ITEM 7
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS
OF OPERATIONS
NET INTEREST INCOME
Net
interest income is determined by calculating the difference between the yields
earned on interest-earning assets and the rates paid on interest-bearing
liabilities. To compare the tax-exempt
asset yields to taxable yields, amounts are adjusted to taxable equivalents
based on the marginal corporate federal tax rate of 34%. The tax equivalent adjustments to net
interest income for 2007, 2006, and 2005 were $2,410,000, $2,245,000, and
$1,764,000, respectively.
2007 vs
2006
Reported net interest income
decreased $41,000 or 0.21% to $19,502,000 for the year ended December 31,
2007 as compared to the year ended December 31, 2006 although the yield on
earning assets increased to 6.91% from 6.70%, respectively. O
n a tax equivalent basis the change in net interest income was an
increase of $124,000 which is primarily the result of the yield on investment
securities increasing to 6.25% from 5.93% at December 31, 2006. Total interest income increased 6.5%
or $2,196,000 primarily due to growth in the average balance of the loan
portfolio of $8,688,000 coupled with an increase in the loan yield to 7.27%
from 7.10% at December 31, 2006.
Interest and dividend income generated from the investment portfolio and
interest bearing cash deposits increased $975,000. The increase was the result of the yield on
the investment portfolio increasing 32 basis points while the average balance
of the investment portfolio increased by $8,749,000.
Interest
expense increased $2,237,000 to $16,447,000 for the year ended December 31,
2007 as compared to 2006. The majority
of the increase, 91% or $2,043,000, is related to increased levels of average
deposits and increased rates being paid on deposit accounts, which had an
average rate paid of 3.35% and 2.88% for the years ended December 31, 2007
and 2006, respectively. The increases
were driven by market competition and rate increases enacted throughout 2006 by
the Federal Open Markets Committee (FOMC) resulting in a higher average prime
rate during 2007 than 2006. Interest expense
related to time deposits increased $2,121,000 as the average rate paid on time
deposits increased to 4.73% from 4.11% for the year ended December 31,
2006. The increase in time deposit rates
was the result of competitive pressure, FOMC rate increases, rate specials
related to the opening of a new branch and the one year anniversary of a
second, and incentive to customers to invest in short-term time deposits. In addition, the average balance in time
deposits increased $21,508,000 due to the before mentioned rate specials,
transfer of dollars from transaction accounts due to the increasing rate
disparity between products, and the use of brokered deposits to limit the
reliance on short-term FHLB funding
The
rate paid on borrowings increased to 4.57% from 4.50% for the year ended December 31,
2007. The increase in rate resulted in
interest expense on borrowings increasing $194,000 with the majority of the
increase occurring in the short-term borrowing category. The short-term borrowing rate increased 11
basis points to 4.45% due to the FOMC rate increases since the start of
2006. Interest expense associated with
long-term borrowings increased $58,000 due to the average balance of long-term
FHLB borrowings increasing $253,000 and a weighted average interest rate on the
long-term debt increase of 6 basis points to 4.62% at December 31, 2007.
2006 vs
2005
Reported net interest
income decreased $979,000 or 4.8% to $19,543,000 for the year ended December 31,
2006 as compared to the year ended December 31, 2005 as the yield on
earning assets increased to 6.70% from 6.29%, respectively. O
n a tax equivalent basis the change in net interest income was a
decrease of $498,000 which is the result of the rate paid on interest bearing
liabilities increasing at nearly twice the rate of increases in the yield on
earning assets. Total interest
income
16
increased 9.2% or
$2,850,000 primarily due to growth in the average balance of the loan portfolio
of $22,150,000 coupled with an increase in loan yield to 7.10% from 6.73% at December 31,
2005. Interest and dividend income
generated from the investment portfolio and interest bearing cash deposits
increased $98,000. The increase was the
result of the yield on the investment portfolio increasing 39 basis points
while the average balance of the investment portfolio declined by $3,474,000.
Interest
expense increased $3,829,000 to $14,210,000 for the year ended December 31,
2006 as compared to 2005. The majority
of the increase, 82% or $3,134,000, is related to increased rates being paid on
deposit accounts, which had an average rate paid of 2.88% and 1.98% for the
years ended December 31, 2006 and 2005, respectively. The increases were driven by market
competition and rate increases enacted by the Federal Open Markets Committee
(FOMC). Interest expense related to time
deposits increased $2,827,000 as the average rate paid on time deposits
increased to 4.11% from 3.02% for the year ended December 31, 2005. The increase in time deposit rates was the
result of competitive pressure, FOMC rate increases, rate specials related to
the opening of a new branch and the one year anniversary of a second, and
incentive to customers to invest in short-term time deposits. In addition, the average balance in time
deposits increased $30,130,000 due to the before mentioned rate specials,
transfer of dollars from transaction accounts due to the increasing rate
disparity between products, and the use of brokered deposits to limit the reliance
on short-term FHLB funding
The
rate paid on borrowings increased to 4.50% from 4.08% for the year ended December 31,
2006. The increase in rate resulted in
interest expense on borrowings increasing $695,000 with the majority of the
increase occurring in the short-term borrowing category. The short-term borrowing rate increased 144
basis points to 4.34% due to the FOMC rate increases since the start of
2005. Interest expense associated with
long-term borrowings increased $123,000 due to the average balance of long-term
FHLB borrowings increasing $2,417,000 while the weighted average interest rate
on the long-term debt remained constant.
AVERAGE BALANCES AND INTEREST RATES
The following tables set
forth certain information relating to the Companys average balance sheet and
reflect the average yield on assets and average cost of liabilities for the
periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities,
respectively, for the periods presented.
17
|
|
2007
|
|
2006
|
|
2005
|
|
(In Thousands)
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
7,857
|
|
$
|
485
|
|
6.17
|
%
|
$
|
8,173
|
|
$
|
503
|
|
6.15
|
%
|
$
|
5,370
|
|
$
|
307
|
|
5.72
|
%
|
All other loans
|
|
353,528
|
|
25,779
|
|
7.29
|
%
|
344,524
|
|
24,545
|
|
7.12
|
%
|
325,177
|
|
21,924
|
|
6.74
|
%
|
Total loans
|
|
361,385
|
|
26,264
|
|
7.27
|
%
|
352,697
|
|
25,048
|
|
7.10
|
%
|
330,547
|
|
22,231
|
|
6.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
securities
|
|
93,480
|
|
5,474
|
|
5.86
|
%
|
91,767
|
|
4,837
|
|
5.27
|
%
|
115,041
|
|
5,529
|
|
4.81
|
%
|
Tax-exempt
securitites
|
|
99,728
|
|
6,602
|
|
6.62
|
%
|
92,692
|
|
6,102
|
|
6.58
|
%
|
72,892
|
|
4,882
|
|
6.70
|
%
|
Total securities
|
|
193,208
|
|
12,076
|
|
6.25
|
%
|
184,459
|
|
10,939
|
|
5.93
|
%
|
187,933
|
|
10,411
|
|
5.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
345
|
|
19
|
|
5.51
|
%
|
152
|
|
11
|
|
7.24
|
%
|
873
|
|
25
|
|
2.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
554,938
|
|
38,359
|
|
6.91
|
%
|
537,308
|
|
35,998
|
|
6.70
|
%
|
519,353
|
|
32,667
|
|
6.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
42,602
|
|
|
|
|
|
40,413
|
|
|
|
|
|
33,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
597,540
|
|
|
|
|
|
$
|
577,721
|
|
|
|
|
|
$
|
552,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
58,710
|
|
428
|
|
0.73
|
%
|
$
|
61,958
|
|
509
|
|
0.82
|
%
|
$
|
64,795
|
|
500
|
|
0.77
|
%
|
Super Now
deposits
|
|
46,596
|
|
611
|
|
1.31
|
%
|
47,294
|
|
655
|
|
1.38
|
%
|
50,756
|
|
438
|
|
0.86
|
%
|
Money market
deposits
|
|
23,920
|
|
540
|
|
2.26
|
%
|
23,905
|
|
493
|
|
2.06
|
%
|
29,317
|
|
412
|
|
1.41
|
%
|
Time deposits
|
|
198,029
|
|
9,372
|
|
4.73
|
%
|
176,521
|
|
7,251
|
|
4.11
|
%
|
146,391
|
|
4,424
|
|
3.02
|
%
|
Total deposits
|
|
327,255
|
|
10,951
|
|
3.35
|
%
|
309,678
|
|
8,908
|
|
2.88
|
%
|
291,259
|
|
5,774
|
|
1.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
36,816
|
|
1,639
|
|
4.45
|
%
|
34,612
|
|
1,503
|
|
4.34
|
%
|
32,114
|
|
931
|
|
2.90
|
%
|
Long-term
borrowings
|
|
83,490
|
|
3,857
|
|
4.62
|
%
|
83,237
|
|
3,799
|
|
4.56
|
%
|
80,820
|
|
3,676
|
|
4.55
|
%
|
Total borrowings
|
|
120,306
|
|
5,496
|
|
4.57
|
%
|
117,849
|
|
5,302
|
|
4.50
|
%
|
112,934
|
|
4,607
|
|
4.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
447,561
|
|
16,447
|
|
3.67
|
%
|
427,527
|
|
14,210
|
|
3.32
|
%
|
404,193
|
|
10,381
|
|
2.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
69,953
|
|
|
|
|
|
69,668
|
|
|
|
|
|
69,457
|
|
|
|
|
|
Other liabilities
|
|
6,924
|
|
|
|
|
|
5,899
|
|
|
|
|
|
4,057
|
|
|
|
|
|
Shareholders
equity
|
|
73,102
|
|
|
|
|
|
74,627
|
|
|
|
|
|
74,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
$
|
597,540
|
|
|
|
|
|
$
|
577,721
|
|
|
|
|
|
$
|
552,661
|
|
|
|
|
|
Interest rate
spread
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
3.38
|
%
|
|
|
|
|
3.72
|
%
|
Net interest
income/margin
|
|
|
|
$
|
21,912
|
|
3.95
|
%
|
|
|
$
|
21,788
|
|
4.06
|
%
|
|
|
$
|
22,286
|
|
4.29
|
%
|
Fees on loans are
included with interest on loans. Loan
fees are included in interest income as follows: 2007 $453,000, 2006 $478,000, 2005 $491,000
Information on this table has been calculated using average daily
balances to obtain average balances.
Nonaccrual loans have been included with loans for the purpose of
analyzing net interest earnings.
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.
18
Reconcilement of Taxable Equivalent Net Interest Income
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
$
|
35,949
|
|
$
|
33,753
|
|
$
|
30,903
|
|
Total interest
expense
|
|
16,447
|
|
14,210
|
|
10,381
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
19,502
|
|
19,543
|
|
20,522
|
|
Tax equivalent
adjustment
|
|
2,410
|
|
2,245
|
|
1,764
|
|
|
|
|
|
|
|
|
|
Net interest
income
(fully taxable equivalent)
|
|
$
|
21,912
|
|
$
|
21,788
|
|
$
|
22,286
|
|
Rate/Volume Analysis
The table below sets
forth certain information regarding changes in our interest income and interest
expense for the periods indicated. For interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (i) changes in volume (changes in average volume
19
multiplied by old rate)
and (ii) changes in rates (changes in rate multiplied by old average
volume). Increases and decreases due to both interest rate and volume, which
cannot be separated, have been allocated proportionally to the change due to
volume and the change due to interest rate.
Income and interest rates are on a taxable equivalent basis.
|
|
Year Ended December 31,
|
|
|
|
2007 vs 2006
Increase (Decrease)
Due to
|
|
2006 vs 2005
Increase (Decrease)
Due to
|
|
(In Thousands)
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
tax-exempt
|
|
$
|
(20
|
)
|
$
|
2
|
|
$
|
(18
|
)
|
$
|
174
|
|
$
|
22
|
|
$
|
196
|
|
Loans
|
|
650
|
|
584
|
|
1,234
|
|
1,342
|
|
1,279
|
|
2,621
|
|
Taxable
investment securities
|
|
88
|
|
549
|
|
637
|
|
(1,192
|
)
|
500
|
|
(692
|
)
|
Tax-exempt
investment securities
|
|
466
|
|
34
|
|
500
|
|
1,304
|
|
(84
|
)
|
1,220
|
|
Interest-bearing
deposits
|
|
12
|
|
(4
|
)
|
8
|
|
(32
|
)
|
18
|
|
(14
|
)
|
Total
interest-earning assets
|
|
1,196
|
|
1,165
|
|
2,361
|
|
1,596
|
|
1,735
|
|
3,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
(30
|
)
|
(51
|
)
|
(81
|
)
|
(23
|
)
|
32
|
|
9
|
|
Super Now
deposits
|
|
(10
|
)
|
(34
|
)
|
(44
|
)
|
(32
|
)
|
249
|
|
217
|
|
Money market
deposits
|
|
|
|
47
|
|
47
|
|
(86
|
)
|
167
|
|
81
|
|
Time deposits
|
|
344
|
|
1,777
|
|
2,121
|
|
471
|
|
2,356
|
|
2,827
|
|
Short-term
borrowings
|
|
100
|
|
36
|
|
136
|
|
65
|
|
507
|
|
572
|
|
Long-term
borrowings
|
|
12
|
|
46
|
|
58
|
|
110
|
|
13
|
|
123
|
|
Total
interest-bearing liabilities
|
|
416
|
|
1,821
|
|
2,237
|
|
505
|
|
3,324
|
|
3,829
|
|
Change in net
interest income
|
|
$
|
780
|
|
$
|
(656
|
)
|
$
|
124
|
|
$
|
1,091
|
|
$
|
(1,589
|
)
|
$
|
(498
|
)
|
PROVISION FOR LOAN LOSSES
2007 vs
2006
The provision for loan
losses is based upon managements 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 managements
consideration of the nature of the portfolio segments, changes in mix and
volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry
standards and trends with respect to nonperforming loans and its knowledge and
experience with specific lending segments.
Although management
believes that it uses the best information available to make such determinations
and that the allowance for loan losses is adequate at December 31, 2007,
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 or 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 interest income. Additionally, as an integral part of the
examination process, bank regulatory agencies periodically review the Banks
loan loss allowance. The banking
regulators 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.
20
The allowance for loan
losses decreased from $4,185,000 at December 31, 2006 to $4,130,000 at December 31,
2007. At December 31, 2007,
allowance for loan losses was 1.15% of total loans compared to 1.16% of total
loans at December 31, 2006.
Managements conclusion is that the allowance for loan losses is
adequate to provide for probable losses inherent in its loan portfolio as of
the consolidated balance sheet date.
The provision for loan
losses totaled $150,000 for the year ended December 31, 2007. The provision for the same period in 2006 was
$635,000. Management concluded that the
decrease of the provision was appropriate when considering the gross loan
growth experienced during 2007 of $94,000 coupled with the low levels of
charge-offs and delinquencies during the year.
Utilizing both internal and external resources, as noted, senior
management has concluded that the allowance for loan losses remains at a level
adequate to provide for probable losses inherent in the loan portfolio.
2006 vs
2005
The allowance for loan
losses increased 13.8% or $506,000 from fiscal 2005 after net charge-offs of
$129,000 contributed to a year-end allowance for loan losses of $4,185,000 or 1.16% of total loans. Based upon this analysis, as well as the
others noted above, senior management concluded that the allowance for loan
losses was at a level adequate to provide for probable losses inherent in the
loan portfolio at December 31, 2006.
Following is a table
showing the changes in the allowance for loan losses for the years ended December 31:
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Balance at
beginning of period
|
|
$
|
4,185
|
|
$
|
3,679
|
|
$
|
3,338
|
|
$
|
3,069
|
|
$
|
2,953
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
50
|
|
132
|
|
121
|
|
63
|
|
Commercial and
industrial
|
|
103
|
|
28
|
|
206
|
|
50
|
|
37
|
|
Installment
loans to individuals
|
|
201
|
|
249
|
|
108
|
|
112
|
|
116
|
|
Total
charge-offs
|
|
304
|
|
327
|
|
446
|
|
283
|
|
216
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
13
|
|
68
|
|
45
|
|
50
|
|
42
|
|
Commercial and
industrial
|
|
1
|
|
40
|
|
8
|
|
4
|
|
16
|
|
Installment
loans to individuals
|
|
85
|
|
90
|
|
14
|
|
33
|
|
19
|
|
Total recoveries
|
|
99
|
|
198
|
|
67
|
|
87
|
|
77
|
|
Net charge-offs
|
|
205
|
|
129
|
|
379
|
|
196
|
|
139
|
|
Additions
charged to operations
|
|
150
|
|
635
|
|
720
|
|
465
|
|
255
|
|
Balance at end
of period
|
|
$
|
4,130
|
|
$
|
4,185
|
|
$
|
3,679
|
|
$
|
3,338
|
|
$
|
3,069
|
|
Ratio of net
charge-offs during the period to average loans outstanding during the period
|
|
0.06
|
%
|
0.04
|
%
|
0.11
|
%
|
0.06
|
%
|
0.05
|
%
|
NON-INTEREST INCOME
2007 vs 2006
Total
non-interest income decreased $1,551,000 from the year ended December 31,
2007 to 2006. Excluding security (loss)
gains and the gain on sale of loans, non-interest income increased
$114,000. Service charges decreased
$120,000 as overdraft protection fees declined and customers migrated to new
checking accounts having reduced or no service charges. Earnings on bank-owned life insurance
increased $36,000. Insurance commissions decreased $59,000 due to a reduction
in the overall commission, from the underwriter, that The M Group receives on
each insurance contract written.
Management of The M Group continues to pursue new and build upon current
relationships.
21
However,
the sales cycle for insurance and investment products can take typically from
six months to one year or more to complete. The sales call program continues to
expand to other financial institutions, which results in additional revenue for
The M Group.
The increase in
other income was primarily due to increases in revenues from debit card
transactions, merchant card commissions,
and commissions generated by The M Group for securities transactions.
|
|
2007
|
|
2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service
charges
|
|
$
|
2,246
|
|
30.03
|
%
|
$
|
2,366
|
|
26.20
|
%
|
$
|
(120
|
)
|
(5.07
|
)%
|
Securities
(losses) gains, net
|
|
(54
|
)
|
(0.72
|
)
|
1,679
|
|
18.60
|
|
(1,733
|
)
|
(103.22
|
)
|
Bank-owned life
insurance
|
|
410
|
|
5.48
|
|
374
|
|
4.14
|
|
36
|
|
9.63
|
|
Gain on sale of
loans
|
|
921
|
|
12.32
|
|
853
|
|
9.45
|
|
68
|
|
7.97
|
|
Insurance
commissions
|
|
2,222
|
|
29.72
|
|
2,281
|
|
25.26
|
|
(59
|
)
|
(2.59
|
)
|
Other income
|
|
1,733
|
|
23.17
|
|
1,476
|
|
16.35
|
|
257
|
|
17.41
|
|
Total
non-interest income
|
|
$
|
7,478
|
|
100.00
|
%
|
$
|
9,029
|
|
100.00
|
%
|
$
|
(1,551
|
)
|
(17.18
|
)%
|
2006 vs 2005
Total
non-interest income decreased $402,000 from the year ended December 31,
2005 to 2006. Excluding security gains
and the gain on sale of loans, non-interest income increased $120,000. Service charges increased $138,000 due to the
full year impact of an overdraft protection program that was started in May 2005. Earnings on bank-owned life insurance
decreased $194,000, however, the year ended December 31, 2005 included the
receipt of $196,000 due to a death benefit claim. Insurance commissions decreased $46,000 due
to a reduction in the overall commission, from the underwriter, that The M
Group receives on each insurance contract written. Management of The M Group continues to pursue
new and build upon current relationships.
However, the sales cycle for insurance and investment products can take
typically from six months to one year or more to complete. The sales call
program continues to expand to other financial institutions, which results in
additional revenue for The M Group.
The
increase in other income was primarily due to increases in revenues from debit
cards and fees associated with the origination of mortgage loans on the behalf
of PHFA and other secondary market entities.
|
|
2006
|
|
2005
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service
charges
|
|
$
|
2,366
|
|
26.20
|
%
|
$
|
2,228
|
|
23.62
|
%
|
$
|
138
|
|
6.19
|
%
|
Securities
gains, net
|
|
1,679
|
|
18.60
|
|
2,190
|
|
23.22
|
|
(511
|
)
|
(23.33
|
)
|
Bank-owned life
insurance
|
|
374
|
|
4.14
|
|
568
|
|
6.02
|
|
(194
|
)
|
(34.15
|
)
|
Gain on sale of
loans
|
|
853
|
|
9.45
|
|
864
|
|
9.16
|
|
(11
|
)
|
(1.27
|
)
|
Insurance
commissions
|
|
2,281
|
|
25.26
|
|
2,327
|
|
24.68
|
|
(46
|
)
|
(1.98
|
)
|
Other income
|
|
1,476
|
|
16.35
|
|
1,254
|
|
13.30
|
|
222
|
|
17.70
|
|
Total
non-interest income
|
|
$
|
9,029
|
|
100.00
|
%
|
$
|
9,431
|
|
100.00
|
%
|
$
|
(402
|
)
|
(4.26
|
)%
|
NON-INTEREST EXPENSES
2007 vs 2006
Total non-interest
expenses increased $987,000 from the year ended December 31, 2006 to December 31,
2007. Salaries and employee benefits increased by $245,000 and were attributed
to several items including standard cost of living wage adjustments for
employees, full year impact of the Montoursville branch, and increased benefit
costs. Occupancy expense increased due to the new branch in Montoursville,
which opened in the third quarter of 2006, and increased cost of maintenance
and property taxes. Amortization
increase attributed to low income housing partnership that began operation
during the fourth quarter of 2006.
22
|
|
2007
|
|
2006
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and
employee benefits
|
|
$
|
9,078
|
|
52.43
|
%
|
$
|
8,833
|
|
54.09
|
%
|
$
|
245
|
|
2.77
|
%
|
Occupancy, net
|
|
1,306
|
|
7.54
|
|
1,137
|
|
6.96
|
|
169
|
|
14.86
|
|
Furniture and
equipment
|
|
1,126
|
|
6.50
|
|
1,201
|
|
7.36
|
|
(75
|
)
|
(6.24
|
)
|
Pennsylvania
shares tax
|
|
643
|
|
3.71
|
|
598
|
|
3.66
|
|
45
|
|
7.53
|
|
Amortization of
investment in limited partnership
|
|
761
|
|
4.39
|
|
245
|
|
1.50
|
|
516
|
|
210.61
|
|
Other expenses
|
|
4,402
|
|
25.43
|
|
4,315
|
|
26.43
|
|
87
|
|
2.02
|
|
Total
non-interest expense
|
|
$
|
17,316
|
|
100.00
|
%
|
$
|
16,329
|
|
100.00
|
%
|
$
|
987
|
|
6.04
|
%
|
2006 vs 2005
Total non-interest
expenses increased $1,221,000 from the year ended December 31, 2005 to December 31,
2006. Salaries and employee benefits increased by $519,000 and was the result
of increased staffing due in part to two new branches since mid 2005, standard
wage increases, and increased health insurance costs. Occupancy expense and furniture and equipment
expenses increased primarily due to the before mentioned branch additions and
increased maintenance costs related to the software and equipment utilized by
the Bank. Other expenses and
amortization of investment in limited partnership increased $377,000 as
amortization of the low income housing partnership investments increased
$155,000 and due to general increases in the cost of business specifically
Pennsylvania shares tax, donations, and director fees.
The increase in low income
housing partnership investment amortization is the result of the Banks
involvement with two partnerships that became eligible for tax credit
recognition during 2006.
|
|
2006
|
|
2005
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and
employee benefits
|
|
$
|
8,833
|
|
54.09
|
%
|
$
|
8,314
|
|
55.03
|
%
|
$
|
519
|
|
6.24
|
%
|
Occupancy, net
|
|
1,137
|
|
6.96
|
|
1,089
|
|
7.21
|
|
48
|
|
4.41
|
|
Furniture and
equipment
|
|
1,201
|
|
7.36
|
|
973
|
|
6.44
|
|
228
|
|
23.43
|
|
Pennsylvania
shares tax
|
|
598
|
|
3.66
|
|
549
|
|
3.63
|
|
49
|
|
8.93
|
|
Amortization of
investment in limited partnership
|
|
245
|
|
1.50
|
|
90
|
|
0.60
|
|
155
|
|
172.22
|
|
Other expenses
|
|
4,315
|
|
26.43
|
|
4,093
|
|
27.09
|
|
222
|
|
5.42
|
|
Total
non-interest expense
|
|
$
|
16,329
|
|
100.00
|
%
|
$
|
15,108
|
|
100.00
|
%
|
$
|
1,221
|
|
8.08
|
%
|
INCOME TAXES
2007 vs 2006
The
provision for income taxes for the year ended December 31, 2007 resulted
in an effective income tax rate of 6.7% compared to 16.9% for 2006. This decrease is the result of a shift in the
investment portfolio from taxable mortgage-backed bonds to tax-exempt municipal
bonds coupled with the receipt of tax credits related to low income housing
partnerships.
2006 vs 2005
The
provision for income taxes for the year ended December 31, 2006 resulted
in an effective income tax rate of 16.9% compared to 22.8% for 2005. This decrease is the result of a shift in the
investment portfolio from taxable mortgage-backed bonds to tax-exempt municipal
bonds coupled with the receipt of tax credits related to low income housing
partnerships.
23
FINANCIAL CONDITION
INVESTMENTS
2007
The estimated fair value
of the investment portfolio increased $29,429,000 or 15.77% from December 31,
2006 to 2007, while the amortized cost increased $35,762,000 over the same
period. The majority of the changes in
value occurred within the state and municipal segment of the portfolio. The amortized cost position in state and
political securities increased $14,993,000 as the Bank continued to build call
protection, maintain taxable equivalent yields, reduce the effective federal
income tax rate, and invest in communities across the Commonwealth of
Pennsylvania and the country. The
amortized cost position of other debt securities increased $13,919,000 as the
Bank began a new leverage transaction to enhance net interest income, return on
average assets, and return on average equity.
The increased level of unrealized losses, which offset the increase in
amortized cost, was the result of changes in the yield curve, not credit
quality, as the credit quality of the portfolio remains sound.
2006
The investment portfolio
decreased $1,800,000 or 0.96% from December 31, 2005 to 2006. The decrease was the result of the cash flow
from the portfolio being utilized to assist in the funding of the higher
yielding loan portfolio. Within the
portfolio, the asset allocation continued to be weighted in tax-exempt
municipal bonds. This continued shift to
a tax-exempt weighting was part of a strategy to increase yield, provide call
protection, and to reduce the Companys overall effective tax rate. At December 31, 2006 the portfolio was
comprised of 55.56% tax-exempt bonds as compared to 47.66% at December 31,
2005. The taxable portion of the
portfolio was revamped to reduce exposure to falling interest rates, while at
the same time increasing the current yield.
The carrying amounts of
investment securities at the dates indicated are summarized as follows for the
years ended December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
(In Thousands)
|
|
Balance
|
|
% Portfolio
|
|
Balance
|
|
% Portfolio
|
|
Balance
|
|
% Portfolio
|
|
U.S. Treasury
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for
Sale
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
U.S. Government
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
14
|
|
0.01
|
%
|
26
|
|
0.01
|
%
|
28
|
|
0.01
|
%
|
Available for
Sale
|
|
62,904
|
|
29.29
|
%
|
54,152
|
|
29.20
|
%
|
63,953
|
|
34.15
|
%
|
State and
political subdivisions (tax-exempt):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for
Sale
|
|
107,314
|
|
49.98
|
%
|
103,057
|
|
55.56
|
%
|
89,265
|
|
47.66
|
%
|
State and
political subdivisions (taxable):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for
Sale
|
|
10,501
|
|
4.89
|
%
|
2,889
|
|
1.56
|
%
|
4,826
|
|
2.58
|
%
|
Other bonds,
notes and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
263
|
|
0.12
|
%
|
257
|
|
0.14
|
%
|
237
|
|
0.13
|
%
|
Available for
Sale
|
|
15,767
|
|
7.34
|
%
|
2,024
|
|
1.09
|
%
|
1,719
|
|
0.92
|
%
|
Total bonds,
notes and debentures
|
|
196,763
|
|
91.63
|
%
|
162,405
|
|
87.56
|
%
|
160,028
|
|
85.45
|
%
|
Corporate stock
- Available for Sale
|
|
17,969
|
|
8.37
|
%
|
23,078
|
|
12.44
|
%
|
27,255
|
|
14.55
|
%
|
Total
|
|
$
|
214,732
|
|
100.00
|
%
|
$
|
185,483
|
|
100.00
|
%
|
$
|
187,283
|
|
100.00
|
%
|
The following table shows
the maturities and repricing of investment securities, at amortized cost, at December 31,
2007 and the weighted average yields (for tax-exempt obligations on a fully
taxable basis assuming a 34% tax rate) of such:
24
|
|
Within
|
|
After One
|
|
After Five
|
|
After
|
|
Amortized
|
|
|
|
One
|
|
But Within
|
|
But Within
|
|
Ten
|
|
Cost
|
|
(In Thousands)
|
|
Year
|
|
Five Years
|
|
Ten Years
|
|
Years
|
|
Total
|
|
U.S. Treasury
securities:
|
|
|
|
|
|
|
|
|
|
|
|
HTM Amount
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
AFS Amount
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
HTM Amount
|
|
|
|
|
|
|
|
14
|
|
14
|
|
Yield
|
|
|
|
|
|
|
|
9.07
|
%
|
9.07
|
%
|
AFS Amount
|
|
|
|
750
|
|
|
|
61,632
|
|
62,382
|
|
Yield
|
|
|
|
5.02
|
%
|
|
|
5.81
|
%
|
5.80
|
%
|
State and
political subdivisions(tax-exempt):
|
|
|
|
|
|
|
|
|
|
|
|
HTM Amount
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
AFS Amount
|
|
|
|
|
|
392
|
|
108,355
|
|
108,747
|
|
Yield
|
|
|
|
|
|
6.24
|
%
|
4.31
|
%
|
4.32
|
%
|
State and
political subdivisions(taxable):
|
|
|
|
|
|
|
|
|
|
|
|
HTM Amount
|
|
|
|
|
|
|
|
|
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
|
|
AFS Amount
|
|
|
|
|
|
|
|
10,904
|
|
10,904
|
|
Yield
|
|
|
|
|
|
|
|
5.41
|
%
|
5.41
|
%
|
Other bonds,
notes and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
HTM Amount
|
|
50
|
|
123
|
|
90
|
|
|
|
263
|
|
Yield
|
|
5.83
|
%
|
6.37
|
%
|
5.77
|
%
|
|
|
6.06
|
%
|
AFS Amount
|
|
75
|
|
50
|
|
3
|
|
15,789
|
|
15,917
|
|
Yield
|
|
4.96
|
%
|
6.45
|
%
|
5.54
|
%
|
6.18
|
%
|
6.18
|
%
|
Total Amount
|
|
$
|
125
|
|
$
|
923
|
|
$
|
485
|
|
$
|
196,694
|
|
$
|
198,227
|
|
Total Yield
|
|
5.31
|
%
|
5.28
|
%
|
6.15
|
%
|
4.99
|
%
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Securities
|
|
|
|
|
|
|
|
|
|
$
|
19,776
|
|
Total Investment
Portfolio Value
|
|
|
|
|
|
|
|
|
|
$
|
218,003
|
|
Total Investment
Portfolio Yield
|
|
|
|
|
|
|
|
|
|
4.54
|
%
|
All yields represent
weighted average yields expressed on a tax equivalent basis. They are calculated on the basis of the cost,
adjusted for amortization of premium and accretion of discount, and effective
yields weighted for the scheduled maturity of each security. The taxable equivalent adjustment represents
the difference between annual income from tax-exempt obligations and the
taxable equivalent of such income at the standard 34% tax rate (derived by
dividing tax-exempt interest by 66%).
LOAN PORTFOLIO
2007
Gross loans of $360,478,000
at December 31, 2007 represented an increase of $94,000 from December 31,
2006. The continued emphasis on well
collateralized real estate loans resulted in real estate secured loans
increasing $1,991,000 from December 31, 2006 to 2007. The success in carrying out this long term
strategy has played a significant role in limiting net charge-offs for 2007 to
0.06% of average loans. Commercial and
agricultural loans declined due to the before mentioned emphasis on real estate
secured loans versus equipment, receivables, or inventory secured loans.
25
2006
Gross loans of
$360,384,000 at December 31, 2006 represented an increase of $21,946,000
from December 31, 2005. The
continued emphasis on well collateralized real estate loans resulted in real
estate secured loans increasing $22,560,000 from December 31, 2005 to
2006. The success in carrying out this
long term strategy has played a significant role in limiting net charge-offs
for 2006 to 0.04% of average loans.
Commercial and agricultural loans declined due to the before mentioned
emphasis on real estate secured loans versus equipment, receivables, or
inventory secured loans.
The amounts of loans
outstanding at the indicted dates are shown in the following table according to
type of loan:
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Commercial and
agricultural
|
|
$
|
35,739
|
|
$
|
36,995
|
|
$
|
37,553
|
|
$
|
31,100
|
|
$
|
24,520
|
|
Real estate
mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
163,268
|
|
158,219
|
|
150,000
|
|
147,461
|
|
147,697
|
|
Commercial
|
|
132,943
|
|
135,404
|
|
127,131
|
|
123,757
|
|
82,896
|
|
Construction
|
|
16,152
|
|
16,749
|
|
10,681
|
|
8,365
|
|
7,652
|
|
Installment
loans to individuals
|
|
13,317
|
|
14,035
|
|
14,135
|
|
14,918
|
|
14,003
|
|
Less: Net
deferred loan fees
|
|
941
|
|
1,018
|
|
1,062
|
|
1,096
|
|
940
|
|
Gross loans
|
|
$
|
360,478
|
|
$
|
360,384
|
|
$
|
338,438
|
|
$
|
324,505
|
|
$
|
275,828
|
|
The amounts of domestic
loans at December 31, 2007 are presented below by category and maturity:
|
|
|
|
Commercial
|
|
Installment
|
|
|
|
|
|
|
|
and
|
|
Loans to
|
|
|
|
(In Thousands)
|
|
Real Estate
|
|
Other
|
|
Individuals
|
|
Total
|
|
Loans with
floating interest rates:
|
|
|
|
|
|
|
|
|
|
1 year or less
|
|
$
|
25,014
|
|
$
|
9,105
|
|
$
|
2,258
|
|
$
|
36,377
|
|
1 through 5
years
|
|
9,215
|
|
1,608
|
|
151
|
|
10,974
|
|
5 through 10
years
|
|
28,421
|
|
4,421
|
|
6
|
|
32,848
|
|
After 10 years
|
|
196,938
|
|
1,918
|
|
391
|
|
199,247
|
|
Total floating
interest rate loans
|
|
259,588
|
|
17,052
|
|
2,806
|
|
279,446
|
|
Loans with
predetermined interest rates:
|
|
|
|
|
|
|
|
|
|
1 year or less
|
|
5,609
|
|
1,091
|
|
1,355
|
|
8,055
|
|
1 through 5
years
|
|
15,843
|
|
9,992
|
|
8,495
|
|
34,330
|
|
5 through 10
years
|
|
19,578
|
|
7,693
|
|
646
|
|
27,917
|
|
After 10 years
|
|
10,480
|
|
189
|
|
61
|
|
10,730
|
|
Total
predetermined interest rate loans
|
|
51,510
|
|
18,965
|
|
10,557
|
|
81,032
|
|
Total
|
|
$
|
311,098
|
|
$
|
36,017
|
|
$
|
13,363
|
|
$
|
360,478
|
|
26
*
|
|
The loan
maturity information is based upon original loan terms and is not adjusted
for rollovers. In the ordinary course of business, loans maturing within
one year may be renewed, in whole or in part, as to principal amount at
interest rates prevailing at the date of renewal.
|
*
|
|
Scheduled
repayments are reported in maturity categories in which the payment is due.
|
The Bank does not
make loans that provide for negative amortization nor do any loans contain
conversion features. The Bank does not have any foreign loans outstanding at December 31,
2007.
ALLOWANCE FOR LOAN LOSSES
2007
The allowance for loan losses represents the amount
which management estimates is adequate to provide for probable losses inherent
in its loan portfolio, as of the consolidated balance sheet date. The allowance method is used in providing for
loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to operations.
The provision for loan losses is based upon managements 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 managements
consideration of the nature of the portfolio segments, changes in mix and
volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry
standards and trends with respect to nonperforming loans and its knowledge and
experience with specific lending segments.
Although
management believes that it uses the best information available to make such
determinations and that the allowance for loan losses is adequate at December 31,
2007, 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 or 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 interest
income. Additionally, as an integral
part of the examination process, bank regulatory agencies periodically review
the Banks loan loss allowance. The
banking agencies could require the recognition of additions to the loan loss
allowance based on their judgment of information available to them at the time
of their examination.
The
allowance for loan losses decreased from $4,185,000 at December 31, 2006
to $4,130,000 at December 31, 2007.
At December 31, 2007, allowance for loan losses was 1.15% of total
loans compared to 1.16% of total loans at December 31, 2006. This percentage is consistent with the Banks
historical experience and peer banks.
Managements 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.
27
2006
At
December 31, 2006, the allowance for loan losses as a percent of total
loans increased to 1.16% from 1.09% at December 31, 2005. Gross loans increased by $21,946,000 from
$338,438,000 at December 31, 2005 to $360,384,000 at December 31,
2006.
Based
on managements loan-by-loan review, the past performance of the borrowers and
current economic conditions, including recent business closures and bankruptcy
levels, management does not anticipate any current losses related to nonaccrual,
nonperforming, or classified loans above those that have already been
considered in its overall judgment of the adequacy of the reserve.
NONPERFORMING
LOANS
Non-accrual
loans increased to $955,000 at December 31, 2007 primarily due to the
addition of a commercial real estate relationship which has filed for
bankruptcy. Overall nonperforming loans increased $831,000 to $1,320,000 from
fiscal year end 2006.
The
following table presents information concerning nonperforming loans. The accrual of interest will be discontinued
when the principal or interest of a loan is in default for 90 days or more, or
as soon as payment is questionable, unless the loan is well secured and in the
process of collection. Consumer loans
and residential real estate loans secured by 1 to 4 family dwellings shall
ordinarily not be subject to those guidelines.
The reversal of previously accrued but uncollected interest applicable
to any loan placed in a nonaccrual status and the treatment of subsequent
payments of either principal or interest will be handled in accordance with
U.S. generally accepted accounting principles.
These principles do not require a write-off of previously accrued
interest if principal and interest are ultimately protected by sound collateral
values. A nonperforming loan may be
restored to an accruing status when:
1.
|
Principal
and interest is no longer due and unpaid.
|
2.
|
It
becomes well secured and in the process of collection.
|
3.
|
Prospects
for future contractual payments are no longer in doubt.
|
|
|
Total Nonperforming Loans
|
|
|
|
|
|
90 Days
|
|
|
|
(In Thousands)
|
|
Nonaccrual
|
|
Past Due
|
|
Total
|
|
2007
|
|
$
|
955
|
|
$
|
365
|
|
$
|
1,320
|
|
2006
|
|
370
|
|
119
|
|
489
|
|
2005
|
|
540
|
|
63
|
|
603
|
|
2004
|
|
1,381
|
|
345
|
|
1,726
|
|
2003
|
|
827
|
|
429
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
The
level of nonaccruing loans continues to fluctuate annually and is attributed to
the various economic factors experienced both regionally and nationally. Overall the portfolio is well secured with a
majority of the balance making regular payments or scheduled to be satisfied in
the near future. Presently there are no
significant amounts of loans where serious doubts exist as to the ability of
the borrower to comply with the current loan payment terms which are not
included in the nonperforming categories as indicated above.
Managements
judgment in determining the amount of the additions to the allowance charged to
operating expense considers the following factors:
1.
|
|
Economic
conditions and the impact on the loan portfolio.
|
2.
|
|
Analysis
of past loan charge-offs experienced by category and comparison to
outstanding loans.
|
3.
|
|
Problem
loans on overall portfolio quality.
|
28
4.
Reports of examination of the loan portfolio
by the Pennsylvania State Banking Department and the Federal Deposit Insurance
Corporation.
Allocation In The Allowance For Loan Losses
|
|
|
|
Percent Of
|
|
|
|
|
|
Loan In
|
|
|
|
|
|
Each
|
|
|
|
|
|
Category To
|
|
(In Thousands)
|
|
Amount
|
|
Total Loans
|
|
December 31,
2007:
|
|
|
|
|
|
Balance at end
of period applicable to:
|
|
|
|
|
|
Commercial and
agricultural
|
|
$
|
823
|
|
9.9
|
%
|
Real estate
mortgage:
|
|
|
|
|
|
Residential
|
|
1,031
|
|
45.2
|
%
|
Commercial
|
|
1,634
|
|
36.8
|
%
|
Construction
|
|
112
|
|
4.5
|
%
|
Installment
loans to individuals
|
|
228
|
|
3.6
|
%
|
Unallocated
|
|
302
|
|
|
|
Total
|
|
$
|
4,130
|
|
100.0
|
%
|
December 31,
2006:
|
|
|
|
|
|
Balance at end
of period applicable to:
|
|
|
|
|
|
Commercial and
agricultural
|
|
$
|
679
|
|
7.9
|
%
|
Real estate
mortgage:
|
|
|
|
|
|
Residential
|
|
951
|
|
43.8
|
%
|
Commercial
|
|
1,972
|
|
37.5
|
%
|
Construction
|
|
108
|
|
4.6
|
%
|
Installment
loans to individuals
|
|
295
|
|
6.2
|
%
|
Unallocated
|
|
180
|
|
|
|
Total
|
|
$
|
4,185
|
|
100.0
|
%
|
December 31,
2005:
|
|
|
|
|
|
Balance at end
of period applicable to:
|
|
|
|
|
|
Commercial and
agricultural
|
|
$
|
582
|
|
10.1
|
%
|
Real estate
mortgage:
|
|
|
|
|
|
Residential
|
|
1,107
|
|
44.2
|
%
|
Commercial
|
|
1,482
|
|
37.5
|
%
|
Construction
|
|
79
|
|
3.1
|
%
|
Installment
loans to individuals
|
|
192
|
|
5.1
|
%
|
Unallocated
|
|
237
|
|
|
|
Total
|
|
$
|
3,679
|
|
100.0
|
%
|
December 31,
2004:
|
|
|
|
|
|
Balance at end
of period applicable to:
|
|
|
|
|
|
Commercial and
agricultural
|
|
$
|
361
|
|
9.1
|
%
|
Real estate
mortgage:
|
|
|
|
|
|
Residential
|
|
1,280
|
|
46.1
|
%
|
Commercial
|
|
1,399
|
|
37.5
|
%
|
Construction
|
|
75
|
|
2.5
|
%
|
Installment
loans to individuals
|
|
207
|
|
4.8
|
%
|
Unallocated
|
|
16
|
|
|
|
Total
|
|
$
|
3,338
|
|
100.0
|
%
|
December 31,
2003:
|
|
|
|
|
|
Balance at end of
period applicable to:
|
|
|
|
|
|
Commercial and
agricultural
|
|
$
|
353
|
|
8.5
|
%
|
Real estate
mortgage:
|
|
|
|
|
|
Residential
|
|
1,483
|
|
53.4
|
%
|
Commercial
|
|
916
|
|
29.9
|
%
|
Construction
|
|
77
|
|
2.8
|
%
|
Installment
loans to individuals
|
|
240
|
|
5.4
|
%
|
Total
|
|
$
|
3,069
|
|
100.0
|
%
|
29
DEPOSITS
2007 vs 2006
Total average deposits
were $397,208,000 for 2007, an increase of $17,862,000 or 4.71% from 2006. Noninterest-bearing deposits increased
slightly to $69,953,000. Time deposits
increased $21,508,000 or 12.19% as deposits shifted from transaction accounts
to time deposits due to the continued rate disparity between time deposits and
other deposit types. The rate on time
deposits increased due to the actions taken by the FOMC during 2006, which
increased the overall rate paid on time deposits. In addition, the Bank utilized brokered time
deposits to supplement market area deposit funding with the level of brokered
deposits decreasing $16,197,000 to $8,831,000 at December 31, 2007.
2006 vs 2005
Total average deposits
were $379,346,000 for 2006, an increase of $18,630,000 or 5.16% from 2005. Non-interest bearing deposits increased
slightly to $69,668,000. Time deposits
increased $30,130,000 or 20.58% as deposits shifted from transaction accounts
to time deposits due to the continued rate disparity between time deposits and
other deposit types. The rate on time
deposits has been increasing due to the actions taken by the FOMC and market competition. In addition, the Bank utilized brokered time
deposits to supplement market area deposit funding.
The
average amount and the average rate paid on deposits are summarized below:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
(In Thousands)
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Noninterest-bearing
|
|
$
|
69,953
|
|
0.00
|
%
|
$
|
69,668
|
|
0.00
|
%
|
$
|
69,457
|
|
0.00
|
%
|
Savings
|
|
58,710
|
|
0.73
|
%
|
61,958
|
|
0.82
|
%
|
64,795
|
|
0.77
|
%
|
Super Now
|
|
46,596
|
|
1.31
|
%
|
47,294
|
|
1.38
|
%
|
50,756
|
|
0.86
|
%
|
Money Market
|
|
23,920
|
|
2.26
|
%
|
23,905
|
|
2.06
|
%
|
29,317
|
|
1.41
|
%
|
Time
|
|
198,029
|
|
4.73
|
%
|
176,521
|
|
4.11
|
%
|
146,391
|
|
3.02
|
%
|
Total average
deposits
|
|
$
|
397,208
|
|
2.76
|
%
|
$
|
379,346
|
|
2.35
|
%
|
$
|
360,716
|
|
1.60
|
%
|
SHAREHOLDERS EQUITY
2007
Shareholders
equity decreased $4,035,000 to $70,559,000 at December 31, 2007 as net
income outpaced dividends paid, accumulated comprehensive income decreased
$5,094,000, and $972,000 in treasury stock was strategically purchased as part
of the previously announced stock buyback plan.
The decrease in accumulated comprehensive income is the result of a
decrease in market value, or net unrealized loss, of the investment portfolio
at December 31, 2007 as compared to December 31, 2006, and the net
excess of the projected benefit obligation over the market value of the plan
assets of the defined benefit pension plan.
The current level of shareholders equity equates to a book value per
share of $18.21 at December 31, 2007 as compared to $19.12 at December 31,
2006 and an equity to asset ratio of 11.23% at December 31, 2007. During the twelve months ended December 31,
2007 cash dividends of $1.79 per share were paid to shareholders. The dividends represented a 3% increase or
$0.06 per share over the dividends paid during the comparable period of 2006.
2006
Shareholders
equity increased $675,000 to $74,594,000 at December 31, 2006 as net
income outpaced dividends paid, accumulated comprehensive income increased
$710,000, and $2,929,000 in
30
treasury
stock was strategically purchased as part of the previously announced stock
buyback plan. The increase in
accumulated comprehensive income is the result of an increase in market value,
or net unrealized gains, of the investment portfolio at December 31, 2006
as compared to December 31, 2005, offset by the net excess of the
projected benefit obligation over the market value of the plan assets of the
defined benefit pension plan. The
current level of shareholders equity equates to a book value per share of
$19.12 at December 31, 2006 as compared to $18.59 at December 31,
2005 and an equity to asset ratio of 12.59% at December 31, 2006. During the twelve months ended December 31,
2006 cash dividends of $1.73 per share were paid to shareholders. The dividends represented an 11% increase or
$0.17 per share over the dividends paid during the comparable period of 2005.
Bank regulators have risk
based capital guidelines. Under these
guidelines the Company and Bank are required to maintain minimum ratios of core
capital and total qualifying capital as a percentage of risk weighted assets
and certain off-balance sheet items. At December 31,
2007, both the Companys and Banks required ratios were well above the minimum
ratios as follows:
|
|
|
|
|
|
Minimum
|
|
|
|
Company
|
|
Bank
|
|
Standards
|
|
Tier 1 capital
ratio
|
|
10.8
|
%
|
8.8
|
%
|
4.0
|
%
|
Total capital
ratio
|
|
18.0
|
%
|
15.1
|
%
|
8.0
|
%
|
For a more comprehensive
discussion of these requirements, see Regulations and Supervision in Item 1
of the Annual Report on Form 10-K.
Management believes that the Company will continue to exceed regulatory
capital requirements.
RETURN ON EQUITY AND ASSETS
The ratio of net income
to average total assets and average shareholders equity and other certain
equity ratios are presented as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Percentage of
net income to:
|
|
|
|
|
|
|
|
Average total
assets
|
|
1.49
|
%
|
1.67
|
%
|
1.97
|
%
|
Average
shareholders equity
|
|
12.14
|
%
|
12.93
|
%
|
14.54
|
%
|
Percentage of
dividends declared to net income
|
|
78.33
|
%
|
70.51
|
%
|
57.10
|
%
|
Percentage of
average shareholders equity to average total assets
|
|
12.23
|
%
|
12.92
|
%
|
13.56
|
%
|
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK
Fundamental
objectives of the Companys asset/liability management process are to maintain
adequate liquidity while minimizing interest rate risk. The maintenance of adequate liquidity
provides the Company with the ability to meet its financial obligations to
depositors, loan customers, and shareholders.
Additionally, it provides funds for normal operating expenditures 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.
31
Management
monitors the Companys 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 $220,053,000
with $144,538,000 utilized, leaving $75,515,000 available. In addition to this credit arrangement, the
Company has additional lines of credit with correspondent banks of $29,539,000.
The Companys management believes that it has sufficient liquidity to satisfy
estimated short-term and long-term funding needs.
Interest
rate sensitivity, which is closely related to liquidity management, is a
function of the repricing characteristics of the Companys portfolio of assets
and liabilities. Asset/liability
management strives to match maturities and rates between loan and investment
security assets with the deposit liabilities and borrowings that fund
them. Successful asset/liability
management results in a balance sheet structure which can cope effectively with
market rate fluctuations. The matching process is affected by segmenting both
assets and liabilities into future time periods (usually 12 months, or less)
based upon when repricing can be effected.
Repriceable assets are subtracted from repriceable liabilities, for a
specific time period to determine the gap, or difference. Once known, the gap
is managed based on predictions about future market interest rates. Intentional mismatching, or gapping, can
enhance net interest income if market rates move as predicted. However, if market rates behave in a manner
contrary to predictions, net interest income will suffer. Gaps, therefore, contain an element of risk
and must be prudently managed. In
addition to gap management, the Company has an asset liability management
policy which incorporates a market value at risk calculation which is used to
determine the effects of interest rate movements on shareholders equity and a
simulation analysis to monitor the effects of interest rate changes on the
Companys balance sheet.
INTEREST RATE SENSITIVITY
In
this analysis the Company examines the result of a 100 and 200 basis point
change in market interest rates and the effect on net interest income. It is assumed that the change is
instantaneous and that all rates move in a parallel manner. Assumptions are also made concerning
prepayment speeds on mortgage loans and mortgage securities.
The
following is a rate shock forecast for the twelve month period ended December 31,
2008 assuming a static balance sheet as of December 31, 2007.
|
|
Parallel Rate Shock in Basis Points
|
|
(In Thousands)
|
|
-200
|
|
-100
|
|
Static
|
|
+100
|
|
+200
|
|
Net interest
income
|
|
$
|
21,322
|
|
$
|
21,484
|
|
$
|
21,134
|
|
$
|
20,578
|
|
$
|
19,797
|
|
Change from
static
|
|
188
|
|
350
|
|
|
|
(556
|
)
|
(1,337
|
)
|
Percent change
from static
|
|
0.89
|
%
|
1.66
|
%
|
|
|
(2.63
|
)%
|
(6.33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
model utilized to create the report presented above makes various estimates at
each level of interest rate change regarding cash flow from principal repayment
on loans and mortgage-backed securities and or call activity on investment
securities. Actual results could differ
significantly from these estimates which would result in significant
differences in the calculated projected change.
In
32
addition,
the limits stated above do not necessarily represent the level of change under
which management would undertake specific measures to realign its portfolio in
order to reduce the projected level of change.
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 Companys
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
that are not measured by a price index.
CRITICAL ACCOUNTING POLICIES
The
Companys accounting policies are integral to understanding the results
reported. The accounting policies are
described in detail in Note 1 of the consolidated financial statements. Our most complex accounting policies require
managements judgment to ascertain the valuation of assets, liabilities,
commitments, and contingencies. We have
established detailed policies and control procedures that are intended to
ensure valuation methods are well controlled and applied consistently from period
to period. In addition, the policies and
procedures are intended to ensure that the process for changing methodologies
occurs in an appropriate manner. The
following is a brief description of our current accounting policies involving
significant management valuation judgments.
Other Than Temporary Impairment of Equity Securities
Equity
securities are evaluated periodically to determine whether a decline in their
value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reason underlying the
decline, to determine whether the loss in value is other than temporary. The
term other than temporary is not intended to indicate that the decline is
permanent. It indicates that the prospects
for a near term recovery of value are not necessarily favorable, or that there
is a lack of evidence to support fair values equal to, or greater than, the
carrying value of the investment. Once a
decline in value is determined to be other than temporary, the value of the
security is reduced and a corresponding charge to earnings is recognized. For a full discussion of the Companys
methodology of assessing impairment, refer to Note 3 of Notes and Consolidated
Financial Statements of the Annual Report on Form 10-K.
Allowance for Loan Losses
Arriving
at an appropriate level of allowance for loan losses involves a high degree of
judgment. The Companys allowance for
loan losses provides for probable losses based upon evaluations of known and
inherent risks in the loan portfolio.
Management
uses historical information to assess the adequacy of the allowance for loan
losses as well as the prevailing business environment; as it is affected by
changing economic conditions and various external factors, which may impact the
portfolio in ways currently unforeseen.
The allowance is increased by provisions for loan losses and by
recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Companys
methodology of assessing the adequacy of the reserve for loan losses, refer to
Note 1 of Notes and Consolidated Financial Statements of the Annual Report of
Form 10-K.
Goodwill and Other Intangible Assets
As
discussed in Note 6 of the Notes to Consolidated Financial Statements of the
Annual Report on Form 10-K, the Company must assess goodwill and other
intangible assets each year for impairment.
33
This
assessment involves estimating cash flows for future periods. If the future cash flows were less than the
recorded goodwill and other intangible assets balances, we would be required to
take a charge against earnings to write down the assets to the lower value.
Deferred Tax Assets
We
use an estimate of future earnings to support our position that the benefit of
our deferred tax assets will be realized.
If future income should prove non-existent or less than the amount of
the deferred tax assets within the tax years to which they may be applied, the
asset may not be realized and our net income will be reduced. Our deferred tax assets are described further
in Note 10 of Notes to Consolidated Financial Statements of the Annual Report
on Form 10-K.
Pension
Benefits
Pension
costs and liabilities are dependent on assumptions used in calculating such
amounts. These assumptions include
discount rates, benefits earned, interest costs, expected return on plan
assets, mortality rates, and other factors.
In accordance with generally accepted accounting principles, actual results
that differ from the assumptions are accumulated and amortized over future
periods and, therefore, generally affect recognized expense and the recorded
obligation of future periods. While
management believes that the assumptions used are appropriate, differences in
actual experience or changes in assumptions may affect the Companys pension
obligations and future expense. Our
pension benefits are described further in Note 11 of Notes to Consolidated
Financial Statements of the Annual Report on Form 10-K.
CONTRACTUAL OBLIGATIONS
The
Company has various financial obligations, including contractual obligations
which may require future cash payments. The following table presents, as of December 31,
2007, significant fixed and determinable contractual obligations to third
parties by payment date. Further
discussion of the nature of each obligation is included in Notes to the
Consolidated Financial Statements of the Annual Report on Form 10-K.
|
|
Payments
Due in
|
|
|
|
|
|
One to
|
|
Three to
|
|
Over
|
|
|
|
|
|
One Year
|
|
Three
|
|
Five
|
|
Five
|
|
|
|
(In Thousands)
|
|
or Less
|
|
Years
|
|
Years
|
|
Years
|
|
Total
|
|
Deposits
without a stated maturity
|
|
$
|
203,340
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
203,340
|
|
Time
Deposits
|
|
157,621
|
|
24,372
|
|
3,064
|
|
625
|
|
185,682
|
|
Repurchase
agreements
|
|
17,154
|
|
|
|
|
|
|
|
17,154
|
|
Short-term
borrowings, FHLB
|
|
38,160
|
|
|
|
|
|
|
|
38,160
|
|
Long-term
borrowings, FHLB
|
|
29,600
|
|
15,000
|
|
25,500
|
|
36,278
|
|
106,378
|
|
Operating
leases
|
|
396
|
|
614
|
|
382
|
|
1,427
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations operating lease obligations represent short and
long-term lease and rental payments for branch facilities. The Bank leases certain facilities under
operating leases which expire on various dates through 2024. Renewal options are available on these
leases.
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.
34
The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Companys actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Companys forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Companys business include the following: general economic
conditions and changes in interest rates including their impact on capital
expenditures; business conditions in the banking industry; the regulatory
environment; rapidly changing technology and evolving banking industry
standards; the effect of changes in accounting policies and practices,
including increased competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; changes in the Companys organization, compensation and benefit
plans; and similar items.
35
Item 7A. 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 Companys interest rate sensitivity is monitored by management
through selected interest rate risk measures produced internally. Additional information and details are
provided in the Interest Sensitivity section of Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Generally,
management believes the Company is well positioned to respond expeditiously
when the market interest rate outlook changes.
36
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PENNS
WOODS BANCORP, INC.
CONSOLIDATED
BALANCE SHEET
|
|
December 31,
|
|
(In Thousands, Except Share Data)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
Noninterest-bearing
balances
|
|
$
|
15,417
|
|
$
|
15,348
|
|
Interest-bearing
deposits in other financial institutions
|
|
16
|
|
25
|
|
Total cash and
cash equivalents
|
|
15,433
|
|
15,373
|
|
|
|
|
|
|
|
Investment
securities, available for sale, at fair value
|
|
214,455
|
|
185,200
|
|
Investment
securities, held to maturity, (fair value of $279 and $286)
|
|
277
|
|
283
|
|
Loans held for
sale
|
|
4,214
|
|
3,716
|
|
|
|
|
|
|
|
Loans
|
|
360,478
|
|
360,384
|
|
Less: Allowance
for loan losses
|
|
4,130
|
|
4,185
|
|
Loans, net
|
|
356,348
|
|
356,199
|
|
|
|
|
|
|
|
Premises and
equipment, net
|
|
6,774
|
|
6,737
|
|
Accrued interest
receivable
|
|
3,343
|
|
2,939
|
|
Bank-owned life
insurance
|
|
12,375
|
|
11,346
|
|
Investment in
limited partnerships
|
|
5,439
|
|
4,950
|
|
Goodwill
|
|
3,032
|
|
3,032
|
|
Other assets
|
|
6,448
|
|
2,510
|
|
TOTAL ASSETS
|
|
$
|
628,138
|
|
$
|
592,285
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
314,351
|
|
$
|
322,031
|
|
Noninterest-bearing
deposits
|
|
74,671
|
|
73,160
|
|
Total deposits
|
|
389,022
|
|
395,191
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
55,315
|
|
34,697
|
|
Long-term
borrowings, Federal Home Loan Bank (FHLB)
|
|
106,378
|
|
82,878
|
|
Accrued interest
payable
|
|
1,744
|
|
1,532
|
|
Other
liabilities
|
|
5,120
|
|
3,393
|
|
TOTAL
LIABILITIES
|
|
557,579
|
|
517,691
|
|
|
|
|
|
|
|
SHAREHOLDERS
EQUITY:
|
|
|
|
|
|
Common stock,
par value $8.33, 10,000,000 shares authorized; 4,006,934 and 4,003,514 shares
issued
|
|
33,391
|
|
33,362
|
|
Additional
paid-in capital
|
|
17,888
|
|
17,810
|
|
Retained
earnings
|
|
27,707
|
|
25,783
|
|
Accumulated
other comprehensive (loss) income:
|
|
|
|
|
|
Net unrealized
(loss) gain on available-for-sale securities
|
|
(2,159
|
)
|
2,139
|
|
Defined benefit
plan
|
|
(1,375
|
)
|
(579
|
)
|
Less: Treasury
stock at cost, 131,302 and 102,772 shares
|
|
(4,893
|
)
|
(3,921
|
)
|
TOTAL
SHAREHOLDERS EQUITY
|
|
70,559
|
|
74,594
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
628,138
|
|
$
|
592,285
|
|
See Accompanying Notes to the Consolidated Financial Statements
37
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
|
|
Year Ended December 31,
|
|
(In Thousands, Except Per Share Data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
INTEREST AND
DIVIDEND INCOME:
|
|
|
|
|
|
|
|
Loans including
fees
|
|
$
|
26,099
|
|
$
|
24,878
|
|
$
|
22,126
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
Taxable
|
|
4,098
|
|
3,577
|
|
4,351
|
|
Tax-exempt
|
|
4,357
|
|
4,027
|
|
3,223
|
|
Dividend and
other interest income
|
|
1,395
|
|
1,271
|
|
1,203
|
|
|
|
|
|
|
|
|
|
TOTAL INTEREST
AND DIVIDEND INCOME
|
|
35,949
|
|
33,753
|
|
30,903
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE:
|
|
|
|
|
|
|
|
Deposits
|
|
10,951
|
|
8,908
|
|
5,774
|
|
Short-term
borrowings
|
|
1,639
|
|
1,503
|
|
931
|
|
Long-term
borrowings
|
|
3,857
|
|
3,799
|
|
3,676
|
|
|
|
|
|
|
|
|
|
TOTAL INTEREST
EXPENSE
|
|
16,447
|
|
14,210
|
|
10,381
|
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME
|
|
19,502
|
|
19,543
|
|
20,522
|
|
|
|
|
|
|
|
|
|
PROVISION FOR
LOAN LOSSES
|
|
150
|
|
635
|
|
720
|
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME AFTER PROVISION FOR LOAN LOSSES
|
|
19,352
|
|
18,908
|
|
19,802
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
Service charges
|
|
2,246
|
|
2,366
|
|
2,228
|
|
Securities
(losses) gains, net
|
|
(54
|
)
|
1,679
|
|
2,190
|
|
Bank-owned life
insurance
|
|
410
|
|
374
|
|
568
|
|
Gain on sale of
loans
|
|
921
|
|
853
|
|
864
|
|
Insurance
commissions
|
|
2,222
|
|
2,281
|
|
2,327
|
|
Other income
|
|
1,733
|
|
1,476
|
|
1,254
|
|
|
|
|
|
|
|
|
|
TOTAL
NON-INTEREST INCOME
|
|
7,478
|
|
9,029
|
|
9,431
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSES:
|
|
|
|
|
|
|
|
Salaries and
employee benefits
|
|
9,078
|
|
8,833
|
|
8,314
|
|
Occupancy
expense, net
|
|
1,306
|
|
1,137
|
|
1,089
|
|
Furniture and
equipment expense
|
|
1,126
|
|
1,201
|
|
973
|
|
Pennsylvania
shares tax expense
|
|
643
|
|
598
|
|
549
|
|
Amortization of
investment in limited partnerships
|
|
761
|
|
245
|
|
90
|
|
Other expenses
|
|
4,402
|
|
4,315
|
|
4,093
|
|
|
|
|
|
|
|
|
|
TOTAL
NON-INTEREST EXPENSES
|
|
17,316
|
|
16,329
|
|
15,108
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE
INCOME TAX PROVISION
|
|
9,514
|
|
11,608
|
|
14,125
|
|
|
|
|
|
|
|
|
|
INCOME TAX
PROVISION
|
|
637
|
|
1,961
|
|
3,224
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
8,877
|
|
$
|
9,647
|
|
$
|
10,901
|
|
|
|
|
|
|
|
|
|
NET INCOME PER
SHARE - BASIC
|
|
$
|
2.28
|
|
$
|
2.45
|
|
$
|
2.75
|
|
|
|
|
|
|
|
|
|
NET INCOME PER
SHARE - DILUTED
|
|
$
|
2.28
|
|
$
|
2.45
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
SHARES OUTSTANDING - BASIC
|
|
3,886,277
|
|
3,934,138
|
|
3,971,926
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
SHARES OUTSTANDING - DILUTED
|
|
3,886,514
|
|
3,934,617
|
|
3,974,055
|
|
See Accompanying Notes to the Consolidated Financial Statements.
38
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
Treasury
|
|
Shareholders'
|
|
(In Thousands, Except Per Share Data)
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2004
|
|
3,998,204
|
|
$
|
33,318
|
|
$
|
17,700
|
|
$
|
18,262
|
|
$
|
4,331
|
|
$
|
(446
|
)
|
$
|
73,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock split
fractional shares
|
|
(293
|
)
|
(2
|
)
|
2
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
10,901
|
|
|
|
|
|
10,901
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
(3,481
|
)
|
|
|
(3,481
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,420
|
|
Dividends
declared ($1.56 per share)
|
|
|
|
|
|
|
|
(6,225
|
)
|
|
|
|
|
(6,225
|
)
|
Stock options
exercised
|
|
4,248
|
|
35
|
|
70
|
|
|
|
|
|
|
|
105
|
|
Purchase of
treasury stock (14,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(546
|
)
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2005
|
|
4,002,159
|
|
33,351
|
|
17,772
|
|
22,938
|
|
850
|
|
(992
|
)
|
73,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
9,647
|
|
|
|
|
|
9,647
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
1,289
|
|
|
|
1,289
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,936
|
|
Cumulative effect
of change in accounting for pension obligations, net of tax bemefit of $298
|
|
|
|
|
|
|
|
|
|
(579
|
)
|
|
|
(579
|
)
|
Dividends
declared ($1.73 per share)
|
|
|
|
|
|
|
|
(6,802
|
)
|
|
|
|
|
(6,802
|
)
|
Common shares
issued for employee stock purchase plan
|
|
1,355
|
|
11
|
|
38
|
|
|
|
|
|
|
|
49
|
|
Purchase of
treasury stock (76,400 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(2,929
|
)
|
(2,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2006
|
|
4,003,514
|
|
33,362
|
|
17,810
|
|
25,783
|
|
1,560
|
|
(3,921
|
)
|
74,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
8,877
|
|
|
|
|
|
8,877
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
(5,094
|
)
|
|
|
(5,094
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,783
|
|
Dividends
declared ($1.79 per share)
|
|
|
|
|
|
|
|
(6,953
|
)
|
|
|
|
|
(6,953
|
)
|
Purchase of
treasury stock (28,530 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(972
|
)
|
(972
|
)
|
Stock options
exercised
|
|
330
|
|
3
|
|
5
|
|
|
|
|
|
|
|
8
|
|
Common shares
issued for employee stock purchase plan
|
|
3,090
|
|
26
|
|
73
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2007
|
|
4,006,934
|
|
$
|
33,391
|
|
$
|
17,888
|
|
$
|
27,707
|
|
$
|
(3,534
|
)
|
$
|
(4,893
|
)
|
$
|
70,559
|
|
PENNS
WOODS BANCORP, INC.
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
|
|
For the years ended
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8,877
|
|
$
|
9,647
|
|
$
|
10,901
|
|
Other
Comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
Change in
unrealized gain (loss) on available for sale securities
|
|
(4,334
|
)
|
2,397
|
|
(2,036
|
)
|
Net realized
(gain) loss included in net income, net of (benefit)
taxes of $(18), $571, and $745
|
|
36
|
|
(1,108
|
)
|
(1,445
|
)
|
|
|
(4,298
|
)
|
1,289
|
|
(3,481
|
)
|
Defined benefit
pension plans:
|
|
|
|
|
|
|
|
Net transition
asset
|
|
(2
|
)
|
|
|
|
|
Prior service
cost
|
|
17
|
|
|
|
|
|
Net loss
|
|
(811
|
)
|
|
|
|
|
Other
comprehensive (loss) income, net of tax
|
|
(5,094
|
)
|
1,289
|
|
(3,481
|
)
|
Comprehensive
income
|
|
$
|
3,783
|
|
$
|
10,936
|
|
$
|
7,420
|
|
See accompanying
notes to the unaudited consolidated financial statements.
39
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
Year Ended December 31,
|
|
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,877
|
|
$
|
9,647
|
|
$
|
10,901
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
680
|
|
744
|
|
549
|
|
Provision for
loan losses
|
|
150
|
|
635
|
|
720
|
|
Accretion and
amortization of investment security discounts and premiums
|
|
(1,011
|
)
|
(784
|
)
|
(453
|
)
|
Securities
losses (gains), net
|
|
54
|
|
(1,679
|
)
|
(2,190
|
)
|
Originations of
loans held for sale
|
|
(43,783
|
)
|
(37,192
|
)
|
(30,353
|
)
|
Proceeds of
loans held for sale
|
|
44,206
|
|
37,874
|
|
32,296
|
|
Gain on sale of
loans
|
|
(921
|
)
|
(853
|
)
|
(864
|
)
|
Increases in
bank-owned life insurance
|
|
(410
|
)
|
(374
|
)
|
(568
|
)
|
Other, net
|
|
(214
|
)
|
(29
|
)
|
254
|
|
|
|
|
|
|
|
|
|
Net cash
provided by operating activities
|
|
7,628
|
|
7,989
|
|
10,292
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Investment
securities available for sale:
|
|
|
|
|
|
|
|
Proceeds from
sales
|
|
60,485
|
|
76,249
|
|
123,546
|
|
Proceeds from
calls and maturities
|
|
5,233
|
|
7,477
|
|
12,664
|
|
Purchases
|
|
(98,799
|
)
|
(78,241
|
)
|
(141,798
|
)
|
Investment
securities held to maturity:
|
|
|
|
|
|
|
|
Proceeds from
calls and maturities
|
|
12
|
|
25
|
|
328
|
|
Purchases
|
|
|
|
(25
|
)
|
(35
|
)
|
Net increase in
loans
|
|
(374
|
)
|
(22,353
|
)
|
(14,745
|
)
|
Acquisition of
bank premises and equipment
|
|
(717
|
)
|
(1,072
|
)
|
(2,076
|
)
|
Proceeds from
the sale of foreclosed assets
|
|
65
|
|
329
|
|
329
|
|
Proceeds from
bank-owned life insurance death benefit
|
|
|
|
|
|
826
|
|
Purchase of
bank-owned life insurance
|
|
(619
|
)
|
(254
|
)
|
|
|
Investment in
limited partnership
|
|
(1,250
|
)
|
(1,646
|
)
|
(3,124
|
)
|
Proceeds from
redemption of regulatory stock
|
|
5,081
|
|
3,630
|
|
4,862
|
|
Purchases of
regulatory stock
|
|
(6,816
|
)
|
(2,899
|
)
|
(4,760
|
)
|
|
|
|
|
|
|
|
|
Net cash used
for investing activities
|
|
(37,699
|
)
|
(18,780
|
)
|
(23,983
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Net (decrease)
increase in interest-bearing deposits
|
|
(7,680
|
)
|
40,881
|
|
(1,636
|
)
|
Net increase
(decrease) in noninterest-bearing deposits
|
|
1,511
|
|
1,781
|
|
(2,671
|
)
|
Net increase
(decrease) in short-term borrowings
|
|
20,618
|
|
(19,306
|
)
|
17,528
|
|
Proceeds from
long-term borrowings, FHLB
|
|
40,000
|
|
|
|
10,000
|
|
Repayment of
long-term borrowings, FHLB
|
|
(16,500
|
)
|
(1,600
|
)
|
(1,400
|
)
|
Dividends paid
|
|
(6,953
|
)
|
(6,802
|
)
|
(6,225
|
)
|
Issuance of
common stock
|
|
99
|
|
49
|
|
|
|
Stock options
exercised
|
|
8
|
|
|
|
105
|
|
Purchase of
treasury stock
|
|
(972
|
)
|
(2,929
|
)
|
(546
|
)
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
30,131
|
|
12,074
|
|
15,155
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN
CASH AND CASH EQUIVALENTS
|
|
60
|
|
1,283
|
|
1,464
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING
|
|
15,373
|
|
14,090
|
|
12,626
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS, ENDING
|
|
$
|
15,433
|
|
$
|
15,373
|
|
$
|
14,090
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
16,235
|
|
$
|
13,786
|
|
$
|
10,123
|
|
Income taxes
paid
|
|
1,610
|
|
2,645
|
|
2,625
|
|
Transfer of
loans to foreclosed real estate
|
|
75
|
|
278
|
|
433
|
|
See Accompanying Notes to the Consolidated Financial Statements.
40
PENNS WOODS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Penns Woods Bancorp, Inc. and its wholly owned subsidiaries, Jersey
Shore State Bank (the Bank), Woods Real Estate Development Co., Inc.,
Woods Investment Company, Inc., and The M Group Inc. D/B/A The
Comprehensive Financial Group (The M Group), a wholly owned subsidiary of the
Bank (collectively, the Company). All
significant intercompany balances and transactions have been eliminated.
Nature of Business
The Bank engages in a full-service commercial banking business, making
available to the community a wide range of financial services including, but
not limited to, installment loans, credit cards, mortgage and home equity
loans, lines of credit, construction financing, farm loans, community
development loans, loans to non-profit entities and local government, and various
types of time and demand deposits including, but not limited to, checking
accounts, savings accounts, clubs, money market deposit accounts, certificates
of deposit, and IRAs. Deposits are
insured by the Federal Deposit Insurance Corporation (FDIC) to the extent
provided by law.
The financial services are provided by the Bank to individuals,
partnerships, non-profit organizations, and corporations through its thirteen
offices located in Clinton, Lycoming, and Centre Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in real estate
transactions on behalf of Penns Woods Bancorp, Inc. and the Bank.
Woods Investment Company, Inc., a Delaware holding company, is
engaged in investing activities.
The M Group engages in securities brokerage and financial planning
services, which include the sale of life insurance products, annuities, and
estate planning services.
Operations are managed
and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial service operations
are considered by management to be aggregated in one reportable operating
segment.
Use of
Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may
differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses, deferred
tax assets and liabilities, and the valuation of real estate acquired through,
or in lieu of, foreclosure on settlement of debt.
Stock Split
During the fourth quarter of 2005, the Company initiated a 6 for 5 stock
split. Previously reported share and per
share amounts have been adjusted to reflect the split.
41
Cash and Cash Equivalents
Cash
equivalents include cash on hand and in banks and interest-earning
deposits. Interest-earning deposits
mature within one year and are carried at cost.
Net cash flows are reported for loan, deposit, and short-term borrowing
transactions.
Restrictions
on Cash and Cash Equivalents
Based
on deposit levels, the Company must maintain cash and other reserves with the
Federal Reserve Bank of Philadelphia (FRB).
Investment Securities
Investment securities are classified as available for sale or held to
maturity.
Securities held to maturity include bonds, notes, and debentures for
which the Company has the positive intent and ability to hold to maturity and
are reported at amortized cost.
Available for sale securities consist of bonds, notes, debentures, and
certain equity securities not classified as trading securities nor as held to
maturity securities. Unrealized holding
gains and losses, net of tax, on available for sale securities are reported as
a net amount in a separate component of shareholders equity until realized.
Gains and losses on the sale of equity securities are determined using
the average cost method, while all other investment securities use the specific
cost method.
All investment securities, regardless of classification, are monitored
and tested for impairment. An investment
security is considered to be impaired when the unrealized loss is considered to
be other than temporary. When this
occurs, the investment is written down to the current fair market value with
the write-down being reflected as a realized loss.
Premiums and discounts on all securities are recognized in interest
income using the level yield method over the period to maturity.
Investment securities fair values are based on
observed market prices. Certain
investment securities do not have observed bid prices and their fair value is
based on instruments with similar risk elements. Since regulatory stock is
redeemable at par, the Company carries it at cost.
Loans
Loans are stated at the principal amount
outstanding, net of deferred fees, unamortized loan fees and costs, and the
allowance for loan losses. Interest on
loans is recognized as income when earned on the accrual method. The Companys general policy has been to stop
accruing interest on loans when it is determined a reasonable doubt exists as
to the collectibility of additional interest.
Income is subsequently recognized only to the extent that cash payments
are received provided the loan is not delinquent in payment and, in managements
judgment, the borrower has the ability and intent to make future principal
payments.
Loan origination and commitment fees as well as
certain direct loan origination costs are being deferred and amortized as an
adjustment to the related loans yield over the contractual lives of the
related loans.
Allowance for Loan Losses
The allowance for loan losses represents the amount
which management estimates is adequate to provide for probable losses inherent
in its loan portfolio, as of the balance sheet date. The allowance method is used in providing for
loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established
through a provision
42
for loan losses charged to operations.
The provision for loan losses is based upon managements 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 managements
consideration of the nature of the portfolio segments, changes in mix and
volume of the loan portfolio, historical loan loss experience, and general
economic conditions. In addition,
management considers industry standards and trends with respect to
nonperforming loans and its knowledge and experience with specific lending
segments.
Although
management believes that it uses the best information available to make such
determinations and that the allowance for loan losses is adequate at December 31,
2007, 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, rising unemployment, or negative performance trends in financial
information from borrowers could be indicators of subsequent increased levels
of nonperforming assets and possible charge-offs, which would normally require
increased loan loss provisions. An
integral part of the periodic regulatory examination process is the review of
the adequacy of the Banks loan loss allowance.
The regulatory agencies could require the Bank, based on their
evaluation of information available at the time of their examination, to
provide additional loan loss provisions to further supplement the allowance.
Impaired loans are commercial and commercial real estate
loans for which it is probable the Bank will not be able to collect all amounts
due according to the contractual terms of the loan agreement. The Bank individually evaluates such loans
for impairment and does not aggregate loans by major risk classifications. The definition of impaired loans is not the
same as the definition of nonaccrual
loans, although the two categories overlap.
The Bank may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in
determining impairment include payment status and collateral value. The amount of impairment for these types of
loans is determined by the difference between the present value of the expected
cash flows related to the loan, using the original interest rate, and its
recorded value, or as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral and the recorded
amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage
loans on one-to-four family properties and all consumer loans are large groups
of smaller-balance homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant payment delays, which are
defined as 90 days or less, generally are not classified as impaired. Management determines the significance of
payment delays on a case-by-case basis taking into consideration all
circumstances surrounding the loan and the borrower including the length of the
delay, the borrowers prior payment record, and the amount of shortfall in
relation to the principal and interest owed.
Loans Held
for Sale
In general, fixed rate residential
mortgage loans originated by the Bank are held for sale and are carried at cost
due to their short holding period, which can range from less than two weeks to
a maximum of thirty days. Sold loans are
not serviced by the Bank. Proceeds from
the sale of loans in excess of the carrying value are accounted for as a
gain. Total gains on the sale of loans
are shown as a component of non-interest income within the consolidated
statement of income.
43
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at
the lower of cost or fair value minus estimated selling costs. Prior to foreclosure, the value of the
underlying loan is written down to the fair value of the real estate to be
acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged
against operating expenses. Net
operating expenses and gains and losses realized from disposition are included
in non-interest expense and income, respectively.
Premises
and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line
and accelerated methods over the estimated useful lives of the related assets,
which range from five to ten years for furniture, fixtures, and equipment and
fifteen to forty years for buildings and improvements. Costs incurred for routine maintenance and
repairs are charged to operations as incurred.
Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Company has purchased
life insurance policies on certain officers and directors. Bank-owned life insurance is recorded at its
cash surrender value, or the amount that can be realized. Increases in the cash surrender value are
recognized as a component of non-interest income within the Consolidated
Statement of Income.
Goodwill
The Company accounts for
goodwill in accordance with Statement of Financial Accounting Standards (FAS)
No. 142,
Goodwill and Other Intangible
Assets.
This statement, among
other things, requires a two-step process for testing the impairment of
goodwill on at least an annual basis.
This approach could cause more volatility in the Companys reported net
income because impairment losses, if any, could occur irregularly and in
varying amounts. The Company performs an
annual impairment analysis of goodwill for its purchased subsidiary, The M
Group. Based on the fair value of this
reporting unit, estimated using the expected present value of future cash
flows, no impairment of goodwill was recognized in 2007 and 2006.
Investments in Limited Partnerships
The Company is a limited partner in four partnerships at December 31,
2007 that provide low income elderly housing in the Companys geographic market
area. The carrying value of the Companys investments in limited partnerships
was $5,439,000 at December 31, 2007 and $4,950,000 at December 31,
2006. The Company is fully amortizing the investment in the partnership entered
into prior to 2005 over the fifteen-year holding period. The partnerships entered into after 2004 are
being fully amortized over the ten-year tax credit receipt period utilizing the
straight-line method. The partnerships
began being amortized once the projects reached the level of occupancy needed
to begin the ten year tax credit recognition period. Amortization of limited partnership
investments amounted to $761,000 in 2007, $245,000 in 2006, and $90,000 in
2005.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance
sheet financial instruments. Those instruments consist of commitments to extend
credit and standby letters of credit. When those instruments are funded or
become payable, the Company reports the amounts in its financial statements
Advertising
Cost
Advertising
costs are generally expensed as incurred.
Income
Taxes
The Company adopted the provisions of FIN No. 48,
Accounting for Uncertainty in Income
Taxes, an
interpretation of FASB Statement 109
, effective January 1,
2007. FIN No. 48 prescribes a recognition
44
threshold and a
measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Benefits from
tax positions should be recognized in the financial statements only when it is
more likely than not that the tax position will be sustained upon examination
by the appropriate taxing authority that would have full knowledge of all
relevant information. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of benefit that is
greater than fifty percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold
should be derecognized in the first subsequent financial reporting period in
which that threshold is no longer met. FIN No. 48 also provides guidance
on the accounting for and disclosure of unrecognized tax benefits, interest and
penalties. Adoption of FIN No. 48 did not have a significant impact on the
Companys financial statements.
Deferred tax assets and liabilities result from temporary
differences in financial and income tax methods of accounting, and are
reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Earnings
Per Share
The Company provides dual presentation of basic and diluted earnings per
share. Basic earnings per share is
calculated utilizing net income as reported in the numerator and weighted
average shares outstanding in the denominator.
The computation of diluted earnings per share differs in that the
dilutive effects of any stock options are adjusted in the denominator.
Employee
Benefits
Pension
and employee benefits include contributions, determined actuarially, to a
defined benefit retirement plan covering the eligible employees of the
Bank. The plan is funded on a current
basis to the extent that it is deductible under existing federal tax
regulations. Pension and other employee
benefits also include contributions to a defined contribution Section 401(k) plan
covering eligible employees.
Contributions matching those made by eligible employees are funded
throughout the year. In addition, an elective contribution is made annually at
the discretion of the Board of Directors.
The M
Group Products and Income Recognition
The
M Group product line is comprised primarily of annuities, life insurance, and
mutual funds. The revenues generated
from life insurance sales are commission only, as The M Group does not
underwrite the policies. Life insurance
sales include permanent and term policies with the majority of the policies
written being permanent. Term life
insurance policies are written for 10, 15, 20, and 30 year terms with the
majority of the policies being written for 20 years. None of these products are offered as an
integral part of lending activities.
Commissions
from the sale of annuities are recognized at the time notice is received from
the third party broker/dealer or an insurance company that the transaction has
been accepted and approved, which is also the time when commission income is
received.
Life
insurance commissions are recognized at varying points based on the payment
option chosen by the customer.
Commissions from monthly and annual payment plans are recognized at the
start of each annual period for the life insurance, while quarterly and
semi-annual premium payments are recognized quarterly and semi-annually when
the earnings process is complete. For
example, semi-annual payments on the first of January and July would
result in commission income recognition on the first of January and July,
while payments on the first of January, April, July, and October would
result in commission income recognition on those dates. The potential for chargebacks only exists for
45
those
policies on a monthly payment plan since income is recognized at the beginning
of the annual coverage period versus at the time of each monthly payment. No liability is maintained for chargebacks as
these are removed from income at the time of the occurrence.
Stock
Options
The Company maintains a stock option plan for directors and certain
officers and employees. For all options granted prior to January 1, 2006,
when the exercise price of the Companys stock options was greater than or
equal to the market price of the underlying stock on the date of the grant, no
compensation expense was recognized in the Companys financial statements.
Accumulated
Other Comprehensive Income
The Company is required to present accumulated other
comprehensive income in a full set of general-purpose financial statements for
all periods presented. Accumulated other
comprehensive income is comprised of unrealized holding gains (losses) on the
available for sale securities portfolio and the unrecognized components of net periodic benefit costs of the defined
benefit pension plan.
Segment Reporting
FAS
No. 131,
Disclosure about Segments of an Enterprise
and Related Information
, requires that public business enterprises
report financial and descriptive information about their reportable operating
segments. Based on the guidance provided by the Statement, the Company has
determined that its only reportable segment is Community Banking.
Reclassification
of Comparative Amounts
Certain items previously
reported have been reclassified to conform to the current years reporting format. Such reclassifications did not affect net
income or shareholders equity.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting
Standards Board (FASB) issued FAS No. 141 (revised 2007),
Business Combinations
(FAS 141(R)), which establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in an acquiree, including the recognition and measurement
of goodwill acquired in a business combination. FAS No. 141(R) is
effective for fiscal years beginning on or after December 15, 2008.
Earlier adoption is prohibited.
The adoption of this standard is not expected to have a material effect
on the Companys results of operations or financial position.
In September 2006,
the FASB issued FAS No. 157,
Fair Value Measurements
,
which provides enhanced guidance for using fair value to measure assets and
liabilities. The standard applies
whenever other standards require or permit assets or liabilities to be measured
at fair value. The Standard does not
expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years.
Early adoption is permitted. The
adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.
In February 2007, the
FASB issued FAS No. 159
, The Fair Value Option
for Financial Assets and
Financial Liabilities
Including an amendment of FASB Statement No. 115
, which
provides all entities with an option to report selected financial assets and
liabilities at fair value. The objective of the FAS No. 159 is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in earnings caused by measuring related assets and liabilities
differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the
beginning of an entitys first fiscal year beginning after November 15,
2007. Early adoption is permitted as of
the beginning of a fiscal year that begins on or before November 15, 2007
provided the entity also elects to apply the provisions of FAS No. 157,
Fair Value Measurements
.
The adoption of
46
this standard is not
expected to have a material effect on the Companys results of operations or
financial position.
In December 2007, the FASB issued FAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
. FAS No. 160 amends ARB No. 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies
that a noncontrolling interest in a subsidiary, which is sometimes referred to
as minority interest, is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements.
Among other requirements, this statement requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent
and the noncontrolling interest. It also requires disclosure, on the face
of the consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. FAS No. 160
is effective for fiscal years beginning on or after December 15,
2008. Earlier adoption is
prohibited. The adoption of this standard is not expected to have a
material effect on the Companys results of operations or financial position.
In September 2006, the
FASB reached consensus on the guidance provided by Emerging Issues Task Force
Issue 06-4 (EITF 06-4),
Accounting for Deferred
Compensation and Postretirement Benefit
Aspects of
Endorsement Split-Dollar Life Insurance Arrangements
. The guidance is applicable to endorsement
split-dollar life insurance arrangements, whereby the employer owns and
controls the insurance policy, that are associated with a postretirement
benefit. EITF 06-4 requires that for a
split-dollar life insurance arrangement within the scope of the Issue, an employer
should recognize a liability for future benefits in accordance with FAS No. 106
(if, in substance, a postretirement benefit plan exists) or Accounting
Principles Board Opinion No. 12 (if the arrangement is, in substance, an
individual deferred compensation contract) based on the substantive agreement
with the employee. EITF 06-4 is
effective for fiscal years beginning after December 15, 2007. The adoption of the EITF on January 1,
2008 will result in an adjustment to retained earnings and an associated
liability in the amount of $437,000.
In March 2007, the FASB
ratified Emerging Issues Task Force Issue No. 06-10 (EITF 06-10),
Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements
. EITF 06-10 provides guidance for determining a liability
for the postretirement benefit obligation as well as recognition and
measurement of the associated asset on the basis of the terms of the collateral
assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007. The adoption of this EITF will not
have a material effect on the Companys results of operations or financial
position.
In June 2007, the FASB
ratified Emerging Issues Task Force Issue No. 06-11 (EITF 06-11),
Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards
. EITF 06-11 applies to
share-based payment arrangements with dividend protection features that entitle
employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend
equivalents on equity-classified nonvested share units, or (c) payments
equal to the dividends paid on the underlying shares while an equity-classified
share option is outstanding, when those dividends or dividend equivalents are
charged to retained earnings under FAS No. 123R, Share-Based Payment, and
result in an income tax deduction for the employer. A consensus was reached
that a realized income tax benefit from dividends or dividend equivalents that
are charged to retained earnings and are paid to employees for
equity-classified nonvested equity shares, nonvested equity share units, and
outstanding equity share options should be recognized as an increase in
additional paid-in capital. EITF 06-11
is effective for fiscal years beginning after December 15, 2007, and
interim periods within those fiscal years.
The adoption of this EITF is not expected to have a material effect on
the Companys results of operations or financial position.
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
47
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.
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
4,005,181
|
|
4,002,416
|
|
3,986,569
|
|
|
|
|
|
|
|
|
|
Average treasury
stock shares
|
|
(118,904
|
)
|
(68,278
|
)
|
(14,643
|
)
|
|
|
|
|
|
|
|
|
Weighted average
common shares and common stock equivalents used to calculate basic earnings
per share
|
|
3,886,277
|
|
3,934,138
|
|
3,971,926
|
|
|
|
|
|
|
|
|
|
Additional
common stock equivalents (stock options) used to calculate diluted earnings
per share
|
|
237
|
|
479
|
|
2,129
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares and common stock equivalents used to calculate diluted earnings
per share
|
|
3,886,514
|
|
3,934,617
|
|
3,974,055
|
|
Options to purchase 8,273 shares of common stock at a price of $40.29
were outstanding during 2007 and 9,002
shares of common stock at a price of $40.29 were outstanding during 2006 and
2005. The options were not included in
the computation of diluted earnings per share as they were anti-dilutive due to
the strike price at December 31, of each period presented being greater
than the market value at that time.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at December 31,
2007 and 2006 are as follows:
48
|
|
2007
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Available for
sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
62,382
|
|
$
|
522
|
|
$
|
|
|
$
|
62,904
|
|
State and
political securities
|
|
119,651
|
|
581
|
|
(2,417
|
)
|
117,815
|
|
Other debt
securities
|
|
15,917
|
|
290
|
|
(440
|
)
|
15,767
|
|
Total debt
securities
|
|
197,950
|
|
1,393
|
|
(2,857
|
)
|
196,486
|
|
Equity
securities
|
|
19,776
|
|
496
|
|
(2,303
|
)
|
17,969
|
|
Total investment
securities AFS
|
|
$
|
217,726
|
|
$
|
1,889
|
|
$
|
(5,160
|
)
|
$
|
214,455
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
(HTM)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
14
|
|
$
|
1
|
|
$
|
|
|
$
|
15
|
|
Other debt
securities
|
|
263
|
|
1
|
|
|
|
264
|
|
Total investment
securities HTM
|
|
$
|
277
|
|
$
|
2
|
|
$
|
|
|
$
|
279
|
|
|
|
2006
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Available for
sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
54,949
|
|
$
|
24
|
|
$
|
(821
|
)
|
$
|
54,152
|
|
State and
political securities
|
|
104,658
|
|
1,646
|
|
(358
|
)
|
105,946
|
|
Other debt
securities
|
|
1,998
|
|
37
|
|
(11
|
)
|
2,024
|
|
Total debt
securities
|
|
161,605
|
|
1,707
|
|
(1,190
|
)
|
162,122
|
|
Equity
securities
|
|
20,353
|
|
2,883
|
|
(158
|
)
|
23,078
|
|
Total investment
securities AFS
|
|
$
|
181,958
|
|
$
|
4,590
|
|
$
|
(1,348
|
)
|
$
|
185,200
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
(HTM)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
26
|
|
$
|
2
|
|
$
|
|
|
$
|
28
|
|
Other debt
securities
|
|
257
|
|
1
|
|
|
|
258
|
|
Total investment
securities HTM
|
|
$
|
283
|
|
$
|
3
|
|
$
|
|
|
$
|
286
|
|
The following tables show the
Companys gross unrealized losses and estimated fair value, aggregated by
investment category and length of time, that the individual securities have
been in a continuous unrealized loss position, at December 31, 2007 and
2006.
49
|
|
2007
|
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
(In Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State and political
securities
|
|
60,002
|
|
1,705
|
|
21,830
|
|
712
|
|
81,832
|
|
2,417
|
|
Other debt
securities
|
|
2,521
|
|
357
|
|
388
|
|
83
|
|
2,909
|
|
440
|
|
Total debt
securities
|
|
62,523
|
|
2,062
|
|
22,218
|
|
795
|
|
84,741
|
|
2,857
|
|
Equity
securities
|
|
8,200
|
|
1,837
|
|
996
|
|
466
|
|
9,196
|
|
2,303
|
|
Total
|
|
$
|
70,723
|
|
$
|
3,899
|
|
$
|
23,214
|
|
$
|
1,261
|
|
$
|
93,937
|
|
$
|
5,160
|
|
|
|
2006
|
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
(In Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
24,552
|
|
$
|
97
|
|
$
|
25,053
|
|
$
|
724
|
|
$
|
49,605
|
|
$
|
821
|
|
State and
political securities
|
|
31,286
|
|
195
|
|
11,706
|
|
163
|
|
42,992
|
|
358
|
|
Other debt
securities
|
|
292
|
|
7
|
|
146
|
|
4
|
|
438
|
|
11
|
|
Total debt
securities
|
|
56,130
|
|
299
|
|
36,905
|
|
891
|
|
93,035
|
|
1,190
|
|
Equity
securities
|
|
726
|
|
33
|
|
2,592
|
|
125
|
|
3,318
|
|
158
|
|
Total
|
|
$
|
56,856
|
|
$
|
332
|
|
$
|
39,497
|
|
$
|
1,016
|
|
$
|
96,353
|
|
$
|
1,348
|
|
At December 31, 2007 there
were a total of 173 and 50 individual securities that were in a continuous
unrealized loss position for less than twelve months and greater than twelve
months, respectively.
The policy of the Company is to
recognize other than temporary impairment of equity securities where the fair
value has been significantly below cost for four consecutive quarters or if the
market value is 50% or less for two consecutive quarters. Certain equity investments were determined
to be impaired at December 31, 2007 resulting in a reduction of carrying
value and a charge to earnings in the amount of $834,000. For fixed maturity
investments with unrealized losses due to interest rates where the Company has
the positive intent and ability to hold the investment for a period of time
sufficient to allow a market recovery, declines in value below cost are not
assumed to be other than temporary. The
Company reviews its position quarterly and has asserted that at December 31,
2007, the declines outlined in the above table for debt securities represent
temporary declines due to interest rate changes that are not expected to result
in the non-collection of principal and interest during the period. In addition, the Company does have the intent
and ability to hold those securities either to maturity or to allow a market
recovery.
The Company has concluded that any
impairment of its investment securities portfolio is not other than temporary.
The amortized cost and estimated fair value of debt securities at December 31,
2007, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities since borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
Available for Sale
|
|
Held to Maturity
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
(In Thousands)
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Due in one year
or less
|
|
$
|
75
|
|
$
|
75
|
|
$
|
50
|
|
$
|
50
|
|
Due after one
year to five years
|
|
800
|
|
790
|
|
123
|
|
124
|
|
Due after five
years to ten years
|
|
395
|
|
421
|
|
90
|
|
90
|
|
Due after ten
years
|
|
196,680
|
|
195,200
|
|
14
|
|
15
|
|
Total
|
|
$
|
197,950
|
|
$
|
196,486
|
|
$
|
277
|
|
$
|
279
|
|
50
Total gross proceeds from sales of securities available for sale were
$60,485,000, $76,249,000, and $123,546,000 for 2007, 2006, and 2005,
respectively. The following table
represents gross realized gains and losses on those transactions:
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Gross realized
gains:
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
68
|
|
$
|
|
|
$
|
128
|
|
State and
political securities
|
|
840
|
|
1,248
|
|
819
|
|
Other debt
securities
|
|
2
|
|
|
|
|
|
Equity
securities
|
|
772
|
|
1,655
|
|
2,209
|
|
Total gross
realized gains
|
|
$
|
1,682
|
|
$
|
2,903
|
|
$
|
3,156
|
|
|
|
|
|
|
|
|
|
Gross realized
losses:
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
902
|
|
$
|
913
|
|
$
|
791
|
|
State and
political securities
|
|
|
|
302
|
|
116
|
|
Other debt
securities
|
|
|
|
|
|
59
|
|
Equity
securities
|
|
834
|
|
9
|
|
|
|
Total gross
realized losses
|
|
$
|
1,736
|
|
$
|
1,224
|
|
$
|
966
|
|
Investment securities with a carrying value of approximately $97,647,000
and $64,821,000 at December 31, 2007 and 2006, respectively, were pledged
to secure certain deposits, repurchase agreements, and for other purposes as
required by law.
There is no concentration of investments that exceed ten percent of
shareholders equity for any individual issuer, excluding those guaranteed by
the U.S. Government.
NOTE 4 LOANS
Major loan classifications as of December 31, 2007 and 2006 are summarized
as follows:
|
|
2007
|
|
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
Or More
|
|
|
|
|
|
|
|
|
|
30 To 90
|
|
& Still
|
|
Non-
|
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
Accruing
|
|
Accrual
|
|
Total
|
|
Commercial and
agricultural
|
|
$
|
35,316
|
|
$
|
236
|
|
$
|
147
|
|
$
|
40
|
|
$
|
35,739
|
|
Real estate
mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
158,424
|
|
4,573
|
|
110
|
|
161
|
|
163,268
|
|
Commercial
|
|
130,692
|
|
1,409
|
|
88
|
|
754
|
|
132,943
|
|
Construction
|
|
16,113
|
|
39
|
|
|
|
|
|
16,152
|
|
Installment
loans to individuals
|
|
12,838
|
|
459
|
|
20
|
|
|
|
13,317
|
|
|
|
353,383
|
|
$
|
6,716
|
|
$
|
365
|
|
$
|
955
|
|
361,419
|
|
Less: Net
deferred loan fees
|
|
941
|
|
|
|
|
|
|
|
941
|
|
Allowance for
loan losses
|
|
4,130
|
|
|
|
|
|
|
|
4,130
|
|
Loans, net
|
|
$
|
348,312
|
|
|
|
|
|
|
|
$
|
356,348
|
|
|
|
2006
|
|
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
Or More
|
|
|
|
|
|
|
|
|
|
30 To 90
|
|
& Still
|
|
Non-
|
|
|
|
(In Thousands)
|
|
Current
|
|
Days
|
|
Accruing
|
|
Accrual
|
|
Total
|
|
Commercial and
agricultural
|
|
$
|
36,122
|
|
$
|
764
|
|
$
|
109
|
|
$
|
|
|
$
|
36,995
|
|
Real estate
mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
156,976
|
|
1,050
|
|
8
|
|
185
|
|
158,219
|
|
Commercial
|
|
133,813
|
|
1,406
|
|
|
|
185
|
|
135,404
|
|
Construction
|
|
16,695
|
|
54
|
|
|
|
|
|
16,749
|
|
Installment
loans to individuals
|
|
13,687
|
|
346
|
|
2
|
|
|
|
14,035
|
|
|
|
357,293
|
|
$
|
3,620
|
|
$
|
119
|
|
$
|
370
|
|
361,402
|
|
Less: Net
deferred loan fees
|
|
1,018
|
|
|
|
|
|
|
|
1,018
|
|
Allowance for
loan losses
|
|
4,185
|
|
|
|
|
|
|
|
4,185
|
|
Loans, net
|
|
$
|
352,090
|
|
|
|
|
|
|
|
$
|
356,199
|
|
Impaired loans totaled $1,477,000 and $574,000 at December 31,
2007 and 2006, respectively. The portion
of the allowance for loan losses allocated for impaired loans was $102,000 and
$42,000 at
51
December 31, 2007 and 2006. The average recorded
investment in impaired loans during the years ended December 31, 2007 and
2006 was approximately $1,130,000 and $504,000, respectively. There were no impaired loans for the year
ended December 31, 2005.
The Company recognized interest income on impaired loans in
the amount of $42,000 and $72,000 for the years ended December 31, 2007
and 2006, respectively. On a cash basis, interest income on impaired loans
amounted to $29,000 and $58,000 for the years ended December 31, 2007 and
2006, respectively.
No additional funds are committed to be advanced in
connection with impaired loans.
Loans on which the accrual of interest has been discontinued
or reduced, exclusive of impaired loans,
amounted to approximately $955,000 and $370,000 at December 31,
2007 and 2006, respectively. If interest
had been recorded based on the original loan agreement terms and rate of
interest for those loans, income would have approximated $87,000, $23,000, and
$39,000 for the years ended December 31, 2007, 2006, and 2005,
respectively. Interest income on such
loans, is recorded as received and amounted to approximately $17,000, $15,000,
and $18,000, for the years ended December 31, 2007, 2006, and 2005,
respectively.
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
4,185
|
|
$
|
3,679
|
|
$
|
3,338
|
|
Provision
charged to operations
|
|
150
|
|
635
|
|
720
|
|
Loans charged
off
|
|
(304
|
)
|
(327
|
)
|
(446
|
)
|
Recoveries
|
|
99
|
|
198
|
|
67
|
|
Balance, end of
year
|
|
$
|
4,130
|
|
$
|
4,185
|
|
$
|
3,679
|
|
The Company has a concentration of loans to both owners of commercial and
residential rental properties at December 31, 2007 and 2006 of 14.43% and
15.38% and 14.56% and 15.82% of total loans , respectively.
The Company grants commercial, industrial, residential, and installment
loans to customers throughout north-central Pennsylvania. Although the Company has a diversified loan
portfolio at December 31, 2007 and 2006, a substantial portion of its
debtors ability to honor their contracts is dependent on the economic
conditions within this region.
NOTE 5 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows
at December 31:
52
(In Thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,391
|
|
$
|
1,370
|
|
Premises
|
|
6,218
|
|
6,038
|
|
Furniture and
equipment
|
|
5,356
|
|
4,844
|
|
Leasehold
improvements
|
|
815
|
|
811
|
|
Total
|
|
13,780
|
|
13,063
|
|
Less accumulated
depreciation and amortization
|
|
7,006
|
|
6,326
|
|
Net premises and
equipment
|
|
$
|
6,774
|
|
$
|
6,737
|
|
Depreciation and amortization charged to operations for the years ended
2007, 2006, and 2005 was $680,000, $744,000, and $549,000, respectively.
NOTE 6 GOODWILL
As of December 31, 2007, 2006, and 2005 goodwill had a gross
carrying value of $3,308,000 and accumulated amortization of $276,000 resulting
in a net carrying amount of $3,032,000.
The gross carrying amount of goodwill is tested for impairment in the
third quarter of each fiscal year. Based
on fair value of the reporting unit, estimated using the expected present value
of future cash flows, there was no evidence of impairment of the carrying
amount at December 31, 2007 and 2006, repectively.
NOTE 7 TIME DEPOSITS
Time deposits of $100,000 or more totaled approximately
$59,424,000 on December 31, 2007 and $49,793,000 on December 31,
2006. Interest expense related to such
deposits was approximately $3,216,000, $1,873,000, and $1,417,000, for the
years ended December 31, 2007, 2006, and 2005, respectively. There were no individual retirement accounts
in excess of $250,000 as of December 31, 2007 and 2006. Time certificates of deposits in excess of
$100,000 and individual retirement accounts in excess of $250,000 are not
federally insured.
At December 31, 2007, the scheduled maturities on time
deposits of $100,000 or more are as follows:
(In Thousands)
|
|
2007
|
|
|
|
|
|
Three months or
less
|
|
$
|
22,258
|
|
Three months to
six months
|
|
13,724
|
|
Six months to
twelve months
|
|
17,554
|
|
Over twelve
months
|
|
5,888
|
|
Total
|
|
$
|
59,424
|
|
Total time deposit maturities are as follows:
53
(In Thousands)
|
|
2007
|
|
|
|
|
|
2008
|
|
$
|
157,621
|
|
2009
|
|
18,702
|
|
2010
|
|
5,670
|
|
2011
|
|
2,409
|
|
2012
|
|
655
|
|
Thereafter
|
|
625
|
|
Total
|
|
$
|
185,682
|
|
NOTE 8 -
SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under
agreements to repurchase and FHLB advances which generally represent overnight
or less than six month borrowings. In
addition to the outstanding balances noted below, the Bank also had additional
lines of credit totaling $29,539,000 available from correspondent banks other
than the FHLB. The outstanding balances
and related information for short-term borrowings are summarized as follows:
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Repurchase
Agreements:
|
|
|
|
|
|
|
|
Balance at year
end
|
|
$
|
17,155
|
|
$
|
15,991
|
|
$
|
15,263
|
|
Maximum amount
outstanding at any month end
|
|
19,058
|
|
19,916
|
|
16,754
|
|
Average balance
outstanding during the year
|
|
16,746
|
|
16,028
|
|
14,268
|
|
Weighted-average
interest rate:
|
|
|
|
|
|
|
|
At year end
|
|
3.37
|
%
|
3.96
|
%
|
2.74
|
%
|
Paid during the
year
|
|
3.69
|
%
|
3.55
|
%
|
2.19
|
%
|
|
|
|
|
|
|
|
|
Open
Repo Plus:
|
|
|
|
|
|
|
|
Balance at year
end
|
|
$
|
38,160
|
|
$
|
18,706
|
|
$
|
1,740
|
|
Maximum amount
outstanding at any month end
|
|
38,895
|
|
43,040
|
|
24,990
|
|
Average balance
outstanding during the year
|
|
19,299
|
|
15,301
|
|
10,765
|
|
Weighted-average
interest rate:
|
|
|
|
|
|
|
|
At year end
|
|
4.32
|
%
|
5.40
|
%
|
4.25
|
%
|
Paid during the
year
|
|
5.09
|
%
|
5.07
|
%
|
3.33
|
%
|
|
|
|
|
|
|
|
|
Short-Term
FHLB:
|
|
|
|
|
|
|
|
Balance at year
end
|
|
$
|
|
|
$
|
|
|
$
|
37,000
|
|
Maximum amount
outstanding at any month end
|
|
15,000
|
|
|
|
37,000
|
|
Average balance
outstanding during the year
|
|
771
|
|
3,283
|
|
7,081
|
|
Weighted-average
interest rate:
|
|
|
|
|
|
|
|
At year end
|
|
|
|
|
|
4.24
|
%
|
Paid during the
year
|
|
5.06
|
%
|
4.82
|
%
|
3.66
|
%
|
NOTE 9 LONG TERM BORROWINGS
The following represents outstanding long-term borrowings with the FHLB
by contractual maturities at December 31, 2007 and 2006:
54
(In Thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Variable rate of
4.49%, maturing in 2007
|
|
$
|
|
|
$
|
5,000
|
|
Variable rates
between 3.14% and 5.56%, maturing in 2008
|
|
29,600
|
|
29,600
|
|
Variable rate of
5.06%, maturing in 2009
|
|
|
|
5,000
|
|
Variable rates
between 3.98% and 6.65%, maturing in 2010
|
|
15,000
|
|
5,000
|
|
Variable rates
between 4.25% and 4.72%, maturing in 2011
|
|
10,000
|
|
10,000
|
|
Variable rates
between 3.68% and 4.43%, maturing in 2012
|
|
15,000
|
|
5,000
|
|
Variable rate of
3.74%, maturing in 2013
|
|
5,000
|
|
5,000
|
|
Variable rate of
3.97%, maturing in 2015
|
|
10,000
|
|
10,000
|
|
Variable rates
between 4.15% and 4.28%, maturing in 2017
|
|
20,000
|
|
|
|
Fixed rates
between 2.67% and 3.13%, maturing in 2007
|
|
|
|
6,500
|
|
Fixed rate of
6.92%, maturing in 2011
|
|
500
|
|
500
|
|
Fixed rate of
5.87%, maturing in 2013
|
|
528
|
|
528
|
|
Fixed rate of
6.92%, maturing in 2015
|
|
750
|
|
750
|
|
Total
|
|
$
|
106,378
|
|
$
|
82,878
|
|
The terms of the convertible borrowings allow the FHLB to convert the
interest rate to an adjustable rate based on the three month London Interbank
Offered Rate (LIBOR) at a predetermined anniversary date of the borrowings
origination, ranging from three months to five years. If the FHLB converts the interest rate on one
of the predetermined dates, the Bank has the ability to payoff the debt on the
conversion date and quarterly thereafter without incurring the customary
pre-payment penalty.
The Bank maintains a credit arrangement, which includes a revolving line
of credit with the FHLB. Under this
credit arrangement, the Bank has a remaining borrowing capacity of $75,515,000
at December 31, 2007, which is subject to annual renewal, and typically
incurs no service charges. Under terms
of a blanket agreement, collateral for the FHLB borrowings must be secured by
certain qualifying assets of the Bank which consist principally of first
mortgage loans and mortgage-backed securities.
NOTE 10 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax
position at December 31, 2007 and 2006:
55
(In Thousands)
|
|
2007
|
|
2006
|
|
Deferred tax
assets:
|
|
|
|
|
|
Allowance for
loan losses
|
|
$
|
1,404
|
|
$
|
1,292
|
|
Deferred compensation
|
|
408
|
|
386
|
|
Pension
|
|
870
|
|
517
|
|
Loan fees and
costs
|
|
320
|
|
346
|
|
Investment
securities allowance
|
|
278
|
|
2
|
|
Unrealized loss
on available for sale securities
|
|
1,112
|
|
|
|
Low income
housing credit carryforwrds
|
|
827
|
|
|
|
Other
|
|
212
|
|
134
|
|
Total
|
|
5,431
|
|
2,677
|
|
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
Bond accretion
|
|
44
|
|
49
|
|
Depreciation
|
|
117
|
|
85
|
|
Amortization
|
|
451
|
|
376
|
|
Unrealized gains
on available for sale securities
|
|
|
|
1,102
|
|
Total
|
|
612
|
|
1,612
|
|
|
|
|
|
|
|
Deferred tax
asset, net
|
|
$
|
4,819
|
|
$
|
1,065
|
|
No valuation allowance was established at December 31, 2007 and
2006, in the view of the Companys ability to carry back taxes paid in previous
years and certain tax strategies, coupled with the anticipated future taxable
income as evidenced by the Companys earning potential.
The provision for income taxes is comprised of the following:
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Currently
payable
|
|
$
|
1,758
|
|
$
|
2,112
|
|
$
|
3,188
|
|
Deferred
(benefit) expense
|
|
(1,121
|
)
|
(151
|
)
|
36
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
637
|
|
$
|
1,961
|
|
$
|
3,224
|
|
A reconciliation between the expected income tax and the effective income
tax rate on income before income tax provision follows:
|
|
2007
|
|
2006
|
|
2005
|
|
(In Thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision at
expected rate
|
|
$
|
3,235
|
|
34.0
|
%
|
$
|
3,947
|
|
34.0
|
%
|
$
|
4,803
|
|
34.0
|
%
|
Decrease in tax resulting
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
income
|
|
(1,512
|
)
|
(15.9
|
)
|
(1,425
|
)
|
(12.3
|
)
|
(1,275
|
)
|
(9.0
|
)
|
Tax credits
|
|
(1,048
|
)
|
(11.0
|
)
|
(363
|
)
|
(3.1
|
)
|
(177
|
)
|
(1.3
|
)
|
Other, net
|
|
(38
|
)
|
(0.4
|
)
|
(198
|
)
|
(1.7
|
)
|
(127
|
)
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income
tax and rate
|
|
$
|
637
|
|
6.7
|
%
|
$
|
1,961
|
|
16.9
|
%
|
$
|
3,224
|
|
22.8
|
%
|
56
NOTE 11 - EMPLOYEE BENEFIT PLANS
Defined
Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (the Plan)
for all employees meeting certain age, length of service requirements, and were
hired prior to January 1, 2004, at which time entrance into the Plan was
frozen. Benefits are based primarily on
years of service and the average annual compensation during the highest five
consecutive years within the final ten years of employment.
The Company adopted the recognition provisions of FAS No. 158
, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans
and initially applied them to the funded status
of its defined benefit pension plan as of December 31, 2006. The initial recognition of the funded status
of its defined benefit pension plan resulted in a decrease in Shareholders
equity of $579,000, which was net of a tax benefit of $298,000.
The following table sets forth the obligation and funded status as of December 31:
(In Thousands)
|
|
2007
|
|
2006
|
|
Change
in benefit obligation
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
8,510
|
|
$
|
8,780
|
|
Service cost
|
|
466
|
|
467
|
|
Interest cost
|
|
486
|
|
434
|
|
Actuarial loss
(gain)
|
|
80
|
|
(785
|
)
|
Benefits paid
|
|
(210
|
)
|
(186
|
)
|
Other, change in
actuarial assumptions
|
|
1,118
|
|
(200
|
)
|
Benefit
obligation at end of year
|
|
10,450
|
|
8,510
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
Fair value of
plan assets at beginning of year
|
|
6,990
|
|
6,011
|
|
Actual return on
plan assets
|
|
531
|
|
629
|
|
Employer
contribution
|
|
580
|
|
550
|
|
Benefits paid
|
|
(210
|
)
|
(186
|
)
|
Expenses paid
|
|
|
|
(14
|
)
|
Fair value of
plan assets at end of year
|
|
7,891
|
|
6,990
|
|
Funded status
|
|
$
|
(2,559
|
)
|
$
|
(1,520
|
)
|
|
|
|
|
|
|
Accounts
recognized on balance sheet as:
|
|
|
|
|
|
Total
liabilities
|
|
$
|
(2,559
|
)
|
$
|
(1,520
|
)
|
|
|
|
|
|
|
Amounts
not yet recognized as a component of net periodic pension cost:
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income (loss) consists of:
|
|
|
|
|
|
Net transition
asset
|
|
$
|
(12
|
)
|
$
|
(15
|
)
|
Prior service
cost
|
|
153
|
|
179
|
|
Net loss
|
|
1,942
|
|
713
|
|
Total
|
|
$
|
2,083
|
|
$
|
877
|
|
The accumulated benefit obligation for the Plan was $7,835,000 and
$6,451,000 at December 31, 2007 and 2006, respectively.
57
Components of Net Periodic Cost and Other Amounts Recognized in other
Comprehensive Income as of December 31, 2007, 2006, and 2005,
respectively, are as follows:
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Net periodic
pension cost:
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
467
|
|
$
|
467
|
|
$
|
505
|
|
Interest cost
|
|
486
|
|
434
|
|
446
|
|
Expected return
on plan assets
|
|
(562
|
)
|
(485
|
)
|
(402
|
)
|
Amortization of
transition asset
|
|
(3
|
)
|
(3
|
)
|
(2
|
)
|
Amortization of
prior service cost
|
|
26
|
|
26
|
|
25
|
|
Amortization of
unrecognized net loss
|
|
|
|
22
|
|
65
|
|
Net periodic
benefit cost
|
|
$
|
414
|
|
$
|
461
|
|
$
|
637
|
|
The estimated net transition asset and prior
service cost for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income (loss) into net periodic benefit cost
over the next fiscal year are $3,000 and $25,000, respectively.
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
6.00
|
%
|
5.75
|
%
|
5.50
|
%
|
Rate of
compensation increase
|
|
5.00
|
%
|
4.75
|
%
|
4.50
|
%
|
Weighted-average assumptions used to determine net periodic cost for
years ended December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
5.75
|
%
|
5.50
|
%
|
5.75
|
%
|
Expected
long-term return on plan assets
|
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
Rate of
compensation increase
|
|
4.75
|
%
|
4.50
|
%
|
4.75
|
%
|
The expected long-term rate of return was estimated using market
benchmarks by which the plan assets would outperform the market value in the
future, based on historical experience adjusted for changes in asset allocation
and expectations for overall lower future returns on similar investments
compared to past periods.
Plan Assets
The Plans weighted-average asset allocations at December 31 by
asset category are as follows:
Asset Category
|
|
2007
|
|
2006
|
|
Cash
|
|
0.2
|
%
|
0.4
|
%
|
Fixed income
securities
|
|
39.6
|
%
|
39.2
|
%
|
Equity
|
|
60.2
|
%
|
60.4
|
%
|
Total
|
|
100.0
|
%
|
100.0
|
%
|
The investment objective for the Plan is to maximize total return with
tolerance for slightly above average risk, meaning the fund is able to tolerate
short-term volatility to achieve above-average returns over the long term.
Asset allocation favors equities, with target allocation of approximately
60% equity securities, 37.5% fixed income securities and 2.5% cash. Due to volatility in the market, the target
allocation is not
58
always desirable and asset allocations will fluctuate between the
acceptable ranges. The equity portfolios
exposure is primarily in mid and large capitalization domestic equities with
limited exposure to small capitalization and international stocks.
It is managements intent to give the investment managers flexibility,
within the overall guidelines, with respect to investment decisions and their
timing. However, certain investments
require specific review and approval by management. Management is also informed of anticipated,
significant modifications of any previously approved investment, or anticipated
use of derivatives to execute investment strategies.
The following benefit payments that reflect expected future service, as
appropriate, are expected to be paid:
(In Thousands)
Estimated future benefit payments(in thousands):
2008
|
|
|
$
|
256
|
|
2009
|
|
|
299
|
|
2010
|
|
|
320
|
|
2011
|
|
|
346
|
|
2012
|
|
|
519
|
|
2013-2017
|
|
|
3,043
|
|
|
|
|
|
|
|
$
|
4,783
|
|
The company expects to contribute $450,000 to its Pension Plan in 2008.
401(k) Savings
Plan
The Company also offers a 401(k) savings plan in which eligible
participating employees may elect to contribute up to a maximum percentage
allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The Company may make matching contributions
equal to a discretionary percentage that is determined by the Board of
Directors. Participants are at all times
fully vested in their contributions and vest over a period of five years
regarding the employer contribution.
Contribution expense was approximately $97,000, $96,000, and $80,000 for
the years ended December 31, 2007, 2006, and 2005, respectively.
Deferred
Compensation Plan
The Company has a deferred compensation plan whereby participating directors
elect to forego directors fees paid in cash.
Under this plan, the Company will make payments for a ten-year period
beginning at age 65 in most cases or at death, if earlier, at which time
payments would be made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the
Company has acquired bank-owned life insurance policies on the lives of the
participating directors for which insurance benefits are payable to the
Company. The Company incurred expenses
related to the plan of $84,750, $69,000, and $69,000 for the years ended December 31,
2007, 2006, and 2005, respectively.
Benefits paid under the plan were approximately $125,000, $122,000, and
$112,000 in 2007, 2006, and 2005 respectively.
59
NOTE 12 EMPLOYEE STOCK PURCHASE PLAN
Effective April 26, 2006 the Company implemented the Penns Woods
Bancorp, Inc. 2006 Employee Stock Purchase Plan (Plan). The Plan is intended to encourage employee
participation in the ownership and economic progress of the Company. The Plan allows for up to 1,000,000 shares to
be purchased by employees. The purchase
price of the shares is 95% of market value with an employee eligible to
purchase up to the lesser of 15% of base compensation or $12,000 in market
value annually. There were 3,090 and
1,355 shares issued under the plan for the years ended December 31, 2007
and 2006, respectively.
NOTE 13 - STOCK OPTIONS
Prior to 1998, the Company granted a select group of its officers options
to purchase shares of its common stock.
These options, which are immediately exercisable, expire within three to
ten years after having been granted.
Also, in 1998, the Company adopted the 1998 Stock Option Plan for key
employees and directors. Incentive stock
options and nonqualified stock options may be granted to eligible employees of
the Bank and nonqualified options may be granted to directors of the
Company.
Incentive nonqualified stock options granted under the 1998 Plan may be
exercised not later than ten years after the date of grant. Each option granted under the 1998 Plan shall
be exercisable only after the expiration of six months following the date of
grant of such options.
A summary of the status of the Companys common stock option plans are
presented below:
|
|
2007
|
|
2006
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
|
11,972
|
|
$
|
37.41
|
|
11,972
|
|
$
|
37.41
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(330
|
)
|
24.72
|
|
|
|
|
|
Forfeited
|
|
(729
|
)
|
40.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end
of year
|
|
10,913
|
|
37.60
|
|
11,972
|
|
37.41
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable
at
year-end
|
|
10,913
|
|
$
|
37.60
|
|
11,972
|
|
$
|
37.41
|
|
The following table summarizes information about nonqualified and
incentive stock options outstanding at December 31, 2007:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
|
Exercise
|
|
Exercise Price
|
|
Shares
|
|
Life
|
|
Price
|
|
Shares
|
|
Price
|
|
$
|
40.29
|
|
8,273
|
|
1
|
|
$
|
40.29
|
|
8,273
|
|
$
|
40.29
|
|
31.82
|
|
1,650
|
|
2
|
|
31.82
|
|
1,650
|
|
31.82
|
|
24.72
|
|
990
|
|
3
|
|
24.72
|
|
990
|
|
24.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
NOTE 14
- RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and
the Bank, including their immediate families and companies in which they are
principal owners (more than ten percent), are indebted to the Company. Such indebtedness was incurred in the
ordinary course of business on the same terms and at those rates prevailing at
the time for comparable transactions with others.
A summary of loan activity with executive officers, directors, principal
shareholders, and associates of such persons is listed below for the years
ended December 31:
|
|
Beginning
|
|
|
|
|
|
Ending
|
|
(In Thousands)
|
|
Balance
|
|
Additions
|
|
Payments
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
9,742
|
|
$
|
1,711
|
|
$
|
2,118
|
|
$
|
9,335
|
|
2006
|
|
9,635
|
|
2,001
|
|
1,894
|
|
9,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits from related parties held by the Company amounted to $7,796,000
at December 31, 2007 and $4,653,000 at December 31, 2006.
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The following schedule of future minimum rental payments
under operating leases with noncancellable terms in excess of one year as of December 31,
2007:
(In Thousands)
|
|
|
|
|
|
|
|
2008
|
|
$
|
396
|
|
2009
|
|
326
|
|
2010
|
|
288
|
|
2011
|
|
202
|
|
2012
|
|
180
|
|
Thereafter
|
|
1,427
|
|
Total
|
|
$
|
2,819
|
|
The
Companys operating lease obligations represent short and long-term lease and
rental payments for facilities. Total
rental expense for all operating leases for the years ended December 31,
2007, 2006, and 2005 were $423,000, $380,000, and $361,000 respectively.
The Company is subject to lawsuits and claims arising
out of its business. There are no such
legal proceedings or claims currently pending or threatened other than those
encountered during the normal course of business.
NOTE 16 - 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 Companys 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
61
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.
Financial instruments whose contract amounts represent credit risk are as
follows at December 31:
(In Thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Commitments to
extend credit
|
|
$
|
74,349
|
|
$
|
61,736
|
|
Standby letters
of credit
|
|
974
|
|
1,033
|
|
|
|
|
|
|
|
|
|
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 customers 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 managements 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.
NOTE 17 - CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum
amounts of capital. Specifically, each
is required to maintain certain minimum dollar amounts and ratios of Total and
Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total
assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act (FDICIA) established five capital categories
ranging from well capitalized to critically undercapitalized. Should any institution fail to meet the requirements
to be considered adequately capitalized, it would become subject to a series
of increasingly restrictive regulatory actions.
As of December 31, 2007 and 2006, the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be classified as a well capitalized
financial institution, Total risk-based, Tier 1 risk-based, and Tier 1 leverage
capital ratios must be at least 10%, 6%, and 5%, respectively.
The Companys and the Banks actual capital ratios are presented in the
following tables, which shows that both met all regulatory capital
requirements.
62
Consolidated Company
|
|
2007
|
|
2006
|
|
(In Thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
70,381
|
|
18.0
|
%
|
$
|
74,342
|
|
20.2
|
%
|
For Capital
Adequacy Purposes
|
|
31,280
|
|
8.0
|
|
29,299
|
|
8.0
|
|
To Be Well
Capitalized
|
|
39,100
|
|
10.0
|
|
36,623
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
66,251
|
|
16.9
|
%
|
$
|
68,931
|
|
18.8
|
%
|
For Capital
Adequacy Purposes
|
|
15,640
|
|
4.0
|
|
14,649
|
|
4.0
|
|
To Be Well
Capitalized
|
|
23,460
|
|
6.0
|
|
21,974
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
(to Average
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
66,251
|
|
10.8
|
%
|
$
|
68,931
|
|
11.8
|
%
|
For Capital
Adequacy Purposes
|
|
24,664
|
|
4.0
|
|
23,332
|
|
4.0
|
|
To Be Well
Capitalized
|
|
30,830
|
|
5.0
|
|
29,165
|
|
5.0
|
|
Bank
|
|
2007
|
|
2006
|
|
(In Thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
57,295
|
|
15.1
|
%
|
$
|
57,260
|
|
16.2
|
%
|
For Capital
Adequacy Purposes
|
|
30,350
|
|
8.0
|
|
28,243
|
|
8.0
|
|
To Be Well
Capitalized
|
|
37,938
|
|
10.0
|
|
35,304
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
53,165
|
|
14.0
|
%
|
$
|
52,860
|
|
15.0
|
%
|
For Capital
Adequacy Purposes
|
|
15,175
|
|
4.0
|
|
14,121
|
|
4.0
|
|
To Be Well
Capitalized
|
|
22,763
|
|
6.0
|
|
21,182
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
|
|
|
|
|
|
|
(to Average
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
53,165
|
|
8.8
|
%
|
$
|
52,860
|
|
9.3
|
%
|
For Capital
Adequacy Purposes
|
|
24,124
|
|
4.0
|
|
22,671
|
|
4.0
|
|
To Be Well
Capitalized
|
|
30,155
|
|
5.0
|
|
28,339
|
|
5.0
|
|
NOTE 18 REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds
for payment of dividends by all state-chartered banks to the additional paid in
capital of the Bank. Accordingly, at December 31,
2007, the balance in the additional paid in capital account totaling
$11,657,000 is unavailable for dividends.
The Bank is subject to regulatory restrictions, which limit its ability
to loan funds to Penns Woods Bancorp, Inc.
At
December 31, 2007, the regulatory lending limit amounted to
approximately $5,780,000.
63
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district
Federal Reserve Bank of $1,009,000 and $990,000 at December 31, 2007 and
2006. The required reserves are computed
by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand
and a balance maintained directly with the Federal Reserve Bank.
NOTE 19 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose estimated fair values for
its financial instruments. Fair value
estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Companys
entire holdings of a particular financial instrument. Also, it is the Companys general practice
and intention to hold most of its financial instruments to maturity and not to
engage in trading or sales activities.
Because no market exists for a significant portion of the Companys
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in
assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical
data and an estimation methodology suitable for each category of financial
instruments. The estimated fair value of
the Companys investment securities is described in Note 1. The Companys fair value estimates, methods,
and assumptions are set forth below for the Companys other financial
instruments.
As certain assets and liabilities, such as
deferred tax assets, premises and equipment, and many other operational
elements of the Company, are not considered financial instruments but have
value, this estimated fair value of financial instruments would not represent
the full market value of the Company.
The estimated fair values of the Companys financial instruments are as
follows at December 31:
|
|
2007
|
|
2006
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(In Thousands)
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
15,433
|
|
$
|
15,433
|
|
$
|
15,373
|
|
$
|
15,373
|
|
Investment
securitites:
|
|
|
|
|
|
|
|
|
|
Available for
sale
|
|
214,455
|
|
214,455
|
|
185,200
|
|
185,200
|
|
Held to maturity
|
|
277
|
|
279
|
|
283
|
|
286
|
|
Loans held for
sale
|
|
4,214
|
|
4,214
|
|
3,716
|
|
3,716
|
|
Loans, net
|
|
356,348
|
|
357,628
|
|
356,199
|
|
356,788
|
|
Bank-owned life
insurance
|
|
12,375
|
|
12,375
|
|
11,346
|
|
11,346
|
|
Accrued interest
receivable
|
|
3,343
|
|
3,343
|
|
2,939
|
|
2,939
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
314,351
|
|
$
|
314,501
|
|
$
|
322,031
|
|
$
|
320,906
|
|
Noninterest-bearing
deposits
|
|
74,671
|
|
74,671
|
|
73,160
|
|
73,160
|
|
Short-term
borrowings
|
|
55,315
|
|
55,315
|
|
34,697
|
|
34,697
|
|
Long-term
borrowings, FHLB
|
|
106,378
|
|
106,154
|
|
82,878
|
|
82,050
|
|
Accrued interest
payable
|
|
1,744
|
|
1,744
|
|
1,532
|
|
1,532
|
|
64
Cash and Cash Equivalents,
Loans Held for Sale, Accrued Interest
Receivable,
Short-term
Borrowings, and
Accrued Interest Payable:
The fair value is equal to the carrying value.
Investment Securities:
The
fair value of investment securities available for sale and held to maturity is
equal to the available quoted market price.
If no quoted market price is available, fair value is estimated using
the quoted market price for similar securities.
Regulatory stocks fair value is equal to the carrying value.
Loans:
Fair values are estimated for portfolios of loans
with similar financial characteristics.
Loans are segregated by type such as commercial, commercial real estate,
residential real estate, construction real estate, and other consumer. Each loan category is further segmented into
fixed and adjustable rate interest terms and by performing and nonperforming
categories.
The fair value of performing loans is calculated
by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of
maturity is based on the Companys historical experience with repayments for
each loan classification, modified, as required, by an estimate of the effect
of current economic and lending conditions.
Fair value for significant nonperforming loans is
based on recent external appraisals. If
appraisals are not available, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discounted rates are judgmentally determined using available market
information and specific borrower information.
Bank-Owned
Life Insurance:
The
fair value is equal to the Cash Surrender Value of the life insurance policies.
Deposits:
The fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, savings, NOW, and money
market accounts, is equal to the amount payable on demand as of December 31,
2007 and 2006. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows.
The fair value estimates above do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market, commonly
referred to as the core deposit intangible.
Long
Term Borrowings:
The
fair value of long term borrowings is based on the discounted value of
contractual cash flows.
Commitments to Extend
Credit, Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the
notional amount and the estimated fair value of off-balance sheet items at December 31,
2007 and 2006, respectively. The
contractual amounts of unfunded commitments and letters of credit are presented
in Note 16.
NOTE 20- PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp, Inc.
follows:
65
CONDENSED BALANCE SHEET, DECEMBER 31,
(In Thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
15
|
|
$
|
41
|
|
Investment in
subsidiaries:
|
|
|
|
|
|
Bank
|
|
56,971
|
|
57,790
|
|
Nonbank
|
|
13,473
|
|
16,595
|
|
Other assets
|
|
234
|
|
234
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
70,693
|
|
$
|
74,660
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Other
liabilities
|
|
$
|
134
|
|
$
|
66
|
|
Shareholders
equity
|
|
70,559
|
|
74,594
|
|
|
|
|
|
|
|
Total liability
and shareholders equity
|
|
$
|
70,693
|
|
$
|
74,660
|
|
CONDENSED
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
Dividends from
subsidiaries
|
|
$
|
8,039
|
|
$
|
9,890
|
|
$
|
7,311
|
|
Equity in
undistributed net income of subsidiaries
|
|
1,152
|
|
53
|
|
3,822
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
(314
|
)
|
(296
|
)
|
(232
|
)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,877
|
|
$
|
9,647
|
|
$
|
10,901
|
|
CONDENSED
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,877
|
|
$
|
9,647
|
|
$
|
10,901
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Equity in
undistributed net income of subsidiaries
|
|
(1,152
|
)
|
(53
|
)
|
(3,822
|
)
|
Other, net
|
|
67
|
|
(30
|
)
|
(70
|
)
|
Net cash
provided by operating activities
|
|
7,792
|
|
9,564
|
|
7,009
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Additional
investment in subsidiaries
|
|
|
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Dividends paid
|
|
(6,953
|
)
|
(6,802
|
)
|
(6,225
|
)
|
Issuance of
common stock
|
|
99
|
|
49
|
|
|
|
Proceeds from
exercise of stock options
|
|
8
|
|
|
|
105
|
|
Purchase of
treasury stock
|
|
(972
|
)
|
(2,929
|
)
|
(546
|
)
|
Net cash used
for financing activities
|
|
(7,818
|
)
|
(9,682
|
)
|
(6,666
|
)
|
|
|
|
|
|
|
|
|
NET DECREASE IN
CASH
|
|
(26
|
)
|
(118
|
)
|
(294
|
)
|
CASH, BEGINNING
OF YEAR
|
|
41
|
|
159
|
|
453
|
|
CASH, END OF
YEAR
|
|
$
|
15
|
|
$
|
41
|
|
$
|
159
|
|
66
NOTE 21
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In Thousands, Except Per Share Data)
|
|
For The Three Months Ended
|
|
2007
|
|
March 31,
|
|
June 30,
|
|
Sept. 30,
|
|
Dec. 31,
|
|
Interest income
|
|
$
|
8,679
|
|
$
|
8,793
|
|
$
|
8,977
|
|
$
|
9,500
|
|
Interest expense
|
|
3,939
|
|
3,999
|
|
4,112
|
|
4,397
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
4,740
|
|
4,794
|
|
4,865
|
|
5,103
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
|
40
|
|
10
|
|
10
|
|
90
|
|
Non-interest
income
|
|
1,648
|
|
1,893
|
|
2,006
|
|
1,985
|
|
Securities gains
(losses), net
|
|
326
|
|
293
|
|
|
|
(673
|
)
|
Non-interest
expenses
|
|
4,128
|
|
4,340
|
|
4,430
|
|
4,418
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income tax provision
|
|
2,546
|
|
2,630
|
|
2,431
|
|
1,907
|
|
Income tax
provision (benefit)
|
|
265
|
|
295
|
|
109
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,281
|
|
$
|
2,335
|
|
$
|
2,322
|
|
$
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share - basic
|
|
$
|
0.59
|
|
$
|
0.60
|
|
$
|
0.59
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share - diluted
|
|
$
|
0.59
|
|
$
|
0.60
|
|
$
|
0.59
|
|
$
|
0.50
|
|
(In Thousands, Except Per Share Data)
|
|
For The Three Months Ended
|
|
2006
|
|
March 31,
|
|
June 30,
|
|
Sept. 30,
|
|
Dec. 31,
|
|
Interest income
|
|
$
|
8,022
|
|
$
|
8,347
|
|
$
|
8,547
|
|
$
|
8,837
|
|
Interest expense
|
|
3,189
|
|
3,421
|
|
3,707
|
|
3,893
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
4,833
|
|
4,926
|
|
4,840
|
|
4,944
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
|
198
|
|
198
|
|
89
|
|
150
|
|
Non-interest
income
|
|
1,778
|
|
1,951
|
|
1,826
|
|
1,795
|
|
Securities
gains, net
|
|
559
|
|
265
|
|
561
|
|
294
|
|
Non-interest
expenses
|
|
3,951
|
|
4,078
|
|
4,114
|
|
4,186
|
|
Income before
income tax provision
|
|
3,021
|
|
2,866
|
|
3,024
|
|
2,697
|
|
Income tax
provision
|
|
566
|
|
432
|
|
560
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,455
|
|
$
|
2,434
|
|
$
|
2,464
|
|
$
|
2,294
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share - basic
|
|
$
|
0.62
|
|
$
|
0.62
|
|
$
|
0.62
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share - diluted
|
|
$
|
0.62
|
|
$
|
0.62
|
|
$
|
0.62
|
|
$
|
0.59
|
|
ITEM
9 CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM
9A CONTROLS AND PROCEDURES
The Company, under the
supervision and with the participation of the Companys management, including
the Companys President and Chief Executive Officer along with the Companys
Principal Accounting Officer (the Principal Financial Officer), has evaluated
the effectiveness as of December 31, 2007 of the design and operation of
the Companys disclosure controls and procedures
, as such
67
term
is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act). Based
upon that evaluation, the
Companys President and Chief Executive
Officer along with the Companys Principal Accounting Officer concluded
that the Companys disclosure controls and procedures were effective as of December 31,
2007.
There have been no material
changes in the Companys internal control over financial reporting during the
fourth quarter of 2007 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
Managements Report on Internal
Control Over Financial Reporting
Management of the Company is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. The Companys internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a significant deficiency (as
defined in Public Company Accounting Oversight Board Auditing Standard No. 2),
or a combination of significant deficiencies, that results in there being more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis by management or employees in the normal course
of performing their assigned functions.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of December 31, 2007.
Managements assessment did not identify any material weaknesses in the Companys
internal control over financial reporting.
In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Because there
were no material weaknesses discovered, management believes that, as of December 31,
2007, the Companys internal control over financial reporting was effective.
S.R. Snodgrass, A.C. an
independent registered public accounting firm, has audited the consolidated
financial statements included in this Annual Report on Form 10-K, as part of
the audit, has issued a report, included herein, on the effectiveness of the
Companys internal control over financial reporting as of December 31, 2007.
Date:
March 11, 2008
|
/s/
Ronald A. Walko
|
|
/s/
Brian L. Knepp
|
|
Chief
Executive Officer
|
Principal
Accounting Officer
|
|
|
(Principal
Financial Officer)
|
68
[
LETTERHEAD OF S.
R. SNODGRASS, A.C.
]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Shareholders
Penns
Woods Bancorp, Inc.
We
have audited the consolidated balance sheets of Penns Woods Bancorp, Inc.
and subsidiaries (the Company) as of December 31, 2007 and 2006,
and the related consolidated statements of income, changes in shareholders
equity, and cash flows for each of the three years in the period ended December 31,
2007. We also have audited Penns Woods
Bancorp, Inc.s internal control over financial reporting as of December 31,
2007, based on criteria established in
Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)
. Management is responsible for these
consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Report on Managements Assessment of Internal Control Over Financial
Reporting
. Our responsibility
is to express an opinion on these consolidated financial statements and an
opinion on the companys internal control over financial reporting based on our
audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the
consolidated financial statements include examining, on a text basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that
our audits provide a reasonable basis for our opinion.
A companys internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Penns
Woods Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles. Also in our opinion, Penns Woods Bancorp, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on the criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)
.
/s/
S. R. Snodgrass, A.C.
|
|
Wexford,
Pennsylvania
March 10, 2008
69
ITEM
9B OTHER INFORMATION
None.
PART III
ITEM 10
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information appearing
under the captions The Board of Directors and Committees, Election of
Directors, Section 16(a) Beneficial Ownership Reporting Compliance, Principal
Officers of the Corporation, Certain Transactions, and Audit Committee Financial
Expert in the Companys Proxy Statement dated March 25, 2008 (the Proxy
Statement) is incorporated herein by reference.
ITEM 11
EXECUTIVE COMPENSATION
Information appearing
under the captions Compensation of Directors, Compensation Committee
Interlocks and Insider Participation, Compensation Discussion and Analysis, Compensation
Committee and Benefits Committee Report, and Executive Compensation in the
Proxy Statement is incorporated herein by reference.
ITEM 12
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information appearing
under the caption Security Ownership of Certain Beneficial Owners and
Management in the Proxy Statement is
incorporated herein by reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
There have been no
material transactions between the Company and the Bank, nor any material
transactions proposed, with any Director or Executive Officer of the Company
and the Bank, or any associate of the foregoing persons. The Company and the Bank have had, and intend
to continue to have, banking and financial transactions in the ordinary course
of business with Directors and Officers of the Company and the Bank and their
associates on comparable terms and with similar interest rates as those
prevailing from time to time for other customers of the Company and the Bank.
Total loans outstanding
from the Bank at December 31, 2007 to the Companys and the Banks
Officers and Directors as a group and members of their immediate families and
companies in which they had an ownership interest of 10% or more was $9,335,000
or approximately 13.23% of the total equity capital of the Company. Loans to such persons were made in the
ordinary course of business, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectability or present other unfavorable features. See also the information appearing in Note 14
to the Consolidated Financial Statements included elsewhere in the Annual
Report.
In addition, the
information appearing under the caption Election of Directors in the Proxy Statement
is incorporated herein by reference.
70
ITEM 14
PRINCIPAL
ACCOUNTING FEES AND SERVICES
The information appearing
in the Proxy Statement under the captions, Audit Fees, Audit-Related Fees, Tax
Fees, All Other Fees, and Audit Committee Pre-Approval Policies and
Procedures is incorporated herein by reference.
PART IV
ITEM 15
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a)1.
|
Financial Statements
|
|
|
The following
consolidated financial statements and reports are set forth in Item 8:
|
|
|
Report of Independent
Auditors
|
|
|
Consolidated
Balance Sheet
|
|
|
Consolidated
Statement of Income
|
|
|
Consolidated
Statement of Changes in Shareholders Equity
|
|
|
|
|
|
Consolidated
Statement of Cash Flows
|
|
|
Notes
to the Consolidated Financial Statements
|
|
2.
|
Financial Statement
Schedules
|
|
|
Financial statement schedules are omitted because
the required information is either not applicable, not required or is shown
in the respective financial statements or in the notes thereto.
|
|
|
|
|
|
(b) Exhibits
|
(3)
(i)
|
|
Articles of
Incorporation of the Registrant, as presently in effect (incorporated by
reference to Exhibit 3(i) of the Registrants Annual Report on
Form 10-K for the year ended December 31, 2005).
|
(3)
(ii)
|
|
Bylaws of the
Registrant as presently in effect (incorporated by reference to
Exhibit 3(ii) of the Registrants Current Report on Form 8-K
filed on June 17, 2005).
|
(10) (i)
|
|
Employment Agreement,
dated August, 1991, between Jersey Shore State Bank and Ronald A. Walko
(incorporated by reference to Exhibit 10.3 of the Registrants
Registration Statement on form S-4, No. 333-65821).*
|
(10) (ii)
|
|
Employment Agreement,
dated May 31, 2005, between Jersey Shore State Bank and Thomas A.
Donofrio (incorporated by reference to Exhibit 10.1 of the Registrants
Form 8-K filed on June 3, 2005).*
|
(10) (iii)
|
|
Employee Severance
Benefit Plan, dated May 30, 1996, for Ronald A. Walko (incorporated by
reference to Exhibit 10.4 of the Registrants Registration Statement on form
S-4, No. 333-65821).*
|
(10) (iv)
|
|
Penns Woods
Bancorp, Inc. 1998 Stock Option Plan (incorporated by reference to
Exhibit 10.1 of the Registrants Registration Statement on form S-4,
No. 333-65821).*
|
(10) (v)
|
|
Form of First
Amendment to the Jersey Shore State Bank Amendment and Restatement of the
Director Fee Agreement, dated as of October 1, 2004 (incorporated by
reference to Exhibit 10.7 of the Registrants Current Report on
Form 8-K filed on June 29, 2006).
|
(10) (vi)
|
|
Consulting Agreement,
dated July 18, 2005 between Hubert A. Valencik and Penns Woods
Bancorp, Inc. (incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K filed on July 18, 2005).
|
(10) (vii)
|
|
Employment Agreement,
dated January 11, 1999, among Penns Woods Bancorp, Inc. , Jersey
Shore State Bank and William H. Rockey.*
|
(21)
|
|
Subsidiaries of the
Registrant.
|
(23)
|
|
Consent of Independent
Certified Public Accountants.
|
(31) (i)
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification
of Chief Executive Officer.
|
(31) (ii)
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification
of Principle Accounting Officer.
|
(32) (i)
|
|
Section 1350
Certification of Chief Executive Officer.
|
71
(32) (ii)
|
|
Section 1350
Certification of Principle Accounting Officer.
|
*
Denotes compensatory plan or arrangement.
EXHIBIT
INDEX
(10) (vii)
|
|
Employment Agreement,
dated January 11, 1999, among Penns Woods Bancorp, Inc. , Jersey
Shore State Bank and William H. Rockey.
|
(21)
|
|
Subsidiaries of the
Registrant.
|
(23)
|
|
Consent of Independent
Certified Public Accountants.
|
(31) (i)
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification
of Chief Executive Officer.
|
(31) (ii)
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification
of Principle Accounting Officer.
|
(32) (i)
|
|
Section 1350
Certification of Chief Executive Officer.
|
(32) (ii)
|
|
Section 1350
Certification of Principle Accounting Officer.
|
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 11, 2008
|
PENNS WOODS BANCORP,
INC.
|
|
|
|
BY:
|
/s/ Ronald A. Walko
|
|
|
President and Chief
Executive Officer
|
Pursuant to the
requirements of the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
/s/ Ronald A. Walko
|
|
|
Ronald A. Walko,
President, Chief Executive
|
|
March 11,
2008
|
Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
/s/ Brian L. Knepp
|
|
|
Brian L. Knepp,
Principal Accounting Officer
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ Lynn S. Bowes
|
|
|
Lynn S. Bowes, Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ Michael J.
Casale, Jr.
|
|
|
Michael J.
Casale, Jr., Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ H. Thomas
Davis, Jr.
|
|
|
H. Thomas
Davis, Jr., Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ James M.
Furey, II
|
|
|
James M. Furey II,
Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ D. Michael
Hawbaker
|
|
|
D. Michael Hawbaker,
Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ Leroy H. Keiler III
|
|
|
Leroy H. Keiler III,
Director
|
|
March 11,
2008
|
73
/s/ Jay H. McCormick
|
|
|
Jay H. McCormick,
Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ R. Edward
Nestlerode, Jr.
|
|
|
R. Edward
Nestlerode, Jr., Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ James E. Plummer
|
|
|
James E. Plummer,
Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ William H. Rockey
|
|
|
William H.
Rockey, Sr. Vice President & Director
|
|
March 11,
2008
|
|
|
|
|
|
|
/s/ Hubert A. Valencik
|
|
|
Hubert A. Valencik,
Director
|
|
March 11,
2008
|
74
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