SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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ý Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
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for the Quarterly Period Ended March 31, 2004, |
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o Transition report pursuant to Section 13 or 15 (d) of the Exchange Act |
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for the Transition Period from to . |
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No. 0-17077 |
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(Commission File Number) |
PENNS WOODS BANCORP, INC.
(Exact name of Registrant as specified in its charter)
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PENNSYLVANIA |
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23-2226454 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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300 Market Street, Williamsport, Pennsylvania |
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17701 |
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(Address of principal executive offices) |
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(Zip Code) |
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(570) 322-1111 |
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Registrant’s telephone number, including area code |
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act)
YES ý NO o
On May 10, 2004 there were 3,319,420 of the Registrant’s common stock outstanding.
PENNS WOODS BANCORP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
2
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
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March 31, |
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December
31, |
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(in thousands) |
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ASSETS: |
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Cash and due from banks |
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$ |
12,112 |
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$ |
10,230 |
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Investment securities available for sale |
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207,079 |
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210,611 |
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Investment securities held to maturity (market value of $713 and $701) |
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699 |
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686 |
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Loans held for sale |
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3,694 |
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4,803 |
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Loans, net of unearned discount of $956 and $793 |
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278,548 |
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275,828 |
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Allowance for loan losses |
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(3,099 |
) |
(3,069 |
) |
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Loans, net |
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275,449 |
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272,759 |
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Premises and equipment, net |
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4,575 |
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4,625 |
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Accrued interest receivable |
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2,109 |
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2,242 |
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Bank-owned life insurance |
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8,998 |
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8,908 |
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Goodwill |
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3,032 |
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3,032 |
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Other assets |
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8,420 |
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9,485 |
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TOTAL ASSETS |
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$ |
526,167 |
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$ |
527,381 |
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LIABILITIES: |
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Noninterest-bearing demand deposits |
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$ |
63,721 |
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$ |
64,875 |
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Interest-bearing demand deposits |
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80,012 |
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77,245 |
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Savings deposits |
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69,465 |
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67,298 |
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Time deposits |
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129,039 |
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124,900 |
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Total deposits |
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342,237 |
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334,318 |
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Short-term borrowings |
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30,594 |
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47,265 |
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Other borrowings |
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75,878 |
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70,878 |
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Accrued interest payable |
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829 |
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836 |
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Other liabilities |
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5,322 |
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4,315 |
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Total liabilities |
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454,860 |
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457,612 |
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SHAREHOLDERS’ EQUITY: |
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Common stock, par value $10; 10,000,000 shares authorized; 3,327,420 and 3,326,560 shares issued |
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33,274 |
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33,265 |
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Additional paid-in capital |
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17,581 |
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17,559 |
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Retained earnings |
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14,532 |
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13,022 |
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Accumulated other comprehensive income |
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6,259 |
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6,132 |
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Less: Treasury stock, at cost (8,000 and 5,000 shares) |
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(339 |
) |
(209 |
) |
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Total shareholders’ equity |
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71,307 |
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69,769 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
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$ |
526,167 |
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$ |
527,381 |
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See accompanying notes to the unaudited consolidated financial statements.
3
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
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Three
Months Ended |
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2004 |
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2003 |
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(in thousands except per share data) |
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INTEREST AND DIVIDEND INCOME: |
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Interest and fees on loans |
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$ |
4,891 |
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$ |
4,995 |
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Interest and dividends on investments: |
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Taxable |
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2,029 |
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1,199 |
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Tax-exempt |
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391 |
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863 |
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Other dividend and interest income |
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16 |
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35 |
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Total interest and dividend income |
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7,327 |
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7,092 |
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INTEREST EXPENSE: |
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Interest on deposits |
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1,135 |
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1,633 |
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Interest on short-term borrowings |
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137 |
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72 |
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Interest on other borrowings |
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852 |
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681 |
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Total interest expense |
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2,124 |
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2,386 |
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Net interest income |
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5,203 |
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4,706 |
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Provision for loan losses |
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75 |
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90 |
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Net interest income after provision for loan losses |
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5,128 |
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4,616 |
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OTHER INCOME: |
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Service charges |
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476 |
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465 |
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Securities gains, net |
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545 |
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101 |
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Earnings on bank-owned life insurance |
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90 |
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104 |
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Insurance commissions |
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614 |
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358 |
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Other operating income |
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312 |
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255 |
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Total other operating income |
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2,037 |
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1,283 |
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OTHER EXPENSES: |
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Salaries and employee benefits |
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1,979 |
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1,635 |
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Occupancy expense, net |
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243 |
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233 |
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Furniture and equipment expense |
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265 |
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285 |
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Pennsylvania shares tax expense |
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116 |
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115 |
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Other expenses |
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870 |
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871 |
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Total other operating expenses |
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3,473 |
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3,139 |
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INCOME BEFORE INCOME TAX PROVISION |
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3,692 |
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2,760 |
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APPLICABLE INCOME TAX PROVISION |
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1,019 |
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573 |
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NET INCOME |
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$ |
2,673 |
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$ |
2,187 |
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EARNINGS PER SHARE |
-BASIC |
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$ |
0.80 |
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$ |
0.66 |
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-DILUTED |
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$ |
0.80 |
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$ |
0.66 |
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DIVIDENDS PER SHARE |
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$ |
0.35 |
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$ |
0.27 |
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WEIGHTED AVERAGE SHARES OUTSTANDING |
-BASIC |
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3,321,853 |
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3,333,393 |
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-DILUTED |
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3,325,395 |
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3,335,101 |
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See accompanying notes to the unaudited consolidated financial statements.
4
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
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Three Months Ended March 31, |
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2004 |
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2003 |
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(in thousands) |
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Net Income |
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$ |
2,673 |
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$ |
2,187 |
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Other comprehensive income: |
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Unrealized gains on available for sale securities |
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$ |
738 |
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$ |
816 |
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Less: Reclassification adjustment for gain included in net income |
|
545 |
|
101 |
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Other comprehensive income before tax |
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193 |
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715 |
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Income tax expense related to other comprehensive income |
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66 |
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243 |
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Other comprehensive income, net of tax |
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127 |
|
472 |
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Comprehensive income |
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$ |
2,800 |
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$ |
2,659 |
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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)
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COMMON |
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ADDITIONAL |
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RETAINED |
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ACCUMULATED |
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TREASURY |
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TOTAL |
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SHARES |
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AMOUNT |
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CAPITAL |
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EARNINGS |
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INCOME |
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STOCK |
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EQUITY |
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Balance, December 31, 2003 |
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3,326,560 |
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$ |
33,265 |
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$ |
17,559 |
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$ |
13,022 |
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$ |
6,132 |
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$ |
(209 |
) |
$ |
69,769 |
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|
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Net income for the three months ended March 31, 2004 |
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|
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2,673 |
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2,673 |
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Dividends declared, $0.35 |
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(1,163 |
) |
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(1,163 |
) |
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Treasury Stock acquired (3,000 shares) |
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(130 |
) |
(130 |
) |
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Net change in unrealized gain on investments available for sale, net of tax of $66 |
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|
|
|
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|
127 |
|
|
|
127 |
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Stock options exercised |
|
860 |
|
9 |
|
22 |
|
|
|
|
|
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|
31 |
|
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Balance, March 31, 2004 |
|
3,327,420 |
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$ |
33,274 |
|
$ |
17,581 |
|
$ |
14,532 |
|
$ |
6,259 |
|
$ |
(339 |
) |
$ |
71,307 |
|
See accompanying notes to the unaudited consolidated financial statements.
6
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
|
Three Months
Ended |
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|
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2004 |
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2003 |
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(in thousands) |
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OPERATING ACTIVITIES: |
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|
|
|
|
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Net Income |
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$ |
2,673 |
|
$ |
2,187 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
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Depreciation |
|
158 |
|
201 |
|
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Provision for loan losses |
|
75 |
|
90 |
|
||
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Accretion and amortization of investment security discounts |
|
|
|
|
|
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and premiums |
|
3 |
|
(142 |
) |
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Securities gains |
|
(545 |
) |
(101 |
) |
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Originations of loans held for sale |
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(2,056 |
) |
(2,258 |
) |
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Proceeds of loans held for sale |
|
3,165 |
|
2,837 |
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||
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Earnings on bank-owned life insurance |
|
90 |
|
104 |
|
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Change in deferred income tax |
|
1,637 |
|
664 |
|
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Other, net |
|
(245 |
) |
(85 |
) |
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Net cash provided by operating activities |
|
4,955 |
|
3,497 |
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INVESTING ACTIVITIES: |
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|
|
|
|
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Investment securities available for sale: |
|
|
|
|
|
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Proceeds from sales |
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35,792 |
|
3,703 |
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Proceeds from calls and maturities |
|
5,364 |
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8,182 |
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Purchases |
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(36,890 |
) |
(33,664 |
) |
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Investment securities held to maturity: |
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|
|
|
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Proceeds from calls and maturities |
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1 |
|
29 |
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Purchases |
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(14 |
) |
(24 |
) |
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Net decrease (increase) in loans |
|
(2,804 |
) |
6,580 |
|
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Acquisition of bank premises and equipment |
|
(108 |
) |
(76 |
) |
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Proceeds from the sale of foreclosed assets |
|
134 |
|
— |
|
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Gross proceeds from redemption of regulatory stock |
|
1,718 |
|
— |
|
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Gross purchases of regulatory stock |
|
(1,252 |
) |
(979 |
) |
||
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Net cash provided by (used in) investing activities |
|
1,941 |
|
(16,249 |
) |
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FINANCING ACTIVITIES: |
|
|
|
|
|
||
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Net increase in interest-bearing deposits |
|
9,073 |
|
7,993 |
|
||
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Net decrease in noninterest-bearing deposits |
|
(1,154 |
) |
(7,067 |
) |
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Proceeds of long-term borrowings |
|
5,000 |
|
19,100 |
|
||
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Net decrease in short-term borrowings |
|
(16,671 |
) |
(146 |
) |
||
|
Dividends paid |
|
(1,163 |
) |
(908 |
) |
||
|
Stock options exercised |
|
31 |
|
33 |
|
||
|
Purchase of Treasury Stock |
|
(130 |
) |
(86 |
) |
||
|
Net cash provided by (used in) financing activities |
|
(5,014 |
) |
18,919 |
|
||
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
1,882 |
|
6,167 |
|
||
|
CASH AND CASH EQUIVALENTS, BEGINNING |
|
10,230 |
|
11,731 |
|
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CASH AND CASH EQUIVALENTS, ENDING |
|
$ |
12,112 |
|
$ |
17,898 |
|
The Company paid approximately $2,131,000 and $2,495,000 interest on deposits and borrowings during the first quarter of 2004 and 2003, respectively.
See accompanying notes to the unaudited consolidated financial statements.
7
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 accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not necessarily include all information which would be included in audited financial statements. The information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary for the fair statement of the results of the period. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. The unaudited consolidated financial statements should be read in conjunction with Form 10-K for the year ended December 31, 2003.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to Interpretation 46, Consolidation of Variable Interest Entities, which established standards for identifying a variable interest entity (VIE) and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. Application of this Interpretation is required in financial statements of public entities that have interests in special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs is required in financial statements for periods ending after March 15, 2004. Small business issuers must apply this Interpretation to all other types of VIEs at the end of the first reporting
8
period ending after December 15, 2004. The adoption of this interpretation has not and is not expected to have a material effect on the Company’s financial position or results of operations.
NOTE 2. Per Share Data
There are no convertible securities, which would affect the numerator in calculating basic and dilutive earnings per share, therefore, net income as presented on the consolidated statement of income will be used as the numerator. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.
|
|
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Three
Months Ended |
|
||
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
3,327,315 |
|
3,451,048 |
|
|
|
|
|
|
|
|
|
Average treasury stock shares |
|
(5,462 |
) |
(117,655 |
) |
|
|
|
|
|
|
|
|
Weighted average common shares and common stock equivalents used to calculate basic earnings per share |
|
3,321,853 |
|
3,333,393 |
|
|
|
|
|
|
|
|
|
Additional common stock equivalents (stock options) used to calculate diluted earnings per share |
|
3,542 |
|
1,708 |
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share |
|
3,325,395 |
|
3,335,101 |
|
Options to purchase 10,890 shares of common stock at the price of $48.35 were outstanding during the three months ended March 31, 2004, and 22,385 shares of common stock at the prices of $48.35 and $38.18 per share were outstanding during the three months ended March 31, 2003, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
9
Note 3. Net Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note K of the Company’s Consolidated Financial Statements included in the 2003 Annual Report on Form 10-K.
The following sets forth the components of net periodic benefit cost of the domestic non-contributory defined benefit plans for the three months ended March 31, 2004 and March 31, 2003 respectively.
|
|
|
Pension Benefits |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Service cost |
|
$ |
113 |
|
$ |
111 |
|
|
Interest cost |
|
106 |
|
96 |
|
||
|
Expected return on plan assets |
|
(84 |
) |
(64 |
) |
||
|
Amortization of transition obligation |
|
(1 |
) |
(1 |
) |
||
|
Amortization of prior service cost |
|
6 |
|
6 |
|
||
|
Amortization of net (gain) loss |
|
14 |
|
21 |
|
||
|
Net periodic cost |
|
$ |
154 |
|
$ |
169 |
|
Employer Contributions
The Company previously disclosed in its consolidated financial statements included in the 2003 Annual Report on Form 10-K that it expected to contribute $560,000 to its defined benefit plan in 2004. As of March 31, 2004, a contribution of $148,000 has been made. The Company presently anticipates contributing an additional $444,000 to fund its pension plan in 2004 for a total of $592,000.
Note 4. Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
10
The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows:
|
|
|
March 31, |
|
December
31, |
|
||
|
Commitments to extend credit |
|
$ |
48,822 |
|
$ |
47,454 |
|
|
|
|
|
|
|
|
||
|
Standby letters of credit |
|
$ |
816 |
|
$ |
258 |
|
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, on extension of credit is based on management’s credit assessment of the counterparty.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
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.
11
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
EARNINGS SUMMARY
Comparison of the Three Months Ended March 31, 2004 and 2003
Net Interest Income
The $497,000 increase of net interest income is the result of the expansion of total interest-earning assets and the reduction of the interest rates paid on deposits partially offset by declining interest rates on interest-earning assets. Total securities experienced a rate decline of 65 basis points effected by management’s repositioning from longer term States & Political securities to shorter term U.S. Government securities. While weighted average interest rates in the loan portfolio decreased 80 basis points, the expansion into the Centre County market facilitated the loan growth of over $27,308,000. The opportunity to borrow funds at historically low interest rates funded the loan and security
12
growth. Management reduced interest expense $498,000 primarily by lowering weighted average interest rates paid on deposits 69 basis points.
Interest Income
For the three months ended March 31, 2004, total interest income increased $235,000 with interest and dividends on investments increasing $339,000 and interest and fees on loans decreasing $104,000. The increase in earnings on investments is primarily the result of an increase of $31,860,000 in the average balance of investment securities held for the current period relative to the same period a year ago. The decrease in the return on loans is primarily the result of approximately an 85 basis point decline in yield.
On a tax equivalent basis, calculated utilizing the statutory tax rate of 34%, investment security income increased $95,000 for the first three months of 2004 compared to the first three months of 2003. The increase of taxable security income of $830,000 is due to the significant purchase of U.S. Government securities over the past year, with the average of these shorter term securities increasing $62,079,000, while the decrease in the average of longer term tax-exempt States & Political securities decreased tax equivalent interest income $716,000. Management has repositioned the investment portfolio from longer term assets to shorter term assets to take advantage of the cash flow opportunities for reinvestment in anticipation of rising rates. The net growth in the volume of investment holdings has generated additional interest income that has offset the 60 basis point decline in the overall portfolios weighted average interest rates.
Within the loan portfolio, an 85 basis point decrease of the tax equivalent return on loans was mostly offset by an increase in the average balance of loans of $24,721,000 in comparing the three months ended March 31, 2004 to the same period for 2003. The loan growth is attributed mostly to the expansion into the Centre County market. Variable rate loans within the portfolio and other new loan originations at lower effective rates have contributed to the reduction of net income compared to a year ago reflective of the historically low rates.
Interest Expense
For the three months ended March 31, 2004, total interest expense decreased by $262,000 or 10% compared to the first three months of 2003. Low interest rates have positively impacted interest expense. Management’s adjustment of rates paid while continuing to monitor the local competition for all deposit accounts contributed the most substantial decrease in interest expense. The weighted average rate of interest paid on deposits declined 69 basis points for the three months ended March 31, 2004 since the same
13
period in 2003 resulting in the decrease of interest paid on savings deposits of $250,000 and $248,000 on time deposits.
Favorable long-term borrowing rates offer opportunities to reduce interest expenses over the coming years. At the end of the first quarter of 2003, the Company borrowed an additional $20 million in long term advances through the FHLB to minimize future borrowing costs and to enhance asset and liability positioning. These additional borrowings were utilized by management to take advantage of current investment opportunities while minimizing interest rate risk. The $171,000 increase in expense on long-term borrowings is the result of these additional advances with average advances of $20,963,000 offset by the 50 basis point decline in the resulting weighted average interest rate for the first quarter of 2004 compared to the same period of 2003. Interest paid on short-term borrowings increased $65,000 as a result of an increase in the average balances of $25,523,000 offset partially by the decline in the weighted average interest rate of 72 basis points. Overnight borrowings increased as a result of leveraging the purchase of securities and loan growth.
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 non-performing 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 to provide for probable losses inherent in its loan portfolio at March 31, 2004, 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 non-performing 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.
14
While management has attributed the allowance for loan losses to various portfolio segments, the allowance is available for the entire portfolio.
The allowance for loan losses increased from $3,069,000 at December 31, 2003 to $3,099,000 at March 31, 2004. The allowance for loan losses was 1.1% of total loans at March 31, 2004 as well as December 31, 2003. This percentage is consistent with the Bank’s historical experience and peer banks. Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.
The provision for loan losses totaled $75,000 for the three months ended March 31, 2004. The provision for the same period in 2003 was $90,000. For the three months period ending March 31, 2004, charge-offs exceeded recoveries by $45,000 compared to the same period ended March 31, 2003, when charge-offs exceeded recoveries by $25,000.
An overall decrease was experienced in non-performing loans from the December 31, 2003 total of $1,256,000 to $1,129,000 on March 31, 2004. This decline consisted of a commercial and industrial loans decrease of $40,000, a real estate secured loan decrease of $100,000 and an installment loans increase of $13,000.
Based upon this analysis, as well as the others noted above, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in its loan portfolio.
Other Operating Income
Other operating income for the three months ended March 31, 2004 increased $754,000. Net security gains represented an increase of $444,000 resulting from management reacting to the opportunities available to sell investment securities without significantly impacting the overall effective yield of the investment portfolio. Management continues to closely monitor the investment portfolio for other similar opportunities which may become available. Excluding net security gains, other income increased $310,000, primarily due to the $256,000 growth of insurance commissions earned by the Bank’s subsidiary, The M Group. In the last year, The M Group added new personnel and has expanded its market area. Miscellaneous income increased $57,000 due to normal operations and service charges grew $11,000 as the weighted average balance of demand deposits increased.
Other Operating Expense
An overall increase in other expenses totaled $334,000 for the first quarter of 2004 compared to the same period in 2003 and is the result of normal operational cost increases. Commission costs increased $159,000 as a result of the growth in sales of
15
financial products offered by The M Group, Inc. Normal salary increases attributed an increase of $185,000.
Provision for Income Taxes
The provision for income taxes for the three months ended March 31, 2004 resulted in an effective income tax rate of 27.60% compared to 20.76% for the corresponding period in 2003. This increasing effective tax rate is the result of management’s repositioning of the investment portfolio from tax-exempt securities to taxable securities. The tax effects of the repositioning were examined by management as part of the strategic plan.
ASSET/LIABILITY MANAGEMENT
Assets
At March 31, 2004, total assets were $526.2 million compared to $527.4 million at December 31, 2003. Cash and due from banks decreased $1.9 million during the first three months of 2004. Investment securities totaled $207.8 million at March 31, 2004 for a net decrease of $3.5 million over the corresponding balance at December 31, 2003. The decline of investments is primarily due to the principal payments of the mortgage-back securities of $5.3 million. Mortgage-backed agency securities were purchased and sold for a net increase of $1.6 million. Management shortened the average life of the portfolio, increased annual yield, and realized a profit on sales in order to strengthen the portfolio. During this period, net loans increased by $2.7 million to $275.5 million as a result of expansion into the Centre County. Loans held for resale decreased $1.1 million to $3.7 million due to normal closing processes.
Deposits
At March 31, 2004, total deposits amounted to $342.2 million representing an increase of $7.9 million from total deposits at December 31, 2003. Non-interest bearing demand deposits decreased $1.2 million and interest-bearing demand deposits increased $2.8 million from year end 2003 to March 31, 2004. Savings accounts increased $2.2 million and time deposits increased $4.1 million. This growth is attributed to normal operations as well as the increased expansion in Centre County. Additionally, the Bank obtained municipal deposits of $2.8 million during the first quarter of 2004.
16
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 March 31, 2004, the Company was “well capitalized” with a total risk based capital ratio of 23.29%, a Tier I capital ratio of 21.20% and a Tier I leverage ratio of 12.10%.
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 internally maintained 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
17
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 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 $291.8 million. In addition to this credit arrangement the Company has additional lines of credit with correspondent banks of $10.5 million. 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 $91.9 million as of March 31, 2004.
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
18
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 10-K for the period ended December 31, 2003.
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, 2003. 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.
19
Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.
Item 4. Controls and Procedures
An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2004. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
The following table sets forth certain information relating to shares of the Company’s common stock repurchased by the Company during the quarter ended March 31, 2004.
20
Issuer Purchases of Equity Securities
|
Period |
|
Total |
|
Average |
|
Total
Number |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month#1(January 1- January 31, 2004) |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month#2 (February 1- February 29, 2004) |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month#3 (March 1,- March 31, 2004) |
|
3,000 |
|
$ |
43.30 |
|
3,000 |
|
54,619 |
|
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
Penns Woods Bancorp, Inc.’s annual meeting of the shareholders was held on April 28, 2004. The results of the items voted on are listed below:
|
Issue |
|
Description |
|
For |
|
Withhold |
|
|
|
|
|
|
|
|
|
|
|
1. |
|
Election of Directors for a Three Year Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Casale, Jr. |
|
2,738,295 |
|
18,729 |
|
|
|
|
R. Edward Nestlerode, Jr. |
|
2,742,402 |
|
14,622 |
|
|
|
|
William H. Rockey |
|
2,696,053 |
|
60,971 |
|
|
|
|
Ronald A. Walko |
|
2,698,910 |
|
58,114 |
|
|
Issue |
|
Description |
|
For |
|
Against |
|
Abstain |
|
|
|
|
|
|
|
|
|
|
|
|
|
2. |
|
Ratification of S.R. Snodgrass A.C., Certified Public Accountants as independent auditors |
|
2,732,074 |
|
10,936 |
|
14,014 |
|
21
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits
(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).
(31) (i) Rule 13a-14(a) Certification of Chief Executive Officer
(31) (ii) Rule 13a-14(a) Certification of Chief Financial Officer
(32) (i) Certification of Chief Executive Officer Section 1350
(32) (ii) Certification of Chief Financial Officer Section 1350
(B) Reports on Form 8-K
January 13, 2004 - First Quarter Earnings Press Release April 13, 2004 - - First Quarter Shareholders’ Report
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: May 10, 2004 |
|
|
|
|
Ronald A. Walko, President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: May 10, 2004 |
|
|
|
|
Sonya E. Scott, Secretary |
|
Exhibit 31(i) Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31(ii) Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32(i) Section 1350 Certification of Chief Executive Officer
Exhibit 32(ii) Section 1350 Certification of Chief Financial Officer
22