Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
|
Quarterly
Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended September 30, 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
November 4, 2009 there were 3,833,764 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)
(In Thousands, Except Share
Data)
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Noninterest-bearing balances
|
|
$
|
12,633
|
|
$
|
16,563
|
|
Interest-bearing deposits in other financial
institutions
|
|
30
|
|
18
|
|
Total cash and cash equivalents
|
|
12,663
|
|
16,581
|
|
|
|
|
|
|
|
Investment securities, available for sale, at fair
value
|
|
219,404
|
|
208,251
|
|
Investment securities held to maturity (fair value
of $111 and $136)
|
|
110
|
|
135
|
|
Loans held for sale
|
|
5,403
|
|
3,622
|
|
Loans
|
|
400,825
|
|
381,478
|
|
Less: Allowance for loan losses
|
|
4,478
|
|
4,356
|
|
Loans, net
|
|
396,347
|
|
377,122
|
|
Premises and equipment, net
|
|
7,791
|
|
7,865
|
|
Accrued interest receivable
|
|
3,515
|
|
3,614
|
|
Bank-owned life insurance
|
|
15,023
|
|
14,546
|
|
Investment in limited partnerships
|
|
5,040
|
|
4,727
|
|
Goodwill
|
|
3,032
|
|
3,032
|
|
Deferred tax asset
|
|
6,907
|
|
10,879
|
|
Other assets
|
|
3,450
|
|
2,429
|
|
TOTAL ASSETS
|
|
$
|
678,685
|
|
$
|
652,803
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
414,493
|
|
$
|
345,333
|
|
Noninterest-bearing deposits
|
|
75,569
|
|
76,035
|
|
Total deposits
|
|
490,062
|
|
421,368
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
21,440
|
|
73,946
|
|
Long-term borrowings, Federal Home Loan Bank (FHLB)
|
|
86,778
|
|
86,778
|
|
Accrued interest payable
|
|
1,191
|
|
1,317
|
|
Other liabilities
|
|
8,675
|
|
8,367
|
|
TOTAL LIABILITIES
|
|
608,146
|
|
591,776
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Common stock, par value $8.33, 10,000,000 shares
authorized; 4,012,519 and 4,010,528 shares issued
|
|
33,437
|
|
33,421
|
|
Additional paid-in capital
|
|
17,995
|
|
17,959
|
|
Retained earnings
|
|
26,481
|
|
28,177
|
|
Accumulated other comprehensive gain (loss):
|
|
|
|
|
|
Net unrealized gain (loss) on available for sale
securities
|
|
2,670
|
|
(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
|
|
70,539
|
|
61,027
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
678,685
|
|
$
|
652,803
|
|
See accompanying
notes to the unaudited consolidated financial statements.
3
Table of
Contents
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In Thousands, Except Per Share
Data)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
AND DIVIDEND INCOME
|
|
|
|
|
|
|
|
|
|
Loans
including fees
|
|
$
|
6,457
|
|
$
|
6,311
|
|
$
|
19,025
|
|
$
|
18,936
|
|
Investment
securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,368
|
|
1,391
|
|
4,105
|
|
3,857
|
|
Tax-exempt
|
|
1,253
|
|
1,205
|
|
3,748
|
|
3,641
|
|
Dividend
and other interest income
|
|
35
|
|
201
|
|
165
|
|
658
|
|
TOTAL
INTEREST AND DIVIDEND INCOME
|
|
9,113
|
|
9,108
|
|
27,043
|
|
27,092
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2,148
|
|
2,410
|
|
6,357
|
|
7,502
|
|
Short-term
borrowings
|
|
82
|
|
310
|
|
318
|
|
996
|
|
Long-term
borrowings, FHLB
|
|
938
|
|
875
|
|
2,781
|
|
3,044
|
|
TOTAL
INTEREST EXPENSE
|
|
3,168
|
|
3,595
|
|
9,456
|
|
11,542
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME
|
|
5,945
|
|
5,513
|
|
17,587
|
|
15,550
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR LOAN LOSSES
|
|
270
|
|
110
|
|
582
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
|
5,675
|
|
5,403
|
|
17,005
|
|
15,320
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME
|
|
|
|
|
|
|
|
|
|
Service
charges
|
|
553
|
|
594
|
|
1,619
|
|
1,704
|
|
Securities
losses, net
|
|
(507
|
)
|
(1,504
|
)
|
(4,962
|
)
|
(1,717
|
)
|
Earnings
on bank-owned life insurance
|
|
144
|
|
121
|
|
418
|
|
367
|
|
Gain
on sale of loans
|
|
305
|
|
314
|
|
526
|
|
678
|
|
Insurance
commissions
|
|
287
|
|
416
|
|
988
|
|
1,482
|
|
Other
|
|
599
|
|
531
|
|
1,624
|
|
1,493
|
|
TOTAL
NON-INTEREST INCOME
|
|
1,381
|
|
472
|
|
213
|
|
4,007
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSE
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
2,588
|
|
2,355
|
|
7,665
|
|
7,275
|
|
Occupancy,
net
|
|
299
|
|
315
|
|
956
|
|
967
|
|
Furniture
and equipment
|
|
293
|
|
304
|
|
906
|
|
876
|
|
Pennsylvania
shares tax
|
|
171
|
|
105
|
|
514
|
|
315
|
|
Amortization
of investment in limited partnerships
|
|
142
|
|
178
|
|
425
|
|
534
|
|
Other
|
|
1,604
|
|
1,194
|
|
4,161
|
|
3,440
|
|
TOTAL
NON-INTEREST EXPENSE
|
|
5,097
|
|
4,451
|
|
14,627
|
|
13,407
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX (BENEFIT) PROVISION
|
|
1,959
|
|
1,424
|
|
2,591
|
|
5,920
|
|
INCOME
TAX (BENEFIT) PROVISION
|
|
37
|
|
(128
|
)
|
(1,002
|
)
|
180
|
|
NET
INCOME
|
|
$
|
1,922
|
|
$
|
1,552
|
|
$
|
3,593
|
|
$
|
5,740
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE - BASIC
|
|
$
|
0.50
|
|
$
|
0.40
|
|
$
|
0.94
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE - DILUTED
|
|
$
|
0.50
|
|
$
|
0.40
|
|
$
|
0.94
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING - BASIC
|
|
3,833,131
|
|
3,855,348
|
|
3,832,471
|
|
3,865,317
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING - DILUTED
|
|
3,833,305
|
|
3,855,458
|
|
3,832,555
|
|
3,865,463
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS
PER SHARE
|
|
$
|
0.46
|
|
$
|
0.46
|
|
$
|
1.38
|
|
$
|
1.38
|
|
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)
(In Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
COMMON
|
|
ADDITIONAL
|
|
|
|
OTHER
|
|
|
|
TOTAL
|
|
|
|
STOCK
|
|
PAID-IN
|
|
RETAINED
|
|
COMPREHENSIVE
|
|
TREASURY
|
|
SHAREHOLDERS
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
3,593
|
|
|
|
|
|
3,593
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
11,156
|
|
|
|
11,156
|
|
Dividends
declared ($1.38 per share)
|
|
|
|
|
|
|
|
(5,289
|
)
|
|
|
|
|
(5,289
|
)
|
Common
shares issued for employee stock purchase plan
|
|
1,991
|
|
16
|
|
36
|
|
|
|
|
|
|
|
52
|
|
Balance,
September 30, 2009
|
|
4,012,519
|
|
$
|
33,437
|
|
$
|
17,995
|
|
$
|
26,481
|
|
$
|
(1,110
|
)
|
$
|
(6,264
|
)
|
$
|
70,539
|
|
(In Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
ACCUMULATED
|
|
|
|
|
|
|
|
COMMON
|
|
ADDITIONAL
|
|
|
|
OTHER
|
|
|
|
TOTAL
|
|
|
|
STOCK
|
|
PAID-IN
|
|
RETAINED
|
|
COMPREHENSIVE
|
|
TREASURY
|
|
SHAREHOLDERS
|
|
|
|
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
|
|
|
|
|
|
|
|
5,740
|
|
|
|
|
|
5,740
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
(10,188
|
)
|
|
|
(10,188
|
)
|
Dividends
declared, ($1.38 per share)
|
|
|
|
|
|
|
|
(5,330
|
)
|
|
|
|
|
(5,330
|
)
|
Stock
options exercised
|
|
330
|
|
3
|
|
8
|
|
|
|
|
|
|
|
11
|
|
Common
shares issued for employee stock purchase plan
|
|
2,282
|
|
19
|
|
48
|
|
|
|
|
|
|
|
67
|
|
Purchase
of treasury stock (27,726 shares)
|
|
|
|
|
|
|
|
|
|
|
|
(861
|
)
|
(861
|
)
|
Balance,
Semptember 30, 2008
|
|
4,009,546
|
|
$
|
33,413
|
|
$
|
17,944
|
|
$
|
27,680
|
|
$
|
(13,722
|
)
|
$
|
(5,754
|
)
|
$
|
59,561
|
|
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
(In Thousands)
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
$
|
1,922
|
|
|
|
$
|
1,552
|
|
|
|
$
|
3,593
|
|
|
|
$
|
5,740
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net unrealized gains (losses) on available for sale securities
|
|
13,119
|
|
|
|
(8,301
|
)
|
|
|
11,941
|
|
|
|
(17,153
|
)
|
|
|
Less:
Reclassification adjustment for net losses included in net income
|
|
(507
|
)
|
|
|
(1,504
|
)
|
|
|
(4,962
|
)
|
|
|
(1,717
|
)
|
|
|
Other
comprehensive income (loss) before tax expense (benefit)
|
|
|
|
13,626
|
|
|
|
(6,797
|
)
|
|
|
16,903
|
|
|
|
(15,436
|
)
|
Income
tax expense (benefit) related to other comprehensive income (loss)
|
|
|
|
4,633
|
|
|
|
(2,311
|
)
|
|
|
5,747
|
|
|
|
(5,248
|
)
|
Other
comprehensive income (loss), net of tax
|
|
|
|
8,993
|
|
|
|
(4,486
|
)
|
|
|
11,156
|
|
|
|
(10,188
|
)
|
Comprehensive
income (loss)
|
|
|
|
$
|
10,915
|
|
|
|
$
|
(2,934
|
)
|
|
|
$
|
14,749
|
|
|
|
$
|
(4,448
|
)
|
See accompanying notes to
the unaudited consolidated financial statements.
5
Table of Contents
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In Thousands)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
Net
Income
|
|
$
|
3,593
|
|
$
|
5,740
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
541
|
|
490
|
|
Provision
for loan losses
|
|
582
|
|
230
|
|
Accretion
and amortization of investment security discounts and premiums
|
|
(1,052
|
)
|
(982
|
)
|
Securities
losses, net
|
|
4,962
|
|
1,717
|
|
Originations
of loans held for sale
|
|
(24,448
|
)
|
(31,276
|
)
|
Proceeds
of loans held for sale
|
|
23,193
|
|
31,181
|
|
Gain
on sale of loans
|
|
(526
|
)
|
(678
|
)
|
Earnings
on bank-owned life insurance
|
|
(418
|
)
|
(367
|
)
|
Other,
net
|
|
(1,169
|
)
|
(1,445
|
)
|
Net
cash provided by operating activities
|
|
5,258
|
|
4,610
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
Investment
securities available for sale:
|
|
|
|
|
|
Proceeds
from sales
|
|
5,377
|
|
39,994
|
|
Proceeds
from calls and maturities
|
|
7,596
|
|
5,905
|
|
Purchases
|
|
(10,963
|
)
|
(49,733
|
)
|
Investment
securities held to maturity:
|
|
|
|
|
|
Proceeds
from calls and maturities
|
|
25
|
|
179
|
|
Net
increase in loans
|
|
(20,728
|
)
|
(11,458
|
)
|
Acquisition
of bank premises and equipment
|
|
(467
|
)
|
(1,551
|
)
|
Proceeds
from the sale of foreclosed assets
|
|
|
|
79
|
|
Purchase
of bank-owned life insurance
|
|
(59
|
)
|
(715
|
)
|
Investment
in limited partnership
|
|
(738
|
)
|
|
|
Proceeds
from redemption of regulatory stock
|
|
|
|
3,663
|
|
Purchases
of regulatory stock
|
|
(170
|
)
|
(2,802
|
)
|
Net
cash used for investing activities
|
|
(20,127
|
)
|
(16,439
|
)
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
Net
increase in interest-bearing deposits
|
|
69,160
|
|
42,634
|
|
Net
decrease in noninterest-bearing deposits
|
|
(466
|
)
|
(1,085
|
)
|
Proceeds
of long-term borrowings, FHLB
|
|
|
|
10,000
|
|
Repayment
of long-term borrowings, FHLB
|
|
|
|
(29,600
|
)
|
Net
decrease in short-term borrowings
|
|
(52,506
|
)
|
(6,886
|
)
|
Dividends
paid
|
|
(5,289
|
)
|
(5,330
|
)
|
Issuance
of common stock
|
|
52
|
|
67
|
|
Stock
options exercised
|
|
|
|
11
|
|
Purchase
of treasury stock
|
|
|
|
(861
|
)
|
Net
cash provided by financing activities
|
|
10,951
|
|
8,950
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(3,918
|
)
|
(2,879
|
)
|
CASH
AND CASH EQUIVALENTS, BEGINNING
|
|
16,581
|
|
15,433
|
|
CASH
AND CASH EQUIVALENTS, ENDING
|
|
$
|
12,663
|
|
$
|
12,554
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
9,582
|
|
$
|
11,915
|
|
Income
taxes paid
|
|
1,175
|
|
1,425
|
|
Transfer
of loans to foreclosed real estate
|
|
921
|
|
297
|
|
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 new guidance impacting ASC Topic 820,
Fair Value
Measurements and Disclosures
.
This ASC provides additional guidance in 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. The adoption of this new guidance did not
have a material effect on the Companys results of operations or financial
position.
In April 2009, the FASB
issued new guidance impacting ASC 825-10-50,
Financial
Instruments
, which relates to fair value disclosures for any
financial instruments that are not currently reflected on the balance sheet of
companies at fair value. This guidance
amended existing GAAP to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This
guidance is effective for interim and annual periods ending after June 15,
2009. The adoption of this new guidance
did not have a material impact on the Companys financial position or results
of operations.
7
Table
of Contents
In April 2009, the FASB
issued new guidance impacting ASC 320-10,
Investments Debt and
Equity Securities
, which provides additional guidance designed to
create greater clarity and consistency in accounting for and presenting
impairment losses on securities. This
guidance is effective for interim and annual periods ending after June 15,
2009. The adoption of this new guidance
did not have a material impact on the Companys financial position.
In
June 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2009-01,
Topic 105 -
Generally Accepted Accounting Principles - FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles
.
The
Codification is the single source of authoritative nongovernmental U.S.
generally accepted accounting principles (GAAP). The Codification
does not change current GAAP, but is intended to simplify user access to all
authoritative GAAP by providing all the authoritative literature related to a
particular topic in one place. Rules and interpretive releases
of the SEC under federal securities laws are also sources of authoritative GAAP
for SEC registrants. The Company adopted this standard for the interim
reporting period ending September 30, 2009. The adoption of
this standard did not have a material impact on the Companys results of
operations or financial position.
In June 2009, the FASB
issued an accounting standard related to the accounting for transfers of
financial assets, which is effective for fiscal years beginning after November 15,
2009, and interim periods within those fiscal years. This standard enhances reporting about
transfers of financial assets, including securitizations, and where companies
have continuing exposure to the risks related to transferred financial assets.
This standard eliminates the concept of a qualifying special-purpose entity
and changes the requirements for derecognizing financial assets. This standard
also requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period.
This accounting standard was subsequently codified into ASC Topic
860. 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, which amends FASB
Interpretation No. 46 (revised December 2003),
Consolidation
of Variable Interest Entities
, (FIN 46(R)). Under FASBs Codification
at ASC 105-10-65-1-d, FAS No. 167 will remain authoritative until
integrated into the FASB Codification.
This statement 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) provides a company with the power to direct significant
activities of the VIE, and (2) obligates a company to absorb losses of
and/or provides rights to receive benefits from the VIE. FAS No. 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, and interim periods within those fiscal
years. The adoption of this standard is not expected to have a material effect
on the Companys results of operations or financial position.
8
Table
of Contents
In August 2009, the
FASB issued ASU No. 2009-05,
Fair Value Measurements
and Disclosures (Topic 820) Measuring Liabilities at Fair Value
. This
ASU provides amendments for fair value measurements of
liabilities. It provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more techniques. ASU 2009-05 also clarifies that when estimating a
fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. ASU 2009-05
is effective for the first reporting period (including interim periods)
beginning after issuance or fourth quarter 2009. The Company is
currently evaluating the impact of this standard on the Companys financial
condition, results of operations, and disclosures.
Note 3. Per Share Data
There are no convertible securities which would affect
the denominator in calculating basic and dilutive earnings per share. Net income as presented on the consolidated
statement of income will be used as the numerator. The following table sets forth the
composition of the weighted average common shares (denominator) used in the
basic and dilutive per share computation.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares issued
|
|
4,012,159
|
|
4,009,070
|
|
4,011,499
|
|
4,008,094
|
|
|
|
|
|
|
|
|
|
|
|
Average treasury stock shares
|
|
(179,028
|
)
|
(153,722
|
)
|
(179,028
|
)
|
(142,777
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock
equivalents used to calculate basic earnings per share
|
|
3,833,131
|
|
3,855,348
|
|
3,832,471
|
|
3,865,317
|
|
|
|
|
|
|
|
|
|
|
|
Additional common stock equivalents (stock options)
used to calculate diluted earnings per share
|
|
174
|
|
110
|
|
84
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common stock
equivalents used to calculate diluted earnings per share
|
|
3,833,305
|
|
3,855,458
|
|
3,832,555
|
|
3,865,463
|
|
Options to purchase 990 shares of common stock at a
strike price of $31.82 and 990 shares at a strike price of $24.72 were
outstanding during the three and nine months ended September 30, 2009. The average market price of the companys
stock was $32.62 and $28.41 for the three and nine months ended September 30,
2009. Options to purchase 8,273 and
9,593 shares of common stock were outstanding during the three and nine months
ended September 30, 2008 but were not included in the computation of
diluted earnings per share as they were anti-dilutive due to the strike price
being greater than the average market price for the three and nine months ended
September 30, 2008.
9
Table
of Contents
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 nine months ended September 30,
2009 and 2008, respectively:
(In Thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
136
|
|
$
|
137
|
|
$
|
408
|
|
$
|
410
|
|
Interest cost
|
|
170
|
|
152
|
|
510
|
|
456
|
|
Expected return on plan assets
|
|
(127
|
)
|
(161
|
)
|
(381
|
)
|
(481
|
)
|
Amortization of transition obligation
|
|
(1
|
)
|
(1
|
)
|
(2
|
)
|
(2
|
)
|
Amortization of prior service cost
|
|
6
|
|
6
|
|
19
|
|
19
|
|
Amortization of net loss
|
|
85
|
|
14
|
|
254
|
|
42
|
|
Net periodic cost
|
|
$
|
269
|
|
$
|
147
|
|
$
|
808
|
|
$
|
444
|
|
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 September 30, 2009, there were contributions of $662,000
made to the plan. The Company expects to
contribute a minimum of $143,000 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.
10
Table
of Contents
Financial instruments whose contract amounts represent
credit risk are as follows at September 30, 2009 and December 31,
2008:
(In Thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Commitments to extend credit
|
|
$
|
82,526
|
|
$
|
85,871
|
|
Standby letters of credit
|
|
1,524
|
|
841
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30,
2009 and 2008, there were 1,991 and 2,282 shares issued under the plan,
respectively.
Note 8. Fair Value Measurements
The
Company adopted FASB ASC Topic 820 Fair Value Measurements and Disclosures
effective January 1, 2008, which provides a framework for measuring fair
value under GAAP.
11
Table
of Contents
FASB
ASC Topic 820 Fair Value Measurements and Disclosures defines fair value as
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. FASB ASC Topic 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
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 September 30, 2009 and December 31,
2008, by level within the fair value hierarchy. As required by GAAP, financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
(In Thousands)
|
|
September 30, 2009
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured on a Recurring Basis:
|
|
|
|
|
|
|
|
|
|
Investment Securities, available-for-sale
|
|
$
|
12,075
|
|
$
|
207,329
|
|
$
|
|
|
$
|
219,404
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2008
|
|
|
|
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 September 30,
2009 and December 31, 2008, by level within the fair value hierarchy. As
required by GAAP, financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair
value measurement.
12
Table
of Contents
(In Thousands)
|
|
September 30, 2009
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured on a Non-recurring Basis:
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
|
|
$
|
6,802
|
|
$
|
|
|
$
|
6,802
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2008
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured on a Non-recurring Basis:
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
|
|
$
|
4,876
|
|
$
|
|
|
$
|
4,876
|
|
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 September 30,
2009 and December 31, 2008:
13
Table
of Contents
(In Thousands)
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,663
|
|
$
|
12,663
|
|
$
|
16,581
|
|
$
|
16,581
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
219,404
|
|
219,404
|
|
208,251
|
|
208,251
|
|
Held to maturity
|
|
110
|
|
111
|
|
135
|
|
136
|
|
Loans held for sale
|
|
5,403
|
|
5,403
|
|
3,622
|
|
3,622
|
|
Loans, net
|
|
396,347
|
|
403,527
|
|
377,122
|
|
380,771
|
|
Bank-owned life insurance
|
|
15,023
|
|
15,023
|
|
14,546
|
|
14,546
|
|
Accrued interest
receivable
|
|
3,515
|
|
3,515
|
|
3,614
|
|
3,614
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
414,493
|
|
$
|
417,427
|
|
$
|
345,333
|
|
$
|
347,657
|
|
Noninterest-bearing
deposits
|
|
75,569
|
|
75,569
|
|
76,035
|
|
76,035
|
|
Short-term borrowings
|
|
21,440
|
|
21,440
|
|
73,946
|
|
73,946
|
|
Long-term borrowings, FHLB
|
|
86,778
|
|
89,932
|
|
86,778
|
|
88,188
|
|
Accrued interest payable
|
|
1,191
|
|
1,191
|
|
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 September 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 September 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 September 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 GAAP 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 September 30,
2009.
Note 11. Investment Securities
The
amortized cost and estimated fair values of investment securities at September 30,
2009 and December 31, 2008 are as follows:
16
Table
of Contents
(In Thousands)
|
|
September 30, 2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available for sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
38,518
|
|
$
|
2,099
|
|
$
|
|
|
$
|
40,617
|
|
State and political securities
|
|
144,464
|
|
4,351
|
|
(4,160
|
)
|
144,655
|
|
Other debt securities
|
|
21,111
|
|
1,287
|
|
(341
|
)
|
22,057
|
|
Total debt securities
|
|
204,093
|
|
7,737
|
|
(4,501
|
)
|
207,329
|
|
Equity securities
|
|
11,266
|
|
1,005
|
|
(196
|
)
|
12,075
|
|
Total investment securities AFS
|
|
$
|
215,359
|
|
$
|
8,742
|
|
$
|
(4,697
|
)
|
$
|
219,404
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
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 September 30, 2009 and December 31,
2008.
(In Thousands)
|
|
September 30, 2009
|
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency
securities
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State and political
securities
|
|
700
|
|
35
|
|
38,818
|
|
4,125
|
|
39,518
|
|
4,160
|
|
Other debt securities
|
|
|
|
|
|
3,968
|
|
341
|
|
3,968
|
|
341
|
|
Total debt securities
|
|
700
|
|
35
|
|
42,786
|
|
4,466
|
|
43,486
|
|
4,501
|
|
Equity securities
|
|
743
|
|
122
|
|
500
|
|
74
|
|
1,243
|
|
196
|
|
Total
|
|
$
|
1,443
|
|
$
|
157
|
|
$
|
43,286
|
|
$
|
4,540
|
|
$
|
44,729
|
|
$
|
4,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
December 31, 2008
|
|
|
|
Less than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
Estimated
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
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
September 30, 2009 there were a total of 10 and 115 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 September 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 125 positions that were temporarily impaired at September 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 September 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.
(In Thousands)
|
|
Available for Sale
|
|
Held to Maturity
|
|
|
|
Amortized
|
|
Estimated
|
|
Amortized
|
|
Estimated
|
|
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
25
|
|
$
|
25
|
|
$
|
25
|
|
$
|
25
|
|
Due after one year to five
years
|
|
11,228
|
|
12,001
|
|
76
|
|
76
|
|
Due after five years to
ten years
|
|
1,142
|
|
1,165
|
|
|
|
|
|
Due after ten years
|
|
191,698
|
|
194,138
|
|
9
|
|
10
|
|
Total
|
|
$
|
204,093
|
|
$
|
207,329
|
|
$
|
110
|
|
$
|
111
|
|
Total gross proceeds from sales of
securities available for sale were $5,377,000 and $39,994,000, for September 30,
2009 and 2008, respectively. The
following table represents gross realized gains and losses on those
transactions:
(In Thousands)
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
Gross realized gains:
|
|
|
|
|
|
U.S. Government and agency
securities
|
|
$
|
|
|
$
|
253
|
|
State and political
securities
|
|
|
|
235
|
|
Other debt securities
|
|
180
|
|
|
|
Equity securities
|
|
21
|
|
486
|
|
Total gross realized gains
|
|
$
|
201
|
|
$
|
974
|
|
|
|
|
|
|
|
Gross realized losses:
|
|
|
|
|
|
U.S. Government and agency
securities
|
|
$
|
|
|
$
|
36
|
|
State and political
securities
|
|
|
|
204
|
|
Other debt securities
|
|
165
|
|
232
|
|
Equity securities
|
|
4,998
|
|
2,219
|
|
Total gross realized
losses
|
|
$
|
5,163
|
|
$
|
2,691
|
|
Gross realized losses for the equity
securities portfolio include impairment charges of $4,614,000 and $2,425,000
for the nine months ended September 30, 2009 and 2008, respectively.
19
Table
of Contents
Note 12. Loans
The allocation of the loan portfolio, by
delinquency status, as of September 30, 2009 and December 31, 2008 is
presented below:
(In Thousands)
|
|
September 30, 2009
|
|
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
Or More
|
|
|
|
|
|
|
|
|
|
30 To 90
|
|
& Still
|
|
Non-
|
|
|
|
|
|
Current
|
|
Days
|
|
Accruing
|
|
Accrual
|
|
Total
|
|
Commercial and agricultural
|
|
$
|
46,801
|
|
$
|
412
|
|
$
|
|
|
$
|
1
|
|
$
|
47,214
|
|
Real estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
170,233
|
|
2,790
|
|
1,209
|
|
502
|
|
174,734
|
|
Commercial
|
|
143,893
|
|
4,779
|
|
245
|
|
341
|
|
149,258
|
|
Construction
|
|
15,400
|
|
27
|
|
2,898
|
|
556
|
|
18,881
|
|
Installment loans to individuals
|
|
11,435
|
|
200
|
|
44
|
|
48
|
|
11,727
|
|
|
|
387,762
|
|
$
|
8,208
|
|
$
|
4,396
|
|
$
|
1,448
|
|
401,814
|
|
Less:
|
Net deferred loan fees
|
|
989
|
|
|
|
|
|
|
|
989
|
|
|
Allowance for loan losses
|
|
4,478
|
|
|
|
|
|
|
|
4,478
|
|
Loans, net
|
|
$
|
382,295
|
|
|
|
|
|
|
|
$
|
396,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Decmeber 31, 2008
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
Or More
|
|
|
|
|
|
|
|
|
|
30 To 90
|
|
& Still
|
|
Non-
|
|
|
|
|
|
|
|
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 amounted to $6,802,000 at September 30, 2009,
compared to $5,042,000 at December 31, 2008. The valuation allowance related to impaired
loans amounted to $536,000 at September 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.
20
Table
of Contents
Note 13. Subsequent Events
The
Company assessed events occurring subsequent to September 30, 2009 through
November 9, 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 November 9, 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.
21
Table
of Contents
Item
2. Managements Discussion and Analysis
of Financial Condition and Results of Operation
EARNINGS SUMMARY
Comparison of the Three and Nine Months Ended September 30, 2009
and 2008
Summary Results
Net
income for the three months ended September 30, 2009 was $1,922,000
compared to $1,552,000 for the same period of 2008 as after-tax securities
losses decreased $658,000 (from a loss of $993,000 to a loss of $335,000). 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 $30,000. Basic
and diluted earnings per share for the three months ended September 30,
2009 were $0.50 compared to $0.40 for the three months ended September 30,
2008. Return on average assets and
return on average equity were 1.15% and 12.08% for the three months ended September 30,
2009 compared to 0.98% and 9.43% for the corresponding period of 2008. Net income from core operations (operating
earnings) decreased to $2,257,000 for the three months ended September 30,
2009 compared to $2,545,000 for the same period of 2008. Operating earnings per share for the three months
ended September 30, 2009 were $0.59 basic and dilutive compared to $0.66
basic and dilutive for the three months ended September 30, 2008.
The nine months ended September 30,
2009 generated net income of $3,593,000 compared to $5,740,000 for the same
period of 2008. Comparable results were
impacted by an increase in after-tax securities losses of $2,142,000 (from a
loss of $1,133,000 to a loss of $3,275,000). Earnings per share, basic and
diluted, for the nine months ended September 30, 2009 were $0.94 as
compared to $1.49 for the comparable period of 2008. Return on average assets and return on
average equity were 0.73% and 7.80% for the nine months ended September 30,
2009 compared to 1.21% and 11.10% for the corresponding period of 2008
. Operating earnings remained stable at
$6,868,000 for the nine months ended September 30, 2009 compared to
$6,873,000 for the comparable period of 2008, resulting in basic and dilutive
operating earnings per share increasing to $1.79 from $1.78 for the nine month
periods ended September 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.
22
Table
of Contents
Reconciliation of GAAP and non-GAAP
Income
(In Thousands)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
GAAP net income
|
|
$
|
1,922
|
|
$
|
1,552
|
|
$
|
3,593
|
|
$
|
5,740
|
|
Securities losses, net of tax
|
|
(335
|
)
|
(993
|
)
|
(3,275
|
)
|
(1,133
|
)
|
Non-GAAP operating earnings
|
|
$
|
2,257
|
|
$
|
2,545
|
|
$
|
6,868
|
|
$
|
6,873
|
|
Interest and Dividend Income
Interest
and dividend income for the three months ended September 30, 2009 remained
stable at $9,113,000 compared to $9,108,000 for the same period of 2008. The increase in interest income was the
result of an increase in loan interest of $146,000 which offset the decline in
investment securities income of $141,000.
The increase in loan interest is the result of growth in the average
gross loan portfolio of $25,843,000. The
growth offset a decline in the average taxable equivalent yield of 27 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 for the third quarter of 2009 compared
to 2008. On a taxable equivalent basis,
total interest income increased $74,000 due to volume increases that offset the
decline in yield.
During
the nine months ended September 30, 2009, interest and dividend income was
$27,043,000, a decrease of $49,000 over the same period in 2008. Interest income on the loan portfolio
increased $89,000 as the growth in the portfolio countered a 38 bp decline in
average yield. The investment portfolio
interest income was negatively impacted by approximately $240,000 due to the
suspension of FHLB dividends which resulted in total interest income from
investment securities decreasing $138,000 from the comparable period of
2008. Tax-equivalent interest income
increased $144,000 due to an overall increase in earning assets of $21,368,000,
and a shift in the earning asset portfolio towards loans from investments.
Interest
and dividend income composition for the three and nine months ended September 30,
2009 and 2008 was as follows:
23
Table
of Contents
(In Thousands)
|
|
For The Three Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Loans including fees
|
|
$
|
6,457
|
|
70.9
|
%
|
$
|
6,311
|
|
69.3
|
%
|
$
|
146
|
|
2.3
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
1,368
|
|
15.0
|
|
1,391
|
|
15.3
|
|
(23
|
)
|
(1.7
|
)
|
Tax-exempt
|
|
1,253
|
|
13.7
|
|
1,205
|
|
13.2
|
|
48
|
|
4.0
|
|
Dividend and other interest income
|
|
35
|
|
0.4
|
|
201
|
|
2.2
|
|
(166
|
)
|
(82.6
|
)
|
Total interest and dividend income
|
|
$
|
9,113
|
|
100.0
|
%
|
$
|
9,108
|
|
100.0
|
%
|
$
|
5
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Loans including fees
|
|
$
|
19,025
|
|
70.4
|
%
|
$
|
18,936
|
|
69.9
|
%
|
$
|
89
|
|
0.5
|
%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
4,105
|
|
15.2
|
|
3,857
|
|
14.2
|
|
248
|
|
6.4
|
|
Tax-exempt
|
|
3,748
|
|
13.9
|
|
3,641
|
|
13.5
|
|
107
|
|
2.9
|
|
Dividend and other interest income
|
|
165
|
|
0.5
|
|
658
|
|
2.4
|
|
(493
|
)
|
(74.9
|
)
|
Total interest and dividend income
|
|
$
|
27,043
|
|
100.0
|
%
|
$
|
27,092
|
|
100.0
|
%
|
$
|
(49
|
)
|
(0.2
|
)
%
|
Interest Expense
Interest
expense for the three months ended September 30, 2009 decreased $427,000
to $3,168,000 compared to $3,595,000 for the same period of 2008. The decreased expense of $262,000 associated
with deposits is primarily the result of a reduction of 86 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 $228,000 as the average balance of such borrowings
decreased $35,758,000, while the rate paid declined 25 bp. Long-term borrowing interest expense
increased $63,000 as the average balance of such borrowings increased slightly,
while the average rate decreased 10 bp to 4.23%.
Interest
expense for the nine months ended September 30, 2009 decreased $2,086,000
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 nine month period.
Interest
expense composition for the three and nine months ended September 30, 2009
and 2008 was as follows:
24
Table
of Contents
(In Thousands)
|
|
For The Three Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
2,148
|
|
67.8
|
%
|
$
|
2,410
|
|
67.0
|
%
|
$
|
(262
|
)
|
(10.9
|
)
%
|
Short-term borrowings
|
|
82
|
|
2.6
|
|
310
|
|
8.6
|
|
(228
|
)
|
(73.5
|
)
|
Long-term borrowings, FHLB
|
|
938
|
|
29.6
|
|
875
|
|
24.4
|
|
63
|
|
7.2
|
|
Total interest expense
|
|
$
|
3,168
|
|
100.0
|
%
|
$
|
3,595
|
|
100.0
|
%
|
$
|
(427
|
)
|
(11.9
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposits
|
|
$
|
6,357
|
|
67.2
|
%
|
$
|
7,502
|
|
65.0
|
%
|
$
|
(1,145
|
)
|
(15.3
|
)
%
|
Short-term borrowings
|
|
318
|
|
3.4
|
|
996
|
|
8.6
|
|
(678
|
)
|
(68.1
|
)
|
Long-term borrowings, FHLB
|
|
2,781
|
|
29.4
|
|
3,044
|
|
26.4
|
|
(263
|
)
|
(8.6
|
)
|
Total interest expense
|
|
$
|
9,456
|
|
100.0
|
%
|
$
|
11,542
|
|
100.0
|
%
|
$
|
(2,086
|
)
|
(18.1
|
)
%
|
Net Interest Margin
The
net interest margin (NIM) for the three months ended September 30, 2009
was 4.35% compared to 4.23% for the corresponding period of 2008. The increase in the NIM was driven by a 52 bp
decline in the rate paid on interest bearing liabilities that more than
compensated for a 27 bp decline in the yield on earning assets. The decrease in earning asset yield is due to
the impact on the loan and investment portfolios of the current low rate
environment. The decrease in the cost of
interest bearing liabilities to 2.41% from 2.93% was driven by a reduction in
the rate paid on time deposits of 86 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 duration of the time deposit portfolio
began to be lengthened during the second and through the third quarter of 2009
due to the apparent bottoming or near bottoming of deposit rates.
The
NIM for the nine months ended September 30, 2009 was 4.39% compared to
4.04% for the same period of 2008. The
impact of the items mentioned in the three month discussion also applies to the
nine month period. A 113 bp decline in
the rate paid on time deposits served as the foundation for an 78 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 nine months ended September 30, 2009 and 2008:
25
Table
of Contents
(In Thousands)
|
|
AVERAGE BALANCES AND INTEREST
RATES
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
17,207
|
|
$
|
279
|
|
6.43
|
%
|
$
|
9,108
|
|
$
|
148
|
|
6.46
|
%
|
All other loans
|
|
382,670
|
|
6,273
|
|
6.50
|
%
|
364,926
|
|
6,213
|
|
6.77
|
%
|
Total loans
|
|
399,877
|
|
6,552
|
|
6.50
|
%
|
374,034
|
|
6,361
|
|
6.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investment securities
|
|
104,905
|
|
1,402
|
|
5.35
|
%
|
107,751
|
|
1,592
|
|
5.91
|
%
|
Tax-exempt investment securities
|
|
104,719
|
|
1,898
|
|
7.25
|
%
|
103,431
|
|
1,826
|
|
7.06
|
%
|
Total securities
|
|
209,624
|
|
3,300
|
|
6.30
|
%
|
211,182
|
|
3,418
|
|
6.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
4,218
|
|
1
|
|
0.09
|
%
|
34
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
613,719
|
|
9,853
|
|
6.39
|
%
|
585,250
|
|
9,779
|
|
6.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
54,284
|
|
|
|
|
|
50,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
668,003
|
|
|
|
|
|
$
|
635,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
62,265
|
|
85
|
|
0.54
|
%
|
$
|
62,792
|
|
120
|
|
0.76
|
%
|
Super Now deposits
|
|
60,476
|
|
127
|
|
0.83
|
%
|
52,970
|
|
175
|
|
1.31
|
%
|
Money market deposits
|
|
71,204
|
|
345
|
|
1.92
|
%
|
34,915
|
|
208
|
|
2.37
|
%
|
Time deposits
|
|
222,816
|
|
1,591
|
|
2.83
|
%
|
205,346
|
|
1,907
|
|
3.69
|
%
|
Total deposits
|
|
416,761
|
|
2,148
|
|
2.04
|
%
|
356,023
|
|
2,410
|
|
2.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
15,457
|
|
82
|
|
2.13
|
%
|
51,215
|
|
310
|
|
2.38
|
%
|
Long-term borrowings, FHLB
|
|
86,778
|
|
938
|
|
4.23
|
%
|
79,061
|
|
875
|
|
4.33
|
%
|
Total borrowings
|
|
102,235
|
|
1,020
|
|
3.91
|
%
|
130,276
|
|
1,185
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
518,996
|
|
3,168
|
|
2.41
|
%
|
486,299
|
|
3,595
|
|
2.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
75,114
|
|
|
|
|
|
75,863
|
|
|
|
|
|
Other liabilities
|
|
10,256
|
|
|
|
|
|
7,467
|
|
|
|
|
|
Shareholders equity
|
|
63,637
|
|
|
|
|
|
65,846
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
668,003
|
|
|
|
|
|
$
|
635,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
3.97
|
%
|
|
|
|
|
3.73
|
%
|
Net interest income/margin
|
|
|
|
$
|
6,685
|
|
4.35
|
%
|
|
|
$
|
6,184
|
|
4.23
|
%
|
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
(In Thousands)
|
|
AVERAGE BALANCES AND INTEREST
RATES
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Average Balance
|
|
Interest
|
|
Average Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt loans
|
|
$
|
16,682
|
|
$
|
817
|
|
6.55
|
%
|
$
|
8,534
|
|
$
|
411
|
|
6.43
|
%
|
All other loans
|
|
378,043
|
|
18,486
|
|
6.54
|
%
|
359,570
|
|
18,665
|
|
6.93
|
%
|
Total loans
|
|
394,725
|
|
19,303
|
|
6.54
|
%
|
368,104
|
|
19,076
|
|
6.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable securities
|
|
102,937
|
|
4,269
|
|
5.53
|
%
|
104,604
|
|
4,514
|
|
5.75
|
%
|
Tax-exempt securities
|
|
103,418
|
|
5,679
|
|
7.32
|
%
|
108,877
|
|
5,517
|
|
6.76
|
%
|
Total securities
|
|
206,355
|
|
9,948
|
|
6.43
|
%
|
213,481
|
|
10,031
|
|
6.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
1,886
|
|
1
|
|
0.07
|
%
|
13
|
|
1
|
|
10.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
602,966
|
|
29,252
|
|
6.48
|
%
|
581,598
|
|
29,108
|
|
6.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
55,080
|
|
|
|
|
|
49,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
658,046
|
|
|
|
|
|
$
|
631,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
$
|
61,106
|
|
244
|
|
0.53
|
%
|
$
|
60,857
|
|
343
|
|
0.75
|
%
|
Super Now deposits
|
|
57,028
|
|
387
|
|
0.91
|
%
|
51,228
|
|
513
|
|
1.34
|
%
|
Money market deposits
|
|
59,061
|
|
924
|
|
2.09
|
%
|
28,372
|
|
481
|
|
2.26
|
%
|
Time deposits
|
|
217,679
|
|
4,802
|
|
2.95
|
%
|
201,950
|
|
6,165
|
|
4.08
|
%
|
Total Deposits
|
|
394,874
|
|
6,357
|
|
2.15
|
%
|
342,407
|
|
7,502
|
|
2.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
31,491
|
|
318
|
|
1.39
|
%
|
47,894
|
|
996
|
|
2.75
|
%
|
Other borrowings
|
|
86,778
|
|
2,781
|
|
4.23
|
%
|
90,088
|
|
3,044
|
|
4.44
|
%
|
Total borrowings
|
|
118,269
|
|
3,099
|
|
3.47
|
%
|
137,982
|
|
4,040
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
513,143
|
|
9,456
|
|
2.46
|
%
|
480,389
|
|
11,542
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
73,469
|
|
|
|
|
|
73,205
|
|
|
|
|
|
Other liabilities
|
|
10,018
|
|
|
|
|
|
8,672
|
|
|
|
|
|
Shareholders equity
|
|
61,416
|
|
|
|
|
|
68,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
658,046
|
|
|
|
|
|
$
|
631,236
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
4.02
|
%
|
|
|
|
|
3.49
|
%
|
Net interest income/margin
|
|
|
|
$
|
19,796
|
|
4.39
|
%
|
|
|
$
|
17,566
|
|
4.04
|
%
|
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.
27
The
following table presents the adjustment to convert net interest income to net
interest income on a fully taxable equivalent basis for the three and nine
months ended September 30, 2009 and 2008.
(In Thousands)
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
9,113
|
|
$
|
9,108
|
|
$
|
27,043
|
|
$
|
27,092
|
|
Total interest expense
|
|
3,168
|
|
3,595
|
|
9,456
|
|
11,542
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
5,945
|
|
5,513
|
|
17,587
|
|
15,550
|
|
Tax equivalent adjustment
|
|
740
|
|
671
|
|
2,209
|
|
2,016
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (fully taxable equivalent)
|
|
$
|
6,685
|
|
$
|
6,184
|
|
$
|
19,796
|
|
$
|
17,566
|
|
The
following table sets forth the respective impact that both volume and rate
changes have had on net interest income on a fully taxable equivalent basis for
the three and nine month periods ended September 30, 2009 and 2008:
(In Thousands)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2009 vs 2008
|
|
2009 vs 2008
|
|
|
|
Increase (Decrease)
|
|
Increase (Decrease)
|
|
|
|
Due to
|
|
Due to
|
|
|
|
Volume
|
|
Rate
|
|
Net
|
|
Volume
|
|
Rate
|
|
Net
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, tax-exempt
|
|
$
|
132
|
|
$
|
(1
|
)
|
$
|
131
|
|
$
|
398
|
|
$
|
8
|
|
$
|
406
|
|
Loans
|
|
306
|
|
(246
|
)
|
60
|
|
916
|
|
(1,095
|
)
|
(179
|
)
|
Taxable investment securities
|
|
(40
|
)
|
(150
|
)
|
(190
|
)
|
(71
|
)
|
(174
|
)
|
(245
|
)
|
Tax-exempt investment securities
|
|
22
|
|
50
|
|
72
|
|
(268
|
)
|
430
|
|
162
|
|
Interest bearing deposits
|
|
1
|
|
|
|
1
|
|
144
|
|
(144
|
)
|
|
|
Total interest-earning assets
|
|
421
|
|
(347
|
)
|
74
|
|
1,119
|
|
(975
|
)
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
(1
|
)
|
(34
|
)
|
(35
|
)
|
1
|
|
(100
|
)
|
(99
|
)
|
Super Now deposits
|
|
22
|
|
(70
|
)
|
(48
|
)
|
53
|
|
(179
|
)
|
(126
|
)
|
Money market deposits
|
|
182
|
|
(45
|
)
|
137
|
|
483
|
|
(40
|
)
|
443
|
|
Time deposits
|
|
152
|
|
(468
|
)
|
(316
|
)
|
450
|
|
(1,813
|
)
|
(1,363
|
)
|
Short-term borrowings
|
|
(193
|
)
|
(35
|
)
|
(228
|
)
|
(9
|
)
|
(669
|
)
|
(678
|
)
|
Long-term borrowings, FHLB
|
|
83
|
|
(20
|
)
|
63
|
|
(106
|
)
|
(157
|
)
|
(263
|
)
|
Total interest-bearing liabilities
|
|
245
|
|
(672
|
)
|
(427
|
)
|
872
|
|
(2,958
|
)
|
(2,086
|
)
|
Change in net interest income
|
|
$
|
176
|
|
$
|
325
|
|
$
|
501
|
|
$
|
247
|
|
$
|
1,983
|
|
$
|
2,230
|
|
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
28
Table
of Contents
performed annually for the Bank. Management remains committed to an aggressive
program of problem loan identification and resolution.
The allowance for loan
losses is determined by applying loss factors to outstanding loans by type,
excluding loans for which a specific allowance has been determined. Loss factors are based on managements
consideration of the nature of the portfolio segments, changes in mix and
volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry
standards and trends with respect to non-performing loans and its knowledge and
experience with specific lending segments.
Although management
believes it uses the best information available to make such determinations and
that the allowance for loan losses is adequate at September 30, 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 $4,478,000 at September 30,
2009. At September 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 $270,000 and $582,000 for the three and nine months ended September 30,
2009, compared to $110,000 and $230,000 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 $19,347,000 since December 31, 2008, a ratio of net charge
offs to average loans of 0.12% for the nine months ended September 30,
2009, a ratio of nonperforming loans to total loans of 1.46%, and a ratio of
the allowance for loan losses to nonperforming loans of 76.63% at September 30,
2009. As noted in the following
schedules, there has been an increase in nonperforming loans and net
charge-offs over the past year.
Nonperforming loans increased to $5,844,000 at September 30, 2009
from $1,735,000 at December 31, 2008 due primarily to a commercial real
estate loan of approximately $2,800,000 being classified as 90 days past due as
of September 30, 2009. The loan is
collateralized with no loss anticipated at this time. Continued uncertainty surrounding the economy
and internal loan review and analysis, coupled with the ratios noted
previously, dictated an increase in the provision for loan losses. The increase did not equate to the increase
in charge-offs and nonperforming loans due to the collateral status of the
nonperforming loans and overall loan portfolio in general, which limits the
loan specific allocation of the allowance for loan losses.
29
Table
of Contents
Following
is a table showing the changes in the allowance for loan losses for the nine
month periods ended September 30, 2009 and 2008:
(In Thousands)
|
|
2009
|
|
2008
|
|
Balance at beginning of period
|
|
$
|
4,356
|
|
$
|
4,130
|
|
Charge-offs:
|
|
|
|
|
|
Real estate
|
|
272
|
|
29
|
|
Commercial and industrial
|
|
129
|
|
31
|
|
Installment loans to individuals
|
|
142
|
|
174
|
|
Total charge-offs
|
|
543
|
|
234
|
|
Recoveries:
|
|
|
|
|
|
Real estate
|
|
11
|
|
13
|
|
Commercial and industrial
|
|
2
|
|
60
|
|
Installment loans to individuals
|
|
70
|
|
69
|
|
Total recoveries
|
|
83
|
|
142
|
|
Net charge-offs
|
|
460
|
|
92
|
|
Additions charged to operations
|
|
582
|
|
230
|
|
Balance at end of period
|
|
$
|
4,478
|
|
$
|
4,268
|
|
Ratio of net charge-offs during the period to
average loans outstanding during the period
|
|
0.12
|
%
|
0.02
|
%
|
Following
is a table showing the changes in total nonperforming loans as of:
(In Thousands)
|
|
Total Nonperforming Loans
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
Nonaccrual
|
|
Past Due
|
|
Total
|
|
09/30/09
|
|
$
|
1,448
|
|
$
|
4,396
|
|
5,844
|
|
06/30/09
|
|
2,089
|
|
578
|
|
2,667
|
|
03/31/09
|
|
2,033
|
|
236
|
|
2,269
|
|
12/31/08
|
|
1,476
|
|
259
|
|
1,735
|
|
09/30/08
|
|
818
|
|
123
|
|
941
|
|
|
|
|
|
|
|
|
|
|
|
Loans
not included above which are troubled debt restructurings as defined in FAS
15,
Accounting by Debtors and Creditors for Troubled
Debt Restructurings
, totaled $275,000, $31,000, and $353,000 at September 30,
2008, December 31, 2008, and September 30, 2009, respectively.
Non-interest Income
Total
non-interest income for the three months ended September 30, 2009 compared
to the same period in 2008 increased $909,000 to $1,381,000 due to a $997,000
decrease in net securities losses.
Excluding net securities gains and losses, non-interest income for the
third quarter of
30
Table
of Contents
2009
would have decreased $88,000 compared to the 2008 period. Deposit service charges decreased $41,000 as
overdraft fee income decreased $29,000, in addition 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 $9,000 due primarily from a change in product mix
which has resulted in a greater percentage of the fee collected being
categorized as other income. This shift
in product mix resulted in other income increasing 12.8% or $68,000.
Insurance
commissions for the three months ended September 30, 2009 decreased
$129,000 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 nine months ended September 30, 2009 compared
to the same period in 2008 decreased $3,794,000. Excluding net securities gains, non-interest
income would have decreased $549,000 compared to the 2008 period. The decrease in non-interest income for the
nine month period is the result of the same items noted in the three month
discussion.
Non-interest
income composition for the three and nine months ended September 30, 2009
and 2008 was as follows:
(In Thousands)
|
|
For The Three Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service charges
|
|
$
|
553
|
|
40.0
|
%
|
$
|
594
|
|
125.8
|
%
|
$
|
(41
|
)
|
(6.9
|
)
%
|
Securities losses, net
|
|
(507
|
)
|
(36.7
|
)
|
(1,504
|
)
|
(318.6
|
)
|
997
|
|
(66.3
|
)
|
Bank owned life insurance
|
|
144
|
|
10.4
|
|
121
|
|
25.6
|
|
23
|
|
19.0
|
|
Gain on sale of loans
|
|
305
|
|
22.1
|
|
314
|
|
66.5
|
|
(9
|
)
|
(2.9
|
)
|
Insurance commissions
|
|
287
|
|
20.8
|
|
416
|
|
88.1
|
|
(129
|
)
|
(31.0
|
)
|
Other
|
|
599
|
|
43.4
|
|
531
|
|
112.6
|
|
68
|
|
12.8
|
|
Total non-interest income
|
|
$
|
1,381
|
|
100.0
|
%
|
$
|
472
|
|
100.0
|
%
|
$
|
909
|
|
192.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Deposit service charges
|
|
$
|
1,619
|
|
760.1
|
%
|
$
|
1,704
|
|
42.5
|
%
|
$
|
(85
|
)
|
(5.0
|
)
%
|
Securities losses, net
|
|
(4,962
|
)
|
(2,329.5
|
)
|
(1,717
|
)
|
(42.9
|
)
|
(3,245
|
)
|
189.0
|
|
Bank owned life insurance
|
|
418
|
|
196.2
|
|
367
|
|
9.2
|
|
51
|
|
13.9
|
|
Gain on sale of loans
|
|
526
|
|
246.9
|
|
678
|
|
16.9
|
|
(152
|
)
|
(22.4
|
)
|
Insurance commissions
|
|
988
|
|
463.8
|
|
1,482
|
|
37.0
|
|
(494
|
)
|
(33.3
|
)
|
Other
|
|
1,624
|
|
762.5
|
|
1,493
|
|
37.3
|
|
131
|
|
8.8
|
|
Total non-interest income
|
|
$
|
213
|
|
100.0
|
%
|
$
|
4,007
|
|
100.0
|
%
|
$
|
(3,794
|
)
|
(94.7
|
)
%
|
31
Table
of Contents
Non-interest Expense
Total
non-interest expense increased $646,000 for the three months ended September 30,
2009 compared to the same period of 2008.
The $233,000 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 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 anticipated inflationary adjustments
to ongoing business operating costs in addition to increased FDIC insurance
cost.
Total
non-interest expense increased $1,220,000 for the nine months ended September 30,
2009 compared to the same period of 2008.
The increase in non-interest expense for the nine month period is the
result of the same items noted in the three month discussion.
Non-interest
expense composition for the three and nine months ended September 30, 2009
and 2008 was as follows:
(In Thousands)
|
|
For The Three Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and employee benefits
|
|
$
|
2,588
|
|
50.8
|
%
|
$
|
2,355
|
|
52.9
|
%
|
$
|
233
|
|
9.9
|
%
|
Occupancy, net
|
|
299
|
|
5.9
|
|
315
|
|
7.1
|
|
(16
|
)
|
(5.1
|
)
|
Furniture and equipment
|
|
293
|
|
5.7
|
|
304
|
|
6.8
|
|
(11
|
)
|
(3.6
|
)
|
Pennsylvania shares tax
|
|
171
|
|
3.4
|
|
105
|
|
2.4
|
|
66
|
|
62.9
|
|
Amortization of investment in limited partnerships
|
|
142
|
|
2.8
|
|
178
|
|
4.0
|
|
(36
|
)
|
(20.2
|
)
|
Other
|
|
1,604
|
|
31.4
|
|
1,194
|
|
26.8
|
|
410
|
|
34.3
|
|
Total non-interest expense
|
|
$
|
5,097
|
|
100.0
|
%
|
$
|
4,451
|
|
100.0
|
%
|
$
|
646
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
For The Nine Months Ended
|
|
|
|
September 30, 2009
|
|
September 30, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Salaries and employee benefits
|
|
$
|
7,665
|
|
52.4
|
%
|
$
|
7,275
|
|
54.3
|
%
|
$
|
390
|
|
5.4
|
%
|
Occupancy, net
|
|
956
|
|
6.5
|
|
967
|
|
7.2
|
|
(11
|
)
|
(1.1
|
)
|
Furniture and equipment
|
|
906
|
|
6.2
|
|
876
|
|
6.5
|
|
30
|
|
3.4
|
|
Pennsylvania shares tax
|
|
514
|
|
3.5
|
|
315
|
|
2.3
|
|
199
|
|
63.2
|
|
Amortization of investment in limited partnerships
|
|
425
|
|
2.9
|
|
534
|
|
4.0
|
|
(109
|
)
|
(20.4
|
)
|
Other
|
|
4,161
|
|
28.5
|
|
3,440
|
|
25.7
|
|
721
|
|
21.0
|
|
Total non-interest expense
|
|
$
|
14,627
|
|
100.0
|
%
|
$
|
13,407
|
|
100.0
|
%
|
$
|
1,220
|
|
9.1
|
%
|
Provision for Income Taxes
Income
taxes increased $165,000 and decreased $1,182,000 for the three and nine months
ended September 30, 2009 compared to the same periods of 2008. The primary cause of the changes in tax expense
is the impact of net securities losses.
Excluding the impact of the net securities gains and losses, the
effective tax rate for the three and nine months ended September 30, 2009
was 8.48% and 9.07% as compared to 13.08% and 10.00% for the same periods 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.
32
Table of Contents
ASSET/LIABILITY
MANAGEMENT
Cash and Cash
Equivalents
Cash and cash equivalents
decreased $3,918,000 from $16,581,000 at December 31, 2008 to $12,663,000
at September 30, 2009 primarily as a result of the following activities
during the nine months ended September 30, 2009:
Loans Held for
Sale
Activity regarding loans
held for sale resulted in loan originations exceeding sale proceeds, less
$526,000 in realized gains, by $1,781,000 for the nine months ended September 30,
2009.
Loans
Gross loans increased
$19,347,000 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 September 30, 2009 and December 31, 2008 is presented below:
(In Thousands)
|
|
September 30, 2009
|
|
December 31, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Commercial,
financial and agricultural
|
|
$
|
47,214
|
|
11.8
|
%
|
$
|
40,602
|
|
10.6
|
%
|
$
|
6,612
|
|
16.3
|
%
|
Real
estate mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
174,734
|
|
43.6
|
|
177,406
|
|
46.5
|
|
(2,672
|
)
|
(1.5
|
)
|
Commercial
|
|
149,258
|
|
37.2
|
|
136,158
|
|
35.7
|
|
13,100
|
|
9.6
|
|
Construction
|
|
18,881
|
|
4.7
|
|
15,838
|
|
4.2
|
|
3,043
|
|
19.2
|
|
Installment
loans to individuals
|
|
11,727
|
|
2.9
|
|
12,487
|
|
3.3
|
|
(760
|
)
|
(6.1
|
)
|
Less:
Net deferred loan fees
|
|
989
|
|
(0.2
|
)
|
1,013
|
|
(0.3
|
)
|
(24
|
)
|
(2.4
|
)
|
Gross
loans
|
|
$
|
400,825
|
|
100.0
|
%
|
$
|
381,478
|
|
100.0
|
%
|
$
|
19,347
|
|
5.1
|
%
|
Investments
The
estimated fair value of the investment securities portfolio at September 30,
2009 has increased $11,128,000 since December 31, 2008. The change is primarily due to an increase in
the estimated fair market value of the state and political securities segment
of the portfolio. The amortized cost of
this segment increased $2,206,000 since December 31, 2008, however, the
estimated fair market value increased $12,813,000 over the same time period as
the market for these securities has begun to rebound. 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
33
Table of Contents
(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 September 30, 2009, held $196,000 in
unrealized losses on an amortized cost basis of $11,266,000. However, the portfolio held $1,005,000 in
unrealized gains at September 30, 2009 with a portion of these gains
related to holdings that were previously written down. 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 $30,000 and $4,614,000 for the
three and nine months ended September 30, 2009. Certain positions may be liquidated, in whole
or part, through the remainder 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 for twelve consecutive months and 50% decline for three consecutive
months in market value from carrying value.
34
Table of Contents
The
amortized cost of investment securities and their estimated fair values at September 30,
2009 and December 31, 2008 are as follows:
(In Thousands)
|
|
September 30, 2009
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available
for sale (AFS)
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency
securities
|
|
$
|
38,518
|
|
$
|
2,099
|
|
$
|
|
|
$
|
40,617
|
|
State
and political securities
|
|
144,464
|
|
4,351
|
|
(4,160
|
)
|
144,655
|
|
Other
debt securities
|
|
21,111
|
|
1,287
|
|
(341
|
)
|
22,057
|
|
Total
debt securities
|
|
204,093
|
|
7,737
|
|
(4,501
|
)
|
207,329
|
|
Equity
securities
|
|
11,266
|
|
1,005
|
|
(196
|
)
|
12,075
|
|
Total
investment securities AFS
|
|
$
|
215,359
|
|
$
|
8,742
|
|
$
|
(4,697
|
)
|
$
|
219,404
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(In Thousands)
|
|
December 31,
2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
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
|
|
35
Table of Contents
The
distribution of credit ratings by amortized cost and estimated fair values for
the debt security portfolio at September 30, 2009 follows:
(In Thousands)
|
|
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
|
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Available
for sale (AFS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency securities
|
|
$
|
38,518
|
|
$
|
40,617
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
38,518
|
|
$
|
40,617
|
|
State
and political securities
|
|
127,182
|
|
127,861
|
|
8,308
|
|
7,991
|
|
|
|
|
|
8,974
|
|
8,803
|
|
144,464
|
|
144,655
|
|
Other
debt securities
|
|
19,320
|
|
20,340
|
|
681
|
|
611
|
|
|
|
|
|
1,110
|
|
1,106
|
|
21,111
|
|
22,057
|
|
Total
debt securities AFS
|
|
$
|
185,020
|
|
$
|
188,818
|
|
$
|
8,989
|
|
$
|
8,602
|
|
$
|
|
|
$
|
|
|
$
|
10,084
|
|
$
|
9,909
|
|
$
|
204,093
|
|
$
|
207,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 16.3% or $68,694,000 from December 31, 2008 to September 30,
2009. The growth was led by a 100.3% or
$35,972,000 increase in money market deposits from December 31, 2008 to September 30,
2009. The increase in core deposits
(deposits less time deposits) of 21.21% or $47,589,000 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:
(In Thousands)
|
|
September 30, 2009
|
|
December 31, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Demand
deposits
|
|
$
|
75,569
|
|
15.4
|
%
|
$
|
76,035
|
|
18.0
|
%
|
$
|
(466
|
)
|
(0.6
|
)
%
|
NOW
accounts
|
|
61,855
|
|
12.6
|
|
53,821
|
|
12.8
|
|
8,034
|
|
14.9
|
|
Money
market deposits
|
|
71,820
|
|
14.7
|
|
35,848
|
|
8.5
|
|
35,972
|
|
100.3
|
|
Savings
deposits
|
|
62,717
|
|
12.8
|
|
58,668
|
|
13.9
|
|
4,049
|
|
6.9
|
|
Time
deposits
|
|
218,101
|
|
44.5
|
|
196,996
|
|
46.8
|
|
21,105
|
|
10.7
|
|
Total
deposits
|
|
$
|
490,062
|
|
100.0
|
%
|
$
|
421,368
|
|
100.0
|
%
|
$
|
68,694
|
|
16.3
|
%
|
Borrowed Funds
Total borrowed funds
decreased 32.7% or $52,506,000 to $108,218,000 at September 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.
36
Table
of Contents
(In Thousands)
|
|
September 30, 2009
|
|
December 31, 2008
|
|
Change
|
|
|
|
Amount
|
|
% Total
|
|
Amount
|
|
% Total
|
|
Amount
|
|
%
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB repurchase agreements
|
|
$
|
9,005
|
|
8.3
|
%
|
$
|
61,013
|
|
38.0
|
%
|
$
|
(52,008
|
)
|
(85.2
|
)
%
|
Securities sold under agreement to repurchase
|
|
12,435
|
|
11.5
|
|
12,933
|
|
8.0
|
|
(498
|
)
|
(3.9
|
)
|
Total short-term borrowings
|
|
21,440
|
|
19.8
|
%
|
73,946
|
|
46.0
|
%
|
(52,506
|
)
|
(71.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings, FHLB
|
|
86,778
|
|
80.2
|
|
86,778
|
|
54.0
|
|
|
|
|
|
Total borrowed funds
|
|
$
|
108,218
|
|
100.0
|
%
|
$
|
160,724
|
|
100.0
|
%
|
$
|
(52,506
|
)
|
(32.7
|
)
%
|
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.
Capital
ratios as of September 30, 2009 and December 31, 2008 were as
follows:
37
Table
of Contents
(In Thousands)
|
|
2009
|
|
2008
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Total Capital
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
66,553
|
|
15.0
|
%
|
$
|
66,891
|
|
16.0
|
%
|
For Capital Adequacy Purposes
|
|
35,541
|
|
8.0
|
|
33,410
|
|
8.0
|
|
To Be Well Capitalized
|
|
44,426
|
|
10.0
|
|
41,763
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Risk-weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
61,710
|
|
13.9
|
%
|
$
|
62,540
|
|
15.0
|
%
|
For Capital Adequacy Purposes
|
|
17,770
|
|
4.0
|
|
16,705
|
|
4.0
|
|
To Be Well Capitalized
|
|
26,656
|
|
6.0
|
|
25,058
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital
(to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
$
|
61,710
|
|
9.3
|
%
|
$
|
62,540
|
|
9.7
|
%
|
For Capital Adequacy Purposes
|
|
26,633
|
|
4.0
|
|
25,773
|
|
4.0
|
|
To Be Well Capitalized
|
|
33,292
|
|
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 September 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 and
business opportunities as they arise. The
objective of interest rate sensitivity management is
38
Table
of Contents
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
$208,971,000.
In addition to this credit arrangement, the
Company has additional lines of credit with correspondent banks of $15,423,000.
Management believes it has sufficient liquidity to satisfy estimated short-term
and long-term funding needs.
FHLB borrowings totaled
$95,783,000 as of September 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.
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,
39
Table
of Contents
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 September 30,
2010 assuming a static balance sheet as of September 30, 2009.
(In Thousands)
|
|
Parallel Rate Shock in Basis
Points
|
|
|
|
-200
|
|
-100
|
|
Static
|
|
+100
|
|
+200
|
|
Net interest income
|
|
$
|
20,537
|
|
$
|
21,110
|
|
$
|
21,459
|
|
$
|
21,424
|
|
$
|
21,193
|
|
Change from static
|
|
(922
|
)
|
(349
|
)
|
|
|
(35
|
)
|
(266
|
)
|
Percent change from static
|
|
-4.30
|
%
|
-1.63
|
%
|
|
|
-0.16
|
%
|
-1.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
40
Table
of Contents
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 September 30, 2009. There were no changes in the Companys
internal control over financial reporting that occurred during the quarter
ended September 30, 2009, that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.
41
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 (July 1 -
July 31, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #2 (August 1 -
August 31, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month #3 (September 1 -
September 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
None
Item 5.
Other
Information
None
42
Table of Contents
Item 6. Exhibits
(3)
(i)
|
Articles
of Incorporation of the Registrant, as presently in effect (incorporated by
reference to Exhibit 3(i) of the Registrants Annual Report on
Form 10-K for the year ended December 31, 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.
|
43
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: November 9,
2009
|
|
/s/ Ronald A. Walko
|
|
|
Ronald A. Walko,
President and Chief Executive Officer
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
Date: November 9,
2009
|
|
/s/ Brian L. Knepp
|
|
|
Brian L. Knepp, Chief
Financial Officer
|
|
|
(Principal Financial
Officer and Principal Accounting Officer)
|
44
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
|
45
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Penns Woods Bancorp (NASDAQ:PWOD)
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From Jul 2023 to Jul 2024