Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
x
|
Quarterly Report pursuant to
Section 13 or 15 (d) of the Securities Exchange Act of 1934
|
|
|
|
for the Quarterly Period Ended
September 30, 2008.
|
|
|
o
|
Transition report pursuant to
Section 13 or 15 (d) of the Exchange Act
|
|
|
|
for the Transition Period from
to .
|
No. 0-17077
(Commission
File Number)
PENNS WOODS BANCORP, INC.
(Exact name of
Registrant as specified in its charter)
PENNSYLVANIA
|
|
23-2226454
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification
No.)
|
|
|
|
300 Market
Street, P.O. Box 967 Williamsport, Pennsylvania
|
|
17703-0967
|
(Address of
principal executive offices)
|
|
(Zip Code)
|
(570)
322-1111
Registrants
telephone number, including area code
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES
x
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. (Check one):
|
|
Large
accelerated filer
¨
|
|
Accelerated
filer
x
|
|
|
Non-accelerated
filer
¨
|
|
Small
reporting company
¨
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES
o
NO
x
On October 27, 2008
there were 3,850,518 shares of the Registrants common stock outstanding.
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNS WOODS
BANCORP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
|
|
September 30,
|
|
December 31,
|
|
(In Thousands, Except Share Data)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Noninterest-bearing
balances
|
|
$
|
12,538
|
|
$
|
15,417
|
|
Interest-bearing
deposits in other financial institutions
|
|
16
|
|
16
|
|
Total cash and
cash equivalents
|
|
12,554
|
|
15,433
|
|
|
|
|
|
|
|
Investment
securities, available for sale, at fair value
|
|
201,220
|
|
214,455
|
|
Investment
securities held to maturity (fair value of $136 and $279)
|
|
135
|
|
277
|
|
Loans held for
sale
|
|
4,987
|
|
4,214
|
|
Loans
|
|
371,547
|
|
360,478
|
|
Less: Allowance
for loan losses
|
|
4,268
|
|
4,130
|
|
Loans, net
|
|
367,279
|
|
356,348
|
|
Premises and
equipment, net
|
|
7,835
|
|
6,774
|
|
Accrued interest
receivable
|
|
3,451
|
|
3,343
|
|
Bank-owned life
insurance
|
|
13,457
|
|
12,375
|
|
Investment in
limited partnerships
|
|
4,905
|
|
5,439
|
|
Goodwill
|
|
3,032
|
|
3,032
|
|
Other assets
|
|
13,389
|
|
6,448
|
|
TOTAL ASSETS
|
|
$
|
632,244
|
|
$
|
628,138
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
356,985
|
|
$
|
314,351
|
|
Noninterest-bearing
deposits
|
|
73,586
|
|
74,671
|
|
Total deposits
|
|
430,571
|
|
389,022
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
48,429
|
|
55,315
|
|
Long-term
borrowings, Federal Home Loan Bank (FHLB)
|
|
86,778
|
|
106,378
|
|
Accrued interest
payable
|
|
1,371
|
|
1,744
|
|
Other
liabilities
|
|
5,534
|
|
5,120
|
|
TOTAL
LIABILITIES
|
|
572,683
|
|
557,579
|
|
|
|
|
|
|
|
SHAREHOLDERS
EQUITY
|
|
|
|
|
|
Common stock,
par value $8.33, 10,000,000 shares authorized; 4,009,546 and 4,006,934 shares
issued
|
|
33,413
|
|
33,391
|
|
Additional paid-in
capital
|
|
17,944
|
|
17,888
|
|
Retained
earnings
|
|
27,680
|
|
27,707
|
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
Net unrealized
loss on available for sale securities
|
|
(12,347
|
)
|
(2,159
|
)
|
Defined benefit
plan
|
|
(1,375
|
)
|
(1,375
|
)
|
Less: Treasury
stock at cost, 159,028 and 131,302 shares
|
|
(5,754
|
)
|
(4,893
|
)
|
TOTAL
SHAREHOLDERS EQUITY
|
|
59,561
|
|
70,559
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
632,244
|
|
$
|
628,138
|
|
See accompanying
notes to the unaudited consolidated financial statements.
3
Table of Contents
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In Thousands, Except Per Share Data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST AND
DIVIDEND INCOME
|
|
|
|
|
|
|
|
|
|
Loans including
fees
|
|
$
|
6,311
|
|
$
|
6,621
|
|
$
|
18,936
|
|
$
|
19,560
|
|
Investment
Securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,391
|
|
964
|
|
3,857
|
|
2,711
|
|
Tax-exempt
|
|
1,205
|
|
1,108
|
|
3,641
|
|
3,271
|
|
Dividend and
other interest income
|
|
201
|
|
284
|
|
658
|
|
907
|
|
TOTAL INTEREST
AND DIVIDEND INCOME
|
|
9,108
|
|
8,977
|
|
27,092
|
|
26,449
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2,410
|
|
2,835
|
|
7,502
|
|
8,215
|
|
Short-term
borrowings
|
|
310
|
|
368
|
|
996
|
|
1,100
|
|
Long-term
borrowings, FHLB
|
|
875
|
|
909
|
|
3,044
|
|
2,735
|
|
TOTAL INTEREST
EXPENSE
|
|
3,595
|
|
4,112
|
|
11,542
|
|
12,050
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME
|
|
5,513
|
|
4,865
|
|
15,550
|
|
14,399
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR
LOAN LOSSES
|
|
110
|
|
10
|
|
230
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST
INCOME AFTER PROVISION FOR LOAN LOSSES
|
|
5,403
|
|
4,855
|
|
15,320
|
|
14,339
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
594
|
|
546
|
|
1,704
|
|
1,654
|
|
Securities
(losses) gains, net
|
|
(1,504
|
)
|
|
|
(1,717
|
)
|
619
|
|
Bank-owned life
insurance
|
|
121
|
|
109
|
|
367
|
|
310
|
|
Gain on sale of
loans
|
|
314
|
|
282
|
|
678
|
|
654
|
|
Insurance
commissions
|
|
416
|
|
625
|
|
1,482
|
|
1,613
|
|
Other
|
|
531
|
|
444
|
|
1,493
|
|
1,316
|
|
TOTAL
NON-INTEREST INCOME
|
|
472
|
|
2,006
|
|
4,007
|
|
6,166
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
Salaries and
employee benefits
|
|
2,355
|
|
2,330
|
|
7,275
|
|
6,912
|
|
Occupancy, net
|
|
315
|
|
319
|
|
967
|
|
987
|
|
Furniture and
equipment
|
|
304
|
|
267
|
|
876
|
|
850
|
|
Pennsylvania
shares tax
|
|
105
|
|
160
|
|
315
|
|
482
|
|
Amortization of
investment in limited partnerships
|
|
178
|
|
220
|
|
534
|
|
503
|
|
Other
|
|
1,194
|
|
1,134
|
|
3,440
|
|
3,164
|
|
TOTAL
NON-INTEREST EXPENSE
|
|
4,451
|
|
4,430
|
|
13,407
|
|
12,898
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE
INCOME TAX (BENEFIT) PROVISION
|
|
1,424
|
|
2,431
|
|
5,920
|
|
7,607
|
|
INCOME TAX
(BENEFIT) PROVISION
|
|
(128
|
)
|
109
|
|
180
|
|
669
|
|
NET INCOME
|
|
$
|
1,552
|
|
$
|
2,322
|
|
$
|
5,740
|
|
$
|
6,938
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER
SHARE - BASIC
|
|
$
|
0.40
|
|
$
|
0.60
|
|
$
|
1.49
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER
SHARE - DILUTED
|
|
$
|
0.40
|
|
$
|
0.60
|
|
$
|
1.49
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
SHARES OUTSTANDING - BASIC
|
|
3,855,348
|
|
3,881,488
|
|
3,865,317
|
|
3,889,310
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
SHARES OUTSTANDING - DILUTED
|
|
3,855,458
|
|
3,881,676
|
|
3,865,463
|
|
3,889,573
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER
SHARE
|
|
$
|
0.46
|
|
$
|
0.45
|
|
$
|
1.38
|
|
$
|
1.33
|
|
See accompanying
notes to the unaudited consolidated financial statements.
4
Table of Contents
PENNS WOODS
BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS
EQUITY
(UNAUDITED)
|
|
COMMON
STOCK
|
|
ADDITIONAL
PAID-IN
|
|
RETAINED
|
|
ACCUMULATED
OTHER
COMPREHENSIVE
|
|
TREASURY
|
|
TOTAL
SHAREHOLDERS
|
|
(In Thousands, Except Per Share Data)
|
|
SHARES
|
|
AMOUNT
|
|
CAPITAL
|
|
EARNINGS
|
|
LOSS
|
|
STOCK
|
|
EQUITY
|
|
Balance,
December 31, 2007
|
|
4,006,934
|
|
$
|
33,391
|
|
$
|
17,888
|
|
$
|
27,707
|
|
$
|
(3,534
|
)
|
$
|
(4,893
|
)
|
$
|
70,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
5,740
|
|
|
|
|
|
5,740
|
|
Unrealized loss
on investments available for sale, net of reclassification adjustment, net of
income tax benefit of $5,248
|
|
|
|
|
|
|
|
|
|
(10,188
|
)
|
|
|
(10,188
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,448
|
)
|
Dividends
declared, ($1.38 per share)
|
|
|
|
|
|
|
|
(5,330
|
)
|
|
|
|
|
(5,330
|
)
|
Purchase of
treasury stock (27,726 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(861
|
)
|
(861
|
)
|
Cumulative effect
of change in accounting for postretirement benefits
|
|
|
|
|
|
|
|
(437
|
)
|
|
|
|
|
(437
|
)
|
Stock options
exercised
|
|
330
|
|
3
|
|
8
|
|
|
|
|
|
|
|
11
|
|
Common shares
issued for employee stock purchase plan
|
|
2,282
|
|
19
|
|
48
|
|
|
|
|
|
|
|
67
|
|
Balance,
September 30, 2008
|
|
4,009,546
|
|
$
|
33,413
|
|
$
|
17,944
|
|
$
|
27,680
|
|
$
|
(13,722
|
)
|
$
|
(5,754
|
)
|
$
|
59,561
|
|
|
|
COMMON
STOCK
|
|
ADDITIONAL
PAID-IN
|
|
RETAINED
|
|
ACCUMULATED
OTHER
COMPREHENSIVE
|
|
TREASURY
|
|
TOTAL
SHAREHOLDERS
|
|
(In Thousands, Except Per Share Data)
|
|
SHARES
|
|
AMOUNT
|
|
CAPITAL
|
|
EARNINGS
|
|
INCOME
(LOSS)
|
|
STOCK
|
|
EQUITY
|
|
Balance,
December 31, 2006
|
|
4,003,514
|
|
$
|
33,362
|
|
$
|
17,810
|
|
$
|
25,783
|
|
$
|
1,560
|
|
$
|
(3,921
|
)
|
$
|
74,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
6,938
|
|
|
|
|
|
6,938
|
|
Unrealized loss
on investments available for sale, net of reclassification adjustment, net of
income tax benefit of $2,061
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
(4,000
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,938
|
|
Dividends
declared, ($1.33 per share)
|
|
|
|
|
|
|
|
(5,169
|
)
|
|
|
|
|
(5,169
|
)
|
Purchase of
treasury stock (26,030 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(892
|
)
|
(892
|
)
|
Stock options
exercised
|
|
330
|
|
3
|
|
5
|
|
|
|
|
|
|
|
8
|
|
Common shares
issued for employee stock purchase plan
|
|
2,240
|
|
19
|
|
54
|
|
|
|
|
|
|
|
73
|
|
Balance,
September 30, 2007
|
|
4,006,084
|
|
$
|
33,384
|
|
$
|
17,869
|
|
$
|
27,552
|
|
$
|
(2,440
|
)
|
$
|
(4,813
|
)
|
$
|
71,552
|
|
PENNS WOODS
BANCORP, INC.
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In Thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,552
|
|
$
|
2,322
|
|
$
|
5,740
|
|
$
|
6,938
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
Change in net
unrealized (losses) gains on available for sale securities
|
|
(8,301
|
)
|
2,415
|
|
(17,153
|
)
|
(5,442
|
)
|
Less: Reclassification
adjustment for net (losses) gains included in net income
|
|
(1,504
|
)
|
|
|
(1,717
|
)
|
619
|
|
Other
comprehensive (loss) income before tax
|
|
(6,797
|
)
|
2,415
|
|
(15,436
|
)
|
(6,061
|
)
|
Income tax
(benefit) provision related to other comprehensive (loss) income
|
|
(2,311
|
)
|
821
|
|
(5,248
|
)
|
(2,061
|
)
|
Other
comprehensive (loss) gain, net of tax
|
|
(4,486
|
)
|
1,594
|
|
(10,188
|
)
|
(4,000
|
)
|
Comprehensive
(loss) income
|
|
$
|
(2,934
|
)
|
$
|
3,916
|
|
$
|
(4,448
|
)
|
$
|
2,938
|
|
See accompanying
notes to the unaudited consolidated financial statements.
5
Table of Contents
PENNS WOODS
BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended
September 30,
|
|
(In Thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
Net Income
|
|
$
|
5,740
|
|
$
|
6,938
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
490
|
|
523
|
|
Provision for
loan losses
|
|
230
|
|
60
|
|
Accretion and
amortization of investment security discounts and premiums
|
|
(982
|
)
|
(738
|
)
|
Securities
losses (gains), net
|
|
1,717
|
|
(619
|
)
|
Originations of
loans held for sale
|
|
(31,276
|
)
|
(33,903
|
)
|
Proceeds of
loans held for sale
|
|
31,181
|
|
31,770
|
|
Gain on sale of
loans
|
|
(678
|
)
|
(654
|
)
|
Increases in
bank-owned life insurance
|
|
(367
|
)
|
(310
|
)
|
Other, net
|
|
(1,445
|
)
|
303
|
|
Net cash
provided by operating activities
|
|
4,610
|
|
3,370
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
Investment
securities available for sale:
|
|
|
|
|
|
Proceeds from
sales
|
|
39,994
|
|
39,226
|
|
Proceeds from
calls and maturities
|
|
5,905
|
|
4,290
|
|
Purchases
|
|
(49,733
|
)
|
(67,067
|
)
|
Investment
securities held to maturity:
|
|
|
|
|
|
Proceeds from
calls and maturities
|
|
179
|
|
11
|
|
Net (increase)
decrease in loans
|
|
(11,458
|
)
|
2,516
|
|
Acquisition of
bank premises and equipment
|
|
(1,551
|
)
|
(627
|
)
|
Proceeds from
the sale of foreclosed assets
|
|
79
|
|
66
|
|
Purchase of
bank-owned life insurance
|
|
(715
|
)
|
(619
|
)
|
Proceeds from
redemption of regulatory stock
|
|
3,663
|
|
3,045
|
|
Purchases of
regulatory stock
|
|
(2,802
|
)
|
(3,620
|
)
|
Net cash used
for investing activities
|
|
(16,439
|
)
|
(22,779
|
)
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
Net increase in
interest-bearing deposits
|
|
42,634
|
|
9,833
|
|
Net decrease in
noninterest-bearing deposits
|
|
(1,085
|
)
|
(170
|
)
|
Proceeds of
long-term borrowings, FHLB
|
|
10,000
|
|
20,000
|
|
Repayment of
long-term borrowings, FHLB
|
|
(29,600
|
)
|
(16,500
|
)
|
Net (decrease)
increase in short-term borrowings
|
|
(6,886
|
)
|
10,096
|
|
Dividends paid
|
|
(5,330
|
)
|
(5,169
|
)
|
Issuance of
common stock
|
|
67
|
|
73
|
|
Stock options
exercised
|
|
11
|
|
8
|
|
Purchase of
treasury stock
|
|
(861
|
)
|
(892
|
)
|
Net cash
provided by financing activities
|
|
8,950
|
|
17,279
|
|
NET DECREASE IN
CASH AND CASH EQUIVALENTS
|
|
(2,879
|
)
|
(2,130
|
)
|
CASH AND CASH
EQUIVALENTS, BEGINNING
|
|
15,433
|
|
15,373
|
|
CASH AND CASH
EQUIVALENTS, ENDING
|
|
$
|
12,554
|
|
$
|
13,243
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
11,915
|
|
$
|
11,744
|
|
Income taxes
paid
|
|
1,425
|
|
1,185
|
|
See accompanying
notes to the unaudited consolidated financial statements.
6
Table
of Contents
PENNS WOODS BANCORP, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements
include the accounts of Penns Woods Bancorp, Inc. (the Company) and its
wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real
Estate Development Company, Inc., and Jersey Shore State Bank (the Bank)
and its wholly-owned subsidiary, The M Group, Inc. D/B/A The Comprehensive
Financial Group (The M Group). All
significant inter-company balances and transactions have been eliminated in the
consolidation.
The interim financial
statements are unaudited but, in the opinion of management, reflect all
adjustments necessary for the fair presentation of results for such
periods. The results of operations for
any interim period are not necessarily indicative of results for the full year. These financial statements should be read in
conjunction with financial statements and notes thereto contained in the
Companys Annual Report on Form 10-K for the year ended December 31,
2007.
The
accounting policies followed in the presentation of interim financial results
are the same as those followed on an annual basis. These policies are
presented on pages 41 through 47 of the Annual Report on Form 10-K
for the year ended December 31, 2007.
In reference to the
attached financial statements, all adjustments are of a normal recurring nature
pursuant to Rule 10-01(b) (8) of Regulation S-X.
Note 2. Recent
Accounting Pronouncements
In December 2007,
the 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. In February 2008, the FASB issued Staff
Position No. 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease
7
Table
of Contents
Classification or
Measurement
under Statement 13, which removed leasing transactions accounted for under FAS No. 13
and related guidance from the scope of FAS No. 157
.
Also in February 2008, the FASB issued
Staff Position No.157-2, Partial Deferral of the Effective Date of Statement
157, which deferred the effective date of FAS No. 157 for all nonfinancial
assets and nonfinancial liabilities to fiscal years beginning after November 15,
2008. On January 1, 2008, the
Company adopted FAS No. 157 which did not have a material effect on the
Companys results of operations or financial position, see Note 8.
In
September 2006, the FASB issued FAS No. 158, Employers Accounting
for Defined Benefit Pension and Other Post Retirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R). This Statement requires that
employers measure plan assets and obligations as of the balance sheet
date. This requirement is effective for
fiscal years ending after December 15, 2008. The other provisions of the Statement were
effective as of the end of the fiscal year ending after December 15, 2006,
for public companies. The complete
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. On January 31,
2008, the Company adopted FAS No. 159 which did not 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
8
Table of Contents
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. On January 1, 2008, the Company adopted
EITF 06-04 which resulted 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. On January 1,
2008, the Company adopted EITF 06-10 which did 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.
On January 1, 2008, the Company adopted EITF 06-11 which did not
have a material effect on the Companys results of operations or financial
position.
In March 2008, the FASB
issued FAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, to require enhanced disclosures about derivative instruments and
hedging activities. The new standard has revised financial reporting for
derivative instruments and hedging activities by requiring more transparency
about how and why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities; and how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. FAS No. 161 requires disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also requires entities to provide more information about their
liquidity by requiring disclosure of derivative features that are credit
risk-related. Further, it requires cross-referencing within footnotes to enable
financial statement users to locate important information about derivative
instruments.
FAS No. 161 is effective for
9
Table of Contents
financial statements issued
for fiscal years and interim periods beginning after November 15, 2008,
with early application encourage. The
adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.
In May 2008, the FASB issued FAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles. FAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (the GAAP hierarchy). FAS No. 162 will
become effective 60 days following the SECs approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company does not expect the adoption of FAS No. 162 to
have a material effect on its results of operations and financial position.
In April 2008, the FASB issued FASB Staff
Position No. 142-3, Determination of the Useful Life of Intangible Assets
(FSP 142-3). FSP 142-3 amends the factors that should be considered in
developing assumptions about renewal or extension used in estimating the useful
life of a recognized intangible asset under FAS No. 142, Goodwill and
Other Intangible Assets. This standard is intended to improve the consistency
between the useful life of a recognized intangible asset under FAS No. 142
and the period of expected cash flows used to measure the fair value of the
asset under FAS No. 141R and other
GAAP. FSP 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The measurement provisions of this
standard will apply only to intangible assets of the Company acquired after the
effective date.
In June 2008, the FASB
issued FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, to clarify that instruments granted in share-based payment
transactions can be participating securities prior to the requisite service
having been rendered. A basic principle
of the FSP is that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and are to be included in the computation
of EPS pursuant to the two-class method.
The provisions of this FSP are effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those years. All prior-period EPS data presented (including
interim financial statements, summaries of earnings, and selected financial
data) are required to be adjusted retrospectively to conform with the
provisions of the FSP. The adoption of this FSP is not expected to
have a material effect on the Companys results of operations or financial
position.
In October 2008, the
FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active.
This FSP clarifies the application of FAS Statement No. 157, Fair
Value Measurements, in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. This FSP shall be effective upon issuance,
including prior periods for which financial statements have not been issued.
Revisions resulting from a change in the valuation technique or its application
shall be accounted for as a change in accounting estimate (FAS Statement No. 154,
Accounting Changes and Error Corrections). The disclosure provisions of
Statement 154 for a change in accounting estimate are not required for
revisions resulting from a change in valuation technique or its
application. The adoption of this
10
Table of Contents
FSP is not expected to have
a material effect on the Companys results of operations or financial position.
Note 3. Per Share Data
The following table sets forth the composition of the
weighted average common shares (denominator) used in the basic and dilutive per
share computation. There are no
convertible securities which would affect the numerator in calculating basic
and diluted earnings per share; therefore, net income as presented on the
consolidated statement of income will be used as the numerator.
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
4,009,070
|
|
4,005,583
|
|
4,008,094
|
|
4,004,778
|
|
|
|
|
|
|
|
|
|
|
|
Average treasury
stock shares
|
|
(153,722
|
)
|
(124,095
|
)
|
(142,777
|
)
|
(115,468
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares and common stock equivalents used to calculate basic earnings
per share
|
|
3,855,348
|
|
3,881,488
|
|
3,865,317
|
|
3,889,310
|
|
|
|
|
|
|
|
|
|
|
|
Additional
common stock equivalents (stock options) used to calculate diluted earnings
per share
|
|
110
|
|
188
|
|
146
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares and common stock equivalents used to calculate diluted earnings
per share
|
|
3,855,458
|
|
3,881,676
|
|
3,865,463
|
|
3,889,573
|
|
Options to purchase 8,273 and 9,593 shares of common
stock were outstanding during the three and nine months ended September 30,
2008 but were not included in the computation of diluted earnings per share as
they were anti-dilutive due to the strike prices range of $31.82 to $40.29
being greater than the market price of $29.00 at September 30, 2008. Options to purchase 8,276 and 9,002 shares of
common stock were outstanding during the three and nine months ended September 30,
2007 but were not included in the computation of diluted earnings per share as
they were anti-dilutive due to the strike price of $40.29 being greater than
the market price of $31.99 at September 30, 2007.
Note 4.
Net
Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Companys pension and
employee benefits plans, please refer to Note 11 of the Companys Consolidated
Financial Statements included in the Annual Report on Form 10-K for the
year ended December 31, 2007.
The following sets forth the components of the net
periodic benefit cost of the domestic non-contributory defined benefit plan for
the three and nine months ended September 30, 2008 and 2007, respectively:
11
Table of Contents
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(In Thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
137
|
|
$
|
117
|
|
$
|
410
|
|
$
|
350
|
|
Interest cost
|
|
152
|
|
121
|
|
456
|
|
364
|
|
Expected return
on plan assets
|
|
(161
|
)
|
(140
|
)
|
(481
|
)
|
(421
|
)
|
Amortization of
transition obligation
|
|
(1
|
)
|
(1
|
)
|
(2
|
)
|
(2
|
)
|
Amortization of
prior service cost
|
|
6
|
|
6
|
|
19
|
|
19
|
|
Amortization of
net loss
|
|
14
|
|
|
|
42
|
|
|
|
Net periodic
cost
|
|
$
|
147
|
|
$
|
103
|
|
$
|
444
|
|
$
|
310
|
|
Employer
Contributions
The Company previously disclosed in its consolidated
financial statements, included in the Annual Report on Form 10-K for the
year ended December 31, 2007, that it expected to contribute $450,000 to
its defined benefit plan in 2008. As of September 30, 2008, a
contribution in the amount of $500,000 was made for the 2007 plan year with no
additional contributions anticipated during 2008.
Note
5. 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 are primarily comprised of 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 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.
Outstanding financial instruments with off
balance sheet risk are as follows:
(In Thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Commitments to
extend credit
|
|
$
|
93,999
|
|
$
|
74,349
|
|
Standby letters
of credit
|
|
961
|
|
974
|
|
|
|
|
|
|
|
|
|
12
Note 6. Reclassification of Comparative Amounts
Certain comparative
amounts for the prior period have been reclassified to conform to current
period presentations. Such reclassifications had no effect on net income or
shareholders equity.
Note 7. Employee Stock Purchase
Plan
The
Company issues shares under the Penns Woods Bancorp, Inc. 2006 Employee
Stock Purchase Plan (Plan) which 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. During the nine months
ended September 30, 2008 and 2007, there were 2,282 and 2,240 shares
issued under the plan, respectively.
Note 8. Fair Value Measurements
Effective
January 1, 2008, the Company adopted FAS 157, which, among other things,
requires enhanced disclosures about assets and liabilities carried at fair
value. FAS 157 establishes a hierarchal disclosure framework associated with
the level of pricing observability utilized in measuring assets and liabilities
at fair value. The three broad levels defined by FAS 157 hierarchy are as
follows:
Level I:
|
|
Quoted prices are available in active markets for
identical assets or liabilities as of the reported date.
|
|
|
|
Level II:
|
|
Pricing inputs are other than quoted prices in
active markets, which are either directly or indirectly observable as of the
reported date. The nature of these assets and liabilities include items for
which quoted prices are available but traded less frequently, and items that
are fair valued using other financial instruments, the parameters of which
can be directly observed.
|
|
|
|
Level III:
|
|
Assets and liabilities that have little to no
pricing observability as of the reported date. These items do not have
two-way markets and are measured using managements best estimate of fair
value, where the inputs into the determination of fair value require
significant management judgment or estimation.
|
The
following table presents the assets and liabilities reported on the
consolidated statements of financial condition at their fair value as of September 30,
2008 by level within the fair value hierarchy. As required by FAS 157,
financial assets and liabilities are classified in their entirety based on the
lowest level of input that is significant to the fair value measurement.
13
|
|
September 30, 2008
|
|
(In Thousands)
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Investment
Securities, available-for-sale
|
|
$
|
|
|
$
|
201,220
|
|
$
|
|
|
$
|
201,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAUTIONARY
STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Report contains
certain forward-looking statements including statements concerning plans,
objectives, future events or performance and assumptions and other statements
which are other than statements of historical fact. The Company wishes to caution readers that
the following important factors, among others, may have affected and could in
the future affect the Companys actual results and could cause the Companys
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by or on behalf of the Company
herein: (i) the effect of changes
in laws and regulations, including federal and state banking laws and
regulations, with which the Company must comply, and the associated costs of
compliance with such laws and regulations either currently or in the future as
applicable; (ii) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as by the
Financial Accounting Standards Board, or of changes in the Companys
organization, compensation and benefit plans; (iii) the effect on the
Companys competitive position within its market area of the increasing consolidation within the banking
and financial services industries, including the increased competition from
larger regional and out-of-state banking organizations as well as non-bank
providers of various financial services; (iv) the effect of changes in
interest rates; and (v) the effect of changes in the business cycle and
downturns in the local, regional or national economies.
You
should not put undue reliance on any forward-looking statements. These statements speak only as of the date of
this Quarterly Report on Form 10-Q, even if subsequently made available by
the Company on its website or otherwise.
The Company undertakes no obligation to update or revise these
statements to reflect events or circumstances occurring after the date of this
Quarterly Report on Form 10-Q.
14
Table
of Contents
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operation
EARNINGS SUMMARY
Comparison
of the Three and Nine Months Ended September 30, 2008 and 2007
Summary
Results
Net
income for the three months ended September 30, 2008 was $1,552,000
compared to $2,322,000 for the same period of 2007 as after-tax securities
gains decreased $993,000 (from $0 to a loss of $993,000). Included within the change in after-tax
securities gains was an other than temporary impairment charge relating to
certain equity securities held in the investment portfolio of $1,222,000. Basic
and diluted earnings per share for the three months ended September 30,
2008 were $0.40 compared to $0.60 for the three months ended September 30,
2007. Return on average assets and
return on average equity were 0.98% and 9.43% for the three months ended September 30,
2008 compared to 1.57% and 13.21% for the corresponding period of 2007. Net income from core operations (operating
earnings) increased 9.6% to $2,545,000 for the three months ended September 30,
2008 compared to $2,322,000 for the same period of 2007. Operating earnings per share for the three
months ended September 30, 2008 increased 10.0% to $0.66 basic and
dilutive compared to $0.60 basic and dilutive for the three months ended September 30,
2007.
The nine months ended September 30,
2008 generated net income of $5,740,000 compared to $6,938,000 for the same
period of 2007 due to a decline in after-tax securities gains of $1,542,000
(from a gain of $409,000 to a loss of $1,133,000).
Included within the change in after-tax
securities gains was an other than temporary impairment charge relating to
certain equity securities held in the investment portfolio of $1,601,000. Earnings
per share, basic and dilutive, for the nine months ended September 30,
2008 were $1.49 as compared to $1.78 for the comparable period of 2007. Return on average assets and return on
average equity were 1.21% and 11.10% for the nine months ended September 30,
2008 compared to 1.57% and 12.63% for the corresponding period of 2007.
Operating earnings increased 5.3% to $6,873,000 for the nine months
ended September 30, 2008 compared to $6,529,000 for the comparable period
of 2007 resulting in basic and dilutive operating earnings per share of $1.78
and $1.68 for the nine month periods ended September 30, 2008 and 2007,
respectively.
(Management uses the
non-GAAP measure of net income from core operations in its analysis of the
Companys performance. This measure, as
used by the Company, adjusts net income by significant gains or losses that are
unusual in nature. Because certain of
these items and their impact on the Companys performance are difficult to
predict, management believes the presentation of financial measures excluding
the impact of such items provides useful supplemental information in evaluating
the operating results of the Companys core businesses. For purposes of this Quarterly Report on Form 10-Q,
net income from core operations means net income adjusted to exclude after-tax
net securities gains or losses. These
disclosures should not be viewed as a substitute for net income determined in
accordance with GAAP, nor are they
15
Table of Contents
necessarily comparable to
non-GAAP performance measures that may be presented by other companies.)
Interest
And Dividend Income
Interest
and dividend income for the three months ended September 30, 2008
increased $131,000 to $9,108,000 compared to $8,977,000 for the same period of
2007. The increase in interest income
was primarily the result of growth in average taxable investment securities of
$15,963,000 coupled with a 48 basis point (bp) increase in the related
securities yields for the three months ended September 30, 2008 over the
same period of 2007. This combination
resulted in a $345,000 increase in taxable investment securities interest
income. Over the same time frame, the average balance of tax-exempt investment
securities increased $8,048,000 with the portfolio yield remaining stable at
7.06% resulting in a $97,000 increase in tax-exempt interest income. On a taxable equivalent basis, the interest
income from the investment portfolio increased $492,000 due to the portfolio
composition and increase in taxable investment security balance and yield. The decrease in dividends received is the
result of a decrease in equity investments coupled with a general decline in
the dividends per share received from the equity holdings. Interest and fee income from the loan
portfolio decreased $310,000 as the rate reduction actions of the Federal Reserve
Boards Federal Open Market Committee (FOMC) served as the foundation for the
54 bp decline in loan portfolio yield.
During
the nine months ended September 30, 2008, interest and dividend income was
$27,092,000, an increase of $643,000 over the same period of 2007. The reasons for the 2.4% growth in interest
income for the nine month period are identical to those for the three month
period ending September 30, 2008 discussed above. The growth in average loans of $6,972,000
coupled with a 37 bp decrease in the loan portfolio yield due to the decreasing
prime rate resulted in a decrease of $624,000 in loan interest and fee
income. Average investment securities
and interest bearing deposit income increased $1,267,000 due to an increase in
average balance of $27,636,000 and a 12 bp increase in yield. The increase in yield was due to an increase
in yield on taxable and tax-exempt securities of 16 bp and 12 bp,
respectively. The increased yield was
primarily the result of approximately $30,000,000 in bonds that were added
during the last half of 2007 as part of a leverage strategy. The asset allocation between loans and the
investment portfolio composition resulted in taxable equivalent interest income
increasing $849,000 for the nine months ended September 30, 2008 compared
to the same period of 2007.
16
Table
of Contents
Interest
and dividend income composition for the three and nine months ended September 30,
2008 and 2007 was as follows:
|
|
For The Three Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Loans including
fees
|
|
$
|
6,311
|
|
69.3
|
%
|
$
|
6,621
|
|
73.8
|
%
|
$
|
(310
|
)
|
(4.7
|
)%
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,391
|
|
15.3
|
|
964
|
|
10.7
|
|
427
|
|
44.3
|
|
Tax-exempt
|
|
1,205
|
|
13.2
|
|
1,108
|
|
12.3
|
|
97
|
|
8.8
|
|
Dividend and
other interest income
|
|
201
|
|
2.2
|
|
284
|
|
3.2
|
|
(83
|
)
|
(29.2
|
)
|
Total interest
and dividend income
|
|
$
|
9,108
|
|
100.0
|
%
|
$
|
8,977
|
|
100.0
|
%
|
$
|
131
|
|
1.5
|
%
|
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Loans including
fees
|
|
$
|
18,936
|
|
69.9
|
%
|
$
|
19,560
|
|
74.0
|
%
|
$
|
(624
|
)
|
(3.2
|
)%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
3,857
|
|
14.2
|
|
2,711
|
|
10.2
|
|
1,146
|
|
42.3
|
|
Tax-exempt
|
|
3,641
|
|
13.5
|
|
3,271
|
|
12.4
|
|
370
|
|
11.3
|
|
Dividend and
other interest income
|
|
658
|
|
2.4
|
|
907
|
|
3.4
|
|
(249
|
)
|
(27.5
|
)
|
Total interest
and dividend income
|
|
$
|
27,092
|
|
100.0
|
%
|
$
|
26,449
|
|
100.0
|
%
|
$
|
643
|
|
2.4
|
%
|
Interest
Expense
Interest
expense for the three months ended September 30, 2008 decreased $517,000
to $3,595,000 compared to $4,112,000 for the same period of 2007. The decreased expense of $425,000 associated
with deposits is primarily the result of a reduction in rate paid of 106 bp on
time deposits. Factors that led to the
rate decreases include, but are not limited to, FOMC interest rate actions over
the past year, campaigns conducted to attract 8 to 12 month maturity CDs that
have resulted in an increased repricing frequency, and decreased average
utilization of $10,038,000 in brokered CDs.
Short-term borrowings interest expense decreased $58,000 as the increase
in average balance of $18,305,000 was countered by a decrease in the rate paid
of 206 bp due to the FOMC rate actions over the past year. Long-term borrowings interest expense
decreased $34,000 as the average balance of such borrowings increased
$1,270,000 for the three months ended September 30, 2008 compared to the
same period of 2007, while the average rate decreased 31 bp to 4.33% for the
2008 period. The change in average
balance and rate is reflective of $29,600,000 in long-term borrowing maturities
during the first half of 2008 at an average rate of 4.77% offset by the
acquisition of $10,000,000 in long-term borrowings at a rate of 3.18% during
the third quarter of 2008.
Interest
expense for the nine months ended September 30, 2008 decreased $508,000 to
$11,542,000 compared to $12,050,000 for the same period of 2007. Interest on deposits decreased $713,000 due
to the reasons noted in the three month analysis discussed in the proceeding paragraph. Borrowing costs increased primarily due to
the addition of borrowings during the latter portion of 2007 as part of a
program to increase net interest income through the purchase of fixed rate
investment securities.
17
Table of Contents
Interest
expense composition for the three and nine months ended September 30, 2008
and 2007 was as follows:
|
|
For The Three Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
2,410
|
|
67.0
|
%
|
$
|
2,835
|
|
68.9
|
%
|
$
|
(425
|
)
|
(15.0
|
)%
|
Short-term
borrowings
|
|
310
|
|
8.6
|
|
368
|
|
9.0
|
|
(58
|
)
|
(15.8
|
)
|
Long-term
borrowings, FHLB
|
|
875
|
|
24.4
|
|
909
|
|
22.1
|
|
(34
|
)
|
(3.7
|
)
|
Total interest
expense
|
|
$
|
3,595
|
|
100.0
|
%
|
$
|
4,112
|
|
100.0
|
%
|
$
|
(517
|
)
|
(12.6
|
)%
|
|
|
For The
Nine Months Ended
|
|
|
|
September 30,
2008
|
|
September 30,
2007
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
7,502
|
|
65.0
|
%
|
$
|
8,215
|
|
68.2
|
%
|
$
|
(713
|
)
|
(8.7
|
)%
|
Short-term
borrowings
|
|
996
|
|
8.6
|
|
1,100
|
|
9.1
|
|
(104
|
)
|
(9.5
|
)
|
Long-term
borrowings, FHLB
|
|
3,044
|
|
26.4
|
|
2,735
|
|
22.7
|
|
309
|
|
11.3
|
|
Total interest
expense
|
|
$
|
11,542
|
|
100.0
|
%
|
$
|
12,050
|
|
100.0
|
%
|
$
|
(508
|
)
|
(4.2
|
)%
|
Net Interest Margin
The
net interest margin (NIM) for the three months ended September 30, 2008
was 4.23% compared to 3.98% for the corresponding period of 2007. The increase in the NIM was driven by a 74 bp
decline in the rate paid on interest bearing liabilities that more than
compensated for a 29 bp decline in the yield on earning assets. The decrease in earning asset yield is due to
the impact on the loan portfolio of the FOMC rate decreases over the past year
offset in part by increases in yield and balance within the investment
portfolio. The growth in the investment
portfolio was driven by a strategic initiative in the third quarter of 2007 to
increase tax equivalent net interest income by purchasing fixed rate
instruments in anticipation of the decreasing rate environment that has
continued to date. The decrease in the
cost of interest bearing liabilities to 2.93% from 3.67% was driven primarily
by a reduction in the rate paid on time deposits of 106 bp. The reduction was the result of a shortening
of the time deposit portfolio initiated in the early stages of 2007 that has
resulted in an increasing repricing frequency during this period of decreasing
rates.
The
NIM for the nine months ended September 30, 2008 and 2007 were 4.04% and
3.96%, respectively. The impact of the
items mentioned in the three month discussion also applies to the nine month
period. A 65 bp decline in the rate paid
on time deposits served as the foundation for a 41 bp decline in rate paid on
deposits, while the FOMC actions steered the yield on earning assets and cost
of borrowings.
18
Table of Contents
Following
is a schedule of average balances and associated yields for the three and nine
month periods ended September 30, 2008 and 2007:
|
|
AVERAGE BALANCES AND INTEREST RATES
|
|
|
|
Three Months Ended
September 30, 2008
|
|
Three Months Ended
September 30, 2007
|
|
(In Thousands)
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
9,108
|
|
$
|
148
|
|
6.46
|
%
|
$
|
7,652
|
|
$
|
118
|
|
6.12
|
%
|
All other loans
|
|
364,926
|
|
6,213
|
|
6.77
|
%
|
354,032
|
|
6,543
|
|
7.33
|
%
|
Total loans
|
|
374,034
|
|
6,361
|
|
6.77
|
%
|
361,684
|
|
6,661
|
|
7.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
investment securities
|
|
107,751
|
|
1,592
|
|
5.91
|
%
|
91,788
|
|
1,247
|
|
5.43
|
%
|
Tax-exempt
investment securities
|
|
103,431
|
|
1,826
|
|
7.06
|
%
|
95,383
|
|
1,679
|
|
7.04
|
%
|
Total securities
|
|
211,182
|
|
3,418
|
|
6.47
|
%
|
187,171
|
|
2,926
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits
|
|
34
|
|
|
|
0.00
|
%
|
40
|
|
1
|
|
9.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
585,250
|
|
9,779
|
|
6.66
|
%
|
548,895
|
|
9,588
|
|
6.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
50,225
|
|
|
|
|
|
43,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
635,475
|
|
|
|
|
|
$
|
592,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
62,792
|
|
120
|
|
0.76
|
%
|
$
|
60,262
|
|
114
|
|
0.75
|
%
|
Super Now
deposits
|
|
52,970
|
|
175
|
|
1.31
|
%
|
46,531
|
|
153
|
|
1.30
|
%
|
Money market
deposits
|
|
34,915
|
|
208
|
|
2.37
|
%
|
23,183
|
|
131
|
|
2.24
|
%
|
Time deposits
|
|
205,346
|
|
1,907
|
|
3.69
|
%
|
203,690
|
|
2,437
|
|
4.75
|
%
|
Total deposits
|
|
356,023
|
|
2,410
|
|
2.69
|
%
|
333,666
|
|
2,835
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
51,215
|
|
310
|
|
2.38
|
%
|
32,910
|
|
368
|
|
4.44
|
%
|
Long-term
borrowings, FHLB
|
|
79,061
|
|
875
|
|
4.33
|
%
|
77,791
|
|
909
|
|
4.64
|
%
|
Total borrowings
|
|
130,276
|
|
1,185
|
|
3.57
|
%
|
110,701
|
|
1,277
|
|
4.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
486,299
|
|
3,595
|
|
2.93
|
%
|
444,367
|
|
4,112
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
75,863
|
|
|
|
|
|
70,689
|
|
|
|
|
|
Other
liabilities
|
|
7,467
|
|
|
|
|
|
7,249
|
|
|
|
|
|
Shareholders
equity
|
|
65,846
|
|
|
|
|
|
70,296
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
635,475
|
|
|
|
|
|
$
|
592,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
spread
|
|
|
|
|
|
3.73
|
%
|
|
|
|
|
3.28
|
%
|
Net interest
income/margin
|
|
|
|
$
|
6,184
|
|
4.23
|
%
|
|
|
$
|
5,476
|
|
3.98
|
%
|
1.
Information
on this table has been calculated using average daily balance sheets to obtain
average balances.
2.
Nonaccrual
loans have been included with loans for the purpose of analyzing net interest
earnings.
3.
Income
and rates on a fully taxable equivalent basis include an adjustment for the
difference between annual income from tax-exempt obligations and the taxable
equivalent of such income at the standard 34% tax rate.
19
Table of Contents
|
|
AVERAGE BALANCES AND INTEREST RATES
|
|
|
|
Nine Months Ended
September 30, 2008
|
|
Nine Months Ended
September 30, 2007
|
|
(In Thousands)
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
8,534
|
|
$
|
411
|
|
6.43
|
%
|
$
|
7,913
|
|
$
|
365
|
|
6.17
|
%
|
All other loans
|
|
359,570
|
|
18,665
|
|
6.93
|
%
|
353,219
|
|
19,320
|
|
7.31
|
%
|
Total loans
|
|
368,104
|
|
19,076
|
|
6.92
|
%
|
361,132
|
|
19,685
|
|
7.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
securities
|
|
104,604
|
|
4,514
|
|
5.75
|
%
|
85,930
|
|
3,600
|
|
5.59
|
%
|
Tax-exempt
securities
|
|
108,877
|
|
5,517
|
|
6.76
|
%
|
99,497
|
|
4,956
|
|
6.64
|
%
|
Total securities
|
|
213,481
|
|
10,031
|
|
6.27
|
%
|
185,427
|
|
8,556
|
|
6.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits
|
|
13
|
|
1
|
|
10.28
|
%
|
431
|
|
18
|
|
5.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
581,598
|
|
29,108
|
|
6.68
|
%
|
546,990
|
|
28,259
|
|
6.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
49,638
|
|
|
|
|
|
42,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
631,236
|
|
|
|
|
|
$
|
589,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
60,857
|
|
343
|
|
0.75
|
%
|
$
|
59,726
|
|
329
|
|
0.74
|
%
|
Super Now
deposits
|
|
51,228
|
|
513
|
|
1.34
|
%
|
46,309
|
|
455
|
|
1.31
|
%
|
Money market
deposits
|
|
28,372
|
|
481
|
|
2.26
|
%
|
24,362
|
|
414
|
|
2.27
|
%
|
Time deposits
|
|
201,950
|
|
6,165
|
|
4.08
|
%
|
198,401
|
|
7,017
|
|
4.73
|
%
|
Total Deposits
|
|
342,407
|
|
7,502
|
|
2.93
|
%
|
328,798
|
|
8,215
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
47,894
|
|
996
|
|
2.75
|
%
|
32,443
|
|
1,100
|
|
4.53
|
%
|
Other borrowings
|
|
90,088
|
|
3,044
|
|
4.44
|
%
|
78,818
|
|
2,735
|
|
4.64
|
%
|
Total borrowings
|
|
137,982
|
|
4,040
|
|
3.85
|
%
|
111,261
|
|
3,835
|
|
4.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
|
480,389
|
|
11,542
|
|
3.19
|
%
|
440,059
|
|
12,050
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
73,205
|
|
|
|
|
|
69,203
|
|
|
|
|
|
Other
liabilities
|
|
8,672
|
|
|
|
|
|
6,866
|
|
|
|
|
|
Shareholders
equity
|
|
68,970
|
|
|
|
|
|
73,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
631,236
|
|
|
|
|
|
$
|
589,380
|
|
|
|
|
|
Interest rate
spread
|
|
|
|
|
|
3.49
|
%
|
|
|
|
|
3.24
|
%
|
Net interest
income/margin
|
|
|
|
$
|
17,566
|
|
4.04
|
%
|
|
|
$
|
16,209
|
|
3.96
|
%
|
1.
Information
on this table has been calculated using average daily balance sheets to obtain
average balances.
2.
Nonaccrual
loans have been included with loans for the purpose of analyzing net interest
earnings.
3.
Income
and rates on a fully taxable equivalent basis include an adjustment for the
difference between annual income from tax-exempt obligations and the taxable
equivalent of such income at the standard 34% tax rate.
20
The following table presents the
adjustment to convert net interest income to net interest income on a fully
taxable equivalent basis for the three and nine month periods ended September 30,
2008 and 2007.
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
(In Thousands)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
$
|
9,108
|
|
$
|
8,977
|
|
$
|
27,092
|
|
$
|
26,449
|
|
Total interest
expense
|
|
3,595
|
|
4,112
|
|
11,542
|
|
12,050
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
5,513
|
|
4,865
|
|
15,550
|
|
14,399
|
|
Tax equivalent
adjustment
|
|
671
|
|
611
|
|
2,016
|
|
1,810
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income (fully taxable equivalent)
|
|
$
|
6,184
|
|
$
|
5,476
|
|
$
|
17,566
|
|
$
|
16,209
|
|
The following table sets forth the
respective impact that both volume and rate changes have had on net interest
income on a fully taxable equivalent basis for the three and nine month periods
ended September 30, 2008 and 2007:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008 vs 2007
Increase (Decrease)
Due to
|
|
2008 vs 2007
Increase (Decrease)
Due to
|
|
(In Thousands)
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
tax-exempt
|
|
$
|
23
|
|
$
|
7
|
|
$
|
30
|
|
$
|
30
|
|
$
|
16
|
|
$
|
46
|
|
Loans
|
|
220
|
|
(550
|
)
|
(330
|
)
|
347
|
|
(1,002
|
)
|
(655
|
)
|
Taxable
investment securities
|
|
229
|
|
116
|
|
345
|
|
803
|
|
111
|
|
914
|
|
Tax-exempt
investment securities
|
|
142
|
|
5
|
|
147
|
|
474
|
|
87
|
|
561
|
|
Interest bearing
deposits
|
|
|
|
(1
|
)
|
(1
|
)
|
(17
|
)
|
|
|
(17
|
)
|
Total
interest-earning assets
|
|
614
|
|
(423
|
)
|
191
|
|
1,637
|
|
(788
|
)
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
5
|
|
1
|
|
6
|
|
6
|
|
8
|
|
14
|
|
Super Now
deposits
|
|
21
|
|
1
|
|
22
|
|
50
|
|
8
|
|
58
|
|
Money market
deposits
|
|
69
|
|
8
|
|
77
|
|
68
|
|
(1
|
)
|
67
|
|
Time deposits
|
|
21
|
|
(551
|
)
|
(530
|
)
|
128
|
|
(980
|
)
|
(852
|
)
|
Short-term
borrowings
|
|
522
|
|
(580
|
)
|
(58
|
)
|
1,501
|
|
(1,605
|
)
|
(104
|
)
|
Long-term
borrowings, FHLB
|
|
10
|
|
(44
|
)
|
(34
|
)
|
437
|
|
(128
|
)
|
309
|
|
Total
interest-bearing liabilities
|
|
648
|
|
(1,165
|
)
|
(517
|
)
|
2,190
|
|
(2,698
|
)
|
(508
|
)
|
Change in net
interest income
|
|
$
|
(34
|
)
|
$
|
742
|
|
$
|
708
|
|
$
|
(553
|
)
|
$
|
1,910
|
|
$
|
1,357
|
|
Provision for Loan
Losses
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
21
Table of
Contents
performed
annually for the Bank. Management
remains committed to an aggressive program of problem loan identification and
resolution.
The allowance for loan
losses is determined 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 non-performing loans and its knowledge and
experience with specific lending segments.
Although management
believes it uses the best information available to make such determinations and
that the allowance for loan losses is adequate at September 30, 2008,
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, increased unemployment, and delays in receiving financial information
from borrowers could result in increased levels of nonperforming assets,
charge-offs, loan loss provisions, and reductions in 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.
While determining the
appropriate allowance level, management has attributed the allowance for loan
losses to various portfolio segments; however, the allowance is available for
the entire portfolio as needed.
The allowance for loan
losses increased from $4,130,000 at December 31, 2007 to $4,268,000 at September 30,
2008. At September 30, 2008 and December 31,
2007, the allowance for loan losses to total loans was 1.15%.
The provision for loan
losses totaled $110,000 and $230,000 for the three and nine months ended September 30,
2008, compared to $10,000 and $60,000 for the same periods in 2007. The amount of the increase in the provision
was the result of several continuing positive factors, including but not
limited to, an increase in gross loans of $11,069,000 since December 31,
2007, a ratio of annualized net charge offs to average loans of 0.03% for the
nine months ended September 30, 2008, a ratio of nonperforming loans to
total loans of 0.25%, and a ratio of the allowance for loan losses to
nonperforming loans of 453.56% at September 30, 2008.
Non-interest
Income
Total
non-interest income for the three months ended September 30, 2008 compared
to the same period in 2007 decreased $1,534,000 to $472,000 due to a $1,504,000
decrease in net securities gains and losses realized when comparing the three
month periods ended September 30, 2008 and 2007. Excluding net securities gains and losses,
non-interest income for the third quarter of 2008 would have decreased $30,000
as compared to the 2007 period. Deposit
service charges increased $48,000 as overdraft fee income compensated for
customers migrating to no service charge checking accounts that were introduced
as part of a customer acquisition and retention
22
Table
of Contents
program. Other income increased due to increased
revenue from electronic card (debit/credit) usage and title insurance.
Insurance
commissions for the three months ended September 30, 2008 decreased
$209,000 compared to the same period in 2007 due to a softening market and
shift in product mix. Management of The
M Group continues to pursue new and build upon current relationships. The sales call program continues to expand to
other financial institutions, which results in additional revenue for The M
Group. However, the addition of another
sales outlet for The M Group can take up to a year or more to be completed.
Total
non-interest income for the nine months ended September 30, 2008 compared
to the same period in 2007 decreased $2,159,000. Excluding net securities gains, non-interest
income would have increased $177,000 as compared to the 2007 period. The increase in non-interest income for the
nine month period is the result of the same items noted in the three month
discussion.
Non-interest
income composition for the three and nine months ended September 30, 2008
and 2007 was as follows:
|
|
For The Three Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service
charges
|
|
$
|
594
|
|
125.8
|
%
|
$
|
546
|
|
27.2
|
%
|
$
|
48
|
|
8.8
|
%
|
Securities
(losses) gains, net
|
|
(1,504
|
)
|
(318.6
|
)
|
|
|
|
|
(1,504
|
)
|
N/A
|
|
Bank owned life
insurance
|
|
121
|
|
25.6
|
|
109
|
|
5.4
|
|
12
|
|
11.0
|
|
Gain on sale of
loans
|
|
314
|
|
66.5
|
|
282
|
|
14.1
|
|
32
|
|
11.3
|
|
Insurance
commissions
|
|
416
|
|
88.1
|
|
625
|
|
31.2
|
|
(209
|
)
|
(33.4
|
)
|
Other
|
|
531
|
|
112.6
|
|
444
|
|
22.1
|
|
87
|
|
19.5
|
|
Total
non-interest income
|
|
$
|
472
|
|
100.0
|
%
|
$
|
2,006
|
|
100.0
|
%
|
$
|
(1,534
|
)
|
(76.5
|
)%
|
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service
charges
|
|
$
|
1,704
|
|
42.5
|
%
|
$
|
1,654
|
|
26.8
|
%
|
$
|
50
|
|
3.0
|
%
|
Securities
(losses) gains, net
|
|
(1,717
|
)
|
(42.9
|
)
|
619
|
|
10.0
|
|
(2,336
|
)
|
(377.4
|
)
|
Bank owned life
insurance
|
|
367
|
|
9.2
|
|
310
|
|
5.0
|
|
57
|
|
18.4
|
|
Gain on sale of
loans
|
|
678
|
|
16.9
|
|
654
|
|
10.6
|
|
24
|
|
3.7
|
|
Insurance
commissions
|
|
1,482
|
|
37.0
|
|
1,613
|
|
26.2
|
|
(131
|
)
|
(8.1
|
)
|
Other
|
|
1,493
|
|
37.3
|
|
1,316
|
|
21.4
|
|
177
|
|
13.4
|
|
Total
non-interest income
|
|
$
|
4,007
|
|
100.0
|
%
|
$
|
6,166
|
|
100.0
|
%
|
$
|
(2,159
|
)
|
(35.0
|
)%
|
Non-interest
Expense
Total
non-interest expense increased $21,000 for the three months ended September 30,
2008 compared to the same period of 2007.
The increase in salaries and employee benefits was attributable to
several items including standard cost of living wage adjustments for employees,
increased pension expense, and other benefit costs. Pennsylvania shares tax decreased $55,000 due
to the use of Pennsylvania Enterprise Zone tax credits from a low income
housing
23
Table of Contents
partnership
committed to during 2007. Other expenses
increased primarily due to normal anticipated inflationary adjustments to
ongoing business operating costs and the amortization related to the before
mentioned low income housing.
Total
non-interest expense increased $509,000 for the nine months ended September 30,
2008 compared to the same period of 2007.
As noted above in the three month discussion, normal increases in
general business expenses and the amortization of a low income housing partnership
impacted the level of non-interest expenses.
Non-interest
expense composition for the three and nine months ended September 30, 2008
and 2007 was as follows:
|
|
For The Three Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and
employee benefits
|
|
$
|
2,355
|
|
52.9
|
%
|
$
|
2,330
|
|
52.6
|
%
|
$
|
25
|
|
1.1
|
%
|
Occupancy, net
|
|
315
|
|
7.1
|
|
319
|
|
7.2
|
|
(4
|
)
|
(1.3
|
)
|
Furniture and
equipment
|
|
304
|
|
6.8
|
|
267
|
|
6.0
|
|
37
|
|
13.9
|
|
Pennsylvania
shares tax
|
|
105
|
|
2.4
|
|
160
|
|
3.6
|
|
(55
|
)
|
(34.4
|
)
|
Amortization of
investment in limited partnerships
|
|
178
|
|
4.0
|
|
220
|
|
5.0
|
|
(42
|
)
|
(19.1
|
)
|
Other
|
|
1,194
|
|
26.8
|
|
1,134
|
|
25.6
|
|
60
|
|
5.3
|
|
Total
non-interest expense
|
|
$
|
4,451
|
|
100.0
|
%
|
$
|
4,430
|
|
100.0
|
%
|
$
|
21
|
|
0.5
|
%
|
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and
employee benefits
|
|
$
|
7,275
|
|
54.3
|
%
|
$
|
6,912
|
|
53.6
|
%
|
$
|
363
|
|
5.3
|
%
|
Occupancy, net
|
|
967
|
|
7.2
|
|
987
|
|
7.7
|
|
(20
|
)
|
(2.0
|
)
|
Furniture and
equipment
|
|
876
|
|
6.5
|
|
850
|
|
6.6
|
|
26
|
|
3.1
|
|
Pennsylvania
shares tax
|
|
315
|
|
2.3
|
|
482
|
|
3.7
|
|
(167
|
)
|
(34.6
|
)
|
Amortization of
investment in limited partnerships
|
|
534
|
|
4.0
|
|
503
|
|
3.9
|
|
31
|
|
6.2
|
|
Other
|
|
3,440
|
|
25.7
|
|
3,164
|
|
24.5
|
|
276
|
|
8.7
|
|
Total
non-interest expense
|
|
$
|
13,407
|
|
100.0
|
%
|
$
|
12,898
|
|
100.0
|
%
|
$
|
509
|
|
3.9
|
%
|
Provision
for Income Taxes
Income
taxes decreased $237,000 and $489,000 for the three and nine month periods
ended September 30, 2008 compared to the same period of 2007. The effective tax rate for the three and nine
months ended September 30, 2008 was (9.0%) and 3.0% as compared to 4.5%
and 8.8% for the same periods of 2007.
The decline in the effective tax rate is primarily the result of net
securities losses of $1,504,000 and $1,717,000 for the three and nine months
ended September 30, 2008 compared to net gains of $619,000 for the nine
months ended September 30, 2007.
The current effective tax rate has resulted in a deferred tax asset due
to the low income housing tax credits.
Management has reviewed the deferred tax asset and has determined that
the asset will be utilized within the appropriate carry forward period and
therefore does not require a valuation allowance.
24
ASSET/LIABILITY
MANAGEMENT
Cash and Cash
Equivalents
Cash and cash equivalents
decreased $2,879,000 from $15,433,000 at December 31, 2007 to $12,554,000
at September 30, 2008 primarily as a result of the following activities
during the nine months ended September 30, 2008:
Loans Held for
Sale
Activity regarding loans
held for sale resulted in sale proceeds lagging loan originations, less
$678,000 in realized gains, by $773,000 for the nine months ended September 30,
2008.
Loans
Gross loans increased
$11,069,000 since December 31, 2007 due to the increase of residential
mortgages coupled with increased competition for commercial loans and a
softening of the market.
The allocation of the loan portfolio, by category,
as of September 30, 2008 and December 31, 2007 is presented below:
|
|
September 30,
|
|
December 31,
|
|
Change
|
|
(In Thousands)
|
|
2008
|
|
2007
|
|
Amount
|
|
%
|
|
Commercial,
financial and agricultural
|
|
$
|
35,365
|
|
$
|
35,739
|
|
$
|
(374
|
)
|
(1.0
|
)%
|
Real estate
mortgage:
|
|
|
|
|
|
|
|
|
|
Residential
|
|
174,009
|
|
163,268
|
|
10,741
|
|
6.6
|
|
Commercial
|
|
134,232
|
|
132,943
|
|
1,289
|
|
1.0
|
|
Construction
|
|
16,176
|
|
16,152
|
|
24
|
|
0.1
|
|
Installment
loans to individuals
|
|
12,759
|
|
13,317
|
|
(558
|
)
|
(4.2
|
)
|
Less: Net
deferred loan fees
|
|
994
|
|
941
|
|
53
|
|
5.6
|
|
Gross loans
|
|
$
|
371,547
|
|
$
|
360,478
|
|
$
|
11,069
|
|
3.1
|
%
|
The recorded investment in loans for which impairment has been
recognized in accordance with Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan
,
amounted to $4,438,000 at September 30, 2008, compared to $1,477,000 at December 31,
2007. The valuation allowance related to
impaired loans amounted to $97,000 at September 30, 2008 and $102,000 at December 31,
2007. The increase in impaired loans and
valuation allowance is from a few commercial relationships.
A loan is considered impaired, based on current information and events,
if it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. The measurement of impaired loans is generally based on
the present value of expected future cash flows discounted at the historical
25
Table of
Contents
effective interest rate, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral.
Investments
The
estimated fair value of the investment securities portfolio in total at September 30,
2008 has decreased $13,378,000 since December 31, 2007, while the
amortized cost increased $2,059,000. The
majority of the changes in value occurred within the agency securities and
state and municipal segments of the portfolio.
The amortized cost position in state and political securities increased
$21,012,000 as the Bank continued its strategy 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. Over the same time period, this
above strategy resulted in the amortized cost position of available for sale
U.S. Government and agency securities to decrease by $15,080,000. The increased
level of unrealized losses within the bond portfolio, which offset the increase
in amortized cost, was the result of changes in the yield curve and virtual
freeze of trading in the municipal market, not credit quality, as the credit
quality of the portfolio remains sound.
The
equity portfolio continues to feel the effects of the economic turbulence that
is effecting the financial sector. This
sector of the portfolio, as of September 30, 2008, held $1,906,000 in
unrealized losses on an amortized cost basis of $15,743,000. The amount of the declines has caused several
of our equity holdings to be deemed other than temporarily impaired resulting
in a write down in value of these holdings of $1,851,000 and $2,425,000 for the
three and nine months ended September 30, 2008. Certain positions may be liquidated, in whole
or part, through the balance of 2008 so that the losses can be carried back for
tax purposes and offset against gains that have been recognized over the past
several years.
26
Table of Contents
The
amortized cost of investment securities and their estimated fair values are as
follows:
|
|
September 30, 2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available for
sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
47,302
|
|
$
|
206
|
|
$
|
(33
|
)
|
$
|
47,475
|
|
State and
political securities
|
|
140,663
|
|
257
|
|
(15,163
|
)
|
125,757
|
|
Other debt
securities
|
|
16,219
|
|
|
|
(2,441
|
)
|
13,778
|
|
Total debt
securities
|
|
204,184
|
|
463
|
|
(17,637
|
)
|
187,010
|
|
Equity
securities
|
|
15,743
|
|
373
|
|
(1,906
|
)
|
14,210
|
|
Total investment
securities AFS
|
|
$
|
219,927
|
|
$
|
836
|
|
$
|
(19,543
|
)
|
$
|
201,220
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
(HTM)
|
|
|
|
|
|
|
|
|
|
U.S. Government
and agency securities
|
|
$
|
10
|
|
$
|
1
|
|
$
|
|
|
$
|
11
|
|
Other debt
securities
|
|
125
|
|
|
|
|
|
125
|
|
Total investment
securities HTM
|
|
$
|
135
|
|
$
|
1
|
|
$
|
|
|
$
|
136
|
|
|
|
December 31, 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
|
|
27
Financing Activities
Deposits
Total
deposits increased 10.7% or $41,549,000 from December 31, 2007 to September 30,
2008. The growth was led by an 88.4% or
$18,598,000 increase in money market accounts coupled with double digit growth
in NOW, savings, and time deposits from December 31, 2007 to September 30,
2008. The increase in core deposits
(deposits less time deposits) of 14.2% or $28,855,000 has allowed for a
reduction in brokered time deposits of 55.8%.
The increase in deposits is the result of a deposit gathering program
coupled with customers coming back to their hometown bank in wake of the
economic turbulence.
Deposit balances and their changes
for the periods being discussed follow:
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Demand deposits
|
|
$
|
73,586
|
|
17.1
|
%
|
$
|
74,671
|
|
19.2
|
%
|
$
|
(1,085
|
)
|
(1.5
|
)%
|
NOW accounts
|
|
56,391
|
|
13.1
|
|
50,883
|
|
13.1
|
|
5,508
|
|
10.8
|
|
Money market
deposits
|
|
39,627
|
|
9.2
|
|
21,029
|
|
5.4
|
|
18,598
|
|
88.4
|
|
Savings deposits
|
|
62,591
|
|
14.5
|
|
56,757
|
|
14.6
|
|
5,834
|
|
10.3
|
|
Time deposits
|
|
194,469
|
|
45.2
|
|
176,851
|
|
45.4
|
|
17,618
|
|
10.0
|
|
Time deposits -
brokered
|
|
3,907
|
|
0.9
|
|
8,831
|
|
2.3
|
|
(4,924
|
)
|
(55.8
|
)
|
Total deposits
|
|
$
|
430,571
|
|
100.0
|
%
|
$
|
389,022
|
|
100.0
|
%
|
$
|
41,549
|
|
10.7
|
%
|
Borrowed Funds
Total borrowed funds
decreased 16.4% or $26,486,000 at September 30, 2008 compared to
$161,693,000 at December 31, 2007.
The decrease in borrowed funds is primarily the result of the previously
discussed deposit gathering campaigns that were utilized to provide funds to
reduce the level of higher cost short-term borrowings and to assist in
replacing long-term borrowing maturities.
Long-term borrowings decreased $19,600,000 since December 31, 2007
due to the maturity of several borrowings that carried rates between 3.14% and
5.56%.
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Change
|
|
(In Thousands)
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Short-term
borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB repurchase
agreements
|
|
$
|
29,950
|
|
22.1
|
%
|
$
|
38,160
|
|
23.6
|
%
|
$
|
(8,210
|
)
|
(21.5
|
)%
|
Securities sold
under agreement to repurchase
|
|
18,479
|
|
13.7
|
|
17,155
|
|
10.6
|
|
1,324
|
|
7.7
|
|
Total short-term
borrowings
|
|
48,429
|
|
35.8
|
%
|
55,315
|
|
34.2
|
%
|
(6,886
|
)
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings, FHLB
|
|
86,778
|
|
64.2
|
|
106,378
|
|
65.8
|
|
(19,600
|
)
|
(18.4
|
)
|
Total borrowed
funds
|
|
$
|
135,207
|
|
100.0
|
%
|
$
|
161,693
|
|
100.0
|
%
|
$
|
(26,486
|
)
|
(16.4
|
)%
|
28
Table
of Contents
Capital
The adequacy of the Companys capital is reviewed on
an ongoing basis with reference to the size, composition, and quality of the
Companys resources and regulatory guidelines.
Management seeks to maintain a level of capital sufficient to support
existing assets and anticipated asset growth, maintain favorable access to
capital markets, and preserve high quality credit ratings.
Bank holding companies are required to comply with the
Federal Reserve Boards risk-based capital guidelines. The risk-based capital rules are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies and to minimize
disincentives for holding liquid assets.
Specifically, each is required to maintain certain minimum dollar
amounts and ratios of Total risk-based, Tier I risk-based, and Tier I leverage
capital. In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvements Act (FDICIA) established five capital categories
ranging from well capitalized to critically undercapitalized. To be
classified as well capitalized, Total risk-based, Tier I risked-based, and
Tier I leverage capital ratios must be at least 10%, 6%,
and 5%,
respectively.
The
Emergency Economic Stabilization Act of 2008, signed into law on October 3,
2008, provides authority to the United States Department of Treasury (Treasury)
to, among other things, purchase up to $700 billion of mortgages, mortgage
backed securities and certain other financial instruments from financial
institutions. On October 14, 2008,
the Treasury announced it will offer to qualifying U.S. banking institutions
the opportunity to issue and sell preferred stock, along with warrants to
purchase common stock, to the Treasury on what may be considered attractive
terms under the Troubled Asset Relief Program Capital Purchase Program (the Program). Although the Companys capital ratios remain
well above the minimum levels required for well capitalized status, it is
currently evaluating the Program. In
addition, the FDIC has initiated the Temporary Liquidity Guarantee Program that
will provide a 100 percent guarantee for a limited period of time to newly
issued senior unsecured debt and non-interest bearing transaction
deposits. Coverage under the Temporary
Liquidity Guarantee Program is available for 30 days without charge and
thereafter at a cost of 75 basis points per annum for senior unsecured debt and
10 basis points per annum for non-interest bearing transaction deposits. Management is currently evaluating the
Temporary Liquidity Guarantee Program.
29
Table of Contents
Capital
ratios as of September 30, 2008 and December 31, 2007 were as
follows:
|
|
2008
|
|
2007
|
|
(In Thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
68,678
|
|
16.8
|
%
|
$
|
70,381
|
|
18.0
|
%
|
For Capital
Adequacy Purposes
|
|
32,713
|
|
8.0
|
|
31,280
|
|
8.0
|
|
To Be Well
Capitalized
|
|
40,891
|
|
10.0
|
|
39,100
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
64,410
|
|
15.8
|
%
|
$
|
66,251
|
|
16.9
|
%
|
For Capital
Adequacy Purposes
|
|
16,356
|
|
4.0
|
|
15,640
|
|
4.0
|
|
To Be Well
Capitalized
|
|
24,534
|
|
6.0
|
|
23,460
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to
Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
64,410
|
|
10.1
|
%
|
$
|
66,251
|
|
10.8
|
%
|
For Capital
Adequacy Purposes
|
|
25,407
|
|
4.0
|
|
24,664
|
|
4.0
|
|
To Be Well
Capitalized
|
|
31,759
|
|
5.0
|
|
30,830
|
|
5.0
|
|
Liquidity and
Interest Rate Sensitivity
The asset/liability committee addresses the liquidity
needs of the Company to ensure that sufficient funds are available to meet
credit demands and deposit withdrawals as well as to the placement of available
funds in the investment portfolio. In
assessing liquidity requirements, equal consideration is given to the current
position as well as the future outlook.
The following liquidity
measures are monitored for compliance within the limits cited:
1. Net Loans to Total Assets, 85% maximum
2. Net Loans to Total Deposits, 100% maximum
3. Cumulative 90 day Maturity GAP %, +/- 20%
maximum
4. Cumulative 1 Year Maturity GAP %, +/- 25%
maximum
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
30
Table of Contents
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
Bank, like other financial institutions, must have sufficient funds available
to meet its liquidity needs for deposit withdrawals, loan commitments and
originations, and expenses. In order to
control cash flow, the Bank estimates future flows of cash from deposits, loan
payments, and investment security payments.
The primary sources of funds are deposits, principal and interest
payments on loans and investment securities, FHLB borrowings, and brokered
deposits. Management believes the Bank
has adequate resources to meet its normal funding requirements.
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 FHLB of
$209,525,000.
In
addition to this credit arrangement, the Company has additional lines of credit
with correspondent banks of $28,797,000. Management believes it has sufficient
liquidity to satisfy estimated short-term and long-term funding needs. FHLB borrowings totaled $116,728,000 as of September 30,
2008.
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.
31
Table of Contents
There
have been no substantial changes in the Companys gap analyses or simulation
analyses compared to the information provided in the Companys Form 10-K
for the year ended December 31, 2007.
Generally,
management believes the Company is well positioned to respond in a timely
manner 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 which are not measured
by a price index.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
Market
risk for the Company is comprised primarily of 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 by an independent third party. There have been no substantial changes in the
Companys gap analyses or simulation analyses compared to the information
provided in the Annual Report on Form 10-K for the period ended December 31,
2007. Additional information and details
are provided in the Liquidity and Interest Rate Sensitivity section of Item
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Generally,
management believes the Company is well positioned to respond in a timely
manner when the market interest rate outlook changes.
Item 4. Controls and Procedures
An analysis was performed under the supervision and with the
participation of the Companys management, including the Chief Executive
Officer and the Principal Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures. Based on
that evaluation, the Companys Chief Executive Officer and Principal Financial
Officer concluded that the Companys disclosure controls and procedures were
effective as of September 30, 2008.
There were no changes in the Companys internal control over financial
reporting that occurred during the quarter ended September 30, 2008, that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
32
Part II. OTHER INFORMATION
Item 1. Legal
Proceedings
None.
Item
1A.
Risk Factors
There are no material
changes to the risk factors set forth in Part I, Item 1A, Risk Factors,
of the Companys Annual Report on Form 10-K for the year ended December 31,
2007. Please refer to that section for
disclosures regarding the risks and uncertainties related to the Companys
business.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
Period
|
|
Total
Number of
Shares (or
Units)
Purchased
|
|
Average
Price Paid
per Share
(or Units)
Purchased
|
|
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #1
(July 1 - July 31, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #2
(August 1 - August 31, 2008)
|
|
9,210
|
|
$
|
30.05
|
|
9,210
|
|
98,344
|
|
|
|
|
|
|
|
|
|
|
|
Month #3
(September 1 - September 30, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 22, 2008,
the Board of Directors extended the previously approved authorization to
repurchase up to 197,000 shares, or approximately 5%, of the outstanding shares
of the Company for an additional year to April 30, 2009. To date, there have been 98,656 shares
repurchased under this plan.
Item 3. Defaults
Upon Senior Securities
None
Item 4. Submission
of Matters to a Vote of Security Holders
None
Item 5. Other
Information
None
33
Table of Contents
Item 6. 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, 2007).
|
(3)
|
(ii)
|
Bylaws
of the Registrants as presently in effect (incorporated by reference to
Exhibit 3(ii) of the Registrants Current Report on Form 8-K
filed June 17, 2005).
|
(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 Principal Financial Officer.
|
(32)
|
(i)
|
Section 1350
Certification of Chief Executive Officer.
|
(32)
|
(ii)
|
Section 1350
Certification of Principal Financial Officer.
|
34
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
PENNS WOODS BANCORP,
INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
Date: November 7,
2008
|
|
/s/ Ronald A. Walko
|
|
|
Ronald A. Walko,
President and Chief Executive Officer
|
|
|
|
|
|
|
Date: November 7,
2008
|
|
/s/ Brian L. Knepp
|
|
|
Brian L. Knepp, Chief
Financial Officer (Principal
Financial Officer)
|
35
Table of Contents
EXHIBIT INDEX
|
|
|
|
|
|
Exhibit 31(i)
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification
of Chief Executive Officer
|
Exhibit 31(ii)
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification
of Principal Financial Officer
|
Exhibit 32(i)
|
|
Section 1350
Certification of Chief Executive Officer
|
Exhibit 32(ii)
|
|
Section 1350
Certification of Principal Financial Officer
|
36
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