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 June 30, 2009.
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
YES
o
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
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Small reporting company
o
|
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
July 30, 2009 there were 3,832,957 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)
|
|
June 30,
|
|
December 31,
|
|
(In
Thousands, Except Share Data)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Noninterest-bearing
balances
|
|
$
|
10,832
|
|
$
|
16,563
|
|
Interest-bearing
deposits in other financial institutions
|
|
7,815
|
|
18
|
|
Total
cash and cash equivalents
|
|
18,647
|
|
16,581
|
|
|
|
|
|
|
|
Investment
securities, available for sale, at fair value
|
|
207,901
|
|
208,251
|
|
Investment
securities held to maturity (fair value of $111 and $136)
|
|
110
|
|
135
|
|
Loans
held for sale
|
|
4,595
|
|
3,622
|
|
Loans
|
|
392,074
|
|
381,478
|
|
Less:
Allowance for loan losses
|
|
4,377
|
|
4,356
|
|
Loans,
net
|
|
387,697
|
|
377,122
|
|
Premises
and equipment, net
|
|
7,656
|
|
7,865
|
|
Accrued
interest receivable
|
|
3,468
|
|
3,614
|
|
Bank-owned
life insurance
|
|
14,862
|
|
14,546
|
|
Investment
in limited partnerships
|
|
5,182
|
|
4,727
|
|
Goodwill
|
|
3,032
|
|
3,032
|
|
Deferred
tax asset
|
|
11,583
|
|
10,879
|
|
Other
assets
|
|
3,128
|
|
2,429
|
|
TOTAL
ASSETS
|
|
$
|
667,861
|
|
$
|
652,803
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
420,492
|
|
$
|
345,333
|
|
Noninterest-bearing
deposits
|
|
74,509
|
|
76,035
|
|
Total
deposits
|
|
495,001
|
|
421,368
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
14,880
|
|
73,946
|
|
Long-term
borrowings, Federal Home Loan Bank (FHLB)
|
|
86,778
|
|
86,778
|
|
Accrued
interest payable
|
|
1,220
|
|
1,317
|
|
Other
liabilities
|
|
8,611
|
|
8,367
|
|
TOTAL
LIABILITIES
|
|
606,490
|
|
591,776
|
|
|
|
|
|
|
|
SHAREHOLDERS
EQUITY
|
|
|
|
|
|
Common
stock, par value $8.33, 10,000,000 shares authorized; 4,011,985 and 4,010,528
shares issued
|
|
33,433
|
|
33,421
|
|
Additional
paid-in capital
|
|
17,983
|
|
17,959
|
|
Retained
earnings
|
|
26,322
|
|
28,177
|
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
Net
unrealized loss on available for sale securities
|
|
(6,323
|
)
|
(8,486
|
)
|
Defined
benefit plan
|
|
(3,780
|
)
|
(3,780
|
)
|
Less:
Treasury stock at cost, 179,028 and 179,028 shares
|
|
(6,264
|
)
|
(6,264
|
)
|
TOTAL
SHAREHOLDERS EQUITY
|
|
61,371
|
|
61,027
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
667,861
|
|
$
|
652,803
|
|
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
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In
Thousands, Except Per Share Data)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST AND DIVIDEND
INCOME
|
|
|
|
|
|
|
|
|
|
Loans including fees
|
|
$
|
6,349
|
|
$
|
6,246
|
|
$
|
12,568
|
|
$
|
12,625
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,374
|
|
1,276
|
|
2,737
|
|
2,466
|
|
Tax-exempt
|
|
1,249
|
|
1,210
|
|
2,495
|
|
2,436
|
|
Dividend and other
interest income
|
|
41
|
|
204
|
|
130
|
|
457
|
|
TOTAL INTEREST AND
DIVIDEND INCOME
|
|
9,013
|
|
8,936
|
|
17,930
|
|
17,984
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2,204
|
|
2,551
|
|
4,209
|
|
5,092
|
|
Short-term borrowings
|
|
78
|
|
257
|
|
236
|
|
686
|
|
Long-term borrowings,
FHLB
|
|
926
|
|
972
|
|
1,843
|
|
2,169
|
|
TOTAL INTEREST EXPENSE
|
|
3,208
|
|
3,780
|
|
6,288
|
|
7,947
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME
|
|
5,805
|
|
5,156
|
|
11,642
|
|
10,037
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR LOAN
LOSSES
|
|
186
|
|
60
|
|
312
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME
AFTER PROVISION FOR LOAN LOSSES
|
|
5,619
|
|
5,096
|
|
11,330
|
|
9,917
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
541
|
|
540
|
|
1,066
|
|
1,110
|
|
Securities losses, net
|
|
(2,086
|
)
|
(251
|
)
|
(4,455
|
)
|
(213
|
)
|
Earnings on bank-owned
life insurance
|
|
112
|
|
91
|
|
274
|
|
246
|
|
Gain on sale of loans
|
|
103
|
|
212
|
|
221
|
|
364
|
|
Insurance commissions
|
|
347
|
|
486
|
|
701
|
|
1,066
|
|
Other
|
|
591
|
|
543
|
|
1,025
|
|
962
|
|
TOTAL NON-INTEREST
INCOME
|
|
(392
|
)
|
1,621
|
|
(1,168
|
)
|
3,535
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
2,595
|
|
2,469
|
|
5,077
|
|
4,920
|
|
Occupancy, net
|
|
318
|
|
314
|
|
657
|
|
652
|
|
Furniture and equipment
|
|
306
|
|
287
|
|
613
|
|
572
|
|
Pennsylvania shares tax
|
|
172
|
|
105
|
|
343
|
|
210
|
|
Amortization of
investment in limited partnerships
|
|
141
|
|
178
|
|
283
|
|
356
|
|
Other
|
|
1,353
|
|
1,158
|
|
2,557
|
|
2,246
|
|
TOTAL NON-INTEREST
EXPENSE
|
|
4,885
|
|
4,511
|
|
9,530
|
|
8,956
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME
TAX (BENEFIT) PROVISION
|
|
342
|
|
2,206
|
|
632
|
|
4,496
|
|
INCOME TAX (BENEFIT)
PROVISION
|
|
(490
|
)
|
149
|
|
(1,039
|
)
|
308
|
|
NET INCOME
|
|
$
|
832
|
|
$
|
2,057
|
|
$
|
1,671
|
|
$
|
4,188
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE -
BASIC
|
|
$
|
0.22
|
|
$
|
0.53
|
|
$
|
0.44
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE -
DILUTED
|
|
$
|
0.22
|
|
$
|
0.53
|
|
$
|
0.44
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC
|
|
3,832,520
|
|
3,865,977
|
|
3,832,135
|
|
3,870,359
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES
OUTSTANDING - DILUTED
|
|
3,832,596
|
|
3,866,115
|
|
3,832,173
|
|
3,870,523
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER SHARE
|
|
$
|
0.46
|
|
$
|
0.46
|
|
$
|
0.92
|
|
$
|
0.92
|
|
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)
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
COMMON
|
|
ADDITIONAL
|
|
|
|
OTHER
|
|
|
|
TOTAL
|
|
|
|
STOCK
|
|
PAID-IN
|
|
RETAINED
|
|
COMPREHENSIVE
|
|
TREASURY
|
|
SHAREHOLDERS
|
|
(In Thousands, Except Per Share Data)
|
|
SHARES
|
|
AMOUNT
|
|
CAPITAL
|
|
EARNINGS
|
|
LOSS
|
|
STOCK
|
|
EQUITY
|
|
Balance,
December 31, 2008
|
|
4,010,528
|
|
$
|
33,421
|
|
$
|
17,959
|
|
$
|
28,177
|
|
$
|
(12,266
|
)
|
$
|
(6,264
|
)
|
$
|
61,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
1,671
|
|
|
|
|
|
1,671
|
|
Other comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
2,163
|
|
|
|
2,163
|
|
Dividends declared
($0.92 per share)
|
|
|
|
|
|
|
|
(3,526
|
)
|
|
|
|
|
(3,526
|
)
|
Common shares issued for
employee stock purchase plan
|
|
1,457
|
|
12
|
|
24
|
|
|
|
|
|
|
|
36
|
|
Balance, June 30,
2009
|
|
4,011,985
|
|
$
|
33,433
|
|
$
|
17,983
|
|
$
|
26,322
|
|
$
|
(10,103
|
)
|
$
|
(6,264
|
)
|
$
|
61,371
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
COMMON
|
|
ADDITIONAL
|
|
|
|
OTHER
|
|
|
|
TOTAL
|
|
|
|
STOCK
|
|
PAID-IN
|
|
RETAINED
|
|
COMPREHENSIVE
|
|
TREASURY
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of
change in accounting for postretirement benefits
|
|
|
|
|
|
|
|
(437
|
)
|
|
|
|
|
(437
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
4,188
|
|
|
|
|
|
4,188
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
(5,701
|
)
|
|
|
(5,701
|
)
|
Dividends declared,
($0.92 per share)
|
|
|
|
|
|
|
|
(3,560
|
)
|
|
|
|
|
(3,560
|
)
|
Stock options exercised
|
|
330
|
|
3
|
|
8
|
|
|
|
|
|
|
|
11
|
|
Common shares issued for
employee stock purchase plan
|
|
1,569
|
|
13
|
|
34
|
|
|
|
|
|
|
|
47
|
|
Purchase of treasury
stock (18,516 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(585
|
)
|
(585
|
)
|
Balance, June 30,
2008
|
|
4,008,833
|
|
$
|
33,407
|
|
$
|
17,930
|
|
$
|
27,898
|
|
$
|
(9,235
|
)
|
$
|
(5,478
|
)
|
$
|
64,522
|
|
PENNS
WOODS BANCORP, INC.
CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
(In
Thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
$
|
832
|
|
|
|
$
|
2,057
|
|
|
|
$
|
1,671
|
|
|
|
$
|
4,188
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized gains (losses) on available for sale securities
|
|
3,520
|
|
|
|
(7,061
|
)
|
|
|
(1,178
|
)
|
|
|
(8,852
|
)
|
|
|
Less:
Reclassification adjustment for net losses included in net income
|
|
(2,086
|
)
|
|
|
(251
|
)
|
|
|
(4,455
|
)
|
|
|
(213
|
)
|
|
|
Other
comprehensive income (loss) before tax expense (benefit)
|
|
|
|
5,606
|
|
|
|
(6,810
|
)
|
|
|
3,277
|
|
|
|
(8,639
|
)
|
Income
tax expense (benefit) related to other comprehensive income (loss)
|
|
|
|
1,906
|
|
|
|
(2,315
|
)
|
|
|
1,114
|
|
|
|
(2,938
|
)
|
Other
comprehensive income (loss), net of tax
|
|
|
|
3,700
|
|
|
|
(4,495
|
)
|
|
|
2,163
|
|
|
|
(5,701
|
)
|
Comprehensive
income (loss)
|
|
|
|
$
|
4,532
|
|
|
|
$
|
(2,438
|
)
|
|
|
$
|
3,834
|
|
|
|
$
|
(1,513
|
)
|
See
accompanying notes to the unaudited consolidated financial statements.
5
Table
of Contents
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
(In
Thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net Income
|
|
$
|
1,671
|
|
$
|
4,188
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
364
|
|
323
|
|
Provision for loan
losses
|
|
312
|
|
120
|
|
Accretion and
amortization of investment security discounts and premiums
|
|
(518
|
)
|
(636
|
)
|
Securities losses, net
|
|
4,455
|
|
213
|
|
Originations of loans held
for sale
|
|
(10,202
|
)
|
(16,137
|
)
|
Proceeds of loans held
for sale
|
|
9,450
|
|
17,125
|
|
Gain on sale of loans
|
|
(221
|
)
|
(364
|
)
|
Earnings on bank-owned
life insurance
|
|
(274
|
)
|
(246
|
)
|
Other, net
|
|
(1,327
|
)
|
(1,465
|
)
|
Net cash provided by
operating activities
|
|
3,710
|
|
3,121
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Investment securities
available for sale:
|
|
|
|
|
|
Proceeds from sales
|
|
4,682
|
|
36,098
|
|
Proceeds from calls and
maturities
|
|
5,132
|
|
5,139
|
|
Purchases
|
|
(9,955
|
)
|
(45,132
|
)
|
Investment securities
held to maturity:
|
|
|
|
|
|
Proceeds from calls and
maturities
|
|
26
|
|
154
|
|
Net increase in loans
|
|
(11,501
|
)
|
(5,520
|
)
|
Acquisition of bank
premises and equipment
|
|
(155
|
)
|
(998
|
)
|
Proceeds from the sale
of foreclosed assets
|
|
|
|
70
|
|
Purchase of bank-owned
life insurance
|
|
(42
|
)
|
(698
|
)
|
Investment in limited
partnership
|
|
(738
|
)
|
|
|
Proceeds from
redemption of regulatory stock
|
|
|
|
3,560
|
|
Purchases of regulatory
stock
|
|
(170
|
)
|
(1,996
|
)
|
Net cash used for
investing activities
|
|
(12,721
|
)
|
(9,323
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Net increase in
interest-bearing deposits
|
|
75,159
|
|
43,662
|
|
Net (decrease) increase
in noninterest-bearing deposits
|
|
(1,526
|
)
|
5,237
|
|
Repayment of long-term
borrowings, FHLB
|
|
|
|
(29,600
|
)
|
Net decrease in
short-term borrowings
|
|
(59,066
|
)
|
(7,234
|
)
|
Dividends paid
|
|
(3,526
|
)
|
(3,560
|
)
|
Issuance of common
stock
|
|
36
|
|
47
|
|
Stock options exercised
|
|
|
|
11
|
|
Purchase of treasury
stock
|
|
|
|
(585
|
)
|
Net cash provided by
financing activities
|
|
11,077
|
|
7,978
|
|
NET NCREASE IN CASH AND
CASH EQUIVALENTS
|
|
2,066
|
|
1,776
|
|
CASH AND CASH
EQUIVALENTS, BEGINNING
|
|
16,581
|
|
15,433
|
|
CASH AND CASH
EQUIVALENTS, ENDING
|
|
$
|
18,647
|
|
$
|
17,209
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
6,385
|
|
$
|
8,228
|
|
Income taxes paid
|
|
1,175
|
|
1,075
|
|
Transfer of loans to
foreclosed real estate
|
|
614
|
|
|
|
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,
2008.
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 38 through 44 of the Annual Report on Form 10-K
for the year ended December 31, 2008.
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 April 2009, the FASB issued FASB Staff
Position (FSP) No. FAS 141(R)-1,
Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies
(FAS 141(R)-1).
This FSP requires companies
acquiring contingent assets or assuming contingent liabilities in business
combination to either (a) if the assets or liabilities fair value can be
determined, recognize them at fair value, at the acquisition date, or (b) if
the assets or liabilities fair value cannot be determined, but (i) it is
probable that an asset existed or that a liability had been incurred at the
acquisition date and (ii) the amount of the asset or liability can be reasonably
estimated, recognize them at their estimated amount, at the acquisition
date. If the fair value of these
contingencies cannot be determined and they are not probable or cannot be
reasonably estimated, then companies should not recognize these contingencies
as of the acquisition date and instead should account for them in subsequent
periods by following other applicable GAAP.
This FSP also eliminates the FAS 141(R)-1 requirement of disclosing in
the footnotes to the financial statements the range of expected outcomes for a
recognized contingency. This FSP shall
be effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The adoption of this FSP has
7
Table
of Contents
not and is not expected to have a material effect on
the Companys results of operations or financial position.
In April 2009, the FASB
issued FSP No. FAS 157-4,
Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly
(FAS
157-4). This FSP relates to determining
fair values when there is no active market or where the price inputs being used
represent distressed sales. It reaffirms
the need to use judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become inactive. FAS
157-4 is effective for interim and annual periods ending after June 15,
2009, but entities may early adopt this FSP for the interim and annual periods
ending after March 15, 2009. The adoption of this FSP has not and is not
expected to have a material effect on the Companys results of operations or
financial position.
In April 2009, the FASB
issued FSP No. FAS 107-1 and APB 28-1,
Interim Disclosures about
Fair Value of Financial Instruments
(FAS 107-1 and APB 28-1),
which relates to fair value disclosures for any financial instruments that are
not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for
these assets and liabilities were only disclosed once a year. The FSP now
requires these disclosures on a quarterly basis, providing qualitative and
quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value. FAS 107-1 and APB 28-1 is effective for
interim and annual periods ending after June 15, 2009, but entities may
early adopt this FSP for the interim and annual periods ending after March 15,
2009. The adoption of this FSP has not
and is not expected to have a material effect on the Companys results of
operations or financial position.
In April 2009, the FASB
issued FSP No. FAS 115-2 and FAS 124-2,
Recognition
and Presentation of Other-Than-Temporary Impairments
(FAS 115-2 and
FAS 124-2), which provides additional guidance designed to create greater
clarity and consistency in accounting for and presenting impairment losses on
securities. FAS 115-2 and FAS 124-2 are
effective for interim and annual periods ending after June 15, 2009, but
entities may early adopt this FSP for the interim and annual periods ending
after March 15, 2009. The adoption
of this FSP has not and is not expected to have a material effect on the
Companys results of operations or financial position.
In May 2009, the FASB
issued FAS No. 165,
Subsequent Events
(FAS 165), which requires companies to evaluate events and transactions that
occur after the balance sheet date but before the date the financial statements
are issued, or available to be issued in the case of non-public
entities. FAS 165 requires entities to recognize in the financial
statements the effect of all events or transactions that provide additional
evidence of conditions that existed at the balance sheet date, including the
estimates inherent in the financial preparation process. Entities
shall not recognize the impact of events or transactions that provide evidence
about conditions that did not exist at the balance sheet date but arose after
that date. FAS 165 also requires entities to disclose the date
through which subsequent events have been evaluated. FAS 165 was
effective for interim and annual reporting periods ending after June 15,
2009. The Company adopted the
8
Table
of Contents
provisions of FAS 165 for
the quarter ended June 30, 2009, as required, and adoption did not have a
material impact on Companys results of operations or financial position.
In June 2009, the FASB
issued FAS No. 166,
Accounting for Transfers
of Financial Assets
(FAS 166). FAS 166 removes the concept of a
qualifying special-purpose entity (QSPE) from FAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
, and removes the exception from
applying FIN 46(R). This statement also clarifies the requirements for
isolation and limitations on portions of financial assets that are eligible for
sale accounting. This statement is effective for fiscal years beginning after November 15,
2009. As such, the Company plans to adopt FAS 166 effective January 1,
2010. The adoption of this standard is not expected to have a material effect
on the Companys results of operations or financial position.
In June 2009, the FASB issued FAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(FAS
167). FAS 167, which amends FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities
,
(FIN 46(R)), prescribes a qualitative model for identifying whether a company
has a controlling financial interest in a variable interest entity (VIE) and
eliminates the quantitative model prescribed by FIN 46(R). The new model
identifies two primary characteristics of a controlling financial interest: (1) it
provides a company with the power to direct significant activities of the VIE,
and (2) it obligates a company to absorb losses of and/or provides rights
to receive benefits from the VIE. FAS 167 requires a company to reassess on an
ongoing basis whether it holds a controlling financial interest in a VIE. A
company that holds a controlling financial interest is deemed to be the primary
beneficiary of the VIE and is required to consolidate the VIE. This statement
is effective for fiscal years beginning after November 15, 2009. The
adoption of this standard is not expected to have a material effect on the
Companys results of operations or financial position.
In June 2009, the FASB issued FAS No. 168,
The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles
(FAS 168). FAS No. 168
establishes the
FASB Accounting Standards Codification
(Codification), which was officially launched on July 1, 2009, and became
the primary source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of
the Securities and Exchange Commission (SEC) under the authority of Federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
subsequent issuances of new standards will be in the form of Accounting
Standards Updates that will be included in the Codification. FAS No. 168
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. As such, the Company plans to adopt FAS
No.168 in connection with its third quarter 2009 reporting. As the Codification
is neither expected nor intended to change GAAP, the adoption of FAS 168 will
not have a material impact on its results of operations or financial position.
Note 3. Per Share Data
There are no convertible securities which would affect
the denominator in calculating basic and dilutive earnings per share;
therefore, net income as presented on the consolidated statement of income will
be used as the numerator. The following
table sets forth the composition of the
9
Table
of Contents
weighted average common shares (denominator) used in the
basic and dilutive per share computation.
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares issued
|
|
4,011,548
|
|
4,008,030
|
|
4,011,163
|
|
4,007,603
|
|
|
|
|
|
|
|
|
|
|
|
Average
treasury stock shares
|
|
(179,028
|
)
|
(142,053
|
)
|
(179,028
|
)
|
(137,244
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares and common stock equivalents used to calculate basic
earnings per share
|
|
3,832,520
|
|
3,865,977
|
|
3,832,135
|
|
3,870,359
|
|
|
|
|
|
|
|
|
|
|
|
Additional
common stock equivalents (stock options) used to calculate diluted earnings
per share
|
|
76
|
|
138
|
|
38
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares and common stock equivalents used to calculate diluted
earnings per share
|
|
3,832,596
|
|
3,866,115
|
|
3,832,173
|
|
3,870,523
|
|
Options to purchase 990 shares of common stock were
outstanding during the three and six months ended June 30, 2009 but were
not included in the computation of diluted earnings per share as they were
anti-dilutive due to the strike price of $31.82 being greater than the average
market price of $28.00 and $26.31 for the three and six months ended June 30,
2009. Options to purchase 8,273 and
9,923 shares of common stock were outstanding during the three and six months ended
June 30, 2008 but were not included in the computation of diluted earnings
per share as they were anti-dilutive due to the strike price being greater than
the average market price for the three and six months ended June 30, 2008.
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, 2008.
The following sets forth the components of the net
periodic benefit cost of the domestic non-contributory defined benefit plan for
the three and six months ended June 30, 2009 and 2008, respectively:
10
Table
of Contents
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In
Thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
136
|
|
$
|
136
|
|
$
|
272
|
|
$
|
273
|
|
Interest
cost
|
|
170
|
|
152
|
|
340
|
|
304
|
|
Expected
return on plan assets
|
|
(127
|
)
|
(163
|
)
|
(254
|
)
|
(320
|
)
|
Amortization
of transition obligation
|
|
|
|
|
|
(1
|
)
|
(1
|
)
|
Amortization
of prior service cost
|
|
7
|
|
7
|
|
13
|
|
13
|
|
Amortization
of net loss
|
|
84
|
|
14
|
|
169
|
|
28
|
|
Net
periodic cost
|
|
$
|
270
|
|
$
|
146
|
|
$
|
539
|
|
$
|
297
|
|
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, 2008, that it expected to contribute a minimum of
$325,000 to its defined benefit plan in 2009. As of June 30, 2009,
there were contributions $519,000 made to the plan. The Company expects to contribute a minimum
of $287,000 to the defined benefit plan during the remaining period of 2009.
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.
Financial instruments whose contract amounts
represent credit risk are as follows at June 30, 2009 and December 31,
2008:
|
|
June 30,
|
|
December 31,
|
|
(In
Thousands)
|
|
2009
|
|
2008
|
|
Commitments
to extend credit
|
|
$
|
88,763
|
|
$
|
85,871
|
|
Standby
letters of credit
|
|
1,532
|
|
841
|
|
|
|
|
|
|
|
|
|
11
Table
of Contents
Commitments to extend credit are
legally binding agreements to lend to customers. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future liquidity requirements. The Company evaluates each customers credit
worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company, on an
extension of credit is based on managements credit assessment of the
counterparty.
Standby letters of credit represent
conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. These
instruments are issued primarily to support bid or performance related
contracts. The coverage period for these
instruments is typically a one year period with an annual renewal option
subject to prior approval by management.
Fees earned from the issuance of these letters are recognized upon
expiration of the coverage period. For
secured letters of credit, the collateral is typically Bank deposit instruments
or customer business assets.
Note 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 maintains the Penns Woods Bancorp, Inc. 2006 Employee Stock
Purchase Plan (Plan). The Plan is intended to encourage employee
participation in the ownership and economic progress of the Company. The Plan
allows for up to 1,000,000 shares to be purchased by employees. The purchase price of the shares is 95% of
market value with an employee eligible to purchase up to the lesser of 15% of
base compensation or $12,000 in market value annually. During the six months ended June 30,
2009 and 2008, there were 1,457 and 1,569 shares issued under the plan,
respectively.
Note 8. Fair Value Measurements
Effective January 1, 2008, the Company adopted
the provisions of FAS No. 157,
Fair Value Measurements
(FAS
157), for financial assets and financial liabilities. FAS 157 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. 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
Classification or Measurement under Statement 13
, which removed
leasing transactions accounted for under FAS 13 and related guidance from the
scope of FAS No. 157. The FASB also
issued Staff Position No. 157-2,
Partial Deferral of the
Effective Date of Statement 157
, which deferred the effective date
of FAS 157 for all nonfinancial assets and nonfinancial liabilities to fiscal
years beginning after November 15, 2008.
12
Table
of Contents
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 reported on the balance sheet at their fair
value on a recurring basis as of June 30, 2009 and December 31, 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.
|
|
June 30,
2009
|
|
(In
Thousands)
|
|
Level
I
|
|
Level
II
|
|
Level
III
|
|
Total
|
|
Assets Measured on a
Recurring Basis:
|
|
|
|
|
|
|
|
|
|
Investment Securities,
available-for-sale
|
|
$
|
11,728
|
|
$
|
196,173
|
|
$
|
|
|
$
|
207,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
(In
Thousands)
|
|
Level
I
|
|
Level
II
|
|
Level
III
|
|
Total
|
|
Assets Measured on a
Recurring Basis:
|
|
|
|
|
|
|
|
|
|
Investment Securities,
available-for-sale
|
|
$
|
13,269
|
|
$
|
194,982
|
|
$
|
|
|
$
|
208,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the assets reported on the balance sheet at their fair
value on a non-recurring basis as of June 30, 2009 and December 31,
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.
|
|
June 30,
2009
|
|
(In
Thousands)
|
|
Level
I
|
|
Level
II
|
|
Level
III
|
|
Total
|
|
Assets Measured on a
Non-recurring Basis:
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
|
|
$
|
6,044
|
|
$
|
|
|
$
|
6,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
(In
Thousands)
|
|
Level
I
|
|
Level
II
|
|
Level
III
|
|
Total
|
|
Assets Measured on a
Non-recurring Basis:
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
|
|
$
|
4,876
|
|
$
|
|
|
$
|
4,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Table of Contents
NOTE 9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The
Company is required to disclose estimated fair values for its financial
instruments. Fair value estimates are
made at a specific point in time, based on relevant market information and
information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Companys entire holdings of a
particular financial instrument. Also,
it is the Companys general practice and intention to hold most of its
financial instruments to maturity and not to engage in trading or sales
activities. Because no market exists for
a significant portion of the Companys financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly
affect the estimates.
Estimated
fair values have been determined by the Company using historical data and an
estimation methodology suitable for each category of financial
instruments. The Companys fair value
estimates, methods, and assumptions are set forth below for the Companys other
financial instruments.
As
certain assets and liabilities, such as deferred tax assets, premises and
equipment, and many other operational elements of the Company, are not
considered financial instruments but have value, this estimated fair value of
financial instruments would not represent the full market value of the Company.
The
estimated fair values of the Companys financial instruments are as follows at June 30,
2009 and December 31, 2008:
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(In
Thousands)
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
18,647
|
|
$
|
18,647
|
|
$
|
16,581
|
|
$
|
16,581
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
207,901
|
|
207,901
|
|
208,251
|
|
208,251
|
|
Held
to maturity
|
|
110
|
|
111
|
|
135
|
|
136
|
|
Loans
held for sale
|
|
4,595
|
|
4,595
|
|
3,622
|
|
3,622
|
|
Loans,
net
|
|
387,697
|
|
394,297
|
|
377,122
|
|
380,771
|
|
Bank-owned
life insurance
|
|
14,862
|
|
14,862
|
|
14,546
|
|
14,546
|
|
Accrued
interest receivable
|
|
3,468
|
|
3,468
|
|
3,614
|
|
3,614
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$
|
420,492
|
|
$
|
423,268
|
|
$
|
345,333
|
|
$
|
347,657
|
|
Noninterest-bearing
deposits
|
|
74,509
|
|
74,509
|
|
76,035
|
|
76,035
|
|
Short-term
borrowings
|
|
14,880
|
|
14,880
|
|
73,946
|
|
73,946
|
|
Long-term
borrowings, FHLB
|
|
86,778
|
|
85,772
|
|
86,778
|
|
88,188
|
|
Accrued
interest payable
|
|
1,220
|
|
1,220
|
|
1,317
|
|
1,317
|
|
14
Table
of Contents
Cash and Cash Equivalents,
Loans Held for Sale, Accrued Interest Receivable, Short-term Borrowings, and
Accrued Interest Payable:
The
fair value is equal to the carrying value.
Investment Securities:
The
fair value of investment securities available for sale and held to maturity is
equal to the available quoted market price. If no quoted market price is
available, fair value is estimated using the quoted market price for similar
securities. Regulatory stocks fair
value is equal to the carrying value.
Loans:
Fair
values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by
type such as commercial, commercial real estate, residential real estate,
construction real estate, and other consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated
by discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan. The estimate of
maturity is based on the Companys historical experience with repayments for
each loan classification, modified, as required, by an estimate of the effect
of current economic and lending conditions.
Fair
value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not
available, estimated cash flows are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discounted rates are judgmentally determined using available market
information and specific borrower information.
Bank-Owned Life Insurance:
The
fair value is equal to the cash surrender value of the life insurance policies.
Deposits:
The
fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings, NOW, and money market accounts, is equal to the
amount payable on demand as of June 30, 2009 and December 31,
2008. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows.
The
fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market, commonly referred to as the core deposit
intangible.
Long
Term Borrowings:
The
fair value of long term borrowings is based on the discounted value of
contractual cash flows.
15
Table
of Contents
Commitments to Extend Credit,
Standby Letters of Credit, and Financial Guarantees Written:
There is no material difference between the notional amount and the
estimated fair value of off-balance sheet items at June 30, 2009 and December 31,
2008. The contractual amounts of
unfunded commitments and letters of credit are presented in Note 5.
Note 10. Federal Home Loan Bank
Stock
The
Bank is a member of the Federal Home Loan Bank of Pittsburgh (the FHLB),
which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan
Bank serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from funds deposited by member
institutions and proceeds from the sale of consolidated obligations of the
Federal Home Loan Bank System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors
of the Federal Home Loan Bank. As a member, the Bank is required to
purchase and maintain stock in the FHLB in an amount equal to the greater of 1%
of its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year or 5% of its outstanding
advances from the FHLB. At June 30, 2009, the Bank held $7,271,300
in stock of the FHLB, which was in compliance with this requirement.
The Company evaluated its holding of FHLB stock
for impairment and deemed the stock to not be impaired due to the expected
recoverability of the par value, which equals the value reflected within the
Companys financial statements. The
decision was based on several items ranging from the estimated true economic
losses embedded within the FHLBs mortgage portfolio to the FHLBs liquidity
position and credit rating. The Company
utilizes the impairment framework outlined in paragraph 8(i) of SOP 01-06
and paragraphs 12.21 12.25 of the AICPA Audit Guide for Depository and
Lending Institutions to evaluate FHLB stock for impairment.
The following factors were evaluated to
determine the ultimate recoverability of the par value of the Companys FHLB
stock holding; (i) the significance of the decline in net assets of the
FHLB as compared to the capital stock amount for the FHLB and the length of
time this situation has persisted; (ii) commitments by the FHLB to make
payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB; (iii) the impact of
legislative and regulatory changes on the institutions and, accordingly, on the
customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v) whether
a decline is temporary or whether it affects the ultimate recoverability of the
FHLB stock based on (a) the materiality of the carrying amount to the
member institution and (b) whether an assessment of the institutions
operational needs for the foreseeable future allow management to dispose of the
stock.
Based on its analysis of these factors, the
Company determined that its holding of FHLB stock was not impaired on June 30,
2009.
Note 11. Investment Securities
The amortized cost and
estimated fair values of investment securities at June 30, 2009 and December 31,
2008 are as follows:
16
Table
of Contents
|
|
June 30,
2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In
Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available
for sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
40,968
|
|
$
|
1,690
|
|
$
|
|
|
$
|
42,658
|
|
State
and political securities
|
|
143,057
|
|
323
|
|
(10,713
|
)
|
132,667
|
|
Other
debt securities
|
|
21,463
|
|
596
|
|
(1,211
|
)
|
20,848
|
|
Total
debt securities
|
|
205,488
|
|
2,609
|
|
(11,924
|
)
|
196,173
|
|
Equity
securities
|
|
11,994
|
|
425
|
|
(691
|
)
|
11,728
|
|
Total
investment securities AFS
|
|
$
|
217,482
|
|
$
|
3,034
|
|
$
|
(12,615
|
)
|
$
|
207,901
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity (HTM)
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
9
|
|
$
|
1
|
|
$
|
|
|
$
|
10
|
|
Other
debt securities
|
|
101
|
|
|
|
|
|
101
|
|
Total
investment securities HTM
|
|
$
|
110
|
|
$
|
1
|
|
$
|
|
|
$
|
111
|
|
|
|
December 31, 2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available
for sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
46,452
|
|
$
|
1,134
|
|
$
|
|
|
$
|
47,586
|
|
State
and political securities
|
|
142,258
|
|
348
|
|
(10,764
|
)
|
131,842
|
|
Other
debt securities
|
|
15,970
|
|
649
|
|
(1,065
|
)
|
15,554
|
|
Total
debt securities
|
|
204,680
|
|
2,131
|
|
(11,829
|
)
|
194,982
|
|
Equity
securities
|
|
16,429
|
|
225
|
|
(3,385
|
)
|
13,269
|
|
Total
investment securities AFS
|
|
$
|
221,109
|
|
$
|
2,356
|
|
$
|
(15,214
|
)
|
$
|
208,251
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
17
Table
of Contents
The
following tables show the Companys gross unrealized losses and estimated fair
value, aggregated by investment category and length of time, that the
individual securities have been in a continuous unrealized loss position, at June 30,
2009 and December 31, 2008.
|
|
June 30,
2009
|
|
|
|
Less
than Twelve Months
|
|
Twelve
Months or Greater
|
|
Total
|
|
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
(In
Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State
and political securities
|
|
18,872
|
|
502
|
|
94,980
|
|
10,211
|
|
113,852
|
|
10,713
|
|
Other
debt securities
|
|
354
|
|
24
|
|
6,810
|
|
1,187
|
|
7,164
|
|
1,211
|
|
Total
debt securities
|
|
19,226
|
|
526
|
|
101,790
|
|
11,398
|
|
121,016
|
|
11,924
|
|
Equity
securities
|
|
802
|
|
369
|
|
444
|
|
322
|
|
1,246
|
|
691
|
|
Total
|
|
$
|
20,028
|
|
$
|
895
|
|
$
|
102,234
|
|
$
|
11,720
|
|
$
|
122,262
|
|
$
|
12,615
|
|
|
|
December 31,
2008
|
|
|
|
Less
than Twelve Months
|
|
Twelve
Months or Greater
|
|
Total
|
|
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
(In
Thousands)
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State
and political securities
|
|
48,388
|
|
4,378
|
|
67,412
|
|
6,386
|
|
115,800
|
|
10,764
|
|
Other
debt securities
|
|
6,341
|
|
451
|
|
2,012
|
|
614
|
|
8,353
|
|
1,065
|
|
Total
debt securities
|
|
54,729
|
|
4,829
|
|
69,424
|
|
7,000
|
|
124,153
|
|
11,829
|
|
Equity
securities
|
|
164
|
|
80
|
|
5,364
|
|
3,305
|
|
5,528
|
|
3,385
|
|
Total
|
|
$
|
54,893
|
|
$
|
4,909
|
|
$
|
74,788
|
|
$
|
10,305
|
|
$
|
129,681
|
|
$
|
15,214
|
|
18
Table
of Contents
At
June 30, 2009 there were a total of 47 and 223 individual securities that
were in a continuous unrealized loss position for less than twelve months and
greater than twelve months, respectively.
The Company reviews its position quarterly and has
asserted that at June 30, 2009, the declines outlined in the above table
represent temporary declines and the Company does have the intent and ability
either to hold those securities to maturity or to allow a market recovery. There were 270 positions that were
temporarily impaired at June 30, 2009.
The Company has concluded that the unrealized losses disclosed above are
not other than temporary but are the result of interest rate changes, sector
credit ratings changes, or Company-specific ratings changes that are not
expected to result in the non-collection of principal and interest during the
period.
The
amortized cost and estimated fair value of debt securities at June 30,
2009, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities since borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
Available
for Sale
|
|
Held
to Maturity
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
(In
Thousands)
|
|
Cost
|
|
Fair
Value
|
|
Cost
|
|
Fair
Value
|
|
Due
in one year or less
|
|
$
|
25
|
|
$
|
25
|
|
$
|
25
|
|
$
|
25
|
|
Due
after one year to five years
|
|
10,092
|
|
10,564
|
|
76
|
|
76
|
|
Due
after five years to ten years
|
|
784
|
|
805
|
|
|
|
|
|
Due
after ten years
|
|
194,587
|
|
184,779
|
|
9
|
|
10
|
|
Total
|
|
$
|
205,488
|
|
$
|
196,173
|
|
$
|
110
|
|
$
|
111
|
|
Total
gross proceeds from sales of securities available for sale were $4,682,000 and
$40,169,000, for June 30, 2009 and December 31, 2008,
respectively. The following table
represents gross realized gains and losses on those transactions:
|
|
June 30,
|
|
December 31,
|
|
|
|
(In
Thousands)
|
|
2009
|
|
2008
|
|
|
|
Gross
realized gains:
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
|
|
$
|
253
|
|
|
|
State
and political securities
|
|
|
|
236
|
|
|
|
Other
debt securities
|
|
162
|
|
6
|
|
|
|
Equity
securities
|
|
4
|
|
539
|
|
|
|
Total
gross realized gains
|
|
$
|
166
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
Gross
realized losses:
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
|
|
$
|
36
|
|
|
|
State
and political securities
|
|
|
|
204
|
|
|
|
Other
debt securities
|
|
37
|
|
510
|
|
|
|
Equity
securities
|
|
4,584
|
|
2,315
|
|
|
|
Total
gross realized losses
|
|
$
|
4,621
|
|
$
|
3,065
|
|
|
|
19
Table
of Contents
Gross realized losses for the equity securities
portfolio include impairment charges of $4,584,000 and $2,797,000 for the six
months ended June 30, 2009 and year ended December 31, 2008, respectively.
Note 12. Subsequent Events
The
Company assessed events occurring subsequent to June 30, 2009 through August 10,
2009 for potential recognition and disclosure in the consolidated financial
statements. No events have occurred that
would require adjustment to or disclosure in the consolidated financial
statements which were issued on August 10, 2009.
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.
20
Table of Contents
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operation
EARNINGS SUMMARY
Comparison
of the Three and Six Months Ended June 30, 2009 and 2008
Summary
Results
Net
income for the three months ended June 30, 2009 was $832,000 compared to
$2,057,000 for the same period of 2008 as after-tax securities losses increased
$1,210,000 (from a loss of $166,000 to a loss of $1,376,000). Included within the change in after-tax
securities losses was an other than temporary impairment charge relating to
certain equity securities held in the investment portfolio of $2,251,000. Basic
and diluted earnings per share for the three months ended June 30, 2009
were $0.22 compared to $0.53 for the three months ended June 30,
2008. Return on average assets and
return on average equity were 0.51% and 5.45% for the three months ended June 30,
2009 compared to 1.30% and 11.73% for the corresponding period of 2008. Net income from core operations (operating
earnings) remained stable at $2,208,000 for the three months ended June 30,
2009 compared to $2,223,000 for the same period of 2008. Operating earnings per share for the three
months ended June 30, 2009 were $0.58 basic and dilutive compared to $0.58
basic and $0.57 dilutive for the three months ended June 30, 2008.
The six months ended June 30,
2009 generated net income of $1,671,000 compared to $4,188,000 for the same
period of 2008. Comparable results were
impacted by an increase in after-tax securities losses of $2,799,000 (from a
loss of $141,000 to a loss of $2,940,000). Earnings per share, basic and
diluted, for the six months ended June 30, 2009 were $0.44 as compared to
$1.08 for the comparable period of 2008.
Return on average assets and return on average equity were 0.51% and
5.54% for the six months ended June 30, 2009 compared to 1.33% and 11.87%
for the corresponding period of 2008
. Operating earnings increased
6.5% to $4,611,000 for the six months ended June 30, 2009 compared to
$4,329,000 for the comparable period of 2008, resulting in basic and dilutive
operating earnings per share increasing 7.1% to $1.20 from $1.12 for the six
month periods ended June 30, 2009 and 2008, respectively.
Management uses the
non-GAAP measure of net income from core operations, or operating earnings, in
its analysis of the Companys performance.
This measure, as used by the Company, adjusts net income by excluding
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, or operating earnings, 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 necessarily comparable to
non-GAAP performance measures that may be presented by other companies.
21
Table
of Contents
Reconciliation
of GAAP and non-GAAP Income
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In
Thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
GAAP net income
|
|
832
|
|
2,057
|
|
1,671
|
|
4,188
|
|
Securities losses, net
of tax
|
|
(1,376
|
)
|
(166
|
)
|
(2,940
|
)
|
(141
|
)
|
Non-GAAP operating
earnings
|
|
2,208
|
|
2,223
|
|
4,611
|
|
4,329
|
|
Interest
And Dividend Income
Interest
and dividend income for the three months ended June 30, 2009 increased
$77,000 to $9,013,000 compared to $8,936,000 for the same period of 2008. The increase in interest income was the
result of an increase in loan interest of $103,000 which offset the slight
decline in investment securities income of $26,000. The increase in loan interest is the result
of growth in the average gross loan portfolio of $26,772,000. The growth offset a decline in the average
taxable equivalent yield of 26 basis points (bp) caused by the low interest
rate environment that has existed over the past year. Dividend income decreased as a direct result
of the current status of the economy that has caused many of the issuers of
equity holdings in our portfolio to decrease or suspend their dividend. In addition, the Federal Home Loan Bank of
Pittsburgh (FHLB) has suspended payment of dividends on shares of its common
stock, which resulted in a decrease of approximately $81,000 in dividend income
the second quarter of 2009. On a taxable
equivalent basis, total interest income increased $143,000 as the tax-exempt
loan and investment securities portfolios were able to obtain better yields
than in the comparable period of 2008.
During
the six months ended June 30, 2009, interest and dividend income was
$17,930,000, a decrease of $54,000 over the same period in 2008. Interest income on the loan portfolio
remained stable as the growth in the portfolio countered a 44 bp decline in
average yield. The investment portfolio
interest income was negatively impacted by approximately $160,000 due to the
suspension of FHLB dividends which resulted in total interest income from
investment securities being flat to the comparable period of 2008. Tax-equivalent interest income increased
$69,000 due to better yields on the loan and investment tax-exempt portfolios,
an overall increase in earning assets of $17,732,000, and a shift in the
earning asset portfolio towards loans from investments.
Interest
and dividend income composition for the three and six months ended June 30,
2009 and 2008 was as follows:
22
Table
of Contents
|
|
For
The Three Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Loans
including fees
|
|
$
|
6,349
|
|
70.4
|
%
|
$
|
6,246
|
|
69.9
|
%
|
$
|
103
|
|
1.6
|
%
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,374
|
|
15.2
|
|
1,276
|
|
14.3
|
|
98
|
|
7.7
|
|
Tax-exempt
|
|
1,249
|
|
13.9
|
|
1,210
|
|
13.5
|
|
39
|
|
3.2
|
|
Dividend
and other interest income
|
|
41
|
|
0.5
|
|
204
|
|
2.3
|
|
(163
|
)
|
(79.9
|
)
|
Total
interest and dividend income
|
|
$
|
9,013
|
|
100.0
|
%
|
$
|
8,936
|
|
100.0
|
%
|
$
|
77
|
|
0.9
|
%
|
|
|
For
The Six Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Loans
including fees
|
|
$
|
12,568
|
|
70.1
|
%
|
$
|
12,625
|
|
70.2
|
%
|
$
|
(57
|
)
|
(0.5
|
)%
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
2,737
|
|
15.3
|
|
2,466
|
|
13.7
|
|
271
|
|
11.0
|
|
Tax-exempt
|
|
2,495
|
|
13.9
|
|
2,436
|
|
13.6
|
|
59
|
|
2.4
|
|
Dividend
and other interest income
|
|
130
|
|
0.7
|
|
457
|
|
2.5
|
|
(327
|
)
|
(71.6
|
)
|
Total
interest and dividend income
|
|
$
|
17,930
|
|
100.0
|
%
|
$
|
17,984
|
|
100.0
|
%
|
$
|
(54
|
)
|
(0.3
|
)%
|
Interest
Expense
Interest
expense for the three months ended June 30, 2009 decreased $572,000 to
$3,208,000 compared to $3,780,000 for the same period of 2008. The decreased expense of $347,000 associated
with deposits is primarily the result of a reduction of 110 bp in rates paid on
time deposits. Factors that led to the
rate decreases include, but are not limited to, Federal Open Market Committee (FOMC)
interest rate actions and campaigns conducted by the Company during the past
two years to attract short-term CDs resulting in an increased repricing
frequency. Short-term borrowings
interest expense decreased $179,000 as the average balance of such borrowings
decreased $23,284,000, while the rate paid declined 72 bp. Long-term borrowing interest expense
decreased $46,000 as the average balance of such borrowings increased slightly,
while the average rate decreased 21 bp to 4.22%. The change in average balance and rate is
reflective of various long-term borrowing maturities and acquisitions during
2008.
Interest
expense for the six months ended June 30, 2009 decreased $1,659,000 from
the same period of 2008. The reasons noted
for the decline in interest expense for the three month period comparison also
apply to the six month period.
Interest
expense composition for the three and six months ended June 30, 2009 and
2008 was as follows:
23
Table
of Contents
|
|
For
The Three Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
2,204
|
|
68.7
|
%
|
$
|
2,551
|
|
67.5
|
%
|
$
|
(347
|
)
|
(13.6
|
)%
|
Short-term
borrowings
|
|
78
|
|
2.4
|
|
257
|
|
6.8
|
|
(179
|
)
|
(69.6
|
)
|
Long-term
borrowings, FHLB
|
|
926
|
|
28.9
|
|
972
|
|
25.7
|
|
(46
|
)
|
(4.7
|
)
|
Total
interest expense
|
|
$
|
3,208
|
|
100.0
|
%
|
$
|
3,780
|
|
100.0
|
%
|
$
|
(572
|
)
|
(15.1
|
)%
|
|
|
For
The Six Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
4,209
|
|
66.9
|
%
|
$
|
5,092
|
|
64.1
|
%
|
$
|
(883
|
)
|
(17.3
|
)%
|
Short-term
borrowings
|
|
236
|
|
3.8
|
|
686
|
|
8.6
|
|
(450
|
)
|
(65.6
|
)
|
Long-term
borrowings, FHLB
|
|
1,843
|
|
29.3
|
|
2,169
|
|
27.3
|
|
(326
|
)
|
(15.0
|
)
|
Total
interest expense
|
|
$
|
6,288
|
|
100.0
|
%
|
$
|
7,947
|
|
100.0
|
%
|
$
|
(1,659
|
)
|
(20.9
|
)%
|
Net Interest Margin
The
net interest margin (NIM) for the three months ended June 30, 2009 was
4.36% compared to 4.01% for the corresponding period of 2008. The increase in the NIM was driven by a 62 bp
decline in the rate paid on interest bearing liabilities that more than
compensated for a 6 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 current low rate environment offset in
part by an increase in yield for the investment portfolio. The increase in the investment portfolio
yield was driven by a strategic initiative to increase tax equivalent net
interest income by purchasing tax-exempt and taxable municipal bonds in
anticipation of the decreasing rate environment that has continued to
date. The decrease in the cost of
interest bearing liabilities to 2.50% from 3.12% was driven by a reduction in
the rate paid on time deposits of 110 bp.
The reduction in the rate paid on time deposits was the result of a
shortening of the time deposit portfolio that has resulted in an increasing
repricing frequency during this period of decreasing rates.
The
NIM for the six months ended June 30, 2009 was 4.42% compared to 3.95% for
the same period of 2008. The impact of
the items mentioned in the three month discussion also applies to the six month
period. A 127 bp decline in the rate
paid on time deposits served as the foundation for an 84 bp decline in rate
paid on deposits, while the FOMC and general market actions affected the yield
on earning assets and cost of borrowings.
The
following is a schedule of average balances and associated yields for the three
and six months ended June 30, 2009 and 2008:
24
Table
of Contents
|
|
AVERAGE BALANCES AND INTEREST
RATES
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
(In
Thousands)
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
16,934
|
|
$
|
271
|
|
6.42
|
%
|
$
|
8,506
|
|
$
|
135
|
|
6.31
|
%
|
All other loans
|
|
377,324
|
|
6,170
|
|
6.56
|
%
|
358,980
|
|
6,157
|
|
6.82
|
%
|
Total loans
|
|
394,258
|
|
6,441
|
|
6.55
|
%
|
367,486
|
|
6,292
|
|
6.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment
securities
|
|
101,984
|
|
1,415
|
|
5.55
|
%
|
105,295
|
|
1,480
|
|
5.62
|
%
|
Tax-exempt investment
securities
|
|
103,848
|
|
1,892
|
|
7.29
|
%
|
108,670
|
|
1,833
|
|
6.75
|
%
|
Total securities
|
|
205,832
|
|
3,307
|
|
6.43
|
%
|
213,965
|
|
3,313
|
|
6.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits
|
|
1,371
|
|
|
|
0.00
|
%
|
34
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets
|
|
601,461
|
|
9,748
|
|
6.52
|
%
|
581,485
|
|
9,605
|
|
6.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
55,793
|
|
|
|
|
|
50,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
657,254
|
|
|
|
|
|
$
|
631,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
61,383
|
|
81
|
|
0.53
|
%
|
$
|
61,197
|
|
115
|
|
0.75
|
%
|
Super Now deposits
|
|
56,645
|
|
131
|
|
0.93
|
%
|
54,327
|
|
183
|
|
1.34
|
%
|
Money market deposits
|
|
64,374
|
|
367
|
|
2.29
|
%
|
26,803
|
|
146
|
|
2.17
|
%
|
Time deposits
|
|
224,918
|
|
1,625
|
|
2.90
|
%
|
209,539
|
|
2,107
|
|
4.00
|
%
|
Total deposits
|
|
407,320
|
|
2,204
|
|
2.17
|
%
|
351,866
|
|
2,551
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
18,035
|
|
78
|
|
1.73
|
%
|
41,319
|
|
257
|
|
2.45
|
%
|
Long-term borrowings,
FHLB
|
|
86,778
|
|
926
|
|
4.22
|
%
|
85,789
|
|
972
|
|
4.43
|
%
|
Total borrowings
|
|
104,813
|
|
1,004
|
|
3.79
|
%
|
127,108
|
|
1,229
|
|
3.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities
|
|
512,133
|
|
3,208
|
|
2.50
|
%
|
478,974
|
|
3,780
|
|
3.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
73,930
|
|
|
|
|
|
73,485
|
|
|
|
|
|
Other liabilities
|
|
10,113
|
|
|
|
|
|
9,095
|
|
|
|
|
|
Shareholders equity
|
|
61,078
|
|
|
|
|
|
70,117
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
657,254
|
|
|
|
|
|
$
|
631,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
4.02
|
%
|
|
|
|
|
3.46
|
%
|
Net interest
income/margin
|
|
|
|
$
|
6,540
|
|
4.36
|
%
|
|
|
$
|
5,825
|
|
4.01
|
%
|
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.
25
Table
of Contents
|
|
AVERAGE BALANCES AND INTEREST
RATES
|
|
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
(In
Thousands)
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate
|
|
Average
Balance
|
|
Interest
|
|
Average
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
16,420
|
|
$
|
538
|
|
6.61
|
%
|
$
|
8,277
|
|
$
|
262
|
|
6.37
|
%
|
All other loans
|
|
375,687
|
|
12,213
|
|
6.56
|
%
|
356,830
|
|
12,453
|
|
7.02
|
%
|
Total loans
|
|
392,107
|
|
12,751
|
|
6.56
|
%
|
365,107
|
|
12,715
|
|
7.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
101,937
|
|
2,867
|
|
5.63
|
%
|
103,013
|
|
2,923
|
|
5.68
|
%
|
Tax-exempt securities
|
|
102,757
|
|
3,780
|
|
7.36
|
%
|
111,630
|
|
3,691
|
|
6.61
|
%
|
Total securities
|
|
204,694
|
|
6,647
|
|
6.49
|
%
|
214,643
|
|
6,614
|
|
6.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits
|
|
700
|
|
|
|
0.00
|
%
|
19
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets
|
|
597,501
|
|
19,398
|
|
6.53
|
%
|
579,769
|
|
19,329
|
|
6.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
55,459
|
|
|
|
|
|
49,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
652,960
|
|
|
|
|
|
$
|
629,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
60,517
|
|
159
|
|
0.53
|
%
|
$
|
59,880
|
|
224
|
|
0.75
|
%
|
Super Now deposits
|
|
55,276
|
|
260
|
|
0.95
|
%
|
50,347
|
|
338
|
|
1.35
|
%
|
Money market deposits
|
|
52,888
|
|
580
|
|
2.21
|
%
|
25,064
|
|
273
|
|
2.19
|
%
|
Time deposits
|
|
215,069
|
|
3,210
|
|
3.01
|
%
|
200,233
|
|
4,257
|
|
4.28
|
%
|
Total Deposits
|
|
383,750
|
|
4,209
|
|
2.21
|
%
|
335,524
|
|
5,092
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
39,641
|
|
236
|
|
1.19
|
%
|
46,216
|
|
686
|
|
2.95
|
%
|
Other borrowings
|
|
86,778
|
|
1,843
|
|
4.22
|
%
|
95,661
|
|
2,169
|
|
4.48
|
%
|
Total borrowings
|
|
126,419
|
|
2,079
|
|
3.27
|
%
|
141,877
|
|
2,855
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities
|
|
510,169
|
|
6,288
|
|
2.48
|
%
|
477,401
|
|
7,947
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
72,633
|
|
|
|
|
|
71,864
|
|
|
|
|
|
Other liabilities
|
|
9,870
|
|
|
|
|
|
9,280
|
|
|
|
|
|
Shareholders equity
|
|
60,288
|
|
|
|
|
|
70,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
652,960
|
|
|
|
|
|
$
|
629,004
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
4.05
|
%
|
|
|
|
|
3.36
|
%
|
Net interest
income/margin
|
|
|
|
$
|
13,110
|
|
4.42
|
%
|
|
|
$
|
11,382
|
|
3.95
|
%
|
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.
26
Table
of Contents
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 six months ended June 30, 2009
and 2008.
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(In
Thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
$
|
9,013
|
|
$
|
8,936
|
|
$
|
17,930
|
|
$
|
17,984
|
|
Total
interest expense
|
|
3,208
|
|
3,780
|
|
6,288
|
|
7,947
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
5,805
|
|
5,156
|
|
11,642
|
|
10,037
|
|
Tax
equivalent adjustment
|
|
735
|
|
669
|
|
1,468
|
|
1,345
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (fully taxable equivalent)
|
|
$
|
6,540
|
|
$
|
5,825
|
|
$
|
13,110
|
|
$
|
11,382
|
|
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 month periods ended June 30,
2009 and 2008:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2009
vs 2008
|
|
2009
vs 2008
|
|
|
|
Increase
(Decrease)
|
|
Increase
(Decrease)
|
|
|
|
Due
to
|
|
Due
to
|
|
(In
Thousands)
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
tax-exempt
|
|
$
|
134
|
|
$
|
2
|
|
$
|
136
|
|
$
|
256
|
|
$
|
20
|
|
$
|
276
|
|
Loans
|
|
277
|
|
(264
|
)
|
13
|
|
990
|
|
(1,230
|
)
|
(240
|
)
|
Taxable
investment securities
|
|
(48
|
)
|
(17
|
)
|
(65
|
)
|
(22
|
)
|
(34
|
)
|
(56
|
)
|
Tax-exempt
investment securities
|
|
(79
|
)
|
138
|
|
59
|
|
(401
|
)
|
490
|
|
89
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
|
284
|
|
(141
|
)
|
143
|
|
823
|
|
(754
|
)
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
deposits
|
|
|
|
(34
|
)
|
(34
|
)
|
5
|
|
(70
|
)
|
(65
|
)
|
Super
Now deposits
|
|
8
|
|
(60
|
)
|
(52
|
)
|
56
|
|
(134
|
)
|
(78
|
)
|
Money
market deposits
|
|
213
|
|
8
|
|
221
|
|
302
|
|
5
|
|
307
|
|
Time
deposits
|
|
142
|
|
(624
|
)
|
(482
|
)
|
550
|
|
(1,597
|
)
|
(1,047
|
)
|
Short-term
borrowings
|
|
(65
|
)
|
(114
|
)
|
(179
|
)
|
(50
|
)
|
(400
|
)
|
(450
|
)
|
Long-term
borrowings, FHLB
|
|
9
|
|
(55
|
)
|
(46
|
)
|
(200
|
)
|
(126
|
)
|
(326
|
)
|
Total
interest-bearing liabilities
|
|
307
|
|
(879
|
)
|
(572
|
)
|
663
|
|
(2,322
|
)
|
(1,659
|
)
|
Change
in net interest income
|
|
$
|
(23
|
)
|
$
|
738
|
|
$
|
715
|
|
$
|
160
|
|
$
|
1,568
|
|
$
|
1,728
|
|
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
performed annually for the Bank.
Management remains committed to an aggressive program of problem loan
identification and resolution.
27
Table of
Contents
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 June 30, 2009, 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 $4,356,000 at December 31, 2008 to $4,377,000 at June 30,
2009. At June 30, 2009 and December 31,
2008, the allowance for loan losses to total loans was 1.12% and 1.14%,
respectively.
The provision for loan
losses totaled $186,000 and $312,000 for the three and six months ended June 30,
2009, compared to $60,000 and $120,000 for the same period in 2008. The amount of the increase in the provision
was the result of several factors, including but not limited to, an increase in
gross loans of $10,596,000 since December 31, 2008, a ratio of net charge
offs to average loans of 0.07% for the six months ended June 30, 2009, a
ratio of nonperforming loans to total loans of 0.68%, and a ratio of the
allowance for loan losses to nonperforming loans of 164.12% at June 30,
2009. As noted in the following
schedules, there has been an increase in nonperforming loans and net
charge-offs over the past year. The
following increases, coupled with the ratios noted previously, dictated an
increase in the provision for loan losses: continued uncertainty surrounding
the economy and internal loan review and analysis. The increase did not equate to the increase
in charge-offs and nonperforming loans due to the well collateralized status of
the nonperforming loans and overall loan portfolio in general, which limits the
loan specific allocation of the allowance for loan losses.
28
Table
of Contents
Following
is a table showing the changes in the allowance for loan losses for the six
month periods ended June 30, 2009 and 2008:
(In
Thousands)
|
|
2009
|
|
2008
|
|
Balance at beginning of
period
|
|
$
|
4,356
|
|
$
|
4,130
|
|
Charge-offs:
|
|
|
|
|
|
Real estate
|
|
192
|
|
9
|
|
Commercial and
industrial
|
|
64
|
|
31
|
|
Installment loans to
individuals
|
|
90
|
|
92
|
|
Total charge-offs
|
|
346
|
|
132
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Real estate
|
|
8
|
|
11
|
|
Commercial and
industrial
|
|
|
|
37
|
|
Installment loans to
individuals
|
|
47
|
|
41
|
|
Total recoveries
|
|
55
|
|
89
|
|
Net charge-offs
|
|
291
|
|
43
|
|
Additions charged to
operations
|
|
312
|
|
120
|
|
Balance at end of
period
|
|
$
|
4,377
|
|
$
|
4,207
|
|
Ratio of net
charge-offs during the period to average loans outstanding during the period
|
|
0.07
|
%
|
0.01
|
%
|
Following
is a table showing the changes in total nonperforming loans as of:
|
|
Total
Nonperforming Loans
|
|
|
|
|
|
90
Days
|
|
|
|
(In
Thousands)
|
|
Nonaccrual
|
|
Past
Due
|
|
Total
|
|
06/30/09
|
|
$
|
2,089
|
|
$
|
578
|
|
$
|
2,667
|
|
12/31/08
|
|
1,476
|
|
259
|
|
1,735
|
|
06/30/08
|
|
605
|
|
304
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
not included above which are troubled debt restructurings as defined in FAS
15,
Accounting by Debtors and Creditors for Troubled
Debt Restructurings
, totaled $31,000 and $214,000 at December 31,
2008 and June 30, 2008; however, there were no troubled debt
restructurings at June 30, 2009.
Non-interest
Income
Total
non-interest income for the three months ended June 30, 2009 compared to
the same period in 2008 decreased $2,013,000 to $(392,000) due to a $1,835,000
decrease in net securities gains and losses when comparing the three month
periods ended June 30, 2009 and 2008.
Excluding net securities gains and losses, non-interest income for the
first quarter of 2009 would have decreased $178,000 compared to the 2008
period. Deposit service charges were
stagnant as overdraft fee income increased $11,000 offsetting a decline in
revenue due to customers migrating to no service charge checking accounts that
were introduced as part of a customer acquisition and retention program. Gain on sale of loans decreased $109,000 due
primarily from a change in product mix which has resulted in a greater
percentage of the fee collected being
29
Table
of Contents
categorized
as other income. This shift in product
mix resulted in other income increasing 8.8% or $48,000.
Insurance
commissions for the three months ended June 30, 2009 decreased $139,000
compared to the same period in 2008 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 if another sales outlet is added.
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 six months ended June 30, 2009 compared to the
same period in 2008 decreased $4,703,000.
Excluding net securities gains, non-interest income would have decreased
$461,000 compared to the 2008 period.
The decrease in non-interest income for the six month period is the
result of the same items noted in the three month discussion.
Non-interest
income composition for the three months ended June 30, 2009 and 2008 was
as follows:
|
|
For
The Three Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Deposit
service charges
|
|
$
|
541
|
|
(138.0
|
)%
|
$
|
540
|
|
33.3
|
%
|
$
|
1
|
|
0.2
|
%
|
Securities
(losses) gains, net
|
|
(2,086
|
)
|
532.2
|
|
(251
|
)
|
(15.5
|
)
|
(1,835
|
)
|
731.1
|
|
Bank
owned life insurance
|
|
112
|
|
(28.6
|
)
|
91
|
|
5.6
|
|
21
|
|
23.1
|
|
Gain
on sale of loans
|
|
103
|
|
(26.3
|
)
|
212
|
|
13.1
|
|
(109
|
)
|
(51.4
|
)
|
Insurance
commissions
|
|
347
|
|
(88.5
|
)
|
486
|
|
30.0
|
|
(139
|
)
|
(28.6
|
)
|
Other
|
|
591
|
|
(150.8
|
)
|
543
|
|
33.5
|
|
48
|
|
8.8
|
|
Total
non-interest income
|
|
$
|
(392
|
)
|
100.0
|
%
|
$
|
1,621
|
|
100.0
|
%
|
$
|
(2,013
|
)
|
(124.2
|
)%
|
|
|
For
The Six Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Deposit
service charges
|
|
$
|
1,066
|
|
(91.3
|
)%
|
$
|
1,110
|
|
31.4
|
%
|
$
|
(44
|
)
|
(4.0
|
)%
|
Securities
(losses) gains, net
|
|
(4,455
|
)
|
381.5
|
|
(213
|
)
|
(6.0
|
)
|
(4,242
|
)
|
1,991.5
|
|
Bank
owned life insurance
|
|
274
|
|
(23.5
|
)
|
246
|
|
7.0
|
|
28
|
|
11.4
|
|
Gain
on sale of loans
|
|
221
|
|
(18.9
|
)
|
364
|
|
10.3
|
|
(143
|
)
|
(39.3
|
)
|
Insurance
commissions
|
|
701
|
|
(60.0
|
)
|
1,066
|
|
30.1
|
|
(365
|
)
|
(34.2
|
)
|
Other
|
|
1,025
|
|
(87.8
|
)
|
962
|
|
27.2
|
|
63
|
|
6.5
|
|
Total
non-interest income
|
|
$
|
(1,168
|
)
|
100.0
|
%
|
$
|
3,535
|
|
100.0
|
%
|
$
|
(4,703
|
)
|
(133.0
|
)%
|
Non-interest
Expense
Total
non-interest expense increased $374,000 for the three months ended June 30,
2009 compared to the same period of 2008.
The $126,000 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 increased $67,000 due
to the utilization of Pennsylvania Enterprise Zone tax credits from a low
income housing partnership during 2008.
Other expenses increased primarily due to normal
30
Table
of Contents
anticipated
inflationary adjustments to ongoing business operating costs in addition to
increased FDIC insurance cost, including an industry-wide special assessment.
Total
non-interest expense increased $574,000 for the six months ended June 30,
2009 compared to the same period of 2008.
The increase in non-interest expense for the six month period is the
result of the same items noted in the three month discussion.
Non-interest
expense composition for the three months ended June 30, 2009 and 2008 was
as follows:
|
|
For
The Three Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Salaries
and employee benefits
|
|
$
|
2,595
|
|
53.1
|
%
|
$
|
2,469
|
|
54.7
|
%
|
$
|
126
|
|
5.1
|
%
|
Occupancy,
net
|
|
318
|
|
6.5
|
|
314
|
|
7.0
|
|
4
|
|
1.3
|
|
Furniture
and equipment
|
|
306
|
|
6.3
|
|
287
|
|
6.4
|
|
19
|
|
6.6
|
|
Pennsylvania
shares tax
|
|
172
|
|
3.5
|
|
105
|
|
2.3
|
|
67
|
|
63.8
|
|
Amortization
of investment in limited partnerships
|
|
141
|
|
2.9
|
|
178
|
|
3.9
|
|
(37
|
)
|
(20.8
|
)
|
Other
|
|
1,353
|
|
27.7
|
|
1,158
|
|
25.7
|
|
195
|
|
16.8
|
|
Total
non-interest expense
|
|
$
|
4,885
|
|
100.0
|
%
|
$
|
4,511
|
|
100.0
|
%
|
$
|
374
|
|
8.3
|
%
|
|
|
For
The Six Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Salaries
and employee benefits
|
|
$
|
5,077
|
|
53.3
|
%
|
$
|
4,920
|
|
54.9
|
%
|
$
|
157
|
|
3.2
|
%
|
Occupancy,
net
|
|
657
|
|
6.9
|
|
652
|
|
7.3
|
|
5
|
|
0.8
|
|
Furniture
and equipment
|
|
613
|
|
6.4
|
|
572
|
|
6.4
|
|
41
|
|
7.2
|
|
Pennsylvania
shares tax
|
|
343
|
|
3.6
|
|
210
|
|
2.3
|
|
133
|
|
63.3
|
|
Amortization
of investment in limited partnerships
|
|
283
|
|
3.0
|
|
356
|
|
4.0
|
|
(73
|
)
|
(20.5
|
)
|
Other
|
|
2,557
|
|
26.8
|
|
2,246
|
|
25.1
|
|
311
|
|
13.8
|
|
Total
non-interest expense
|
|
$
|
9,530
|
|
100.0
|
%
|
$
|
8,956
|
|
100.0
|
%
|
$
|
574
|
|
6.4
|
%
|
Provision
for Income Taxes
Income
taxes decreased $639,000 and $1,347,000 for the three and six months ended June 30,
2009 compared to the same periods of 2008.
The decreases, due to net securities losses of $2,086,00 and $4,455,000,
resulted in a tax benefit of $490,000 and $1,039,000 for the three and six
months ended June 30, 2009.
Excluding the impact of the net securities gains and losses, the
effective tax rate for the three and six months ended June 30, 2009 was
9.02% and 9.36% as compared to 9.52% and 8.07% for the same period of
2008. The Company currently is in a
deferred tax asset position due to the low income housing tax credits earned
both currently and previously.
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.
31
Table
of Contents
ASSET/LIABILITY
MANAGEMENT
Cash and Cash
Equivalents
Cash and cash equivalents
increased $2,066,000 from $16,581,000 at December 31, 2008 to $18,647,000
at June 30, 2009 primarily as a result of the following activities during
the six months ended June 30, 2009:
Loans Held for
Sale
Activity regarding loans
held for sale resulted in loan originations exceeding sale proceeds, less
$221,000 in realized gains, by $973,000 for the six months ended June 30,
2009.
Loans
Gross loans increased
$10,596,000 since December 31, 2008 due to the increase of commercial
related loans, while non-commercial loans remained relatively constant.
The allocation of the loan portfolio, by category,
as of June 30, 2009 and December 31, 2008 is presented below:
|
|
June 30,
2009
|
|
December 31,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Commercial,
financial and agricultural
|
|
$
|
43,906
|
|
11.2
|
%
|
$
|
40,602
|
|
10.6
|
%
|
$
|
3,304
|
|
8.1
|
%
|
Real
estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
175,982
|
|
44.9
|
|
177,406
|
|
46.5
|
|
(1,424
|
)
|
(0.8
|
)
|
Commercial
|
|
143,204
|
|
36.5
|
|
136,158
|
|
35.7
|
|
7,046
|
|
5.2
|
|
Construction
|
|
18,005
|
|
4.6
|
|
15,838
|
|
4.2
|
|
2,167
|
|
13.7
|
|
Installment
loans to individuals
|
|
11,962
|
|
3.1
|
|
12,487
|
|
3.3
|
|
(525
|
)
|
(4.2
|
)
|
Less:
Net deferred loan fees
|
|
985
|
|
(0.3
|
)
|
1,013
|
|
(0.3
|
)
|
(28
|
)
|
(2.8
|
)
|
Gross
loans
|
|
$
|
392,074
|
|
100.0
|
%
|
$
|
381,478
|
|
100.0
|
%
|
$
|
10,596
|
|
2.8
|
%
|
The allocation of the loan portfolio, by delinquency
status, as of June 30, 2009 and December 31, 2008 is presented below:
32
Table
of Contents
|
|
June 30,
2009
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
|
|
|
|
|
|
|
90
Days
|
|
|
|
|
|
|
|
|
|
Past
Due
|
|
Or
More
|
|
|
|
|
|
|
|
|
|
30 To
90
|
|
&
Still
|
|
Non-
|
|
|
|
(In
Thousands)
|
|
Current
|
|
Days
|
|
Accruing
|
|
Accrual
|
|
Total
|
|
Commercial and
agricultural
|
|
$
|
43,419
|
|
$
|
353
|
|
$
|
94
|
|
$
|
40
|
|
$
|
43,906
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
171,800
|
|
3,042
|
|
337
|
|
803
|
|
175,982
|
|
Commercial
|
|
140,875
|
|
1,565
|
|
120
|
|
644
|
|
143,204
|
|
Construction
|
|
17,270
|
|
186
|
|
|
|
549
|
|
18,005
|
|
Installment loans to
individuals
|
|
11,631
|
|
251
|
|
27
|
|
53
|
|
11,962
|
|
|
|
384,995
|
|
$
|
5,397
|
|
$
|
578
|
|
$
|
2,089
|
|
393,059
|
|
Less: Net deferred loan
fees
|
|
985
|
|
|
|
|
|
|
|
985
|
|
Allowance for loan
losses
|
|
4,377
|
|
|
|
|
|
|
|
4,377
|
|
Loans, net
|
|
$
|
379,633
|
|
|
|
|
|
|
|
$
|
387,697
|
|
|
|
Decmeber
31, 2008
|
|
|
|
|
|
|
|
Past
Due
|
|
|
|
|
|
|
|
|
|
|
|
90
Days
|
|
|
|
|
|
|
|
|
|
Past
Due
|
|
Or
More
|
|
|
|
|
|
|
|
|
|
30 To
90
|
|
&
Still
|
|
Non-
|
|
|
|
(In
Thousands)
|
|
Current
|
|
Days
|
|
Accruing
|
|
Accrual
|
|
Total
|
|
Commercial and
agricultural
|
|
$
|
40,006
|
|
$
|
517
|
|
$
|
|
|
$
|
79
|
|
$
|
40,602
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
170,011
|
|
6,582
|
|
223
|
|
590
|
|
177,406
|
|
Commercial
|
|
134,647
|
|
775
|
|
|
|
736
|
|
136,158
|
|
Construction
|
|
15,652
|
|
167
|
|
|
|
19
|
|
15,838
|
|
Installment loans to
individuals
|
|
12,053
|
|
346
|
|
36
|
|
52
|
|
12,487
|
|
|
|
372,369
|
|
$
|
8,387
|
|
$
|
259
|
|
$
|
1,476
|
|
382,491
|
|
Less: Net deferred loan
fees
|
|
1,013
|
|
|
|
|
|
|
|
1,013
|
|
Allowance for loan
losses
|
|
4,356
|
|
|
|
|
|
|
|
4,356
|
|
Loans, net
|
|
$
|
367,000
|
|
|
|
|
|
|
|
$
|
377,122
|
|
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 $6,597,000 at June 30, 2009, compared to $5,042,000 at December 31,
2008. The valuation allowance related to
impaired loans amounted to $553,000 at June 30, 2009 and $166,000 at December 31,
2008. The increase in impaired loans and
valuation allowance is primarily 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
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 at June 30,
2009 has decreased $375,000 since December 31, 2008. The change is primarily due to a reduction in
agency securities caused by normal principal payments as the cash flows have
not been fully reinvested
33
Table
of Contents
back
into the portfolio. The unrealized
losses within the debt securities portfolio are the result of market activity,
not credit issues/ratings, as approximately 90% of the debt securities
portfolio is currently rated A or higher by either S&P or Moodys.
The
Company considers various factors, which include examples from applicable
accounting guidance, when analyzing the available for sale portfolio for
possible other than temporary impairment.
The Company primarily considers the following factors in its analysis:
length of time and severity of the market value being less than carrying value,
reduction of dividend paid (equities), continued payment of dividend/interest,
credit rating, and financial condition of an issuer, intent and ability to hold
until anticipated recovery (which may be maturity), and general outlook for the
economy, specific industry, and entity in question.
The
bond portion of the portfolio review is conducted with emphases on several
factors. Continued payment of principal
and interest is given primary importance with credit rating and financial
condition of the issuer following as the next most important. Credit ratings were reviewed with the ratings
of the bonds being satisfactory. Those
that were not currently rated were discussed with a third party and/or
underwent an internal financial review.
The Company also monitors whether each of the investments incurred a
decline in market value from carrying value of at least 20% for twelve
consecutive months or a similar decline of at least 50% for three consecutive
months. Each bond is reviewed to
determine whether it is a general obligation bond, which is backed by the
credit and taxing power of the issuing jurisdiction, or revenue bond, which is
only payable from specified revenues.
Based on the review undertaken by the Company and the intent and ability
to hold the bonds until anticipated recovery (which may be maturity) the
Company determined that the decline in value of the various bond holdings were
deemed to be temporary and were the result of the general market downturns and
interest rate/yield curve changes, not credit issues. Consistent with the Companys review of the
portfolio as a whole, the intent and ability to hold such bonds until
anticipated recovery and the fact that almost all of such bonds are general
obligation bonds, the Company determined that the decline in the value of these
bond holdings were deemed to be temporary.
The
equity portfolio continues to feel the effects of the economic turbulence that
is affecting the financial sector. This
sector of the portfolio, as of June 30, 2009, held $691,000 in unrealized
losses on an amortized cost basis of $11,994,000. 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 $2,251,000 and $4,584,000 for the
three and six months ended June 30, 2009.
Certain positions may be liquidated, in whole or part, through the
balance of 2009 so that the losses can be carried back for tax purposes and
offset against gains that have been recognized over the past several years.
The
equity portion of the portfolio, which is invested entirely in financial
institutions, is reviewed for possible other than temporary impairment in a
similar manner to the bond portfolio with greater emphasis placed on the length
of time the market value has been less than the carrying value and financial
sector outlook. The Company also reviews
dividend payment activities and, in the case of financial institutions, whether
or not such issuer was participating in the TARP Capital Purchase Program. The starting point for the equity analysis is
the length and severity of a market price decline. The Company monitors two primary measures:
20% decline
34
Table
of Contents
for twelve consecutive months and 50% decline
for three consecutive months in market value from carrying value.
35
Table of Contents
The
amortized cost of investment securities and their estimated fair values at June 30,
2009 and December 31, 2008 are as follows:
|
|
June 30,
2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In
Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available
for sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
40,968
|
|
$
|
1,690
|
|
$
|
|
|
$
|
42,658
|
|
State
and political securities
|
|
143,057
|
|
323
|
|
(10,713
|
)
|
132,667
|
|
Other
debt securities
|
|
21,463
|
|
596
|
|
(1,211
|
)
|
20,848
|
|
Total
debt securities
|
|
205,488
|
|
2,609
|
|
(11,924
|
)
|
196,173
|
|
Equity
securities
|
|
11,994
|
|
425
|
|
(691
|
)
|
11,728
|
|
Total
investment securities AFS
|
|
$
|
217,482
|
|
$
|
3,034
|
|
$
|
(12,615
|
)
|
$
|
207,901
|
|
|
|
|
|
|
|
|
|
|
|
Held
to maturity (HTM)
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
9
|
|
$
|
1
|
|
$
|
|
|
$
|
10
|
|
Other
debt securities
|
|
101
|
|
|
|
|
|
101
|
|
Total
investment securities HTM
|
|
$
|
110
|
|
$
|
1
|
|
$
|
|
|
$
|
111
|
|
|
|
December 31,
2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In
Thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available
for sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
46,452
|
|
$
|
1,134
|
|
$
|
|
|
$
|
47,586
|
|
State
and political securities
|
|
142,258
|
|
348
|
|
(10,764
|
)
|
131,842
|
|
Other
debt securities
|
|
15,970
|
|
649
|
|
(1,065
|
)
|
15,554
|
|
Total
debt securities
|
|
204,680
|
|
2,131
|
|
(11,829
|
)
|
194,982
|
|
Equity
securities
|
|
16,429
|
|
225
|
|
(3,385
|
)
|
13,269
|
|
Total
investment securities AFS
|
|
$
|
221,109
|
|
$
|
2,356
|
|
$
|
(15,214
|
)
|
$
|
208,251
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
36
Table
of Contents
The
distribution of credit ratings by amortized cost and estimated fair values for
the debt security portfolio at June 30, 2009 follows:
|
|
A- to AAA
|
|
B- to BBB+
|
|
C to CCC+
|
|
Not Rated
|
|
Total
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
(In Thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Available for sale (AFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
agency securities
|
|
$
|
40,968
|
|
$
|
42,658
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
40,968
|
|
$
|
42,658
|
|
State and political
securities
|
|
124,873
|
|
116,525
|
|
11,619
|
|
10,355
|
|
|
|
|
|
6,565
|
|
5,787
|
|
143,057
|
|
132,667
|
|
Other debt securities
|
|
19,442
|
|
19,061
|
|
1,010
|
|
798
|
|
50
|
|
37
|
|
961
|
|
952
|
|
21,463
|
|
20,848
|
|
Total debt securities
AFS
|
|
$
|
185,283
|
|
$
|
178,244
|
|
$
|
12,629
|
|
$
|
11,153
|
|
$
|
50
|
|
$
|
37
|
|
$
|
7,526
|
|
$
|
6,739
|
|
$
|
205,488
|
|
$
|
196,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity (HTM)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and
agency securities
|
|
$
|
9
|
|
$
|
10
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
9
|
|
$
|
10
|
|
Other debt securities
|
|
101
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
101
|
|
Total debt securities
HTM
|
|
$
|
110
|
|
$
|
111
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
110
|
|
$
|
111
|
|
Financing Activities
Deposits
Total
deposits increased 17.5% or $73,633,000 from December 31, 2008 to June 30,
2009. The growth was led by a 100.1% or
$35,900,000 increase in money market deposits from December 31, 2008 to June 30,
2009. The increase in core deposits
(deposits less time deposits) of 18.6% or $41,829,000 has provided relationship
driven funding for the loan portfolio, while also reducing the utilization of
FHLB borrowings. The increase in
deposits is the result of a deposit gathering program coupled with customers
coming back to their hometown bank in the wake of the economic turbulence.
Deposit balances and their changes
for the periods being discussed follow:
|
|
June 30,
2009
|
|
December 31,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Demand
deposits
|
|
$
|
74,509
|
|
15.1
|
%
|
$
|
76,035
|
|
18.0
|
%
|
$
|
(1,526
|
)
|
(2.0
|
)%
|
NOW
accounts
|
|
58,020
|
|
11.7
|
|
53,821
|
|
12.8
|
|
4,199
|
|
7.8
|
|
Money
market deposits
|
|
71,748
|
|
14.5
|
|
35,848
|
|
8.5
|
|
35,900
|
|
100.1
|
|
Savings
deposits
|
|
61,924
|
|
12.5
|
|
58,668
|
|
13.9
|
|
3,256
|
|
5.5
|
|
Time
deposits
|
|
228,800
|
|
46.2
|
|
196,996
|
|
46.8
|
|
31,804
|
|
16.1
|
|
Total
deposits
|
|
$
|
495,001
|
|
100.0
|
%
|
$
|
421,368
|
|
100.0
|
%
|
$
|
73,633
|
|
17.5
|
%
|
Borrowed Funds
Total borrowed funds
decreased 36.7% or $59,066,000 to $101,658,000 at June 30, 2009 compared
to $160,724,000 at December 31, 2008.
The decrease in borrowed funds is primarily the result of growth in
deposits as part of the previously discussed deposit gathering campaigns that
were utilized to provide loan portfolio funding and to reduce the level of
total borrowings. FHLB repurchase
agreements were utilized as their structure allowed for a reduction in interest
expense, while providing the ability to reduce the borrowings at our discretion
as deposit levels increased.
37
Table
of Contents
|
|
June 30,
2009
|
|
December 31,
2008
|
|
Change
|
|
(In
Thousands)
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
Total
|
|
Amount
|
|
%
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB
repurchase agreements
|
|
$
|
|
|
|
%
|
$
|
61,013
|
|
38.0
|
%
|
$
|
(61,013
|
)
|
(100.0
|
)%
|
Securities
sold under agreement to repurchase
|
|
14,880
|
|
14.6
|
|
12,933
|
|
8.0
|
|
1,947
|
|
15.1
|
|
Total
short-term borrowings
|
|
14,880
|
|
14.6
|
%
|
73,946
|
|
46.0
|
%
|
(59,066
|
)
|
(79.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings, FHLB
|
|
86,778
|
|
85.4
|
|
86,778
|
|
54.0
|
|
|
|
|
|
Total
borrowed funds
|
|
$
|
101,658
|
|
100.0
|
%
|
$
|
160,724
|
|
100.0
|
%
|
$
|
(59,066
|
)
|
(36.7
|
)%
|
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.
38
Table
of Contents
Capital
ratios as of June 30, 2009 and December 31, 2008 were as follows:
|
|
2009
|
|
2008
|
|
(In
Thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total
Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
66,175
|
|
15.2
|
%
|
$
|
66,891
|
|
16.0
|
%
|
For
Capital Adequacy Purposes
|
|
34,788
|
|
8.0
|
|
33,410
|
|
8.0
|
|
To
Be Well Capitalized
|
|
43,485
|
|
10.0
|
|
41,763
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital
|
|
|
|
|
|
|
|
|
|
(to
Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
61,798
|
|
14.2
|
%
|
$
|
62,540
|
|
15.0
|
%
|
For
Capital Adequacy Purposes
|
|
17,394
|
|
4.0
|
|
16,705
|
|
4.0
|
|
To
Be Well Capitalized
|
|
26,091
|
|
6.0
|
|
25,058
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital
|
|
|
|
|
|
|
|
|
|
(to
Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
61,798
|
|
9.4
|
%
|
$
|
62,540
|
|
9.7
|
%
|
For
Capital Adequacy Purposes
|
|
26,329
|
|
4.0
|
|
25,773
|
|
4.0
|
|
To
Be Well Capitalized
|
|
32,912
|
|
5.0
|
|
32,216
|
|
5.0
|
|
Liquidity;
Interest Rate Sensitivity and Market Risk
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 and were within the limits cited at June 30,
2009:
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
39
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 cash flows 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 funding 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
$196,482,000.
In addition to this credit arrangement, the
Company has additional lines of credit with correspondent banks of $13,101,000.
Management believes it has sufficient liquidity to satisfy estimated short-term
and long-term funding needs.
FHLB borrowings totaled
$86,778,000 as of June 30, 2009.
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.
40
Table of Contents
The
Company currently maintains a GAP position of being liability sensitive. The Company has strategically taken this
position as it has decreased the duration of the time deposit portfolio, while
continuing to maintain a primarily fixed rate earning asset portfolio with a
duration greater than the liabilities utilized to fund earning assets. Lengthening of the liability portfolio
coupled with the addition of limited short-term assets is being
undertaken. These actions are expected
to reduce, but not eliminate, the liability sensitive structure of the balance
sheet.
A
market value at risk calculation is utilized to monitor the effects of interest
rate changes on the Companys balance sheet and more specifically shareholders
equity. The Company does not manage the
balance sheet structure in order to maintain compliance with this
calculation. The calculation serves as a
guideline with greater emphases placed on interest rate sensitivity. Changes to calculation results from period to
period are reviewed as changes in results could be a signal of future
events. As of the most recent analysis,
the results of the market value at risk calculation were outside of established
guidelines due to the strategic direction being taken.
Interest
Rate Sensitivity
In
this analysis the Company examines the result of a 100 and 200 basis point
change in market interest rates and the effect on net interest income. It is
assumed that the change is instantaneous and that all rates move in a parallel
manner. Assumptions are also made
concerning prepayment speeds on mortgage loans and mortgage securities.
The
following is a rate shock forecast for the twelve month period ended December 31,
2009 assuming a static balance sheet as of December 31, 2008.
|
|
Parallel
Rate Shock in Basis Points
|
|
(In
Thousands)
|
|
-200
|
|
-100
|
|
Static
|
|
+100
|
|
+200
|
|
Net
interest income
|
|
$
|
21,415
|
|
$
|
21,606
|
|
$
|
21,407
|
|
$
|
20,954
|
|
$
|
20,497
|
|
Change
from static
|
|
8
|
|
199
|
|
|
|
(453
|
)
|
(910
|
)
|
Percent
change from static
|
|
0.04
|
%
|
0.93
|
%
|
|
|
-2.12
|
%
|
-4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
model utilized to create the report presented above makes various estimates at
each level of interest rate change regarding cash flow from principal repayment
on loans and mortgage-backed securities and or call activity on investment
securities. Actual results could differ
significantly from these estimates which would result in significant
differences in the calculated projected change.
In addition, the limits stated above do not necessarily represent the
level of change under which management would undertake specific measures to
realign its portfolio in order to reduce the projected level of change. Generally, management believes the Company is
well positioned to respond expeditiously when the market interest rate outlook
changes.
Inflation
The asset and liability
structure of a financial institution is primarily monetary in nature. Therefore, interest rates rather than
inflation have a more significant impact on the Companys
41
Table
of Contents
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,
2008. 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 Chief 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 Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective
as of June 30, 2009. There were no
changes in the Companys internal control over financial reporting that
occurred during the quarter ended June 30, 2009, that have materially affected,
or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
42
Table
of Contents
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,
2008. 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
|
|
Total
|
|
Average
|
|
Total
Number of
|
|
Maximum
Number (or
|
|
|
|
Number
of
|
|
Price
Paid
|
|
Shares
(or Units)
|
|
Approximate
Dollar Value)
|
|
|
|
Shares
(or
|
|
per
Share
|
|
Purchased
as Part of
|
|
of
Shares (or Units) that
|
|
|
|
Units)
|
|
(or
Units)
|
|
Publicly
Announced
|
|
May Yet
Be Purchased
|
|
Period
|
|
Purchased
|
|
Purchased
|
|
Plans
or Programs
|
|
Under
the Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
Month
#1 (April 1 - April 30, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month
#2 (May 1 - May 31, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month
#3 (June 1 - June 30, 2009)
|
|
|
|
|
|
|
|
|
|
On April 28, 2009,
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, 2010. To date, there have been 118,656 shares
repurchased under this plan.
Item 3. Defaults
Upon Senior Securities
None
Item 4. Submission
of Matters to a Vote of Security Holders
Penns Woods Bancorp, Inc.s
annual meeting of the shareholders was held on April 29, 2009. The results of the items voted on are listed
below:
43
Table
of Contents
Issue
|
|
Description
|
|
For
|
|
Withhold
|
|
|
|
1.
|
|
Election of Directors for
a Three Year Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leroy H. Keiler, III
|
|
2,913,359
|
|
62,278
|
|
|
|
|
|
James E. Plummer
|
|
2,853,717
|
|
121,920
|
|
|
|
|
|
Hubert A. Valencik
|
|
2,856,984
|
|
118,653
|
|
|
|
Issue
|
|
Description
|
|
For
|
|
Against
|
|
Abstain
|
|
2.
|
|
Ratification of S.R.
Snodgrass, A.C., Certified Public Accountants as independent auditors
|
|
2,913,135
|
|
52,048
|
|
10,454
|
|
Item 5. Other
Information
None
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, 2005).
|
(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 Chief Financial Officer.
|
(32)
|
(i)
|
|
Section 1350
Certification of Chief Executive Officer.
|
(32)
|
(ii)
|
|
Section 1350
Certification of Chief Financial Officer.
|
44
Table
of Contents
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:
|
August 10, 2009
|
/s/ Ronald A. Walko
|
|
|
Ronald A. Walko,
President and Chief Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
Date:
|
August 10, 2009
|
/s/ Brian L. Knepp
|
|
|
Brian L. Knepp, Chief
Financial Officer
|
|
|
(Principal Financial
Officer and Principal Accounting
|
|
|
Officer)
|
45
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 Chief Financial Officer
|
Exhibit 32(i)
|
|
Section 1350
Certification of Chief Executive Officer
|
Exhibit 32(ii)
|
|
Section 1350
Certification of Chief Financial Officer
|
46
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