FORM 10-Q QUARTERLY REPORT
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 10
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30 , 1998 Commission file number
0-17077
PENNS WOODS BANCORP, INC.
Incorporated in Pennsylvania
Main Office 115 South Main Street
Jersey Shore, Pennsylvania, 17740
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the
past 90 days.
YES [ X ] NO[ ]
On September 30, 1998 there were 2,571,302 shares of the
Registrant's common stock outstanding.
PART I FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PENNS WOODS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
AT DATES INDICATED
September 30, December 31,
1998 1997
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and due from banks $8,508 $12,557
Investment securities available-for-sale 93,064 75,400
Investment securities held-to-maturitity 3,050 3,234
Loans, net of unearned discount 197,221 187,567
Allowance for loan and lease losses (2,461) (2,414)
Loans, net 194,760 185,153
Bank premises and equipment, net 3,850 3,835
Foreclosed assets held for sale 0 35
Accrued interest receivable 1,764 1,708
Other assets 4,592 2,066
--------------------------------
TOTAL ASSETS $309,588 $283,988
================================
LIABILITIES:
Demand Deposits $32,120 $35,811
Interest-bearing demand deposits 37,615 38,499
Savings deposits 43,569 43,399
Time deposits 105,151 102,827
--------------------------------
Total deposits $218,455 $220,536
Federal funds purchased 8,620 6,980
Securities sold under repurchase agreements 12,388 8,580
Accrued interest payable 890 907
Other Liabilities 4,753 4,011
Long-term borrowings 20,000 0
Total liabilities --------------------------------
$265,106 $241,014
--------------------------------
SHAREHOLDERS' EQUITY:
Common stock, par value $10 per share,
10,000,000 shares authorized $25,713 $12,828
Stock dividend distributable 0 12,828
Additional paid-in capital 4,695 4,712
Retained earnings 9,807 6,621
Accumulated other comprehensive income 4,267 5,985
--------------------------------
Total shareholders' equity $44,482 $42,974
--------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $309,588 $283,988
================================
</TABLE>
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIODS INDICATED
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS QUARTER QUARTER
ENDED ENDED ENDED ENDED
Sept 30, 1998 Sept 30, 1997 Sept 30, 1998 Sept 30, 1997
----------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $13,365 $11,738 $4,570 $4,054
Interest and dividends on investments----------------------------------------------------------------
Taxable interest 2,199 2,131 831 724
Nontaxable interest 747 976 291 228
Dividends 490 370 152 117
----------------------------------------------------------------
Total interest and dividends
on investments 3,436 3,477 1,274 1,069
Interest on Federal funds sold 0 59 0 7
----------------------------------------------------------------
Total interest income 16,801 15,274 5,844 5,130
----------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 5,957 5,733 2,004 1,907
Interest on Federal funds purchased 196 125 100 25
Interest on securities sold under
repurchase agreements 381 323 134 98
Interest on other borrowings 439 0 283 0
----------------------------------------------------------------
Total interest expense 6,973 6,181 2,521 2,030
----------------------------------------------------------------
Net interest income 9,828 9,093 3,323 3,100
Provision for loan losses 225 160 75 40
----------------------------------------------------------------
Net interest income after provision for
loan losses 9,603 8,933 3,248 3,060
----------------------------------------------------------------
OTHER OPERATING INCOME:
Service charges 772 631 258 215
Securities gains 1,059 3,295 216 970
Other income 154 228 45 76
----------------------------------------------------------------
Total other operating income 1,985 4,154 519 1,261
----------------------------------------------------------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 2,951 2,851 983 956
Occupancy expense, net 417 363 157 120
Furniture and equipment expense 447 507 149 165
Other expenses 1,627 1,651 522 605
----------------------------------------------------------------
Total other operating expense 5,442 5,372 1,811 1,846
----------------------------------------------------------------
INCOME BEFORE TAXES 6,146 7,715 1,956 2,475
INCOME TAX PROVISION 1,573 2,090 545 688
----------------------------------------------------------------
NET INCOME $4,573 $5,625 $1,411 $1,787
================================================================
EARNINGS PER SHARE - BASIC 1.78 2.20 0.55 0.70
================================================================
EARNINGS PER SHARE - DILUTED 1.77 2.19 0.55 0.70
================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 2,567,892 2,555,824 2,567,892 2,555,824
================================================================
</TABLE>
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIODS INDICATED
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
NET INCOME $4,573 $5,625
--------------------------------
OTHER COMPREHENSIVE INCOME (LOSS),
Unrealized gains on securities:
Gains (losses) arising during the quarter (2,777) (1,203)
Reclassification adjustment for gains included
in net income 1,059 3,295
--------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), BEFORE TAX (1,718) 2,092
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER
COMPREHENSIVE INCOME (LOSS) (584) 711
--------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX (1,134) 1,381
--------------------------------
COMPREHENSIVE INCOME $3,439 $7,006
================================
<FN>
PENNS WOODS BANCORP, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE QUARTERS ENDING SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Note :
During the first quarter of 1998, Penns Woods Bancorp, Inc. adopted FASB
Statement no. 130, Reporting Comprehensive Income. Statement no. 130
requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of
net income.
At quarterend September 30, 1998 and September 30, 1997, securities classified as
available-for-sale were held, which had unrealized (losses) gains
of ($1,718,000) and $2,092,000 before tax, respectively. The tax
(benefit) expense for each period was ($584,000) and $711,000, resepctively,
resulting in other comprehensive (loss) income of ($1,134,000) for the quarter
ended September 30, 1998 and $1,381,000 for the quarter ended September 30, 1997.
</FN>
</TABLE>
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
APPREC.
COMMON STOCK ADDITIONAL (DEPREC.) ON TOTAL
STOCK DIVIDEND PAID-IN RETAINED SECURITIES SHAREHOLDERS
SHARES AMOUNT DISTRIBUTABLE CAPITAL EARNINGS AVAIL.-FOR-SALE EQUITY
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,282,779 $12,828 $12,828 $4,712 $6,621 $5,985 $42,974
Net income for the nine months
ended September 30, 1998 4,573 4,573
Stock split effected in the form
of a 100% stock dividend 1,282,779 12,828 (12,828) 0
Dividends declared, $0.54 (1,387) (1,387)
Net change in unrealized
appreciation (depreciation) (1,719) (1,719)
Stock options exercised 5,744 58 (17) 41
------------------------------------------------------------------------------------------------------
Balance, Sept 30, 1998 2,571,302 $25,714 $0 $4,695 $9,807 $4,266 $44,482
=========================================================================================================
</TABLE>
PENNS WOODS BANCORP, INC.
CONSOLIDATED STATEMENT
OF CASH FLOWS
FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
--------------------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $4,573 $5,625
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 211 283
Provision for loan losses 225 160
Amortization of investment security premiums 47 24
Accretion of investment security discounts (76) (91)
Securities gains, net (1,059) (3,295)
Gain on sale of foreclosed assets (12) (40)
Increase in all other assets (2,574) (1,180)
Increase in all other liabilities 1,614 1,062
--------------------------------
Net cash provided by operating activities 2,949 2,548
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale (38,460) (50,907)
Proceeds from sale of securities available-for-sale 17,050 66,574
Proceeds from the sale of foreclosed assets 47 270
Purchase of securities held-to-maturity (224) (200)
Proceeds from calls and maturities of securities held 2,403 48
Proceeds from calls and maturities of securities
available-for-sale 235 0
Net increase in loans (9,832) (16,143)
Acquisition of bank premises and equipment (226) (221)
Acquisition of foreclosed assets 0 (107)
--------------------------------
Net cash (used in) provided by investing
activities (29,007) (686)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in interest-bearing deposits 1,610 2,654
Net (decrease) increase in noninterest-bearing deposits (3,691) 1,348
Net increase in sec. sold under repurch. agree. 3,808 2,832
Increase (Decrease) in other borrowed funds 1,640 (7,271)
Net increase in long-term borrowings 20,000 0
Dividends paid (1,387) (1,726)
Stock options exercised 29 40
--------------------------------
Net cash (used in) provided by
financing activities 22,009 (2,123)
--------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,049) (261)
CASH AND CASH EQUIVALENTS, BEGINNING 12,557 8,014
--------------------------------
CASH AND CASH EQUIVALENTS, ENDING $8,508 $7,753
================================
</TABLE>
The interim financial statements are unaudited
but, in the opinion of management, reflect all
adjustments necessary for the fair presentation
of results for such periods. The results of
operations for any interim period are not
necessarily indicative of results for the full
year. These financial statements should be read
in conjunction with financial statements and
notes thereto contained in the Company's annual
report for the year ended December 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS SUMMARY
Interest Income
For the nine months ended September 30, 1998,
total interest income increased by $1,527,000
or 10.00% compared to the same period in 1997.
This increase is due to an increase of $1,627,000
in interest and fees on loans, a decrease in
total interest and dividends on investments of
$41,000 and a decrease in interest on
Federal funds sold of $59,000.
The increase in interest and fees on
loans of $1,527,000 was primarily due to
an increase in the loan volume during the first
nine months, ended September 30, 1998 of $9,654,000,
and also due to loan fees and late charges collected.
Interest and dividends on investments
decreased due to the net effect of a $68,000
increase in taxable interest, a $229,000 decrease
in nontaxable interest and an increase in
dividend income of $120,000.
Interest Expense
For the nine months ended September 30, 1998
total interest expense increased $792,000 or
12.81% over the same period in 1997. The
increase in interest expense can be attributed
to the interest paid on time deposits, due to the
increase in volume of such deposits and
an increase in the amount of interest paid on
securities sold under repurchase
agreements due to the increase in volume
of these accounts. In addition, interest
expense on other borrowings increased due
to two, $10,000,000 advances from the
Federal Home Loan Bank of Pittsburgh
("FHLB").
Provision for Loan Losses
The provision for losses for the nine
months ended September 30, 1998 increased
$65,000 from the corresponding period in
1997. This increase reflects an anticipated
rise in consumer loan losses throughout the
remainder of the year.
As of the third quarter of 1998, charge offs
exceeded recoveries by $178,000 compared to
the third quarter of 1997 when charge offs
exceeded recoveries by $48,000. Provisions
to date total $225,000 as compared to
provisions through September 30, 1997 of
$160,000.
Senior Management utilizes several
different methods to determine the adequacy
of the loan loss allowance and to establish
quarterly provisions. Among these methods
is the analysis of the most recent five
year average loss history, the coverage of
non-performing loans provided by the
allowance, an estimate of potential loss in
homogeneous pools of loans and the internal
credit rating assigned to watch and problem
loans.
In addition to the preceding, senior
management also reviews macro portfolio
risks such as the absence of
concentrations, absence of foreign credit
exposure and growth objectives in fine
tuning the allowance and provisions.
The ratio of non-accruing loans and those
accruing but delinquent more than 90 days
(collectively called "non-performing"
loans) to the allowance for loan losses
stood at .39 times at September 30, 1998 an
increase in coverage from the .40 times at
December 31, 1997. The increase in
non-performing loans occurred mainly in the
mortgage loan portfolio. Based upon this analysis
as well as the others noted above, senior
management has concluded that the allowance
for loan losses is adequate.
Other Operating Income
Other operating income for the nine months
ended September 30, 1998 decreased $2,169,000.
This decrease is due to the net effect of an
increase in service charges collected of
$141,000, a decrease in securities gains
realized of $2,236,000 and a decrease in
other income of $74,000.
The increase in service charges was
a result of an increase in service charges
collected on deposit accounts.
The overall decrease in other operating
income was primarily due to
the $2,236,000 decrease in securities gains
recognized. Realized gains were on sales
of bonds that were sold in effort to better
match the Bank's rate-sensitive assets and
rate-sensitive liabilities given the current
economic conditions. In addition, gains
were realized on partial sales of equity securities
that have been in the portfolio long-term
that had reached what management had
determined to be their maximum potential.
Other Operating Expense
For the nine months ended September 30, 1998
total other operating expenses increased $70,000
over the same period in 1997.
Employee salaries and benefits
increased $100,000 as a result of increases in
salary levels and the hiring of additional employees.
Occupancy expense increased $54,000 and
furniture and equipment expense decreased
$60,000. The increase in occupancy
expense can be attributed to an increase
in depreciation expense and an increase in
the amount of maintenance and repairs
expense incurred during the third quarter of
1998 compared to the same period in 1997.
The $60,000 decrease in furniture and
equipment expense can be attributed mainly
to a decrease in depreciation expense, and
to a decrease in maintenance and repairs.
Expenses included under the other expenses
heading are such items as: advertising, postage,
maintenance, FDIC, other insurance,
Pennsylvania State shares tax,
legal and professional fees, telephone,
printing and supplies and other general and
administrative expenses. An overall decrease
in other expenses totalled $24,000.
Provision for Income Taxes
Provision for income taxes for the nine
months ended September 30, 1998 resulted in an
effective income tax rate of 25.59%
compared to 27.09% for the corresponding
period in 1997. The decrease noted is
primarily a result of the decrease in the amount
of security gains included in taxable income.
ASSET/LIABILITY MANAGEMENT
Assets
At September 30, 1998, cash, federal funds sold,
and investment securities totalled
$104,622,000, or a net increase of $13,431,000
over the corresponding balance at December
31, 1997. Investment securities increased
$17,480,000 while cash decreased $4,049,000.
During this period, net loans
increased by $9,607,000 to $194,760,000.
The increase in investment securities from
December 31, 1997 to September 30, 1998 is
primarily due to the purchases of Government
securities and obligations of states and
political subdivisions which were funded by
long-term advances from FHLB and purchases
of equity securities.
Management evaluates credit risk,
anticipated economic conditions and other
relevant factors impacting the quality of
the loan portfolio in order to establish an
adequate loan-loss allowance. An internal
credit review committee monitors loans in
accordance with Federal supervisory standards
In addition, management frequently reviews and
utilizes the results of examinations and reports
provided by the committee, regulators, and
independent loan review consultants, on the
adequacy of the loan loss allowance.
Accordingly, on a quarterly basis,
management determines an appropriate
provision for possible loan losses from
earnings in order to maintain allowance
coverage relative to potential losses.
Management has reviewed the loan portfolio
for credit risk related to the Year 2000 compliance
and found no material effect to the allowance.
The allowance for loan losses totalled
$2,461,000 at September 30, 1998, an increase of
$47,000 over the balance at December 31,
1997. For the nine months ended
September 30, 1998, the provision for loan
losses totalled $225,000. As a percent of loans,
the allowance for loan losses at
September 30, 1998 totalled 1.25% versus
1.29% at December 31, 1997.
Loans accounted for on a non-accrual basis
totalled $850,000 and $552,000 at September
30, 1998 and December 31, 1997 respectively.
Accruing loans, contractually delinquent 90
days or more were $111,000 at September 30, 1998
and $409,000 at December 31, 1997.
These loans are predominately secured by
first lien mortgages on residential real
estate where appraisal values mitigate any
potential loss of interest and principal.
The ratio of non-accruing loans and those
accruing but delinquent more than 90 days to
the allowance for loan losses stood at .39
times at September 30, 1998 and .40 times at
December 31, 1997. Presently the portfolio
has no loans that meet the definition of
"trouble debt restructurings" under FAS 15.
A watch list of potential problem loans is
maintained and updated quarterly by an
internal credit review committee. At this
time there are no credits of substance that
have the potential to become more than 90
days delinquent.
The Bank has not had nor presently has any
foreign outstandings. In addition, no known
concentrations of credit presently exist.
At September 30, 1998 the balance of other real
estate was $0 compared to $35,000 at
December 31, 1997. The property that was
being held in the account on December 31,
1997 was sold in February, 1998.
Deposits
At September 30, 1998 total deposits amounted to
$218,455,000 representing a decrease of
$2,081,000, or .94%, from total deposits
at December 31, 1997.
Other Liabilities
At September 30, 1998, other liabilities
totalled $4,753,000 or a $742,000 increase
over the balance at December 31, 1997. This
increase is primarily due to an increase in
accrued taxes and accrued expenses.
Capital
The adequacy of the Company's capital is
reviewed on an ongoing basis with reference
to the size, composition and quality of the
Company's resources and regulatory
guidelines. Management seeks to maintain a
level of capital sufficient to support
existing assets and anticipated asset
growth, maintain favorable access to capital
markets and preserve high quality credit
ratings. The capital requirements of the
Pennsylvania Department of Banking are 6%.
The capital requirements of the Federal
Deposit Insurance Corporation are:
1. Regulatory capital to total assets 6%.
2. Primary capital to total assets 5 1/2%.
At September 30, 1998, regulatory capital to
total assets was 14.37% compared to 15.13%
at December 31, 1997. Primary capital to
total assets at September 30, 1998 was 15.16%
compared to 15.98% at December 31, 1997.
The Federal Reserve Board, the FDIC and the
OCC have issued certain risk-based capital
guidelines, which supplement existing
capital requirements. The guidelines
require all United States banks and bank
holding companies to maintain a minimum
risk-based capital ratio of 8.00% (of which
at least 4.00% must be in the form of common
stockholders' equity). Assets are assigned
to five risk categories, with higher levels
of capital being required for the categories
perceived as representing greater risk. The
required capital will represent equity and
(to the extent permitted) nonequity capital
as a percentage of total risk-weighted
assets. 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.
Capital is being maintained in compliance
with risk-based capital guidelines.
The Company's Tier 1 Capital to total risk
weighted assets ratio is 20.09% and the
total capital ratio to total risk weighted
assets ratio is 22.40%.
Liquidity and Interest Rate Sensitivity
The asset/liability committee addresses the
liquidity needs of the Bank to see that
sufficient funds are available to meet
credit demands and deposit withdrawals as
well as to the placement of available funds
in the investment portfolio. In assessing
liquidity requirements, equal consideration
is given to the current position as well as
the future outlook.
The following liquidity measures are
monitored and kept within the limits cited.
1. Net Loans to Total Assets, 70% maximum
2. Net Loans to Total Deposits, 92.5% maximum
3. Net Loans to Core Deposits, 100% maximum
4. Investments to Total Assets, 40% maximum
5. Investments to Total Deposits, 50% maximum
6. Total Liquid Assets to Total Assets, 25% minimum
7. Total Liquid Assets to Total Liabilities, 25% minimum
8. Net Core Funding Dependence, 15% maximum
The Bank has maintained a liquidity level at or above the
guidelines of the FDIC and the Pennsylvania Department
of Banking. The Bank has available to it Federal Funds
lines of credit totalling $8,000,000 from correspondent banks.
In addition, the Bank has an agreement with the Federal
Home Loan Bank of Pittsburgh that enables the Bank
to receive advances up to $94,425,000 through
the Federal Home Loan Bank's "Open Repo Plus", revolving
line of credit program, with commitment up to one year.
All of the funding mentioned is available to the Bank,
should the need for short-term funds arise.
The following table sets forth the Bank's interest rate
sensitivity as of September 30, 1998:
<TABLE>
<CAPTION>
AFTER ONE AFTER TWO AFTER
WITHIN BUT WITHIN BUT WITHIN FIVE
ONE YEAR TWO YEARS FIVE YEARS YEARS
<S> <C> <C> <C> <C>
Earning assets: (1) (2)
Investment securities (1) $14,119 $14,171 $29,712 $31,678
Loans (2) 77,767 23,259 79,126 17,072
-------------------------------------------------------------
Total earning assets 91,886 37,430 108,838 48,750
Deposits (3) 103,155 22,253 45,387 15,540
Borrowings 16,854 0 24,154 0
-------------------------------------------------------------
Total interest bearing
liabilities 120,009 22,253 69,541 15,540
Net non-interest bearing
funding (4) 10,212 7,848 19,286 22,215
-------------------------------------------------------------
Total net funding sources 130,221 30,101 88,827 37,755
Excess assets (liabilities) (38,335) 7,329 20,011 10,995
Cumulative excess
assets (liabilities) (38,335) (31,006) (10,995) 0
<FN>
(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 NOW's,
savings accounts, and the MMDA accounts
will be adjusted by 50% of the assumed rate
change. Assumptions are also made concerning
prepayment speeds on mortgage 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 September 30, 1998.
Net Interest Income
Change in Rates Change (After tax)
-200 $547
-100 $297
+100 ($346)
+200 ($704)
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.
</FN>
</TABLE>
Inflation
The asset and liability structure of a financial
insitution 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.
Year 2000 Compliance; Management Information Systems
Penns Woods Bancorp, Inc. has taken a proactive
approach to assessment, remediation, testing and external
and internal risks related to the upcoming date change
challenge.
On September 18, 1997 a Year 2000 Committee first met to
evaluate the above criteria for Jersey Shore State Bank,
Penns Woods Bancorp, Inc., Woods Investment Co., Inc.,
and Woods Real Estate Development Co., Inc.
As of September 30, 1998 the assessment phase, during
which information technology systems and non-information
technology systems were identified and assigned core
system or non-core system status was complete.
Most of the systems that were known to be non-compliant
were already scheduled for replacement and in the budget
as such before any replacement became necessary due to
year 2000 concerns. These expenses, therefore, are
neither included in any historical expenses nor in estimates
of future expenses stemming from year 2000 issues.
ATM does require an upgrade, which will cost
approximately $ 12,000.00. In addition, Penns Woods was
in the midst of upgrading hardware, software and personal
computers as early as 1997 and continued in 1998 by
adding a compliant phone system and more updated
personal computers and software. These expenses were
not generated because of Year 2000, but rather by our
holding company's commitment to better serve our
customers. "Stand alone testing" of core information
technology systems as well as any certifications of
non-core information technology systems and
non-information technology systems (ie: phones, heating/
cooling) were substantially complete as of September 30, 1998.
Testing of software that relates information between systems
continues. No incompatibilities are expected.
The readiness of these systems for all companies under
the holding company have been carefully considered. For
instance, the software and personal computer used to track
and operate Woods Investment Company, Inc. was
determined to be non-compliant and has been scheduled
to be replaced by March 31,1999.
Internal risks relating to deposit and loan customers were
' assessed to the extent possible by use of questionnaires to
major loan customers, culminating in on-site visits where
deemed necessary by management.
The effects on investments and deposits in the year 2000
will be, in our opinion, undeterminable events. A
contingency plan is being developed to address any
withdrawal of funds.
In July of 1998 the Jersey Shore State Bank began mailing
brochures to all deposit customers explaining the Year
2000 and the Bank's efforts in that regard. We do not
anticipate any change in liquidity, operations or financial
condition due to these factors.
Except for Woods Investment Company, Inc.'s and Woods
Real Estate Development Co., Inc.'s reliance on the same
systems as Jersey Shore State Bank for Year 2000
readiness, no major computer to computer transmission of
information or sharing exists, with the exception of computer
links with the Federal Reserve Bank and Federal Home
Loan Bank that have already been tested and shown to be
compliant.
Third party vendors from suppliers of office equipment and
forms to providers of software and hardware for computers
have been contacted and have adequately responded.
Those responses were evaluated and are considered
adequate with the exception of Jersey Shore State Bank's
payroll provider, one electronic forms provider, a branch
phone system provider, two third parties who purchase our
mortgages and the manufacturer of our automatic mailing
machine.
We will also be assessing newly purchased software and
an imaging system that will be installed as they are
activated.
Contingency plans are being formulated for the event that
these third parties cannot attain compliance. The plans are
expected to be complete by the end of the first quarter in
1999.
In addition, Jersey Shore State Bank has made an offer to
purchase and merge with another bank. In the first quarter
of 1999 we expect to have assessed and remediated any
Year 2000 inconsistencies within these new offices and
remediated any problems, if found. These new offices will
be switched to our already Year 2000 certified third party
providers.
We do not anticipate any additional Year 2000 costs as a
result of the merger. Any costs determined at a later date
would be included in our regular Year 2000 budget.
To date no independent verifications of any
systems have been necessary.
The following definitions and chart have been prepared to
provide a snapshot of our Year 2000 progress:
PHASES DEFINITIONS:
Awareness: The Board of Directors and employee recognition that
the Year 2000 hurdle exists and the possible
effect it could have on our holding company.
Assessment: Determination of which are core and non-core systems
to our operations, income, budgeting and
scheduling remediation, as necessary.
Determining loan, deposit and investment risk.
Remediation: The actual replacement or upgrading of systems found
to be non-compliant and developing policies and
procedures to offset or minimize internal and
external risks including contingency plans for
undetermined effects.
Testing: Trying systems used for core and non-core operations
separately and together to assure proper
results as of the century date change.
Implementation: All systems are certified Year 2000 compliant and are in
place in the everyday operations of the
Corporation.
<TABLE>
<S> <C> <C>
EXPECTED COMPLETED OR
PHASE COMPLETION DATE IMPLEMENTED
Awareness September 1997 September 1997
Assessment June 1998 August 1998
Remediation December 1998
Testing December 1998
Implementation 1st quarter 1999
</TABLE>
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 herin: (i) the
effect of changes in laws and regulations,
including federal and state banking laws and
regulations, which the Company must comply,
and the associated costs of compliance with such
laws and regulations either currently or in the
future as applicable; (ii) the effect of changes
in accounting policies and practices, as may be
adopted by the regulatory agencies as well as
by the Financial Accounting Standards Board,
or of changes in the Company's organization,
compensation and benefit plans; (iii) the effect on
the Company's competitive position within its
market area of the increasing consolidation
within the banking and financial services
industries, including the increased competition from
larger regional and out-of-state banking
organizations as well as nonbank providers
of various financial services; (iv) the effect of
changes in interest rates; and (v) the effect of
changes in the business cycle and downturns
in the local, regional or national economies.
In reference to the attached financial statements, all
adjustments are of a normal recurring nature pursuant
to Rule 10-01 (b) (8) of Regulation S-X.
Part II. OTHER INFORMATION
Item 5. Other Information.
On July 22, 1998, Penns Woods Bancorp, Inc. entered into
an agreement of merger with The First National Bank of Spring
Mills ("FNBSM") providing for the merger of FNBSM with and
into Jersey Shore State Bank, a wholly-owned subsidiary of
Penns Woods Bancorp, Inc., and the conversion of each
outstanding share of common stock of FNBSM into 3.5 shares of
common stock, $10.00 par value per share, of Penns Woods
common stock. Based on this exchange ratio, Penns Woods
expects to issue 262,500 shares of Penns Woods Bancorp, Inc.
common stock. The Company anticipates that the Merger
transaction will close early in the first quarter of 1999.
On October 14, 1998, Jersey Shore State Bank, a wholly-owned
subsidiary of Penns Woods Bancorp, Inc. opened a full-service
branch office in the Wal-Mart Supercenter in Mill Hall,
Pennsylvania. This in-store bank branch will provide our
customers with the ability to shop and bank in the same
location.
Item 6. Exhibits and reports on Form 8-K.
Number Description
- --------------------------
(11) Statement Regarding Computation of Per Share Earnings
(27) Financial Data Schedule
b. RepNo reports on Form 8-K were filed in the third quarter of 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PENNS WOODS BANCORP, INC.
(Registrant)
Date: November 16, 1998
--------------------------------
Theodore H. Reich, President
Date: November 16, 1998
--------------------------------
Sonya E. Hartranft, Secretary
Description
- --------------------------
(11) Statement Regarding Computation of Per Share Earnings
(27) Financial Data Schedule
EXHIBIT 11
<TABLE>
STATEMENT OF COMPUTATION OF EARNING PER SHARE
FOR THE PERIOD ENDED 9/30/98
LESS FRACTION
SHARES FRACTIONAL OF WEIGHTED
DATE OUTSTANDING RESTATEMENT SHARES YEAR SHARES
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/01/98-1/14 1,282,779 2 - 14/273 131,567.0
1/15/98-2/25 2,565,598 - - 42/273 394,707.0
2/26/98-6/03 2,565,958 - - 98/273 921,113.0
6/04/98-7/23 2,569,558 - - 50/273 470,615.0
7/24/98-9/30 2,571,302 - - 69/273 649,890.0
WEIGHTED SHARES OUTSTANDING 9/30/98 2,567,892
================
<S> <C> <C>
NET INCOME 9/30/98 $4,572,986
WEIGHTED SHARES OUTSTANDING 9/30/98 2,567,892
EARNINGS PER SHARE 9/30/98 - BASIC $1.78
================
NET INCOME 9/30/98 $4,572,986
WEIGHTED SHARES OUTSTANDING 9/30/98 2,567,892
DILUTIVE EFFECT OF STOCK OPTIONS 9/30/98 12,130
2,580,022
EARNINGS PER SHARE 9/30/98 - DILUTED $1.77
================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8477
<INT-BEARING-DEPOSITS> 31
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93604
<INVESTMENTS-CARRYING> 3050
<INVESTMENTS-MARKET> 0
<LOANS> 197221
<ALLOWANCE> 2461
<TOTAL-ASSETS> 309588
<DEPOSITS> 21845
<SHORT-TERM> 21008
<LIABILITIES-OTHER> 5643
<LONG-TERM> 20000
0
0
<COMMON> 25713
<OTHER-SE> 18769
<TOTAL-LIABILITIES-AND-EQUITY> 309588
<INTEREST-LOAN> 13365
<INTEREST-INVEST> 3436
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16801
<INTEREST-DEPOSIT> 5957
<INTEREST-EXPENSE> 1016
<INTEREST-INCOME-NET> 9828
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 1059
<EXPENSE-OTHER> 5442
<INCOME-PRETAX> 6146
<INCOME-PRE-EXTRAORDINARY> 6146
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4573
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 0
<LOANS-NON> 850
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2414
<CHARGE-OFFS> 226
<RECOVERIES> 48
<ALLOWANCE-CLOSE> 2461
<ALLOWANCE-DOMESTIC> 2461
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
