were outstanding during the three months ended
September 30, 2002 and 30,350 shares at prices from $32.63 to
$53.18 were outstanding during the three months ended September
30, 2001, but were not included in the computation of diluted
earnings per share because to do so would have been anti-
dilutive. Options to purchase 20,350 shares of common stock at
prices from $42.00 to $53.18 were outstanding during the first
nine months of 2002 and 30,350 shares at prices from $32.63 to
$53.18 were outstanding during the first nine months of 2001,
but were not included in the computation of diluted earnings per
share because to do so would have been anti-dilutive.
13
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.
14
EARNINGS SUMMARY
Comparison of the Nine Months Ended September 30, 2002 and 2001
Interest Income
For the nine months ended September 30, 2002, total interest
income increased by $192,000 compared to the first nine months
of 2001. Total interest and dividends on investments increased
$985,000 while interest and fees on loans decreased $744,000 and
other interest income decreased $49,000. Overall, the increase
in total interest income of $192,000 is the result of an
increase in the volume of investment securities held relative to
a year ago. Interest income generated from the increase in
volume has more than compensated for the decrease of interest on
loans caused by a general decline in rates.
Total interest and fees on loans decreased $744,000 in the first
three quarters of 2002 compared to the same period in 2001. The
Bank Prime Loan Rate was at 4.75% at September 30, 2002 and the
average Prime rate during the third quarter was lower than it
has been for over thirty years. Historically low rates have
negatively affected interest income collected on variable and
new loans compared to a year ago when Prime rates averaged
6.28%. Loan growth has been sluggish as businesses and
consumers have been reluctant to borrow in an uncertain economic
environment.
Interest and dividends on investments increased $985,000 due to
the net effect of a $876,000 increase in taxable interest, an
increase of $105,000 in nontaxable interest and a $4,000
increase in dividends. The increase of taxable interest is due
to the significant purchase of additional U.S. Government agency
securities over the past year. The average holdings of U.S.
Government agency securities have increased $21,401,000 when
comparing the first nine months of 2001 to the same period in
2002. The net growth in the volume of investment holdings has
generated additional interest that has offset the negative
impact of lower rates.
15
Interest Expense
For the nine months ended September 30, 2002, total interest
expense decreased by $1,371,000 or 14% compared to the first
three quarters of 2001. The overall decrease in interest
expense is the result of a $1,507,000 decrease in interest paid
on deposits and a $300,000 decrease in interest expense paid on
short-term borrowings, offset by an increase of $436,000 on
interest paid on other borrowings. Historically low interest
rates have positively impacted interest expense. The lower
rates for all deposit accounts contribute the most substantial
decrease in interest expense. At July 31, 2002, interest rates
on Super Now and Insured Money Market accounts were lowered by
50 basis points. In addition to demand deposit rates, time
deposit rates have steadily declined over the past two years,
with the current rates at their low. Fewer borrowings and
declining rates also reduced interest expense on short-term
borrowings. Favorable long-term borrowing rates offer
opportunities to reduce interest expenses over the coming years.
The Company borrowed an additional $5 million in long term
advances through the FHLB during the first three quarters of
2002 to minimize future borrowing costs and to enhance asset and
liability positioning. The $436,000 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
16
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 September 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 judgment of
information available to them at the time of their examination.
The allowance for loan losses increased $101,000 from December
31, 2001 compared to the allowance for loan losses of
$3,028,000 or 1.2% of total loans for September 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 $275,000 for the nine
months ended September 30, 2002. The provision for the same
period in 2001 was $279,000.
As of September 30, 2002, charge-offs exceeded recoveries by
$174,000 compared to September 30, 2001, when charge-offs
exceeded recoveries by $274,000.
The ratio of the allowance to net loans for September 30, 2002
and December 31, 2001 was 1.2%.
An overall increase in non-performing loans from December 31,
2001, totaled $352,000. Non-performing commercial and
industrial loans increased $23,000, real estate secured loans
increased by $327,000 and installment loans increased $2,000.
17
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 nine months ended September 30,
2002 increased $28,000. Excluding net security gains, service
charges and other income increased $653,000. An increase in
service charges of $173,000 was mostly due to the amendment of
the Bank's overdraft fee structure in May of 2001. Other income
increased $480,000.
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 $324,000 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. Debit card income has increased 27% or $24,000
and ATM surcharges increased 19% or $18,000 when comparing the
first three quarters 2002 to the same period in 2001.
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 $2,083,000,
which was charged to security gains and losses, to provide for
this decline. Extracting the $2,083,000 charge, security gains
increased $2,173,000. 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 nine months ended September 30, 2002 total other
operating expenses increased $434,000 over the same period in
2001.
18
Employee salaries and benefits increased $552,000 as a result of
increased salaries that correspond with the growth in sales of
financial products offered by the M Group and the cost of staff
at the new State College Wal-Mart Branch.
Occupancy expense increased $30,000 and furniture and equipment
expense increased $55,000. Occupancy expense experienced an
overall increase due to rent for the new State College Wal-Mart
Branch. The $55,000 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 $203,000. The
elimination of goodwill amortization as per the adoption of FAS
No. 142 represents $166,000 of the decrease in expenses. The
other miscellaneous operating expense decrease was additionally
offset by a $55,000 expense as a result of a check kiting
incident.
Provision for Income Taxes
The provision for income taxes for the nine months ended
September 30, 2002 resulted in an effective income tax rate of
20.44% compared to 20.06% for the corresponding period in 2001.
Comparison of the Three Months Ended September 30, 2002 and 2001
Interest Income
During the third quarter of 2002 interest income earned was
$7,399,000 an increase of $170,000 over the same quarter in
2001.
Interest income on loans decreased $332,000 due to a decline in
average prime rates during 2002 relative to the third quarter of
2001.
An increase of $524,000 occurred in interest and dividends on
investments. Taxable interest increased $465,000, non-taxable
interest increased $4,000 and dividends increased $55,000 due to
the same reasons noted for the nine-month comparison.
19
Interest Expense
Interest expense during the third quarter of 2002 decreased by
$340,000 or 11.13% over interest expense incurred during the
third quarter of 2001. Interest on deposits and short-term
borrowings decreased $430,000 and $81,000, respectively, while
interest on other borrowings increased $171,000. For the same
reasons noted in the nine month comparison, overall interest
expense decreased
Other Operating Income
Total other operating income increased $1,000 to $1,230,000
during the three-month period in 2002 compared to $1,229,000 in
2001. Service charges and other income increased $57,000 and
$32,000, respectively, while security gains decreased by
$88,000. The increase in the amount of service charges mostly
pertains to overdraft charges. As deposit accounts have grown
from a year ago, the volume of overdraft charges have also
increased. Other income increased as a result of a general
increase in debit card, atm surcharges and other miscellaneous
income sources.
Other Operating Expense
Total other operating expenses increased $190,000. Salaries and
employee benefits increased $242,000 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 third quarter
of 2002 compared to the third quarter of 2001 by $32,000.
Furniture and equipment expense increased $26,000. Other
operating expenses decreased during the three-month period in
2002 when compared to the same period in 2001 by $110,000. This
reflects the elimination of goodwill amortization expense.
20
Provision for Income Taxes
Income taxes increased $74,000 for the quarter ended September
30, 2002 compared to the third quarter of 2001. The effective
tax rates for the quarter ended September 30, 2002, and 2001 are
21.7% and 21.6%, respectively.
ASSET/LIABILITY MANAGEMENT
Assets
At September 30, 2002, total assets were $464,242,000 compared
to $424,810,000 at December 31, 2001. Cash and due from banks
increased $3,963,000 during the first nine months of 2002.
Investment securities totaled $168,644,000 at September 30, 2002
or a net increase of $35,357,000 over the corresponding balance
at December 31, 2001. During this period, net loans increased
by $1,441,000 to $250,137,000. Loans held for resale decreased
$1,461,000 to $2,532,000. The remaining assets increased
$132,000.
At September 30, 2002 the balance of other real estate was
$438,000 compared to $346,000 at December 31, 2001. Two of
three properties totaling $101,000 that were held in other real
estate at December 31, 2001 were sold during the first and
second quarters of 2002. An additional five properties were
acquired in the amount of $214,000 during the first nine months
of 2002. One property acquired in 2002 in the amount of
$21,000, was sold in the third quarter. Five properties remain
in other real estate at September 30, 2002.
Deposits
At September 30, 2002 total deposits amounted to $334,038,000
representing an increase of $28,888,000, from total deposits at
December 31, 2001. Non-interest bearing demand deposits
increased $3,206,000 while interest-bearing demand deposits
increased $18,733,000. Savings increased $4,904,000 and time
deposits increased $2,045,000. Due to successful marketing
techniques and consumers desire to hold cash in the current
economic environment, total demand accounts have grown
substantially.
21
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 September 30, 2002 the Company was "well capitalized" with a
total capital ratio of 21.77%, a Tier I capital ratio of 20.51%
and a Tier I leverage ratio of 12.27%
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
22
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
23
money market investments such as federal funds sold. The use of
these resources, in conjunction with access to credit provides
core ingredients to satisfy depositor, borrower and creditor
needs.
Management monitors and determines the desirable level of
liquidity. Consideration is given to loan demand, investment
opportunities, deposit pricing and growth potential as well as
the current cost of borrowing funds. The Company has a current
borrowing capacity at the Federal Home Loan Bank of
$152,214,000. In addition to this credit arrangement the
Company has additional lines of credit with correspondent banks
of $10,500,000. 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 September 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.
24
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 10-K 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`.
Item 3. Quantitative and Qualitative Disclosure About Market
Risk
Market risk for the Company is comprised primarily from interest
rate risk exposure and liquidity risk. Interest rate risk and
liquidity risk management is performed at the Bank level as well
as the Company level. The Company's interest rate sensitivity
is monitored by management through selected interest rate risk
measures produced internally. 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 10-K
for the period ended December 31, 2001. Additional information
and details are provided in the Interest Sensitivity section of
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
25
Generally, management believes the Company is well positioned to
respond expeditiously when the market interest rate outlook
changes.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this Form 10-Q, the
Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including
the Company's President and Chief Executive Officer along with
the Company's Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon
that evaluation, the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures
are effective in timely alerting them to material information
relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic
SEC filings. There have been no significant changes in the
Company's internal controls or in other factors which could
significantly affect internal controls subsequent to the date
the Company carried out its evaluation.
26
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) (i) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(99) (ii) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PENNS WOODS BANCORP, INC.
(Registrant)
Date: November 14, 2002 _______________________________
Ronald A. Walko, President
and Chief Executive Officer
Date: November 14, 2002 ________________________________
Sonya E. Scott, Secretary
28
SECTION 302 CERTIFICATION
I, Ronald A. Walko, Chief Executive Officer of Penns Woods
Bancorp, Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penns
Woods Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Company and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
29
5. The Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of Company's board of directors:
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
Company's ability to record, process, summarize and report
financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated
in this quarterly report whether there were significant changes
in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Ronald A. Walko
Chief Executive Officer
30
SECTION 302 CERTIFICATION
I, Sonya E. Scott, Chief Financial Officer of Penns Woods
Bancorp, Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penns
Woods Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Company and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
31
5. The Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of Company's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Company's ability to record, process, summarize and report
financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated
in this quarterly report whether there were significant changes
in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Sonya E. Scott
Chief Financial Officer
32