-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PyIm+CIiPYzvfMz/yFT2H51MLKzrkDm95wl/HP+Id5NKXdvd8033WVn+1L2Iy9Pq V1/97JQfKbm3q0hWeZ0nFA== 0000716605-00-000005.txt : 20000328 0000716605-00-000005.hdr.sgml : 20000328 ACCESSION NUMBER: 0000716605-00-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNS WOODS BANCORP INC CENTRAL INDEX KEY: 0000716605 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232226454 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17077 FILM NUMBER: 579155 BUSINESS ADDRESS: STREET 1: 115 S MAIN ST CITY: JERSEY SHORE STATE: PA ZIP: 17740 BUSINESS PHONE: 5703982213 MAIL ADDRESS: STREET 1: 300 MARKET ST CITY: WILLIAMSPORT STATE: PA ZIP: 17701 10-K 1 [Letter of Penns Woods Bancorp, Inc.] 24-Mar-00 VIA EDGAR Securities and Exchange Commission 450 Fifth Street, N. W. Washington, DC 20549 RE: Penns Woods Bancorp. Inc. (File No. 0-17077) 1999 Annual Report on Form 10-K Ladies and Gentlemen: Enclosed for filing via EDGAR is the Annual Report on Form 10-K for the year ended December 31, 1999 of Penns Woods Bancorp, Inc. Please contact the undersigned at (570) 322-1111 if you have any questions relating to this filing. Very truly yours, PENNS WOODS BANCORP, INC. /s/ Sonya E. Scott Sonya E. Scott Secretary SES/mjs Enclosures FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________to___________ Commission file number 0-17077 PENNS WOODS BANCORP, INC. (exact name of registrant as specified in its charter) Pennsylvania 23-2226454 (State or other jurisdiction (IRS. Employer of incorporation or organization) Identification No.) 300 Market Street, P.O. Box 967 Williamsport, Pennsylvania 17703-0967 (Address of principal executive offices) Registrant's telephone number, including area code (570) 398-2213 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange which registered None None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, par value $10 per share (Title of Class) 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 State the aggregate market value of the voting stock held by non-affiliates of the registrant $87,900,640 at February 29, 2000 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at February 29, 2000 Common Stock, $10 Par Value 3,125,384 Shares DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference: a). Penns Woods Bancorp, Inc. 1999 Annual Report (Annual Report) b). Penns Woods Bancorp, Inc. Proxy Statement (Proxy Statement dated March 24, 2000) Location in Form 10-K Incorporated Information Part II Item 7. Management's Discussion Pages 23 through 37 and Analysis of Consolidated of the Annual Report Financial Condition and Results of Operations Item 8. Financial Statements and Pages 5 through 22 of Supplemental Data the Annual Report Part III Item 13. Certain Relationships and Page 17 of the Annual Related Transactions Report INDEX PART I ITEM PAGE Item 1. Business. . . . . . . . . . . . . . . . . . . . . . 40-44 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . 44-45 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 45 Item 4. Submission of Matters to a Vote of Security Holders. 45 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . 46 Item 6. Selected Financial Data . . . . . . . . . . . . . . . 47 Item 7. Management's Discussion and Analysis of Consolidated 23-37 Condition and Results of Operations Item 8. Financial Statements and Supplementary Data . . . . . 48 Item 9. Disagreements on Accounting and Financial Disclosure. 48 PART III Item 10. Directors and Executive Officers of the Registrant. .48 Item 11. Executive Compensation. . . . . . . . . . . . . . . . 48 Item 12. Security Ownership and Certain Beneficial Owners and 48 Management Item 13. Certain Relationships and Related Transactions. . . . 49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . .49 Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . 49 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 50 PART I ITEM 1 BUSINESS A. General Development of Business and History On January 7, 1983, Penns Woods Bancorp, Inc. (the Company) was incorporated under the laws of the Commonwealth of Pennsylvania as a bank holding company. The Jersey Shore State Bank (the "Bank") became a wholly-owned subsidiary of the Company, and each outstanding share of Bank common stock was converted into one share of Company common stock. This transaction was approved by the shareholders of the Bank on April 11, 1983 and was officially effective on July 12, 1983. The Company's business has consisted primarily of managing and supervising the Bank, and its principal source of income has been dividends paid by the Bank. The Company's two other wholly-owned subsidiaries are Woods Real Estate Development Company and Woods Investment Company, Inc. The Bank is engaged in commercial and retail banking and the taking of time and regular savings and demand deposits, the making of commercial and consumer loans and mortgage loans, and safe deposit services. Auxiliary services, such as cash management, are provided to commercial customers. The Bank operates full banking services with ten branch offices and a Mortgage/Loan Center in Northcentral Pennsylvania. Neither the Company nor the Bank anticipates that compliance with environmental laws and regulations will have any material effect on capital expenditures, earnings, or on its competitive position. The Bank is not dependent on a single customer or a few customers, the loss of whom would have a material effect on the business of the Bank. The Bank employed approximately 158 persons as of December 31, 1999. The Company does not have any employees. The principal officers of the Bank also serve as officers of the Company. B. Regulation and Supervision The Company is also subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "BHCA") and to supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB"). The Bank is subject to the supervision and examination by the Federal Deposit Insurance Corporation (the "FDIC"), as its primary federal regulator and as the insurer of the Bank's deposits. The Bank is also regulated and examined by the Pennsylvania Department of Banking (the Department). The FRB has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the FRB, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. The BHCA requires the Company to secure the prior approval of the FRB before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of 5% or more of any voting shares of any bank. Such a transaction would also require approval of the Department. A bank holding company is prohibited under the BHCA from engaging in, or acquiring direct or indirect control of, more than 5% of the voting shares of any company engaged in non banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHCA, the FRB has the authority to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon FRB's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Bank holding companies are required to comply with the FRB's 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. Currently, the required minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders' equity, less certain intangible assets. The remainder ("Tier 2 capital") may consist of certain preferred stock, a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, 45% of net unrealized gains on marketable equity securities and a limited amount of the general loan loss allowance. The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities. In addition to the risk-based capital guidelines, the FRB requires each bank holding company to comply with the leverage ratio, under which the bank holding company must maintain a minimum level of Tier 1 capital to average total consolidated assets of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are expected to maintain a leverage ratio of at least 4% to 5%. The Bank is subject to similar capital requirements adopted by the FDIC. C. Regulation of the Bank From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions of, the business of the Bank. It cannot be predicted whether any such legislation will be adopted or how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Prompt Corrective Action - The FDIC has specified the levels at which an insured institution will be considered "well- capitalized," "adequately capitalized," "undercapitalized," and "critically undercapitalized." In the event an institution's capital deteriorates to the "undercapitalized" category or below, the Federal Deposit Insurance Act (the "FDIA") and FDIC regulations prescribe an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan by a bank and a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions, the FDIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. Deposit Insurance - There are two deposit insurance funds administered by the FDIC - the Savings Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF"). The Bank's deposits are insured under the BIF; however, the deposits assumed by the Bank in connection with the merger of Lock Haven Savings Bank are treated and assessed as SAIF-insured deposits. The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measure. Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, each institution to one of three capital groups (well-capitalized, adequately capitalized or undercapitalized) and further assigns such institution to one of three subgroups within a capital group. The institution's subgroup assignment is based upon the FDIC's judgment of the institution's strength in light of supervisory evaluations, including examination reports, statistical analyses and other information relevant to gauging the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10.0% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a Tier 1 leverage ratio of 5.0% or greater, are assigned to the well-capitalized group. As of December 31, 1999, the Bank's ratios were well above required minimum ratios. Both the BIF and SAIF are presently fully funded at more than the minimum amount required by law. Accordingly, the BIF and SAIF assessment rates range from zero for those institutions with the least risk, to $0.27 for every $100 of insured deposits for institutions deemed to have the highest risk. The Bank is in the category of institutions that presently pay nothing for deposit insurance. The FDIC adjusts the rates every six months. While the Bank presently pays no premiums for deposit insurance, it is subject to assessments to pay the interest on Financing Corporation ("FICO") bonds. FICO was created by Congress to issue bonds to finance the resolution of failed thrift institutions. Prior to 1997, only thrift institutions were subject to assessments to raise funds to pay the FICO bonds. Commercial banks are subject to 1/5 of the assessment to which thrifts are subject for FICO bond payments through 1999. Beginning in 2000, commercial banks and thrifts will be subject to the same assessment for FICO bonds. The annual FICO assessment for the Bank (and all commercial banks) is $.0212 for each $100 of BIF deposits. New Banking Legislation Landmark legislation in the financial services area was signed into law by the President on November 12, 1999. The Gramm-Leach-Bliley Act dramatically changes certain banking laws that have been in effect since the early part of the 20th Century. The most radical changes are that the separation between banking and the securities businesses mandated by the Glass-Steagall Act has now been removed, and the provisions of any state law that prohibits affiliation between banking and insurance entities have been preempted. Accordingly, the new legislation now permits firms engaged in underwriting and dealing in securities, and insurance companies, to own banking entities, and permits bank holding companies (and in some cases, banks) to own securities firms and insurance companies. The provisions of federal law that preclude banking entities from engaging in non-financially related activity, such as manufacturing, have not been changed. For example, a manufacturing company cannot own a bank and become a bank holding company, and a bank holding company cannot own a subsidiary that is not engaged in financial activities, as defined by the regulators. The new legislation creates a new category of bank holding company called a financial holding company. In order to avail itself of the expanded financial activities permitted under the new law, a bank holding company must notify the Federal Reserve that it elects to be a financial holding company. A bank holding company can make this election if it, and all its bank subsidiaries, are well capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating, each in accordance with the definitions percribed by the Federal Reserve and the regulators of the subsidiary banks. Once a bank holding company makes such an election, and provided that the Federal Reserve does not object to such election by such bank holding company, the financial holding company may engage in financial activities (i.e. securities underwriting, insurance underwriting, and certain other activities that are financial in nature as to be determined by the Federal Reserve) by simply giving a notice to the Federal Reserve within thirty days after beginning such business or acquiring a company engaged in such business. This makes the regulatory approval process to engage in financial activities much more streamlined than it was under prior law. The Company believes it qualifies to become a financial holding company, but has not yet determined whether or not it will file to become treated as one. It is too early to tell what effect the Gramm-Leach-Bliley Act may have on the Company and the Bank. The intent and scope of the act is posititve for the financial industry, and is an attempt to modernize federal banking laws and make U.S. institutions competitive with those from other countries. While the legislation makes significant changes in U.S. banking law, such changes may not directly affect the Company's business unless it decides to avail itself of new opportunities available under the new law. The Company does not expect any of the provisions of the Act to have a material adverse effect on our existing operations, or to significantly increase its costs. Separately from the Gramm-Leach-Bliley Act, Congress is often considering some financial industry legislation. The Company cannot predict how any new legislation, or new rules adopted by the federal banking agencies, may affect its business in the future. Environmental Laws Environmentally related hazards have become a source of high risk and potential liability for financial institutions relating to their loans. Environmentally contaminated properties owned by an institution's borrowers may result in a drastic reduction in the value of the collateral securing the institution's loans to such borrowers, high environmental clean up costs to the borrower affecting its ability to repay the loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean up costs, and liability to the institution for clean up costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. The Company is not aware of any borrower who is currently subject to any environmental investigation or clean up proceeding which is likely to have a material adverse effect on the financial condition or results of operations of the Company. Effect of Government Monetary Policies The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States Government and its agencies. The monetary policies of the FRB have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments and deposits through its open market operations in the United States Government securities and through its regulation of, among other things, the discount rate on borrowing of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies. DESCRIPTION OF BANK a. History and Business Jersey Shore State Bank (Bank) was incorporated under the laws of the Commonwealth of Pennsylvania as a state bank in 1934 and became a wholly-owned subsidiary of the Company on July 12, 1983. As of December 31, 1999, the Bank had total assets of $362,286,000; total shareholders' equity of $33,261,000 and total deposits of $255,668,000. The Bank's deposits are insured by the Federal Deposit Insurance Corporation for the maximum amount provided under current law. Jersey Shore State Bank engages in business as a commercial bank, doing business at several locations in Lycoming, Clinton and Centre Counties, Pennsylvania. Services offered by the Bank include accepting time, demand and savings deposits including Super NOW accounts, regular savings accounts, money market certificates, investment certificates, fixed rate certificates of deposit and club accounts. Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans and the renting of safe deposit facilities. Additional services include making residential mortgage loans, revolving credit loans with overdraft protection, small business loans, etc. Business loans include seasonal credit collateral loans and term loans, as well as accounts receivable and inventory financing. The Bank's loan portfolio mix can be classified into four principal categories. They are real estate, agricultural, commercial and consumer. Real estate loans can be further segmented into construction and land development, farm land, one-to-four family residential, multi-family and commercial or industrial. Qualified borrowers are defined by policy or by industry underwriting standards. Owner provided equity requirements range from 20% to 30% with a first lien status required. Terms are restricted to between 10 and 20 years with the exception of construction and land development, which is limited to one to five years. Appraisals, verifications and visitations comply with industry standards. Financial information that is required on all commercial mortgages includes the most current three years' balance sheets and income statements and projections on income to be developed through the project. In the case of corporations and partnerships, the principals are often asked to indebt themselves personally as well. As regards residential mortgages, repayment ability is determined from information contained in the application and recent income tax returns. Emphasis is on credit, employment, income and residency verification. Broad hazard insurance is always required and flood insurance where applicable. In the case of construction mortgages, builders risk insurance is requested. Adjustable rate mortgages are not offered for residential mortgages. Agricultural loans for the purchase or improvement of real estate must meet the Bank's real estate underwriting criteria. The only permissible exception is when a Farmers Home Loan Administration guaranty is obtained. Agricultural loans made for the purchase of equipment are usually payable in five years, but never more than seven, depending upon the useful life of the purchased asset. Minimum borrower equity required is 20%. Livestock financing criteria depends upon the nature of the operation. A dairy herd could be financed over three years, but a feeder operation would require cleanup in intervals of less than one year. Agricultural loans are also made for crop production purposes. Such loans are structured to repay within the production cycle and not carried over into a subsequent year. General purpose working capital loans are also a possibility with repayment expected within one year. It is also a general policy to collateralize non-real estate loans with not only the asset purchased but also junior liens on all other available assets. Insurance and credit criteria is the same as mentioned previously. In addition, annual visits are made to our agricultural customers to determine the general condition of assets. Personal credit requirements are handled as consumer loans. Commercial loans are made for the acquisition and improvement of real estate, purchase of equipment and for working capital purposes on a seasonal or revolving basis. Criteria was discussed under real estate financing for such loans, but it is important to note that such loans may be made in conjuction with the Pennsylvania Industrial Development Authority. Caution is also exercised in taking industrial property for collateral by requiring, on a selective basis, environmental audits. Equipment loans are generally amortized over three to seven years, with an owner equity contribution required of at least 20% of the purchase price. Unusually expensive pieces may be financed for a longer period depending upon the asset's useful life. The increased cash flow resulting from the additional piece, through improved income or greater depreciation expense, serves in establishing the terms. Insurance coverage with the Bank as loss payee is required, especially in the case where the equipment is rolling stock. Seasonal and revolving lines of credit are offered for working capital purposes. Collateral for such a loan includes the pledge of inventory and/or receivables. Drawing availability is usually 50% of inventory and 75% of eligible receivables. Eligible receivables are defined as invoices less than 90 days delinquent. Exclusive reliance is very seldom placed on such collateral, therefore, other lienable assets are also taken into the collateral pool. Where reliance is placed on inventory and accounts receivable, the applicant must provide financial information including agings on a monthly basis. In addition, the guaranty of the principals is usually obtained. It is unusual for Jersey Shore State Bank to make unsecured commercial loans. But when such a loan is a necessity, credit information in the file must support that decision. Letter of Credit availablity is limited to standbys where the customer is well known to the Bank. Credit criteria is the same as that utilized in making a direct loan and collateral is obtained in most cases, and whenever the expiration date is for more than one year. Consumer loan products include second mortgages, automobile financing, small loan requests, overdraft check lines and PHEAA referral loans. Our policy includes standards used in the industry on debt service ratios and terms are consistent with prudent underwriting standards and the use of proceeds. Verifications are made of employment and residency, along with credit history. Second mortgages are confined to equity borrowing and home improvements. Terms are generally ten years or less and rates are fixed. Loan to collateral value criteria is 80% or less and verifications are made to determine values. Automobile financing is generally restricted to four years and done on a direct basis. The Bank, as a practice, does not floor plan and therefore does not discount dealer paper. Small loan requests are to accommodate personal needs such as the purchase of small appliances or for the payment of taxes. Overdraft check lines are limited to $5,000 or less. The Bank's investment portfolio is analyzed and priced on a monthly basis. Investments are made in U.S. Treasuries, U.S. Agency issues, bank qualified municipal bonds, corporate bonds and corporate stocks which consist of Pennsylvania bank stocks. Bonds with BAA or better ratings are used, unless a local issue is purchased that has a lesser or no rating. Factors taken into consideration when investments are made include liquidity, the company's tax position and the policies of the Asset/Liability Committee. The Bank has experienced deposit growth in the range of .96% to 8.22% over the last five years. This growth has primarily come in the form of core deposits. Although the Bank has regular opportunities to bid on pools of funds of $100,000 or more in the hands of municipalities, hospitals and others, it does not rely on these monies to fund loans on intermediate or longer term investments. Minor seasonal growth in deposits is experienced at or near the year end. It is the policy of Jersey Shore State Bank to generally maintain a rate sensitive asset (RSA) to rate sensitive liability (RSL) ratio of 200% of equity for a 6-month time horizon, 175% of equity for a 2-year time horizon and 150% of equity for a 5-year time horizon. The Bank operates 10 full service offices in Lycoming, Clinton, and Centre Counties, Pennsylvania, and a Mortgage/Center in Centre County, Pennsylvania. The economic base of the region is developed around service, light manufacturing industries and agriculture. The banking environment in Lycoming, Clinton and Centre Counties, Pennsylvania is highly competitive. The Bank competes for loans and deposits with commerial banks, savings and loan associations and other financial institutions. The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including federal, state and local governments). The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits. b. Supervision and Regulation The earnings of the Bank are affected by the policies of regulatory authorities including the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. An important function of the Federal Reserve System is to regulate the money supply and interest rates. Among the instruments used to implement these objectives are open market operations in U.S. Government Securities, changes in reserve requirements against member bank deposits, and limitations on interest rates that member banks may pay on time and savings deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments on deposits, and their use may also affect interest rates charged on loans or paid for deposits. The policies and regulations of the Federal Reserve Board have had and will probably continue to have a significant effect on the Bank's deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Bank's operation in the future. The effect of such policies and regulations upon the future business and earnings of the Bank cannot accurately be predicted. EXECUTIVE OFFICERS OF THE REGISTRANT: NAME AGE Theodore H. Reich 61 President and Chairman of the Company; the Bank; Woods Real Estate Development Co., Inc.; and Woods Investment Company, Inc. Ronald A. Walko 53 Chief Executive Officer and Executive Vice President of the Company; the Bank; Senior Vice President of Woods Invesment Company; Federal bank examiner prior to 1986 for an eighteen-year period. Hubert A. Valencik 58 Senior Vice President of the Company; Senior Vice President and Operations Officer of the Bank; Vice President with another bank prior to 1985 for a fourteen-year period. Sonya E. Scott 40 Secretary of the Company; Controller of the Bank; Secretary of Woods Real Estate Development Co., Inc. and Woods Investment Company, Inc. ITEM 2 PROPERTIES The Company owns and leases its properties. Listed herewith are the locations of properties owned or leased, in which the banking offices and Mortgage/Loan Center are located; are located; all properties are in good condition and adequate for the Bank's purposes:
Office Address Main 115 South Main Street Owned PO. Box 5098 Jersey Shore, Pennsylvania 17740 Jersey Shore 112 Bridge Street Owned Jersey Shore, Pennsylvania 17740 DuBoistown 2675 Euclid Avenue Under Lease DuBoistown, Pennsylvania 17702 -- see below Williamsport 300 Market Street Owned P.O. Box 967 Williamsport, Pennsylvania 17703-0967 Montgomery RD. 1, Box 493 Under Lease Montgomery, Pennsylvania 17752 -- see below Lock Haven 4 West Main Street Owned Lock Haven, Pennsylvania 17745 Mill Hall (Inside Wal-Mart), 167 Hogan Boulevard Under Lease Mill Hall, Pennsylvania 17751 -- see below Spring Mills Ross Hill Road, P.O. Box 66 Owned Spring Mills, Pennsylvania 16875 Centre Hall RR 2, Route 45 West Land Under Lease Centre Hall, Pennsylvania 16828 -- see below Zion 100 Cobblestone Road Under Lease Bellefonte, Pennsylvania 16823 -- see below Mortgage/Loan Center State College 300 Allen Street State College, Pennsylvania 16801 Under Lease -- see below
The DuBoistown branch office was leased for a twenty-year period that ended in 1995. After the initial twenty-year period, the Bank had the option to extend the lease for each of four successive five-year terms. In 1995 the bank extended the lease for the first of four five-year optional terms. At the end of the last five-year extension, the Bank shall be afforded the opportunity to negotiate a new lease agreement. The Bank is granted, during the term of the lease or any renewal or extension thereof, an option to purchase the leased property at any time at a purchase price to be determined in the following manner: Two competent real estate appraisers to be selected by agreement of the Bank and the lessor, and if no such agreement can be reached, then one selected by the lessor and one selected by the Bank shall individually appraise the property, and the purchase price shall be seventy-five (75%) percent of the average of the two appraisals. The annual rent for the DuBoistown branch office was $9,000 for the year ended December 31, 1999. The Montgomery branch office is leased for a fifteen-year period ending in the year 2002. The Bank has the option to extend the lease for a five-year period after the initial fifteen-year term has expired. The Bank also has the opportunity to negotiate a new lease agreement after the five-year extension has expired. The Bank is granted, at the end of the initial term of the lease or at any time during the extended period, an option to purchase the property at a price to be determined in the following manner: Two competent real estate appraisers selected by agreement of the Bank and the lessor, and if no such agreement can be reached then one selected by the Bank and one selected by the lessor, shall individually appraise the property and the purchase price shall be the average of the two. The annual rent for the Montgomery branch office was $30,000 for the year ended December 31, 1999. The Mill Hall branch office (Inside WAL-MART), is leased for a five-year period ending in October 2003. After the initial period the Bank has the option to extend the lease for two additional five-year terms. The rent for the Mill Hall branch office for the year ended December 31, 1999 was $25,000. The Centre Hall branch office is situated on a lot leased for a five year period ending March 2003. The Bank has the option to renew this lease for three successive ten-year terms. The monthly rent is adjusted annually in accordance with changes in the Consumer Price Index published by the United States Department of Labor with the measuring month being February of each year. The annual rent for the Centre Hall branch office lot was $7,403 for the year ended December 31, 1999. The Zion branch office was leased for a ten-year period beginning in May of 1999. After the intial ten-year term, the Bank has the option of renewing this lease for two additional ten-year terms. The Bank is granted, at the end of the initial term of the lease, or at any time during any renewal or extension, an option to purchase the property at a price to be determined in the following manner: Each party, the Bank and the lessor, shall choose a commerical appraiser to appraise the property; the two appraisers shall also agree on a third independent commercial appraiser to determine the fair market value of the property. Each party, the Bank and the lessor, is bound by the average of the three appraisals. The annual rent for the Zion branch office for the year ended December 31, 1999 was $36,000. On July 7, 1997, the Bank commenced operating a Mortgage/Loan Center in State College, Pennsylvania. The Mortgage/Loan Center was initially leased for a one-year term ending in May, 1998, with the option to renew the lease for one additional, one-year period. The Bank exercised this option, renewing the lease term, which ended May, 1999. In October of 1998, the Bank again renewed the lease for an additional, one-year term which will end in May, 2000. The annual rent for the State College Mortgage/ Loan Center was $14,652 for the year ended December 31, 1999. ITEM 3 LEGAL PROCEEDINGS In the normal course of business, various lawsuits and claims arise against the Company and its subsidiary. There are no such legal proceedings or claims currently pending or threatened. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Registrant's Common Stock is traded locally. The following table sets forth (1) the quarterly high and low prices for a share of the Registrant's Common Stock during the periods indicated as reported by the management of the Registrant, and (2) quarterly dividends on a share of the Common Stock with respect to each quarter since January 1, 1997. The following quotations represent prices between buyers and sellers and do not include retail markup, markdown or commission. They may not necessarily represent actual transactions. Dividends HIGH LOW Declared 1997: First quarter $ 22.73 $ 19.09 $ 0.13 Second quarter $ 26.06 $ 24.15 $ 0.13 Third quarter $ 27.73 $ 26.14 $ 0.35 Fourth quarter $ 28.86 $ 27.27 $ 0.14 1998: First quarter $ 43.64 $ 29.44 $ 0.15 Second quarter $ 48.18 $ 42.73 $ 0.15 Third quarter $ 50.45 $ 49.09 $ 0.17 Fourth quarter $ 51.82 $ 48.64 $ 0.41 1999: First quarter $ 56.36 $ 51.82 $ 0.18 Second quarter $ 54.32 $ 48.00 $ 0.20 Third quarter $ 50.75 $ 44.75 $ 0.20 Fourth quarter $ 47.50 $ 40.00 $ 0.43
The stock prices and the dividend have been adjusted to reflect the issuance of a stock split effected in the form of a 100% stock dividend issued on January 15, 1998, and a 10% stock dividend on June 8, 1999. The stock prices and dividends have also been adjusted for the acquisition of First National Bank of Spring Mills. The Bank has paid cash dividends since December 31, 1941. The Registrant has paid dividends since the effective date of its formation as a bank holding company. It is the present intention of the Registrant's Board of Directors to continue the dividend payment policy; however, further dividends must necessarily depend upon earnings, financial condition, appropriate legal restrictions and other factors relevant at the time the Board of Directors of the Registrant considers dividend policy. Cash available for dividend distributions to shareholders of the Registrant must initially come from dividends paid by the Bank to the Registrant. Therefore, the restrictions on the Bank's dividend payments are directly applicable to the Registrant. Under the Pennsylvania Business Corporation Law of 1988 a corporation may not pay a dividend, if after giving effect thereto, the corporation would be unable to pay its debts as they become due in the usual course of business and after giving effect thereto the total assets of the Corporation would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders whose preferential rights are superior to those receiving the dividend. As of February 29, 1999, the Registrant had approximately 1,187 shareholders of record. ITEM 6 SELECTED FINANCIAL DATA Information appearing in the Annual Report under the caption "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" at page 23 contains statistical and other financial information in accordance with guidelines for bank holding companies as issued by the Securities and Exchange Commission. SELECTED FINANCIAL DATA The following table sets forth certain financial data as of and for each of the years in the five-year period ended December 31, 1999.
As of and for the Years Ended December 31, 1999 1998 1997 1996 1995 (Dollars in thousands, except per share amounts) Consolidated Statement of Income Data: Interest income $26,030 $25,096 $23,146 $22,074 $20,548 Interest expense 10,518 10,529 9,324 8,985 8,548 Net interest income 15,512 14,567 13,822 13,089 12,000 Provision for loan losses 286 305 274 137 300 Net interest income after provision for loan losses 15,226 14,262 13,548 12,952 11,700 Other income 3,527 3,435 5,921 2,611 2,264 Other expense 9,339 9,065 8,219 7,726 8,219 Income before income taxes 9,414 8,632 11,250 7,837 5,745 Applicable income taxes 2,224 2,164 3,113 2,082 1,513 Net Income $7,190 $6,468 $8,137 $5,755 $4,232 Consolidated Balance Sheet at End of Period: Total assets $373,742 $341,601 $314,562 $287,787 $267,141 Loans 233,823 216,566 204,756 177,910 166,687 Allowance for loan losses (2,823) (2,681) (2,579) (2,553) (2,473) Deposits 255,573 253,134 242,806 224,356 221,324 Long-term debt -- other 27,278 22,778 3,500 2,260 1,257 Stockholders' equity 46,085 49,896 47,392 27,734 33,622 Per Share Data: Net income Earnings per share - Basic $2.30 $2.08 $2.62 $1.86 $1.38 Earnings per share - Diluted $2.30 $2.07 $2.61 $1.86 $1.37 Cash dividends declared 1.01 0.88 0.75 0.54 0.45 Book Value 14.75 15.97 13.94 11.14 9.96 Number of shares outstanding, at end of period 3,128,332 2,840,823 1,545,250 1,539,769 1,533,810 Average number of shares outstanding 3,121,413 3,114,376 3,101,203 3,087,735 3,077,302 Selected financial ratios: Return on average stockholders' equity 14.96% 13.06% 18.94% 16.37% 13.54% Return on average total assets 1.99% 1.94% 2.73% 2.06% 1.64% Net interest income to average interest earning assets 4.63% 4.77% 5.20% 5.05% 5.02% Dividend payout ratio 43.91% 42.51% 31.33% 31.79% 35.88% Average stockholders' equity to average total assets 13.81% 15.04% 14.51% 12.61% 11.58% Loans to deposits, at end of period 90.39% 84.49% 83.27% 78.16% 74.20%
Per share data and number of shares outstanding have been adjusted in each reporting period to give retroactive effect to a stock split effective in the form of a 50% stock dividend issued July 31, 1995, a stock split effected in the form of a 100% stock dividend issued January 15, 1998, and a 10% stock dividend issued June 8, 1999. In addition, all financial data has been adjusted for the acquisition of the First National Bank of Spring Mills in 1999. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations RESULTS OF OPERATIONS ITEM 7 NET INTEREST INCOME Net interest income is determined by calculating the difference between the yields earned on interest earning assets and the rates paid on interest bearing liabilities. 1999 vs 1998 Taxable equivalent net interest income increased 5.2% or $804,000, to $16,396,000 from year end 1998 to year end 1999. The increase is mostly attributable to an increase in tax exempt investment securities volume of $1,618,000 and a $167,000 decline in the rate creating a net increase of $1,451,000. A net decrease in taxable investment securities of $511,000 and a $147,000 decrease in loans, moderates the increase of total interest earning assets to $793,000. Total average interest earning assets increased to $334,680,000 in 1999. The $29,488,000 increase over the previous year consisted of an $18,713,000 increase in total average securities and an increase of $10,775,000 in total average loans. Total average interest bearing liabilities increased $23,577,000 during 1999. The increase was primarily due to an increase in borrowings of $9,878,000. Other contributors include an increase of $8,442,000 and a $5,257,000 increase to total deposits. The effective interest differential declined 21 basis points during 1999. The decrease was due to the net effect of an interest rate decrease in total average earning assets and a rate increase in total total average interest bearing liabilities. Competitve pressures and target interest rate increases by the Federal Reserve have resulted in upward interest rate pressure. 1998 vs 1997 Fully taxable equivalent net interest income increased to $15,592,000 for the year ended December 31,1998, or an increase of $976,000 or 6.7% over the previous year. The increase in total interest earning avaerage assets from year end 1997 to year end 1998 was $39,327,000. Total average securities increased $9,943,000, total average loans increased $30,520,000, total average federal funds sold decreased $1,136,000 and total average other assets decreased $3,290,000. The increase in tax equivalent net interest income, related to the volume increase in average investment securities, was $269,000, while the decrease due to a decline in average interest rate of return was $264,000. The resulting net increase of $5,000 to tax equivalent net interest income was primarly due to two leverage transactions completed in April and June of 1998; each transaction was $10,000,000. Average net loans contributed $2,864,000 to tax equivalent net interest income due to a volume increase; a decline in the average rate of return on loans offset this increase by $626,000, resulting in a net increase of $2,238,000. Average loans grew primarily due to strong demand for commercial loans. The increase in total interest bearing average liabilities from year end 1997 to year end 1998 was $24,297,000. Total average savings increased $2,502,000 and total average other time deposits increased $6,691,000. Total average short term borrowings increased $2,355,000 and total average borrowings increased $12,749,000. Average total deposits increased by a total of $9,193,000. The related increase in interest expense due to volume increases was $437,000. The related decrease in interest expense due to interest rate was $73,000 for a net increase in interest expense of $364,000 related to deposits. Average short term borowings and other borrowings increased $15,104,000 in total. Increases in interest expense due to volume on the above accounts was $848,000 and a decrease of $8,000 due to interest rate. The net increase in interest expense related to these items was $849,000. In summary, the total effective interest differential declined 39 basis points mainly due to a decline in interest rates on interest earning assets. The decline in interest rates was due to the economy in general and the result of the effects of a 75 basis point decline in the Federal Reserve discount rate. AVERAGE BALANCES AND INTEREST RATES (INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS) (IN THOUSANDS)
1999 ------------------------------------ AVERAGE AVERAGE BALANCE INTEREST RATE ASSETS: Interest earning assets: Securities: US. Treasury and federal agency. . . . . . $39,906 $2,513 6.30% State and political subdivisions . . . . . 43,291 3,353 7.75% Other . . . . . . . . . . . . . . . . . . 28,143 1,030 3.66% ------------------------ Total securities . . . . . . . . . . . . 111,340 6,896 6.19% LOANS: ------------------------ Tax-exempt loans. . . . . . . . . . . . . . . . . 6,157 487 7.91% All other loans, net of discount where applicable 217,183 19,531 8.99% ------------------------ Total loans . . . . . . . . . . . . . . . . 223,340 20,018 8.96% ------------------------ Federal funds sold. . . . . . . . . . . . . . . . - - 0.00% ------------------------ Total earning assets . . . . . . . . . . . 334,680 $26,914 8.04% ============ Other assets. . . . . . . . . . . . . . . . . . . 21,096 ------------ TOTAL ASSETS . . . . . . . . . . . . . . $355,776 ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing liabilities: Deposits: Savings . . . . . . . . . . . . . . . . . . . $96,876 $1,965 2.03% Other time. . . . . . . . . . . . . . . . . . 115,785 5,933 5.12% ------------------------ Total deposits . . . . . . . . . . . . . . . 212,661 7,898 3.71% Short-term borrowings. . . . . 23,524 1,197 5.09% Other borrowings. . . . . . . . . . . . . . . . . . 25,492 1,423 5.58% ------------------------ Total interest bearing liabilities 261,677 $10,518 4.02% ============ Demand deposits . . . . . . . . . . . . . . . . . 41,071 Other liabilities . . . . . . . . . . . . . . . . 3,912 Shareholders' equity . . . . . . . . . . . . . . . 49,116 ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . $355,776 ============ Interest income/earning assets . . . . . . . . $334,680 $26,914 8.04% Interest expense/earning assets. . . . . . . . $334,680 10,518 3.14% --------------------- Effective interest differential . . . . . . . . . $16,396 4.90% ======================
1. Fees on loans are included with interest on loans. 2. Information on this table has been calculated using average daily balance sheets to obtain average balances. 3. Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. 4. Loan fees are included in interest income as follows: 1999, $601,000, 1998, $623,000, 1997, $527,000. 5. 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 (derived by dividing tax-exempt interest by .66).
AVERAGE BALANCES AND INTEREST RATES (INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS) (IN THOUSANDS) 1998 1997 - ----------------------------------------------- ----------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE $48,970 $3,186 6.51% $42,977 $3,004 6.99% 22,134 1,902 8.59% 23,451 2,085 8.89% 21,523 868 4.03% 16,256 862 5.30% - ---------------------------------- ----------------------- 92,627 5,956 6.43% 82,684 5,951 7.20% - ---------------------------------- ----------------------- 6,742 520 7.71% 3,268 295 9.03% 205,823 19,645 9.54% 178,777 17,632 9.86% - ---------------------------------- ----------------------- 212,565 20,165 9.49% 182,045 17,927 9.85% - ---------------------------------- ----------------------- - - 0.00% 1,136 62 5.46% - --------------------------------- ----------------------- 305,192 $26,121 8.56% 265,865 $23,940 9.00% =============== ============ 25,308 28,598 - ------------------- ----------- $330,500 $294,463 =================== =========== $91,930 $2,475 2.69% $89,428 $2,426 2.71% 115,474 6,390 5.53% 108,783 6,075 5.58% - ------------------------------- ----------------------- 207,404 8,865 4.27% 198,211 8,501 4.29% 15,082 771 5.11% 12,727 649 5.10% 15,614 893 5.72% 2,865 174 6.07% - ------------------------------- ----------------------- 238,100 $10,529 4.42% 213,803 $9,324 4.36% =============== ============ 36,592 32,351 6,097 5,586 49,711 42,723 - ------------------ ----------- $330,500 $294,463 ================== =========== $305,192 $26,121 8.56% $265,865 $23,940 9.00% $305,192 10,529 3.45% $265,865 9,324 3.51% -------------------------- ------------------------ $15,592 5.11% $14,616 5.50% ========================== ========================
SUMMARY OF CHANGES IN INTEREST EARNED AND INTEREST PAID (IN THOUSANDS) INTEREST EARNED ON - ------------------------------------------------------------------------------------------- TAXABLE TAX-EXEMPT FEDERAL TOTAL INTEREST INVESTMENT INVESTMENT FUNDS EARNING SECURITIES SECURITIES LOANS SOLD ASSETS 1999 compared to 1998 Increase (decrease) Due to: Volume . . . . . . . . . . . . . ($342) $1,618 $1,651 $ - $2,927 Rate. . . . . . . . . . . . . . (169) (167) (1,798) - ($2,134) ----------------------------------------------------------- Net increase (decrease) ($511) $1,451 ($147) $ - $793 =========================================================== 1998 compared to 1997 Increase (decrease) Due to: Volume . . . . . . . . . . . . . $384 ($115) $2,864 ($31) $3,102 Rate. . . . . . . . . . . . . . . (196) (68) (626) (31) (921) ----------------------------------------------------------- Net increase (decrease) $188 ($183) $2,238 ($62) $2,181 ===========================================================
The change in net interest income (expense) due to volume and rate mix has been allocated to the change due to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
SUMMARY OF CHANGES IN INTEREST EARNED AND INTEREST PAID (IN THOUSANDS) INTEREST PAID ON - ---------------------------------------------------------------------------------- TOTAL OTHER SHORT INTEREST NET SAVINGS TIME TERM OTHER BEARING INTEREST DEPOSITS DEPOSITS BORROWINGS BORROWINGS LIABILITIES EARNINGS - ---------------------------------------------------------------------------------- $142 $17 $430 $551 $1,140 $1,787 (652) (474) (4) (21) ($1,151) ($983) - ---------------------------------------------------------------------------------- ($510) ($457) $426 $530 ($11) $804 ================================================================================== - ---------------------------------------------------------------------------------- $67 $370 $120 $729 $1,286 $1,816 (18) (55) 2 (10) (81) ($840) - ---------------------------------------------------------------------------------- $49 $315 $122 $719 $1,205 $976 ==================================================================================
PROVISION FOR LOAN LOSSES 1999 vs 1998 The provision for loan losses decreased 6.2% from fiscal 1998 to $286,000 for a year end allowance for loan losses of $2,823,000. This allotment recongnized the prior year end allowance for loan losses balance, overall loan performance and anticipated recoveries. Each quarter management conducts comprehensive, detailed credit review of the loan portfolio to determine the adequacy of the provision. Supplementing the internal review is an external review. In so doing, management remains committed to an aggressive program of problem loan identification and resolution. 1998 vs 1997 The provision for loan losses was increased 11.3% over the prior year to $305,000. This increase is attributed to an anticipated significant rise in consumer loan losses accompanied by a further decline in recoveries. Each quarter management conducts comprehensive, detailed credit review of the loan portfolio to determine the adequacy of the provision. Supplementing the internal review is an external review. In so doing, management remains committed to an aggressive program of problem loan identification and resolution. 1999 1998 1997 1996 1995 Balance at beginning of period. . . . . $2,681 $2,579 $2,553 $2,473 $2,247 Charge-offs: Domestic: Real estate . . . . . . . 50 - - 4 - Commercial and industrial. . . . 28 91 183 100 44 Installment loans to individuals. . 98 180 176 152 210 Total charge-offs. . . . . . 176 271 359 256 254 Recoveries: Real estate . . . . . . . . . 4 - 2 - - Commercial and industrial. . . . 11 29 68 175 9 Installment loans to individuals. . 17 39 41 24 171 Total recoveries. . . . . . 32 68 111 199 180 Net charge-offs . . . . . . . . . . . 144 203 248 57 74 Additions charged to operations. . . . 286 305 274 137 300 Balance at end of period. . . . . $2,823 $2,681 $2,579 $2,553 $2,473 Ratio of net charge-offs during the period to average loans 0.06% 0.09% 0.14% 0.03% 0.04% outstanding during the period. . .
OTHER INCOME 1999 vs 1998 Total other income at December 31, 1999 was $3,527,000 versus 1998's year end total of $3,435,000. This $92,000 increase resulted from the net effect of an increase in service charges collected of $258,000, a decrease in securities gains realized of $130,000 and a decrease in other operating income of $36,000. A significant portion of the increase in service charge income, of $105,000, is due to the growth in the deposit base and an increase in charges collected on deposit accounts. Other major factors include an increase of $153,000 in income based upon ATM and debit card usage. During 1999 securities gains realized amounted to $1,946,000 versus $2,076,000 realized in 1998. 1998 vs 1997 Other income for the year ended December 31, 1998 decreased $2,486,000 from 1997. The majority of the decrease was the result of securities gains taken during 1998 versus those taken in 1997. Securities gains realized during 1998 were $2,076,000 versus $4,658,000 that were realized in 1997. The increase in service charges from $903,000 in 1997 to $1,100,000 in 1998 was the result of increases in charges collected on customers activity on their deposit accounts and overall growth in the deposit base. Other operating income decreased in 1998 over that reported in 1997 by $101,000. There were two main factors that contributed to the majority of the decrease. The first was the sale of foreclosed assets during 1997. The income reported on the 1997 sales exceeded the amount of income reported in 1998 for such sales. The second was a decrease in the income received for insurance purchases on installment loans. This decrease was the result of a decrease in the amount of installment loans opened during 1998. OTHER EXPENSES 1999 vs 1998 When comparing the year ended December 31, 1999 with the year ended December 31, 1998, there was a $274,000 or 3% increase in other expenses. Salaries and employee benefits expensed during 1999 increased by $72,000 over the amount expensed during 1998 due to normal wage increases. Occupancy, furniture and equipment expense decreased in 1999 by $11,000 compared to 1998. The net effect of a $39,000 increase in occupancy expense and a decrease of $50,000 in furniture and equipment expense account for this decrease. The increase in occupancy expense is related to the opening of a new branch office in Zion. The decrease in furniture and equipment expense is attributable to a decline in the monthly cost of the IBM computer lease offset by the increase in depreciation on new equipment. Other operating expenses, the final component of total other expenses increased by $213,000. The most significant increases occurred in bookkeeping and data processing, check imprinting, stationery and supplies and ATM expenses. 1998 vs 1997 At December 31, 1998, other expenses had increased $846,000, or 10% over 1997 expenses. The amount of salaries and employee benefits expensed during 1998 increased by $229,000 due to a special bonus that was paid to all employees and wage increases. Occupancy expense increased $96,000 and furniture and equipment expense increased slightly in 1998 by $2,000 compared to 1997. The increase in occupancy expense is primarily due to an increase in depreciation resulting from the purchase of an imaging system and increased expenses that were incurred by First National Bank of Spring Mills. Other operating expenses increased by $519,000. Acquisition costs, related to the agreement signed by the Company to acquire First National Bank of Spring Mills, accounted for the majority of the increase. It should be noted that expenses related to the merger are non-recurring. INCOME TAXES 1999 vs 1998 Income tax expense recognized in 1999 was $2,224,000 compared to $2,164,000 in 1998, resulting in an effective income tax rate of 23.6% and 25.1% for 1999 and 1998, respectively. The increase in tax-exempt income from 1998 to 1999 caused 1.5% decline in the effective tax rate. 1998 vs 1997 The provision for income taxes for the year ended December 31, 1998 resulted in an effective income tax rate of 25.1% compared to 27.8% for 1997. The decrease in the effective income tax rate was primarily due to a decline in the amount of securities gains realized during 1998. FINANCIAL CONDITION INVESTMENTS 1999 The investment portfolio increased in 1999 by $10,918,000 due to net increases in U.S. Government agencies and state and political subdivisions of $19,135,000 and a decrease in U.S. Treasury securities, other bonds, notes and debentures and corporate stock of $8,217,000. The total investment portfolio at year end 1999 was comprised of 34% U.S. Government and agency securities, 42% state and political subdivions, 23% equity securities and 1% other bonds notes and debentures. Held to maturity securities had a carrying value of $3,014,000. The largest portion of the portfolio is classified as available for sale and had an amortized cost of $117,740,000 with an estimated market value of $113,305,000. Due to the unrealized loss on available for sale securities of $4,435,000, shareholders equity was effected by $(2,927,000), net of deferred taxes. Management has significantly increased holdings in tax free municipals which has served to increase its after-tax yield. The decrease in corporate stock is due to the net effect of purchases and sales in addition to the change in the net unrealized gain from year end 1998 The investment security portfolio increased in 1998 by $14,928,000 due to net increases in U.S. Government agencies, state and political subdivisions and corporate stock of $16,900,000 and a decrease in U.S. Treasury securities of $1,972,000. The increase in investment securities is primarily due to purchases of equity securities, and purchases of government securities and state and political subdivisions funded by long-term advances from Federal Home Loan Bank. The total investment portfolio at year end 1998 was comprised of 43% US Government and agency securities, 29% state and political subdivisions, 27% equity securities, and 1% other bonds, notes and debentures. Held to maturity securities had a carrying value of $3,078,000. The largest portion of the portfolio is classified as available for sale and had an amortized cost of $94,812,000 with an estimated market value of $102,323,000. The carrying amounts of investment securities at the dates indicated are summarized as follows ( in thousands): DECEMBER 31, 1999 1998 1997 US. Treasury securities. . . . . . . . . Held to Maturity $ - $ - $ - Available for Sale 3,504 10,866 12,767 US. Government agencies. . . . . . . . . Held to Maturity 259 339 513 Available for Sale 35,130 35,112 32,324 State and political subdivisions. . . . . Held to Maturity 2,465 2,464 2,417 Available for Sale 46,829 27,633 17,162 Other bonds, notes and debentures . . . . Held to Maturity 290 275 250 Available for Sale 1,213 701 797 Total bonds, notes and debentures.. 89,690 77,390 66,284 Corporate stock -Available for Sale. . . . 26,629 28,011 24,189 Total . . . . . . . . . . . . $116,319 $105,401 $90,473
The following table shows the maturities and repricing of investment securities at December 31, 1999 and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of such securities (in thousands): WITHIN AFTER ONE AFTER FIVE AFTER ONE BUT WITHIN BUT WITHIN TEN YEAR FIVE YEARS TEN YEARS YEARS US. Treasury securities: HTM Amount. . . . . . . . . . . . $ - $ - $ - $ - Yield . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 0.00% AFS Amount . . . . . . . . . . . 3,499 - - - Yield . . . . . . . . . . . . . . 6.33% 0.00% 0.00% 0.00% US. Government agencies: HTM Amount. . . . . . . . . . . . - - - 259 Yield . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 8.82% AFS Amount . . . . . . . . . . . 6,004 4,340 2,000 23,879 Yield . . . . . . . . . . . . . . 5.92% 5.97% 7.42% 7.30% State and political subdivisions: HTM Amount. . . . . . . . . . . . - 1,141 402 922 Yield . . . . . . . . . . . . . . 0.00% 7.13% 7.31% 7.39% AFS Amount . . . . . . . . . . . - 200 170 49,854 Yield . . . . . . . . . . . . . . 0.00% 9.42% 9.63% 7.56% Other bonds, notes and debentures: HTM Amount. . . . . . . . . . . . 5 135 150 - Yield . . . . . . . . . . . . . . 6.63% 7.14% 7.14% 0.00% AFS Amount . . . . . . . . . . . - - - 1,229 Yield . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 6.59% Total Amount. . . . . . . . . . . $9,508 $5,816 $2,722 $76,143 Total Yield . . . . . . . . 6.07% 6.35% 7.52% 7.48%
All yields represent weighted average yields expressed on a tax equivalent basis. They are calculated on the basis of the cost, adjusted for amortization of premium and accretion of discount and effective yields weighted for the scheduled maturity of each security. The taxable equivalent adjustment represents the difference between annual income from tax-exempt obligations and the taxable equivalent of such income at the standard 34% tax rate (derived by dividing tax-exempt interest by .66). LOAN PORTFOLIO 1999 Gross loans totaled $233,823,000 at year end, an increase of $17,257,000 or 8.0% over fiscal 1998. Our commercial, agricultural loan portfolio declined $1,185,000 (3.6%) and installment loans to individuals delcined $986,000 (4.0%). These reductions were offset by a $19,428,000 (12.2%) increase in our real estate secured portfolio. Contributing to this volume are increases of $11,687,000 (10.5%) in residential mortgages, $7,883,000 (18.1%) in commercial mortgages and a $142,000 (3.7%) decline in construction loans. A viable local economy and marketable lending practices are responsible for this overall increase. 1998 Gross loans totaled $216,566,000 at year end, an increase of $8,979,000 or 4.3% over the prior year end. While commercial and agricultural loans declined by $5,711,000 or 14.8%, installment loans to individuals grew by $997,000 or 4.2%, residential real estate mortgages increased by $1,938,000 or 1.8%, commercial real estate mortgages increased by $10,892,000 or 33.3%, and construction real estate mortgages grew $863,000 or 28.7%. Growth has leveled off primarily because of aggressive pricing in the market place. The amount of loans outstanding at the indicated dates are shown in the following table according to type of loan (in thousands): December 31, 1999 1998 1997 1996 1995 Domestic: Commercial and agricultural $31,735 $32,920 $38,631 $38,999 $38,758 Real estate mortgage Residential $123,392 $111,705 $109,767 $98,069 $86,289 Commercial $51,445 $43,562 $32,670 $21,600 $18,350 Construction $3,732 $3,874 $3,011 $1,512 $1,212 Installment loans to individuals $23,519 $24,505 $23,508 $20,452 $24,859 Gross loans $233,823 $216,566 $207,587 $180,632 $169,468
The amounts of domestic loans at December 31, 1999 are presented below by category and maturity (in thousands): CATEGORY (1) (2) COMMERCIAL INSTALLMENT AND LOANS TO REAL ESTATE OTHER INDIVIDUALS TOTAL Loans with floating interest rates: 1 year or less . . . . . . . . . . . $2,930 $8,094 $1,767 $12,791 1 through 5 years. . . . . . . . . . 2,339 1,072 6 3,417 5 through 10 years. . . . . . . . .. . 5,967 846 233 7,046 After 10 years. . . . . . . . . . .. . 18,137 3,378 48 21,563 Sub Total. . . . . . . . . . . .. . 29,373 13,390 2,054 44,817 Loans with predetermined interest rates: 1 year or less. . . . . . . . . . . . . 3,865 1,214 1,750 6,829 1 through 5 years . . . . . . . . . . . 14,560 8,800 16,525 39,885 5 through 10 years. . . . . . . . . . . 35,654 5,011 1,526 42,191 After 10 years. . . . . . . . . . . . . 95,117 3,320 1,664 100,101 Sub Total. . . . . . . . . . . . . . 149,196 18,345 21,465 189,006 Total. . . . . . . . . . . . . . $178,569 $31,735 $23,519 $233,823
(1) The loan maturity information is based upon original loan terms and is not adjusted for "rollovers". In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal. (2) Scheduled repayments are reported in maturity categories in which the payment is due. The Bank does not make loans that provide for negative amortization nor do any loans contain conversion features. The Bank does not have any foreign loans outstanding at December 31, 1999. ALLOWANCE FOR LOAN LOSSES 1999 At December 31, 1999, the allowance for loan losses stood at $2,823,000 or 1.2% of gross loans. This was a $142,000 (5.3%) increase over year end 1998. The adequacy of the loan loss allowance is determined quarterly in unison with management's comprehensive rewiew of the loan portfolio of credit quality. Reviews are further enhanced by anaylsis of recent and past economic conditions, portfolio trends and growth, peer comparisons and other factors impacting overall credit quality. Underwriting continues to emphasize the need for security and adequate collateral margins. Nonaccruing loans declined $362,000 (56.0%) to $383,000 from year end 1998. Overall non-performing loans were reduced $181,000 (25.6%) to 525,000 from fiscal 1998. 37.3% of nonaccruing loans are meeting contractual obligations and three of the five loans are real estate secured. 1998 At December 31, 1998, the allowance for loan losses stood at $2,681,000 or 1.2% of gross loans. This was an increase of $102,000 or 4.0%. Adequacy of the loan loss allowance is determined quarterly in unison with management's comprehensive review of the loan portfolio for credit quality. Reviews are further enhanced by analyses of present and past economic conditions, portfolio trends and growth, peer comparisons and other factors impacting overall credit quality. Underwriting continues to emphasize the need for security and adequate collateral margins. In 1998 while nonaccruing loans increased by $94,000 to $646,000, overall non-performing loans were in fact declining. Twelve percent (12%) of nonaccruing loans are meeting contractual obligations and all such loans are real estate secured. The following table presents information concerning nonperforming loans. The accrual of interest will be discontinued when the principal or interest of a loan is in default for 90 days or more, or as soon as payment is questionable, unless the loan is well secured and in the process of collection. Consumer loans and residential real estate loans secured by 1 to 4 family dwellings shall ordinarily not be subject to those guidelines. The reversal of previously accrued but uncollected interest applicable to any loan placed in a nonaccrual status and the treatment of subsequent payments of either principal or interest will be handled in accordance with generally accepted accounting principles. Generally accepted accounting principles do not require a write-off of previously accrued interest if principal and interest are ultimately protected by sound collateral values. A nonperforming loan may be restored to an accruing status when: 1. Principal and interest is no longer due and unpaid. 2. It becomes well secured and in the process of collection. 3. Prospects for future contractual payments are no longer in doubt. TOTAL NONPERFORMING LOANS (IN THOUSANDS) 90 DAYS NONACCRUAL PAST DUE RENEGOTIATED 1999 $284 $241 $0 1998 $646 $60 $0 1997 $552 $430 $0 1996 $748 $278 $0 1995 $1,009 $798 $0 If interest had been recorded at the original rate on nonaccrual loans, such income would have approximated $48,000, $98,000 and $81,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Interest income on such loans, which is recorded when received, amounted to approximately $38,000, $50,000 and $42,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The significant reduction in nonaccruing loans over the past five years is attributed to a strengthening in underwriting standards and the successful culmination of several commercial loan workouts. Presently there are no significant amounts of loans where serious doubts exist as to the ability of the borrower to comply with the current loan payment terms which are not included in the nonperforming categories as indicated above. Management's judgment in determining the amount of the additions to the allowance charged to operating expense considers the following factors: 1. Economic conditions and the impact on the loan portfolio. 2. Analysis of past loan charge-offs experience by category and comparison to outstanding loans. 3. Problem loans on overall portfolio quality. 4. Reports of examination of the loan portfolio by the Pennsylvania State Banking Department and the Federal Deposit Insurance Corporation. ALLOCATION IN THE ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS) PERCENT OF LOANS IN EACH CATEGORY TO AMOUNT TOTAL LOANS DECEMBER 31, 1999: Balance at end of period applicable to: Domestic: Commercial and agricultural $383 13.5% Real estate mortgage Residential $1,490 52.8% Commercial $621 22.0% Construction $45 1.6% Installment loans to individuals $284 10.1% Total $2,823 100.0% DECEMBER 31, 1998: Balance at end of period applicable to: Domestic: Commercial and agricultural $408 15.2% Real estate mortgage Residential $1,383 51.6% Commercial $539 20.1% Construction $48 1.8% Installment loans to individuals $303 11.3% Total $2,681 100.0% DECEMBER 31, 1997: Balance at end of period applicable to: Domestic: Commercial and agricultural $480 18.6% Real estate mortgage Residential $1,364 52.9% Commercial $406 15.7% Construction $37 1.5% Installment loans to individuals $292 11.3% Total $2,579 100.0% DECEMBER 31, 1996: Balance at end of period applicable to: Domestic: Commercial and agricultural $551 21.6% Real estate mortgage Residential $1,387 54.3% Commercial $305 12.0% Construction $21 0.8% Installment loans to individuals $289 11.3% Total $2,553 100.0% DECEMBER 31, 1995: Balance at end of period applicable to: Domestic: Commercial and agricultural $566 22.9% Real estate mortgage Residential $1,258 50.9% Commercial $268 10.8% Construction $18 0.7% Installment loans to individuals $363 14.7% Total $2,473 100.0%
DEPOSITS 1999 All categories of deposits increased with demand deposits showing the most significant growth of 12.2%. Interest bearing deposits grew $5,257,000 while noninterest-bearing deposits increased $4,479,000. Together interest and noninterest-bearing deposits add $9,736,000 to the increase of total average deposits. Saving deposits increased $4,946,000 or 5.4% from year end 1998 to year end 1999. Time deposits remained stable, increasing only $311,000 in 1999. The reduction of growth in time deposits from 1998 to 1999 as compared to 1997 to 1998 is reflective of a highly competitive market for funds. Relatively high consumer spending ignited growth in transaction accounts. 1998 There was an increase in average deposits in 1998 of $13,434,000, or 5.8% over 1997's average deposits. An increase in other time deposits contributed $6,691,000 to the overall increase. Movements in demand deposits and savings deposits resulted in increases of $6,332,000 and $411,000, respectively. The $13,434,000 increase is the result of the Bank's successful efforts to offer competitive interest rates on their savings and other time deposit accounts, in addition to providing an attractive, low-fee checking account product. Time deposits of $100,000 or more totaled approximately $24,308,000 on December 31, 1999 and $23,112,000 on December 31, 1998. Interest expense related to such deposits was approximately $1,242,000, $1,238,000 and $954,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Time deposits of $100,000 or more at December 31, 1999 mature as follows: 2000 - $18,004,000; 2001 - $4,847,000; 2002 - $538,000; 2003 - $219,000; thereafter - $700,000. The average amount and the average rate paid on deposits are summarized below (in thousands):
1999 1998 1997 AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE AMOUNT RATE DEPOSITS IN DOMESTIC BANK OFFICES: Demand deposits: Noninterest-bearing. . . . $41,071 0.00% $36,592 0.00% $32,351 0.00% Interest-bearing . . . . . 45,095 2.15% 42,687 2.56% 40,596 2.58% Savings deposits . . . . . . . 51,781 1.92% 49,243 2.81% 48,832 2.82% Time deposits. . . . . . . . . 115,785 5.12% 115,474 5.53% 108,783 5.58% Total average deposits . $253,732 $243,996 $230,562
SHAREHOLDERS' EQUITY 1999 Shareholders' equity is evaluated in relation to total assets and the risk associated with those assets. A company is more likely to meet its cash obligations and absorb unforeseen losses when the capital resources are greater. Total Shareholders' Equity at December 31, 1999 was $46,085,000, decreasing by $3,811,000 from the balance at December 31, 1998 of $49,896,000. Net income and the exercising of stock options contributed $7,190,000 and $118,000, respectively, to shareholders' equity. The overall decline in total shareholders' equity is largely attributed to the decrease in the unrealized appreciation on securities. Additional reductions to shareholders' equity included $3,178,000 that was paid out in dividends and $56,000 for the purchase of treasury stock. 1998 At December 31, 1998, total shareholders' equity increased by $2,503,000 reaching $49,896,000 which is up from $47,393,000 at December 31, 1997. Net income of $6,468,000 was added to equity at year-end 1998, in addition to $184,000 from stock options that were exercised throughout 1998. The net change in the unrealized appreciation on securities available for sale from year end 1997 to 1998 reduced shareholders' equity by $1,180,000. A purchase of treasury stock also reduced shareholders' equity by $214,000. Dividends that were paid from equity in 1998 totaled $2,755,000. Bank regulators have recently issued risk based capital guidelines. Under these guidelines, banks are required to maintain minimum ratios of core capital and total qualifying capital as a percentage of risk weighted assets and certain off-balance sheet items. At December 31, 1999, the Company's required ratios were well above the minimum ratios as follows: 1999 Minimum Company Standards Tier 1 capital ratio 20.33% 4.00% Total capital ratio 21.51% 8.00% For a more comprehensive discussion of these requirements, see Regulations and Supervision on the Form 10K. Management believes that the Company will continue to exceed regulatory capital requirements. RETURN ON EQUITY AND ASSETS: The ratio of net income to average total assets and average shareholders' equity and certain ratios are presented as follows: 1999 1998 1997 Percentage of net income to: Average total assets. . . . . . . . . . 1.99% 1.94% 2.73% Average shareholders' equity. . . . . 14.96% 13.06% 18.94% Percentage of dividends declared per common share 43.91% 42.51% 31.33% Percentage of average shareholders' equity to average 13.81% 15.04% 14.51% Total assets
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK Fundamental objectives of the Company's 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 stockholders. Additionally, it provides funds for normal operating expenditures and business opportunities as they arise. The objective of interest rate sensitivity management is to increase net interest income by managing interest sensitive assets and liabilities in such a way that they can be repriced in response to changes in market interest rates. Liquidity is generated from transactions relating to both the Company's assets and liabilities. Liquidity from assets is achieved primarily through temporary investments in Federal funds sold and time deposits with financial institutions. Cash receipts arising from normal customer loan payments provide another important source of asset related liquidity. On the liability side, deposit growth and temporary borrowings from the Federal Home Loan Bank of Pittsburgh's Repo Plus product provide liquidity. The liquidity provided by these sources is more than adequate to meet the Company's needs. Interest rate sensitivity, which is closely related to liquidity management, is a function of the repricing characteristics of the Company's 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 recently developed an asset liability management policy which incorporates two new tools in managing interest rate risk. A market value at risk calculation which is used to determine the effects of interest rate movements on shareholders' equity is now being utilized, as well as, simulation analysis to monitor the effects of interest rate changes on the Company's balance sheets. INTEREST RATE SENSITIVITY The following table sets forth the Bank's interest rate sensitivity as of December 31, 1999: AFTER ONE AFTER TWO AFTER WITHIN BUT WITHIN BUT WITHIN FIVE ONE YEAR TWO YEARS FIVE YEARS YEARS Earning assets (1) (2) Investment securities (1) $16,523 $12,237 $21,631 $70,773 Loans (2) 79,378 31,176 98,447 24,822 Total earning assets 95,901 43,413 120,078 95,595 Interest-bearing liabilities: Deposits (3) 100,301 29,573 67,203 15,452 Borrowings 39,641 - 29,278 - Total interest-bearing liabilities 139,942 29,573 96,481 15,452 Net noninterest-bearing funding (4) 12,827 9,781 24,044 26,887 Total net funding sources 152,769 39,354 120,525 42,339 Excess assets (liabilities) (56,868) 4,059 (447) 53,256 Cumulative excess (56,868) (52,809) (53,256) - assets (liablilities)
(1) Investment balances reflect estimated prepayments on mortgage-backed securities. (2) Loan balances include annual repayment assumptions based on projected cash flow from the loan portfolio. The cash flow projections are based on the terms of the credit facilities and estimated prepayments on fixed rate mortgage loans. Loans include loans held for resale. (3) Adjustments to the interest sensitivity of Savings, NOW and MMDA account balances reflect managerial assumptions based on historical experience, expected behavior in future rate environments and the Bank's positioning for these products. (4) Net noninterest-bearing funds is the sum of noninterest- bearing liabilities and shareholders' equity minus noninterest-earning assets and reflect managerial assumptions as to the appropriate investment maturity categories. 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. In addition, it is assumed that rates on core deposit products such as NOWs, savings accounts, and the MMDA accounts will be adjusted by 50% of the assumed rate change. Assumptions are also made concerning prepayment speeds on mrotgage loans and mortgage securities. The results of this rate shock are a useful tool to assist the Company in assessing interest rate risk inherent in its balance sheet. Below are the results of this rate shock analysis as of December 31, 1999. Changes in Net Interest Rates Income change (after Tax) -200 845 -100 437 +100 (444) +200 (890) 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 measure 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 Corporation's 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. COMPREHENSIVE INCOME Comprehensive income is a measure of all the changes in equity of a corporation. It excludes transactions with owners in their capacity as owners (ie. Stock options granted or exercised, repurchase of treasury stock transactions, and dividends to shareholders). Other comprehensive income is the difference between Net Income and Comprehensive Income. The Company's Other Comprehensive Income is composed of unrealized gains and losses on available for sale securities, net of deferred income tax. Comprehensive income is not a measure of net income. Net income would be affected by Other Comprehensive Income only in the event that the entire securities portfolio was sold on the statement date. Unrealized gains or losses reflected in the Company's Comprehensive Income may vary widely at statement dates as a result of changing markets and/or interest rate movements. Other Comprehensive Income (Loss) for the years ended December 31, 1999, 1998, 1997 were (7,885,000), (1,180,000) and 3,656,000, respectively. 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 Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, Penns Woods Bancorp, Inc. and its subsidiaries (the Company) notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following: general economic conditions and changes in interest rates including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; the effect of changes in accounting policies and practices, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; changes in the Company's organization, compensation and benefit plans; and similar items. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Penns Woods Bancorp, Inc. We have audited the accompanying consolidated balance sheet of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of income, cash flows, and changes in stockholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 1998, and for the two years in the period ended December 31, 1998, were audited by other auditors whose report, dated January 15, 1999, expressed an unqualified opinion on those financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ S.R. Snodgrass A.C. Wexford, PA January 21, 2000 CONSOLIDATED BALANCE SHEET December 31, 1999 and 1998 1999 1998 (in thousands) ASSETS Cash and due from banks $ 12,474 12,297 Securities available for sale 113,305 102,323 Securities held to maturity (market value 3,014 3,078 of $2,992,000 and $3,141,000) Loans, net of unearned discount 233,823 216,566 Less Allowance for loan losses 2,823 2,681 Loans, net 231,000 213,885 Bank premises and equipment, net 4,888 4,783 Accrued interest receivable 2,283 1,940 Foreclosed assets held for sale 67 40 Other assets 6,711 3,300 TOTAL $ 373,742 341,601 LIABILITIES Interest-bearing deposits $ 212,528 210,901 Noninterest-bearing deposits 43,045 42,233 TOTAL DEPOSITS 255,573 253,134 Short-term borrowings 41,641 11,223 Other borrowings 27,278 22,778 Accrued interest payable 1,123 1,211 Other liabilities 2,042 3,359 TOTAL LIABILITIES 327,657 291,705 SHAREHOLDERS' EQUITY Common stock, par value $10; 10,000,000 shares authorized 3,128,332 and 2,840,823 shares issued 31,283 28,409 Additional paid-in capital 18,165 4,768 Retained earnings -166 11,975 Accumulated other comprehensive income (loss) -2,927 4,958 Less: Treasury stock, at cost 4,960 and 3,656 -270 -214 TOTAL SHAREHOLDERS' EQUITY 46,085 49,896 TOTAL $ 373,742 $ 341,601
See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENT OF INCOME December 31, 1999 and 1998 1999 1998 1997 (in thousands) INTEREST INCOME Interest and fees on loans $ 19,990 $ 19,770 $ 17,827 Interest and dividends on investments: Taxable interest 3,555 3,395 3,381 Tax-exempt interest 1,664 1,223 1,348 Dividends 821 708 528 Interest on federal funds sold - - 62 TOTAL INTEREST INCOME 26,030 25,096 23,146 INTEREST EXPENSE Interest on deposits 7,898 8,865 8,501 Interest on short-term borrowings 1,197 771 649 Interest on other borrowings 1,423 893 174 TOTAL INTEREST EXPENSE 10,518 10,529 9,324 NET INTEREST INCOME 15,512 14,567 13,822 PROVISION FOR LOAN LOSSES 286 305 274 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,226 14,262 13,548 OTHER INCOME: Service charges 1,358 1,100 903 Securities gains, net 1,946 2,076 4,658 Other operating income 223 259 360 TOTAL OTHER INCOME 3,527 3,435 5,921 OTHER EXPENSES Salaries and employee benefits 4,860 4,788 4,559 Occupancy expense, net 673 634 538 Furniture and equipment expense 687 737 735 Other operating expenses 3,119 2,906 2,387 TOTAL OTHER EXPENSES 9,339 9,065 8,219 INCOME BEFORE INCOME TAX PROVISION 9,414 8,632 11,250 INCOME TAX PROVISION 2,224 2,164 3,113 NET INCOME $ 7,190 $ 6,468 $ 8,137 EARNINGS PER SHARE - BASIC $ 2.3 $ 2.08 $ 2.62 EARNINGS PER SHARE - DILUTED $ 2.3 $ 2.07 $ 2.61
See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997 Accumulated Stock Additional Other Total Common Stock Dividend Paid-in Retained Comprehensive Treasury Shareholders' Shares Amount Distributable Capital Earnings Income(loss) Stock Equity (in thousands except share data) Balance, December 31, 1996 1,539,769 $15,398 $ - $ 4,559 $ 15,290 $ 2,482 $ - $ 37,729 Comprehensive income: Net income 8,137 8,137 Unrealized gain on securities, net of reclassification adjustments and tax effect of $1,883 3,656 3,656 Total comprehensive income 11,793 Dividends declared, $0.75 -2,337 -2,337 Stock options exercised 5,481 55 153 208 Declaration of stock split in the form of a 100 percent stock dividend 12,828 -12,828 - Balance, December 31, 1997 1,545,250 15,453 12,828 4,712 8,262 6,138 - 47,393 Stock split effected in the form of a 100 percent stock dividend 1,282,779 12,828 -12,828 - Comprehensive income: Net income 6,468 6,468 Unrealized loss on securities, net of reclassification adjustments and tax benefit of $608 -1,180 -1,180 Total comprehensive income 5,288 Dividends declared, $0.88 -2,755 -2,755 Stock options exercised 12,794 128 56 184 Treasury stock acquired, 3,656 shares -214 -214 Balance, December 31, 1998 2,840,823 28,409 - 4,768 11,975 4,958 -214 49,896 10 percent stock dividend 283,393 2,833 13,320 -16,153 - Comprehensive Loss: Net income 7,190 7,190 Unrealized loss on securities, net of reclassification adjustments and tax benefit of $4,062 -7,885 -7,885 Total comprehensive loss -695 Dividends declared, $1.01 -3,178 -3,178 Stock options exercised 4,116 41 77 118 Treasury stock acquired, 1,304 shares -56 -56 Balance, December 31, 1999 3,128,33 $ 31,273 $ - $ 18,165 $ -166 $ -2,927 $ -270 $ 46,085 1999 1998 1997 Components of comprehensive income (loss): Change in net unrealized gain (loss) on investments held for sale $ -6,601 $ 190 $ 6,730 Realized gains included in net income, net of tax $662, $706, -1,284 -1,370 -3,074 and $1,584 Total $ -7,885 $ -1,180 $ 3,656
See accompanying notes to the consolidated financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended December 31,1999,1998, and 1997 1999 1998 1997 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,190 6,468 $ 8,137 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 512 431 456 Provision for loan losses 286 305 274 Accretion and amortization of investment -156 -34 -75 security discounts and premiums Securities gains, net -1,946 -2,076 -4,658 Gain on sale of foreclosed assets -6 -12 -67 Decrease (increase) in all other assets -999 -964 420 Decrease in all other liabilities -121 -100 -721 Net cash provided by operating activities 4,760 4,018 3,766 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale -78,020 -48,469 -62,148 Proceeds from sale of securities available 53,521 27,371 74,584 for sale Proceeds from calls and maturities of securities available for sale 1,819 4,361 2,424 Purchase of securities held to maturity -25 -323 -200 proceed from calls and muturities of securities held to maturities 2,010 2,473 96 Net increase in loans -17,502 -12,053 -27,235 Proceeds from the sale of foreclosed assets 80 47 426 Purchase of securities held to maturity -25 -323 -200 Acquisition of bank premises and equipment -662 -713 -502 Net cash used in investing activities -38,779 -27,306 -12,555 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in interest-bearing deposits 1,627 6,619 11,522 Net increase in noninterest-bearing deposits 812 3,709 6,928 Net increase (decrease) in short-term borrowings 30,418 -5,087 -3,809 Proceeds from other borrowings 5,000 20,528 1,500 Repayment of other borrowings -500 -500 -1,000 Dividends paid -3,178 -2,755 -2,337 Stock options exercised 40 56 197 Purchase of treasury stock -23 -109 - Net cash provided by financing activities 34,196 22,461 13,001 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 177 -827 4,212 CASH AND CASH EQUIVALENTS, BEGINNING 12,297 13,124 8,912 CASH AND CASH EQUIVALENTS, ENDING $ 12,474 12,297 $ 13,124
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: The Company paid approximately $10,606,000, $10,374,000, and $9,284,000 in interest on deposits and other borrowings during 1999, 1998, and 1997, respectively. The Company made income tax payments of approximately $1,972,000, $2,563,000, and $3,221,000 during 1999, 1998, and 1997, respectively. Transfers from loans to foreclosed assets held for sale amounted to approximately $102,000, $40,000, and $142,000 in 1999, 1998, and 1997, respectively. See accompanying notes to the consolidated financial statements. PENNS WOODS BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. and its wholly- owned subsidiaries, Jersey Shore State Bank (the "Bank"), Woods Real Estate Development Co., Inc., and Woods Investment Company, Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated. Nature of Business The Bank engages in a full-service commercial banking business, making available to the community a wide range of financial services including, but not limited to, installment loans, credit cards, mortgage and home equity loans, lines of credit, construction financing, farm loans, community development loans, loans to non-profit entities and local government loans and various types of time and demand deposits including, but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit and IRAs. Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The financial services are provided to individuals, partnerships, non-profit organizations and corporations through its ten offices and Mortgage/Loan Center located in Clinton, Lycoming, and Centre Counties, Pennsylvania. Woods Real Estate Development Co., Inc. engages in real estate transactions on behalf of Penns Woods Bancorp, Inc. and the Bank. Woods Investment Company, Inc. is engaged in investing activities. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt. Investment Securities Investment securities are classified as held to maturity, available for sale, or trading. Securities held to maturity include bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Trading account securities are recorded at their fair values. Unrealized gains and losses on trading account securities are included in other income. The Company has no trading account securities as of December 31, 1999 or 1998. Available for sale securities consist of bonds, notes, debentures, and certain equity securities not classified as trading securities nor as held to maturity securities. Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of shareholders' equity until realized. Gains and losses on the sale of all securities are determined using the specific-identification method. Declines in the fair value of individual securities held to maturity and available for sale below their cost that are other than temporary result in write-downs of the individual securities to their fair value and are included in earnings as realized losses. Premiums and discounts on all securities are recognized in interest income using the interest method over the period to maturity. The fair value of investments and mortgage-backed securities, except certain state and political securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and political securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for difference between the quoted instruments and the instruments being valued. Loans Loans are stated at the principal amount outstanding, net of unearned interest, unamortized loan fees and costs, and the allowance for loan losses. Interest on loans is recognized as income when earned on the accrual method. The Company's general policy has been to stop accruing interest on loans when it is determined a reasonable doubt exists as to the collectibility of additional interest. Income is subsequently recognized only to the extent that cash payments are received provided the loan is not delinquent in payment and, in management's judgement, the borrower has the ability and intent to make future principal payments. Allowance for Loan Losses The allowance for loan losses represents the amount which management estimates is adequate to provide for potential losses in its portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management's periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term. Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed. It is the opinion of management that the allowance for loan losses is adequate to absorb foreseeable loan losses. Loan losses are charged directly against the allowance, and recoveries on previously charged-off loans are added to the allowance. Foreclosed Assets Held for Sale Foreclosed assets held for sale are carried at the lower of fair value minus estimated costs to sell or cost. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight- line and accelerated methods over the estimated useful lives of the related assets. Costs incurred for routine maintenance and repairs are expensed currently. Income Taxes Deferred tax assets and liabilities result from temporary differences in financial and income tax methods of accounting, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Earnings Per Share The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options are adjusted in the denominator. Stock Options The Company maintains a stock option plan for the Directors, officers and employees. When the exercise price of the Company's stock options is greater than or equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company's financial statements. Pro forma net income and earnings per share are presented to reflect the impact of the stock option plan assuming compensation expense had been recognized based on the fair value of the stock options granted under the plan. Comprehensive Income The Company is required to present comprehensive income in a full set of general-purpose financial statements for all periods presented. Other comprehensive income is comprised exclusively of unrealized holding gains (losses) on the available for sale securities portfolio. The Company has elected to report the effects of other comprehensive income as part of the Statement of Changes in Shareholders' Equity. Cash Flows The Company utilizes the net reporting of cash receipts and cash payments for deposit and lending activities. The Company considers amounts due from banks as cash equivalents. Pending Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 ". Accounting for Derivative Instruments and Hedging Activities" as amended by in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". The statement provides accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring the recognition of those items as assets or liabilities in the statement of financial position, recorded at fair value. Statement No. 133, precludes a held to maturity security from being designated as a hedged item, however, at the date of initial application of this statement, an entity is permitted to transfer any held to maturity security into the available for sale or trading categories. The unrealized holding gain or loss on such transferred securities shall be reported consistent with the requirements of Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Such transfers do not raise an issue regarding an entity's intent to hold other debt securities to maturity in the future. This statement applies prospectively for all fiscal quarters of all years beginning after June 15, 2000. Earlier adoption is permitted for any fiscal quarter that begins after the issue date of this statement. NOTE B - PER SHARE DATA Earnings per share is based on the weighted-average number of shares of common stock outstanding. During 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which requires presentation of two amounts, basic and diluted earnings per share. The number of shares used in calculating basic and diluted earnings and cash dividends per share reflect the retroactive effect of stock dividends declared. The following data show the amounts used in computing earnings per share: 1999 1998 1997 Weighted average common shares outstanding 3,125,292 3,114,396 3,101,203 Average treasury stock shares -3,879 -20 - Weighted average common shares and common stock equivalents used to calculate basic earnings per share 3,121,413 3,114,376 3,101,203 Additional common stock equivalents (stock options) used to calculate diluted earnings per share 8,682 7,585 18,854 Weighted average common shares and common stock equivalents used to calculate diluted earnings per share 3,130,095 3,121,961 3,120,057
NOTE C - CASH AND DUE FROM BANKS Banks are required to maintain reserves consisting of vault cash and deposit balances with the Federal Reserve Bank in their district. The reserves are based on deposit levels during the year and account activity and other services provided by the Federal Reserve Bank. Average daily currency, coin and cash balances with the Federal Reserve Bank needed to cover reserves against deposits for 1999 ranged from $2,438,000 to $3,873,000. For 1998, these balances ranged from $1,738,000 to $2,752,000. Average daily cash balances with the Federal Reserve Bank required to cover services provided to the Bank amounted to $800,000 throughout 1999 and 1998. Total balances restricted at December 1999 and 1998, respectively, were $4,384,000 and $3,246,000. NOTE D - INVESTMENT SECURITIES The amortized cost of investment securities and their approximate fair values at December 31, 1999 and 1998 were as follows (in thousands): 31-Dec-99 Gross Gross Amortized Unrealize Unrealized Fair Cost Gains Losses Value Securities available for sale: Equity surities $ 23,718 $ 3,122 $ -3,058 $ 23,782 U.S Government agency securities 39,722 5 -1,093 38,634 State and political sec 50,224 66 -3,461 46,829 Restricted equity sec 2,847 - - 2,847 Other debt securities 1,229 2 -18 1,213 $ 117,740 $ 3,195 $ -7,630 $ 113,305 Securities held to maturity: U.S Government and agency securities $ 259 $ 7 $ - $ 266 State and polititical sec 2,465 8 -37 2,436 Other debt securities 290 - - 290 $ 3,014 $ 15 -37 2,992 31-Dec-98 Gross Gross Amortized Unrealize Unrealized Fair Cost Gains Losses Value Securities available for sale: Equity surities $ 20,297 $ 6,417 -579 26,135 U.S Government and agency securities 45,60 447 -69 45,978 State and political sec 26,387 1,313 -67 27,633 Restricted equity securities 1,826 50 - 1,876 Other debt securities 702 - -1 701 $ 94,812 $ 8,227 -716 102,323 Securities held to maturity: U.S Government and agency securities $ 339 $ 15 - 354 State and political sec 2,464 49 -1 2,512 Other debt securities 275 - - 275 $ 3,078 $ 6 4 -1 3,141
The amortized cost and fair value of debt securities at December 31, 1999, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities Securities Held to Maturity Available for Sale Amoritized Fair Amoritized Fair Cost Value Cost Value Due in one year $ 5 $ 5 $ 9,503 $ 9,497 Due after one year to five 1,251 1,278 4,540 4,526 Due after five years to ten 577 556 2,170 2,167 Due after ten years 1,181 1,153 74,962 70,486 $ 3,014 $ 2,992 $ 91,175 $ 86,676
Total gross proceeds from sales of securities available for sale, were $53,521,000 $27,371,000 and $74,584,000 for 1999, 1998 and 1997, respectively. The following table represents gross realized gains and gross realized losses on those transactions (in thousands): 1999 1998 1997 Gross realized gains: U.S Government and agency sec $ 128 $ 72 $ 68 State and political securities 364 - 288 Equity securities 2,104 2,024 4,923 Other debt securities - - - $ 2596 $ 2,096 $ 5,279 Gross realized losses: U.S Government and agency sec $ 416 5 579 State and political securities 26 5 19 Equity securities 181 10 1 Other debt securities 27 - 22 $ 650 $ 20 $ 621
Investment securities with a carrying value of approximately $34,121,000 and $22,729,000 at December 31, 1999 and 1998, respectively, were pledged to secure certain deposits, security repurchase agreements, and for other purposes as required by law. There is no concentration of investments that exceed ten percent of shareholders' equity for any individual issuer, excluding those guaranteed by the U.S. Government. NOTE E - LOANS Major loan classifications loans are summarized as follows (in thousands): December 31, 1999 Past Due Past Due 30 to 90 90 Days Non- Current Days or More Accrual Total Commercial and agricultural $ 31,189 $ 482 $ 25 $ 39 $ 31,735 Real estate mortgage Residential 120,668 2,518 201 5 123,392 Commercial 51,102 343 - - 51,445 Construction 3,493 3 - 236 3,732 Installment loans to individuals23,141 359 15 4 23,519 $229,593 $ 3,705 241 284 233,823 Less: Allowance 2,823 2,823 Loans, net $226,770 $ 231,000 December 31, 1998 Past Due Past Due 30 to 90 90 Days Non- Current Days or More Accrual Total Commercial and agricultural $ 32,270 $ 583 23 44 $ 32,920 Real estate mortgage Residential 109,130 2,480 32 63 111,705 Commercial 42,903 615 - 44 43,562 Construction 3,355 30 - 489 3,874 Installment loans to individual 24,036 458 5 6 24,505 $211,694 $ 4,166 60 646 216,566 Less: Allowance 2,681 2,681 Loans, net $209,013 $213,885
Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $284,000 and $646,000 at December 31, 1999 and 1998, respectively. If interest had been recorded at the original rate on those loans, such income would have approximated $48,000, $98,000, and $81,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Interest income on such loans, which is recorded as received, amounted to approximately $38,000, $50,000, and $42,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Transactions in the allowance for loan losses are summarized as follows (in thousands): Years Ended December 31, 1999 1998 1997 Balance, beginning of year $ 2,681 $ 2,579 $ 2,553 Provision charged to operations 286 305 274 Loans charged off -176 -271 -359 Recoveries 32 68 111 Balance, end of year $ 2,823 $ 2,681 $ 2,579
The Company had no concentration of loans to borrowers engaged in similar businesses or activities which exceed five percent of total assets at December 31, 1999 or 1998. The Company grants commercial, industrial, residential, and installment loans to customers throughout Northcentral Pennsylvania. Although the Company has a diversified loan portfolio at December 31, 1999 and December 31,1998, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions within this region. NOTE F - BANK PREMISES AND EQUIPMENT Bank premises and equipment are summarized as follows (in thousands): December 31, 1999 1998 Land $ 566 $ 566 Bank premises 4,598 4,545 Furniture and equipment 4,813 4,356 Leasehold improvements 753 601 Total 10,730 10,068 Less accumulated depreciation 5,842 5,330 Net $ 4,888 $ 4,738 Depreciation expense for the years ended 1999, 1998 and 1997 was $512,000, $431,000, and $456,000, respectively. NOTE G - DEPOSITS Time deposits of $100,000 or more totaled approximately $24,308,000 on December 31, 1999 and $23,112,000 on December 31, 1998. Interest expense related to such deposits was approximately $1,242,000, $1,238,000, and $954,000 for the years ended December 31, 1999, 1998, and 1997, respectively. These time deposits at December 31, 1999 mature as follows: 2000 - - $18,004,000; 2001 - $4,847,000; 2002 - $538,000; 2003 - $219,000; thereafter -$700,000. NOTE H - SHORT-TERM BORROWINGS Short-term borrowings consist of federal funds purchased, securities under agreements to repurchase, and FHLB advances which generally represent overnight or less than 30-day borrowings. The outstanding balances and related information for short-term borrowings are summarized as follows (in thousands): 1999 1998 Federal Home Loan Bank: Balance at year end $2,000 -- Maximum amount outstanding at any month end $2,000 -- Average balance outstanding during the year $2,000 -- Weighted-average interest rate: At year end 6.12% -- Paid during the year 6.12% -- Open Repo Plus: Balance at year end $23,590 -- Maximum amount outstanding at any month end $23,590 $10,460 Average balance outstanding during the year $ 6,108 $ 4,090 Weighted-average interest rate: At year end 4.05% 4.46% Paid during the year 5.26% 5.60% Repurchase Agreements: Balance at year end $16,051 $11,223 Maximum amount outstanding at any month end $17,147 $14,115 Average balance outstanding during the year $15,416 $10,992 Weighted-average interest rate: At year end 4.62% 4.67% Paid during the year 4.62% 4.67%
NOTE I - OTHER BORROWINGS Other borrowings are comprised of advances form the FHLB. A schedule of other borrowings by maturity as of December 31, 1999 and 1998 is summarized as follows (in thousands): Interest Description Maturity Rate 1999 1998 FHLB Borrowing Nov 29,2000 5.21% $ 500 $ 500 FHLB Borrowing 14-Feb-02 5.48% - 500 FHLB Borrowing 14-Feb-02 5.87% 528 528 Convertible Select Advance 7-Apr-08 5.54% 10,000 10,000 Convertible Select Advance 16-Jun-08 5.56% 10,000 10,000 Convertible Select Advance 26-Feb-09 5.06% 5.000 - FHLB Borrowing 17-Nov-11 6.92% 500 500 FHLB Borrowing May 25, 2015 6.92% 750 750 Total $27,278 $22,778
The Bank maintains a credit arrangement which includes a revolving line of credit with FHLB. Under this credit arrangement, the Bank has a remaining borrowing capacity of approximately $29,923,000 million at December 31, 1999, is subject to annual renewal, and typically incurs no service charges. Under terms of a blanket agreement, collateral for the FHLB borrowings must be secured by certain qualifying assets of the Bank which consist principally of first mortgage loans. NOTE J - INCOME TAXES The following temporary differences gave rise to the net deferred tax asset (liability) at December 31, 1999 and 1998 (in thousands): 1999 1998 Deferred tax asset: Allowance for loan losses $ 601 $ 546 Deferred compensation 260 234 Contingencies 83 75 Pension 202 136 Loan fees and costs 169 139 Unrealized losses on available for s 1,508 - Stock option 14 18 Total $2,837 $1,148 Deferred tax liability: Bond accretion 20 25 Depreciation 124 122 Unrealized gains on available for sale securities - 2,486 Total 144 2,633 Deferred tax asset (liability) $2,693 $-1,485 No valuation allowance was established at December 31, 1999 and 1998, in the view of the Company's ability to carry back to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company's earning potential. The provision for income taxes is comprised of the following (in thousands): Year Ended December 31, 1999 1998 1997 Currently payable $ 2,422 $ 2,263 $ 3,217 Deferred benefit -198 -99 -104 Total provision $ 2,224 $ 2,164 $ 3,113
The effective federal income tax rate for the years ended December 31, 1999, 1998, and 1997 was 23.6 percent, 25.1 percent, and 27.8 percent, respectively. A reconciliation between the expected income tax and rate and the effective income tax and rate on income before income tax provision follows (in thousands): 1999 1998 1997 Amount % Amount % Amount % Provision at expected rate $ 3,201 34 $ 2,935 34%$ $ 3,937 35% Increase (decrease) in tax resulting from: Tax-exempt income -677 -7.2 -416 -4.8 -458 -4.2 Other, net -300 -3.2 -355 -4.1 -366 -3.0 Effective income tax and rates $ 2,224 23.6 2,164 25.1% $ 3,113 27.80%
NOTE K - EMPLOYEE BENEFIT PLANS Defined Benefit Pension Plan The Company has a noncontributory defined benefit pension plan (the "Plan") for all employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten years of employment. The following tables show the funded status and components of net periodic benefit cost from this defined benefit plan (in thousands): 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year $ 3,459 $ 3,026 Service cost 254 222 Interest cost 236 213 Actuarial adjustment 253 59 Benefits paid -103 -61 Benefit obligation at end of year 4,099 3,459 Change in plan assets: Fair value of plan assets at beginning of yr 3,476 2,819 Actual return on plan assets 268 547 Employer contribution - 171 Benefits paid -103 -61 Fair value of plan assets at end of year 3,641 3,476 Funded status -460 17 Unrecognized net actuarial gain -350 -619 Unrecognized transition asset -32 -35 Unrecognized prior service cost 248 268 Accrued benefit cost $ -594 $ -369 Weighted-average assumptions as of December 31: Discount rate 6.50% 7.00% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 5.00% 5.00% Components of net periodic benefit cost: Service cost $ 254 $ 222 Interest cost 236 213 Actual return on plan assets -268 -224 Amortization of transition asset -3 -3 Amortization of prior service cost 20 18 Recognized net actuarial gain -15 -1 Net periodic benefit cost $ 224 $ 225
401(k) Savings Plan The Company also offers a 401(k) savings plan in which eligible participating employees may elect to contribute up to a maximum percentage allowable not to exceed the limits of Code Sections 401(k), 404, and 415. The company may make matching contributions equal to a discretionary percentage to be determined by the Company. Participants are at all times fully vested in their contributions and vest over a period of five years in the employer contribution. Contribution expense was approximately $64,000, $114,000, and $100,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Deferred Compensation Plan The Company has a deferred compensation plan whereby participating directors elected to forego director's fees for a period of five years. Under this plan the Company will make payments for a ten-year period beginning at age 65 in most cases or at death, if earlier, at which time payments would be made to their designated beneficiaries. To fund benefits under the deferred compensation plan, the Company has acquired corporate-owned life insurance policies on the lives of the participating directors for which insurance benefits are payable to the Company. The total expense charged to other expenses was $128,000, $114,000 and $114,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Benefits paid under the plan were approximately $57,000 in 1999 and $45,000 in 1998 and 1997. NOTE L- STOCK OPTIONS Prior to 1998, the Company granted a select group of its officers options to purchase shares of its common stock. These options, which are immediately exercisable, expire within three to ten years after having been granted. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for these options. Accordingly, compensation expense is recognized on the grant date, in amount equivalent to the intrinsic value of the options (stock price less exercise price, at measurement date). Had compensation costs for these options been determined based on the fair values at the grant dates for awards consistent with the method of SFAS No. 123, the effect on the Company's net income and earnings per share for 1999, 1998, and 1997 would have been insignificant. For purposes of the calculations required by SFAS No. 123, the fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants issued in 1999, 1998 and 1997, respectively: dividend yield of 1.85 percent, 2.52 percent, and 3.45 percent, respectively; risk-free interest rates of 6.75 percent, 5.63 percent, and 5.69 percent, respectively; and expected option lives of three years and expected volatility of 18.73 percent, 14.51 percent, and 17.50 percent, respectively. Also, in 1998, the Company adopted the "1998 Stock Option Plan" for key employees and directors. Incentive stock options and nonqualified stock options may be granted to eligible employees of the Bank and nonqualified options may be granted to directors of the Company. In addition, non-employee directors are eligible to receive grants of nonqualified stock options. Incentive nonqualified stock options granted under the 1998 Plan may be exercised not later than ten years after the date of grant. Each option granted under the 1998 Plan shall be exercisable only after the expiration of six months following the date of grant of such options. A summary of the status of the Company's common stock option plans, adjusted to reflect a stock split effected in the form of a 100 percent stock dividend issued January 15, 1998 and a 10 percent stock dividend issued June 8, 1999, is presented below: 1999 1998 1997 Weighted- Weighted- Weighted- average average average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding, beginning of year 28,479 $ 34.27 32,652 $ 18.7 27,220 $12.97 Granted 10,450 42.00 9,900 53.18 17,490 25.98 Exercised 4,116 17.95 14,073 11.45 12,058 16.34 Forfeited - - - - - - Outstanding, end 34,813 $ 38.52 28,479 $ 34.27 32,652$ 18.70 of year Options exercisable at year-end 24,363 18,579 32,652
The following table summarizes information about nonqualified and incentive stock options outstanding at December 31, 1999. Exercise Number Remaining Number Prices Outstanding Contractual Exercisable $ 25.98 14,463 4 years 14,463 53.18 9,900 9 years 9,900 42 10,450 10 years - 34,813 24,363 NOTE M - RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and the Bank, including their immediate families and companies in which they are principal owners (more than ten percent), are indebted to the Company. Such indebtedness was incurred in the ordinary course of business on the same terms and at those rates prevailing at the time for comparable transactions with others. A summary of loan activity with executive officers, directors, principal shareholders, and associates of such persons is listed below (in thousands): Beginning Retired/ Charge- Ending Year Balance Additions Payments Resigned offs Balance 1999 $ 2,452 $ 6,775 $ 3,417 $ - $ - $ 5,810 1998 $ 2,096 $ 1,642 $ 1,074 $ 212 $ - $ 2,452 1997 $ 2,014 $ 900 $ 818 $ - $ - $ 2,096
NOTE N - COMMITMENTS AND CONTINGENT LIABILITIES The following schedule of future minimum rental payments under operating leases with noncancellable terms in excess of one year as of December 31, 1999 (in thousands): Year Ending December 31, 2000 $ 185 2001 175 2002 127 2003 80 2004 56 Thereafter 249 Total $ 872 Total rental expense for all operating leases for the years ended December 31, 1999, 1998, and 1997 approximated $197,000, $268,000, and $263,000, respectively. The Company is subject to lawsuits and claims arising out of its business. In the opinion of management, after review and consultation with counsel, any proceedings that may be assessed will not have a material adverse effect on the consolidated financial position of the Company. NOTE 0 - OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letter of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk. Financial instruments whose contract amounts represent credit risk are as follows at December 31 (in thousands): 1999 1998 Commitments to extend credit $ 25,917 $ 29,455 Standby letters of credit $ 1,564 $ 1,157 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 customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, on extension of credit is based on management's credit assessment of the counterparty. Standby letters of credit are conditional commitments issued by the Company guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. NOTE P - CAPITAL REQUIREMENTS Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total assets. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) established five capital categories ranging form "well capitalized" to "critically undercapitalized." Should any institution fail to meet the requirements to be considered "adequately capitalized," it would become subject to a series of increasingly restrictive regulatory actions. As of December 31, 1999 and 1998, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Tier 1 risk-based and Tier 1 leverage capital ratios must be at least 10%, 6%, and 5%, respectively. The Company's and the Bank's actual capital ratios are presented in the following tables, which shows that both met all regulatory capital requirements. The Company's actual capital amounts and ratios are presented in the following table (in thousands). 1999 1998 Amount Ratio Amount Ratio Total Capital (to Risk-weighted Assets) Actual $ 51,864 21.5 50,269 22.8% For Capital Adequacy Pur 19,286 8 17,630 8 To Be Well Capitalized 24,108 10 22,038 10 Tier I Capital (to Risk-weighted Assets) Actual $ 49,012 20.3 44,938 20.4% For Capital Adequacy Pur 9,643 4 8,815 4 To Be Well Capitalized 14,464 6 13,223 6 Tier I Capital (to Average Assets) Actual $ 49,012 13.5 44,938 13.5% For Capital Adequacy Pur 14,481 4 13,326 4 To Be Well Capitalized 18,102 5 16,657 5 The Bank's actual capital amounts and ratios are presented in the following table (in thousands). 1999 1998 Amount Ratio Amount Ratio Total Capital (to Risk-weighted Assets) Actual $ 38,572 16.8 38,024 18.5% For Capital Adequacy Purposes 18,332 8 16,475 8 To Be Well Capitalized 22,916 10 20,594 10 Tier I Capital (to Risk-weighted Assets) Actual $ 35,749 15.6 34,485 16.8% For Capital Adequacy Pur 9,166 4 8,238 4 To Be Well Capitalized 13,749 6 12,356 6 Tier I Capital (to Average Assets) Actual $ 35,749 10.5 34,485 10.6% For Capital Adequacy Pur 13,607 4 13,073 4 To Be Well Capitalized 17,009 5 16,341 5
Banking regulations limit the amount of dividends that may be paid by the Bank to Penns Woods Bancorp, Inc. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately $10,057,000 at December 31, 1999, subject to minimum capital ratio requirements noted above. The Bank is subject to regulatory restrictions which limit its ability to loan funds to Penns Woods Bancorp, Inc. At December 31, 1999, the regulatory lending limit amounted to approximately $3,716,000. NOTE Q - ACQUISITION On January 11, 1999 the Company completed the acquisition of all the outstanding common stock of the First National Bank of Spring Mills in exchange for 262,471 shares of the Company's common stock, in a business combination accounted for as a pooling of interest. As a result of this transaction, total consolidated assets increased approximately $31,834,000. Historical financial information has been restated to include the First National Bank of Spring Mills. NOTE R - STOCK DIVIDEND On April 28, 1999, the Board of Directors approved a ten percent stock dividend to shareholders of record as of May 10, 1999. As a result of the dividend, an additional 283,393 shares of the Company were issued, with fractional shares paid in cash. On November 25, 1997 the Board of Directors approved a two-for-one stock split issued to shareholders on January 15, 1998. The additional shares resulting from the split were effected in the form of a 100% stock dividend. Average shares and all pre share amounts included in the consolidated financial statements are based on the increased number of shares after giving retroactive effect to the stock dividends. NOTE S - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company 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 Company's entire holdings of a particular financial instrument. Also, it is the Company's 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 Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates. Estimated fair values have been determined by the Company using historical data and an estimation methodology suitable for each category of financial instruments. The estimated fair value of the Company's investment securities is described in Note A. The Company's fair value estimates, methods, and assumptions are set forth below for the Company's other financial instruments. Cash and Cash Equivalents The carrying amounts for cash and due from banks approximate fair 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 mortgage, credit card, 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, except residential mortgage and credit card 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 Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discounted rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. 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. The following table presents information for loans (in thousands): Average Average Estimated Book Historica Maturity Discounted Value Yield Years (1)Rate (2) Fair Value 31-Dec-99 Commercial and agricult $31,735 9.13% 4.48 9.25%$ 31,700 Real estate mortgage Residential 123,392 8.28% 7.35 8.00% 123,712 Commercial 51,445 8.45% 6.05 8.75% 51,303 Construction 3,732 9.18% 2.7 9.00% 3,738 Installment loans to ind 23,519 9.02% 3.48 9.25% 23,469 31-Dec-98 Commercial and agricul $ 32,920 8.98% 4.27 9.00%$ 32,914 Real estate mortgage Residential 111,705 8.50% 6.27 7.95% 112,274 Commercial 43,562 8.77% 5.21 8.00% 43,873 Construction 3,874 8.89% 1.7 8.50% 3,888 Installment loans to 24,505 8.65% 2.75 8.50% 24,539 individuals
(1) Average maturity represents the expected average cash flow period, which in some instances is different than the stated maturity. (2) Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. Deposits The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market and checking accounts, is equal to the amount payable on demand as of December 31, 1999 and 1998. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities (in thousands): Book Value Fair Value 31-Dec-99 Interest-bearing deposits $ 212,528 $ 212,378 Noninterest-bearing deposits 43,045 43,045 31-Dec-98 Interest-bearing deposits $ 210,901 $ 211,559 Noninterest-bearing deposits 42,233 42,223 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. Securities Sold under Repurchase Agreements and Short-term Borrowings The carrying amounts for securities sold under repurchase agreements and short-term borrowings approximate fair value. Other Borrowings: The fair value of other borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for borrowings of similar maturities (in thousands): Book Value Fair Value 31-Dec-99 $ 27,278 $ 26,888 31-Dec-98 $ 22,778 $ 22,903 Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written: There is no material difference between the notional amount and the estimated fair value of off-balance sheet items at December 31, 1999 and 1998 respectively. NOTE T - PARENT COMPANY ONLY FINANCIAL STATEMENTS Condensed financial information for Penns Woods Bancorp, Inc. follows CONDENSED BALANCE SHEET, DECEMBER 31, 1999 1998 (in thousands) ASSETS $ 27 $ 51 Investment in subsidiaries: Bank 33,261 36,973 Nonbank 13,224 13,221 Deferred tax asset 14 18 Prepaid taxes 13 149 Total Assets $ 46,539 $ 50,412 LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 454 $ 516 Shareholders' equity 46,085 49,896 Total Liabilities and Shareholders' Equity $ 46,.539 $ 50,412 CONDENSED STATEMENT OF INCOME, FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 (in thousands) OPERATING INCOME Dividends from subsidiaries $3,735 $ 3,789 $ 4,956 Equity in undistributed net income of subsidiaries 3,583 2,691 3,163 Other income 1 - 156 OPERATING EXPENSES -129 -12 -138 NET INCOME $ 7,190 $ 6,468 $ 8,137 CONDENSED STATEMENT OF CASH FLOWS, FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,190 $ 6,468 $ 8,137 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries 3,583 -2,691 -3,163 Increase in income taxes payable 174 37 6 Increase (decrease) in liabilities -24 -105 9 Stock option compensation expense - - 7 Net cash provided by operating activities $3,757 3,709 4,996 CASH FLOWS FROM INVESTING ACTIVITIES Additional investment in subsidiaries -620 -1,105 -2,638 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid -3,178 -2,755 -2,337 Proceeds from exercise of stock options 40 56 197 Purchase of treasury stock -23 -109 - Net cash used in financing activities -3,161 -2,808 -2,140 NET INCREASE (DECREASE) IN CASH -24 -204 218 CASH, BEGINNING OF YEAR 51 255 37 CASH, END OF YEAR $ 27 $ 51 $ 255
NOTE U - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE THREE MONTHS ENDED March June September December 1999 31 30 30 31 Interest income $ 6,214 6,368 6,580 $ 6,868 Interest expense 2,524 2,536 2,610 2,848 Net interest income 3,690 3,832 3,970 4,020 Provision for loan losses 78 52 78 78 Other income 377 397 389 418 Securities gains 185 94 272 1,395 Other expenses 2,268 2,220 2,233 2,618 Income before income tax provisi 1,906 2,051 2,320 3,137 Income tax provision 431 454 540 799 Net income $ 1,475 1,597 1,780 $ 2,338 Earnings per share - bas$ 0.52 0.46 0.57 $ 0.75 Earnings per share - dil$ 0.52 0.46 0.57 $ 0.75 FOR THE THREE MONTHS ENDED March June September December 1998 31 30 30 31 Interest income $ 5,968 6,236 6,467 $ 6,425 Interest expense 2,399 2,581 2,800 2,749 Net interest income 3,569 3,655 3,667 3,676 Provision for loan losses 80 75 75 75 Other income 609 64 326 360 Securities gains 354 489 216 1,017 Other expenses 2,036 2,061 2,074 2,894 Income before income tax provisi 2,416 2,072 2,060 2,084 Income tax provision 619 471 574 500 Net income $ 1,797 1,601 1,486 $ 1,584 Earnings per share - basic 0.58 0.51 0.48 $ 0.51 Earnings per share - diluted 0.57 0.51 0.48 $ 0.51
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
SCHEDULE 1 PENNS WOODS BANCORP, INC. INDEBTEDNESS OF RELATED PARTIES Column A Column B Column C Column D Column E Deductions Beginning Retired/ Charge- Ending Year Name of Debtor Balance Additions Payments Resigned offs Balance 1999 6 directors, 15 affiliated interests, and 2 officers $2,452 $6,775 $3,417 $0 $0 $5,810 1998 7 directors, 18 affiliated interests, and 3 officers $2,096 $1,642 $1,074 $212 $0 $2,452 1997 8 directors, 15 affiliated interests, and 3 officers $2,014 $900 $818 $0 $0 $2,096
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information appearing in the Proxy Statement under the caption "Election of Directors" is incorporated herein by reference. (a) Identification of directors. The information appearing under the caption "Election of Directors" in the Company's Proxy Statement dated March 7, 2000 (at page 5 thereto) is incorporated by reference. ITEM 11 EXECUTIVE COMPENSATION Information appearing under the caption "Executive Compensation" in the Company's Proxy Statement (at page 6 thereto) is incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under the caption "Principal Beneficial Owners of the Corporation's Common Stock" in the Company's Proxy Statement (at page 3 thereto) is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CERTAIN TRANSACTIONS There have been no material transactions between the Corporation and the Bank, nor any material transactions proposed, with any Director or executive officer of the Corporation and the Bank, or any associate of the foregoing persons. The Corporation and the Bank have had, and intend to continue to have, banking and financial transactions in the ordinary course of business with Directors and Officers of the Corporation and the Bank and their associates on comparable terms and with similar interest rates as those prevailing from time to time for other customers of the Corporation and the Bank. Total loans outstanding from the Bank at December 31, 1999 to the Corporation's and the Bank's Officers and Directors as a group and members of their immediate families and companies in which they had an ownership interest of 10% or more was $5,810,000 or approximately 17.47% of the total equity capital of the Bank. Loans to such persons were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features. See also the information appearing in footnote L to the Consolidated Financial Statements included elsewhere in the Annual Report. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements 1. The following consolidated financial statements and reports are set forth in Item 8: Report of Independent Certified Public Accountants Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Changes in Shareholders' Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 2. The following schedules are submitted herewith: I. Indebtedness of Related Parties (b) Reports on Form 8-K On January 26, 1999 Penns Woods Bancorp, Inc. filed a Form 8-K, reporting completion of the Company's acqusition of the First National Bank of Spring Mills. In addition, on September 23, 1999 Penns Woods Bancorp, Inc. filed a Form 8-K report under Item 4 of Form 8-K reporting a change in the registrant's independent certified public accountants. The schedules not included are omitted because the required matter or conditions are not present, the data is insignificant or the required information is submitted as part of the consolidated financial statements and notes thereto. (c) Exhibits: (3) (i) Articles of Incorporation of the Registrant, as presently in effect (incorporated herein by reference to Exhibit 3.1 of Registration Statement No. 333-65821 on Form S-4). (3) (ii) Bylaws of the Registrant as presently in effect(incorporated herein by reference to Exhitit 3.2 of Registration Statement No. 333-65821 on Form S-4). (13) Annual Report to Shareholders (22) Subsidiaries of the Registrant (24) Consent of Independent Certified Public Accountants EXHIBIT INDEX (3) (i) Articles of Incorporation of the Registrant, as presently in effect (incorporated herein by reference to Exhibit 3.1 of Registration Statement No. 333-65821 on Form S-4). (3) (ii) Bylaws of the Registrant as presently in effect (incorporated herein by reference to Exhibit 3.2 of Registration Statement No. 333-65821 on Form S-4). (13) Annual Report to Shareholders (22) Subsidiaries of the Registrant (24) Consent of Independent Certified Public Accountants SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 14, 2000 PENNS WOODS BANCORP, INC. BY: THEODORE H. REICH President Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Theodore H. Reich, President and Director March 14, 2000 Sonya E. Scott, Principal Accounting Officer & March 14, 2000 Principal Financial Officer Phillip H. Bower, Director March 14, 2000 Lynn S. Bowes, Director March 14, 2000 Michael J. Casale, Jr., Director March 14, 2000 H. Thomas Davis, Jr., Director March 14, 2000 William S. Frazier, Director March 14, 2000 James M. Furey II, Director March 14, 2000 Allan W. Lugg, Director March 14, 2000 Jay H. McCormick, Director March 14, 2000 R. Edward Nestlerode, Jr., Director March 14, 2000 James E. Plummer, Director March 14, 2000 William H. Rockey, Sr. Vice President & March 14, 2000 Director This statement has not been reviewed or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation. EX-21 2 NAME STATE OF INCORPORATION JERSEY SHORE STATE BANK PENNSYLVANIA WOODS REAL ESTATE DEVELOPMENT COMPANY PENNSLYVANIA WOODS INVESTMENT COMPANY, INC. DELAWARE EX-23.PR 3 Consent of Independent Auditors Penns Woods Bancorp, Inc. Jersey Shore, Pennsylvania We hereby consent to the inclusion of our opinion dated January 15, 1999 on the consolidated financial statements of Penns Woods Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1998 and for two years in the period then ended, in the Company's 1999 Annual Report to Shareholders and Form K. /s/ Parente, Randolph, Orlando, Carey & Associates Williamsport, Pennsylvania 23-Mar-00 EXHIBIT 23.SN Consent of Independent Auditors Penns Woods Bancorp, Inc. Jersey Shore, Pennsylvania We consent to the use in the Annual Report on Form 10-K under the Securities Exchange Act of 1934 of Penns Woods Bancorp, Inc. for the year ended December 31, 1999, of our report dated January 21, 2000 insofar as such report relates to the consolidated financial statements of Penns Woods Bancorp, Inc. as of and for the year ended December 31, 1999. /s/ S.R. Snodgrass, A.C. Wexford, Pennsylvania March 24, 2000 EX-27 4
9 1000 YEAR DEC-31-1999 DEC-31-1999 12474 212528 0 0 113305 3014 0 233823 2823 373742 255573 41641 3165 27278 0 0 31283 14802 373742 19990 6040 0 26030 7898 2620 15512 286 1946 9339 9414 0 0 0 7190 2.30 2.30 0 284 3946 0 0 2681 176 32 2823 2823 0 0
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