FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
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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 jurisdictionof incorporation or organization)
(I.R.S. EmployerIdentification No.)
300 Market Street, P.O. Box 967Williamsport, Pennsylvania 17703-0967
(Address of principal executive offices)
Registrant’s telephone number, including area code (570) 322-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchangewhich registered
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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is an accelerated filer as of defined in Rule 12b-2 of the Act. Yes ý No o
State the aggregate market value of the voting stock held by non-affiliates of the registrant $135,611,421 at June 30, 2004.
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 March 7, 2005
Common Stock, $10 Par Value
3,321,637 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement prepared in connection with its annual meeting of shareholders to be held on April 27, 2005 are incorporated by reference in Part III hereof.
INDEX
PART I
ITEM
Item 1.
Business
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A.
Controls and Procedures
Item 9B.
Other information
Item 11.
Executive Compensation
Item 12.
Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures and Certifications
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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 Co, Inc. and Woods Investment Co., 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 eleven branch offices and a Mortgage/Loan Center in Northcentral Pennsylvania.
In October 2000, the Bank acquired The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). The M Group, which operates as a subsidiary of the Bank, offers insurance and securities brokerage services. Securities are offered by The M Group through ING Financial Partners, Inc., a registered broker-dealer.
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 149 persons as of December 31, 2004. 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 insurance activities of The M Group are subject to regulation by the insurance departments of the various states in which The M Group conducts business including principally the Pennsylvania Department of Insurance. The securities brokerage activities of The M Group are subject to regulation by federal and state securities commissions.
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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 non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the 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 riskweighted 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 “wellcapitalized,” “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
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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, 2004, 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. The FDIC indicated that all banks may again be required to pay deposit insurance premiums in the future if the current trend of the size of the deposit insurance funds relative to all insured deposits continues. 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. The current annual FICO assessment for the Bank (and all banks) is $.0144 per $100 of BIF deposits.
Other Legislation
The Fair and Accurate Credit Transactions Act (“FACT”) was signed into law on December 4, 2003. This law extends the previously existing Fair Credit Reporting Act. New provisions added by FACT address the growing problem of identity theft. Consumers will be able to initiate a fraud alert when they are victims of identity theft, and credit reporting agencies will have additional duties. Consumers will also be entitled to obtain free credit reports, and will be granted certain additional privacy rights.
Regulators will be issuing rules to implement FACT over the next year, and some of these rules will likely impose additional duties on the Bank, although the Company does not believe that the application of these new rules will have a material effect on its operations. The Sarbanes-Oxley Act of 2002 was enacted to enhance penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures under the federal securities laws. The Sarbanes-Oxley Act generally applies to all companies, including the Company, that file or are required to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or the Exchange Act. The legislation includes provisions, among other things, governing the services that can be provided by a public company’s independent auditors and the procedures for approving such services, requiring the chief executive officer and principal accounting officer to certify certain matters relating to the company’s periodic filings under the Exchange Act, requiring expedited filings of reports by insiders of their securities transactions and containing other provisions relating to insider conflicts of interest, increasing disclosure requirements relating to critical financial accounting policies and their application, increasing penalties for securities law violations, and creating a new public accounting oversight board, a regulatory body subject to SEC jurisdiction with broad powers to set auditing, quality control and ethics standards for accounting firms. In response to the legislation, the national securities exchanges and NASDAQ have adopted new rules relating to certain matters, including the independence of members of a company’s audit committee as a condition to listing or continued listing. The Company does not believe that the application of these new rules to the Company will have a material effect on its results of operations. In addition, 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.
In addition to federal banking law, the Bank is subject to the Pennsylvania Banking Code. The Banking Code was amended in late 2000 to provide more complete “parity” in the powers of state-chartered institutions compared to national banks and federal savings banks doing business in Pennsylvania.
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Pennsylvania banks have the same ability to form financial subsidiaries authorized by the Gramm-Leach-Bliley Act, as do national banks.
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, 2004, the Bank had total assets of $530,736,000; total shareholders’ equity of $56,743,000 and total deposits of $357,479,000. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation for the maximum amount provided under current law.
The Bank engages in business as a commercial bank, doing business at several locations in Lycoming, Clinton and Centre Counties, Pennsylvania. The Bank offers insurance and securities brokerage services through its wholly owned subsidiary, The M Group, Inc. D/B/A The Comprehensive Financial Group.
Services offered by the Bank include accepting time, demand and savings deposits including Super NOW accounts, regular savings accounts, money market accounts, 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.
The Bank’s loan portfolio mix can be classified into four principal categories of real estate, agricultural, commercial and consumer. Real estate loans can be further segmented into construction and land development, farmland, 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. 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.
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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 ranges from 20% to 30%. 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 conjunction 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 the 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 availability 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 five 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. Government 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. 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 the Bank to generally maintain a rate sensitive asset (RSA) to rate sensitive liability (RSL) ratio of 150% of equity for a 6-month time horizon, 150% of equity for a 2-year time horizon and 150% of equity for a 5-year time horizon. The Bank operates eleven full service offices in Lycoming,
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Clinton, and Centre Counties, Pennsylvania, and a Mortgage/Loan 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 commercial 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 FDIC and the FRB. An important function of the FRB 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 FRB 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
FIVE-YEAR ANALYSIS OF DUTIES
Ronald A. Walko
58
President and Chief Executive Officer of the Company; the Bank; The M Group; and Woods Investment Company, Inc.; President of Woods Real Estate Development Co, Inc.; and Federal Bank examiner prior to 1986 for an eighteen-year period.
Hubert A. Valencik
63
Senior Vice President of the Company; Senior Vice President and Operations Officer of the Bank; Assistant Secretary of Woods Investment Company, Inc.Vice President of Woods Real Estate Development Co, Inc.; Vice President - Operations of The M Group; Vice President with another bank prior to 1985 for a fourteen-year period.
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 Financial Center are located; all properties are in good condition and adequate for the Bank’s purposes:
Office
Address
Main
115 South Main StreetP.O. Box 5098Jersey Shore, Pennsylvania 17740
Owned
Bridge Street
112 Bridge StreetJersey Shore, Pennsylvania 17740
DuBoistown
2675 Euclid AvenueDuBoistown, Pennsylvania 17702
Williamsport
300 Market StreetP.O. Box 967Williamsport, Pennsylvania 17703-0967
Montgomery
9094 Rt 405 HighwayMontgomery, Pennsylvania 17752
Under Lease
Lock Haven
4 West Main StreetLock Haven, Pennsylvania 17745
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Mill Hall
(Inside Wal-Mart), 167 Hogan BoulevardMill Hall, Pennsylvania 17751
Spring Mills
Ross Hill Road, P.O. Box 66Spring Mills, Pennsylvania 16875
Centre Hall
2842 Earlystown RoadCentre Hall, Pennsylvania 16828
Land Under Lease
Zion
100 Cobblestone RoadBellefonte, Pennsylvania 16823
Jersey Shore State Bank Financial CenterState College
1952 Waddle Road, Suite 106State College, Pennsylvania 16803
The M Group, Inc.D/B/A The ComprehensiveFinancial Group
705 Washington BoulevardWilliamsport, Pennsylvania 17701
State College
(Inside Wal-Mart), 1665 North Atherton PlaceState College, Pennsylvania 16803
2050 North Atherton StreetState College, Pennsylvania 16803
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 2004.
PART II
ITEM 5 MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASE OF EQUITY SECURITIES
The Common Stock is listed on The NASDAQ National Market under the symbol “PWOD”. The following table sets forth (1) the quarterly high and low bid information for a share of the Company’s Common Stock during the periods indicated, and (2) quarterly dividends on a share of the Common Stock with respect to each quarter since January 1, 2003. The following quotations reflect inter-dealer prices and do not include retail markup, markdown or commission. They may not necessarily represent actual transactions.
High
Low
DividendsDeclared
2003:
First Quarter
$
41.27
32.86
0.27
Second Quarter
47.43
37.71
Third Quarter
42,32
38.64
Fourth Quarter
47.91
40.85
0.68
2004:
48.39
43.10
0.35
46.91
42.47
50.75
44.16
50.12
45.26
0.71
The Bank has paid cash dividends since 1941. The Company has paid dividends since the effective date of its formation as a bank holding company. It is the present intention of the Company Board of Directors to
9
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 Company considers dividend policy. Cash available for dividend distributions to shareholders of the Company must initially come from dividends paid by the Bank to the Company. Therefore, the restrictions on the Bank’s dividend payments are directly applicable to the Company.
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 March 7, 2005, the Company had approximately 1,234 shareholders of record.
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ITEM 6 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, 2004.
(In Thousands, Except Per Share Data)
2004
2003
2002
2001
2000
Consolidated Statement of Income Data:
Interest income
30,947
29,232
29,302
28,736
28,454
Interest expense
8,768
9,265
10,846
12,481
12,778
Net interest income
22,179
19,967
18,456
16,255
15,676
Provision for loan losses
465
255
365
372
286
Net interest income after provision for loan losses
21,714
19,712
18,091
15,883
15,390
Noninterest income
7,949
8,454
5,255
5,109
2,615
Noninterest expense
14,317
13,289
12,213
11,272
9,820
Income before income taxes
15,346
14,877
11,133
9,720
8,185
Applicable income taxes
4,263
3,703
2,247
1,978
1,619
Net Income
11,083
11,174
8,886
7,742
6,566
Consolidated Balance Sheet at End of Period:
Total assets
546,703
527,381
472,206
424,810
394,913
Loans
324,505
275,828
257,845
251,623
244,798
Allowance for loan losses
(3,338
)
(3,069
(2,953
(2,927
(2,879
Deposits
356,836
334,318
339,848
305,150
278,134
Long-term debt – other
75,878
70,878
51,778
41,778
31,778
Shareholders’ equity
73,165
69,769
63,142
55,252
50,514
Per Share Data:
Earnings per share - Basic
3.33
3.35
2.66
2.30
1.91
Earnings per share - Diluted
Cash dividends declared
1.76
1.49
1.24
1.11
1.00
Book value
22.03
21.00
18.94
16.53
14.83
Number of shares outstanding, at end of period
3,321,527
3,321,560
3,031,329
3,039,590
3,097,293
Average number of shares outstanding-basic
3,325,007
3,330,585
3,336,312
3,371,845
3,431,494
Selected financial ratios:
Return on average shareholders’ equity
15.49
%
16.60
15.00
14.38
13.77
Return on average total assets
2.06
2.24
2.01
1.95
1.74
Net interest income to average interest earning assets
4.41
4.28
4.45
4.39
4.35
Dividend payout ratio
52.72
44.76
46.40
48.17
52.18
Average shareholders’ equity to average total assets
13.30
13.51
13.39
13.54
12.62
Loans to deposits, at end of period
90.94
82.50
75.87
82.46
88.01
Per share data and number of shares outstanding have been adjusted in each reporting period to give retroactive effect to a stock split effected in the form of a 100% stock dividend issued January 15, 1998, a 10% stock dividend issued June 9, 1999 and a 10% stock dividend issued November 13, 2003.
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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
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. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable equivalents based on the marginal corporate federal tax rate of 34%. The tax equivalent adjustments to net interest income for 2004, 2003, and 2002 were $907,000, $1,367,000, and $1,738,000, respectively.
2004 vs 2003
Reported net interest income increased $2,212,000 or 11.1% from fiscal 2003 to 2004. Total interest income increased $1,715,000 and is attributed to the increase of $41,067,000 in the average balance of the loan portfolio, offset partially by a decrease of the return on investment securities of 4 basis points, the decrease in the average balance of the investment securities of $1,270,000, and a decrease in the return on loans of 57 basis points.
On a tax equivalent basis, net interest income increased 8.2% or $1,752,000, to $23,086,000 in a period when both average interest earning assets and average interest-bearing liabilities increased. The increase of taxable security income of $1,216,000 is due to the purchases of U.S. Government Agency securities over the past year, with the average of these securities increasing $13,585,000, while the decrease in the average of tax-exempt State & Political securities decreased tax equivalent interest income $1,366,000. The investment portfolio has been repositioned from longer term assets to shorter term assets to take advantage of the cash flow opportunities for reinvestment in anticipation of rising rates. The net growth in the volume of the loan portfolio has generated additional interest income that has offset the 57 basis point decline in the overall portfolios weighted average interest rate.
Within the loan portfolio, a 27 basis point decrease of the tax equivalent return on loans was offset by an increase of $41,067,000 in the average balance of loans when comparing the year 2004 to the year 2003. For the year ended December 31, 2004, reported interest expense decreased $497,000 or 5.4% over the same period of 2003. Lower rates on deposit accounts contributed the most substantial decrease in interest expense. The weighted average rate on deposits declined 38 basis points for 2004 as compared to 2003. The overall average balance of savings deposits increased $12,481,000, offset by a decrease in the weighted average rate for a net decrease in interest expense of $343,000. Interest expense on time deposits decreased $538,000 due to both the 39 basis point decline in the weighted average rate and the decrease in the average balance of $1,020,000.
During 2004, the Company borrowed an additional $5 million in long term advances through the FHLB to minimize future borrowing costs and to enhance liability positioning. These additional borrowings were utilized by management to fund the substantial loan growth of 2004. The $273,000 increase in expense on long-term borrowings is the result of average balances of long term FHLB borrowings increasing $8,442,000 partially offset by the 17 basis point decline in the resulting weighted average interest rate for the year ending December 31, 2004 compared to the same period in 2003. Interest paid on short-term borrowings increased $111,000 as a result of an increase of the average balances outstanding during the year of $6,866,000 offset partially by a decline in the weighted average interest rate of 3 basis points. The opportunity to borrow from the Federal Home Loan Bank at historically low interest rates was utilized to assist the funding of the loan portfolio growth and is attributed to the increase of interest expense paid on borrowings.
2003 vs 2002
Reported net interest income increased $1,511,000 or 8.2% from year end 2002 to year end 2003. The decrease in total interest income of $70,000 is the result of an increase of $44,185,000 in the average balance of investment securities held for the current period relative to the same period a year ago offset by
12
a decrease in the return on loans of approximately 62 basis points. Overall, interest income generated from the net increase in volume of interest earning assets was offset by a decline in rates of approximately 95 basis points.
On a tax equivalent basis, net interest income increased 5.6% or $1,140,000, to $21,334,000 in a period when both average interest earning assets and average interest-bearing liabilities increased. The increase of taxable security income of $1,522,000 is due to the significant purchase of U.S. Government securities over the past year, with the average of these securities increasing $70,159,000, while the decrease in the average of tax-exempt State & Political securities decreased tax equivalent interest income $975,000. The investment portfolio has been repositioned from longer term assets to shorter term assets to take advantage of the cash flow opportunities for reinvestment in anticipation of rising rates. The net growth in the volume of investment holdings has generated additional interest income that has offset the 115 basis point decline in the overall portfolios weighted average interest rates.
Within the loan portfolio, a 62 basis point decrease in the tax equivalent return on loans was partially offset by an increase of $7,612,000 in the average balance of loans when comparing the year 2003 to the year 2002. Variable rate loans within the portfolio and other new loan originations at lower effective rates aided in the reduction of new income compared to a year ago because of the historically low rates.
For the year ended December 31, 2003, reported interest expense decreased $1,581,000 or 14.6% over the same period of 2002. Lower rates for all deposit accounts contribute the most substantial decrease in interest expense. The weighted average rate on interest paid on deposits declined 92 basis points for the year 2003 as compared to 2002. The overall average balance of savings deposits increased $17,925,000, offset by a decrease in the weighted average rate for a net decrease in the related interest expense of $997,000. Interest expense on time deposits decreased $1,204,000 due to both the 76 basis point decline in the weighted average rate and the decrease in the average balance of $5,453,000.
Favorable long-term borrowing rates offer opportunities to reduce interest expenses over the coming years. Throughout 2003, the Company borrowed an additional $19.1 million in long term advances through the FHLB to minimize future borrowing costs and to enhance liability positioning. These additional borrowings were utilized by management to take advantage of current investment opportunities while minimizing interest rate risk. The $693,000 increase in expense on long-term borrowings is the result of these additional advances with average balances of $20,986,000 partially offset by the 64 basis point decline in the resulting weighted average interest rate for the year ending December 31, 2003 compared to the same period in 2002. Interest paid on short-term borrowings decreased $73,000 as a result of an overall decline in the weighted average interest rate of 131 basis points while the average balances outstanding during the year increased $8,322,000. The increase in short-term borrowings is the result of taking advantage of the opportunity to borrow from Federal Home Loan Bank at historically low rates.
AVERAGE BALANCERS AND INTEREST RATES
The following tables set forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
13
(In Thousands)
AVERAGEBALANCE(2)
INTEREST
AVERAGERATE
ASSETS:
Interest-earning assets:
Securities:
U.S. Treasury and federal agency
138,434
6,555
4.74
State and political subdivisions(4)
34,665
2,586
7.46
Other
26,174
1,322
5.05
Total securities
199,273
10,463
5.25
LOANS:
Tax-exempt loans(4)
1,359
82
6.03
All other loans, net of discount where applicable
301,248
21,309
7.07
Total loans(1),(3)
302,607
21,391
Total interest-earning assets
501,880
31,854
6.35
Other assets
35,766
TOTAL ASSETS
537,646
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Interest-bearing liabilities:
Deposits:
Savings
159,650
1,361
0.85
Other time
130,340
3,414
2.62
Total interest-bearing deposits
289,990
4,775
1.65
Short-term borrowings
31,653
539
1.70
Other borrowings
75,727
3,454
4.56
Total interest-bearing liabilities
397,370
2.21
Demand deposits
64,434
Other liabilities
4,295
71,547
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest rate spread
4.14
Net interest income/margin
23,086
4.60
14
124,849
5,584
4.47
54,690
2,923
5.34
50,822
3,952
7.78
77,216
4,927
6.38
24,872
1,077
4.33
24,452
2,216
9.06
200,543
10,613
5.29
156,358
10,066
6.44
1,008
68
6.75
2,309
185
8.01
260,532
19,918
7.65
251,619
20,789
8.26
261,540
19,986
7.64
253,928
20,974
462,083
30,599
6.62
410,286
31,040
7.57
36,297
31,977
498,380
442,263
147,169
1,704
1.16
129,244
2,701
2.09
131,360
3.01
136,813
5,156
3.77
278,529
5,656
2.03
266,057
7,857
2.95
24,787
428
1.73
16,465
501
3.04
67,285
3,181
4.73
46,299
2,488
5.37
370,601
2.50
328,821
3.30
56,672
50,877
3,780
3,334
67,327
59,231
4.12
4.27
21,334
4.62
20,194
4.92
1. Fees on loans are included with interest on loans. Loan fees are included in interest income as follows: 2004 $889,000, 2003 $1,032,000, 2002, $803,000.
2. Information on this table has been calculated using average daily balance sheets to obtain average balances.
3. Non-accrual loans have been included with loans for the purpose of analyzing net interest earnings.
4. 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.
15
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by old rate); (ii) changes in rates (changes in rate multiplied by old average volume). Increases and decreases due to both rate and volume, which cannot be separated, have been allocated proportionally to the change due to volume and the change due to rate. Income and rates are on a taxable equivalent basis.
Year Ended December 31,
2004 vs 2003Increase (Decrease)Due to
2003 vs 2002Increase (Decrease)Due to
Volume
Rate
Net
Interest income:
Taxable investment securities
737
479
1,216
3,223
(577
2,646
Tax-exempt investment securities
(1,197
(169
(1,366
(2,054
(28
(2,082
2,979
(1,574
1,405
616
(1,604
(988
2,519
(1,264
1,255
1,785
(2,209
(424
Interest expenses:
Savings deposits
136
(479
(343
335
(1,332
(997
Other time deposits
(31
(507
(538
(216
(1,204
116
(5
111
194
(267
(73
Long-term borrowings
388
(115
273
1,021
(328
693
609
(1,106
(497
1,334
(2,915
(1,581
Change in net interest income
1,910
(158
1,752
451
706
1,157
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 December 31, 2004, 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 chargeoffs, 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 judgment of information available to them at the time of their examination.
16
The allowance for loan losses increased from $3,069,000 at December 31, 2003 to $3,338,000 at December 31, 2004. At December 31, 2004, allowance for loan losses was 1.01% of total loans compared to 1.10% of total loans at December 31, 2003. Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.
The provision for loan losses totaled $465,000 for the year ended December 31, 2004. The provision for the same period in 2003 was $255,000. Management concluded that the increase of the provision is adequate with the loan growth experienced during 2004 and economic changes during the year. Based upon this analysis, as well as the others noted above, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
The allowance for loan losses increased 3.9% or $116,000 from fiscal 2002 after net charge-offs of $139,000 contributing to a year-end allowance for loan losses of $3,069,000 or 1.10% of total loans. Based upon this analysis, as well as the others noted above, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
Balance at beginning of period
3,069
2,953
2,927
2,879
2,823
Charge-offs:
Real estate
121
262
154
165
Commercial and industrial
50
37
80
122
38
Installment loans to individuals
60
66
Total charge-offs
282
216
402
358
269
Recoveries:
42
25
21
20
32
19
17
Total recoveries
86
77
34
39
Net charge-offs
196
139
339
324
230
Additions charged to operations
Balance at end of period
3,338
Ratio of net charge-offs during the period to average loans outstanding during the period
0.06
0.05
0.13
0.10
NON-INTEREST INCOME
Total non-interest income decreased $505,000 from fiscal 2003 to 2004. Security gains realized decreased $1,303,000. Excluding the security gains, non-interest income increased $798,000. Service charges increased $66,000 due to an increased fee structure. Earnings on bank-owned life insurance decreased $110,000 due to the decrease of the average crediting rate paid on the policies as a result of the low rate environment. Commissions earned on the sales of insurance increased $684,000 due to the expanded staff and market area of the sales. The majority of the increase in other income of $158,000 was attributed to commissions generated from the new addition of title insurance to the bank’s product line.
%Change
Service charges
1,983
1,917
3.4
Securities gains, net
2,176
3,479
(37.5
Bank-owned life insurance
294
404
(27.2
Insurance commissions
2,282
1,598
42.8
Other income
1,214
1,056
15.0
Total non-interest income
(6.0
)%
Total non-interest income for 2003 was $8,454,000, an increase of $3,199,000 from the prior year. Excluding security gains of $3,479,000 in 2003 and $35,000 in 2002, other income decreased $245,000. Service charges increased 4.6% or $84,000 to $1,917,000 in 2003.
Decreases in commission income from the sale of financial products sold by the Bank’s subsidiary, The M Group, accounted for $209,000 of the total decrease of other operating income. Other operating income decreased $108,000 primarily due to a nonrecurring life insurance income item included in 2002, resulting in a $116,000 decrease.
1,833
4.6
35
9,840.0
416
(2.9
1,807
(11.6
1,164
(9.3
60.9
NON-INTEREST EXPENSES
Total non-interest expenses increased $1,028,000 or 7.7% from the year ended December 31, 2003 to December 31, 2004. Salaries and employee benefits increase of $675,000 was the result of the increase in commission earned by the M Group and standard cost of living increases. Expenses related to the new State College Atherton Street branch caused the majority of the $82,000 increase in occupancy expense. Increased maintenance and repairs contributed the $17,000 increase to furniture and equipment expense. Advertising expense decreased $44,000 as the result of a purchase of brochures in 2003 for $22,000 and a decrease in normal advertising expenses. Pennsylvania shares taxes increased $53,000 from 2003 to 2004. Other expenses increased $245,000. This increase was primarily the increase of computer software amortization due to the implementation of teller machines, the increase of legal, audit, and consultant fees in relation to Sarbanes-Oxley compliance, and expenses on the new title insurance product.
% Change
Salaries and employee benefits
7,937
7,262
9.3
Occupancy expense, net
959
877
9.4
Furniture and equipment expense
1,016
999
1.7
Advertising Expense
344
(11.3
Pennsylvania shares tax expense
508
455
11.6
Other expenses
3,553
3,308
7.4
Total non-interest expenses
7.7
18
Total non-interest expenses increased $1,076,000 or 8.8% from the year ended December 31, 2002 to December 31, 2003. Salaries and employee benefits increased $318,000. This change was the result of the decline in commission earned by the M Group and the retirement of an executive officer offset by the standard cost of living salary increases and an extra pay cycle in 2003 when compared to 2002. Expenses such as rent, maintenance, and utilities for the new State College Wal-Mart Branch caused the majority of the $46,000 increase to occupancy expense. The depreciation of a new Wide Area Network has resulted in most of the $162,000 increase to furniture and equipment expense. Advertising expense increased $16,000 due to a decrease in normal advertising expenses offset by the purchase of new brochures for $22,000. Other operating expenses increased $490,000 consistent with the addition of the aforementioned branch.
6,944
831
5.5
837
19.4
4.3
411
10.7
2,818
17.4
8.8
INCOME TAXES
The provision for income taxes for the year ended December 31, 2004 resulted in an effective income tax rate of 27.8% compared to 24.9% for 2003. This increase is the result of an overall decline in revenue from tax-exempt loans and investment securities as compared to revenue as a whole.
The provision for income taxes for the year ended December 31, 2003 resulted in an effective income tax rate of 24.9% compared to 20.2% for 2002. This increase is the result of management’s current investment strategy of reinvesting proceeds from tax-exempt portfolio into other U.S. Government securities.
FINANCIAL CONDITION
INVESTMENTS
The investment portfolio decreased $32,782,000 or 15.5% in 2004. The decline in the investments is attributed to a $45,847,000 decrease in U.S. Treasury and Government Agency securities, $13,117,000 increase in states and political securities, $296,000 decrease in other debt securities and $244,000 increase in equity securities. The proceeds from the sale of securities was utilized to fund loan growth. The total realized gains on the securities for 2004 was $2,176,000 a decrease of $1,303,000 from December 31, 2003. The investment portfolio at year-end 2004 comprised of 58.3% U.S. Government agency and Treasury securities, 26.5% state and political subdivisions, 14.3% equity securities and 0.9% other bonds, notes and debentures. Held to maturity securities had a carrying value of $558,000. Available for sale securities had an amortized cost of $171,394,000 with an estimated market value of $177,957,000.
The investment portfolio increased $33,680,000 or 19.0% in 2003. The growth is largely attributed to management’s strategic plan to benefit from the low borrowing rates by taking advantage of over a 200
basis point interest rate spread of investments with similar maturity periods. The bank borrowed $19,100,000 in long-term FHLB advances to purchase securities and take advantage of interest rate imbalances in the market. Short-term borrowing funded the balance of the additional investment securities purchased. Most of the increase is attributable to an increase of $61,980,000 in U.S. Government agencies category, and a $10,331,000 increase in the equity securities category. There was a $185,000 decrease in other bonds, notes and debentures, $1,168,000 decrease in the U.S. Treasury securities category, and the state and political subdivisions category decreased $37,278,000. The investment portfolio at year-end 2003 was comprised of 70.9% U.S. Government agency and Treasury securities, 16.2% state and political subdivisions, 12.0% equity securities, and 0.9% other bonds, notes and debentures. Held to maturity securities had a carrying value of $686,000. Available for sale securities occupied 99.7% of the total portfolio and had an amortized cost of $201,321,000 with an estimated market value of $210,611,000. The unrealized gain of $9,290,000 effected shareholders’ equity by $6,132,000, net of deferred taxes.
The carrying amounts of investment securities at the dates indicated are summarized as follows for the years ended December 31:
U.S. Treasury securities:
Available for Sale
1,024
3,128
4,296
U.S. Government agencies:
Held to Maturity
75
94
103,001
146,701
84,702
State and political subdivisions:
248
347
796
47,068
33,852
70,681
Other bonds, notes and debentures:
278
264
291
1,342
1,652
1,810
Total bonds, notes and debentures
152,993
186,019
162,670
Corporate stock - Available for Sale
25,522
25,278
14,947
Total
178,515
211,297
177,617
The following table shows the maturities and repricing of investment securities at December 31, 2004 and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate) of such:
WITHINONEYEAR
AFTER ONEBUT WITHINFIVE YEARS
AFTER FIVEBUT WITHINTEN YEARS
AFTERTENYEARS
AFS Amount
—
Yield
3.43
HTM Amount
8.85
3,473
99,528
5.31
5.06
5.75
47,052
6.58
7.41
128
7.13
6.48
7.39
7.14
Total Amount
1,099
3,548
392
147,954
Total Yield
3.68
5.33
6.32
5.83
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 final maturity of each security. Scheduled maturities and actual maturities may differ due to certain investment securities having the ability to prepay or call the bond without penalty. 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
Gross loans for the year ended December 31, 2004 increased 17.7% to $324,505,000 from $275,828,000 at December 31, 2003. Real estate mortgages increased $41,338,000 as a whole with commercial and construction real estate loans increasing $40,861,000 and $713,000 respectively, while residential loans decreased $236,000. Commercial and agricultural loans and installment loans increased $6,580,000 and $915,000 respectively. Net deferred loan fees increased $156,000. Given the current market conditions, management has directed its conservative lending approach toward well collateralized real estate loans. Commercial real estate projects provided the greatest opportunity for growth in 2004. During 2004, gross loans grew $48,677,000 as a result of continued expansion into the Centre County commercial market as well as increases in Lycoming and Clinton counties.
Gross loans for the year ended December 31, 2003 increased 7.0% to $275,828,000 from $257,845,000. Real estate mortgages increased $18,273,000 as a whole with residential, commercial and construction real estate loans increasing $6,973,000, $7,004,000, and $4,296,000 respectively. Commercial and agricultural loans decreased $185,000, while installment loans to individuals increased $66,000.
The amounts of loans outstanding are shown in the following table according to type of loan for the years ended December 31:
Commercial and agricultural
30,103
23,523
23,708
22,629
26,471
Real estate mortgage:
Residential
147,461
147,697
140,724
140,614
131,761
Commercial
123,757
82,896
75,892
67,038
60,856
Construction
8,365
7,652
3,356
4,077
4,748
15,915
15,000
14,934
17,896
21,503
Less: Net deferred loan fees
1,096
940
769
631
541
Gross loans
The amount of loans outstanding at December 31, 2004 are presented below by category and maturity:
REAL ESTATE
COMMERCIALANDOTHER
INSTALLMENTLOANS TOINDIVIDUALS
TOTAL
Loans with floating interest rates:
1 year or less
17,641
9,497
1,724
28,862
1 through 5 years
7,004
3,615
74
10,693
5 through 10 years
30,891
3,112
149
34,152
After 10 years
154,310
2,340
156,778
Sub Total
209,846
18,564
2,075
230,485
Loans with predetermined interest rates:
3,370
718
1,038
5,126
22,001
7,985
11,066
41,052
23,511
2,697
1,682
27,890
19,749
64
19,952
68,631
11,539
13,850
94,020
278,477
15,925
(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, 2004.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio, as of the balance sheet date. 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 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.
22
The allowance for loan losses increased from $3,069,000 at December 31, 2003 to $3,338,000 at December 31, 2004. At December 31, 2004, allowance for loan losses was 1.01% of total loans compared to 1.10% of total loans at December 31, 2003. This percentage is consistent with the Bank’s historical experience and peer banks. Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.
Based upon this analysis, as well as the others noted above, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in its loan portfolio.
At December 31, 2003, the allowance for loan losses as a percent of gross loans remained the same as December 31, 2002 at 1.10%. Gross loans increased by $17,983,000 from $257,845,000 at December 31, 2002 to $275,828,000 at December 31, 2003.
Non-accruing loans decreased $44,000 from year-end 2002. Overall nonperforming loans decreased $840,000 to $1,256,000 from fiscal year end 2002.
Based on management’s loan-by-loan review, the past performance of the borrowers and current economic conditions, including recent business closures and bankruptcy levels, management does not anticipate any current losses related to non-accrual, non-performing, or classified loans that have already been considered in its overall judgment of the adequacy of the reserve.
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 non-accrual status and the treatment of subsequent payments of either principal or interest will be handled in accordance with U.S. generally accepted accounting principles. These 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
NONACCRUAL
90 DAYSPAST DUE& STILLACCRUING
1,381
345
827
429
871
1,225
281
338
777
27
23
If interest had been recorded at the original rate on those loans, such income would have approximated $64,000, $55,000, and $24,000 for the years ended December 31, 2004, 2003, and 2002, respectively. Interest income on such loans, which is recorded as received, amounted to approximately $10,000, $7,000, and $17,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
The level of non-accruing loans continues to fluctuate annually and is attributed to the various economic factors experienced both regionally and nationally. Overall the portfolio is well secured with a majority of the balance making regular payments or scheduled to be satisfied in the near future. 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.
ALLOCATION IN THE ALLOWANCE FOR LOAN LOSSES
AMOUNT
PERCENT OFLOANS INEACHCATEGORY TOTOTAL LOANS
DECEMBER 31, 2004:
Balance at end of period applicable to:
361
9.1
1,280
46.1
1,399
37.5
2.5
207
4.8
Unallocated
100.0
DECEMBER 31, 2003:
353
8.5
1,483
53.4
916
29.9
2.8
240
5.4
24
DECEMBER 31, 2002:
471
9.2
1,162
54.4
1,082
29.3
1.3
172
5.8
DECEMBER 31, 2001:
414
9.0
1,379
55.8
763
26.5
1.6
271
7.1
Unallocated general allowance
26
DECEMBER 31, 2000:
10.8
1,211
53.7
723
24.8
71
1.9
306
DEPOSITS
Total average deposits were $354,424,000 for 2004, an increase of $19,223,000 or 5.7%. Total demand deposits increased $15,120,000. Noninterest-bearing demand deposits increased $7,762,000 and interest-bearing demand deposits increased $7,358,000. Savings deposits increased $5,123,000 while time deposits decreased $1,020,000. Low rates have influenced investors away from longer term commitments which has resulted in an increase in more liquid accounts such as demand deposits and savings and a decrease in time deposit accounts.
Total average deposits were $335,201,000 for 2003, an increase of $18,267,000 or 5.8%. Total demand deposits increased $16,517,000. Noninterest-bearing demand deposits increased $5,795,000 and interest-bearing demand deposits increased $10,722,000. Savings deposits increased $7,203,000 while time deposits decreased $5,453,000. Historically low rate levels have influenced investors away from longer term commitments which has resulted in an increase in more liquid accounts such as demand deposits and savings and a decrease in time deposit accounts. The shift from time deposits to demand and savings deposits have also had a positive impact on earnings. More details pertaining to the changes in interest expense are stated in the Net Interest Income discussion.
The average amount and the average rate paid on deposits are summarized below:
2004AVERAGEAMOUNT
RATE
2003AVERAGEAMOUNT
2002AVERAGEAMOUNT
DEPOSITS IN DOMESTICBANK OFFICES:
Demand deposits:
Noninterest-bearing
0.00
Interest-bearing
89,854
0.87
82,496
1.15
71,774
2.13
69,796
0.83
64,673
1.17
57,470
2.04
Time deposits
Total average deposits
354,424
1.35
335,201
1.39
316,934
2.48
SHAREHOLDERS’ EQUITY
Total shareholders’ equity at December 31, 2004 was $73,165,000, an increase of $3,396,000 from the balance at December 31, 2003 of $69,769,000. Net income and the exercising of stock options contributed $11,083,000 and $194,000, respectively, to shareholders’ equity. The net change in the unrealized appreciation on securities available for sale from year end 2003 to 2004 reduced shareholders’ equity by $1,801,000. Additional reductions to shareholders’ equity included $5,843,000 in dividends to shareholders and $237,000 for the purchase of treasury stock.
Shareholders’ equity is evaluated in relation to total assets and the risks 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, 2003 was $69,769,000, an increase of $6,627,000 from the balance at December 31, 2002 of $63,142,000. Net income and the exercising of stock options contributed $11,174,000 and $87,000, respectively, to shareholders’ equity. The unrealized appreciation on securities also added $987,000 to total equity. The increases in shareholders’ equity were offset by $5,001,000 in dividends to shareholders. Bank regulators have 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, 2004, the Company’s required ratios were well above the minimum ratios as follows:
COMPANY
2004MINIMUMSTANDARDS
Tier 1 capital ratio
19.9
4.0
Total capital ratio
21.8
8.0
For a more comprehensive discussion of these requirements, see “Regulations and Supervision” on the Form 10-K. 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:
Percentage of net income to:
Average total assets
Average shareholders’ equity
Percentage of dividends declared per common share
46.41
Percentage of average shareholders’ equity to average 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 shareholders. 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 money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit provides core ingredients to satisfy depositor, borrower and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential as well as the current cost of borrowing funds. The Company has a current borrowing capacity at the Federal Home Loan Bank of $145,110,000. In addition to this credit arrangement the Company has additional lines of credit with correspondent banks of $10,500,000. 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 $98,508,000 as of December 31, 2004. The Bank borrowed an additional $5,000,000, in FHLB long term borrowings in 2004 to supplement the securities proceeds to fund loan growth.
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.
INTEREST RATE SENSITIVITY
In this analysis the Company examines the result of a 100 and 200 basis point change in market interest rates and the effect on net interest income. It is assumed that the change is instantaneous and that all rates move in a parallel manner. Assumptions are also made concerning prepayment speeds on mortgage loans and mortgage securities. The following is a rate shock analysis for the period indicated:
DECEMBER 31, 2004
CHANGES INRATES
NET INTERESTINCOME CHANGE (AFTER TAX)(IN THOUSANDS)
-100
(1,093
+100
72
+200
+300
694
The model utilized to create the report presented above makes various estimates at each level of interest rate change regarding cash flow from principal repayment on loans and mortgage-backed securities and or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change. Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.
INFLATION
The asset and liability structure of a financial institution is primarily monetary in nature, therefore, interest rates rather than inflation have a more significant impact on the Company’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 that are not measured by a price index.
CRITICAL ACCOUNTING POLICIES
The Company’s accounting policies are integral to understanding the results reported. The accounting policies are described in detail in Note 1 of the consolidated financial statements. Our most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description or our current accounting policies involving significant management valuation judgments.
Other Than Temporary Impairment of Equity Securities
Equity securities are evaluated periodically to determine whether a decline in their value is other than temporary, management utilized criteria such as the magnitude and duration of the decline, in addition to the reason underlying the decline, to determine whether the loss in value is other than temporary, The term “other than temporary” is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known, and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 4 of “Notes and Consolidated Finanical Statements” of the Form 10-K.
Goodwill and Other Intangible Assets
As discussed in Note 6 of the consolidated financial statements, the Company must assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against earnings to write down the assets to the lower value.
28
Deferred Tax Assets
We use an estimate of future earnings to support our position that the benefit of our deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. Our deferred tax assets are described further in Note 10 of the consolidated financial statements.
CONTRACTUAL OBLIGATIONS
The Corporation has various financial obligations, including contractual obligations which may require future cash payments. The following table presents in thousands, as of December 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
Payments Due in
One Yearor Less
One toThreeYears
Three toFiveYears
OverFiveYears
Deposits without a stated maturity
231,445
Time Deposits
81,340
36,235
6,463
1,353
125,391
Security repurchase agreements
13,845
Borrowed funds
22,630
Long-term debt
1,400
13,100
34,600
26,778
Operating leases
348
619
299
1,837
3,103
The Corporation’s operating lease obligations represent short and long-term lease and rental payment for facilities, certain software and data processing and other equipment.
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, 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 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at the Bank level as well as the Company level. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced internally. Additional information and details are provided in “Management’s Discussion and Analysis of Consolidated Financial Condition” and Results of Operations “Liquidity, Interest Rates Sensitivity and Market Risk-Interst Rate Sensitivity” at the Annual Report.
29
Generally, management believes the Company is well positioned to respond expeditiously when the market interest rate outlook changes.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Penns Woods Bancorp, Inc.
We have audited the consolidated balance sheet of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
Wexford, Pennsylvania
February 11, 2005
31
Consolidated Balance Sheet
DECEMBER 31,
Noninterest-bearing balances in other financial institutions
12,602
10,196
Interest-bearing deposits in other financial institutions
Total cash and cash equivalents
12,626
10,230
Investment securities, available for sale, at fair value
177,957
210,611
Investment securities held to maturity (fair value of $561 and $701)
558
686
Loans held for sale
4,624
4,803
Loans, net of unearned discount of $1,096 and $940
Less:Allowance for loan losses
Loans, net
321,167
272,759
Premises and equipment, net
4,882
4,625
Accrued interest receivable
2,246
2,242
10,976
8,908
Goodwill
3,032
8,635
9,485
LIABILITIES:
Interest-bearing deposits
282,786
269,443
Noninterest-bearing deposits
74,050
64,875
TOTAL DEPOSITS
36,475
47,265
Long-term borrowings, Federal Home Loan Bank
Accrued interest payable
850
836
3,499
4,315
TOTAL LIABILITIES
473,538
457,612
SHAREHOLDERS’EQUITY:
Common stock, par value $10; 10,000,000 shares authorized 3,331,837 and 3,326,560 shares issued
33,318
33,265
Additional paid-in capital
17,700
17,559
Retained earnings
18,262
13,022
Accumulated other comprehensive income
4,331
6,132
Treasury stock, at cost (10,310 and 5,000 shares)
(446
(209
TOTAL SHAREHOLDERS’EQUITY
See Accompanying Notes to the Consolidated Financial Statements.
Consolidated Statement of Income
INTEREST AND DIVIDEND INCOME:
Loans including fees
21,363
19,963
20,911
Investment Securities:
Taxable
7,769
6,550
4,999
Tax-exempt
1,707
2,608
3,252
Other dividend and interest income
108
140
TOTAL INTEREST AND DIVIDEND INCOME
INTEREST EXPENSE:
TOTAL INTEREST EXPENSE
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
NON-INTEREST INCOME:
TOTAL NON-INTEREST INCOME
NON-INTEREST EXPENSES:
Advertising expense
TOTAL NON-INTEREST EXPENSES
INCOME BEFORE INCOME TAX PROVISION
INCOME TAX PROVISION
NET INCOME
EARNINGS PER SHARE – BASIC
EARNINGS PER SHARE – DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC
WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED
3,328,627
3,333,798
3,339,249
33
Consolidated Statement of Changes In Shareholders’Equity
COMMON STOCKSHARES
ADDITIONALPAID-INCAPITAL
RETAINEDEARNINGS
ACCUMULATEDOTHERCOMPREHENSIVEINCOME(LOSS)
TREASURYSTOCK
TOTALSHAREHOLDERS’EQUITY
Balance, December 31, 2001
3,131,644
31,316
18,230
6,987
1,729
(3,010
Comprehensive Income:
Net income
Unrealized gain on available for sale securities, net of reclassification adjustments and tax of $1,760
3,416
Total comprehensive income
12,302
Dividends declared, ($1.24 per share)
(4,124
Stock options exercised
5,188
52
61
113
Purchase of treasury stock (13,449 shares)
(401
Balance, December 31, 2002
3,136,832
31,368
18,291
11,749
5,145
(3,411
Stock split effected in the form of a 10% dividend
187,143
1,871
(793
(4,900
3,822
Unrealized gain on available for sale securities, net of reclassification adjustments and tax of $508
987
12,161
Dividends declared, ($1.49 per share)
(5,001
2,585
87
Purchase of treasury stock (14,787 shares)
(620
Balance, December 31, 2003
3,326,560
Unrealized gain on available for sale securities, net of reclassification adjustments and tax of $926
(1,801
9,282
Dividends declared, ($1.76 per share)
(5,843
5,277
53
141
Purchase of treasury stock (5,310 shares)
(237
Balance, December 31, 2004
3,331,837
Components of comprehensive income (loss):
Change in net unrealized gain (loss) on investment securities available for sale
(365
3,283
3,439
Realized gains included in net income, net of taxes of $740, $1,183 and $12
(1,436
(2,296
(23
See Accompanying Notes to the Consolidated Financial Statements
Consolidated Statement of Cash Flows
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
585
526
Accretion and amortization of investment security discounts and premiums
(132
(194
(906
(2,176
(3,479
(35
Originations of loans held for sale
(34,398
(15,983
(16,597
Proceeds of loans held for sale
34,577
13,831
17,939
Earnings on bank-owned life insurance
(294
(404
(416
Other, net
482
606
(1,190
Net cash provided by operating activities
10,192
6,437
8,572
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales
162,796
82,489
79,022
Proceeds from calls and maturities
28,732
48,046
13,047
Purchases
(159,295
(159,363
(130,328
Investment securities held to maturity:
142
520
137
(14
(24
(41
Net increase in loans
(49,002
(18,390
(6,800
Acquisition of bank premises and equipment
(842
(400
(992
Proceeds from the sale of foreclosed assets
237
341
Purchase of bank-owned life insurance
(1,774
Proceeds from redemption of regulatory stock
3,322
1,507
1,262
Purchases of regulatory stock
(2,940
(4,402
(2,080
Net cash used for investing activities
(18,638
(49,676
(46,429
FINANCING ACTIVITIES:
Net increase (decrease) in interest-bearing deposits
13,343
(3,344
22,914
Net increase (decrease) in noninterest-bearing deposits
9,175
(2,186
11,784
Net (decrease) increase in short-term borrowings
(10,790
33,702
(5,542
Proceeds from other borrowings
5,000
20,000
10,000
Repayment of other borrowings
(900
Dividends paid
Purchase of treasury stock
Net cash provided by financing activities
10,842
41,738
34,744
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
2,396
(1,501
(3,113
CASH AND CASH EQUIVALENTS, BEGINNING
11,731
14,844
CASH AND CASH EQUIVALENTS, ENDING
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
8,754
9,521
10.944
Income taxes paid
4,350
3,500
3,394
Transfer of loans to foreclosed real estate
129
173
254
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — 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., Woods Investment Company, Inc. and The M Group Inc. D/B/A The Comprehensive Financial Group (“The M Group”), a wholly owned subsidiary of the Bank (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 by the bank to individuals, partnerships, non-profit organizations and corporations through its eleven offices located in Clinton, Lycoming, and Centre Counties, Pennsylvania and a Financial Center located in State College, 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., a Delaware holding company, is engaged in investing activities.
The M Group engages in securities brokerage and insurance activities.
Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all financial services operations are considered by management to be aggregated in one reportable operating segment.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 consolidated 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, deferred tax assets and liabilities, and the valuation of real estate acquired through, or in lieu of, foreclosure on settlement of debt.
Cash and Cash Equivalents
Cash equivalents include cash on hand and in banks, interest-earning deposits and federal funds sold. Interest-earning deposits mature within one year and are carried at cost. Net cash flows are reported for loan and deposit transactions.
Investment Securities
Investment securities are classified as available for sale or held to maturity.
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.
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 as a separate component of shareholders’ equity until realized.
Gains and losses on the sale of equity securities are determined using the average cost method, while all other investment securities use the specific cost method.
All investment securities, regardless of classification, are monitored and tested for impairment. An investment security is considered to be impaired when the unrealized loss is considered to be other than temporary. When this occurs, the investment is written down to the current fair market value with the write-downs being reflected as a realized loss.
Premiums and discounts on all securities are recognized in interest income using the interest method over the period to maturity.
Investment securities fair values are based on observed market prices. Certain investment securities do not have observed bid prices and their fair value is based on instruments with similar risk elements.
Loans are stated at the principal amount outstanding, net of unearned discount, 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 judgment, the borrower has the ability and intent to make future principal payments.
36
Loan origination and commitment fees as well as certain direct loan origination costs are being deferred and the net amount amortized as an adjustment to the related loan’s yield. These amounts are being amortized over the contractual lives of the related loans.
Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at December 31, 2004, 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 judgment of information available to them at the time of their examination.
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.
Loans Held for Sale
In general, fixed rate residential mortgage loans originated by the Bank are held for sale and are carried at the aggregate lower of cost or market. Such loans sold are not serviced by the Bank.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are carried at the lower of cost or fair value less estimated costs to sell. 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 writedowns 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.
Foreclosed assets held for sale totaled $40,000 and $132,000 at December 2004 and 2003, respectively.
Bank Premises and Equipment
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, which range from five to seven years for furniture, fixtures and equipment and thirty-one and a half years for buildings and improvements. Costs incurred for routine maintenance and repairs are charged to operations as incurred. Costs of major additions and improvements are capitalized.
Bank-Owned Life Insurance
The Company has purchased life insurance policies on certain officers and directors, and is the sole beneficiary on those policies. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Increases in the cash surrender value are recognized as non-interest income.
The company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“FAS”) No. 142, Goodwill and Other Intangible Assets. This statement, among other things, requires 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. The Company performs an annual
impairment analysis of goodwill. Based on the fair value of the reporting unit, estimated using the expected present value of future cash flows, no impairment of goodwill was recognized in 2004 and 2003.
Advertising Costs
Advertising costs are generally expensed as incurred.
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 weighted 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.
Employee Benefits
Pension and employee benefits include contributions, determined actuarially, to a defined benefit retirement plan covering the eligible employees of the Bank. The plan is funded on a current basis to the extent that it is deductible under existing federal tax regulations. Pension and other employee benefits also include contributions to a defined contribution Section 401(k) plan covering eligible employees. Contributions matching those made by eligible employees and an elective contribution are made annually at the discretion of the Board of Directors.
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.
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 the 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 FAS No. 123, there would be no effect on the Company’s net income and earnings per share for 2004, 2003, and 2002.
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.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect net income or shareholders’ equity.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 123 (Revised 2004), Share-Based Payment. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on July 1, 2005 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.
In October 2003, the American Institute of Certified Public Accountants issued SOP 03-3, “Accounting for Loans or Certain Debt Securities Acquired in a Transfer.” SOP 03-3 applies to a loan that is acquired where it is probable, at acquisition, that a transferee will be unable to collect all contractually required payments receivable. SOP 03-3 requires the recognition, as accretable yield, the excess of all cash flows expected at acquisition over the investor’s initial investment in the loan as interest income on a level-yield basis over the life of the loan. The amount by which the loan’s contractually required payments exceed the amount of its expected cash flows at acquisition may not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. The adoption of SOP 03-3 is not expected to have a material impact on the consolidated financial statements.
NOTE 2 - PER SHARE DATA
There are no convertible securities, which would affect the numerator in calculating basic and dilutive earnings per share, therefore, net income as presented on the consolidated statement of income will be used as the numerator. The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation.
Weighted average common shares outstanding
3,327,780
3,430,302
3,445,477
Weighted average treasury stock shares
(2,773
(99,717
(109,165
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
Additional common stock equivalents (stock options) used to calculate diluted earnings per share
3,620
3,213
2,937
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share
Options to purchase 8,713 shares of common stock at a price of $48.35 were outstanding during 2004, 10,890 shares of common stock at a price of $48.35 were outstanding during 2003 and 22,385 shares of common stock at prices from $38.18 to $48.35 were outstanding during 2002, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of the end of the fiscal year.
NOTE 3 – INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values are as follows:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
FairValue
Available for Sale (AFS)
U.S. Government and agency securities
104,248
(430
104,025
State and political securities
46,829
766
(527
Other debt securities
1,302
47
(7
Total debt securities
152,379
1,020
(964
152,435
Equity securities
19,015
6,579
(72
Total Investment Securities AFS
171,394
7,599
(1,036
Held to Maturity (HTM)
251
Total Investment Securities HTM
561
150,218
626
(1,015
149,829
31,364
2,510
(22
1,581
(4
183,163
3,211
(1,041
185,333
18,158
7,146
(26
201,321
10,357
(1,067
(1
363
701
40
The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time, that the individual securities have been in a continuous unrealized loss position, at December 31, 2004.
Less than Twelve Months
Twelve Months or Greater
U.S. Government and agency Securities
51,636
226
28,598
204
80,234
430
17,339
527
146
288
69,117
756
28,744
208
97,861
964
1,187
298
1,485
70,304
820
29,042
99,346
1,036
The policy of the Company is to recognize other than temporary impairment of equity securities where the fair value has been significantly below cost for one year. For fixed maturity investments with unrealized losses due to interest rates where the Company has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other than temporary. The Company reviews its position quarterly and has asserted that at December 31, 2004, the declines outlined in the above table represent temporary declines and the Company does have the intent and ability to hold those securities either to maturity or to allow a market recovery.
The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.
The amortized cost and fair value of debt securities at December 31, 2004, by contractual maturity, are shown below. 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.
HELD TO MATURITY
AVAILABLE FOR SALE
AMORTIZEDCOST
FAIRVALUE
Due in one year or less
1,019
Due after one year to five years
3,420
Due after five years to ten years
376
379
Due after ten years
147,925
147,922
Total gross proceeds from sales of securities available for sale were $162,796,000, $82,489,000, and $79,022,000 for 2004, 2003, and 2002, respectively. The following table represents gross realized gains and gross realized losses on those transactions:
41
Gross realized gains:
459
1,191
3,345
2,234
1
2,192
1,015
1,605
3,843
4,641
4,049
Gross realized losses:
1,623
742
125
67
368
1,667
4,014
In 2003, the Company recorded an investment security gain of $24,000 resulting from a business combination where the Company received the common stock of the acquirer in a non-monetary exchange. This gain is included in the above table. There were no gains of this nature in 2004.
A charge of $292,000 was recorded in 2003 and $2,083,000 was recorded in 2002 to recognize other than temporary declines in the value of marketable equity securities. These losses are included in the above table.
Investment securities with a carrying value of approximately $71,730,000 and $34,059,000 at December 31, 2004 and 2003, 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 4 - LOANS
Major loan classifications are summarized as follows:
CURRENT
PAST DUE30 TO 90DAYS
PAST DUE90 DAYSOR MORE& STILLACCRUING
NON-ACCRUAL
29,467
389
143,028
3,530
649
121,951
1,257
549
8,359
15,495
399
318,300
5,575
325,601
313,866
23,105
215
182
144,102
2,625
383
587
82,156
667
7,637
14,738
252
271,738
3,774
276,768
267,729
Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $1,381,000 and $827,000 at December 31, 2004 and 2003, respectively. If interest had been recorded at the original rate on those loans, such income would have approximated $64,000, $55,000, and $24,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Interest income on such loans, which is recorded as received, amounted to approximately $10,000, $7,000, and $17,000, for the years ended December 31, 2004, 2003 and 2002, respectively.
Charges in the allowance for loan losses for the years ended December 31, are as follows:
Balance, beginning of year
Provision charged to operations
Loans charged off
(283
(402
Recoveries
Balance, end of year
43
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, 2004 or December 31, 2003.
The Company grants commercial, industrial, residential, and installment loans to customers throughout north-central Pennsylvania. Although the Company has a diversified loan portfolio at December 31, 2004 and 2003, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within this region.
NOTE 5 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at December 31:
Land
566
Premises
5,290
4,883
Furniture and equipment
6,756
6,348
Leasehold improvements
894
867
13,506
12,664
Less accumulated depreciation
8,624
8,039
Depreciation charges to operations for the years ended 2004, 2003, and 2002 were $585,000, $631,000, and $526,000, respectively.
The Bank has committed to $1,000,000 for the premises and equipment of a new branch in State College, PA.
NOTE 6 - GOODWILL
As of December 31, 2004, 2003, and 2002 goodwill had a gross carrying value of $3,308,000 and accumulated amortization of $276,000 resulting in a net carrying amount of $3,032,000.
The gross carrying amount of goodwill is tested for impairment in the third quarter of each fiscal year. Based on fair value of the reporting unit, estimated using the expected present value of future cash flows, no goodwill impairment loss was recognized in the current year.
NOTE 7 - DEPOSITS
Time deposits of $100,000 or more totaled approximately $30,212,000 on December 31, 2004 and $27,386,000 on December 31, 2003. Interest expense related to such deposits was approximately $818,000, $829,000, and $1,098,000, for the years ended December 31, 2004, 2003 and 2002, respectively.
Maturities on time deposits of $100,000 or more are as follows:
Three months or less
6,869
Three months to six months
5,316
Six months to twelve months
8,807
Over twelve months
9,220
30,212
44
Total time deposits at December 31, 2004 mature as follows:
2005
2006
22,237
2007
13,998
2008
5,811
2009
652
Thereafter
Total deposits at December 31 are as follows:
Interest-bearing demand deposits
87,588
77,245
Saviings deposits
69,807
67,298
124,900
Total deposits
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold 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:
Repurchase Agreements:
Balance at year end
10,225
Maximum amount outstanding at any month end
15,301
15,665
Average balance outstanding during the year
13,317
13,214
Weighted-average interest rate:
At year end
1.82
Paid during the year
1.77
2.07
Open Repo Plus:
36,140
32,480
18,336
11,537
1.06
1.64
Short Term FHLB:
900
695
1.40
1.42
45
NOTE 9 - OTHER BORROWINGS
The following represents outstanding long-term borrowings by contractual maturities at December 31, 2004 and 2003:
Variable rate of 4.49%, maturing in 2007
Variable rates between 3.14% and 5.56%, maturing in 2008
29,600
Variable rate of 5.06%, maturing in 2009
Variable rate of 6.65%, maturing in 2010
Variable rates of 4.25% and 4.72%, maturing in 2011
Variable rate of 3.68%, maturing in 2012
Variable rate of 3.74%, maturing in 2013
Fixed rate of 2.02%, maturing in 2005
Fixed rate of 2.58%, maturing in 2006
1,600
Fixed rates between 2.67% and 3.13%, maturing in 2007
6,500
1,500
Fixed rate of 6.95%, maturing in 2011
500
Fixed rate of 5.87%, maturing in 2013
528
Fixed rate of 6.92%, maturing in 2015
750
The terms of the convertible borrowings allow the Federal Home Loan Bank (“FHLB”) to convert the interest rate to an adjustable rate based on the three month London Interbank Offered Rate (“LIBOR”) at a predetermined anniversary date of the borrowing’s origination, ranging from three months to five years.
The Bank maintains a credit arrangement, which includes a revolving line of credit with the FHLB. Under this credit arrangement, the Bank has a remaining borrowing capacity of approximately $145 million at December 31, 2004, 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 10 - INCOME TAXES
The following temporary differences gave rise to the net deferred tax liability at December 31, 2004 and 2003:
Deferred tax asset:
841
716
Deferred compensation
346
Contingencies
Pension
515
Loan fees and costs
320
Investment securities allowance
98
119
2,214
1,952
Deferred tax liability:
Bond accretion
205
260
Amortization
225
150
Unrealized gains on available for sale securities
2,231
3,159
2,682
3,597
Deferred tax liability, net
(468
(1,645
46
No valuation allowance was established at December 31, 2004 and 2003, in the view of the Company’s ability to carry back 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 for the years ended December 31:
Currently payable
4,512
3,666
2,363
Deferred (benfit) expense
(249
(116
Total provision
The effective federal income tax rate for the years ended December 31, 2004, 2003, and 2002 was 27.8%, 24.9% and 20.2%, respectively. A reconciliation between the expected income tax and the effective income tax rate on income before income tax provision follows:
Provision at expected rate
5,218
34.0
5,058
3,785
Decrease in tax resulting from:
Tax-exempt income
(632
(4.1
(6.4
(1,367
(12.3
(323
(2.1
(391
(2.7
(171
(1.5
Effective income tax and rates
27.8
24.9
20.2
NOTE 11 - EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
The Company has a noncontributory defined benefit pension plan (the “Plan”) for all employees hired prior to January 1, 2004, 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:
Change in benefit obligation
Benefit obligation at beginning of year
7,145
6,473
Service cost
447
443
Interest cost
398
384
Actuarial (gain) loss
(225
Benefits paid
(198
Benefit obligation at end of year
7,549
Change in plan assets
Fair value of plan assets at beginning of year
4,042
3,131
Actual return on plan assets
394
620
Employer contribution
506
Expenses paid
(18
(17
Fair value of plan assets at end of year
4,549
Funded status
(3,000
(3,103
Unrecognized net actuarial loss
1,275
1,609
Unrecognized prior service cost
229
Unrecognized tranisition asset
(19
Net Accrued Benefit Cost Recognized
(1,515
(1,261
The accumulated benefit obligation for the defined benefit pension plan was $5,606,000, and $4,913,000 at December 31, 2004 and 2003, respectively. Amounts recognized in the Statement of Income consist of:
381
342
Expected return on plan assets
(376
(256
(246
Amortization of transition asset
(3
Amortization of prior service cost
Recognized net actuarial gain
109
83
Net periodic benefit cost
601
677
519
The plan was amended, effective January 1, 2004, to cease eligibility for employees with a hire date of January 1, 2004 or later. Employees with a hire date of January 1, 2004 or later are eligible to receive, after meeting certain age and length of service requirements, an annual discretionary pension contribution from the Bank equal to a percentage of an employee’s base compensation. The dollars will be placed in a separate account within the 401(k) plan with a vesting requirement.
The following information relates to the Plan’s projected obligation, accumulated benefit obligation, and plan assets at December 31:
Projected benefit obligation
Accumulative benefit obligation
5,606
4,913
Fair value of plan assets
48
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31:
Discount rate
6.00
Rate of compensation increase
4.75
5.00
Weighted-average assumptions used to determine net periodic cost for years ended December 31:
6.50
Expected long-term return on plan assets
8.00
The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the market value in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower future returns on similar investments compared to past periods.
Plan Assets
The Company’s pension plan weighted-average asset allocations at December 31 by asset category are as follows:
Asset Category
Cash
0.3
0.6
Fixed Income securities
37.9
38.7
Equity
61.8
60.7
The investment objective for the defined pension plan is to maximize total return with tolerance for slightly above average risk, meaning the fund is able to tolerate short-term volatility to achieve above-average returns over the long term. The portfolio’s target exposure to equities is 60%, primarily invested in mid and large capitalization domestic equities. Exposure to small capitalization and international stocks may be allowed.
Asset allocation favors equities, with target allocation of approximately 60% equity securities, 37.5% fixed income securities and 2.5% cash. Due to volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between the acceptable ranges.
It is management’s intent to give the investment managers flexibility within the overall guidelines with respect to investment decisions and their timing. However, certain investments require specific review and approval by management. Management is also informed of anticipated, significant modifications of any previously approved investment, or anticipated use of derivatives to execute investment strategies.
The following benefit payments, which reflect expected future cost, are expected to be paid during the years ended December 31:
49
Estimated future benefit payments:
181
192
235
272
277
20010 - 2014
3,399
The company expects to contribute $575,000 to its Pension Plan in 2005.
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 $83,000, $75,000, and $80,000 for the years ended December 31, 2004, 2003, and 2002, respectively.
DEFERRED COMPENSATION PLAN
Certain directors have entered into deferred compensation agreements with the Corporation pursuant to which all or a specified portion of their directors’ fees are deferred until their retirement or termination of service. Interest on amounts credited to the account balance for each director accrues at an amount equal to one half of the Corporation’s return on equity for the prior year. 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 $73,000, $104,000, and $98,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Benefits paid under the plan were approximately $127,000 in 2004, $132,000 in 2003 and $51,000 in 2002.
NOTE 12 - 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. 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 are presented below:
SHARES
WEIGHTEDAVERAGEEXERCISEPRICE
Outstanding, beginning of year
30,607
39.39
33,385
38.69
Granted
Exercised
(5,277
36.73
(2,778
30.93
Forfeited
(9,365
38.63
Outstanding, end of year
15,965
40.24
Options exercisable at year-end
The following table summarizes information about nonqualified and incentive stock options outstanding at December 31, 2004:
OUTSTANDING
EXERCISABLE
EXERCISE PRICE
AVERAGELIFE
AVERAGEEXERCISEPRICE
48.35
8,410
38.18
1,375
29.66
6,180
NOTE 13 - 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 for the years ended December 31:
BEGINNING
ENDING
BALANCE
ADDITIONS
PAYMENTS
RESIGNED
7,227
5,720
1,273
11,674
6,785
2,374
1,791
NOTE 14 - 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, 2004:
51
Year Ending December 31,(In Thousands)
326
293
105
Total rental expense for all operating leases for the years ended December 31, 2004, 2003 and 2002 were $320,000, $269,000, and $258,000 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 15 - 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 letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The 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:
Commitments to extend credit
42,537
47,454
Standby letters of credit
1,321
258
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 represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.
NOTE 16 - 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 from “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, 2004 and 2003, 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:
RATIO
Total Capital
(to Risk-weighted Assets)
Actual
72,042
66,820
23.0
For Capital Adequacy Purposes
26,475
23,225
To Be Well Capitalized
33,094
10.0
29,031
Tier 1 Capital
65,776
60,547
20.9
13,238
11,613
19,856
6.0
17,419
(to Average Assets)
12.1
21,750
20,922
27,187
5.0
26,153
The Bank’s actual capital amounts and ratios are presented in the following table:
55,717
17.6
52,161
18.8
25,311
22,155
31,639
27,693
51,213
16.2
47,770
17.3
12,656
11,077
18,983
16,616
9.7
9.6
21,039
19,982
26,299
24,978
NOTE 17 - REGULATORY RESTRICTIONS
The Pennsylvania Banking Code restricts the availability of capital funds for payment of dividend by all state-chartered banks to the additional paid in capital of the Bank. Accordingly, at December 31, 2004, the balance in the additional paid in capital account totaling approximately $11,700,000 is unavailable for dividends.
The Bank is subject to regulatory restrictions, which limit its ability to loan funds to Penns Woods Bancorp, Inc. At
December 31, 2004, the regulatory lending limit amounted to approximately $5,502,000.
Cash and Due from Banks
Included in cash and due from banks are reserves required by the district Federal Reserve Bank of $1,197,000 and $1,151,000 at December 31, 2004 and 2003. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of cash on hand and a balance maintained directly with the Federal Reserve Bank.
NOTE 18 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose estimated fair values for its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the 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 1.
The Company’s fair value estimates, methods, and assumptions are set forth below for the Company’s other financial instruments.
As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments but have value, this estimated fair value of financial instruments would not represent the full market value of the Company.
The estimated fair values of the Company’s financial instruments are as follows at December 31,:
CARRYINGVALUE
Financial assets:
Cash and due from equivalents
Investment securities:
Available for sale
Held to maturity
331,350
287,310
Regulatory stock
6,206
6,588
Financial liabilities:
263,509
271,200
Long-term borrowings, FHLB
77,858
73,107
54
Cash and Cash Equivalents, Loans Held for Sale, Regulatory Stock, Accrued Interest Receivable, Short-term Borrowings, and Accrued Interest Payable:
The fair value is equal to the carrying value.
The fair value of investment securities available for sale and held to maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.
Loans:
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential real estate, construction real estate, and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the 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.
Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discounted rates are judgmentally determined using available market information and specific borrower information.
Bank-owned life insurance:
The fair value is equal to the Cash Surrender Value of life insurance policies.
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, 2004 and 2003. The fair value of certificates of deposit is based on the discounted value of contractual cash flows.
The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.
Other borrowings:
The fair value of other borrowings is based on the discounted value of contractual cash flows.
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, 2004 and 2003, respectively. The contractual amounts of unfunded commitments and letters of credit are presented in Note 15.
NOTE 19 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp, Inc. follows:
55
CONDENSED BALANCE SHEET, DECEMBER 31,
ASSETS
453
369
Investment in subsidiaries:
Bank
56,743
54,133
Nonbank
15,980
15,307
104
91
Total Assets
73,280
69,900
LIABILITIES AND SHAREHOLDERS’ EQUITY
115
131
Total liability and shareholders’ equity
56
CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
Operating income:
Dividends from subsidiaries
6,440
6,651
4,878
Equity in undistributed net income of subsidiaries
4,833
4,649
4,121
Operating expenses:
(190
(126
(113
CONDENSED STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
(4,833
(4,649
(4,121
(9
(64
6,241
6,461
4,742
INVESTING ACTIVITIES
Additional investment in subsidiaries
(271
(1,039
FINANCING ACTIVITIES
Proceeds from exercise of stock options
Purchase/retirement of treasury stock
Net cash used for financing activities
(5,886
(5,534
(4,412
NET INCREASE (DECREASE) IN CASH
84
(112
330
CASH, BEGINNING OF YEAR
481
151
CASH, END OF YEAR
57
NOTE 20 - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
FOR THE THREE MONTHS ENDED
March 31,
June 30,
Sept. 30,
Dec. 31,
7,327
7,532
7,924
8,164
2,124
2,142
2,229
2,273
5,203
5,390
5,695
5,891
Non-interest income
1,492
1,467
1,548
1,266
545
583
407
641
Non-interest expenses
3,453
3,509
3,882
Income before income tax provision
3,692
3,912
3,976
3,766
Income tax provision
1,108
1,150
986
2,673
2,804
2,826
2,780
Earnings per share - basic
0.80
Earnings per share - diluted
7,092
7,251
7,281
7,608
2,386
2,395
2,327
2,157
4,706
4,856
4,954
5,451
90
1,182
1,195
1,325
101
1,750
1,247
3,139
3,186
3,290
3,674
2,760
4,570
4,146
3,401
573
1,233
1,135
762
2,187
3,337
3,011
2,639
0.72
1.10
0.53
0.99
0.54
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of December 31, 2004. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2004. There have been no material changes in the Company’s internal control over financial reporting during the fourth quarter of 2004 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
As permitted by an applicable SEC order, management’s annual report on internal control over financial reporting, required by Item 308(a) of Regulations S-K, and the related attestation report of the independent registered accounting firm, required by Item 308(b) of Regulation S-K, will be filed by amendment to this form 10-K within the required filing period.
ITEM 9B OTHER INFORMATION
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information appearing in the Proxy Statement under the captions “The Board of Directors and Its Committees,” “Election of Directors,” “Security Ownership of Certain Beneficial Owners and Management,” and “Principal Officers of the Corporation” are incorporated herein by reference. A copy of the Code of Ethics and Code of Conduct for the Company can be requested from Brian Knepp, Vice President of Finance, at 300 Market Street, Williamsport, PA 17701. A link with access to the Company’s SEC 10- K filings, annual reports, and quarterly filings can be found at www.jssb.com.
ITEM 11 EXECUTIVE COMPENSATION
Information appearing under the captions “Compensation of Directors,” “Executive Compensation,” “Options/SAR Grants,” “Aggregated Option/SAR Exercises in Last Fiscal Year” and “FY-End Option/SAR Values,” and “Executive Employment and Severance Agreements,” in the Proxy Statement is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
Plan Category
Number ofsecurities to beissued uponexercise ofoutstanding options,warrants and rights
Weighted-averageexercised ofoutstanding options,warrants and rights
Number ofsecurities remainingavailable for futureissuance underequity compensationplans [excludingsecurities reflected incolumn (a)]
(a)
(b)
(c)
Equity compensation plans approved by security holders
15,695
Equity compensation plans not approved by security holders
59
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no material transactions between the Company and the Bank, nor any material transactions proposed, with any Director or Executive Officer of the Company and the Bank, or any associate of the foregoing persons. The Company 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 Company 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 Company and the Bank. Total loans outstanding from the Bank at December 31, 2004 to the Company’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 $11,674,000 or approximately 15.96% of the total equity capital of the Company. 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 13 to the Consolidated Financial Statements included elsewhere in the Annual Report.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing in the Proxy Statement under the captions, “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” “All Other Fees,” and “Audit Committee Pre-Approval Policies and Procedures” (at page 8) is incorporated herein by reference.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
1. The following consolidated financial statements and reports are set forth in Item 8:
Report of Independent Auditors
Consolidated Statement of Changes in Shareholders’ Equity
Notes to the Consolidated Financial Statements
2. The following schedules is submitted herewith:
I. Indebtedness of Related Parties
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.
(b) Exhibits:
(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).
(10) (i) Employment Agreement, dated August, 1991, between Jersey Shore State Bank and Ronald A. Walko (incorporated by reference to Exhibit 10.3 of the Registrant’s Registration Statement on form S-4, No. 333- 65821).*
(10) (ii) Employment Agreement, dated November 5, 1984, between Jersey Shore State Bank and Hubert A. Valencik (incorporated by reference to Exhibit (10)(iii) of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).*
(10) (iii) Employee Severance Benefit Plan, dated May 30, 1996, for Ronald A. Walko (incorporated by reference to Exhibit 10.4 of the Registrant’s Registration Statement on form S-4, No. 333-65821).*
(10) (iv) Employee Severance Benefit Plan, dated May 30, 1996, for Hubert A. Valencik (incorporated by reference to Exhibit (10)(v) of the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).*
(10) (v) Penns Woods Bancorp, Inc. 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on form S-4, No. 333-65821).*
(10) (vi) Amendment and Restatement of the Jersey Shore State Bank Director Deferred Fee Agreement, dated October 29, 2004, between Jersey Shore State Bank and Philip H. Bower.*
(10) (vii) Amendment and Restatement of the Jersey Shore State Bank Director Deferred Fee Agreement, dated October 29, 2004, between Jersey Shore State Bank and Lynn S. Bowes.*
(10) (viii) Amendment and Restatement of the Jersey Shore State Bank Director Deferred Fee Agreement, dated October 29, 2004, between Jersey Shore State Bank and Michael J. Casale.*
(10) (ix) Amendment and Restatement of the Jersey Shore State Bank Director Deferred Fee Agreement, dated October 29, 2004, between Jersey Shore State Bank and James M. Furey II.* dated October 29, 2004, between Jersey Shore State Bank and Jay H. McCormick.*
(10) (xi) Amendment and Restatement of the Jersey Shore State Bank Director Deferred Fee Agreement, dated October 29, 2004, between Jersey Shore State Bank and William H. Rockey.*
(10) (xii) Amendment and Restatement of the Jersey Shore State Bank Director Deferred Fee Agreement, dated October 29, 2004, between Jersey Shore State Bank and Ronald A. Walko.*
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Certified Public Accountants.
(31) (i) Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer
(31) (ii) Rule 13a-14(a)/Rule 15d-14(a) Certification of Principle Accounting Officer
(32) (i) Section 1350 Certification of Chief Executive Officer
(32) (ii) Section 1350 Certification of Principle Accounting Officer
*Denotes compensatory plan or arrangement.
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 8, 2005
/s/ Ronald A. Walko
BY: RONALD A. WALKOPresident & Chief Executive Officer
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:
Ronald A. Walko, President & Chief ExecutiveOfficer and Director
/s/ Brian L. Knepp
Brian L. Knepp, Principal Financialand Accounting Officer
/s/ Phillip H. Bower
Phillip H. Bower, Director
/s/ Lynn S. Bowes
Lynn S. Bowes, Director
/s/ Michael J. Casale, Jr.
Michael J. Casale, Jr., Director
/s/ H. Thomas Davis, Jr.
H. Thomas Davis, Jr., Director
/s/ James M. Furey, II
James M. Furey II, Director
/s/ Jay H. McCormick
Jay H. McCormick, Director
/s/ R. Edward Nestlerode, Jr.
R. Edward Nestlerode, Jr., Director
/s/ James E. Plummer
James E. Plummer, Director
/s/ William H. Rockey, Sr.
William H. Rockey, Sr. Vice President &Director
62