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, 1998
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
(570) 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
<PAGE 1>
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant $151,664,915 at February 28,
1999.
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 28, 1999
Common Stock, $10 Par Value 2,837,167 Shares
PAGE 2
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following document is incorporated by reference in response
to Part III of this Report: Penns Woods Bancorp, Inc. Proxy
Statement (Proxy Statement dated March 25, 1999)
PAGE 3
<PAGE>
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 nine 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 140 persons as of
December 31, 1998. The Company does not have any employees. The
principal officers of the Bank also serve as officers of the
Company.
B. Regulations 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
<PAGE 4> 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, 45% of net unrealized gains on marketable equity
securities, and a limited amount of the general loan loss
allowance. The risk-based capital guidelines are required to
take adequate account of interest rate risk, concentration of
credit risk, and risks of nontraditional activities.
In addition to the risk-based capital guidelines, the FRB
requires each bank holding company to comply with the leverage
ratio, under which the bank holding company must maintain a
minimum level of Tier 1 capital to average total consolidated
assets of 3% for those bank holding companies which have the
highest regulatory examination ratings and are not contemplating
or experiencing significant growth or expansion. All other bank
<PAGE 5> 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, number of branches or lines of business. If capital
has reached the significantly or critically undercapitalized
levels, further material restrictions can be imposed, including
restrictions on interest payable on accounts, dismissal of
management and (in critically undercapitalized situations)
appointment of a receiver. For well-capitalized institutions,
the FDIA provides authority for regulatory intervention where the
institution is deemed to be engaging in unsafe or unsound
practices or receives a less than satisfactory examination report
rating for asset quality, management, earnings or liquidity.
Deposit Insurance - There are two deposit insurance funds
administered by the FDIC - the Savings Association Insurance Fund
("SAIF") and the Bank Insurance Fund ("BIF"). The Bank's
deposits are 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
<PAGE 6> 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,
1998, the Bank's ratios were well above required minimum ratios.
Both the BIF and SAIF are presently fully funded at more
than the minimum amount required by law. Accordingly, the BIF
and SAIF assessment rates range from zero for those institutions
with the least risk, to $0.27 for every $100 of insured deposits
for institutions deemed to have the highest risk. The Bank is in
the category of institutions that presently pay nothing for
deposit insurance. The FDIC adjusts the rates every six months.
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 $.0122 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 $.0610 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.
<PAGE 7>
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, 1998, the Bank had total assets of
$297,115,000; total shareholders' equity of $32,703,000 and total
deposits of $228,925,000. 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
<PAGE 8> 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 conjunction with
the Pennsylvania Industrial Development Authority. Caution is
also exercised in taking industrial property for collateral by
requiring, on a selective basis, environmental audits.
Equipment loans are generally amortized over three to seven
years, with an owner equity contribution required of at least 20%
of the purchase price. Unusually expensive pieces may be
financed for a longer period depending upon the asset's useful
life. The increased cash flow resulting from the additional
<PAGE 9> 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 availability is limited to standbys where
the customer is well known to the Bank. Credit criteria is the
same as that utilized in making a direct loan and collateral is
obtained in most cases, and whenever the expiration date is for
more than one year.
Consumer loan products include second mortgages, automobile
financing, small loan requests, overdraft check lines and PHEAA
referral loans. Our policy includes standards used in the
industry on debt service ratios and terms are consistent with
prudent underwriting standards and the use of proceeds.
Verifications are made of employment and residency, along with
credit history. Second mortgages are confined to equity
borrowing and home improvements. Terms are generally ten years
or less and rates are fixed. Loan to collateral value criteria
is 80% or less and verifications are made to determine values.
Automobile financing is generally restricted to 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. <PAGE 10>
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) cumulative gap 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 9 full service offices in Lycoming,
Clinton and Centre 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 commercial banks, savings
and loan associations and other financial institutions.
The Bank has a relatively stable deposit base and no
material amount of deposits is obtained from a single depositor
or group of depositors (including federal, state and local
governments). The Bank has not experienced any significant
seasonal fluctuations in the amount of its deposits.
b. Supervision and Regulation
The earnings of the Bank are affected by the policies of
regulatory authorities including the 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 in 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.
<PAGE 11>
EXECUTIVE OFFICERS OF THE REGISTRANT:
NAME AGE FIVE-YEAR ANALYSIS OF DUTIES
Theodore H. Reich 60 President and Chief Executive Officer
of the Company; the Bank; Woods Real
Estate Development Co., Inc.; and
Woods Investment Company, Inc.
Ronald A. Walko 52 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 57 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.
Sonya E. Hartranft 39 Secretary of the Company; Controller
of the Bank; Secretary of Woods Real
Estate Development Co., Inc. and Woods
Investment Company, Inc.
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:
<TABLE>
<CAPTION>
Office Address
<S> <C> <C>
Jersey Shore Main 115 South Main Street Owned
PO. Box 5098
Jersey Shore, Pennsylvania 17740
Jersey Shore 112 Bridge Street Owned
Jersey Shore, Pennsylvania 17740
DuBoistown 2675 Euclid Avenue Under Lease
DuBoistown, Pennsylvania 17702 -- see below
Williamsport 300 Market Street Owned
P.O. Box 967
Williamsport, Pennsylvania 17703-0967
Montgomery RD. 1, Box 493 Under Lease
Montgomery, Pennsylvania 17752 -- see below <PAGE 12>
Lock Haven 4 West Main Street Owned
Lock Haven, Pennsylvania 17745
Mill Hall (Inside Wal-Mart), 167 Hogan Boulevard Under Lease
Mill Hall, Pennsylvania 17751 -- see below
Spring Mills Route 45, Ross Hill Road, P.O. Box 66 Owned
Spring Mills, Pennsylvania 16875
Centre Hall RR 2, Route 45 West Land Under Lease
Centre Hall, 16828 -- see below
Mortgage/Loan Center
State College 300 Allen Street Under Lease
State College, Pennsylvania 16801 -- see below
</TABLE>
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, 1998.
The Montgomery branch office is leased for a fifteen-year
period ending in the year 2002. The Bank has the option to
extend the lease for a five-year period after the initial
fifteen-year term has expired. The Bank also has the 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, 1998.
The Mill Hall branch office space, inside WAL-MART, is
leased for a five-year period ending in October, 2003. After the
initial period the Bank has the option to extend the lease for
two additional five-year terms. The rent for the Mill Hall branch
office from opening date, October 14th, to year end December 31,
1998 was $9,543. <PAGE 13>
Penns Woods Bancorp, Inc. completed the acquisition of the
First National Bank of Spring Mills on January 11, 1999. The
Centre Hall branch office is situated on a lot leased for a
five-year period ending March 2003. The Bank has the option to
renew this lease for three successive ten-year terms. The monthly
rent is adjusted annually in accordance with changes in the
Consumer Price Index published by the United States Department of
Labor with the measuring month being February of each year.
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 exercised this option,
renewing the lease term, which will end May, 1999. In October of
1998, the Bank again renewed the lease for an additional,
one-year term which will end in May, 2000. The annual rent for
the State College Mortgage/ Loan Center was $13,900 for the year
ended December 31, 1998.
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 1998.
PAGE 14
<PAGE>
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, 1996. 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.
Dividends
HIGH LOW Declared
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
1998:
First quarter $48 $32 3/8 0.180
Second quarter $53 $47 0.180
Third quarter $55 1/2 $54 0.180
Fourth quarter $57 $53 1/12 0.460
The stock prices and the dividend have been adjusted to
reflect 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
<PAGE 15> 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, 1999, the Registrant had approximately
1,074 shareholders of record.
<PAGE 16>
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth certain financial data as of
and for each of the years in the five-year period ended
December 31, 1998.
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Interest income $ 22,591 $ 20,823 $ 19,997 $ 18,695 $ 16,882
Interest expense 9,447 8,317 8,079 7,793 6,902
Net interest income 13,144 12,506 11,918 10,902 9,980
Provision for loan losses 300 220 105 300 577
Net interest income after
provision for loan losses 12,844 12,286 11,813 10,602 9,403
Other income 3,334 5,840 2,461 2,215 2,137
Other expense 7,717 7,384 6,967 7,534 6,997
Income before income taxes 8,461 10,742 7,307 5,283 4,543
Applicable income taxes 2,050 2,991 1,965 1,421 1,174
Net Income $ 6,411 $ 7,751 $ 5,342 $ 3,862 $ 3,369
Consolidated Balance Sheet
at End of Period:
Total assets $309,763 $283,988 $259,724 $242,629 $235,638
Loans 196,052 187,567 162,267 153,640 151,492
Allowance for loan losses (2,501) (2,414) (2,413) (2,353)
(2,127)
Deposits 228,537 220,536 203,016 202,258 190,839
Long-term debt -- other 20,000 0 0 0 7,000
Stockholders' equity 45,626 42,974 33,557 29,685 23,839
Per Share Data:
Net income
Earnings per share - Basic $ 2.50 $ 3.03 $ 2.10 $ 1.52 $ 1.33
Earnings per share - Diluted $ 2.49 $ 3.01 $ 2.09 $ 1.52 $ 1.33
Cash dividends declared 1.00 0.85 0.60 0.50 0.395
Book Value 17.72 16.75 13.14 11.67 9.42
Number of shares outstanding,
at end of period 2,578,352 1,282,779 1,277,298 1,271,339 1,265,597
Average number of shares
outstanding 2,568,780 2,556,804 2,544,561 2,535,076 2,533,756
Selected financial ratios:
Return on average stockholders'
equity 14.23% 20.07% 17.25% 14.07% 13.89%
Return on average total assets 2.12% 2.88% 2.12% 1.64% 1.45%
Net interest income to average
interest earning assets 4.77% 5.25% 5.08% 5.04% 4.71%
Dividend payout ratio 40.00% 28.05% 28.57% 32.79% 29.70%
Average stockholders' equity
to average total assets 15.10% 14.46% 12.31% 11.64% 10.42%
Loans to deposits, at end of
period 84.69% 83.96% 78.74% 74.80% 78.27%
</TABLE>
Numbers adjusted to reflect a stock split effected in the
form of a 50% stock dividend. In addition, per share data and
number of shares outstanding have been adjusted in each reporting
<PAGE 17> period to give retroactive effect to a stock split
effected in the form of a 100% stock dividend issued January 15,
1998.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is determined by calculating the
difference between the yields earned on interest earning assets
and the rates paid on interest bearing liabilities.
1998 vs 1997
Fully taxable equivalent net interest income increased to
$13,896,000 for the year ended December 31, 1998, or an increase
of $680,000 or 5.1% over the previous year.
The increase in total interest earning average assets from
year end 1997 to year end 1998 was $33,656,000. Total average
securities increased $10,213,000, total average loans increased
$27,932,000, total average federal funds sold decreased
$1,136,000 and total average other assets decreased $3,353,000.
The increase in tax equivalent net interest income, related
to the volume increase in average investment securities, was
$229,000, while the decrease due to a decline in average interest
rate of return was $174,000. The resulting net increase of
$55,000 to tax equivalent net interest income was primarily due
to two leverage transactions completed in April and June of 1998;
each transaction was $10,000,000.
Average net loans contributed $2,611,000 to tax equivalent
net interest income due to a volume increase; a decline in the
average rate of return on loans offset this increase by $614,000,
resulting in a net increase of $1,997,000. Average loans grew
primarily due to strong demand for commercial loans.
The increase in total interest bearing average liabilities
from year end 1997 to year end 1998 was $22,601,000.
Total average savings increased $2,148,000 and total average
other time deposits increases $5,142,000. Total average
securities sold under repurchase agreements and federal funds
purchased increased $2,462,000 and total average borrowed money
increased $12,849,000. Average total deposits increased by total
of $7,290,000. The related increase in interest expense due to
<PAGE 18> volume increases was $343,000. The related decrease in
interest expense due to interest rate was $64,000 for a net
increase in interest expense of $279,000 related to deposits.
Average total borrowed money, federal funds purchased and
securities sold under agreement to repurchase increased
$15,311,000 in total. Increases in interest expense due to
volume on the above accounts was $488,000 and $363,000 due to
interest rate. The net increase in interest expense related to
these items was $851,000.
In summary, the total effective interest differential
declined 43 basis points mainly due to a decline in interest
rates on interest earning assets. The decline in interest rates
was due to the economy in general and the result of the effects
of a 75 basis point decline in the Federal Reserve discount rate.
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%. <PAGE 19>
AVERAGE BALANCES AND INTEREST RATES
(INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998
AVERAGE AVERAGE
BALANCE INTEREST RATE
<S> <C> <C> <C>
ASSETS:
Interest earning assets:
Securities:
US. Treasury and federal agency $ 42,667 $ 2,792 6.54%
State and political subdivisions 18,747 1,595 8.51%
Other 20,375 805 3.95%
Total securities 81,789 5,192 6.35%
LOANS:
Tax-exempt loans 6,742 520 7.71%
All other loans, net of discount where
applicable 186,851 17,811 9.53%
Total loans 193,593 18,331 9.47%
Federal funds sold 0 0 0.00%
Total earning assets 275,382 $23,523 8.54%
Other assets 23,639
TOTAL ASSETS $299,021
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Savings $ 85,223 $ 2,336 2.74%
Other time 101,420 5,616 5.54%
Total deposits 186,643 7,952 4.26%
Securities sold under repurchase
agreements & federal funds purchased 15,082 772 5.12%
Borrowed money 12,849 723 5.63%
Total interest bearing liabilities 214,574 $ 9,447 4.40%
Demand deposits 33,479
Other liabilities 5,828
Shareholders' equity 45,145
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $299,026
Interest income/earning assets $275,382 $23,523 8.54%
Interest expense/earning assets............. $275,382 9,447 3.43%
Effective interest differential............. $14,076 5.11%
<PAGE 20>
<CAPTION>
1997 1996
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:
Securities:
US. Treasury and federal agency......... $ 35,607 $ 2,526 7.09% $ 41,273 $ 2,911 7.05%
State and political subdivisions........ 20,574 1,795 8.72% 22,452 1,974 8.79%
Other................................... 15,395 816 5.30% 13,469 909 6.75%
Total securities...................... 71,576 5,137 7.18% 77,194 5,794 7.51%
LOANS:
Tax-exempt loans............................ 3,268 295 9.03% 1,568 145 9.25%
All other loans, net of discount where
applicable................................ 162,393 16,039 9.88% 155,633 15,147 9.73%
Total loans........................... 165,661 16,334 9.86% 157,201 15,292 9.73%
Federal funds sold.......................... 1,136 62 5.46% 86 5 5.81%
Total earning assets.................. 238,373 $21,533 9.03% 234,481 $21,091 8.99%
Other assets................................ 26,992 17,052
TOTAL ASSETS........................ $265,365 $251,533
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Savings................................. $ 83,075 $ 2,286 2.75% $ 84,722 $ 2,376 2.80%
Other time.............................. 96,278 5,387 5.60% 89,994 5,054 5.62%
Total deposits........................ 179,353 7,673 4.28% 174,716 7,430 4.25%
Securities sold under repurchase
agreements & federal funds purchased...... 12,620 644 5.10% 14,034 649 4.62%
Borrowed money.............................. 0 0 0.00% 0 0 0.00%
Total interest bearing liabilities.... 191,973 $ 8,317 4.33% 188,750 $ 8,079 4.28%
Demand deposits............................. 29,697 27,306
Other liabilities........................... 5,318 4,507
Shareholders' equity........................ 38,377 30,970
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.............. $265,365 $251,533
Interest income/earning assets.............. $238,373 $21,533 9.03% $234,481 $21,091 8.99%
Interest expense/earning assets............. $238,373 8,317 3.49% $234,481 8,079 3.45%
Effective interest differential............. $13,216 5.54% $13,012 5.54%
</TABLE>
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.
<PAGE 21>
5. Loan fees are included in interest income as follows: 1998,
$623,000, 1997, $527,000, 1996, $673,000.
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). <PAGE 22>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
1998 compared to 1997
Increase (decrease)
Due to:
Volume $ 385 $(156) $2,611 $(31) $2,809
Rate (130) (44) (614) (31) $ (819)
Net increase (decrease) $ 255 $(200) $1,997 $(62) $1,990
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
</TABLE>
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.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
$ 59 $284 $126 $362 $ 831 $ 1,978
(9) (55) 2 361 $ 299 $(1,118)
$ 50 $229 $128 $723 $1,130 $ 860
$(46) $352 $(68) $ 0 $ 238 $ 204
(44) (19) 63 0 0 $ 0
$(90) $333 $ (5) $ 0 $ 238 $ 204
</TABLE>
<PAGE 23>
PROVISION FOR LOAN LOSSES
1998 vs 1997
The provision for loan losses was increased 36% over the
prior year to $300,000. This increase is attributed to an
anticipated significant rise in consumer loan losses accompanied
by a further decline in recoveries. Management conducts a
quarterly, a comprehensive, detailed credit review of the loan
portfolio for quality from which the adequacy of the provision is
determined. Supplementing the internal review is an external
review. In so doing, management remains committed to an
aggressive program of problem loan identification and resolution.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $2,414 $2,413 $2,353 $2,127 $1,956
Charge-offs:
Domestic:
Real estate 0 0 4 0 0
Commercial and industrial 91 182 100 44 432
Consumer and all other loans 180 145 138 210 62
Total charge-offs 271 327 242 254 494
Recoveries:
Real estate 0 2 0 0 0
Commercial and industrial 29 68 175 9 67
Consumer and all other loans 29 38 22 171 21
Total recoveries 58 108 197 180 88
Net charge-offs 213 219 45 74 406
Additions charged to operations 300 220 105 300 577
Balance at end of period $2,501 $2,414 $2,413 $2,353 $2,127
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.11% 0.13% 0.03% 0.05% 0.28%
</TABLE>
<PAGE 24>
OTHER INCOME
1998 vs 1997
Other income for the year ended December 31, 1998 decreased
$2,506,000 from 1997. The majority of the decrease was the
result of securities gains taken during 1998 versus those taken
in 1997. Securities gains realized during 1998 were $2,076,000
versus $4,656,000 that were realized in 1997.
The increase in service charges from $858,000 in 1997 to
$1,046,000 in 1998 was the result of increases in charges
collected on customer's deposit accounts and overall growth in
the deposit base.
Other operating income decreased in 1998 over that reported
in 1997 by $114,000. There were two main factors that
contributed to the majority of the decrease. The first was the
sale of foreclosed assets during 1997. The income reported on
the 1997 sales exceeded the amount of income reported in 1998 for
such sales. The second was a decrease in the income received for
insurance purchases on installment loans. This decrease was the
result of a decrease in the amount of installment loans opened
during 1998.
1997 vs 1996
Total other income increased to $5,840,000 in 1997 over
1996's total other income of $2,461,000. This $3,379,000
increase resulted from the net effect of an increase in service
charges collected of $18,000, an increase in securities gains
realized of $3,311,000, and an increase in other operating income
of $50,000.
During 1997 securities gains realized amounted to
$4,656,000. The gains were realized on sales of bank stocks and
various types of bond securities that were being held in the
portfolio.
OTHER EXPENSES
1998 vs 1997
When comparing the year ended December 31, 1998 with the
year ended December 31, 1997, there was a $333,000 or 4% increase
in other expenses.
Salaries and employee benefits expensed during 1998
increased by $107,000 over the amount expensed during 1997 due to
a special bonus that was paid to all employees and wage
increases.
Occupancy expense increased $91,000 and furniture and
equipment expense decreased in 1998 by $49,000 compared to 1997.
<PAGE 25> The increase in occupancy expense is primarily due to
an increase in depreciation resulting from the purchase of an
imaging system.
Other operating expenses, the final component of total other
expenses, increased by $184,000. ATM and debit card expenses
account for the majority of this difference, $81,000, which is
the result of the addition of one ATM machine and increased usage
by our customers and foreign customers.
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 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.
<PAGE 26>
INCOME TAXES
1998 vs 1997
The provision for income taxes for the year ended
December 31, 1998 resulted in an effective income tax rate of
24.2% compared to 27.8% for 1997. The decrease in the effective
income tax rate was primarily due to a tax credit for Jersey
Shore State Bank's investment in a low-to-moderate income housing
project.
1997 vs 1996
The income tax provision for 1997 totaled $2,991,000 or an
effective income tax rate of 27.8% compared to 26.9% in 1996.
The increase in the effective income tax rate was primarily due
to a decline in tax-exempt interest.
FINANCIAL CONDITION
INVESTMENTS
1998
The investment security portfolio increased in 1998 by
$17,723,000 due to net increases in U.S. government agencies,
state and political subdivisions, other bonds, notes and
debentures and corporate stock of $19,624,000 and a decrease in
U.S. treasury securities of 1,901,000. The increase in
investment securities is primarily due to purchases of equity
securities, and purchases of government securities and state and
political subdivisions funded by long-term advances from Federal
Home Loan Bank. The total investment portfolio at year end 1998
was comprised of 43% U.S. government and agency securities, 27%
state and municipal subdivisions, 29% equity securities, and 1%
other bonds, notes and debentures. Held-to-maturity securities
had a carrying value of $3,078,000. The largest portion of the
portfolio is classified as available-for-sale and had an
amortized cost of $85,965,000 with an estimated market value of
$93,279,000. Due to the unrealized gain on available-for-sale
securities of $7,314,000, shareholders' equity was effected by
$4,826,000, 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.
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
<PAGE 27> 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.
The carrying amounts of investment securities at the dates
indicated are summarized as follows ( in thousands):
DECEMBER 31,
1998 1997
US. Treasury securities:
Held-to-Maturity $ 0 $ 0
Available-for-Sale 10,866 12,767
US.government agencies:
Held-to-Maturity 339 513
Available-for-Sale 30,448 24,695
State and political subdivisions:
Held-to-Maturity 2,464 2,471
Available-for-Sale 23,466 13,165
Other bonds, notes and debentures:
Held-to-Maturity 275 250
Available-for-Sale 701 797
Total bonds, notes and debentures 68,559 54,658
Corporate stock -Available-for-Sale 27,798 23,976
Total $96,357 $78,634
The following table shows the maturities and repricing
of investment securities at December 31, 1998 and the weighted
average yields (for tax-exempt obligations on a fully taxable
<PAGE 28> basis assuming a 34% tax rate) of such securities (in
thousands):
<TABLE>
<CAPTION>
WITHIN AFTER ONE AFTER FIVE AFTER
ONE BUT WITHIN BUT WITHIN TEN
YEAR FIVE YEARS TEN YEARS YEARS
<S> <C> <C> <C> <C>
US. Treasury securities:
HTM Amount $ 0 $ 0 $ 0 $ 0
Yield 0.00% 0.00% 0.00% 0.00%
AFS Amount 3,004 7,591 0 0
Yield 6.17% 6.32% 0.00% 0.00%
US.government agencies:
HTM Amount 0 0 0 339
Yield 0.00% 0.00% 0.00% 8.83%
AFS Amount 0 0 0 30,358
Yield 0.00% 0.00% 0.00% 7.21%
State and political subdivisions:
HTM Amount 0 1,142 401 921
Yield 0.00% 6.34% 7.31% 7.34%
AFS Amount 0 1,198 687 20,515
Yield 0.00% 9.02% 8.83% 7.71%
Other bonds, notes and debentures:
HTM Amount 10 165 100 0
Yield 6.63% 7.34% 7.05% 0.00%
AFS Amount 0 0 0 702
Yield 0.00% 0.00% 0.00% 7.62%
Total Amount $3,014 $10,096 $1,188 $52,835
Total Yield 6.17% 6.67% 8.14% 7.45%
</TABLE>
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
1998
Gross loans totaled $196,462,000 at year end, an increase of
$8,487,000 or 4.5% over the prior year end. While commercial
loans grew by $12,070,000 or 11.9% and consumer loans grew by
$1,426,000 or 5.0%, residential real estate mortgages declined by
$5,009,000 or 8.6%. Growth has leveled off primarily because of
aggressive pricing in the market place.
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
<PAGE 29> grew $1,807,000 or 6.78%. Growth was propelled by
increased loan demand and competitive rates.
The amount of loans outstanding at the indicated dates are
shown in the following table according to type of loan (in
thousands):
December 31,
1998 1997
Domestic:
Real estate mortgage $ 53,483 $ 58,492
Commercial and industrial 113,112 101,042
Consumer and all other loans 29,867 28,441
Gross loans $196,462 $187,975
The amounts of domestic loans at December 31, 1998 are
presented below by category and maturity (in thousands):
<TABLE>
<CAPTION>
CATEGORY(1)(2)
COMMERCIAL
REAL AND
ESTATE OTHER CONSUMER TOTAL
<S> <C> <C> <C> <C>
Loans with floating
interest rates:
1 year or less $ 6 $ 10,002 $ 761 $ 10,769
1 through 5 years 97 3,884 208 4,189
5 through 10 years 561 5,905 0 6,466
After 10 years 5,041 8,275 1,754 15,070
Sub Total 5,705 28,066 2,723 36,494
Loans with predetermined
interest rates:
1 year or less 123 5,100 1,428 6,651
1 through 5 years 2,039 19,622 15,978 37,639
5 through 10 years 8,480 14,540 9,708 32,728
After 10 years 37,136 45,784 30 82,950
Sub Total 47,778 85,046 27,144 159,968
Total $53,483 $113,112 $29,867 $196,462
</TABLE>
(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, 1998.
<PAGE 30>
ALLOWANCE FOR LOAN LOSSES
1998
At December 31, 1998, the allowance for loan losses stood at
$2,501,000 or 1.3% of gross loans. This was an increase of
$87,000 or 3.6%.
Adequacy of the loan loss allowance is determined quarterly
in unison with management's comprehensive review of the loan
portfolio for credit quality. Reviews are further enhanced by
analyses of present and past economic conditions, portfolio
trends and growth, peer comparisons and other factors impacting
overall credit quality. Underwriting continues to emphasize the
need for security and adequate collateral margins.
In 1998, non accruing loans increased by $94,000 to
$646,000, while overall non performing loans were in fact
declining. 12% of non accruing loans are meeting contractual
obligations and all such loans are real estate secured.
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.
TOTAL NONPERFORMING LOANS
(IN THOUSANDS)
90 DAYS
NONACCRUAL PAST DUE RENEGOTIATED
1998 $ 646 $ 56 $0
1997 $ 552 $409 $0
1996 $ 748 $256 $0
1995 $1,009 $791 $0
1994 $2,275 $677 $0
<PAGE 31>
If interest had been recorded at the original rate on
nonaccrual loans, such income would have approximated $98,000,
$81,000 and $86,000 for the years ended December 31, 1998, 1997
and 1996, respectively. Interest income on such loans, which is
recorded when received, amounted to approximately $50,000,
$42,000 and $43,000 for the years ended December 31, 1998, 1997
and 1996, 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, 1998 and 1997, the Company had loans
amounting to approximately $56,000 and $51,000, respectively,
that were specifically classified as impaired. Of these amounts
$44,000 was included in non-accrual loans in 1997. 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 loan trends and levels compared to outstandings
and peer banks.
4. Reports of examination of the loan portfolio by the
Pennsylvania State Banking Department and the Federal
Deposit Insurance Corporation. <PAGE 32>
ALLOCATION IN THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
PERCENT OF
LOANS IN
EACH
CATEGORY TO
AMOUNT TOTAL LOANS
DECEMBER 31, 1998:
Balance at end of period applicable to:
Domestic:
Real Estate $ 50 2.0%
Commercial and industrial 2,251 90.0%
Consumer and all other loans 200 8.0%
Total $2,501 100.0%
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 loan 106 5.0%
Total $2,127 100.0%
DEPOSITS
1998
There was an increase in average deposits in 1998 of
$11,072,000, or 5.3% over 1997's average deposits.
An increase in other time deposits contributed $5,142,000 to
the overall increase. Movements in demand deposits and savings
deposits resulted in increases of $3,782,000 and $2,148,000,
respectively.
<PAGE 33>
The $11,072,000 increase is the result of the Bank's
successful efforts to offer competitive interest rates on their
savings and other time deposit accounts, in addition to providing
an attractive, low-fee checking account product.
There were approximately $20,950,000 in time deposits
exceeding $100,000.
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 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.
This decline suggests the 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.
Time deposits of $100,000 or more totaled approximately
$20,950,000 on December 31, 1998 and $19,524,000 on December 31,
1997. Interest expense related to such deposits was
approximately $1,151,000, $851,000 and $750,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Time
deposits of $100,000 or more at December 31, 1998 mature as
follows: 1999 - $18,613,000; 2000 - $987,000; 2001 - $344,000;
2002 - $405,000; 2003 - $100,000; thereafter - $501,000.
The average amount and the average rate paid on deposits are
summarized below (in thousands): <PAGE 34>
<TABLE>
<CAPTION>
1998 1997 1996
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C> <C>
DEPOSITS IN DOMESTIC
BANK OFFICES:
Demand deposits:
Noninterest bearing $ 33,479 0.00% $ 29,697 0.00% $ 27,306 0.00%
Interest Bearing 38,403 2.62% 36,561 2.68% 37,146 2.63%
Savings deposits 46,820 2.84% 46,514 3.07% 47,576 2.94%
Time deposits 101,420 5.54% 96,278 5.60% 89,994 5.62%
Total average deposits $220,122 $209,050 $202,022
</TABLE>
SHAREHOLDERS' EQUITY
1998
Shareholders' equity is evaluated in relation to total
assets and the risk associated with those assets. A company is
more likely to meet its cash obligations and absorb unforeseen
losses when the capital resources are greater.
At December 31, 1998, total shareholders' equity increased
by $2,652,000 reaching $45,626,000, which is up from $42,974,000
at December 31, 1997. Net income of $6,411,000 was added to
equity at year-end 1998, in addition to $184,000 from stock
options that were exercised throughout 1998. The net change in
the unrealized appreciation on securities available-for-sale from
year end 1997 to 1998 reduced shareholders' equity by $1,159,000.
A purchase of treasury stock also reduced shareholders' equity by
$214,000. Dividends that were paid from equity in 1998 totaled
$2,570,000.
1997
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, issued 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
<PAGE 35> distributable for the par value of the shares to be
issued. This transaction had no net effect on shareholders'
equity.
Bank regulators have 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, 1998, the Company's required ratios were
well above the minimum ratios as follows:
1998
Minimum
Company Standards
Tier 1 capital ratio 20.23% 4.00%
Total capital ratio 22.73% 8.00%
For a more comprehensive discussion of these requirements,
see "Regulations and Supervision" on Page 41 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:
1998 1997 1996
Percentage of net income to:
Average total assets 2.12% 2.88% 2.12%
Average shareholders' equity 14.23% 20.07% 17.25%
Percentage of dividends declared
per common share 40.00% 28.05% 28.57%
Percentage of average shareholders'
equity to average total assets 14.89% 14.46% 12.31%
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
<PAGE 36> 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, 1998: <PAGE 37>
<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) $ 12,039 $ 11,944 $ 28,549 $36,535
Loans(2) 74,521 23,175 83,068 15,698
Total earning assets 86,560 35,119 111,617 52,233
Interest-bearing liabilities:
Deposits(3) 108,911 20,659 45,761 14,394
Borrowings 11,370 147 20,440 1,048
Total interest-bearing liabilities 120,281 20,806 66,201 15,442
Net non-interest bearing
funding(4) 11,317 8,518 20,518 22,446
Total net funding sources 131,598 29,324 86,719 37,888
Excess assets (liabilities) (45,038) 5,795 24,898 14,345
Cumulative excess (45,038) (39,243) (14,345) 0
assets (liabilities)
</TABLE>
(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 noninterest-bearing funds is the sum of
noninterest-bearing liabilities and shareholders'
equity minus noninterest-earning assets and reflect
managerial assumptions as to the appropriate maturity
categories.
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 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 the rate shock
analysis for the periods indicated:
<PAGE 38>
Net Interest Income
Changes in Rates Change (After tax)
December 31
1998 1997
-200 $ 421 $ 306
-100 $ 239 $ 161
+100 $(273) $(172)
+200 $(553) $(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.
MERGER WITH FIRST NATIONAL BANK OF SPRING MILLS
On January 11, 1999, Penns Woods Bancorp, Inc. and First
National Bank of Spring Mills,("FNBSM") completed the merger of
FNBSM with and into Jersey Shore State Bank, the wholly owned
banking subsidiary of Penns Woods Bancorp, Inc. Penns Woods
Bancorp, Inc., Jersey Shore State Bank and FNBSM completed the
merger in accordance with an agreement and plan of merger, dated
as of July 22, 1998 between Penns Woods Bancorp, Inc. and FNBSM.
The merger provides Penns Woods Bancorp, Inc. with a natural
extension of its existing Pennsylvania community bank franchise
by establishing a strong presence in Centre County, Pennsylvania.
The combination of the two companies provides the potential
benefit of a reduction in total expenses. The primary expense
reduction is expected to be in data processing. First National
Bank of Spring Mills outsourced their data processing function.
Jersey Shore State Bank's in house processing system is now
handling all processing for the combined institution.
When reviewing the pro-forma financial statements included
in the audit report, it is important to note that $390,000 merger
related costs were expensed during 1998.
Although we can not forecast the future, management does
expect the results of the merger to be favorable.
<PAGE 39>
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.
COMPREHENSIVE INCOME
Comprehensive income is a measure of all the changes in
equity of a corporation. It excludes transactions with owners in
their capacity as owners (i.e. stock options granted or
exercised, repurchase of treasury stock transactions, and
dividends to shareholders).
Other comprehensive income is the difference between Net
Income and Comprehensive Income. The Company's Other
Comprehensive Income is composed of unrealized gains and losses
on available-for-sale securities, net of deferred income tax.
Comprehensive income is not a measure of net income. Net Income
would be affected by Other Comprehensive Income only in the event
that the entire securities portfolio was sold on the statement
date.
Unrealized gains or losses reflected in the Company's
Comprehensive Income may vary widely at statement dates as a
result of changing markets and /or interest rate movements.
Other Comprehensive Income (Loss) for the years ended
December 31, 1998, 1997 and 1996 were ($1,159,000), $3,633,000
and ($106,000) respectively.
CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Report contains certain "forward-looking statements"
including statements concerning plans, objectives, future events
or performance and assumptions and other statements which are
other than statements of historical fact.
The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order
to comply with the terms of the safe harbor, Penns Woods Bancorp,
Inc. and its subsidiaries (the "Company") notes that a variety of
factors could cause the Company's actual results and experience
to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking
statements. The risks and uncertainties that may affect the
operations, performance, development and results of the company's
business include the following: general economic conditions and
changes in interest rates including their impact on capital
<PAGE 40> expenditures; business conditions in the banking
industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; the effect of changes in
accounting policies and practices, including increased
competition with community, regional and national financial
institutions; new service and product offerings by competitors
and price pressures; changes in the Company's organization,
compensation and benefit plans; the inability of the Company to
accurately estimate the cost of systems preparation for Year 2000
compliance; and similar items.
YEAR 2000 COMPLIANCE
Definitions
Company: Penns Woods Bancorp, Inc.
Bank: Jersey Shore State Bank
Awareness: Recognition of "Year 2000" issues and their
potential effect on the Company.
Assessment: First, determining which systems are mission
critical and which are not. Second, quantifying
risk in loans, deposits, investments as well as
outside suppliers and services.
Remediation: First, the actual replacement or upgrading of
noncompliant systems. Second, drafting of
procedures and contingency plans for expected and
undeterminable effects.
Testing: Actual analysis of the way remediated systems
work, independently and together, to assure
accurate information through and after Year 2000"
Implementation: All areas are certified "Year
2000" compliant and are in place in the everyday
operations of the Company and the Bank.
YEAR 2000 PROGRESS
The Company appointed, through the Bank, a "Year 2000
Committee" on September 18, 1997, to conduct the awareness,
assessment, remediation , testing and implementation phases of
the compliance plan.
As of December 31, 1998 the first three of the five phases
are complete. All mission critical systems have been tested.
Some smaller peripheral systems are in the process of being
tested.
Critical core providers were quick to respond with Year 2000
certifications of their software. Customer and third party
response went well in accordance with the timetable established
<PAGE 41> for their completion. At this time, no significant
projects have been delayed as a result of the Company's Year 2000
efforts.
Contingency plans in the event of unforeseen operational
difficulties have been drafted and should be in place by March
31. 1999. Remaining costs, identified historically, associated
with Year 2000 deficiencies are the automated teller machine
upgrades, estimated at $8,000. The majority of the costs related
to the year 2000 issue have been internal and have not been
quantified.
Capital purchases related to the Y2K issue expected for 1999
are anticipated to either be zero or minimal.
Contingency plans remain part of the Year 2000 compliance
program because no absolute guarantee, even if available, would
prevent unfavorable Year 2000 issues stemming from unforseen
difficulties due to future changes in third party readiness.
Financial institution regulators have intensively focused
upon Year 2000 exposures, issuing guidance concerning the
responsibilities of senior management and directors. Year 2000
testing and certification is being addressed as a key safety and
soundness issue in conjunction with regulatory exams. In May
1997, the Federal Financial Institutions Examination Council
("FFIEC") issued an interagency statement to the chief executive
officers of all federally supervised financial institutions
regarding Year 2000 project management awareness. The FFIEC has
highly prioritized Year 2000 compliance in order to avoid major
disruptions to the operations of financial institutions and the
country's financial systems when the new century begins. The
FFIEC statement provides guidance to financial institutions,
providers of data services, and all examining personnel of the
federal banking agencies regarding the Year 2000 Issue.
The federal banking agencies have been conducting Year 2000
examinations. The failure to implement an adequate Year 2000
program can be identified as an unsafe and unsound banking
practice. The Company and the Bank are regulated by the Federal
Reserve and F.D.I.C. respectively. Both are reviewed regularly
for Year 2000 issues. The F.D.I.C. established examination
procedures which contain three categories of ratings which are
satisfactory, needs improvement, and unsatisfactory.
Institutions that receive a Year 2000 rating of unsatisfactory
may be subject to formal enforcement action, supervisory
agreements, cease and desist orders, civil money penalties, or
the appointment of a conservator. In addition, the F.D.I.C.
will be taking into account Year 2000 compliance programs when
reviewing applications and may deny an application because of
Year 2000 issues. Failure to adequately prepare for Year 2000
issues could negatively impact the Company's banking operations,
including the imposition of restrictions upon its operations by
the F.D.I.C.
<PAGE 42>
Despite the Company's activities in regards to the Year 2000
issue, there can be no assurance that partial or total systems
interruptions or the costs necessary to update hardware and
software would not have a material adverse effect upon the
Company's business, financial condition, results of operations,
and business prospects.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
Incorporated by reference to the information included under
the caption "Interest Rate Sensitivity" under Item 7 hereof.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 sheet
of Penns Woods Bancorp, Inc. and subsidiaries (the "Company") as
of December 31, 1998 and 1997, 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, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Williamsport, Pennsylvania
January 15, 1999
PAGE 43
<PAGE>
Consolidated
Balance Sheet
December 31, 1998 and 1997
(IN THOUSANDS)
1998 1997
ASSETS:
Cash and due from banks $ 10,858 $ 12,557
Securities available-for-sale 93,279 75,400
Securities held-to-maturity 3,078 3,234
Loans, net 193,551 185,153
Bank premises and equipment, net 4,076 3,835
Accrued interest receivable 1,752 1,708
Foreclosed assets held for sale 40 35
Other assets 3,129 2,066
TOTAL $309,763 $283,988
======== ========
LIABILITIES:
Interest-bearing deposits $189,726 $184,725
Noninterest-bearing deposits 38,811 35,811
TOTAL DEPOSITS 228,537 220,536
Securities sold under repurchase
agreements 11,223 8,580
Other borrowed funds - 6,980
Long-term Borrowings 20,000 -
Accrued interest payable 965 907
Other liabilities 3,412 4,011
TOTAL LIABILITIES 264,137 241,014
SHAREHOLDERS' EQUITY:
Common stock, par value $10,
10,000,000 shares authorized 25,784 12,828
Stock dividend distributable - 12,828
Additional paid-in capital 4,768 4,712
Retained earnings 10,462 6,621
Accumulated other comprehensive income 4,826 5,985
Less: Treasury stock at cost (214) -
TOTAL SHAREHOLDERS' EQUITY 45,626 42,974
TOTAL $309,763 $283,988
======== ========
See Notes to Consolidated Financial Statements
PAGE 44
<PAGE>
Consolidated
Statement of Income
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA)
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 17,936 $ 16,234 $ 15,022
Interest and dividends on investments:
Taxable interest 2,922 2,822 3,126
Tax-exempt interest 1,042 1,185 1,295
Dividends 691 520 529
Interest on federal funds sold 0 62 25
TOTAL INTEREST INCOME 22,591 20,823 19,997
INTEREST EXPENSE:
Interest on deposits 7,953 7,674 7,430
Interest on securities sold under
repurchase agreements 540 432 310
Interest on other borrowings 954 211 339
TOTAL INTEREST EXPENSE 9,447 8,317 8,079
NET INTEREST INCOME 13,144 12,506 11,918
PROVISION FOR LOAN LOSSES 300 220 105
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 12,844 12,286 11,813
OTHER INCOME:
Service charges 1,046 858 840
Securities gains, net 2,076 4,656 1,345
Other operating income 212 326 276
TOTAL OTHER INCOME 3,334 5,840 2,461
OTHER EXPENSES:
Salaries and employee benefits 4,225 4,118 3,642
Occupancy expense, net 573 482 466
Furniture and equipment expense 639 688 553
Other operating expenses 2,280 2,096 2,306
TOTAL OTHER EXPENSES 7,717 7,384 6,967
INCOME BEFORE INCOME TAX PROVISION 8,461 10,742 7,307
INCOME TAX PROVISION 2,050 2,991 1,965
NET INCOME $ 6,411 $ 7,751 $ 5,342
========= ========= =========
EARNINGS PER SHARE - BASIC $ 2.50 $ 3.03 $ 2.10
========= ========= =========
EARNINGS PER SHARE - DILUTED $ 2.49 $ 3.01 $ 2.09
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 2,568,780 2,556,804 2,544,561
========= ========= =========
</TABLE>
PAGE 45
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
STOCK DIVIDEND PAID-IN RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES AMOUNT DISTRIBUTABLE CAPITAL EARNINGS INCOME STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,271,339 $12,714 $ - $4,453 $10,060 $ 2,458 $ - $29,685
Comprehensive Income:
Net income 5,342 5,342
Unrealized loss on securities,
net of reclassification
adjustments and tax effects (106) (106)
Total comprehensive income 5,236
Dividends Declared, $0.60 (1,529) (1,529)
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
Comprehensive Income:
Net income 7,751 7,751
Unrealized loss on securities, -
net of reclassification
adjustments and tax effects 3,633 3,633
Total comprehensive income 11,384
Dividends Declared, $0.85 (2,175) (2,175)
Stock options exercised 5,481 55 153 208
Declaration of stock
split in the form of a 100%
stock dividend 12,828 (12,828) -
Balance, December 31, 1997 1,282,779 $12,828 $12,828 $4,712 $6,621 $ 5,985 - $42,974
Stock split effected in the 1,282,779 12,828 (12,828)
of a 100% stock dividend
Comprehensive Income:
Net income 6,411 6,411
Unrealized loss on securities,
net of reclassification
adjustments and tax effects (1,159) (1,159)
Total comprehensive income 5,252
Dividends Declared, $1.00 (2,570) (2,570)
Stock options exercised 12,794 128 56 184
Treasury stock acquired,
3,656 shares _______ (214) (214)
<PAGE 46>
Balance, December 31, 1998 2,578,352 $25,784 - $4,768 $10,462 $ 4,826 $(214) $45,626
========= ======= ======= ====== ======= ======== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements
PAGE 47
<PAGE>
Consolidated Statement
of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(IN THOUSANDS)
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,411 $ 7,751 $ 5,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 419 379 365
Provision for loan losses 300 220 105
Amortization of investment security premiums 65 37 20
Accretion of investment security discounts (105) (117) (70)
Securities gains, net (2,076) (4,656) (1,345)
Gain on sale of foreclosed assets (12) (67) (40)
Stock option compensation expense - 7 16
Decrease(increase) in all other assets (1,107) 438 (1,130)
(Decrease)increase in all other liabilities 78 (805) 113
Net cash provided by operating activities 3,973 3,187 3,376
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale (47,119) (58,348) (47,761)
Proceeds from sales and maturities of
securities available-for-sale 27,607 74,437 33,038
Proceeds from the sale of foreclosed assets 47 426 1,083
Purchase of securities held-to-maturity (323) (200) (1,296)
Proceeds from calls and maturities of
securities held to-maturity 2,473 96 1,015
Net increase in loans (8,738) (25,660) (9,025)
Acquisition of bank premises and equipment (660) (379) (391)
Net cash used in investing activities (26,713) (9,628) (23,337)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in interest-bearing
deposits 5,001 10,665 (1,019)
Net increase in noninterest-bearing deposits 3,000 6,855 1,777
Net (decrease) increase in securities
sold under repurchase agreements 2,643 2,952 (716)
(Decrease)increase in other borrowed funds (6,980) (7,511) 14,491
Proceeds from long-term borrowings 20,000 - -
Dividends paid (2,570) (2,175) (1,529)
Stock options exercised 161 197 118
Purchase of Treasury Stock (214) - -
Net cash provided by financing activities 21,041 10,983 13,122
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,699) 4,542 (6,839)
CASH AND CASH EQUIVALENTS, BEGINNING 12,557 8,015 14,854
CASH AND CASH EQUIVALENTS, ENDING $ 10,858 $ 12,557 $ 8,015
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company paid approximately $9,389,000, $8,294,000 and
$8,114,000 in interest on deposits and other borrowings during
1998, 1997 and 1996, respectively. <PAGE 48>
The Company made income tax payments of approximately
$2,453,000, $3,096,000 and $1,998,000 during 1998, 1997 and 1996,
respectively.
Transfers from loans to foreclosed assets held for sale
amounted to approximately $40,000, $142,000 and $352,000 in 1998,
1997 and 1996, respectively.
See Notes to Consolidated Financial Statements
PAGE 49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated
financial statements include the accounts of Penns Woods Bancorp,
Inc. and its wholly-owned subsidiaries, Jersey Shore State Bank
("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 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.
Investment Securities: Investment securities are classified
as held-to-maturity, available-for-sale or trading.
<PAGE 50>
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, 1998 or 1997.
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.
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
<PAGE 51> 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.
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.
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 amounts, basic and diluted earnings
per share.
The number of shares used in calculating basic and diluted
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:
<PAGE 52>
Common
Income Shares Earnings
Numerator Denominator Per Share
1998
Earnings per share -
basic $6,411,000 2,568,780 $2.50
Stock options 6,500
Earnings per share -
diluted $6,411,000 2,575,280 $2.49
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
NOTE C - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income," as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-
for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
The adoption of SFAS No. 130 had no effect on the Company's
net income or shareholders' equity for 1998, 1997 or 1996. As
required by SFAS No. 130, the consolidated financial statements
for 1997 and 1996 have been reclassified to reflect application
of this pronouncement.
The components of other comprehensive income and related tax
effects are as follows (in thousands):
Years Ended December 31, 1999
1998 1997 1996
Unrealized holding gains on
available-for-sale securities $ 321 $10,161 $1,184
Less: Reclassification adjustment
for gains realized in income 2,076 4,656 1,345
Net unrealized gains(losses) (1,755) 5,505 (161)
<PAGE 53>
Tax effect (596) 1,872 (55)
Net-of-tax effect $(1,159) $ 3,633 $ (106)
NOTE D - 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 1998 ranged from $1,738,000 to $2,752,000.
For 1997, these balances ranged from $1,274,000 to $2,110,000.
Average daily cash balances with the Federal Reserve Bank
required to cover services provided to the Bank amounted to
$800,000 throughout 1998 and 1997. Total balances restricted at
December 31, 1998 and 1997, respectively, were $3,246,000 and
$2,821,000.
<PAGE 54>
NOTE E - INVESTMENT SECURITIES
The amortized cost of investment securities and their
approximate fair values at December 31, 1998 and 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available-for-sale:
Equity securities $20,297 $6,417 $579 $26,135
U.S. government and agency
securities 40,953 399 38 41,314
State and municipal securities 22,400 1,133 67 23,466
Restricted equity securities 1,613 50 - 1,663
Other debt securities 702 - 1 701
$85,965 $7,999 $685 $93,279
Securities held-to-maturity:
U.S. government and agency
securities $ 339 $ 15 - 354
State and municipal securities 2,464 49 1 2,512
Other debt securities 275 - - 275
$ 3,078 $ 64 $ 1 $ 3,141
<CAPTION>
DECEMBER 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Securities available-for-sale:
Equity securities $14,774 $7,897 $ 1 $22,670
U.S. government and agency
securities 37,096 366 - 37,462
State and municipal securities 12,407 759 1 13,165
Restricted equity securities 1,256 50 - 1,306
Other debt securities 798 - 1 797
$66,331 $9,072 $ 3 $75,400
Securities held-to-maturity:
U.S. government and agency
securities $ 513 $ 23 $ - $ 536
State and municipal securities 2,471 44 - 2,515
Other debt securities 250 1 - 251
$ 3,234 $ 68 $ 0 $ 3,302
</TABLE>
The amortized cost and fair value of debt securities at
December 31, 1998, 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.
<PAGE 55>
<TABLE>
<CAPTION>
Securities Securities
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 10 $ 10 $ 3,004 $ 3,022
Due from one year to five years 1,307 1,322 8,789 9,135
Due from five to ten years 501 517 687 752
Due after ten years 1,260 1,292 51,575 52,572
$3,078 $3,141 $64,055 $65,481
</TABLE>
Gross realized gains and gross realized losses on sales of
available-for-sale securities were (in thousands):
1998 1997 1996
Gross realized gains:
U.S. government and agency
securities $ 72 $ 68 $ 13
State and municipal securities - 286 466
Equity securities 2,024 4,923 1,362
Other debt securities - - 13
$2,096 $5,277 $1,854
Gross realized losses:
U.S. government and agency
securities $ 5 $ 579 $ 445
State and municipal securities 5 19 27
Equity securities 10 1 18
Other debt securities - 22 19
$ 20 $ 621 $ 509
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 approximately $8,000 for the year 1996. There were no
sales of securities classified as held to maturity in 1998 or
1997.
Investment securities with a carrying value of approximately
$22,729,000 and $18,971,000 at December 31, 1998 and 1997,
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.
<PAGE 56>
NOTE F - LOANS
Major loan classifications are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
PAST DUE PAST DUE
30 TO 90 90 DAYS NON-
CURRENT DAYS OR MORE ACCRUAL TOTAL
<S> <C> <C> <C> <C> <C>
Real estate loans - mortgage $ 46,078 $2,903 $32 $596 $ 49,609
Real estate loans - construction 3,844 30 - - 3,874
Commercial and industrial loans 112,514 532 22 44 113,112
Consumer and all other loans 29,417 442 2 6 29,867
Gross loans $191,853 $3,907 $56 $646 196,462
Less: Unamortized loan
fees/costs 410
Allowance for loan losses 2,501
Loans, net $193,551
<CAPTION>
DECEMBER 31, 1998
PAST DUE PAST DUE
30 TO 90 90 DAYS NON-
CURRENT DAYS OR MORE ACCRUAL TOTAL
<S> <C> <C> <C> <C> <C>
Real estate loans - mortgage $ 53,492 $1,765 $ 88 $136 $ 55,481
Real estate loans - construction 3,011 - - - 3,011
Commercial and industrial loans 9,362 988 283 409 101,042
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
fees/costs 404
Allowance for loan losses 2,414
Loans, net $185,153
</TABLE>
Loans on which the accrual of interest has been discontinued
or reduced amounted to approximately $646,000 and $552,000 at
December 31, 1998 and 1997, respectively. If interest had been
recorded at the original rate on those loans, such income would
have approximated $98,000, $81,000, and $86,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Interest
income on such loans, which is recorded as received, amounted to
approximately $50,000, $42,000 and $43,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
<PAGE 57>
Transactions in the allowance for loan losses are summarized
as follows (in thousands):
YEAR ENDED DECEMBER 31,
1998 1997 1996
Balance, beginning of year $2,414 $2,413 $2,353
Provision charged to operations 300 220 105
Loans charged off (271) (327) (242)
Recoveries 58 108 197
Balance, end of year $2,501 $2,414 $2,413
At December 31, 1998 and 1997, the Company had loans
amounting to approximately $56,000 and $51,000 respectively, that
were specifically classified as impaired. Of these amounts,
$44,000, was included in nonaccrual loans in 1997. 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 1998 and 1997, the average balance of
these loans amounted to approximately $56,000 and $52,000,
respectively for the year. There was no specific allowance for
the loan losses related to impaired loans at December 31, 1998
and 1997. 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):
1998 1997 1996
Cash receipts applied to reduce principal
balance $1 $1 $ 6
Cash receipts recognized as interest income 8 2 5
Total $9 $3 $11
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, 1998 or 1997.
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.
<PAGE 58>
NOTE G - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows (in
thousands):
DECEMBER 31,
1998 1997
Land $ 511 $ 511
Bank premises 3,871 3,670
Furniture and equipment 3,991 3,583
Leasehold improvements 601 551
Total 8,974 8,315
Less accumulated depreciation 4,898 4,480
Net $4,076 $3,835
NOTE H - DEPOSITS
Time deposits of $100,000 or more totaled approximately
$20,950,000 on December 31, 1998 and $19,524,000 on December 31,
1997. Interest expense related to such deposits was approximately
$1,151,000, $851,000 and $750,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Time deposits of
$100,000 or more at December 31, 1998 mature as follows: 1999 -
$18,613,000; 2000 - $988,000; 2001 - $344,000; 2002 - $405,000;
2003 - $100,000; thereafter - $501,000.
NOTE I - OTHER BORROWED FUNDS
At December 31, 1998, the Company did not have any
borrowings in the form of advances received from the Federal Home
Loan Bank of Pittsburgh under the "Repo Plus" credit program.
There were $6,980,000 of such borrowings at December 31, 1997.
The weighted average interest rate for the years ended
December 31, 1998, 1997 and 1996 was 5.60%, 5.63% and 5.44%,
respectively. The maximum amount of other borrowed funds
outstanding at any time was $11,760,000, $14,491,000 and
$16,737,000, respectively, for those same periods.
NOTE J - LONG-TERM BORROWINGS
Long Term borrowings are "Convertible Select" advances with
the Federal Home Bank of Pittsburgh ("FHLB"). These advances are
set at a fixed rate for five years. After the five years, FHLB
has the option to convert the advance to a floating rate. The
borrowings are as follows (in thousands):
1998
5.54%, maturing April 7, 2008 $10,000
5.56%, maturing June 16, 2008 10,000
Total advances 20,000
Both advances are collateralized by the Company's Federal
Home Loan Bank stock, deposits and mortgage loans.
<PAGE 59>
NOTE K - INCOME TAXES
The following temporary differences gave rise to the net
deferred tax liability at December 31, 1998 and 1997 (in
thousands):
1998 1997
Deferred tax asset:
Allowance for loan losses $ 542 $ 506
Deferred compensation 234 198
Contingencies 75 75
Pension 126 107
Loan fees and costs 139 137
Stock option 18 25
Total 1,134 1,048
Deferred tax liability:
Bond accretion (25) (39)
Depreciation (122) (117)
Unrealized gains on available-
for-sale securities (2,486) (3,083)
Total (2,633) (3,239)
Deferred tax liability, net $(1,499) $(2,191)
The provision for income taxes is comprised of the following
(in thousands):
YEAR ENDED DECEMBER 31,
1998 1997 1996
Currently payable $2,149 $3,095 $2,110
Deferred benefit (99) (104) (145)
Total provision $2,050 $2,991 $1,965
The effective federal income tax rate for the years ended
December 31, 1998, 1997 and 1996 was 24.2%, 27.8% 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):
<TABLE>
<CAPTION>
1998 1997 1996
AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C>
Provision at expected rate $2,877 34.0% $3,759 35.0% $2,484 34.0%
Increase (decrease) in
tax resulting from:
Tax-exempt income (365) (4.30) (570) (5.4) (578) (7.9)
Other, net (462) (5.5) (198) (1.8) 59 0.8
Effective income tax
and rates $2,050 24.2% $2,991 27.8% $1,965 26.9%
</TABLE>
<PAGE 60>
NOTE L - EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
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.
During 1998, the Company adopted SFAS No. 132 "Employers'
Disclosures About Pensions and Other Postretirement Benefits".
As required under SFAS No. 132, the following tables show the
funded status and components of net periodic benefit cost from
this defined benefit plan (in thousands). <PAGE 61>
Pension Benefits
1998 1997
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $3,026 $2,664
Service cost 222 191
Interest cost 213 185
Plan participants' contributions - -
Amendments - -
Actuarial loss 59 19
Benefits paid (61) (33)
Benefit obligation at end of year 3,459 3,026
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year 2,819 2,137
Actual return on plan assets 547 510
Employer contribution 171 205
Plan participants' contributions - -
Benefits paid (61) (33)
Fair value of plan assets at end of year 3,476 2,819
17 (207)
Unrecognized net actuarial gain (619) (357)
Unrecognized transition asset (35) (38)
Unrecognized prior service cost 268 286
Accrued benefit cost $ (369) $ (316)
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 7.00% 7.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service costs $ 222 $ 191
Interest cost 213 185
Expected return on plan assets (224) (171)
Amortization of transition asset (3) (3)
Amortization of prior service cost 18 20
Recognized net actuarial gain (1) -
Net periodic benefit cost $ 225 $ 222
401(k) SAVINGS PLAN
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
$54,000, $52,000 and $45,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
<PAGE 62>
DEFERRED COMPENSATION PLAN
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
$114,000 for the three years ended December 31, 1998. Benefits
paid under the Plan were approximately $45,000 in 1998 and 1997,
and $39,000 in 1996.
NOTE M - STOCK OPTIONS
Prior to 1998, the Company granted a select group of its
officers options to purchase shares of its common stock. These
options, which are immediately exercisable, expire within three
to ten years after having been granted. 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 1998, 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 1998, 1997 and
1996, respectively: dividend yield of 2.52%, 3.45% and 3.05%,
respectively; risk free interest rates of 5.63%, 5.69% and 5.81%,
respectively; expected option lives of three years and expected
volatility of 14.51%, 17.50% and 17.58%, respectively.
Also in 1998, the Company adopted the "1998 Stock Option
Plan" for key employees and director's. Both incentive stock
options and nonqualified stock options may be granted to eligible
employees of the Company. In addition, non-employee directors
are eligible to receive grants of nonqualified stock options.
Incentive stock options granted under the 1998 Plan may be
exercised not later than five years after the date of grant.
Nonqualified stock options granted under the 1998 Plan may be
exercised not later than 10 years after the date of grant. Each
option granted under the 1998 Plan shall be exercisable only
after the expiration of six months following the date of grant of
such option.
<PAGE 63>
A summary of the status of the Company's common stock option
plans, adjusted to reflect a stock split effective in the form of
a 100% stock dividend issued January 15, 1998, is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Stock Options Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 29,684 $20.57 24,746 $14.27 26,464 $11.08
Granted 9,000 58.50 15,900 25.58 10,200 17.50
Exercised 12,794 12.59 10,962 17.97 11,918 9.94
Forfeited - - - - - -
Outstanding, end of year 25,890 $37.69 29,684 $20.57 24,746 $14.27
Options exercisable at year-end 16,890 29,684 24,746
Fair value of options granted during
the year $7.89 $6.86 $4.60
</TABLE>
The following table summarizes information about
nonqualified and incentive stock options outstanding at
December 31, 1998:
Exercise Number Remaining Number
Prices Outstanding Contractual Life Exercisable
17.500 400 2 400
17.500 2,600 1 2,600
28.575 13,890 5 13,890
58.500 6,500 5 -
58.500 2,500 10 -
25,890 16,890
NOTE N - 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 RETIRED/ CHARGE- ENDING
YEAR BALANCE ADDITIONS PAYMENTS RESIGNED OFFS BALANCE
1998 $2,096 $1,642 $1,074 $212 $- $2,452
1997 $2,014 $ 900 $ 818 $ - $- $2,096
1996 $1,781 $1,009 $ 776 $ - $- $2,014
<PAGE 64>
NOTE O- 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, 1998 (in thousands):
YEAR ENDING DECEMBER 31,
1999 $168
2000 167
2001 157
2002 117
2003 79
Thereafter 309
Total $997
Total rental expense for all operating leases for years
ended December 31, 1998, 1997 and 1996 approximated $268,000,
$263,000 and $172,000, 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 P- 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) <PAGE 65>
CONTRACT
AMOUNT
DECEMBER 31,
1998 1997
Commitments to extend credit $26,961 $27,942
Standby letters of credit $ 1,157 $ 1,608
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 Q - 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, 1998, 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.
<PAGE 66>
The Bank's actual capital amounts and ratios are also
presented in the following table (in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $45,839 22.7%> $16,400 >8.0% >$20,500 >10.0%
Tier I Capital
(to Risk Weighted Assets) $40,800 20.2%> $ 8,200 >4.0% >$12,300 > 6.0%
Tier I Capital
(to Average Assets) $40,800 13.5%> $12,099 >4.0% >$15,123 > 5.0%
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%
</TABLE>
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
$24,570,000 at December 31, 1998, 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, 1998, the regulatory lending limit amounted to
approximately $3,035,000.
NOTE R - 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
<PAGE 67> 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 instruments.
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.
<PAGE 68>
The following table presents information for loans (in
thousands):
<TABLE>
<CAPTION>
AVERAGE AVERAGE ESTIMATED
BOOK HISTORICAL MATURITY DISCOUNT FAIR
VALUE YIELDS (YRS)(1) RATE(2) VALUE
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Commercial $113,112 8.61% 4.03 8.25% $113,488
Real Estate 53,483 8.48% 5.17 7.63% 53,908
Other 29,867 9.52% 5.76 8.50% 30,148
DECEMBER 31, 1997
Commercial $101,042 8.93% 3.60 9.38% $100,642
Real Estate 58,492 9.47% 4.77 8.63% 58,947
Other 28,441 9.75% 5.80 9.00% 28,637
</TABLE>
(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, 1998 and 1997 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, 1998
Interest-bearing deposits $189,726 $190,303
Noninterest-bearing deposits $ 38,811 $ 38,811
DECEMBER 31, 1997
Interest-bearing deposits $184,725 $184,942
Noninterest-bearing deposits $ 35,811 $ 35,811
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:
<PAGE 69>
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 $28,118,000 and $29,550,000 at December 31,
1998 and 1997, respectively, and are primarily comprised of
unfunded loan commitments which are generally priced at market at
the time of funding.
<PAGE 70>
NOTE S - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods Bancorp,
Inc. follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
CONDENSED BALANCE SHEET, DECEMBER 31, 1998 1997
<S> <C> <C>
ASSETS:
Cash $ 51 $ 255
Investment in subsidiaries:
Bank 32,703 31,606
Nonbank 13,221 11,581
Deferred tax asset 18 26
Prepaid taxes 149 79
Total assets $46,142 $43,547
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other liabilities 516 573
Shareholders' equity 45,626 42,974
Total liabilities and shareholders' $46,142 $43,547
equity
<CAPTION>
CONDENSED STATEMENT OF INCOME FOR (IN THOUSANDS)
THE YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Operating income:
Dividends from subsidiaries $ 3,789 $ 4,956 $ 1,707
Equity in undistributed net
income of subsidiaries 2,634 2,777 3,727
Other income - 156 -
Operating expenses (12) (138) (92)
Net income 6,411 $ 7,751 $ 5,342
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,411 $ 7,751 $ 5,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiaries (2,634) (2,777) (3,727)
Increase (decrease) in income taxes payable 37 6 37
(Decrease) increase in liabilities (105) 9 9
Stock option compensation expense - 7 16
Net cash provided by operating activities 3,709 4,996 1,677
CASH FLOWS FROM INVESTING ACTIVITIES,
Additional investment in subsidiaries (1,290) (2,800) (335)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,570) (2,175) (1,529)
Proceeds from exercise of stock options 161 197 118
Purchase of Treasury Stock (214) - -
Net cash used in financing activities (2,623) (1,978) (1,411)
NET INCREASE (DECREASE) IN CASH 204 218 (69)
CASH, BEGINNING OF YEAR 255 37 106
CASH, END OF YEAR $ 51 $ 255 $ 37
<PAGE 71>
CONDENSED STATEMENT OF CASH FLOWS SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING
AND FINANCING ACTIVITY:
NOTE T - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA
FOR THE THREE MONTHS ENDED
MAR JUN SEPT DEC
1998 31 31 31 31
Interest income $5,355 $5,602 $5,844 $5,790
Interest expense 2,133 2,319 2,521 2,474
Net interest income 3,222 3,283 3,323 3,316
Provision for loan losses 75 75 75 75
Other income 328 297 301 332
Securities gains 609 234 216 1,017
Other expenses 1,823 1,810 1,809 2,275
Income before income tax
provision 2,261 1,929 1,956 2,315
Income tax provision 589 439 545 477
Net income $1,672 $1,490 $1,411 $1,838
Earnings per share $ 0.65 $ 0.58 $ 0.55 $ 0.72
FOR THE THREE MONTHS ENDED
MAR JUN SEPT DEC
1997 31 31 31 31
Interest income $5,111 $5,034 $5,129 $5,549
Interest expense 2,082 2,069 2,030 2,136
Net interest income 3,029 2,965 3,099 3,413
Provision for loan losses 60 60 40 60
Other income 276 291 292 325
Securities gains 1,176 1,149 970 1,361
Other expenses 1,776 1,749 1,847 2,012
Income before income tax
provision 2,645 2,596 2,474 3,027
Income tax provision 699 703 688 901
Net income $1,946 $1,893 $1,786 $2,126
Earnings per share $ 0.76 $ 0.74 $ 0.70 $ 0.83
NOTE U- SUBSEQUENT EVENT
On January 11, 1999, the Company acquired all of the
outstanding common stock of the First National Bank of Spring
Mills in exchange for 262,500 shares of the Company's common
stock, in a business combination accounted for as a pooling of
interests. Historical financial information presented in future
reports will be restated to include the First National Bank of
Spring Mills.
<PAGE 72>
The following summarized operating data gives effect to the
acquisition had it occurred on January 1, 1996(in thousands
except share data):
1998 1997 1996
Interest income $25,096 $23,146 $22,074
Interest expense 10,529 9,324 8,985
Net interest income 14,567 13,822 13,089
Provision for loan losses 305 274 137
Other income 3,435 5,921 2,611
Other expense 9,065 8,219 7,726
Income before income tax provision 8,632 11,250 7,837
Income tax provision 2,164 3,113 2,082
Net income $ 6,468 $ 8,137 $ 5,755
Earnings per share - basic $ 2.28 $ 2.89 $ 2.05
Earnings per share - diluted $ 2.28 $ 2.86 $ 2.04
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.
PAGE 73
<PAGE>
SCHEDULE 1
PENNS WOODS BANCORP, INC.
INDEBTEDNESS OF RELATED PARTIES
</TABLE>
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Deductions
Beginning Retired Charge- Ending
Year Name of Debtor Balance Additions Payments Resigned offs Balance
<S> <C> <C> <C> <C> <C> <C>
1998 7 directors, 18 affiliated $2,096 $1,642 $1,074 $212 $0 $2,452
interests, and 3 officers
1997 8 directors, 15 affiliated $2,014 $ 900 $ 818 $ 0 $0 $2,096
interests, and 3 officers
1996 8 directors, 10 affiliated $1,781 $1,009 $ 776 $ 0 $0 $2,014
interests, and 3 officers
</TABLE>
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PAGE 74
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the caption "Election of
Directors" in the Company's Proxy Statement dated March 9, 1999
is incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION
The information appearing under the caption "Executive
Compensation" in the Company's Proxy Statement is incorporated
herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information appearing under the caption "Security
Ownership of Beneficial Owners and Management" in the Company's
Proxy Statement 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, 1998
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
$2,452,000 or approximately 7.50% 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 N to the
Consolidated Financial Statements included under Item 7 hereof.
PAGE 75
<PAGE>
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 are set forth in Item 8:
Report 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 Current Reports on Form 8-K were filed during the fourth
quarter of 1998.
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:
3.1 Articles of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1
to Registration Statement on Form S-4 (No. 333-
65821)).
3.2 Bylaws of the Registrant (incorporated herein by
reference to Exhibit 3.2 to Registration Statement
on Form S-4 (No. 333-65821).
10.1 Penns Woods Bancorp, Inc. 1998 Stock Option Plan,
as amended and restated (incorporated herein by
reference to Exhibit 10.1 to Registration
Statement on Form S-4 (No. 333-65821).*
10.2 Agreement dated as of January 1, 1995 among Penns
Woods Bancorp, Inc. Jersey Shore State Bank and
Theodore H. Reich (incorporated herein by
reference to Exhibit 10.2 to Registration
Statement on Form S-4 (No. 333-65821).*
<PAGE 76>
10.3 Agreement dated as of August 29, 1991, among Penns
Woods Bancorp, Inc., Jersey Shore State Bank and
Ronald A. Walko (incorporated herein by reference
to Exhibit 10.3 to Registration Statement on Form
S-4 (No. 333-65821).*
10.4 Severance Agreement dated May 30, 1996, between
Jersey Shoe State Bank and Ronald A. Walko
(incorporated herein by reference to Exhibit 10.3
to Registration Statement on Form S-4 (No. 333-
65821).*
(22) Subsidiaries of the Registrant.
(23) Consent of Independent Certified Public
Accountants.
(27) Financial Data Schedule.
______________________
* Indicates compensatory plan or arrangement
PAGE 77
<PAGE>
EXHIBIT INDEX
(22) Subsidiaries of the Registrant.
(23) Consent of Independent Certified Public
Accountants.
(27) Financial Data Schedule.
PAGE 78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
March 9, 1999 PENNS WOODS BANCORP, INC.
BY: THEODORE H. REICH
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:
Theodore H. Reich, President and Director March 9, 1999
Sonya E. Hartranft, Principal Accounting March 9, 1999
Officer & Principal Financial Officer
Phillip H. Bower, Director March 9, 1999
Lynn S. Bowes, Director March 9, 1999
William S. Frazier, Director March 9, 1999
James M. Furey II, Director March 9, 1999
Allan W. Lugg, Director March 9, 1999
Jay H. McCormick, Director March 9, 1999
R. Edward Nestlerode, Jr., Director March 9, 1999
James E. Plummer, Director March 9, 1999
William H. Rockey, Sr. Vice President & March 9, 1999
Director
This statement has not been reviewed or confirmed for
accuracy or relevance, by the Federal Deposit Insurance
Corporation. <PAGE 79>
Exhibit 21
Name State of Incorporation
Jersey Shore State Bank Pennsylvania
Woods Real Estate Development Company Pennsylvania
Woods Investment Company, Inc. Pennsylvania
Exhibit 22
Consent of Independent Auditors
Penns Woods Bancorp, Inc.
Jersey Shore, Pennsylvania
We hereby consent to the inclusion of our opinion dated
January 15, 1999 on the company's 1998 consolidated financial
statements in the company's 1998 Annual Report to Stockholders.
/s/ Parente, Randolph, Orlando, Carey &
Associates
Williamsport, Pennsylvania
January 15, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,858
<INT-BEARING-DEPOSITS> 189,726
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93,279
<INVESTMENTS-CARRYING> 3,078
<INVESTMENTS-MARKET> 0
<LOANS> 196,052
<ALLOWANCE> 2,501
<TOTAL-ASSETS> 309,763
<DEPOSITS> 228,537
<SHORT-TERM> 11,223
<LIABILITIES-OTHER> 4,377
<LONG-TERM> 20,000
0
0
<COMMON> 25,784
<OTHER-SE> 19,842
<TOTAL-LIABILITIES-AND-EQUITY> 309,763
<INTEREST-LOAN> 17,936
<INTEREST-INVEST> 4,655
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,591
<INTEREST-DEPOSIT> 7,953
<INTEREST-EXPENSE> 1,494
<INTEREST-INCOME-NET> 13,144
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 2,076
<EXPENSE-OTHER> 7,717
<INCOME-PRETAX> 8,461
<INCOME-PRE-EXTRAORDINARY> 8,461
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,411
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.49
<YIELD-ACTUAL> 0
<LOANS-NON> 646
<LOANS-PAST> 56
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,414
<CHARGE-OFFS> 271
<RECOVERIES> 58
<ALLOWANCE-CLOSE> 2,501
<ALLOWANCE-DOMESTIC> 2,501
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
