SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý     Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2005,

 

o     Transition report pursuant to Section 13 or 15 (d) of the Exchange Act for the Transition Period from                                         to                                        .

 

No. 0-17077

(Commission File Number)

 

PENNS WOODS BANCORP, INC.

(Exact name of Registrant as specified in its charter)

 

PENNSYLVANIA		23-2226454
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
300 Market Street, Williamsport, Pennsylvania		17701
(Address of principal executive offices)		(Zip Code)
(570) 322-1111
Registrant’s telephone number, including area code

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  ý          NO  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act)

 

YES  ý          NO  o

 

On April 25, 2005 there were 3,321,869 of the Registrant’s common stock outstanding.

 

 

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

Part I Financial Information
Item I Financial Information
	Consolidated Balance Sheet (unaudited) as of March 31, 2005 and December 31, 2004
	Consolidated Statement of Income (unaudited) for the Three Months ended March 31, 2005 and 2004
	Consolidated Statement of Comprehensive Income (unaudited) For the Three Months ended March 31, 2005 and 2004
	Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months ended March 31, 2005 and 2004
	Consolidated Statement of Cash Flows (unaudited) for the Three Months ended March 31, 2005 and 2004
	Notes to Consolidated Financial Statements (unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
Exhibit Index and Exhibits

 

2

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

(In Thousands, Except Share Data)		March 31, 2005			December 31, 2004
ASSETS:
Cash and noninterest-bearing balances in other financial institutions		$	17,314		$	12,602
Interest-bearing deposits in other financial institutions		30			24
Total cash and cash equivalents		17,344			12,626
Investment securities, available for sale, at fair value		178,071			184,163
Investment securities held to maturity (fair value of $307 and $561)		309			558
Loans held for sale		2,575			4,624
Loans, net of unearned discount of $1,060 and $1,096		323,140			324,505
Allowance for loan and lease losses		(3,399		)	(3,338		)
Loans, net		319,741			321,167
Premises and equipment, net		5,588			4,882
Accrued interest receivable		2,208			2,246
Bank-owned life insurance		11,070			10,976
Goodwill		3,032			3,032
Other assets		4,055			2,429
TOTAL ASSETS		$	543,993		$	546,703
LIABILITIES:
Interest-bearing deposits		$	281,593		$	282,786
Noninterest-bearing deposits		72,708			74,050
Total deposits		354,301			356,836
Short-term borrowings		37,262			36,475
Long-term borrowings, Federal Home Loan Bank		74,478			75,878
Accrued interest payable		862			850
Other liabilities		5,179			3,499
TOTAL LIABILITIES		472,082			473,538
SHAREHOLDERS’ EQUITY:
Common stock par value $10.00, 10,000,000 shares authorized; 3,332,179 and 3,331,837 shares issued		33,322			33,318
Additional paid-in capital		17,707			17,700
Retained earnings		19,481			18,262
Accumulated other comprehensive gain		1,847			4,331
Less: Treasury stock at cost, 10,310 shares		(446		)	(446		)
TOTAL SHAREHOLDERS’ EQUITY		71,911			73,165
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	543,993		$	546,703

 

See accompanying notes to the unaudited consolidated financial statements.

 

3

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

		Three Months Ended March 31,
(In Thousands, Except Per Share Data)		2005			2004
INTEREST AND DIVIDEND INCOME:
Loans including fees		$	5,500		$	4,891
Investment securities:
Taxable		1,264			1,803
Tax-exempt		589			391
Dividend		298			242
TOTAL INTEREST AND DIVIDEND INCOME		7,651			7,327
INTEREST EXPENSE:
Deposits		1,194			1,135
Short-term borrowings		202			137
Long-term borrowings		853			852
TOTAL INTEREST EXPENSE		2,249			2,124
NET INTEREST INCOME		5,402			5,203
PROVISION FOR LOAN LOSSES		180			75
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,222			5,128
NON-INTEREST INCOME:
Service charges		455			476
Securities gains, net		611			545
Bank-owned life insurance		94			90
Insurance commissions		643			614
Other income		314			312
TOTAL NON-INTEREST INCOME		2,117			2,037
NON-INTEREST EXPENSES:
Salaries and employee benefits		2,020			1,979
Occupancy expense, net		291			243
Furniture and equipment expense		221			265
Advertising expense		94			94
Pennsylvania shares tax expense		139			116
Other operating expenses		856			776
TOTAL NON-INTEREST EXPENSES		3,621			3,473
INCOME BEFORE INCOME TAX PROVISION		3,718			3,692
INCOME TAX PROVISION		1,003			1,019
NET INCOME		$	2,715		$	2,673
EARNINGS PER SHARE - BASIC		$	0.82		$	0.80
EARNINGS PER SHARE - DILUTED		$	0.82		$	0.80
DIVIDENDS PER SHARE		$	0.45		$	0.35
WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC		3,311,272			3,321,853
WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED		3,313,422			3,325,395

 

See accompanying notes to the unaudited consolidated financial statements.

 

4

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

 

(In Thousands Except Per Share Data)		COMMON STOCK					ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE INCOME			TREASURY STOCK			TOTAL SHAREHOLDERS’ EQUITY
		SHARES		AMOUNT
Balance, December 31, 2004		3,331,837		$	33,318		$	17,700		$	18,262		$	4,331		$	(446	)	$	73,165
Net income										2,715									2,715
Dividends declared, $0.45										(1,496		)							(1,496		)
Net change in unrealized gain on investments available for sale, net of tax benefit of $1,280													(2,484		)				(2,484		)
Stock options exercised		342		4			7												11
Balance, March 31, 2005		3,332,179		$	33,322		$	17,707		$	19,481		$	1,847		$	(446	)	$	71,911

 

5

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended March 31,
(In Thousands)		2005			2004
Net Income		$	2,715		$	2,673
Other comprehensive income:
Unrealized gains (losses) on available for sale securities		(3,155		)	737
Less: Reclassification adjustment for gain included in net income		611			545
Other comprehensive income (loss) before tax		(3,766		)	192
Income tax expense (benefit) related to other comprehensive income (loss)		(1,280		)	65
Other comprehensive income (loss), net of tax		(2,486		)	127
Comprehensive income		$	229		$	2,800

 

See accompanying notes to the unaudited consolidated financial statements.

 

6

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended March 31,
(In Thousands)		2005			2004
OPERATING ACTIVITIES:
Net Income		$	2,715		$	2,673
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		143			158
Provision for loan losses		180			75
Accretion and amortization of investment security discounts and premiums		(105		)	3
Securities gains, net		(611		)	(545		)
Originations of loans held for sale		(4,838		)	(2,056		)
Proceeds of loans held for sale		6,887			3,165
Earnings on bank-owned life insurance		(94		)	(90		)
Other, net		1,010			1,572
Net cash provided by operating activities		5,287			4,955
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales		63,594			35,792
Proceeds from calls and maturities		3,517			5,364
Purchases		(64,153		)	(36,890		)
Investment securities held to maturity:
Proceeds from calls and maturities		249			1
Purchases		—			(14		)
Net decrease (increase) in loans		1,169			(2,804		)
Acquisition of bank premises and equipment		(849		)	(108		)
Proceeds from the sale of foreclosed assets		28			134
Proceeds from redemption of regulatory stock		1,286			1,718
Purchases of regulatory stock		(777		)	(1,252		)
Net cash provided by investing activities		4,064			1,941
FINANCING ACTIVITIES:
Net (decrease) increase in interest-bearing deposits		(1,193		)	9,073
Net decrease in noninterest-bearing deposits		(1,342		)	(1,154		)
Proceeds of long-term borrowings		—			5,000
Repayment of long-term borrowings		(1,400		)	—
Net increase (decrease) in short-term borrowings		787			(16,671		)
Dividends paid		(1,496		)	(1,163		)
Stock options exercised		11			31
Purchase of treasury stock		—			(130		)
Net cash provided used in financing activities		(4,633		)	(5,014		)
NET INCREASE IN CASH AND CASH EQUIVALENTS		4,718			1,882
CASH AND CASH EQUIVALENTS, BEGINNING		12,626			10,230
CASH AND CASH EQUIVALENTS, ENDING		$	17,344		$	12,112
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid		$	2,237		$	2,131
Transfer of loans to foreclosed assets		$	77		$	39

 

See accompanying notes to the unaudited consolidated financial statements.

 

7

 

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.  Basis of Presentation

 

The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., and Jersey Shore State Bank (the “Bank”) and its wholly-owned subsidiary The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”).  All significant inter-company balances and transactions have been eliminated in the consolidation.

 

The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for the fair presentation of results for such periods.  All of those adjustments are of a normal, recurring nature.  The results of operations for any interim period are not necessarily indicative of results for the full year.  These financial statements should be read in conjunction with financial statements and notes thereto contained in the Company’s annual report for the year ended December 31, 2004.

 

Recent Accounting Pronouncements

 

In April, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123R).  The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued.  FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

 

In December 2004, FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply

 

8

 

the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

NOTE 2. Per Share Data

 

The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.  There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share, therefore, net income as presented on the consolidated statement of income will be used as the numerator.

 

		Three Months Ended March 31,
		2005		2004
Weighted average common shares outstanding		3,321,582		3,327,315
Average treasury stock shares		(10,310	)	(5,462	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share		3,311,272		3,321,853
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		2,150		3,542
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		3,313,422		3,325,395

 

Options to purchase 8,410 shares of common stock at the price of $48.35 were outstanding during the three months ended March 31, 2005 and 10,890 shares of common stock at the price of $48.35 were outstanding for the three months ended March 31, 2004, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of the end of the quarter.

 

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 11 of the Company’s Consolidated Financial Statements included in the 2004 Annual Report on Form 10-K.

 

9

 

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, 2005 and 2004,  respectively.

 

		2005			2004
Service cost		$	127		$	113
Interest cost		112			106
Expected return on plan assets		(95		)	(84		)
Amortization of transition obligation		(1		)	(1		)
Amortization of prior service cost		6			6
Amortization of net (gain) loss		16			14
Net periodic cost		$	165		$	154

 

Employer Contributions

 

The Company previously disclosed in its consolidated financial statements included in the 2004 Annual Report on Form 10-K that it expected to contribute $575,000 to its defined benefit plan in 2005.  As of March 31, 2005, contributions of $206,000 have been made.  The Company presently anticipates contributing an additional $369,000 to fund its pension plan in 2005 for a total of $575,000.

 

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.

 

The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.

 

10

 

Financial instruments whose contract amounts represent credit risk are as follows:

 

 

Note 5.  Reclassification of Comparative Amounts

 

Certain comparative amounts for the prior periods have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE

SECURITIES LITIGATION REFORM ACT OF 1995

 

This Report contains certain “forward-looking statements” including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact.  The Company wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein:  (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies.

 

11

 

ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

EARNINGS SUMMARY

 

Comparison of the Three Months Ended March 31, 2005 and 2004

 

Summary Results

 

Net income for the three months ended March 31, 2005 was $2,715,000 compared to $2,673,000 for the same period of 2004.  Basic and diluted earnings per share for the three months ended March 31, 2005 were $0.82 as compared to $0.80 for the three months ended March 31, 2004.  Return on average assets and return on average equity were 2.01% and 14.56% for the three months ended March 31, 2005 as compared to 2.04% and 14.99% for the corresponding period of 2004.  Net income from core operations for the three months ended March 31, 2005, excluding after-tax securities gains of $403,000, remained stable at $2,312,000. (Management uses the non-GAAP measure of net income from core operations in its analysis of the Company’s performance.  This measure, as used by the Company, adjusts net income significant gains or losses that are unusual in nature.  Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses.  These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.)

 

Interest Income

 

During the first quarter of 2005, interest and dividend income was $7,651,000, an increase of $324,000 over the same quarter in 2004.  The increase in total interest income was primarily the result of a change in the mix of earning assets from March 31, 2004 to March 31,2005.  Over this time frame cash flows from the investment portfolio have been reinvested into the higher yielding loan portfolio, principally commercial products.  The shift in earning assets increased loan interest and fee income by $609,000 while decreasing interest and dividend income on investment securities by $285,000.  The decrease in taxable investment security interest income was also the effect of a portfolio reallocation from the taxable investment portfolio to tax-free municipal bonds.  This shift within the investment securities portfolio was undertaken to ladder cash flows, maintain the interest margin, and to invest at the community level.  The increase in dividends received is the result of an increase in the level of dividends from the Federal Home Loan Bank of Pittsburgh coupled with an emphasis on purchasing stocks consistently having an above average dividend yield.

 

Interest income composition for the three months ended March 31, 2005 and 2004 is as follows:

 

12

 

		For The Three Months Ended
		March 31, 2005					March 31, 2004					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			% Total
Loans including fees		$	5,500		71.9	%	$	4,891		66.8	%	$	609		12.5	%
Investment securities:
Taxable		1,264			16.5		1,803			24.6		(539		)	(29.9	)
Tax-exempt		589			7.7		391			5.3		198			50.6
Dividend		298			3.9		242			3.3		56			23.1
Total interest income		$	7,651		100.0	%	$	7,327		100.0	%	$	324		4.4	%

 

Interest Expense

 

Interest expense during the first quarter of 2005 increased $125,000 to $2,249,000 from $2,124,000 for the first quarter of 2004.  The increased expense associated with deposits is the result of both rate and volume increases from the first quarter of 2004 to the corresponding period of 2005.  During this time frame an emphasis was placed on building and retaining strong customer relationships by providing needed deposit products at a competitive rate.  This emphasis along with the current rising rate environment led to both the rate and volume increases that occurred from period to period.  Short-term borrowing costs also increased do to the 175 basis point increase in the Fed Funds rate over the past year.  This increase affected the rate paid on FHLB overnight borrowings, FHLB short-term borrowings, and the rate paid to cash management customers.  Long-term FHLB borrowing expense remained constant as there were no new long-term borrowings and a maturity of $1,400,000 at a rate of 2.02% at the end of the quarter.

 

Interest expense composition for the three months ended March 31, 2005 and 2004 is as follows:

 

		For The Three Months Ended
		March 31, 2005					March 31, 2004					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			% Total
Deposits		$	1,194		53.1	%	$	1,135		53.4	%	$	59		5.2	%
Short-term borrowings		202			9.0		137			6.5		65			47.4
Long-term borrowings		853			37.9		852			40.1		1			0.1
Total interest expense		$	2,249		100.0	%	$	2,124		100.0	%	$	125		5.9	%

 

Net Interest Margin

 

The net interest margin (NIM) for the three months ended March 31, 2005 was 4.58% as compared to 4.48% for the corresponding period of 2004.  The increase in the NIM was the result of the yield on earning assets increasing 14 basis points (bp) to 6.39% for the three months ended March 31, 2005 as compared to 2004 offset by a 9 bp increase in interest bearing liabilities over the same period.  The increase in the yield on earning assets is attributable to a change in the mix of earning assets.  Over the time periods being compared, total average loans increased $47,759,000, while the lower yielding investment securities portfolio average balance decreased $31,228,000.  In addition, within the investment portfolio, average tax-exempt investment securities accounted for 27.3% of the portfolio for the three months ended March 31, 2005 as compared to 14.9% during the comparable period of 2004.  The NIM impact of the earning asset mix improvements and volume increase in total loans were reduced by rate increases on interest bearing liabilities.  The rates paid on deposit accounts remained relatively constant at 1.72% as

 

13

 

compared to 1.68% for the 2004 period.  Short-term borrowings, the majority of which is Federal Home Loan Bank (FHLB) advances, incurred a rate increase of 83 bp to 2.25% for the three months ended March 31, 2005.  The increase in the FHLB rate can be associated with the increase in prime rate from 4.00% during the three months ended March 31, 2004 to 5.75% at March 31, 2005.

 

Following is a schedule of average balances and associated yields for the three month periods ended March 31, 2005 and 2004:

 

AVERAGE BALANCES AND INTEREST RATES

 

		3/31/2005								3/31/2004
Tax-exempt loans(4)		$	1,421		$	21		6.05	%	$	1,446		$	21		5.95	%
All other loans		325,426			5,486			6.84	%	277,642			4,877			7.12	%
Total loans(1),(3)		326,847			5,507			6.83	%	279,088			4,898			7.12	%
US Treasury		101,738			1,235			4.86	%	150,007			1,768			4.71	%
State & Political(4)		48,279			892			7.39	%	30,910			592			7.67	%
Other		26,546			326			4.91	%	26,874			276			4.11	%
Total securities		176,563			2,453			5.56	%	207,791			2,636			5.08	%
Total interest-earning assets		503,410			7,961			6.39	%	486,879			7,535			6.25	%
Other assets		37,715								37,540
Total assets		$	541,125							$	524,419
Savings		$	66,930		131			0.79	%	$	68,108		140			0.83	%
Super Now deposits		53,505			107			0.81	%	42,867			54			0.51	%
Money market deposits		32,560			91			1.13	%	35,439			97			1.11	%
Time deposits		128,968			865			2.72	%	127,957			844			2.68	%
Total Deposits		281,963			1,194			1.72	%	274,371			1,135			1.68	%
Short-term borrowings		36,398			202			2.25	%	39,050			137			1.42	%
Other borrowings		75,754			853			4.57	%	74,449			852			4.64	%
Total interest bearing liabilities		394,115			$	2,249		2.31	%	387,870			$	2,124		2.22	%
Demand deposits		68,205								60,165
Other liabilities		4,200								5,050
Shareholders’ equity		74,605								71,334
		$	541,125							$	524,419
Interest rate spread								4.07	%							4.03	%
Net interest income/margin					$	5,712		4.57	%				$	5,411		4.48	%

 

(1).  Information on this table has been calculated using average daily balance sheets to obtain average balances.

(2).  Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

(3).  Income and rates on a fully taxable equivalent basis include an adjustment for the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate.

 

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the periods ended March 31, 2005 and 2004.

 

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		For the Three Months Ended March 31,
		2005			2004
Total interest income		$	7,651		$	7,327
Total interest expense		2,249			2,124
Net interest income		$	5,402		$	5,203
Tax equivalent adjustment		310			208
Net interest income (fully taxable equivalent)		$	5,712		$	5,411

 

The following table sets forth the respective impact that both volume and rate changes have had on net interest income and the net interest margin for the three month periods ended March 31, 2005 and 2004:

 

		For the Three Months Ended March 31,
		2005 vs 2004 Increase (Decrease) Due to
(In Thousands)		Volume			Rate			Net
Interest income:
Loans		$	810		$	(201	)	$	609
Taxable investment securities		(588		)	105			(483		)
Tax-exempt investment securities		322			(22		)	300
Total interest-earning assets		544			(118		)	426
Interest expenses:
Savings deposits		(2		)	(7		)	(9		)
Super Now deposits		8			45			53
Money Market deposits		(8		)	2			(6		)
Time deposits		7			14			21
Short-term borrowings		(10		)	75			65
Long-term borrowings		15			(14		)	1
Total interest-bearing liabilities		10			115			125
Change in net interest income		$	534		$	(233	)	$	301

 

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

 

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performed annually for the Bank.  Management remains committed to an aggressive program of problem loan identification and resolution.

 

The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined.  Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience.  In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.

 

Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at March 31, 2005, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations.  A downturn in the local economy, employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income.  Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance.  The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

 

While determining the appropriate allowance level management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.

 

The allowance for loan losses increased from $3,338,000 at December 31, 2004 to $3,399,000 at March 31, 2005.  At March 31, 2005, the allowance for loan losses was 1.04% of total loans compared to 1.01% of total loans at December 31, 2004.  Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.

 

The provision for loan losses totaled $180,000 for the three months ended March 31, 2005 as compared to $75,000 the same period in 2004.  The increase of $105,000 was the result of gross loan growth of $45,711,000, primarily in the commercial category, from March 2004 to March 2005.

 

An overall decrease of $382,000 was experienced in non-performing loans from December 31, 2004 to $1,343,000 on March 31, 2005 as a result of a 41% decrease of non-performing loans secured by 1-4 family residential properties.

 

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.

 

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Non-interest Income

 

Total non-interest income for the quarter ended March 31, 2005 compared to the same period in 2004 increased $80,000.  Excluding net security gains, the increase from period to period was $14,000.  Insurance commissions increased as the Comprehensive Financial Group (d/b/a M Group) continued to gather new and build upon current relationships.  In addition, The M Group continues to add sales representatives to better cover and expand their foot print.  The decrease in service charge on deposit accounts is primarily the result of a decrease in insufficient fund charges.

 

Non-interest income composition for the three months ended March 31, 2005 and 2004 is as follows:

 

		For The Three Months Ended
		March 31, 2005					March 31, 2004					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			% Total
Service charge on deposit accounts		$	455		21.5	%	$	476		23.4	%	$	(21	)	(4.4	)%
Net security gains		611			28.9		545			26.8		66			12.1
Bank owned life insurance		94			4.4		90			4.4		4			4.4
Insurance commissions		643			30.4		614			30.1		29			4.7
Other income		314			14.8		312			15.3		2			0.6
Total non-interest income		$	2,117		100.0	%	$	2,037		100.0	%	$	80		3.9	%

 

Non-interest Expenses

 

Total non-interest expenses increased $148,000 from the quarter ended March 31, 2004 as compared to the same period of 2005.  The increase in salaries and employee benefits was attributable to standard cost of living salary increases for employees.  Occupancy expenses increased do to increased utility costs, property taxes, and depreciation.  Other expenses increased primarily do to normal increases in business expenses and nonrecurring consultant fees related to employee recruitment. The decrease in furniture and equipment expenses was the result of decreased depreciation.

 

Non-interest expense composition for the three months ended March 31, 2005 and 2004 is as follows:

 

		For The Three Months Ended
		March 31, 2005					March 31, 2004					Change
(In Thousands)		Amount			% Total		Amount			% Total		Amount			% Total
Salaries and employee benefits		$	2,020		55.9	%	$	1,979		57.1	%	$	41		2.1	%
Occupancy expense, net		291			8.0		243			7.0		48			19.8
Furniture and equipment expenses		221			6.1		265			7.6		(44		)	(16.6	)
Advertising expense		94			2.6		94			2.7		—			—
Pennsylvania shares tax		139			3.8		116			3.3		23			19.8
Other expense		856			23.6		776			22.3		80			10.3
Total non-interest expense		$	3,621		100.0	%	$	3,473		100.0	%	$	148		4.3	%

 

Provision for Income Taxes

 

Income taxes decreased $16,000 for the quarter ended March 31, 2005 compared to the same period of 2004.  The effective tax rates for the quarter ended March 31, 2005 and 2004 were

 

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