-----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, VAgHXKdpaaGk9hVQlK6fLpYxhdPz+Po0s45GMs1QN/RlGZxW1/PgsOQM4ne8DwPF 68Fu79hUNPyph6kfKqqLKw== 0000903594-02-000060.txt : 20020814 0000903594-02-000060.hdr.sgml : 20020814 20020814112138 ACCESSION NUMBER: 0000903594-02-000060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17077 FILM NUMBER: 02732564 BUSINESS ADDRESS: STREET 1: 115 S MAIN ST STREET 2: C/O SONYA E. SCOTT CITY: JERSEY SHORE STATE: PA ZIP: 17740 BUSINESS PHONE: 570-322-1111 MAIL ADDRESS: STREET 1: 300 MARKET ST CITY: WILLIAMSPORT STATE: PA ZIP: 17701 10-Q 1 f10qpenns.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2002, ( ) Transition report pursuant to Section 13 or 15 (d) of the Exchange Act for the Transition Period from _______________ to _______________. No. 0-17077 (Commission File Number) PENNS WOODS BANCORP, INC. (Exact name of Registrant as specified in its charter) PENNSYLVANIA 23-2226454 (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No.) 300 Market Street, Williamsport, Pennsylvania 17701 (Address of principal executive offices) (Zip Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] On August 7, 2002 there were 3,030,498 of the Registrant's common stock outstanding. PENNS WOODS BANCORP, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q Page Number ------ Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheet (unaudited) as of June 30, 2002 And December 31, 2001 Consolidated Statement of Income (unaudited) for the Three and Six Months ended June 30, 2002 and 2001 Consolidated Statement of Comprehensive Income (unaudited) For the Three and Six Months ended June 30, 2002 and 2001 Consolidated Statement of Changes in Shareholders' Equity (unaudited) for the Six Months ended June 30, 2002 Consolidated Statement of Cash Flows (unaudited) for the Six Months ended June 31, 2002 and 2001 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Other Information Signatures PENNS WOODS BANCORP, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) June 30, December 31, 2002 2001 -------- ------------ (IN THOUSANDS) ASSETS: Cash and due from banks $ 12,887 $ 14,844 Investment securities available for sale 152,318 131,985 Investment securities held to maturity (market value of $1,300,000 and $1,312,000) 1,252 1,302 Loans held for sale 1,940 3,993 Loans, net of unearned discount 251,806 251,623 Allowance for loan losses (3,000) (2,927) -------- -------- Loans, net 248,806 248,696 Bank premises and equipment, net 4,514 4,478 Accrued interest receivable 2,605 2,685 Bank owned life insurance 8,327 8,126 Other assets 12,277 8,701 -------- -------- TOTAL ASSETS $444,926 $424,810 ======== ======== LIABILITIES: Demand deposits $ 50,572 $ 55,277 Interest-bearing demand deposits 72,244 58,139 Savings deposits 58,487 53,309 Time deposits 134,330 138,425 -------- -------- Total deposits 315,633 305,150 Short-term borrowings 20,869 19,105 Other borrowings 46,778 41,778 Accrued interest payable 1,134 1,190 Other liabilities 2,176 2,335 -------- -------- Total liabilities 386,590 369,558 -------- -------- SHAREHOLDERS' EQUITY: Common stock, par value $10; 10,000,000 shares authorized and 3,131,644 shares issued 31,316 31,316 Additional paid-in capital 18,230 18,230 Retained earnings 9,486 6,987 Accumulated other comprehensive income 2,511 1,729 Less: Treasury stock at cost, 98,054 and 92,054 (3,207) (3,010) -------- -------- Total shareholders' equity 58,336 55,252 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $444,926 $424,810 ======== ======== See accompanying notes to the unaudited consolidated financial statements. PENNS WOODS BANCORP, INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Six months ended Three months ended June 30, June 30, ----------------------- ----------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (IN THOUSANDS EXCEPT PER SHARE DATA) INTEREST INCOME: Interest and fees on loans $10,454 $10,866 $ 5,184 $ 5,477 Interest and dividends on investments: Taxable interest 1,926 1,515 1,087 700 Nontaxable interest 1,569 1,468 784 792 Dividends 266 319 119 147 ------- ------- ------- ------- Total interest and dividends on investments 3,761 3,302 1,990 1,639 Other interest income 60 85 25 34 ------- ------- ------- ------- Total interest income 14,275 14,253 7,199 7,150 ------- ------- ------- ------- INTEREST EXPENSE: Interest on deposits 4,007 5,084 1,970 2,519 Interest on short-term borrowings 276 495 159 220 Interest on other borrowings 1,176 911 611 458 ------- ------- ------- ------- Total interest expense 5,459 6,490 2,740 3,197 ------- ------- ------- ------- Net interest income 8,816 7,763 4,459 3,953 Provision for loan losses 185 186 80 93 ------- ------- ------- ------- Net interest income after provision for loan losses 8,631 7,577 4,379 3,860 ------- ------- ------- ------- OTHER OPERATING INCOME: Service charges 832 716 442 383 Securities gains (losses), net (191) 346 (72) 211 Other income 1,214 766 544 368 ------- ------- ------- ------- Total other operating income 1,855 1,828 914 962 ------- ------- ------- ------- OTHER OPERATING EXPENSES: Salaries and employee benefits 2,955 2,645 1,534 1,337 Occupancy expense, net 394 396 203 187 Furniture and equipment expense 411 382 204 191 Other expenses 1,576 1,669 784 869 ------- ------- ------- ------- Total other operating expenses 5,336 5,092 2,725 2,584 ------- ------- ------- ------- INCOME BEFORE TAXES 5,150 4,313 2,568 2,238 INCOME TAX PROVISION 1,013 823 528 432 ------- ------- ------- ------- NET INCOME $ 4,137 $ 3,490 $ 2,040 $ 1,806 ======= ======= ======= ======= EARNINGS PER SHARE - BASIC $ 1.36 $ 1.13 $ 0.67 $ 0.58 EARNINGS PER SHARE - DILUTED $ 1.36 $ 1.13 $ 0.67 $ 0.58 BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,035,750 3,079,471 3,039,590 3,079,471 DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 3,038,391 3,079,471 3,042,152 3,079,471
See accompanying notes to the unaudited consolidated financial statements. PENNS WOODS BANCORP, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended June 30, ------------------ 2002 2001 ------ ------- (IN THOUSANDS) Net Income $2,040 $1,806 Other comprehensive income: Unrealized gains (losses) on available for sale securities $1,560 $ 214 Reclassification adjustment for (gain) loss included in net income 72 (211) ------ ------ Other comprehensive income before tax 1,632 3 Income tax expense related to other Comprehensive income 555 1 ------ ------ Other comprehensive income, net of tax 1,077 2 ------ ------ Comprehensive income $3,117 $1,808 ====== ====== Six Months Ended June 30, ----------------- 2002 2001 ------ ------- (IN THOUSANDS) Net Income $4,137 $3,490 Other comprehensive income: Unrealized gains on available for sale securities $ 994 $4,650 Reclassification adjustment for (gain) loss included in net income 191 (346) ------ ------ Other comprehensive income before tax 1,185 4,304 Income tax expense related to other Comprehensive income 403 1,463 ------ ------ Other comprehensive income, net of tax 782 2,841 ------ ------ Comprehensive income $4,919 $6,331 ====== ====== See accompanying notes to the unaudited consolidated financial statements. PENNS WOODS BANCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED COMMON ADDITIONAL OTHER TOTAL STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS INCOME STOCK EQUITY --------- ------- ---------- -------- ------------- -------- ------------- Balance, December 31, 2001 3,131,644 $31,316 $18,230 $ 6,987 $1,729 $(3,010) $55,252 Net income for the six months ended June 30, 2002 4,137 4,137 Dividends declared, $0.54 (1,638) (1,638) Treasury Stock acquired (6,000 shs) (197) (197) Net change in unreal- ized gain on invest- ments available for sale, net of tax benefit $403 782 782 --------- ------- ------- ------- ------ ------- ------- Balance, June 30, 2002 3,131,644 $31,316 $18,230 $ 9,486 $2,511 $(3,207) $58,336 ========= ======= ======= ======= ====== ======= =======
See accompanying notes to the unaudited consolidated financial statements. PENNS WOODS BANCORP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2002 2001 ---------- ---------- (IN THOUSANDS) OPERATING ACTIVITIES: Net Income $ 4,137 $ 3,490 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 275 324 Provision for loan losses 185 186 Accretion and amortization of investment security discounts and premiums (491) (394) Securities losses (gains), net 191 (346) Loss (gain) on sale of foreclosed assets 10 (24) Gross originations of loans held for sale (8,778) (11,785) Gross proceeds of loans held for sale 10,831 9,323 Decrease (Increase) in all other assets (856) 561 Increase in all other liabilities 188 120 -------- -------- Net cash provided by operating activities $ 5,692 $ 1,455 -------- -------- INVESTING ACTIVITIES: Investment securities available for sale: Proceeds from sales 25,009 16,122 Proceeds from calls and maturities 4,388 8,014 Purchases (51,793) (28,675) Investment securities held to maturity: Proceeds from calls and maturities 90 1,346 Purchases (40) (25) Net decrease (increase) in loans (495) 2,562 Acquisition of bank premises and equipment (311) (158) Proceeds from the sale of foreclosed assets 91 368 -------- -------- Net cash used in investing activities $(23,061) $ (446) FINANCING ACTIVITIES: Net increase in interest-bearing deposits 15,188 12,950 Net increase (decrease) in noninterest-bearing deposits (4,705) 580 Proceeds from long-term borrowings 5,000 - Net increase (decrease) in short-term borrowings 1,764 (13,535) Dividends paid (1,638) (1,537) Purchase of Treasury Stock (197) (853) -------- -------- Net cash provided by (used in) financing activities 15,412 (2,395) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,957) (1,386) CASH AND CASH EQUIVALENTS, BEGINNING 14,844 15,318 -------- -------- CASH AND CASH EQUIVALENTS, ENDING $ 12,887 $ 13,932 ======== ======== The Company paid approximately $5,515,000 and $6,615,000 interest on deposits and other borrowings during the first half of 2002 and 2001, respectively. The Company made income tax payments of approximately $1,095,000 and $920,000 in the first half of 2002 and 2001, respectively. See accompanying notes to the unaudited consolidated financial statements. PENNS WOODS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Basis of Presentation The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the "Company") and its wholly-owned subsidiaries Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., and Jersey Shore State Bank (the "Bank") and its wholly-owned subsidiary The M Group, Inc. D/B/A The Comprehensive Financial Group ("The M Group"). All significant inter-company balances and transactions have been eliminated in the consolidation. The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for the fair presentation of results for such periods. All of those adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with financial statements and notes thereto contained in the Company's annual report for the year ended December 31, 2001. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141, Business Combinations, effective for all business combinations initiated after June 30, 2001, as well as all business combinations accounted for by the purchase method that are completed after June 30, 2001. The new statement requires that the purchase method of accounting be used for all business combinations and prohibits the use of the pooling-of-interests method. FAS No. 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. The adoption of FAS No. 141 did not have a material effect on the Company's financial position or results of operations. On January 1, 2002, the Company adopted FAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. This statement changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. However, this new statement did not amend FAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, which requires recognition and amortization of unidentified intangible assets relating to the acquisition of financial institutions or branches thereof. The FASB has undertaken a limited scope project to reconsider the provisions of FAS No. 72 in 2002 and has issued an exposure draft of a proposed statement, Acquisitions of Certain Financial Institutions, that would remove acquisitions of financial institutions from the scope of FAS No. 72. The adoption of this proposed statement would require all goodwill originating from acquisitions that meet the definition of a business combination as defined in Emerging Issues Task Force Issue ("EITF") No. 98-3 to be discontinued. This statement, among other things, eliminates the regularly scheduled amortization of goodwill and replaces this method with a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company's reported net income because impairment losses, if any, could occur irregularly and in varying amounts. Upon adoption of this statement on January 1, 2002, the Company stopped amortizing existing goodwill of $3.0 million. In addition, the Company performed its initial impairment analysis of goodwill noting that the estimated fair value exceeded the carrying amount. Application of the non- amortization provisions of FAS No. 142 resulted in an increase in net income of $110,000, or $0.03 per share, during the first half of 2002. In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The new statement takes effect for fiscal years beginning after June 15, 2002. The adoption of this statement, which is effective January 1, 2003, is not expected to have a material effect on the Company 's financial statements. On January 1, 2002, the Company adopted FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. FAS No. 144 supercedes FAS No. 121 and applies to all long-lived assets (including discontinued operations) and consequently amends APB Opinion No. 30, Reporting Results of Operations- Reporting the Effects of Disposal of a Segment of a Business. FAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less costs to sell. The adoption of FAS No. 144 did not have a material effect on the Company's financial statements. In April 2002, the FASB issued FAS No. 145, "Recission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS No. 145 rescinds FAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. This statement also amends FASB FAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This statement also makes technical corrections to existing pronouncements, which are not substantive but in some cases may change accounting practice. FAS No. 145 is effective for transactions occurring after May 15, 2002. The adoption of FAS No. 145 did not have a material effect on the Company's financial position or results of operations. In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The new statement will be effective for exit or disposal activities initiated after December 31, 2002, the adoption of which is not expected to have a material effect on the Company's financial statements. Per Share Data There are no convertible securities, which would affect the numerator in calculating basis and dilutive earnings per share, therefore, net income as presented on the consolidated statement of income will be used as the numerator. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation Six Months Three Months Ended Ended June 30, June 30, 2002 2002 ---------- ------------ Weighted average common shares outstanding 3,131,644 3,131,644 Average treasury stock shares (95,894) (92,054) --------- --------- Weighted average common shares and common stock equivalents used to calculate basic earnings per share 3,035,750 3,039,590 Additional common stock equivalents (stock options) used to calculate diluted earnings per share 2,641 2,562 --------- --------- Weighted average common shares and common stock equivalents used to calculate diluted earnings per share 3,038,391 3,042,152 ========= ========= Options to purchase 20,350 shares of common stock at prices from $42.00 to $53.18 were outstanding during the first half of 2002 and 30,350 shares at prices from $32.63 to $53.18 were outstanding during the first half of 2001, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. Reclassification of Comparative Amounts Certain comparative amounts for the prior periods have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or stockholders' equity. CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Report contains certain "forward-looking statements" including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company's actual results and could cause the Company's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company's organization, compensation and benefit plans; (iii) the effect on the Company's competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies. EARNINGS SUMMARY Comparison of the Six Months Ended June 30, 2002 and 2001 Interest Income For the six months ended June 30, 2002, total interest income increased by $22,000 compared to the first half of 2001. Total interest and dividends on investments increased $459,000 while interest and fees on loans decreased $412,000 and Other interest income decreased $25,000. Historically low interest rates during the first half of 2002 have negatively effected interest income. Investment opportunities that have generated additional interest income to offset the decrease in loan interest, resulting in a minimal total interest income increase of $22,000. Total interest and fees on loans decreased $412,000 in the first two quarters 2002 compared to the same period in 2001. Prime rates declined from a year ago, negatively impacting the interest collected on variable rate loans and new loans initiated over the past twelve months. Interest and dividends on investments increased $459,000 due to the net effect of a $411,000 increase in taxable interest, an increase of $101,000 in nontaxable interest and a $53,000 decrease in dividends. The increase of taxable interest is due to the purchase of taxable municipal securities over the past year. Taxable municipal yields have remained favorable compared to other investing alternatives. The decrease in dividend income of $53,000 is partially the result of the sale of stocks that had previously received dividends. Interest Expense For the six months ended June 30, 2002, total interest expense decreased by $1,031,000 or 16% compared to the first half of 2001. The overall decrease in interest expense is the result of a $1,077,000 decrease in interest paid on deposits and a $219,000 decrease in interest expense paid on short-term borrowings, offset by an increase of $265,000 on interest paid on other borrowings. Although total deposits increased almost $24 million over the past year, declining rates have had a positive effect on interest expense. Average short-term borrowings declined from a year ago mostly due to deposit growth. Fewer borrowings and declining rates also reduced interest expense on short-term borrowings. Favorable long-term borrowing rates currently present an opportunity to reduce interest expenses over the coming years. The Company borrowed an additional $15 million in long term advances through the FHLB to minimize future borrowing costs and to enhance asset and liability positioning. The $265,000 in expense on other borrowings is the result of the additional advances. Provision for Loan Losses The provision for loan losses is based upon management's quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution. The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management's consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments. Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at June 30, 2002, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, employment and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank's loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgement of information available to them at the time of their examination. The allowance for loan losses increased $73,000 from December 31, 2001 compared to the allowance for loan losses of $3,000,000 or 1.2% of total loans for June 30, 2002. This percentage is consistent with the guidelines of regulators and peer banks. Management's conclusion is that the provision for loan losses is adequate. The provision for loan losses totaled $185,000 for the six months ended June 30, 2002. The provision for the same period in 2001 was $186,000. As of June 30, 2002, charge-offs exceeded recoveries by $112,000 compared to June 30, 2001, when charge-offs exceeded recoveries by $155,000. The ratio of the allowance to net loans for June 30, 2002 and December 31, 2001 was 1.2%. An overall decrease in non-performing loans from December 31, 2001, totaled $113,000. Non-performing commercial and agricultural loans decreased $11,000, real estate secured loans decreased by $102,000 and installment loans were unchanged. Based upon this analysis as well as the others noted above, senior management has concluded that the allowance for loan losses is adequate. Other Operating Income Other operating income for the six months ended June 30, 2002 increased $27,000. Excluding security gains (losses), service charges and other income increased $564,000. An increase in service charges of $116,000 was mostly due to the revision of the Bank's overdraft fee structure in May of 2001. Other income increased $448,000. The substantial increase in other income was mostly due to commission income realized from the sale of various financial products offered through the Bank's subsidiary, The M Group. Income generated from The M Group, comprised $309,000 of the increase in other income. Proceeds of $116,000 from a bank owned life insurance policy also contributed to the increase in other income. Management has analyzed its equity portfolio for impairment that would qualify as other than temporary. Impairment is determined using factors such as length of time and the extent to which the market value is less than cost; the financial condition and the near-term prospects of the issuer; and the intent and ability of the Company to retain its investment to allow for the market to recover. In doing so, management has identified securities within the equity portfolio that have an other than temporary decline in market value. Management has reserved $1,516,000, which was charged to security gains and losses, to provide for this decline. Extracting the $1,516,000 charge, security gains increased $1,325,000. The Company sold securities that were determined to have attained their maximum long-term potential value which thereby resulted in the substantial gains on securities. Other Operating Expense For the six months ended June 30, 2002 total other operating expenses increased $244,000 over the same period in 2001. Employee salaries and benefits increased $310,000 as a result of increased salaries that correspond with the growth in sales of financial products offered by the M Group as well as normal increases in salary levels. Occupancy expense decreased $2,000 and furniture and equipment expense increased $29,000. Occupancy experienced an overall decline in normal expenses. The $16,000 increase in furniture and equipment expense is explained by miscellaneous costs associated with the new State College office build-out and Wide Area Network preparation. An overall decrease in other expenses totaled $93,000. Excluding the decrease of $110,000 resulting from the elimination of goodwill amortization as per the adoption of FAS No. 142, other expenses increased $17,000. The remaining $17,000 increase includes professional fees, pension costs, an annual NASDAQ fee and expenses on foreclosed assets held for sale. Provision for Income Taxes The provision for income taxes for the six months ended June 30, 2002 resulted in an effective income tax rate of 19.67% compared to 19.08% for the corresponding period in 2001. Comparison of the Three Months Ended June 30, 2002 and 2001 Interest Income During the second quarter of 2002 interest income earned was $7,199,000 an increase of $49,000 over the same quarter in 2001. Interest income on loans decreased $293,000 due to a decline in average prime rates during 2002 relative to the second quarter of 2001. An increase of $351,000 occurred in interest and dividends on investments. Taxable interest increased $387,000, non-taxable interest decreased $8,000 and dividends decreased $28,000 due to the same reasons noted for the six-month comparison. Interest Expense Interest expense during the second quarter of 2002 decreased by $457,000 or 14.29% over interest expense incurred during the second quarter of 2001. Although interest bearing deposits grew $21,445,000 from the second quarter 2001, time deposits declined by $15,928,000 during the same period. The shift from time deposits that are offered at higher rates to interest bearing demand deposits which are offered at lower rates explain the decrease in interest rates. In addition, rates offer on time deposits declined over the past twelve months, contributing to the decrease of interest expense. Interest expense on short-term borrowings decreased by $61,000 and interest expense on other borrowings increased $153,000. The decrease in interest expense paid on short-term borrowings was due to the reduction of FHLB overnight borrowings. The increase of $153,000 in interest paid on other borrowings was due to a net increase of $15,000,000 in FHLB borrowings for reasons stated in the six month comparison. Other Operating Income Total other operating income decreased $48,000 to $914,000 during the three-month period in 2002 compared to $962,000 in 2001. Service charges and other income increased $59,000 and $176,000, respectively, while security gains decreased by $283,000. The substantial increase in other income was mostly due to commission income realized during the second quarter of 2002 from the sale of various financial products. Such financial products are offered through the Bank's subsidiary, The M Group. The change in security gains is explained in the six month comparison. Other Operating Expense Total other operating expenses increased $141,000. Salaries and employee benefits increased $197,000 as a result of normal increases in salary levels, commissions and salaries associated with the opening of a new branch office inside Wal-Mart in State College. Occupancy expense increased during the second quarter of 2002 compared to the second quarter of 2001 by $16,000. Furniture and equipment expense increased $13,000. Other operating expenses decreased during the three-month period in 2002 when compared to the same period in 2001 by $85,000. This reflects the elimination of goodwill amortization expense in 2002 relative to 2001. Provision for Income Taxes Income taxes increased $96,000 for the quarter ended June 30, 2002 compared to the second quarter of 2001. The effective tax rates for the quarter ended June 30, 2002, and 2001 are 20.6% and 19.3%, respectively. ASSET/LIABILITY MANAGEMENT Assets At June 30, 2002, cash and investment securities totaled $166,457,000 or a net increase of $18,326,000 over the corresponding balance at December 31, 2001. Investment securities increased $20,283,000 and cash decreased $1,957,000. During this period, net loans increased by $110,000 to $248,806,000. Loans held for resale decreased $2,053,000 to $1,940,000. Other assets increased $3,576,000 mostly due to the increase of accounts receivable relating to the sale and maturity of securities that had not yet been paid to the Company. Payment for the matured securities and proceeds of the sales were subsequently received on the date of settlement. At June 30, 2002 the balance of other real estate was $445,000 compared to $346,000 at December 31, 2001. Two of three properties totaling $101,000 that was held in other real estate at December 31, 2001 was sold during the first and second quarters. An additional four properties were acquired in the amount of $200,000 during the first half of 2002. Five properties remain in other real estate at June 30, 2002. Deposits At June 30, 2002 total deposits amounted to $315,633,000 representing an increase of $10,483,000, from total deposits at December 31, 2001. Deposits shifted during the first half from non-interest bearing demand deposits and time deposits into interest-bearing deposits and savings. Non-interest bearing demand deposits decreased $4,705,000 while interest-bearing demand deposits increased $14,105,000. Savings increased $5,178,000 while time deposits decreased $4,095,000. Capital The adequacy of the Company's capital is reviewed on an ongoing basis with reference to the size, composition and quality of the Company's resources and regulatory guidelines. Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets and preserve high quality credit ratings. Bank holding companies are required to comply with the Federal Reserve Board'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. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total risk-based, Tier I risk-based and Tier I leverage capital requirements. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act (FDICIA) established five capital categories ranging from "well capitalized" to "critically undercapitalized." To be classified as "well capitalized, "Total risk-based, Tier I risked- based and Tier I leverage capital ratios must be at least 10%, 6%, and 5% respectively. At June 30, 2002 the Company was "well capitalized" with a total capital ratio of 21.11%, a Tier I capital ratio of 19.81% and a Tier I leverage ratio of 12.22%. Liquidity and Interest Rate Sensitivity The asset/liability committee addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook. The following liquidity measures are monitored and kept within the limits cited. 1. Net Loans to Total Assets, 70% maximum 2. Net Loans to Total Deposits, 92.5% maximum 3. Net Loans to Core Deposits, 100% maximum 4. Investments to Total Assets, 40% maximum 5. Investments to Total Deposits, 50% maximum 6. Total Liquid Assets to Total Assets, 25% minimum 7. Total Liquid Assets to Total Liabilities, 25% minimum 8. Net Core Funding Dependence, 35% maximum 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. The Company, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments and expenses. In order to control cash flow, the bank estimates future flows of cash from deposits and loan payments. The primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, as well as Federal Home Loan Bank borrowings. Funds generated are used principally to fund loans and purchase investment securities. Management believes the Company has adequate resources to meet its normal funding requirements. Management monitors the Company's liquidity on both a long and short-term basis thereby, providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both customer needs and economical cost. Both short and long term funding needs are addressed by maturities and sales of available for sale investment securities, loan repayments and maturities, and liquidating mone{ market investments such as federal funds sold. The use of these resources, in conjunction with access to credit provides core ingredients to satisfy depositor, borrower and creditor needs. Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential as well as the current cost of borrowing funds. The Company has a current borrowing capacity at the Federal Home Loan Bank of $152,214,000. In addition to this credit arrangement the Company has additional lines of credit with correspondent banks of $8,000,000. The Company's management believes that it has sufficient liquidity to satisfy estimated short-term and long- term funding needs. Federal Home Loan Bank advances totaled $46,778,000 as of June 30, 2002. 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 an asset liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders' equity and a simulation analysis to monitor the effects of interest rate changes on the Company's balance sheets. There has been no substantial changes in the Company's GAP analyses or simulation analyses compared to the information provided in the Company's SEC 10k for the period ended December 31, 2001. 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. In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01 (b) (8) of Regulation S-X. Part II. OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information None Item 6. Exhibits and reports on Form 8-K. (3)(i) Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-4, No. 333-65821). (3)(ii) Bylaws of the Registrant as presently in effect (incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-4, No. 333-65821). (99) Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENNS WOODS BANCORP, INC. (Registrant) Date: August 13, 2002 /s/Ronald A. Walko ---------------------------------- Ronald A. Walko, President and Chief Executive Officer Date: August 13, 2002 /s/ Sonya E. Scott ---------------------------------- Sonya E. Scott, Secretary EX-99 3 ex99penns.txt Exhibit 99 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Penns Wood Bancorp, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Ronald A. Walko, Chief Executive Officer, and Sonya E. Scott, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all in material respects, the financial condition and results of operations of the Company. /s/ Ronald A. Walko /s/ Sonya E. Scott Ronald A. Walko Sonya E. Scott Chief Executive Officer Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----