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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 0-21939
Pennwood Bancorp, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Pennsylvania 25-1783648
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
683 Lincoln Avenue
Pittsburgh, Pennsylvania 15202
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(Address of Principal Executive Offices) (Zip Code)
(412) 761-1234
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(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
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Pennwood Bancorp, Inc. had 629,408 shares of common stock outstanding as
of February 10, 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PENNWOOD BANCORP, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS. 3
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998 (unaudited) 3
Consolidated Statements of Income for the three months and six
months ended December 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended December 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 10
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS. 14
ITEM 2. CHANGES IN SECURITIES. 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. 14
ITEM 5. OTHER INFORMATION. 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 15
SIGNATURES
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PENNWOOD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
DEC. 31 JUNE 30,
ASSETS 1998 1998
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Cash and amounts due from depository institutions $1,034 $527
Money market investments at cost which approximates
market value 2,486 2,026
Investment and mortgage-backed securities:
Available-for-sale (Amortized cost of $2,682 and $7,652) 2,753 7,752
Held-to-maturity (Market value of $956 and $216) 954 210
Loans receivable, net 41,146 33,625
Real estate owned, net 66 11
Federal Home Loan Bank stock 300 284
Premises and equipment, net 1,245 1,044
Accrued interest receivable 291 331
Prepaid expenses and other assets 394 270
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Total assets $50,669 $46,080
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Savings deposits $35,955 $35,754
Advances from borrowers for taxes and insurance 333 392
Accrued interest payable on savings deposits 506 423
Borrowed funds 6,413 1,432
Accrued expenses and other liabilities 173 118
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Total liabilities 43,380 38,119
Shareholders' Equity:
Common Stock, $.01 par value; 4,000,000 shares authorized;
813,419 issued at December 31, 1998 8 8
Additional paid-in capital 5,657 5,644
Retained earnings, substantially restricted 4,525 4,427
Treasury stock, at cost: 184,011 and 116,025 shares at December 31, 1998
and June 30, 1998, respectively. (2,350) (1,526)
Unearned Employee Stock Ownership Plan shares (366) (391)
Unearned common stock - Recognition and Retention Plan (232) (267)
Unrealized gain (loss) on securities available-for-sale, net 47 66
-- --
Total shareholders' equity 7,289 7,961
Total liabilities and shareholders' equity $50,669 $46,080
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</TABLE>
See accompanying notes to unaudited consolidated financial statements
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PENNWOOD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands except Per Share Amount)
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THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
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Interest income:
Loans $884 $688 $1,688 $1,332
Investment securities 63 169 173 428
Mortgage backed securities 27 33 57 67
Federal funds sold & other investments 5 11 10 20
Money market investments 24 47 49 68
-- -- -- --
Total interest income 1,003 948 1,977 1,915
Interest expense:
Interest on savings deposits 405 423 812 845
Interest on borrowed funds 89 25 140 68
-- -- --- --
Total interest expense 494 448 952 913
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Net interest income 509 500 1,025 1,002
Provision for loan losses 7 12 20 27
Net interest income after provision - -- -- --
for loan losses 502 488 1,005 975
Other income:
Service charges 15 32 32 48
Other 48 42 66 63
-- -- -- --
Total other income 63 74 98 111
Other expenses:
Compensation and employee benefits 212 186 415 362
Premises and occupancy costs 63 56 118 115
Federal insurance premiums 5 5 11 11
Data processing expense 28 20 48 40
Net loss on real estate owned 0 7 0 7
Other operating expenses 108 102 202 188
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Total other expenses 416 376 794 723
Income before income taxes 149 186 309 363
Provision for income taxes 53 74 114 123
Net income $96 $112 $195 $240
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Basic earnings per share $ .16 $ .17 $ .33 $ .35
Diluted earnings per share $ .16 $ .16 $ .33 $ .34
Dividend declared per share $ .075 $ .068 $ .145 $ .128
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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PENNWOOD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
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<CAPTION>
6 MONTHS ENDED
DECEMBER 31,
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OPERATING ACTIVITIES: 1998 1997
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Net Income $195 $240
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation expense 19 27
Provision for loan and real estate owned losses 20 39
Decrease in accrued interest receivable 40 166
(Increase) in prepaid expenses and other assets (124) (47)
Increase in accrued interest payable on deposits 109 107
Other, net 14 (2)
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Total adjustments 78 290
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Net cash (used) provided by operating activities 273 530
INVESTING ACTIVITIES:
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Purchases of premises and equipment (220) (18)
Purchases of investment and mortgage-backed securities
available-for-sale (1,085) (1,750)
Purchases of investment and mortgage-backed securities
held-to-maturity (750) (995)
Proceeds from maturities and principal repayments of
investment and mortgage-backed securities held-to-maturity 1 200
Proceeds from maturities and principal repayments of
investment and mortgage-backed securities available-
for-sale 6,101 10,050
Net (increase) in loans receivable (7,541) (3,352)
Net (increase) decrease in FHLB Stock (16) 155
Other, net (28) (7)
-- -
Net cash provided (used) by investing activities (3,538) 4,283
FINANCING ACTIVITIES:
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Net increase (decrease) in passbook, club, money market and
NOW accounts 17 (599)
Net increase in certificates of deposit accounts 184 1,047
Net (decrease) in advances from borrowers for
taxes and insurance (59) (21)
Purchase of Treasury Stock (824) (523)
Increase (decrease) of FHLB Advances 5,000 (3,000)
Dividends paid (96) (97)
Other 10 (9)
-- -
Net cash (used) provided by financing activities 4,232 (3,202)
Net increase in cash and cash equivalents 967 1,611
Cash and cash equivalents, beginning of period 2,553 1,804
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Cash and cash equivalents, end of period $3,520 $3,415
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</TABLE>
See accompanying notes to unaudited consolidated financial statements
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PENNWOOD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
(Dollars in Thousands)
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6 MONTHS ENDED
DECEMBER 31,
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1998 1997
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on savings deposits $729 $792
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Income taxes $ 7 $ 125
= ===
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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PENNWOOD BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, such information presented reflects
all adjustments (consisting solely of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of results for the
interim periods.
The results of operations for the three months and six months ended December 31,
1998 are not necessarily indicative of the results to be expected for the year
ending June 30, 1999. The unaudited consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements and
notes thereto contained in Pennwood Bancorp, Inc.'s Form 10-KSB for the year
ended June 30, 1998.
Note 2 - Principles of Consolidation
The accompanying unaudited financial statements of Pennwood Bancorp, Inc. (the
"Company") include the accounts of the Company and its wholly-owned subsidiary,
Pennwood Savings Bank (the "Savings Bank"). All significant inter-company
transactions have been eliminated in consolidation.
Note 3 - Conversion to Stock Form of Ownership
On February 20, 1996, as amended on April 6, 1996, the Board of Trustees adopted
a plan of conversion whereby the Savings Bank would be converted from a
Pennsylvania mutual savings bank to a Pennsylvania stock savings bank. The
conversion was completed on July 12, 1996, and the Savings Bank issued 610,128
shares of common stock resulting in $6,101,280 in gross proceeds to the Savings
Bank. Costs of the common stock offering of approximately $477,000 were deducted
from the offering proceeds.
At the completion of the conversion to stock form, the Savings Bank established
a liquidation account in the amount of retained earnings set forth in the
offering circular utilized in the conversion. The liquidation account will be
maintained for the benefit of eligible savings account holders who maintain
deposit accounts in the Savings Bank after the conversion. In the event of a
complete liquidation (and only in such event), each eligible savings account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted balance of
deposit accounts held, before any liquidation distribution may be made with
respect to the common shares. Except for the repurchase of stock and payment of
dividends by the
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Company, the existence of the liquidation account will not restrict the use or
further application of such retained earnings.
The Company may not declare or pay a cash dividend on, or repurchase any of its
common shares if the effect thereof would cause the Company's stockholders'
equity to be reduced below either the amount required for the liquidation
account or the regulatory capital requirements for insured institutions.
On January 27, 1997, the Savings Bank completed its reorganization into the
holding company form of ownership. The resulting holding company is Pennwood
Bancorp, Inc.
Note 4 - Adoption of New Accounting Principles
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share ("Opinion
No. 15") and requires the calculation and dual presentation of Basic and Diluted
earnings per share ("EPS"), replacing the measures of primary and fully-diluted
EPS as reported under Opinion No. 15. SFAS No. 128 is effective for financial
statements issued for periods ending December 31, 1997. Prior year EPS data has
been restated to conform with the requirements of SFAS No. 128.
The following weighted average shares and share equivalents are used to
calculate Basic and Diluted EPS for the three months and six months ended
December 31, 1998 and 1997:
<TABLE>
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Three Months Ended Six Months Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
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<S> <C> <C> <C> <C>
Weighted average number 582,480 663,698 594,887 672,475
of shares outstanding
used to calculate Basic EPS
Dilutive securities:
Stock Options 1,415 16,932 3,842 12,560
Weighted average number of
shares and share equivalents
outstanding used to calculate
Diluted EPS 583,895 680,630 598,729 685,035
</TABLE>
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." SFAS No. 129 summarizes previously issued disclosure
guidance contained within APB Opinions No. 10 and 15 as well as SFAS No. 47.
There were no changes to the Company's disclosures pursuant to the adoption of
SFAS No. 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as `the change
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in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investment by owners and
distributions to owners.' The components of comprehensive income are net income
and the impact of unrealized gains or (losses) on securities available for sale.
Comprehensive income for the three and six month periods ended December 31, 1998
and December 31, 1997 is $72,000, $176,000 and $86,000, $317,000, respectively.
Note 5 - Payment of Dividends
On December 16, 1998, the Company declared a quarterly dividend of $.075 per
share, payable on January 15, 1999, to shareholders of record of December 31,
1998.
Note 6 - Employee Stock Ownership Plan ("ESOP")
In connection with the conversion to stock form of ownership, the Company formed
an ESOP. The ESOP covers employees who have completed at least 1000 hours of
service during a twelve month period and have attained the age of 21. The ESOP
borrowed $488,000 from an independent third party lender to fund the purchase of
48,810 shares or 8% of the shares issued in the conversion. The loan to the ESOP
will be repaid from scheduled discretionary cash contributions from the Company
sufficient to service the debt over a ten year period. Shares are released and
allocated to the participants on the basis of a compensation formula. ESOP
compensation expense for the three months and six months ended December 31,
1998, was approximately $18,000 and $20,000, respectively.
Note 7 - Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for the related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 supersedes FASB Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise," but retains the requirement to report information
about major customers. It amends FASB Statement No. 94, "Consolidation of All
Majority-Owned Subsidiaries," to remove the special disclosure requirements for
previously unconsolidated subsidiaries. Adoption of SFAS No. 131 had no impact
on the Company's financial statements as it has only one operating segment,
retail banking.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures About
Pensions and Other Post-Retirement Benefits." This statement standardized the
disclosure requirements for pensions and other post-retirement benefits and is
effective for fiscal years beginning after December 15, 1997. Management does
not expect SFAS No. 132 to have a significant impact on the consolidated
financial statements of the Company.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a (1) fair
value edge, (2) a cash flow hedge, or (3) a foreign currency hedge. The
accounting for changes in the fair value of a derivative (gains and losses)
depends on the intended use of the derivative and the resulting designation.
SFAS No. 133 is effective for all fiscal years beginning after June 15, 1999.
Management does not expect SFAS No. 133 to have a significant impact on the
consolidated financial statements of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Pennwood Bancorp, Inc. (the "Company") is the holding company for
Pennwood Savings Bank (the "Savings Bank"). The operating results of the Company
depend upon the operating results of the Savings Bank. The operating results of
the Savings Bank depend primarily upon its net interest income, which is
determined by the difference between interest income on interest-earning assets,
which consist principally of loans, investment securities and other investments,
and interest expense on interest-bearing liabilities, which consist principally
of deposits and borrowed money. The Savings Bank's net income also is affected
by its provision for loan losses, as well as the level of its other income,
including loan fees and service charges and miscellaneous items, and its other
expenses, including compensation and other employee benefits, premises and
occupancy costs, federal deposit insurance premiums, data processing expense,
net loss on real estate owned and other miscellaneous expenses, and income
taxes.
On July 12, 1996, the Savings Bank completed its conversion from the
mutual to the stock form (the "Conversion"). In the Conversion, the Savings Bank
issued 610,128 shares of common stock, which resulted in net proceeds to the
Savings Bank of approximately $5.7 million. On January 27, 1997, the Savings
Bank completed its reorganization into the holding company form of ownership
whereby each outstanding share of common stock of the Savings Bank was converted
into common stock of the Company and the Company acquired all the capital stock
of the Savings Bank.
CHANGES IN FINANCIAL CONDITION
The Company's total assets increased by $4.6 million or 10.0% from $46.1
million at June 30, 1998 to $50.7 million at December 31, 1998. During the six
months ended December 31, 1998, the Company's investment and mortgage-backed
securities (classified as available for sale) decreased by $5.0 million or 64.5%
from $7.7 million at June 30, 1998 to $2.7 million at December 31, 1998, while
investment and mortgage-backed securities (classified as held-to-maturity)
increased by $744,000, cash and amounts due from depository institutions
increased by $507,000, and money
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market investments (consisting of interest-bearing deposits, including
certificates of deposit, with other financial institutions) increased by
$460,000. The Company's net loans receivable increased $7.5 million or 22.4%
during the six month period as part of an ongoing strategy to increase loan
balances. During the six month period, the Company's total liabilities increased
by $5.3 million or 13.8% at December 31, 1998. Borrowed money increased by $5.0
million or 347.8%, and deposit liabilities increased by $201,000 or 0.6%.
Shareholders equity decreased by $672,000 during the six months ended December
31, 1998 as a result of the purchase of Treasury Stock of $824,000 and by the
market value adjustment on investments classified as available for sale of
$19,000, which was partially offset by $72,000 in employee benefit shares earned
and the year to date net income of $195,000 less dividends paid of $96,000.
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $96,000 and $195,000 for
the three and six months ended December 31, 1998, respectively, compared to
$112,000 and $240,000 during the three and six months ended December 31, 1997.
The $16,000 decrease in net income during the three month period ended December
31, 1998 was primarily due to a $40,000 increase in other expenses and a $11,000
decrease in other income which were partially offset by a $9,000 increase in net
interest income, a $5,000 decrease in loan loss provisions and a $21,000
decrease in income taxes. The $45,000 decrease in net income for the six month
period over the prior year was due to a $71,000 increase in other expenses and a
$13,000 decrease in other income which were offset by a $23,000 increase in net
interest income, a $7,000 decrease in loan loss provisions and a $9,000 decrease
in income taxes.
The Company's net interest margin decreased by 19 basis points and 7
basis points to 4.27% and 4.37%, for the three and six month periods ending
December 31, 1998, respectively, from 4.46% and 4.44% for the three and six
month periods ended December 31, 1997, respectively. The average yield earned on
the Company's interest-earning assets decreased by 5 basis points and 6 basis
points, respectively, for the three and six month periods ended December 31,
1998 over the same periods ended December 31, 1997, which were offset by a 4
basis point and a 16 basis point decrease in the average rate paid on the
Company's interest-bearing liabilities, for the same periods ended December 31,
1998 and December 31, 1997, respectively.
NET INTEREST INCOME. Net interest income increased by $9,000 or 1.8% and
$23,000 or 2.3% during the three and six months ended December 31, 1998,
respectively, as compared to the same periods ended December 31, 1997. The
increase was primarily due to a $3.0 million or 6.4% and $1.8 million or 4.0%
increase in the average balance of interest-earning assets for the three and six
months ended December 31, 1998, respectively, over the corresponding prior
periods in 1997, which was partially offset by a $4.3 million or 11.4% and $2.9
million or 7.6% increase in the average balance of interest-bearing liabilities.
There was a 5 basis point and a 6 basis point decrease in the average rate
earned on interest-earning assets which was offset by a 4 basis point and a 16
basis point decrease in the average rate paid thereon on interest-bearing
liabilities, for the same periods.
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During the three and six months ended December 31, 1998, total interest
income increased by $55,000 or 5.8% and $62,000 or 3.2%, respectively, as
compared to the same period in 1997. The increases were primarily due to an
increase in interest earned on loans of $196,000 or 28.5% and $356,000 or 26.7%,
which were partially offset by a $106,000 or 62.7% and $255,000 or 59.6%
decrease in interest earned on investment securities, a $6,000 or 18.2% and
$10,000 or 14.9% decrease in interest earned on mortgage-backed securities, a
$6,000 or 54.5% and $20,000 or 50.0% decrease in interest earned on federal
funds and other investments and a $23,000 or 48.9% and a $19,000 or 27.9%
decrease in interest earned on money market investments. The increase in
interest earned on loans was due primarily to a $11.2 million or 37.6% and $9.7
million or 33.5% increase in the average balance of loans outstanding, during
the three and six months ending December 31, 1998 as compared to the same 1997
periods, which was partially offset by a 61 basis point and a 48 basis point
decrease in the average yield earned thereon. The decrease in interest earned on
investment securities was due primarily to a $6.9 million or 61.5% and $7.3
million or 56.3% decrease in the average balance of investment securities. The
increase in the average balance of loans outstanding reflected the Company's
reinvestment of a portion of its maturing investment securities in loans.
During the three and six months ended December 31, 1998, total interest
expense increased by $46,000 or 10.3% and $39,000 or 4.3%, respectively, as
compared to the same period in 1997, due primarily to a $4.9 million or 337.71%
increase and a $3.5 million or 186.9% increase in the average balance of
borrowed money, as compared to the same 1997 period.
PROVISION FOR LOAN LOSSES. The Company establishes provisions for losses
on loans, which are charged to operations, in order to maintain the allowance
for loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, the volume and type of lending presently
being conducted by the Company, past due loans, economic conditions in the
Company's market area generally and other factors related to the collectibility
of the Company's loan portfolio. During the three and six months ended December
31, 1998, the Company established provisions for loan losses of $7,000 and
$20,000, respectively, compared to $12,000 and $27,000 in the same 1997 periods.
OTHER INCOME. Total other income decreased by $11,000 or 14.9% and
$13,000 or 11.7% during the three and six months ended December 31, 1998 as
compared to the same 1997 periods. This was primarily due to a decrease in
income of $40,000 from other miscellaneous income (which consists primarily of
rental income earned on real estate owned, late charges, service charges and
other miscellaneous fees), which was offset by a $29,000 gain on the sale of an
investment security.
OTHER EXPENSES. Total other expenses increased by $40,000 or 10.6% and by
$71,000 or 9.8% during the three and six months ended December 31, 1998 as
compared to the same 1997 periods. During the three months ended December 31,
1998, as compared to the same period ending December 31, 1997, there was an
increase in compensation and employee benefits of $26,000 or 14.0%, an increase
in office occupancy expenses of $7,000 or 12.5%, an increase in data processing
expenses of $8,000 or 40.0% and an increase of $6,000 or 5.9% in other
miscellaneous expenses
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which were offset by a $7,000 or 100.0% decrease in real estate owned expenses.
During the six months ended December 31, 1998, as compared to the same period
ending December 31, 1997, there was a $53,000 or 14.6% increase in compensation,
employee benefits and staffing, a $3,000 or 2.6% increase in office occupancy
expenses, an $8,000 or 20.0% increase in data processing expenses and a $14,000
or 7.4% increase in other miscellaneous expenses which were offset by a $7,000
or 100.0% decrease in real estate owned expenses.
PROVISION FOR INCOME TAXES. The Company incurred a decrease of $21,000 or
28.4% and $9,000 or 7.3% in income tax expense for the three and six months
ended December 31, 1998, as compared to the same 1997 periods due to the
reduction of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds are deposits, repayments,
prepayments and maturities of outstanding loans, maturities of investment
securities and other short-term investments, and funds provided from operations.
While scheduled loan repayments and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by the movement of interest
rates in general, economic conditions and competition. The Company manages the
pricing of its deposits to maintain a deposit balance deemed appropriate and
desirable. In addition, the Company invests in short-term investment securities
and other interest-earning assets which provide liquidity to meet lending
requirements. Although the Company has been able to generate enough cash through
the retail deposit market, its traditional funding source, the Company may, to
the extent deemed necessary, utilize other borrowing sources, consisting
primarily of advances from the Federal Home Loan Bank ("FHLB") of Pittsburgh. At
December 31, 1998, the Savings Bank had $6.0 million of outstanding advances
from the FHLB of Pittsburgh.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, including money market investments and federal funds sold, and U.S.
Government and agency obligations. On a longer-term basis, the Company invests
in various lending products and investment securities. The Company uses its
sources of funds primarily to meet its ongoing commitments to pay maturing
savings certificates and savings withdrawals, fund loan commitments and maintain
an investment securities portfolio. At December 31, 1998, the total commitments
outstanding (excluding undisbursed portions of loans in process) amounted to
$2.1 million in mortgage loans and $653,000 in unused lines of credit. At the
same date, the unadvanced portion of loans in process approximated $1.4 million.
Certificates of deposit scheduled to mature in three months or less at December
31, 1998, totaled $4.0 million. Management of the Company believes that the
Company has adequate resources, including principal payments and repayments of
loans and maturing investments, to fund all of its commitments to the extent
required. Based upon its historical run-off experience, management believes that
a significant portion of maturing deposits will remain with the Company.
As of December 31, 1998, the Company had regulatory capital, which was in
excess of required amounts.
13
<PAGE> 14
YEAR 2000 COMPLIANCE
The Company has developed a plan of action to help insure that its
operational and financial systems will not be adversely affected by year 2000
software/hardware failures due to processing errors arising from calculations
using the year 2000 date. While the Company believes it is doing everything
technologically and operationally possible to assure year 2000 compliance, it is
to a large extent dependent upon vendor cooperation. The Company is requiring
its computer systems and software vendors to represent that the products
provided are or will be year 2000 compliant. Any year 2000 compliance failures
could result in additional expenses or business disruptions to the Company which
are currently unknown and are believed to be immaterial. The Company does not
itself internally program any major operating system of the Company; therefore,
the Company does not expect to incur material costs for remediation efforts.
Testing of all critical systems is expected to be completed by the end of the
Company's fiscal year. To date, no significant problems have been encountered.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENNWOOD BANCORP, INC.
Date: February 10, 1999 By: /s/ Paul S. Pieffer
----------------------------------------
Paul S. Pieffer, President and
Chief Executive Officer
Date: February 10, 1999 By: /s/ James W. Kihm
----------------------------------------
James W. Kihm, Vice President and
Secretary (principal financial officer)
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<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1999
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