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TABLE OF CONTENTS
Letter to Shareholders 2
Three Year Financial Highlights 3
Report of Independent Certified Accountants 4
Consolidated Balance Sheet 5
Consolidated Statement of Income 6
Consolidated Statement of Changes in 7
Shareholders' Equity
Consolidated Statement of Cash Flows 8
Notes to Consolidated Financial Statements 9-20
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operation 21-36
SEC Form 10-K 37-49
Management and Board of Directors 50
Offices of Jersey Shore State Bank 51
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________________to___________
Commission file number 0-17077
PENNS WOODS BANCORP, INC.
(exact name of registrant as specified in its charter)
Pennsylvania 23-2226454
(State or other jurisdiction (IRS. Employer
of incorporation or organization) Identification No.)
115 South Main Street, PO. Box 5098
Jersey Shore, Pennsylvania 17740
(Address of principal executive offices)
Registrant's telephone number, including area code
(717) 398-2213
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
which registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
State the aggregate market value of the voting stock held by
non-affiliates of the registrant $97,667,280 at February 28, 1998
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at February 29, 1998
Common Stock, $10 Par Value 2,565,958 Shares
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
a). Penns Woods Bancorp, Inc. 1997 Annual Report (Annual Report)
b). Penns Woods Bancorp, Inc. Proxy Statement (Proxy Statement dated
March 26, 1998)
Location in Form 10-K Incorporated
Information
Part II
Item 7. Management's Discussion
and Analysis of Consolidated Pages 21 through 36
Financial Conditionand of the Annual Report
Results of Operations
Item 8. Financial Statements and
Supplementary Data Pages 5 through 20 of
the Annual Report
Part III
Item 13. Certain Relationships and Related Page 16 of the
Transactions Annual Report
INDEX
PART I
ITEM PAGE
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . 39-43
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . 44
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 45
Item 4. Submission of Matters to a Vote of Security Holders 45
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 45
Item 6. Selected Financial Data . . . . . . . . . . . . . . 45-46
Item 7. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 21-36
Item 8. Financial Statements and Supplementary Data . . . . 47
Item 9. Disagreements on Accounting and Financial Disclosure.47
PART III
Item 10. Directors and Executive Officers of the Registrant..47
Item 11. Executive Compensation. . . . . . . . . . . . . . ..47
Item 12. Security Ownership and Certain Beneficial Owners and
Management 47
Item 13. Certain Relationships and Related Transactions. . . 47
PART IV
Item 1. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 48
Index to Exhibits . . . . . .. . . . . . . . . . . . . . . . . 48
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 49
PART I
ITEM 1 BUSINESS
A. General Development of Business and History
On January 7, 1983, Penns Woods Bancorp, Inc. (the
"Company") was incorporated under the laws of the
Commonwealth of Pennsylvania as a bank holding company.
The Jersey Shore State Bank (the "Bank") became a
wholly-owned subsidiary of the Company, and each outstanding
share of Bank common stock was converted into one share of
Company common stock. This transaction was approved by the
shareholders of the Bank on April 11, 1983 and was officially
effective on July 12, 1983. The Company's business has
consisted primarily of managing and supervising the Bank, and
its principal source of income has been dividends paid by the
Bank. The Company's two other wholly-owned subsidiaries are
Woods Real Estate Development Company and Woods
Investment Company, Inc.
The Bank is engaged in commercial and retail banking and the
taking of time and regular savings and demand deposits, the
making of commercial and consumer loans and mortgage loans,
and safe deposit services. Auxiliary services, such as cash
management, are provided to commercial customers. The Bank
operates full banking services with seven branch offices and a
Mortgage/Loan Center in Northcentral Pennsylvania.
Neither the Company nor the Bank anticipates that
compliance with environmental laws and regulations will have
any material effect on capital expenditures, earnings, or on its
competitive position. The Bank is not dependent on a single
customer or a few customers, the loss of whom would have a
material effect on the business of the Bank.
The Bank employed approximately 139 persons as of
December 31, 1997. 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 under the jurisdiction of the Securities and
Exchange Commission (the "SEC") and of state securities
commissions for matters relating to the offering and sale of its
securities. In addition, the Company is subject to the SEC's
rules and regulations relating to periodic reporting, reporting
to its shareholders, proxy solicitation and insider trading.
The Company is also subject to the provisions of the Bank
Holding Company Act of 1956, as amended (the "BHCA") and to
supervision and examination by the Board of Governors of the
Federal Reserve System (the "FRB"). The Bank is subject to the
supervision and examination by the Federal Deposit Insurance
Corporation (the "FDIC"), as its primary federal regulator and as
the insurer of the Bank's deposits. The Bank is also regulated
and examined by the Pennsylvania Department of Banking (the
"Department").
The FRB has issued regulations under the BHCA that
require a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks.
As a result, the FRB, pursuant to such regulations, may
require the Company to stand ready to use its resources to
provide adequate capital funds to the Bank during periods of
financial stress or adversity. The BHCA requires the
Company to secure the prior approval of the FRB before it
can acquire all or substantially all of the assets of any bank,
or acquire ownership or control of 5% or more of any voting
shares of any bank. Such a transaction would also require
approval of the Department.
A bank holding company is prohibited under the BHCA from
engaging in, or acquiring direct or indirect control of, more
than 5% of the voting shares of any company engaged in
non-banking activities unless the FRB, by order or regulation,
has found such activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
Under the BHCA, the FRB has the authority to require a bank
holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon FRB's determination that such activity or control
constitutes a serious risk to the financial soundness and
stability of any bank subsidiary of the bank holding company.
Bank holding companies are required to comply with the FRB's
risk-based capital guidelines. The risk-based capital rules are
designed to make regulatory capital requirements more sensitive
to differences in risk profiles among banks and bank holding
companies and to minimize disincentives for holding liquid
assets. Currently, the required minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least
half of the total capital is required to be Tier 1 capital,
consisting principally of common shareholders' equity, less
certain intangible assets. The remainder ("Tier 2 capital") may
consist of certain preferred stock, a limited amount of
subordinated debt, certain hybrid capital instruments and other
debt securities, and a limited amount of the general loan loss
allowance. The risk-based capital guidelines are required to
take adequate account of interest rate risk, concentration of
credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the FRB
requires each bank holding company to comply with the leverage
ratio, under which the bank holding company must maintain a
minimum level of Tier 1 capital to average total consolidated
assets of 3% for those bank holding companies which have the
highest regulatory examination ratings and are not contemplating
or experiencing significant growth or expansion. All other bank
holding companies are expected to maintain a leverage ratio of at
least 4% to 5%. The Bank is subject to similar capital
requirements adopted by the FDIC.
C. Regulation of the Bank
From time to time, various types of federal and state
legislation have been proposed that could result in additional
regulation of, and restrictions of, the business of the Bank. It
cannot be predicted whether any such legislation will be adopted
or how such legislation would affect the business of the Bank.
As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation
and regulations that may increase the costs of doing business.
Prompt Corrective Action - The FDIC has specified the levels at
which an insured institution will be considered "well- capitalized,"
"adequately capitalized," "undercapitalized," and "critically
undercapitalized." In the event an institution's capital deteriorates to the
"undercapitalized" category or below, the Federal Deposit Insurance Act
(the "FDIA") and FDIC regulations prescribe an increasing amount of
regulatory intervention, including: (1) the institution of a capital
restoration plan by a bank and a guarantee of the plan by a parent
institution; and (2) the placement of a hold on increases in assets,
significantly or critically undercapitalized levels, further material
restrictions can be imposed, including restrictions on interest payable on
accounts, dismissal of management and (in critically undercapitalized
situations) appointment of a receiver. For well-capitalized institutions,
the FDIA provides authority for regulatory intervention where the
institution is deemed to be engaging in unsafe or unsound practices or
receives a less than satisfactory examination report rating for asset
quality, management, earnings or liquidity.
Deposit Insurance - There are two deposit insurance funds
administered by the FDIC - the Savings Association Insurance Fund
("SAIF") and the Bank Insurance Fund ("BIF"). The Bank's deposits are
insured under the BIF; however, the deposits assumed by the Bank in
connection with the merger of Lock Haven Savings Bank are treated and
assessed as SAIF-insured deposits. The FDIC has implemented a
risk-related premium schedule for all insured depository institutions that
results in the assessment of premiums based on capital and supervisory
measure. Under the risk-related premium schedule, the FDIC assigns, on
a semiannual basis, each institution to one of three capital groups
(well-capitalized, adequately capitalized or undercapitalized) and further
assigns such institution to one of three subgroups within a capital group.
The institution's subgroup assignment is based upon the FDIC's judgment
of the institution's strength in light of supervisory evaluations, including
examination reports, statistical analyses and other information relevant to
gauging the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10.0% or greater, a Tier 1 capital
to risk-adjusted assets ratio of 6.0% or greater and a Tier 1 leverage ratio
of 5.0% or greater, are assigned to the well-capitalized group. As of
December 31, 1997, the Bank's ratios were well above required minimum
ratios.
Below, both the BIF and SAIF are presently fully funded at more than the
minimum amount required by law. Accordingly, the BIF and SAIF assessment rates
range from zero for those institutions with the least risk, to $0.27 for
every $100 of insured deposits for institutions deemed to have the
highest risk. The Bank is in the category of institutions that presently
pay nothing for deposit insurance. The FDIC adjusts the rates every six
months.
While the Bank presently pays no premiums for deposit insurance, it
is subject to assessments to pay the interest on Financing Corporation
("FICO") bonds. FICO was created by Congress to issue bonds to
finance the resolution of failed thrift institutions. Prior to 1997, only
thrift institutions were subject to assessments to raise funds to pay the FICO
bonds. Commercial banks are subject to 1/5 of the assessment to which thrifts
are subject for FICO bond payments through 1999. Beginning in 2000, commercial
banks and thrifts will be subject to the same assessment for FICO bonds.
The annual FICO assessment for the Bank (and all commercial banks) is $.0126
for each $100 of BIF deposits. Because the Bank has SAIF deposits as a result
of its acquisition of Lock Haven Savings Bank, the Bank is also subject to
a FICO assessment of $.0630 for each $100 of SAIF deposits.
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, 1997, the Bank had total assets of
$272,412,000; total shareholders' equity of $31,606,000 and
total deposits of $220,831,000. The Bank's deposits are insured by
the Federal Deposit Insurance Corporation for the maximum
amount provided under current law.
Jersey Shore State Bank engages in business as a
commercial bank, doing business at several locations in
Lycoming, Clinton and Centre Counties, Pennsylvania.
Services offered by the Bank include accepting time, demand
and savings deposits including Super NOW accounts, regular
savings accounts, money market certificates, investment
certificates, fixed rate certificates of deposit and club accounts.
Its services also include making secured and unsecured
commercial and consumer loans, financing commercial
transactions, making construction and mortgage
loans and the renting of safe deposit facilities. Additional
services include making residential mortgage loans, revolving
credit loans with overdraft protection, small business loans, etc.
Business loans include seasonal credit collateral loans and term
loans, as well as accounts receivable and inventory financing.
The Bank's loan portfolio mix can be classified into four principal
categories. They are real estate, agricultural, commercial and
consumer.
Real estate loans can be further segmented into construction
and land development, farm land, one-to-four family residential,
multi-family and commercial or industrial. Qualified borrowers
are defined by policy or by industry underwriting standards.
Owner provided equity requirements range from 20% to 30%
with a first lien status required. Terms are restricted to between
10 and 20 years with the exception of construction and land
development, which is limited to one to five years. Appraisals,
verifications and visitations comply with industry standards.
Financial information that is required on all commercial
mortgages includes the most current three years' balance
sheets and income statements and projections on income to be
developed through the project. In the case of corporations and
partnerships, the principals are often asked to indebt
themselves personally as well. As regards residential
mortgages, repayment ability is determined from information
contained in the application and recent income tax returns.
Emphasis is on credit, employment, income and residency
verification. Broad hazard insurance is always required and
flood insurance where applicable. In the case of construction
mortgages, builders risk insurance is requested. Adjustable
rate mortgages are not offered for residential mortgages.
Agricultural loans for the purchase or improvement of real estate
must meet the Bank's real estate underwriting criteria. The only
permissible exception is when a Farmers Home Loan
Administration guaranty is obtained. Agricultural loans made for
the purchase of equipment are usually payable in three years,
but never more than seven, depending upon the useful life of the
purchased asset. Minimum borrower equity required is 20%.
Livestock financing criteria depends upon the nature of the
operation. A dairy herd could be financed over five years, but a
feeder operation would require cleanup in intervals of less than
one year. Agricultural loans are also made for crop production
purposes. Such loans are structured to repay within the
production cycle and not carried over into a subsequent year.
General purpose working capital loans are also a possibility
with repayment expected within one year. It is also a general
policy to collateralize non-real estate loans with not only the
asset purchased but also junior liens on all other available
assets. Insurance and credit criteria is the same as mentioned
previously. In addition, annual visits are made to our agricultural
customers to determine the general condition of assets.
Personal credit requirements are handled as consumer loans.
Commercial loans are made for the acquisition and
improvement of real estate, purchase of equipment and for
working capital purposes on a seasonal or revolving basis.
Criteria was discussed under real estate financing for such
loans, but it is important to note that such loans may be made
in conjuction with the Pennsylvania Industrial Development
Authority. Caution is also exercised in taking industrial property
for collateral by requiring, on a selective basis, environmental
audits.
Equipment loans are generally amortized over three to seven
years, with an owner equity contribution required of at least 20%
of the purchase price. Unusually expensive pieces may be
financed for a longer period depending upon the asset's useful
life. The increased cash flow resulting from the additional piece,
through improved income or greater depreciation expense,
serves in establishing the terms. Insurance coverage with the
Bank as loss payee is required, especially in the case where the
equipment is rolling stock.
Seasonal and revolving lines of credit are offered for working
capital purposes. Collateral for such a loan includes the pledge
of inventory and/or receivables. Drawing availability is usually
50% of inventory and 75% of eligible receivables. Eligible
receivables are defined as invoices less than 90 days
delinquent. Exclusive reliance is very seldom placed on such
collateral, therefore other lienable assets are also taken into the
collateral pool. Where reliance is placed on inventory and
accounts receivable, the applicant must provide financial
information including agings on a monthly basis. In addition,
the guaranty of the principals is usually obtained.
It is unusual for Jersey Shore State Bank to make unsecured
commercial loans. But when such a loan is a necessity, credit
information in the file must support that decision.
Letter of Credit availablity is limited to standbys where the
customer is well known to the Bank. Credit criteria is the same as
that utilized in making a direct loan and collateral is obtained in
most cases, and whenever the expiration date is for more than
one year.
Consumer loan products include second mortgages,
automobile financing, small loan requests, overdraft check lines
and PHEAA referral loans. Our policy includes standards used in the
industry on debt service ratios and terms are consistent with
prudent underwriting standards and the use of proceeds.
Verifications are made of employment and residency, along with
credit history. Second mortgages are confined to equity
borrowing and home improvements. Terms are generally ten
years or less and rates are fixed. Loan to collateral value criteria
is 80% or less and verifications are made to determine values.
Automobile financing is generally restricted to four years and
done on a direct basis. The Bank, as a practice, does not floor
plan and therefore does not discount dealer paper. Small loan
requests are to accommodate personal needs such as the
purchase of small appliances or for the payment of taxes.
Overdraft check lines are limited to $5,000 or less.
The Bank's investment portfolio is analyzed and priced on a
monthly basis. Investments are made in U.S. Treasuries, U.S.
Agency issues, bank qualified municipal bonds, corporate
bonds and corporate stocks which consist of Pennsylvania bank
stocks. Bonds with BAA or better ratings are used, unless a
local issue is purchased that has a lesser or no rating.
Factors taken into consideration when investments are made
include liquidity, the company's tax position and the policies of
the Asset/Liability Committee.
The Bank has experienced deposit growth in the range of
.38% to 8.63% over the last five years. This growth has
primarily come in the form of core deposits. Although the Bank
has regular opportunities to bid on pools of funds of $100,000 or
more in the hands of municipalities, hospitals and others, it
does not rely on these monies to fund loans on intermediate or
longer term investments. Minor seasonal growth in deposits is
experienced at or near the year end.
It is the policy of Jersey Shore State Bank to generally
maintain a rate sensitive asset (RSA) to rate sensitive liability
(RSL) ratio of 200% of equity for a 6-month time horizon,
175% of equity for a 2-year time horizon and 150% of equity
for a 5-year time horizon.
The Bank operates 7 full service offices in Lycoming and
Clinton Counties, Pennsylvania, and a Mortgage/Center in Centre
County, Pennsylvania. The economic base of the region is developed
around service, light manufacturing industries and agriculture. The
banking environment in Lycoming, Clinton and Centre Counties,
Pennsylvania is highly competitive. The Bank competes for loans and
deposits with commerial banks, savings and loan associattions and
other financial institutions.
The Bank has a relatively stable deposit base and no
material amount of deposits is obtained from a single depositor
or group of depositors (including federal, state and local
governments). The Bank has not experienced any significant
seasonal fluctuations in the amount of its deposits.
b. Supervision and Regulation
The earnings of the Bank are affected by the policies of
regulatory authorities including the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve
System. An important function of the Federal Reserve System is
to regulate the money supply and interest rates. Among the
instruments used to implement these objectives are open
market operations in U.S. Government Securities, changes in
reserve requirements against member bank deposits, and
limitations on interest rates that member banks may pay on time
and savings deposits. These instruments are used in varying
combinations to influence overall growth and distribution of bank
loans, investments on deposits, and their use may also affect
interest rates charged on loans or paid for deposits.
The policies and regulations of the Federal Reserve Board
have had and will probably continue to have a significant effect
on the Bank's deposits, loans and investment growth, as well as
the rate of interest earned and paid, and are expected to affect
the Bank's operation in the future. The effect of such policies
and regulations upon the future business and earnings of the
Bank cannot accurately be predicted.
EXECUTIVE OFFICERS OF THE REGISTRANT:
NAME FIVE-YEAR ANALYSIS OF DUTIES
Theodore H. Reich 59 President and Chief Executive Officer
of the Company; the Bank; Woods
Real Estate Development Co., Inc.;
and Woods Investment Company, Inc.
Ronald A. Walko 51 Vice President of the Company; Senior
Vice President and Senior Loan Officer
of the Bank from 1986 to current; Vice
President of Woods Investment
Company, Inc.; Federal bank examiner
prior to 1986 for an eighteen-year
period.
Hubert A. Valencik 56 Vice President of the Company; Senior
Vice President and Operations Officer
of the Bank; Vice President of Woods
Real Estate Development Co., Inc. and
Woods Investment Company, Inc.; Vice
President with another bank prior to
1985 for a fourteen-year period.
Chris B. Ward 51 Treasurer of the Company; Vice
President of the Bank; Treasurer of
Woods Real Estate Development Co.,
Inc. and Woods Investment Company,
Inc.
Sonya E. Hartranft 38 Secretary of the Company; Controller of
the Bank; Secretary of Woods Real
Estate Development Co., Inc. and
Woods Investment Company, Inc.
The following individual is an officer of
the Bank only:
G. David Gundy 49 Vice President.of the Bank;
Vice President and Regional
Manager with another bank
prior to 1992 for a thirteen-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 Mortgage/Loan Center are located;
are located; all properties are in good condition and adequate for the
Bank's purposes:
Office Address
Main 115 South Main Street
PO. Box 5098 Owned
Jersey Shore, Pennsylvania 17740
Jersey Shore 112 Bridge Street
Jersey Shore, Pennsylvania 17740 Owned
DuBoistown 2675 Euclid Avenue
DuBoistown, Pennsylvania 17701 Under Lease
-- see below
Williamsport 300 Market Street
PO. Box 967 Owned
Williamsport, Pennsylvania 17703-0967
Montgomery RD. 1, Box 493
Montgomery, Pennsylvania 17752 Under Lease
-- see below
Lock Haven 4 West Main Street
Lock Haven, Pennsylvania 17745 Owned
Mill Hall Millbrook Plaza, Hogan Boulevard
Mill Hall, Pennsylvania 17751 Under Lease
-- see below
Mortgage/Loan Center
State College 300 Allen Street
State College, Pennsylvania 16801 Under Lease
-- see below
The DuBoistown branch office was leased for a twenty-year
period that ended in 1995. After the initial twenty-year period,
the Bank had the option to extend the lease for each of
four successive five-year terms. In 1995 the bank extended the
lease for the first of four five-year optional terms. At the end of
the last five-year extension, the Bank shall be afforded the
opportunity to negotiate a new lease agreement. The Bank is
granted, during the term of the lease or any renewal or extension
thereof, an option to purchase the leased property at any time at
a purchase price to be determined in the following manner: Two
competent real estate appraisers to be selected by agreement
of the Bank and the lessor, and if no such agreement can be
reached, then one selected by the lessor and one selected by
the Bank shall individually appraise the property, and the
purchase price shall be seventy-five (75%) percent of the
average of the two appraisals. The annual rent for the
DuBoistown branch office was $9,000 for the year ended
December 31, 1997.
The Montgomery branch office is leased
for a fifteen-year period ending in the year 2002. The Bank shall
have the option to extend the lease for a five-year period after the
initial fifteen-year term has expired. The Bank shall also have an
opportunity to negotiate a new lease agreement after the
five-year extension has expired. The Bank is granted, at the end
of the initial term of the lease or at any time during the extended
period, an option to purchase the property at a price to be
determined in the following manner: Two competent real estate
appraisers selected by agreement of the Bank and the lessor,
and if no such agreement can be reached then one selected by
the Bank and one selected by the lessor, shall individually
appraise the property and the purchase price shall be the
average of the two. The annual rent for the Montgomery branch
office was $30,000 for the year ended December 31, 1997.
The Mill Hall branch office was leased for a five-year period
that ended in 1997. The Bank had the option to renew the
lease for up to two additional terms of five years each after the
initial five-year term of the lease agreement had expired. In
1997, the Bank renewed the lease for the first of two additional
five-year terms. The annual rent for the Mill Hall branch office
was $22,000 for the year ended December 31, 1997.
On July 7, 1997, the Bank commenced operating a Mortgage/Loan
Center in State College, Pennsylvania. The Mortgage/Loan Center
was initially leased for a one-year term ending in May, 1998, with
the option to renew the lease for one additional, one-year period.
The Bank has exercised this option, renewing the lease term, which
will end May, 1999. The annual rent for the State College Mortgage/
Loan Center was $11,100.
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 1997.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Registrant's Common Stock is traded locally. The
following table sets forth (1) the quarterly high and low prices for
a share of the Registrant's Common Stock during the periods
indicated as reported by the management of the Registrant, and
(2) quarterly dividends on a share of the Common Stock with
respect to each quarter since January 1, 1995. The following
quotations represent prices between buyers and sellers and do
not include retail markup, markdown or commission. They may
not necessarily represent actual transactions.
HIGH LOW Dividends
1995: Declared
First quarter $16 1/6 $16 0.100
Second quarter $16 3/4 $15 5/6 0.100
Third quarter $17 3/4 $16 0.110
Fourth quarter $18 $17 3/4 0.190
1996:
First quarter $18 $18 0.110
Second quarter $19 3/4 $18 1/4 0.110
Third quarter $21 $19 1/2 0.125
Fourth quarter $21 1/4 $19 7/8 0.255
1997:
First quarter $25 $21 0.125
Second quarter $28 2/3 $26 9/16 0.150
Third quarter $30 1/2 $28 3/4 0.400
Fourth quarter $31 3/4 $30 0.175
The stock prices and the dividend have been adjusted to reflect
the 50% stock dividend issued July 31, 1995, for the
aquisition of Lock Haven Savings Bank and for the issuance
of a stock split effected in the form of a 100% stock
dividend paid on January 15, 1998.
The Bank has paid cash dividends since December 31,
1941. The Registrant has paid dividends since the effective
date of its formation as a bank holding company. It is the
present intention of the Registrant's Board of Directors to
continue the dividend payment policy; however, further dividends
must necessarily depend upon earnings, financial condition,
appropriate legal restrictions and other factors relevant at the
time the Board of Directors of the Registrant considers dividend
policy. Cash available for dividend distributions to shareholders
of the Registrant must initially come from dividends paid by the
Bank to the Registrant. Therefore, the restrictions on the Bank's
dividend payments are directly applicable to the Registrant.
Under the Pennsylvania Business Corporation Law of 1988 a
corporation may not pay a dividend, if after giving effect thereto,
the corporation would be unable to pay its debts as they become
due in the usual course of business and after giving effect
thereto the total assets of the Corporation would be less than
the sum of its total liabilities plus the amount that would be
needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
the shareholders whose preferential rights are superior to those
receiving the dividend.
As of February 28, 1998, the Registrant had approximately
808 shareholders of record.
ITEM 6 SELECTED FINANCIAL DATA
Information appearing in the Annual Report under the caption
"Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" at page 21
contains statistical and other financial information in accordance
with guidelines for bank holding companies as issued by the
Securities and Exchange Commission.
SELECTED FINANCIAL DATA
The following table sets forth certain financial data as of and
for each of the years in the five-year period ended December 31,
1997.
As of and for the Years Ended December 31,
(Dollars in thousands, except per share amounts)
1997 1996 1995 1994 1993
Consolidated Statement of
Income Data:
Interest income $20,823 $19,997 $18,695 $16,882 $15,967
Interest expense 8,317 8,079 7,793 6,902 6,546
Net interest income 12,506 11,918 10,902 9,980 9,421
Provision for loan losses 220 105 300 577 791
Net interest income after provision
for loan losses 12,286 11,813 10,602 9,403 8,630
Other income 5,840 2,461 2,215 2,137 2,942
Other expense 7,384 6,967 7,534 6,997 6,097
Income before income taxes 10,742 7,307 5,283 4,543 5,475
Applicable income taxes 2,991 1,965 1,421 1,174 1,497
Net Income $7,751 $5,342 $3,862 $3,369 $3,978
Consolidated Balance Sheet at
End of Period:
Total assets $283,988 $259,724 $242,629 $235,638 $223,672
Loans 187,567 162,267 153,640 151,492 134,571
Allowance for loan losses (2,414) (2,413) (2,353) (2,127) (1,956)
Deposits 220,536 203,016 202,258 190,839 180,587
Long-term debt -- other 0 0 0 7,000 5,825
Stockholders' equity 42,974 33,557 29,685 23,839 21,894
Per Share Data:
Net income $3.03 $2.10 $1.52 $1.33 $1.57
Cash dividends declared 0.85 0.60 0.50 0.395 0.445
Book Value 16.75 13.14 11.67 9.42 8.70
Number of shares outstanding, at
end of period 1,282,779 1,277,298 1,271,339 1,265,597 1,258,569
Average number of shares
outstanding 2,556,804 2,544,561 2,535,076 2,533,756 2,533,756
Selected financial ratios:
Return on average stockholders' 20.07% 17.25% 14.07% 13.89% 19.12%
equity
Return on average total assets 2.88% 2.12% 1.64% 1.45% 1.89%
Net interest income to average
interest earning assets 5.25% 5.08% 5.04% 4.71% 4.80%
Dividend payout ratio 28.05% 28.57% 32.79% 29.70% 28.34%
Average stockholders' equity to
average total assets 14.46% 12.31% 11.64% 10.42% 9.88%
Loans to deposits, at end of period 83.96% 78.74% 74.80% 78.27% 73.44%
Numbers adjusted to reflect a stock split effective in the form of a 50%
stock dividend. In addition, 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 paid January 15,
1998.
Management's Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
ITEM 7
NET INTEREST INCOME
Net interest income is determined by calculating the difference between
the yields earned on interest earning assets and the rates paid on interest
bearing liabilities.
1997 vs 1996
Taxable equivalent net interest income increased $204,000 during 1997 or
an increase of 1.6%. Increases in aggregate average asset volume contributed
$442,000 to this net increase, offset by increases in aggregate average
liability volume which contributed a net decrease of $238,000.
Total average interest earning assets increased $3,892,000 in 1997,
consisting of, an increase in average total loans of $8,460,000, a decrease in
average total securities of $5,618,000 and an increase in average federal funds
sold of $1,050,000. The loan growth experienced was a result of loan demand
and competitive rates.
Total average interest bearing liabilities increased $3,223,000 in 1997,
as a net result of the following: a decrease in average savings deposits
of $1,647,000, an increase in average other time deposits of $6,284,000, and
a decrease in average securities sold under repurchase agreements and federal
funds purchased of $1,414,000.
The total effective interest rate differential was unchanged from 1996
at 5.54% to 1997 at 5.54%. The average rate of return on average interest
earning assets increased by .04%, however, the average cost of funds on
average interest bearing liabilities also increased by .04% for a net effect
of no change to the effective interest rate differential of 5.54%.
1996 vs 1995
Net interest income , on a fully taxable equivalent basis, was $13,012,000
for the year ended December 31, 1996 compared to $12,073,000 at
December 31, 1996, or an increase of 7.8%. A volume increase in
aggregate earning assets contributed $1,435,000 to the overall net increase
in net interest income, while net volume increases in interest-bearing
liabilities contributed a net decrease to net interest income of $350,000.
An overall net decline in the rate of return on earning assets contributed a
$210,000 decrease to net interest income, while an overall rate decrease
in the rate paid for interest-bearing deposits contributed an increase to the
net interest income of $64,000. (Please refer to pages 23-25).
Average interest earning assets increased $17,347,000 during 1996.
The majority of this increase or $16,386,000 was in the investment
portfolio. The loan portfolio increased $3,488,000, while federal funds
sold declined by $2,527,000. While the volume of interest earning assets
increased during 1996, the prime lending rate was lower overall in 1996
than in 1995. During 1995, the prime lending rate declined from a high of
9.00% to a low of 8.50%. However, in 1996 the prime lending rate's high
was 8.50% and its low was 8.25%, therefore on average, rates of return on
loans were lower in 1996. The yield curve continued to flatten during
1996, therefore, purchases of investments during 1996 were at lower
yielding rates of return than the average rates of return earned during 1995.
Total interest bearing liabilities increased by $8,318,000, made up of an
increase in savings deposits of $209,000, an increase in other time
deposits of $2,764,000, an increase in securities sold under repurchase
agreements and federal funds purchased of $8,262,000,and and increase
in other borrowed money of $2,917,000. The cost of funds of these
deposits declined minimally from 4.32% in 1995 to 4.28% during 1996
which also reflects the market decline in interest rates.
AVERAGE BALANCES AND INTEREST RATES
(INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS)
(IN THOUSANDS)
1997
---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
ASSETS:
Interest earning assets:
Securities:
US. Treasury and federal agency. . . . . . $35,607 $2,526 7.09%
State and political subdivisions . . . . . . 20,574 1,795 8.72%
Other . . . . . . . . . . . . . . . . . . . 15,395 816 5.30%
----------------------
Total securities . . . . . . . . . . . . 71,576 5,137 7.18%
LOANS: ----------------------
Tax-exempt loans. . . . . . . . . . . . . . . . . 3,268 295 9.03%
All other loans, net of discount where applicable 162,393 16,039 9.88%
----------------------
Total loans . . . . . . . . . . . . . . . . 165,661 16,334 9.86%
----------------------
Federal funds sold. . . . . . . . . . . . . . . . 1,136 62 5.46%
----------------------
Total earning assets . . . . . . . . . . . 238,373 $21,533 9.03%
===========
Other assets. . . . . . . . . . . . . . . . . . . 26,992
-----------
TOTAL ASSETS . . . . . . . . . . . . . . $265,365
===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Savings . . . . . . . . . . . . . . . . . . . $83,075 $2,286 2.75%
Other time. . . . . . . . . . . . . . . . . . 96,278 5,387 5.60%
----------------------
Total deposits . . . . . . . . . . . . . . . 179,353 7,673 4.28%
Securities sold under repurchase
agreements & federal funds purchased. . . . . . 12,620 644 5.10%
Borrowed money. . . . . . . . . . . . . . . . . . 0 0 0.00%
----------------------
Total interest bearing liabilities 191,973 $8,317 4.33%
===========
Demand deposits . . . . . . . . . . . . . . . . . 29,697
Other liabilities . . . . . . . . . . . . . . . . 5,318
Shareholders' equity . . . . . . . . . . . . . . . 38,377
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY . . . . . . . $265,365
===========
Interest income/earning assets . . . . . . . . . $238,373 $21,533 9.03%
Interest expense/earning assets. . . . . . . . . $238,373 8,317 3.49%
----------------------
Effective interest differential . . . . . . . . . $13,216 5.54%
======================
1. Fees on loans are included with interest on loans.
2. Average daily balance sheets are not maintained by the Bank.
Information on this table has been calculated using average
monthly balances to obtain average balances.
3. Average daily balances cannot be obtained without undue
burden or expense by the Bank.
4. Nonaccrual loans have been included with loans for the
purpose of analyzing net interest earnings.
5. Loan fees are included in interest income as follows: 1997,
$527,000, 1996, $673,000, 1995, $401,000.
6. Income and rates on a fully taxable equivalent basis include
an adjustment for the difference between annual income
from tax-exempt obligations and the taxable equivalent of such
income at the standard 34% tax rate (derived by dividing
tax-exempt interest by .66).
AVERAGE BALANCES AND INTEREST RATES
(INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS)
(IN THOUSANDS)
1996 1995
- -------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
$41,273 $2,911 7.05% $31,385 $1,978 6.30%
22,452 1,974 8.79% 17,767 1,699 9.56%
13,469 909 6.75% 11,656 1,032 8.85%
- ----------------------------------- ----------------------
77,194 5,794 7.51% 60,808 4,709 7.74%
- ----------------------------------- ----------------------
1,568 145 9.25% 1,818 190 10.45%
155,633 15,147 9.73% 151,895 14,823 9.76%
- ----------------------------------- ----------------------
157,201 15,292 9.73% 153,713 15,013 9.77%
- ----------------------------------- ----------------------
86 5 5.81% 2,613 144 5.51%
- ----------------------------------- ----------------------
234,481 $21,091 8.99% 217,134 $19,866 9.15%
============== ===========
17,052 15,478
- --------------------- -----------
$251,533 $232,612
===================== ===========
$84,722 $2,376 2.80% $84,513 $2,372 2.81%
89,994 5,054 5.62% 87,230 4,934 5.66%
- ----------------------------------- ----------------------
174,716 7,430 4.25% 171,743 7,306 4.25%
14,034 649 4.62% 5,772 291 5.04%
0 0 0.00% 2,917 196 6.72%
- ----------------------------------- ----------------------
188,750 $8,079 4.28% 180,432 $7,793 4.32%
============== ===========
27,306 24,164
4,507 2,228
30,970 25,788
- --------------------- -----------
$251,533 $232,612
===================== ===========
$234,481 $21,091 8.99% $217,134 $19,866 9.15%
$234,481 8,079 3.45% $217,134 7,793 3.59%
------------------------- ----------------------
$13,012 5.54% $12,073 5.56%
========================= ======================
SUMMARY OF CHANGES IN INTEREST EARNED AND INTEREST PAID
(IN THOUSANDS)
INTEREST EARNED ON
--------------------------------------------------------------------------------------------
TOTAL
TAXABLE TAX-EXEMPT FEDERAL INTEREST
INVESTMENT INVESTMENT FUNDS EARNING
SECURITIES SECURITIES LOANS SOLD ASSETS
1997 compared to 1996
Increase (decrease)
Due to:
Volume . . . . . . . . . . . . . ($283) ($164) $832 $57 $442
Rate. . . . . . . . . . . . . . (195) (15) 210 0 0
---------------------------------------------------------
Net increase (decrease) ($478) ($179) $1,042 $57 $442
=========================================================
1996 compared to 1995
Increase (decrease)
Due to:
Volume . . . . . . . . . . . . . . . . . $823 $420 $339 ($147) $1,435
Rate. . . . . . . . . . . . . . . . . . (13) (145) (60) 8 (210)
---------------------------------------------------------
Net increase (decrease) $810 $275 $279 ($139) $1,225
=========================================================
The change in net interest income (expense) due to volume and rate mix
has been allocated to the change due to volume and rate changes
in proportion to the relationship of the absolute dollar
amounts of the change in each.
SUMMARY OF CHANGES IN INTEREST EARNED AND INTEREST PAID
(IN THOUSANDS)
INTEREST PAID ON
- -------------------------------------------------------------------------------------------------------
SECURITIES
SOLD UNDER
REPURCHASE TOTAL
OTHER AGREEMENTS INTEREST NET
SAVINGS TIME AND FUNDS BORROWED BEARING INTEREST
DEPOSITS DEPOSITS PURCHASED MONEY LIABILITIES EARNINGS
- --------------------------------------------------------------------------------
($46) $352 ($68) $0 $238 $204
(44) (19) 63 0 0 $0
- --------------------------------------------------------------------------------
($90) $333 ($5) $0 $238 $204
================================================================================
- --------------------------------------------------------------------------------
$6 $155 $385 ($196) $350 $1,085
(2) (35) (27) 0 (64) ($146)
- --------------------------------------------------------------------------------
$4 $120 $358 ($196) $286 $939
================================================================================
PROVISION FOR LOAN LOSSES
1997 vs 1996
$220,000 was provided for loan losses in 1997, an increase of 110%
over the prior year. This adjustment is attributed to a projected
rise in consumer and small business loan losses and a decline in
recoveries. A detailed comprehensive internal quarterly review
of loan portfolio quality is used in determining the provision and is
supplemented by an annual external review. Management continues to
support a program of aggressive problem loan resolution.
1996 vs 1995
Approximately $105,000 was provided for 1996 loan losses, a 65% decline
from the prior year. The amount provided is determined by a detailed internal
quarterly review of loan portfolio quality supplemented by an annual detailed
external review. Management continues to support a program of aggressive
problem loan resolution.
[CAPTION]
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1997 1996 1995
Balance at beginning of period. . . . . . . . . . . . . . $2,413 $2,353 $2,127
Charge-offs:
Domestic:
Real estate . . . . . . . . . . . . . . . . . . . 0 4 0
Commercial and industrial. . . . . . . . . . . . 182 100 44
Consumer and all other loans. . . . . . . . . . . 145 138 210
Total charge-offs. . . . . . . . . . . . . . . 327 242 254
Recoveries:
Real estate . . . . . . . . . . . . . . . . . . . 2 0 0
Commercial and industrial. . . . . . . . . . . . 68 175 9
Consumer and all other loans. . . . . . . . . . . 38 22 171
Total charge-offs. . . . . . . . . . . . . . . 108 197 180
Net charge-offs . . . . . . . . . . . . . . . . . . . . 219 45 74
Additions charged to operations. . . . . . . . . . . . 220 105 300
Balance at end of period. . . . . . . . . . . . . . . . $2,414 $2,413 $2,353
Ratio of net charge-offs during the period to average
loans outstanding during the period. . . . . . . . 0.13% 0.03% 0.05%
OTHER INCOME
1997 vs 1996
Other income for the year ended December 31, 1997 increased $3,379,000
over 1996. Securities gains realized during 1997 contributed $3,311,000 to
the overall increase in other income. Gains were realized on sales of bank
stocks and various types of bond securities that were being held in the
portfolio.
The increase in service charges from $840,000 in 1996 to
$858,000 in 1997 was the result of the increase in charges collected on
deposit accounts due to growth in the deposit base.
Other operating income increased in 1997 over that reported in 1996, by
$50,000. There were two main factors that generated the increase in other
income. The first was sales of foreclosed assets throughout 1997. The income
reported on these sales exceeded the amount of income reported in 1996 for
such sales. Also, the Bank recorded the first full year of income on their
debit card, which was a new product offered to customers in late, 1996. The
income generated is based on customer usage of the debit card.
1996 vs 1995
Total other income increased to $2,461,000 in 1996 over 1995's total other
income of $2,215,000. This $246,000, or 11.1% increase resulted from the
net effect of an increase in service charges collected of $76,000, an increase
in securities gains realized of $165,000, and a slight increase in other
operating income of $5,000.
Security gains realized amounted to $1,345,000 during 1996. Security
transactions were in both debt and equity securities. The majority of the
gains taken were due to liquidation of equity securities which had reached, in
management's opinion, their peak performance. Management also initiated
various security transactions in order to maintain a quality portfolio and to
maintain interest rate risk.
OTHER EXPENSES
1997 vs 1996
There was a $417,000, or 6% increase in other expenses when comparing the
year ended December 31, 1997 with the year ended December 31, 1996.
The amount of salaries and employee benefits expensed during 1997
increased by $476,000 over the amount expensed during 1996 due a special
bonus that was was paid to all employees, wage increases and also an increase
in the number of full-time equivalent employees from 112 at December 31, 1996
to 118 at December 31, 1997.
Occupancy expense increased in 1997 by $16,000 compared to 1996. This
increase is associated with the Bank's Mortgage/Loan Center that was opened in
State College, Pennsylvania on July 7, 1997.
Total expense for furniture and equipment was $135,000 higher
in 1997 compared to 1996. The main factor contributing to the increase in
expense was the cost of an IBM lease agreement entered into for upgrading the
Bank's AS400 main frame. This upgrade decreased processing time considerably
and is expected to reduce operating exepenses in the long term. Other
factors include increases in repairs and maintenance and depreciation.
Other operating expenses declined by $210,000 when comparing 1997 to 1996.
Federal Depository Insurance, which is a component of other operating
expenses, declined by $255,000. The Bank's assessment rates decreased in
1997 as compared to 1996. The assessment rates are based on the Bank's
classification as "well capitalized" by the FDIC risk classifications. Also,
the one-time expense imposed by the FDIC to recapitalize the Savings
Association Insurance Fund was charged to operating expense in 1996.
In direct correlation to the decline in the balance of foreclosed assets
held for sale, expenses on these assets declined in 1997 compared to expenses
incurred in 1996.
All of the savings mentioned above, netted against net
increases in other expenses, mainly advertising, check imprinting,
Pennsylvania Shares Tax and stationery and supplies, account for the $210,000
decline in other operating expenses.
1996 vs 1995
There was a considerable decline in other expenses incurred
during 1996 compared to 1995. Total other expenses reported for
1996 were $6,967,000 compared to $7,534,000 for 1995, resulting in
a $567,000, or 7.5% decrease. The most significant reduction
occurred in salaries and benefits. In 1995, salaries and
employee benefits were charged to satisfy the terms of two Lock
Haven Savings Bank executives' employment agreements in
connection with the merger. This expense did not recur in 1996;
therefore, this reduction, netted with increases in salary
levels, accounts for the overall decrease in salaries and
employee benefits of $370,000.
Occupancy and furniture and expense fell by $44,000. This savings
was experienced due to the closing of two branch offices after the 1995
merger. During 1996 there was a special assessment on Savings
Association Insurance Fund ("SAIF") accessable deposits called for under
the recently enacted "Deposit Insurance Funds Act of 1996." This special
assessment coupled with a decline in the Bank Insurance Fund ("BIF")
assessment rate caused a $38,000 increase in Federal depository
insurance (FDIC) expense over 1995's FDIC insurance expense.
Other operating expenses, the final component of total other
expenses, declined by $191,000. Expenses that were directly
related to the merger in 1995 did not recur in 1996. In
addition, the Company has experienced operational efficiencies
also due to the 1995 merger with Lock Haven Savings Bank as well
as the addition of platform automation.
INCOME TAXES
1997 vs 1996
The provision for income taxes for the year ended December 31, 1997
resulted in an effective income tax rate of 27.8% compared to 26.9% for 1996.
The increase in the effective income tax rate was primarily due to an increase
in taxable income and secondarily due to a decline in tax-exempt interest.
1996 vs 1995
The income tax provision for 1996 totaled $1,965,000 or an effective
income tax rate of 26.9% compared to 26.9% in 1995. Although income before
the application of income taxes increased, tax-exempt and tax deductible
income increased as well, therefore, the effective income tax rate remained
the same for the two years indicated.
FINANCIAL CONDITION
INVESTMENTS
1997
The investment security portfolio decreased in 1997 by $5,743,000 due to
net increases in U.S. treasury securities and corporate stock of $18,073,000
and decreases in U.S. government agencies, state and political subdivisions
and other bonds, notes and debentures, of $23,816,000. The total investment
portfolio at year end 1997 was comprised of 48% US government and agency
securities, 20% state and municipal subdivisions, 30.5% equity securities,
and 1.5% other bonds, notes and debentures. Held-to-maturity securities had a
carrying value of $3,234,000. The largest portion of the portfolio is
classified as available-for-sale and had an amortized cost of $66,331,000
with an estimated market value of $75,400,000. Due to the unrealized gain on
available-for-sale securities of $9,069,000, shareholders' equity was
effected by $5,985,000, net of deferred taxes. At this time, management has
no intention to establish a trading securities classification. Management
also plans to continue to hold tax-free bonds, which maintain the overall
quality of the portfolio, and increase its after- tax yield.
1996
There was an overall increase in the investment security portfolio of
$16,238,000 during 1996 due primarily to increases in state and political
subdivisions, and secondarily to increases in U.S. government agencies. At
year end 1996, the investment portfolio was comprised of 47% US
government and agencies, 34% state and municipal subdivisions, 17% equity
securites, and 2% other bonds, notes and debentures. As of year end,
held-to-maturity securities had a carrying value of $3,105,000.
Available-for-sale securities had an amortized cost of $77,709,000 and a
carrying value of $81,272,000. Available-for-sale securies had an unrealized
gain of $3,563,000, which effected shareholder's equity by an increase of
$2,352,000 net of related federal income taxes. At this time, management has
no intention to establish a trading securites classification. Management also
plans to continue to hold tax-free bonds, which maintain the overall quality of
the portfolio, and increase its after-tax yield.
The carrying amounts of investment securities at the dates indicated are
summarized as follows ( in thousands):
DECEMBER 31,
1997 1996
US. Treasury securities. . . . . . . . .
Held-to-Maturity $0 $0
Available-for-Sale 12,767 3,987
US. government agencies. . . . . . . . .
Held-to-Maturity 513 609
Available-for-Sale 24,695 34,647
State and political subdivisions. . . . .
Held-to-Maturity 2,471 2,271
Available-for-Sale 13,165 26,282
Other bonds, notes and debentures . . . .
Held-to-Maturity 250 225
Available-for-Sale 797 1,673
Total bonds, notes and
debentures 54,658 69,694
Corporate stock -Available-for-Sale. . . . 23,976 14,683
Total . . . . . . . . . . . . $78,634 $84,377
The following table shows the maturities and repricing of
investment securities at December 31, 1997 and the weighted average yields
(for tax-exempt obligations on a fully taxable basis assuming a 34% tax rate)
of such securities (in thousands):
[CAPTION]
WITHIN AFTER ONE AFTER FIVE AFTER
ONE BUT WITHIN BUT WITHIN TEN
YEAR FIVE YEARS TEN YEARS YEARS
U.S. Treasury securities:
HTM Amount. . . . . . . . . . . $0 $0 $0 $0
Yield . . . . . . . . . . . . . 0.00% 0.00% 0.00% 0.00%
AFS Amount . . . . . . . . . . . 1,993 10,606 0 0
Yield . . . . . . . . . . . . . 7.12% 6.28% 0.00% 0.00%
U.S. government agencies:
HTM Amount. . . . . . . . . . . 0 0 0 513
Yield . . . . . . . . . . . . . 0.00% 0.00% 0.00% 8.83%
AFS Amount . . . . . . . . . . . 0 0 0 24,497
Yield . . . . . . . . . . . . . 0.00% 0.00% 0.00% 7.76%
State and political subdivisions:
HTM Amount. . . . . . . . . . . 0 993 855 623
Yield . . . . . . . . . . . . . 0.00% 4.16% 5.01% 5.36%
AFS Amount . . . . . . . . . . . 39 200 0 12,168
Yield . . . . . . . . . . . . . 9.10% 6.50% 0.00% 5.92%
Other bonds, notes and debentures:
HTM Amount. . . . . . . . . . . 0 100 150 0
Yield . . . . . . . . . . . . . 0.00% 7.28% 7.41% 0.00%
AFS Amount . . . . . . . . . . . 0 0 0 798
Yield . . . . . . . . . . . . . 0.00% 0.00% 0.00% 7.66%
Total Amount. . . . . . . . . . $2,032 $11,899 $1,005 $38,599
Total Yield . . . . . . . . 7.16% 6.11% 5.36% 6.95%
All yields represent weighted average yields expressed on a tax equivalent
basis. They are calculated on the basis of the cost, adjusted for
amortization of premium and accretion of discount and effective yields
weighted for the scheduled maturity of each security. The taxable equivalent
adjustment represents the difference between annual income from tax-exempt
obligations and the taxable equivalent of such income at the standard 34% tax
rate (derived by dividing tax-exempt interest by .66).
LOAN PORTFOLIO
1997
At year end gross loans totaled $187,975,000, an increase of
$25,332,000 or 15.58% over the prior year end. While commercial and
industrial loans grew by $21,949,000 or 27.75%, residential real estate
mortgages grew $1,576,000 or 2.77% and consumer loans grew $1,807,000 or
6.78%. Growth was propelled by increased loan demand and competitive
rates.
1996
At the close of the year, gross loans totaled $162,643,000, an increase
of $8,642,000 or 5.61% over the prior year end. While residential real
estate mortgages remained relatively flat year to year, increasing
$407,000, commerical and industrial loans grew $5,796,000 or 7.91% and
consumer loans grew $2,439,000 or 10.08%. Growth in the portfolio is
attributed to having competitive products and pricing and the markets
displeasure with the consolidations occurring within the industry.
The amount of loans outstanding at the indicated dates are shown in the
following table according to type of loan (in thousands):
December 31,
1997 1996
Domestic:
Real estate mortgage $58,492 $56,916
Commercial and industrial 101,042 79,093
Consumer and all other loans 28,441 26,634
Gross loans $187,975 $162,643
The amounts of domestic loans at December 31, 1997 are presented below by
category and maturity (in thousands):
[CAPTION]
CATEGORY (1) (2)
COMMERCIAL
AND
REAL ESTATE OTHER CONSUMER TOTAL
Loans with floating interest rates:
1 year or less . . . . . . . . . . . . . . . . $1 $8,821 $1,463 $10,285
1 through 5 years. . . . . . . . . . . . . . . 63 6,919 19 7,001
5 through 10 years. . . . . . . . . . . . . . 484 3,924 0 4,408
After 10 years. . . . . . . . . . . . . . . . 7,128 14,593 0 21,721
Sub Total. . . . . . . . . . . . . . . . . 7,676 34,257 1,482 43,415
Loans with predetermined interest rates:
1 year or less. . . . . . . . . . . . . . . . 208 4,526 935 5,669
1 through 5 years . . . . . . . . . . . . . . 2,294 17,244 16,504 36,042
5 through 10 years. . . . . . . . . . . . . . 8,292 12,002 9,467 29,761
After 10 years. . . . . . . . . . . . . . . . 40,022 33,013 53 73,088
Sub Total. . . . . . . . . . . . . . . . . 50,816 66,785 26,959 144,560
Total. . . . . . . . . . . . . . . . . $58,492 $101,042 $28,441 $187,975
(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. Also, adjustable rate mortgages are not
offered on residential properties. The Bank does not have any foreign loans
outstanding at December 31, 1997.
ALLOWANCE FOR LOAN LOSSES
1997
The allowance for loan losses at December 31, 1997 was
$2,414,000 or 1.3% of gross loans. This was an increase of $1,000 over
the prior year end.
Management determined loan loss allowance adequacy quarterly
through an analysis of the loan portfolio for credit quality. Included
in these analyses are determinations of current and projected economic
conditions, growth performance and other factors felt to impact overall
loan portfolio credit quality. Portfolio growth occurred principally in
loans to municipalities and in accounts secured by adequately margined
real estate collateral thus eliminating the need for growth in
the allowance.
In 1997 nonaccrual loans declined by $196,000 to $552,000. Of
these, 28% continue to make regularly scheduled contractual payments and
98% are supported by adequately margined real estate collateral. Given
the preceding factors, management does not anticipate a significant
impact on the Company's income or capital resulting from nonaccruing
loans.
1996
At the close of business December 31, 1996 the allowance for loan losses
totaled $2,413,021 or 1.5% of gross loans. This is an increase of $59,697
over the prior year.
Management carefully determines the adequacy of the loan loss allowance
through analyses for credit quality, an awareness of current and projected
economic conditions, growth levels and trends, and other factors impacting the
overall quality of the loan portfolio.
For 1996 nonaccrual loans declined by $261,000 to $748,000. Of these
loans, 48% continue to make regularly scheduled payments and 86% are
secured by adequately margined real estate collateral. Because of the recent
payments and collateral level, it is not anticipated that nonaccrual loans will
have a significant impact on the Company's income or capital.
The following table presents information concerning nonperforming loans.
The accrual of interest will be discontinued when the principal or interest
of a loan is in default for 90 days or more, or as soon as payment is
questionable, unless the loan is well secured and in the process of
collection. Consumer loans and residential real estate loans secured by 1 to
4 family dwellings shall ordinarily not be subject to those guidelines. The
reversal of previously accrued but uncollected interest applicable to any
loan placed in a nonaccrual status and the treatment of subsequent payments
of either principal or interest will be handled in accordance with generally
accepted accounting principles. Generally accepted accounting principles do
not require a write-off of previously accrued interest if principal and
interest are ultimately protected by sound collateral values. A
nonperforming loan may be restored to an accruing status when:
1. Principal and interest is no longer due and unpaid.
2. It becomes well secured and in the process of collection.
3. Prospects for future contractual payments are no longer in doubt.
TOTAL NONPERFORMING LOANS
(IN THOUSANDS)
90 DAYS
NONACCRUAL PAST DUE RENEGOTIATED
1997 $552 $409 $0
1996 $748 $256 $0
1995 $1,009 $791 $0
1994 $2,275 $677 $0
1993 $2,273 $382 $295
If interest had been recorded at the original rate on nonaccrual loans,
such income would have approximated $81,000, $86,000, and $101,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest
income on such loans, which is recorded when received, amounted to
approximately $42,000, $43,000, and $63,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The significant reduction in nonaccruing loans over the past five years
is attributed to a strengthening in underwriting standards and the successful
culmination of several commercial loan workouts.
At December 31, 1997 and 1996, the Company had loans amounting to
approximately $51,000 and $181,000, respectively, that were specifically
classified as impaired. Of these amounts $172,000 was included in non-
accrual loans in 1996. By definition, a loan is impaired when, based on
current information and events, it is probable that all amounts due will
not be collected according to the contractual terms of the loan agreement.
Due to the low level of loans classified as impaired, and the fact that
the majority of such impaired loans are adequately collateralized, impaired
loans should not have a material effect on the allowance for loan losses
or the earnings of the Company.
Presently there are no significant amounts of loans where serious doubts
exist as to the ability of the borrower to comply with the current loan payment
terms which are not included in the nonperforming categories as indicated
above.
Management's judgment in determining the amount of the additions to the
allowance charged to operating expense considers the following factors:
1. Economic conditions and the impact on the loan portfolio.
2. Analysis of past loan charge-offs experience by category and comparison to
outstanding loans.
3. Problem loans on overall portfolio quality.
4. Reports of examination of the loan portfolio by the Pennsylvania State
Banking Department and the Federal Deposit Insurance Corporation.
ALLOCATION IN THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
PERCENT OF
LOANS IN
EACH
CATEGORY TO
AMOUNT TOTAL LOANS
DECEMBER 31, 1997:
Balance at end of period applicable to:
Domestic:
Real Estate $72 3.0%
Commercial and industrial 2,173 90.0%
Consumer and all other loans 169 7.0%
Total $2,414 100.0%
DECEMBER 31, 1996:
Balance at end of period applicable to:
Domestic:
Real Estate $48 2.0%
Commercial and industrial 2,172 90.0%
Consumer and all other loans 193 8.0%
Total $2,413 100.0%
DECEMBER 31, 1995:
Balance at end of period applicable to:
Domestic:
Real Estate $24 1.0%
Commercial and industrial 2,235 95.0%
Consumer and all other loans 94 4.0%
Total $2,353 100.0%
DECEMBER 31, 1994:
Balance at end of period applicable to:
Domestic:
Real Estate $21 1.0%
Commercial and industrial 2,000 94.0%
Consumer and all other loans 106 5.0%
Total $2,127 100.0%
DECEMBER 31, 1993:
Balance at end of period applicable to:
Domestic:
Real Estate $19 1.0%
Commercial and industrial 1,839 94.0%
Consumer and all other loans 98 5.0%
Total $1,956 100.0%
DEPOSITS
1997
An increase in average deposits amounted to $7,028,000, or 3.5% when
comparing average balances for 1997 and 1996. The movements in savings
The movements in savings deposits occurred in interest-bearing checking and
savings accounts, with a slight decline in both categories, totaling
$1,647,000. Non-interest bearing demand accounts moved upward by $2,391,000.
Average other time deposits for 1997 increased by $6,284,000 over 1996.
The most significant movement contributing to the increase occurred in
certificate of deposit accounts. Movements in investment savings accounts
remained relatively constant and individual retirement accounts declined
slightly.
The decline in the interest-bearing checking and savings accounts suggest
depositors' desire to invest in higher yielding instruments.
During 1997, the Bank offered a special CD to make available an
opportunity to current and potential depositors to invest in a competitive,
high percentage yielding investment as well as to attract additional funds to
support increased loan demand.
There were approximately $19,524,000 in time deposits exceeding
$100,000. It should be noted that these large deposits are not relied
on by management as a major source of funding.
1996
There was an upward movement in average deposits in 1996 of
$6,115,000, or 3.1% over year-end 1995's average deposits. The increase in
average demand deposits contributed $2,639,000 to the overall increase.
Movements in savings deposits and other time deposits resulted in increases
of $712,000 and $2,764,000, respectively. The Bank's successful efforts to
offer competitive interest rates on their savings and other time deposit
accounts, as well as providing an attractive, low-fee checking account product
justifies the $6,115,000 upward movement in average deposits. Additionally,
the shifts in deposits may also be seen as indication that our depositors are
attempting to maintain liquidity in order to take advantage of high-yielding,
investing opportunities.
There were approximately $13,850,000 in time deposits exceeding
$100,000. It should be noted that these large deposits are not relied on
by management as a major source of funding.
Time deposits of $100,000 or more totaled approximately $19,524,000
on December 31, 1997 and $13,250,000 on December 31, 1996. Interest
expense related to such deposits was approximately $851,000, $750,000 and
$727,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Time deposits of $100,000 or more at December 31, 1997 mature as follows:
1998 - $13,092,000; 1999 - $5,847,000; 2000 - $212,000; 2001 - $120,000;
2002 - $0; Thereafter - $253,000.
The average amount and the average rate paid on deposits
are summarized below (in thousands):
1997 1996 1995
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
DEPOSITS IN DOMESTIC
BANK OFFICES:
Demand deposits:
Noninterest bearing. . . . $29,697 0.00% $27,306 0.00% $24,164 0.00%
Interest Bearing . . . . . 36,561 2.68% 37,146 2.63% 37,649 2.62%
Savings deposits . . . . . . . 46,514 3.07% 47,576 2.94% 46,864 2.96%
Time deposits. . . . . . . . . 96,278 5.60% 89,994 5.62% 87,230 5.66%
Total average deposits $209,050 $202,022 $195,907
SHAREHOLDERS' EQUITY
1997
Shareholders' equity is evaluated in relation to total assets and risk
associated with those assets. The greater the capital resources, the more
likely a company is to meet its cash obligations and absorb unforeseen losses.
Total shareholders' equity at December 31, 1997 increased by
$9,417,000, reaching $42,974,000, up from $33,557,000 at December 31, 1996.
Net income of $7,751,000 at year-end 1997 was added to equity, as was
$208,000 from stock options that were exercised throughout 1997. The
$3,633,000 increase in the unrealized appreciation on securities
available-for-sale was also a contributing factor to the increase in
shareholders' equity. Dividends paid from equity in 1997 totaled $2,175,000.
Stock dividend distributable was a $12,828,000 component of shareholders'
equity at December 31, 1997, resulting from a stock split effected
in the form of a 100% stock dividend that was declared by the Board of
Directors on November 25, 1997, to shareholders of record, December 15, 1997,
payable on January 15, 1998.
The declaration of the stock split was recorded in 1997 as a
reduction in retained earnings, and an increase in stock dividend
distributable for the par value of the shares to be issued. This
transaction had no effect on shareholders' equity.
1996
Shareholders' equity increased $3,872,000 or 13.04% to $33,557,000
as of December 31, 1996 from $29,685,000 at December 31, 1995. The
total change in equity can be accounted for by the contribution of net
income earned in 1996 of $5,342,000, an addition of $165,000 due to
stock options exercised, and a reduction of $1,529,000 for the total
dividends paid to shareholders during 1996. In addition, the net change in
the unrealized appreciation on securities available-for-sale from year-end
1995 to year-end 1996 reduced shareholders' equity by $106,000.
Bank regulators have recently issued risk based capital guidelines.
Under these guidelines, banks are required to maintain minimum ratios of core
capital and total qualifying capital as a percentage of risk weighted assets
and certain off-balance sheet items. At December 31, 1997, the Company's
required ratios were well above the minimum ratios as follows:
1997
Minimum
Company Standards
Tier 1 capital ratio 20.8% 4.00%
Total capital ratio 22.0% 8.00%
For a more comprehensive discussion of these requirements, see
"Regulations and Supervision" on Page 39 of Form 10K. Management
believes that the Company will continue to exceed regulatory capital
requirements.
RETURN ON EQUITY AND ASSETS:
The ratio of net income to average total assets and average shareholders'
equity and certain ratios are presented as follows:
1997 1996 1995
Percentage of net income to:
Average total assets. . . . . . . . . . 2.88% 2.12% 1.64%
Average shareholders' equity. . . . . 20.07% 17.25% 14.07%
Percentage of dividends declared per common share 28.05% 28.57% 32.79%
Percentage of average shareholders' equity to average 14.46% 12.31% 11.64%
total assets
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK
Fundamental objectives of the Company's asset/liability management
process are to maintain adequate liquidity while minimizing interest rate
risk. The maintenance of adequate liquidity provides the Company with the
ability to meet its financial obligations to depositors, loan customers and
stockholders. Additionally, it provides funds for normal operating
expenditures and business opportunities as they arise. The objective of
interest rate sensitivity management is to increase net interest income by
managing interest sensitive assets and liabilities in such a way that they
can be repriced in response to changes in market interest rates.
Liquidity is generated from transactions relating to both the Company's
assets and liabilities. Liquidity from assets is achieved primarily through
temporary investments in Federal funds sold and time deposits with financial
institutions. Cash receipts arising from normal customer loan payments
provide another important source of asset related liquidity. On the
liability side, deposit growth and temporary borrowings from the Federal
Home Loan Bank of Pittsburgh's Repo Plus product provide liquidity. The
liquidity provided by these sources is more than adequate to meet the
Company's needs.
Interest rate sensitivity, which is closely related to
liquidity management, is a function of the repricing characteristics of the
Company's portfolio of assets and liabilities. Asset/liability management
strives to match maturities and rates between loan and investment security
assets with the deposit liabilities and borrowings that fund them.
Successful asset/liability management results in a balance sheet structure
which can cope effectively with market rate fluctuations. The matching
process is affected by segmenting both assets and liabilities into future
time periods (usually 12 months, or less) based upon when repricing can be
effected. Repriceable assets are subtracted from repriceable liabilities,
for a specific time period to determine the "gap", or difference. Once
known, the gap is managed based on predictions about future market interest
rates. Intentional mismatching, or gapping, can enhance net interest income
if market rates move as predicted. However, if market rates behave in a
manner contrary to predictions, net interest income will suffer. Gaps,
therefore, contain an element of risk and must be prudently managed.
In addition to gap management, the Company has recently developed an asset
liability management policy which incorporates two new tools in managing
interest rate risk. A market value at risk calculation which is used to
determine the effects of interest rate movements on shareholders' equity is
now being utilized, as well as, simulation analysis to monitor the effects of
interest rate changes on the Company's balance sheets.
INTEREST RATE SENSITIVITY
The following table sets forth the Bank's interest rate
sensitivity as of December 31, 1997:
AFTER ONE AFTER TWO AFTER
WITHIN BUT WITHIN BUT WITHIN FIVE
ONE YEAR TWO YEARS FIVE YEARS YEARS
Earning assets (1) (2)
Investment securities (1) $10,191 $10,410 $28,409 $20,585
Loans (2) 71,441 23,563 74,528 18,035
Total earning assets 81,632 33,973 102,937 38,620
Interest-bearing liabilities:
Deposits (3) 80,943 27,086 63,537 13,159
Borrowings 15,335 225 0 0
Total interest-bearing liabilities 96,278 27,311 63,537 13,159
Net non-interest bearing
funding (4) 9,732 7,567 18,509 21,069
Total net funding sources 106,010 34,878 82,046 34,228
Excess assets (liabilities) (24,378) (905) 20,891 4,392
Cumulative excess (24,378) (25,283) (4,392) 0
asssets (liablilities)
(1) Investment balances reflect estimated prepayments
on mortgage-backed securities.
(2) Loan balances include annual repayment assumptions
based on projected cash flow from the loan portfolio.
The cash flow projections are based on the terms of
the credit facilities and estimated prepayments on
fixed rate mortgage loans. Loans include loans held
for resale.
(3) Adjustments to the interest sensitivity of Savings,
NOW and MMDA account balances reflect managerial
assumptions based on historical experience,
expected behavior in future rate environments and
the Bank's positioning for these products.
(4) Net non-interest bearing funds is the sum of non-interest
bearing liabilities and shareholders' equity minus
non-interest earning assets and reflect managerial
assumptions as to the appropriate investment
maturities for these sources.
In this analysis the Company examines the result of a 100 and 200
basis point change in market interest rates and the effect on net
interest income. It is assumed that the change is instantaneous
and that all rates move in a parallel manner. In addition, it is
assumed that rates on core deposit products such as NOWs, savings
accounts, and the MMDA accounts will be adjusted by 50% of the
assumed rate change. Assumptions are also made concerning prepayment
speeds on mrotgage loans and mortgage securities. The results
of this rate shock are a useful tool to assist the Company in assessing
interest rate risk inherent in its balance sheet. Below are the results
of this rate shock analysis as of December 31, 1997.
Net Interest
Income
Changes in Change
Rates (After tax)
-200 $306
-100 $161
+100 ($172)
+200 ($345)
The model utilized to create the report presented above makes
various estimates at each level of interest rate change regarding
cash flow from principal repayment on loans and mortgage-backed
securities and or call activity on investment securities. Actual
results could differ significantly from these estimates which
would result in significant differences in the calculated projected
change. In addition, the limits stated above do not necessarily
represent the level of change under which management would undertake
specific measure to realign its portfolio in order to reduce the
projected level of change.
Generally, management believes the Company is well positioned
to respond expeditiously when the market interest rate outlook changes.
INFLATION
The asset and liability structure of a financial institution is
primarily monetary in nature, therefore, interest rates rather than
inflation have a more significant impact on the Corporation's
performance. Interest rates are not always affected in the same
direction or magnitude as prices of other goods and services, but
are reflective of fiscal policy initiatives or economic factors which
are not measured by a price index.
NEW FINANCIAL ACCOUNTING STANDARD - REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Statements
No. 130 requires that all items that are required to be recognized
as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement does not require a specific format for
that financial statement , but requires that an enterprise display
an amount representing total comprehensive income for the period in
that financial statement. Statement No. 130 is effective for fiscal
years beginning after December 15, 1997. The impact of this
Statement on the Company will result in additional disclosures in
the Company's financial statements.
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. Penns Woods Bancorp, Inc. and
its subsidiaries (the "Company") wishes to caution readers that the
following important factors, among others, may have affected and
could in the future affect the Company's actual results and could
cause the Company's actual results for subsequent periods to differ
materially from those expressed in any forward-looking statement
made by or on behalf of the Company herein: (i) the effect of changes
in laws and regulations, including federal and state banking laws
and regulations, with which the Company must comply, and the
associated costs of compliance with such laws and regulations, either
currently or in the future as applicable; (ii) the effect of changes
in accounting policies and practices, as may be adopted by the
regulatory agencies as well as by Financial Accounting Standards
Board, or of changes in the Company's organization, compensation
and benefit plans; (iii) the effect on the Company's competitive
position within its market area of the increasing consolidation
within the banking and financial services industries, including the
increased competition from larger regional and out-of-state banking
organizations as well as nonbank providers of various financial
services; (iv) the effect of changes in interest rates; and (v) the
effect of changes in the business cycle and downturns in the local,
regional or national economies.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
To our
Shareholders
Dear Shareholder:
Penns Woods Bancorp, Inc. has always been committed to being a strong,
independent financial institution that serves the needs of customers,
enhances shareholder value and promotes community development. The
Corporation's financial results and operational achievements for 1997
and its long-term strategic plans reinforce this commitment.
Net earnings for the year-ended December 31, 1997 reached $7,751,000,
or $3.03 per share, up from $5,342,000, or $2.10 per share reported at
December 31, 1996 (adjusted to reflect the 100% stock dividend issued on
January 15, 1998). The ratio of net earnings to average assets and average
equity was 2.88% and 20.07%, respectively. In comparison, these ratios
reported for 1996 were 2.12% and 17.25%, respectively.
Turning attention to Penns Woods' December 31, 1997 balance sheet,
substantial growth occurred in loans and deposits. Compared to 1996, net loans
increased $25,299,000 to $185,153,000, or 15.8%. Total deposits grew from
$203,016,000 at December 31, 1996 to $220,536,000 at December 31, 1997,
resulting in a $17,520,000 or 8.6% increase.
Shareholders' equity remains strong, showing an increase of $9,417,000
from December 31, 1996 to December 31, 1997, including net unrealized
appreciation on available-for-sale securities. The increase excluding net
unrealized appreciation on available-for-sale securities was $5,784,000.
Once again, Penns Woods Bancorp, Inc. increased the yearly dividends
paid to shareholders. In 1997 a total of $.85 per share was paid compared to
$.60 per share paid in 1996. In addition, Penns Woods was pleased to issue a
100% stock dividend to shareholders on January 15, 1998. Book value per share
at year-end 1997 was $16.75 compared to a market value "high" during the
fourth quarter of $31.75. (The dividend and book value have been adjusted
to reflect the 100% stock dividend.)
Continued efforts were made throughout 1997 to provide quality,
convenient service to current and potential customers. In summary, the
opening of the Mortgage/Loan Center in State College, the up-coming opening
of a full-service branch office in Zion and one in the Mill Hall Wal-Mart
store and the establishment of the Bank's web site, www.jssb.com, were
announced. Also, in late 1997, a new telephone system was installed in
the Williamsport branch office. This system has added voice mail and
several direct lines, making it possible to leave messages after banking
hours.
We continually face the challenge of upgrading our technology to
keep pace with advancements that will meet the changing needs of our
customers and also be the most cost efficient for the Company. Currently,
plans for implementation of a check imaging system in 1998 are in progress.
This system will cut check processing time dramatically. Another area of
present concentration is compliance to the "Year 2000" issue. We are aware
of the public's concern with this matter. In 1997, an internal committee was
formed to address the issues involving our main frame computer, peripheral
equipment, and personal computers. Regulators also monitor the Bank's actions
taken to comply with required regulatory standards. We can assure you that
prudent measures have been and will continue to be made in order to have
all operational systems compliant.
We recognize and commend shareholders, customers, directors, and
staff, for their role in making Penns Woods Bancorp, Inc. a superb institution.
With this kind of dedication, strong capital and our distinct market
in Lycoming, Clinton, and Centre Counties, a solid foundation has been
set for future prosperity.
Very truly yours,
Theodore H. Reich
President
Report of Independent
Certified Public Accountants
To the Shareholders and Board of Directors
Penns Woods Bancorp, Inc. and Subsidiaries
Jersey Shore, Pennsylvania:
We have audited the accompanying consolidated balance sheets of
Penns Woods Bancorp, Inc. and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements
of income, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's managment. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Penns Woods Bancorp, Inc. and subsidiaries as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
As discussed in Note B to the consolidated financial statements, the
Company changed its method of computing earnings per share.
Williamsport, Pennsylvania
January 16, 1998
Consolidated
Balance Sheet
December 31, 1997 and 1996
(IN THOUSANDS)
1997 1996
ASSETS:
Cash and due from banks $12,557 $8,015
Federal funds sold 0 0
Securities available-for-sale 75,400 81,272
Securities held-to-maturity 3,234 3,105
Loans, net 185,153 159,854
Bank premises and equipment, net 3,835 3,835
Accrued interest receivable 1,708 1,676
Foreclosed assets held for sale 35 253
Other assets 2,066 1,714
TOTAL $283,988 $259,724
LIABILITIES:
Interest-bearing deposits $184,725 $174,060
Noninterest-bearing deposits 35,811 28,956
TOTAL DEPOSITS 220,536 203,016
Securities sold under repurchase agreements 8,580 5,628
Other borrowed funds 6,980 14,491
Accrued interest payable 907 884
Other liabilities 4,011 2,148
TOTAL LIABILITIES 241,014 226,167
SHAREHOLDERS' EQUITY:
Common stock, par value $10, 10,000,000 shares authorized 12,828 12,773
Stock dividend distributable 12,828 0
Additional paid-in capital 4,712 4,559
Retained earnings 6,621 13,873
Net unrealized appreciation on securities available-for-sa 5,985 2,352
TOTAL SHAREHOLDERS' EQUITY 42,974 33,557
TOTAL $283,988 $259,724
See Notes to Consolidated Financial Statements
Consolidated
Statement of Income
For the Years Ended December 31, 1997, 1996 and 1995
(IN THOUSANDS EXCEPT SHARE DATA)
1997 1996 1995
INTEREST INCOME:
Interest and fees on loans $16,234 $15,022 $14,706
Interest and dividends on investments:
Taxable interest 2,822 3,126 2,326
Tax-exempt interest 1,185 1,295 1,110
Dividends 520 529 409
Interest on federal funds sold 62 25 144
TOTAL INTEREST INCOME 20,823 19,997 18,695
INTEREST EXPENSE:
Interest on deposits 7,674 7,430 7,306
Interest on securities sold under repurchase a 432 310 222
Interest on other borrowings 211 339 265
TOTAL INTEREST EXPENSE 8,317 8,079 7,793
NET INTEREST INCOME 12,506 11,918 10,902
PROVISION FOR LOAN LOSSES 220 105 300
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 12,286 11,813 10,602
OTHER INCOME:
Service charges 858 840 764
Securities gains, net 4,656 1,345 1,180
Other operating income 326 276 271
TOTAL OTHER INCOME 5,840 2,461 2,215
OTHER EXPENSES:
Salaries and employee benefits 4,118 3,642 4,012
Occupancy expense, net 482 466 468
Furniture and equipment expense 688 553 595
Other operating expenses 2,096 2,306 2,459
TOTAL OTHER EXPENSES 7,384 6,967 7,534
INCOME BEFORE INCOME TAX PROVISION 10,742 7,307 5,283
INCOME TAX PROVISION 2,991 1,965 1,421
NET INCOME $7,751 $5,342 $3,862
EARNINGS PER SHARE - BASIC $3.03 $2.10 $1.52
EARNINGS PER SHARE - DILUTED $3.01 $2.09 $1.52
WEIGHTED AVERAGE SHARES OUTSTANDING 2,556,804 2,544,561 2,535,076
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE DATA)
UNREALIZED
APPRECIATION
STOCK ADDITIONAL (DEPRECIATIO TOTAL
...COMMON STOCK... DIVIDEND PAID-IN RETAINED SECURITIES SHAREHOLDERS'
SHARES AMOUNT DISTRIBUTAB CAPITAL EARNINGS AVAILABLE-FO EQUITY
Balance, December 31, 1994 843,731 8,438 - 4,368 11,660 (626) 23,840
Net income 3,862 3,862
Dividends declared, $0.49 per share (1,239) (1,239)
Stock split effected in the 422,286 4,223 (4,223) -
form of a 50% stock dividend
Net change in unrealized 3,084 3,084
appreciation (depreciation)
Stock options exercised 5,342 53 85 138
Balance, December 31, 1995 1,271,339 12,714 - 4,453 10,060 2,458 29,685
Net income 5,342 5,342
Dividends Declared, $0.60 per share (1,529) (1,529)
Net change in unrealized (106) (106)
appreciation (depreciation)
Stock options exercised 5,959 59 106 165
Balance, December 31, 1996 1,277,298 $12,773 - $4,559 $13,873 $2,352 $33,557
Net income 7,751 7,751
Dividends Declared, $0.85 per share (2,175) (2,175)
Stock split effected in the form 12,828 (12,828) -
of a 100% stock dividend
Net change in unrealized
appreciation (depreciation) 3,633 3,633
Stock options exercised 5,481 55 153 208
Balance, December 31, 1997 1,282,779 $12,828 $12,828 $4,712 $6,621 $5,985 $42,974
See Notes to Consolidated Financial Statements
Consolidated Statement
of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
(IN THOUSANDS)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,751 $5,342 $3,862
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 379 365 343
Provision for loan losses 220 105 300
Amortization of investment security premiums 37 20 38
Accretion of investment security discounts (117) (70) (105)
Securities gains, net (4,656) (1,345) (1,180)
Gain on sale of foreclosed assets (67) (40) (27)
Stock option compensation expense 7 16 5
Decrease(increase) in all other assets 438 (1,130) (855)
(Decrease)increase in all other liabilities (805) 113 1,245
Net cash provided by operating activities 3,187 3,376 3,626
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale (58,348) (47,761) (52,595)
Proceeds from sale of securities available-for-sale 74,437 33,038 52,586
Proceeds from the sale of foreclosed assets 426 1,083 668
Purchase of securities held-to-maturity (200) (1,296) (515)
Proceeds from calls and maturities of securities held to-maturity 96 1,015 5,130
Net increase in loans (25,660) (9,025) (3,392)
Acquisition of bank premises and equipment (379) (391) (83)
Net cash (used in) provided by investing acti (9,628) (23,337) 1,799
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in interest-bearing deposits 10,665 (1,019) 7,053
Net increase in noninterest-bearing deposits 6,855 1,777 4,366
Net (decrease) increase in securities sold under repurchase agreement 2,952 (716) 1,327
(Decrease)increase in other borrowed funds (7,511) 14,491 (7,170)
Repayment of long-term borrowings - - (7,000)
Dividends paid (2,175) (1,529) (1,239)
Stock options exercised 197 118 66
Net cash provided by (used in) financing activ 10,983 13,122 (2,597)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,542 (6,839) 2,828
CASH AND CASH EQUIVALENTS, BEGINNING 8,015 14,854 12,026
CASH AND CASH EQUIVALENTS, ENDING
$12,557 $8,015 $14,854
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company paid approximately $8,294,000, $8,114,000 and $7,485,000 in
interest on deposits and other borrowings during 1997, 1996 and 1995,
respectively.
The Company made income tax payments of approximately $3,096,000,
$1,998,000 and $1,350,000 during 1997, 1996 and 1995, respectively.
Transfers from loans to foreclosed assets held for sale
amounted to approximately $142,000, $352,000 and $1,372,000 in 1997,
1996 and 1995, respectively.
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS 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 ("Bank"), Woods Real
Estate Development Co., Inc. and Woods Investment Company, Inc.
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated.
Nature of Business: The Bank engages in a full service commercial banking
business, making available to the community a wide range of financial
services, including, but not limited to, installment loans, credit cards,
mortgage and home equity loans, lines of credit, construction financing, farm
loans, community development loans, loans to non- profit entities and local
government loans and various types of time and demand deposits, including,
but not limited to, checking accounts, savings accounts, clubs, money market
deposit accounts, certificates of deposit and IRAs. Deposits are insured by
the Federal Deposit Insurance Corporation (FDIC) to the extent provided by
law.
The financial services are provided to individuals, partnerships, non-profit
organizations and corporations through its seven offices and Mortgage/Loan
Center located in Clinton, Lycoming and Centre Counties, Pennsylvania.
Woods Real Estate Development Company engages in real estate transactions on
behalf of the Penns Woods Bancorp, Inc. and the Bank.
Woods Investment Company, Inc. is engaged in investing activities.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results may differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses and the
valuation of real estate acquired through, or in lieu of, foreclosure on
settlement of debt.
While it is reasonably possible that the estimate of the effect on the
financial statements of a condition, situation, or set of circumstances that
existed at the date of the financial statements will change in near term due
to one or more future confirming events, based on current information known
to management, management is not aware of a condition, situation, or set of
circumstances whereby the offset of the change would be material to the
financial statements.
Investment Securities: Investment securities are classified as
held-to-maturity, available-for-sale or trading.
Securities held-to-maturity include bonds, notes, and debentures for
which the Company has the positive intent and ability to hold to maturity and
are reported at amortized cost.
Trading account securities are recorded at their fair values. Unrealized
gains and losses on trading account securities are included in other income.
The Company has no trading account securities as of December 31, 1997 or 1996.
Available-for-sale securities consist of bonds, notes, debentures,
and certain equity securities not classified as trading securities nor as
held-to-maturity securities. Unrealized holding gains and losses, net of tax,
on available-for-sale securities are reported as a net amount in a separate
component of shareholders' equity until realized.
Gains and losses on the sale of all securities are determined using the
specific-identification method.
Declines in the fair value of individual securities held-to-maturity and
available-for- sale below their cost that are other than temporary result in
write downs of the individual securities to their fair value and are included
in earnings as realized losses.
Premiums and discounts on all securities are recognized in interest income
using the interest method over the period to maturity.
The fair value of investments and mortgage-backed securities, except
certain state and municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities is not
readily available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued.
Loans: Loans are stated at the principal amount outstanding, net of
unearned interest, unamortized loan fees and costs, and the allowance for
loan losses. Loans are placed on a nonaccrual basis when there are serious
doubts about the collectibility of principal or interest.
The Company recognizes nonrefundable loan origination fees and certain
direct loan origination costs over the life of the related loans as an
adjustment of loan yield using the interest method. For loans made before
1988, the Company has recognized such fees and costs in the year received
or incurred.
Allowance for Loan Losses: The provision for loan losses charged to
operations reflects the amount deemed appropriate by management to establish
an adequate allowance to meet the present and foreseeable risks of the loan
portfolio. Management's judgment is based upon evaluation of individual
loans, overall risk of the various portfolio segments, past experience with
losses, the impact of economic conditions on borrowers and other relevant
factors.
It is the opinion of management that the allowance for loan losses is
adequate to absorb foreseeable loan losses. Loan losses are charged directly
against the allowance and recoveries on previously charged-off loans are
added to the allowance.
Foreclosed Assets Held For Sale: Foreclosed assets held for sale are carried
at the lower of fair value minus estimated costs to sell or cost. Prior to
foreclosure, the value of the underlying loan is written down to the fair
value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged against
operating expenses. Operating expenses of such properties, net of related
income, and gains and losses on their disposition are included in other
expenses.
Bank Premises and Equipment: Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
related assets. Costs incurred for routine maintenance and repairs are
expensed currently.
Defined Benefit Pension Plan: It is the Company's policy to fund pension
cost on a current basis to the extent deductible under existing tax
regulations. Such contributions are intended to provide not only for
benefits attributed to service to date, but also for those expected to be
earned in the future.
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.
Cash Flows: The Company utilizes the net reporting of cash receipts and cash
payments for deposit and lending activities.
The Company considers amounts due from banks and federal funds sold as
cash equivalents.
Reporting Format: Certain 1996 and 1995 financial information has been
reclassified to conform to the 1997 financial statement presentation.
Earnings per share data for all periods presented have been restated
to reflect a stock split effected in the form of a 100% stock dividend
declared in the fourth quarter of 1997, payable January 15, 1998.
NOTE B - PER SHARE DATA
Earnings per share is based on the weighted-average number of shares of
common stock outstanding. Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", requires presentation of two new
amounts, basic and diluted earnings per share. The adoption of SFAS No. 128
is required for all reporting periods after December 15, 1997, and requires
the restatement of earnings per share for all prior periods.
The number of shares used in calculating earnings and cash dividends per
share reflect the retroactive effect of stock dividends declared. The
following data show the amounts used in computing earnings per share:
Common
Income Shares Earnings
Numerator Denominator Per Share
1997
Earnings per share - basic $7,751,000 2,556,804 $3.03
Stock options 22,499
Earnings per share - diluted $7,751,000 $2,579,303 $3.01
1996
Earnings per share - basic $5,342,000 2,544,561 $2.10
Stock options 14,941
Earnings per share - diluted $5,342,000 $2,559,502 $2.09
1995
Earnings per share - basic $3,862,000 2,535,076 $1.52
Stock options 10,781
Earnings per share - diluted $3,862,000 $2,545,857 $1.52
Earnings per share, as determined under accounting principles in
effect prior to SFAS No. 128, would be the same as the basic
earnings per share amounts reported by the Company for 1997,
1996 and 1995.
NOTE C - CASH AND DUE FROM BANKS
Banks are required to maintain reserves consisting of vault cash and
deposit balances with the Federal Reserve Bank in their district. The
reserves are based on deposit levels during the year and account
activity and other services provided by the Federal Reserve Bank.
Average daily currency, coin and cash balances with the Federal Reserve
Bank needed to cover reserves against deposits for 1997 ranged from
$1,274,000 to $2,110,000. For 1996, these balances ranged from $948,000
to $1,365,000. Average daily cash balances with the Federal Reserve Bank
required to cover services provided to the Bank amounted to $800,000
throughout 1997 and 1996. Total balances restricted at December 31, 1997
and 1996, respectively, were $2,821,000 and $2,082,000.
NOTE D - INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values
at December 31, 1997 and 1996 were as follows (in thousands):
DECEMBER 31, 1997
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gains Losses Value
Securities available-for-sale:
Equity securities $14,774 $7,897 $1 $22,670
U.S. government and agency
securities 37,096 366 0 37,462
State and municipal securities 12,407 759 1 13,165
Restricted equity securities 1,256 50 0 1,306
Other debt securities 798 0 1 797
$66,331 $9,072 $3 $75,400
Securities held-to-maturity:
U.S. government and agency
securities $513 $23 $0 536
State and municipal securities 2,471 44 0 2,515
Other debt securities 250 1 0 251
$3,234 $68 $0 $3,302
DECEMBER 31, 1996
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gains Losses Value
Securities available-for-sale:
Equity securities $9,801 $3,494 $5 $13,290
U.S. government and agency
securities 39,058 119 543 38,634
State and municipal securities 25,769 560 47 26,282
Restricted equity securities 1,393 1,393
Other debt securities 1,688 15 1,673
$77,709 $4,173 $610 $81,272
Securities held-to-maturity:
U.S. government and agency
securities $609 $27 $636
State and municipal securities 2,271 12 17 2,266
Other debt securities 225 225
$3,105 $39 $17 $3,127
The amortized cost and fair value of debt securities at December 31, 1997, by
contractual maturity, are shown below (in thousands). Expected maturities
will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Securities Securities
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $0 $0 $2,032 $2,038
Due from one year to five years 1,093 1,103 10,806 10,984
Due from five to ten years 1,005 1,027 0 0
Due after ten years 1,136 1,172 37,463 38,402
$3,234 $3,302 $50,301 $51,424
Gross realized gains and gross realized losses on sales of available-for-sale
securities were (in thousands):
1997 1996 1995
Gross realized gains:
U.S. government and agency
securities $68 $13 $88
State and municipal securities 286 466 511
Equity securities 4,923 1,362 1,124
Other debt securities 0 13
$5,277 $1,854 $1,723
Gross realized losses:
U.S. government and agency
securities $579 $445 $408
State and municipal securities 19 27 127
Equity securities 1 18 4
Other debt securities 22 19 4
$621 $509 $543
During 1996, the Company sold a debt security with a carrying value of
$465,000 which had been classified as held to maturity. Subsequent to the
purchase of this security, the Company received information indicating that
this was not a bank qualified investment. This transaction resulted in a
realized gain of $8,0000 for the year 1996. There were no sales of
securities classified as held to maturity in 1997 or 1995.
Investment securities with a carrying value of approximately $18,971,000 and
$11,506,000 at December 31, 1997 and 1996, 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 10% of shareholders'
equity for any individual issuer, excluding those guaranteed by the U.S.
government.
NOTE E - LOANS
Major loan classifications are summarized as follows (in thousands):
DECEMBER 31, 1997
PAST DUE PAST DUE
30 TO 90 90 DAYS NON-
CURRENT DAYS OR MORE ACCRUAL TOTAL
Real estate loans - mortgage $53,492 $1,765 $88 $136 $55,481
Real estate loans - construction 3,011 $3,011
Commercial and industrial loans 99,362 988 283 409 $101,042
Consumer and all other loans 27,871 525 38 7 $28,441
Gross loans $183,736 $3,278 $409 $552 187,975
Less: Unearned income 4
Unamortized loan 404
fees/costs
Allowance for loan losses 2,414
Loans, net $185,153
DECEMBER 31, 1996
PAST DUE PAST DUE
30 TO 90 90 DAYS NON-
CURRENT DAYS OR MORE ACCRUAL TOTAL
Real estate loans - mortgage $53,005 $1,907 $146 $346 $55,404
Real estate loans - construction 1,512 1,512
Commercial and industrial loans 77,298 1,377 70 348 79,093
Consumer and all other loans 25,762 778 40 54 26,634
Gross loans $157,577 $4,062 $256 $748 162,643
Less: Unearned income 6
Unamortized loan 370
fees/costs
Allowance for loan losses 2,413
Loans, net $159,854
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $552,000 and $748,000 at December 31, 1997 and
1996, respectively. If interest had been recorded at the original rate on
those loans, such income would have approximated $81,000, $86,000, and
$101,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Interest income on such loans, which is recorded as received, amounted to
approximately $42,000, $43,000 and $63,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Transactions in the allowance for loan losses are summarized as follows (in
thousands):
YEAR ENDED DECEMBER 31,
1997 1996 1995
Balance, beginning of year $2,413 $2,353 $2,127
Provision charged to operations 220 105 300
Loans charged off (327) (242) (254)
Recoveries 108 197 180
Balance, end of year $2,414 $2,413 $2,353
At December 31, 1997 and 1996, the Company had loans amounting to
approximately $51,000 and $181,000 respectively, that were specifically
classified as impaired.Of these amounts, $172,000, was included in nonaccrual
loans n 1996. By definition, a loan is impaired when, based on current
information and events, it is probable that all amounts due will not be
collected according to the contractual terms of the loan agreement. (This
classification excludes large groups of smaller balance loans that are
collectively evaluated for impairment, such as residential mortgage, credit
card and consumer installment loans.) In 1997 and 1996, the average balance
of these loans amounted to approximately $52,000 and $184,000, respectively
for the year. There was no specific allowance for the loan losses related to
impaired loans at December 31, 1997 and 1996. Due to the low level of loans
classified as impaired, and the fact that the majority of such impaired loans
are adequately collateralized, impaired loans should not have a material
effect on the allowance for loan losses or the earnings of the Company. The
following is a summary of cash receipts on these loans and how they were
applied (in thousands):
1997 1996 1995
Cash receipts applied to reduce principal balance $1 $6 $1
Cash receipts recognized as interest income 2 5 3
Total $3 $11 $4
The Company has no commitments to loan additional funds to borrowers with
impaired or nonaccrual loans.
The Company has no concentration of loans to borrowers engaged in similar
businesses or activities which exceed 5% of total assets at December 31, 1997
or 1996.
The Company grants commercial, industrial, residential and consumer loans to
customers throughout Northcentral Pennsylvania. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on the economic conditions within this
region.
NOTE F - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows (in thousands):
DECEMBER 31,
1997 1996
Land 511 $440
Bank premises 3,670 3,642
Furniture and equipment 3,583 3,357
Leasehold improvements 551 497
Total 8,315 7,936
Less accumulated depreciation 4,480 4,101
Net $3,835 $3,835
NOTE G - DEPOSITS
Time deposits of $100,000 or more totaled approximately $19,524,000 on
December 31, 1997 and $13,250,000 on December 31, 1996. Interest expense
related to such deposits was approximately $851,000, $750,000 and $727,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Time
deposits of $100,000 or more at December 31, 1997 mature as follows:
1998 - $13,092,000; 1999 - $5,847,000; 2000 - $212,000; 2001 - $120,000;
2002 - $0; Thereafter - $253,000.
NOTE H - OTHER BORROWED FUNDS
At December 31, 1997, the Company had $6,980,000 of such borrowings in the form
of advances received from the Federal Home Loan Bank of Pittsburgh under
the "Repo Plus" credit program. There were $14,491,000 of such borrowings at
December 31, 1996. The weighted average interest rate for the years ended
December 31, 1997, 1996 and 1995 was 5.63%, 5.44% and 6.18%, respectively.
The maximum amount of other borrowed funds outstanding at any time was
$14,491,000, $16,737,000 and $8,186,000, respectively, for those same periods.
NOTE I - INCOME TAXES
The following temporary differences gave rise to the net
December 31, 1997 and 1996 (in thousands):
1997 1996
Deferred tax asset:
Allowance for loan losses $506 $494
Deferred compensation 198 168
Contingencies 75 79
Pension 107 101
Loan fees and costs 137 126
Stock option 25 12
Total 1048 980
Deferred tax liability:
Bond accretion (39) (75)
Depreciation (117) (117)
Unrealized gains on available-for-sale securities (3,083) (1,211)
Total (3,239) (1,403)
Deferred tax liability, net ($2,191) ($423)
The provision for income taxes is comprised of the following (in thousands):
YEAR ENDED DECEMBER 31,
1997 1996 1995
Currently payable 3095 $2,110 $1,600
Deferred benefit (104) (145) (179)
Total provision $2,991 $1,965 $1,421
The effective federal income tax rate for the years ended December 31, 1997,
1996 and 1995 was 27.8%, 26.9% and 26.9%, respectively. A reconciliation
between the expected income tax and rate and the effective income tax and
rate on income before income tax provision follows (in thousands):
[CAPTION]
1997 1997 1995
AMOUNT % AMOUNT % AMOUNT %
Provision at expected rate $3,759 35.0% $2,484 34.0% $1,796 34.0%
Increase (decrease) in
tax resulting from:
Tax-exempt income (570) (5) (578) -7.9% (452) (8.6)
Other, net (198) (2) 59 0.8% 77 2
Effective
Income tax
and rates $2,991 27.8% $1,965 26.9% $1,421 26.9%
NOTE J - EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan (the "Plan")
for all employees meeting certain age and length of service requirements.
Benefits are based primarily on years of service and the average annual
compensation during the highest five consecutive years within the final ten
years of employment. The Company's funding policy is consistent with the
funding requirements of federal law and regulations. Plan assets are
comprised of common stock, U.S. government and corporate debt securities.
Net periodic pension cost includes the following components (in thousands):
YEAR ENDED DECEMBER 31,
1997 1996 1995
Service costs benefits earned during the period $191 $218 $180
Interest cost on projected benefit obligation 185 189 158
Return on assets (171) (154) (119)
Amortization of transition gain (3) 2 (1)
Prior service costs 20 19 24
Net periodic pension cost $222 $274 $242
The funded status of the Plan and amount recognized in the Company's balance
sheet is summarized below (in thousands):
1997 1996
Actuarial present value of:
Vested benefit obligation $1,955 $1,742
Nonvested benefit obligation $14 $12
Projected benefit obligation $3,026 $3,032
Plan assets at fair value 2,820 2,137
Excess of projected benefit obligation over assets (206) (895)
Unrecognized prior-service cost 287 307
Unrecognized transition gain being recognized over
employees' average remaining service life (37) (40)
Deferred unexpected(gain)loss (359) 329
Accrued pension cost ($315) ($299)
The projected benefit obligation at December 31, 1997 and 1996 was determined
using an assumed discount rate of 7%, and an assumed long-term rate of
compensation increase of 6%. An assumed long-term rate of return on Plan
assets of 8% was used in both 1997 and 1996.
The Company 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 $52,000, $45,000 and $40,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
The Company has a deferred compensation plan whereby participating directors
elected to forego director's fees for a period of five years. Under this
plan the Company will make payments for a ten year period beginning at age
65, in most cases or at death if earlier, at which time payments would be
made to their designated beneficiaries.
To fund benefits under the deferred compensation plan, the Company has
acquired corporate owned life insurance policies on the lives of the
participating directors for which insurance benefits are payable to the
Company. The total expense charged to other expenses was approximately
$114,000, $114,000 and $72,000 for the years ended December 31, 1997, 1996
and 1995, respectively. Benefits paid under the Plan were approximately
$45,000, $39,000 and $34,000, respectively, for the years ended December 31,
1997, 1996 and 1995.
NOTE K - STOCK OPTIONS
The Company has granted a select group of its officers options to purchase
shares of its common stock. These options, which are immediately
exercisable, expire within three to ten years after having been granted. The
Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for these options. Accordingly, compensation
expense is recognized on the grant date, in amounts equivalent to the
intrinsic value of the options (stock price less exercise price, at
measurement date). Had compensation costs for these options been determined
based on the fair values at the grant dates for awards consistent with the
method of SFAS No. 123, the effect on the Company's net income and earnings
per share for 1997 and 1996 would have been insignificant. For purposes of
the calculations required by SFAS No. 123, the fair value of each option
grant is estimated on the date of the grant using the Black-Scholes option-
pricing model with the following weighted average assumptions for grants
issued in 1997, 1996 and 1995, respectively: dividend yield of 3.45%, 3.05%
and 3.05%, respectively;risk free interest rates of 5.69%, 5.81% and 5.20%,
respectively; expected option lives of three years and expected volatility of
17.50%, 17.58% and 19.86%, respectively.
A summary of the status of the Company's stock option agreements as of
December 31, 1997 and 1996, and changes during the years then ended, is
presented below:
[CAPTION]
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Nonqualified Stock Options Excercise Excercise Excercise
Shares Price Shares Price Shares Price
Outstanding, beginning of year 12,373 $28.55 13,232 $22.16 12,593 $14.45
Granted 7,950 57.15 5,100 35.00 5,100 35.00
Exercised 5,481 35.95 5,959 19.89 4,461 15.07
Forfeited - - - - - -
Outstanding, end of year 14,842 $41.14 12,373 $28.55 13,232 $22.16
Options exercisable at year-end 14,842 12,373 13,232
Fair value of options granted during
the year $13.73 $9.20 $6.08
The following table summarizes information about nonqualified stock options
outstanding at December 31, 1997:
Exercise Number Remaining Number
Prices Outstanding Contractual Life Exercisable
$35.00 500 1 500
35.00 4,825 2 4,825
6.67 2,372 3 2,372
57.15 7,145 5 7,145
14,842 14,842
The data above have not been adjusted for the stock split effected in the form
of a 100% stock dividend declared in the fourth quarter of 1997, payable
January 15, 1998.
NOTE L - 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 10%), 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
stockholders and associates of such persons is listed below (in thousands):
BEGINNING CHARGE- ENDING
YEAR BALANCE ADDITIONS PAYMENTS OFFS BALANCE
1997 $2,014 $900 $818 0 $2,096
1996 $1,781 $1,009 $776 $ - $2,014
1995 $1,272 $652 $143 $ - $1,781
NOTE M- COMMITMENTS AND CONTINGENT LIABILITIES
The following is a schedule of future minimum rental payments under operating
leases with noncancellable terms in excess of one year as of December 31,
1997 (in thousands):
YEAR ENDING DECEMBER 31,
1998 $261
1999 101
2000 88
2001 83
2002 60
Thereafter 25
Total $618
Total rental expense for all operating leases for years ended December 31,
1997, 1996 and 1995 approximated $263,000, $172,000 and $164,000,
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 N - 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 (in thousands)
CONTRACT AMOUNT
DECEMBER 31,
1997 1996
Commitments to extendto extend credit $27,942 $16,010
Standby letters of credit $1,608 $2,026
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity
requirements. The Company evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company, on extension of credit is based on management's
credit assessment of the counterparty.
Standby letters of credit are conditional commitments issued by the Company
guaranteeing performance by a customer to a third party. Those guarantees
are issued primarily to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
NOTE O - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures
of the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
To be categorized as adequately capitalized a bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth
in the table.
The Bank's actual capital amounts and ratios are also presented in the
following table (in thousands):
For CapitalTo Be Well
Adequacy Capitalized Under
Actual Purposes Prompt Corrective
Action Provisions
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $39,218 22.0%>$14,251 >8.0% >$17,814 >10.0%
Tier I Capital
(to Risk Weighted Assets) $36,989 20.8%>$ 7,125 >4.0% >$10,688 > 6.0%
Tier I Capital
(to Average Assets) $36,989 13.8%>$10,762 >4.0% >$13,452 > 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $33,208 21.0%>$12,783 >8.0% >$15,979 >10.0%
Tier I Capital
(to Risk Weighted Assets) $31,205 19.7%>$ 6,392 >4.0% >$9,587 > 6.0%
Tier I Capital
(to Average Assets) $31,205 12.3%>$10,135 >4.0% >$12,669 > 5.0%
Banking regulations limit the amount of dividends that may be paid by the Bank
to Penns Woods Bancorp, Inc. Retained earnings against which dividends
may be paid without prior approval of the banking regulators amounted to
approximately $22,2798,000 at December 31, 1997, subject to minimum capital
ratio requirements noted above.
The Bank is subject to regulatory restrictions which limit its ability to
loan funds to Penns Woods Bancorp, Inc. At December 31, 1997, the regulatory
lending limit amounted to approximately $2,876,000.
NOTE P - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire holdings
of a particular financial instrument. Also, it is the Company's general
practice and intention to hold most of its financial instruments to maturity
and not to engage in trading or sales activities. Because no market exists
for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions can significantly
affect the estimates.
Estimated fair values have been determined by the Company using historical data
and an estimation methodology suitable for each category of financial
instruments. The estimated fair value of the Company's investment securities
is described in Note A. The Company's fair value estimates, methods and
assumptions are set forth below for the Company's other financial intruments.
Cash and cash equivalents:
The carrying amounts for cash, due from banks and federal funds sold
approximate fair value.
Loans:
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, credit card and other consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms
and by performing and nonperforming categories.
The fair value of performing loans, except residential mortgage and credit
card loans, is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of maturity
is based on the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. For performing residential mortgage
loans, fair value is estimated by discounting contractual cash flows adjusted
for prepayment estimates using discounted rates based on secondary market
sources adjusted to reflect differences in servicing and credit costs. For
credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted using
secondary market rates adjusted for differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discounted rates are judgmentally determined using available market
information and specific borrower information.
The following table presents information for loans (in thousands):
[CAPTION]
AVERAGE AVERAGE ESTIMATED
BOOK HISTORICAL MATURITY DISCOUNT FAIR
VALUE YIELDS (YRS) (1) RATE(2) VALUES
DECEMBER 31, 1997 $101,042 89.30% 3.60 9.38% $100,642
Commercial 58,492 94.70% 4.77 8.63% 58,947
Real Es 28,441 97.50% 5.80 9.00% 28,637
Other
DECEMBER 31, 19 $79,093 9.00% 3.53 9.44% $78,775
Commerc 56,916 9.71% 5.21 8.75% 57,416
Real Estate 25,634 9.42% 5.84 8.75% 26,798
Other
(1) Average maturity represents the expected average cash-flow period, which
in some instances is different than the stated maturity.
(2) Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for many of
these financial instruments, management has no basis to determine whether the
fair value presented above would be indicative of the value negotiated in an
actual sale.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest bearing
demand deposits, savings and NOW accounts, and money market and
checking accounts, is equal to the amount payable on demand as of
December 31, 1997 and 1996 The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities (in thousands):
BOOK VALUE FAIR VALUE
DECEMBER 31, 1997 $184,725 $184,942
Interest-bearing deposits $35,811 $35,811
Noninterest-bearing deposits
DECEMBER 31, 1996 $174,060 $174,400
Interest-bearing deposits $28,956 $28,956
Noninterest-bearing deposits
The fair value estimates above do not include the benefit that
results from the low- cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market, commonly
referred to as the core deposit intangible.
Securities sold under repurchase agreements and short-term borrowings:
The carrying amounts for securities sold under repurchase agreements
and short-term borrowings approximate fair value.
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 which total approximately $18,036,000
and $19,613,000 at December 31, 1997 and 1996, respectively, and are
primarily comprised of unfunded loan commitments which are generally priced
at market at the time of funding.
NOTE Q - PARENT COMPANY ONLY FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
Condensed financial information for Penns Woods Bancorp, I 1997 1996
CONDENSED BALANCE SHEET, DECEMBER 31,
ASSETS:
Cash $255 $37
Investment in subsidiaries:
Bank 31,606 28,586
Nonbank 11,581 5,272
Deferred tax asset 26 12
Prepaid taxes 79 55
Total assets $43,547 $33,962
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other liabilities 573 405
Shareholders' equity 42,974 33,557
Total liabilities and
shareholders' equity $43,547 $33,962
[CAPTION]
(IN THOUSANDS)
1997 1996 1995
CONDENSED STATEMENT OF INCOME FOR
THE YEARS ENDED DECEMBER 31,
Operating income:
Dividends from subsidiaries $4,956 $1,707 $1,530
Equity in undistributed net
income of subsidiaries 2,777 3,727 2,581
Other income 156 - -
Operating expenses Net income (138) (92) (249)
$7,751 $5,342 $3,862
[CAPTION]
(IN THOUSANDS)
CONDENSED STATEMENT OF CASH FLOWS 1997 1996 1995
FOR THE YEARS ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,751 $5,342 $3,862
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiaries (2,777) (3,727) (2,581)
Increase (decrease) in income taxes payable 6 37 (72)
Increase (decrease) in liabilities 9 9 24
Stock option compensation expense 7 16 5
Net cash provided by
operating activities 4,996 1,677 1,238
CASH FLOWS FROM INVESTING ACTIVITIES,
Additional investment in subsidiaries (2,800) (335) (18)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,175) (1,529) (1,239)
Proceeds from exercise of stock options 197 118 66
Net cash
used in financing activities (1,978) (1,411) (1,173)
NET INCREASE (DECREASE) IN CASH 218 (69) 47
CASH, BEGINNING OF YEAR 37 106 59
CASH, END OF YEAR $255 $37 $106
CONDENSED STATEMENT OF CASH FLOWS SUPPLEMENTAL SCHEDULE
OF NONCASH INVESTING AND FINANCING ACTIVITY:
NOTE R - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[CAPTION] FOR THE THREE MONTHS ENDED
MAR JUN SEPT DEC
31 31 31 31
1997 $5,111 $5,034 $5,129 $5,549
2,082 2,069 2,030 2,136
Interest income 3,029 2,965 3,099 3,413
Interest expense 60 60 40 60
Net interest income 276 291 292 325
Provision for loan losses 1,176 1,149 970 1,361
Other income 1,776 1,749 1,847 2,012
Securities gains 2,645 2,596 2,474 3,027
Other expenses 699 703 688 901
Income before income tax provision $1,946 $1,893 $1,786 $2,126
Income tax provision $0.76 $0.74 $0.70 $0.83
Net income
Earnings per share FOR THE THREE MONTHS ENDED
MAR JUN SEPT DEC
31 31 31 31
$4,782 $4,888 $5,049 $5,278
1996 1,970 1,978 2,057 2,074
Interest income 2,812 2,910 2,992 3,204
Interest expense 42 21 21 21
Net interest income 262 304 276 274
Provision for loan losses 36 255 397 657
Other income 1,760 1,748 1,750 1,709
Securities gains 1,308 1,700 1,894 2,405
Other expenses 326 434 536 669
Income before income tax provision $982 $1,266 $1,358 $1,736
Income tax provision $0.39 $0.50 $0.53 $0.68
Net income
Earnings per share
The Registrant's Consolidated Financial Statements and
notes thereto contained in the Annual Report (at page 10
thereto)are incorporated in their entirety by reference under this
Item 8.
The Registrant does not meet both of the tests under Item
302(a)(5) of Regulation S-K, and therefore, is not required to
provide supplementary financial data.
SCHEDULE 1
PENNS WOODS BANCORP, INC.
INDEBTEDNESS OF RELATED PARTIES
Column A Column B Column C Column D Column E
Deductions
Beginning Charge- Ending
Name of Debtor Balance Additions Payments offs Balance
1997 8 directors, 15 affiliated interests,
and 3 officers $2,014 $900 $818 $0 $2,096
1996 8 directors, 10 affiliated interests,
and 3 officers $1,781 $1,009 $776 $0 $2,014
1995 6 directors, 7 affiliated interests,
and 3 officers 1,272 652 143 0 1,781
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information appearing in the Proxy Statement under the
caption "Election of Directors" is incorporated herein by
reference. (a) Identification of directors. The information
appearing under the caption "Election of Directors" in the
Company's Proxy Statement dated March 10, 1998 (at page 5
thereto) is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
Information appearing under the caption "Executive
Compensation" in the Company's Proxy Statement (at page 6
thereto) is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information appearing under the caption "Principal
Beneficial Owners of the Corporation's Common Stock" in the
Company's Proxy Statement (at page 3 thereto) is incorporated
herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
There have been no material transactions between the
Corporation and the Bank, nor any material transactions
proposed, with any Director or executive officer of the
Corporation and the Bank, or any associate of the foregoing
persons. The Corporation and the Bank have had, and intend to
continue to have, banking and financial transactions in the
ordinary course of business with Directors and Officers of the
Corporation and the Bank and their associates on comparable
terms and with similar interest rates as those prevailing from
time to time for other customers of the Corporation and the Bank.
Total loans outstanding from the Bank at December 31, 1997
to the Corporation's and the Bank's Officers and Directors as a
group and members of their immediate families and companies
in which they had an ownership interest of 10% or more was
$2,096,000 or approximately 6.63% of the total equity capital of
the Bank. Loans to such persons were made in the ordinary
course of business, were made on substantially the same
terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other persons, and
did not involve more than the normal risk of collectability or
present other unfavorable features.
See also the information appearing in footnote L to the
Consolidated Financial Statements included elsewhere in the
Annual Report.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Financial Statements
1. The following consolidated financial statements and
reports arReport of Independent Certified Public Accountants
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
2. The following schedules are submitted herewith:
I. Indebtedness of Related Parties
(b) Reports on Form 8-K
No reports were required to be filed on Form 8-K during 1997.
The schedules not included are omitted because the
required matter or conditions are not present, the data is
insignificant or the required information is submitted as part of
the consolidated financial statements and notes thereto.
(c) Exhibits:
(3) (i) Articles of Incorporation of the Registrant, as presently
in effect (incorporated herein by reference to Exhibit B to
Amendment No. 2 of Form 10 filed on February 3, 1989).
(3) (ii) Bylaws of the Registrant as presently in effect
(incorporated herein by reference to Exhibit C to Amendment No.
2 of Form 10 filed on February 3, 1989).
(4) Dissenting Shareholders' Rights presently in effect
(incorporated herein by reference to Exhibit D to Amendment
No. 2 of Form 10 filed on February 3, 1989).
(13) Annual Report to Shareholders
(22) Subsidiaries of the Registrant (incorporated herein by
reference to Exhibit F to Amendment No. 2 of Form 10 filed on
February 3, 1989).
(24) Consent of Independent Certified Public Accountants
(28) Proxy
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. PENNS WOODS BANCORP, INC.
BY: THEODORE H. REICH
March 10, 1998 President
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated:
March 10, 1998
Theodore H. Reich, President and Director
/s/Theodore H. Reich
March 10, 1998
Sonya E. Hartranft, Principal Accounting Officer &
Principal Financial Officer
/s/Sonya E. Hartranft
March 10, 1998
Phillip H. Bower, Director
/s/ Phillip H. Bower
March 10, 1998
Lynn S. Bowes, Director
/s/Lynn S. Bowes
March 10, 1998
William S. Frazier, Director
/s/William S. Frazier
March 10, 1998
James M. Furey II, Director
/s/James M. Furey, II
March 10, 1998
Allan W. Lugg, Director
/s/Allan W. Lugg
March 10, 1998
Jay H. McCormick, Director
/s/Jay H. McCormick
March 10, 1998
R. Edward Nestlerode, Jr., Director
/s/R. Edward Nestlerode, Jr.
March 10, 1998
James E. Plummer, Director
/s/James E. Plummer
March 10, 1998
Howard M. Thompson, Director
/s/Howard M. Thompson
March 10, 1998
William F. Williams, Jr., Director
/s/Williams F. Williams, Jr.
This statement has not been reviewed or confirmed for accuracy
or relevance, by the Federal Deposit Insurance Corporation.
EXHIBIT INDEX
(3) (i) Articles of Incorporation of the Registrant, as presently
in effect (incorporated herein by reference to Exhibit B to
Amendment No. 2 of Form 10 filed on February 3, 1989).
(3) (ii) Bylaws of the Registrant as presently in effect
(incorporated herein by reference to Exhibit C to Amendment No.
2 of Form 10 filed on February 3, 1989).
(4) Dissenting Shareholders' Rights presently in effect
(incorporated herein by reference to Exhibit D to Amendment
No. 2 of Form 10 filed on February 3, 1989).
(13) Annual Report to Shareholders
(22) Subsidiaries of the Registrant (incorporated herein by
reference to Exhibit F to Amendment No. 2 of Form 10 filed on
February 3, 1989).
(24) Consent of Independent Certified Public Accountants
(28) Proxy