[Letter of Penns Woods Bancorp, Inc.]
24-Mar-00
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, DC 20549
RE: Penns Woods Bancorp. Inc. (File No. 0-17077)
1999 Annual Report on Form 10-K
Ladies and Gentlemen:
Enclosed for filing via EDGAR is the Annual Report
on Form 10-K for the year ended December 31, 1999 of
Penns Woods Bancorp, Inc.
Please contact the undersigned at (570) 322-1111
if you have any questions relating to this filing.
Very truly yours,
PENNS WOODS BANCORP, INC.
/s/ Sonya E. Scott
Sonya E. Scott
Secretary
SES/mjs
Enclosures
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, 1999
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.)
300 Market Street, P.O. Box 967
Williamsport, Pennsylvania 17703-0967
(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
State the aggregate market value of the voting stock
held by non-affiliates of the registrant $87,900,640
at February 29, 2000
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at February 29, 2000
Common Stock, $10 Par Value 3,125,384 Shares
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
a). Penns Woods Bancorp, Inc. 1999 Annual Report
(Annual Report)
b). Penns Woods Bancorp, Inc. Proxy Statement (Proxy
Statement dated March 24, 2000)
Location in Form 10-K Incorporated Information
Part II
Item 7. Management's Discussion Pages 23 through 37
and Analysis of Consolidated of the Annual Report
Financial Condition and
Results of Operations
Item 8. Financial Statements and Pages 5 through 22 of
Supplemental Data the Annual Report
Part III
Item 13. Certain Relationships and Page 17 of the Annual
Related Transactions Report
INDEX
PART I
<TABLE>
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ITEM PAGE
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . 40-44
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . 44-45
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 45
Item 4. Submission of Matters to a Vote of Security Holders. 45
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters . . . . . . . . . . . 46
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 47
Item 7. Management's Discussion and Analysis of Consolidated 23-37
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data . . . . . 48
Item 9. Disagreements on Accounting and Financial Disclosure. 48
PART III
Item 10. Directors and Executive Officers of the Registrant. .48
Item 11. Executive Compensation. . . . . . . . . . . . . . . . 48
Item 12. Security Ownership and Certain Beneficial Owners and 48
Management
Item 13. Certain Relationships and Related Transactions. . . . 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . .49
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . 49
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 50
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 ten 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 158 persons as of
December 31, 1999. The Company does not have any
employees. The principal officers of the Bank also
serve as officers of the Company.
B. Regulation and Supervision
The Company is also subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the
"BHCA") and to supervision and examination by the
Board of Governors of the Federal Reserve System (the
"FRB"). The Bank is subject to the supervision and
examination by the Federal Deposit Insurance
Corporation (the "FDIC"), as its primary federal
regulator and as the insurer of the Bank's deposits.
The Bank is also regulated and examined by the
Pennsylvania Department of Banking (the Department).
The 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
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 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,
1999, 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 $.0212 for each $100 of
BIF deposits.
New Banking Legislation
Landmark legislation in the financial services area
was signed into law by the President on November 12,
1999. The Gramm-Leach-Bliley Act dramatically changes
certain banking laws that have been in effect since
the early part of the 20th Century. The most radical
changes are that the separation between banking and
the securities businesses mandated by the
Glass-Steagall Act has now been removed, and the
provisions of any state law that prohibits affiliation
between banking and insurance entities have been
preempted. Accordingly, the new legislation now
permits firms engaged in underwriting and dealing in
securities, and insurance companies, to own banking
entities, and permits bank holding companies (and in
some cases, banks) to own securities firms and
insurance companies. The provisions of federal law
that preclude banking entities from engaging in
non-financially related activity, such as
manufacturing, have not been changed. For example, a
manufacturing company cannot own a bank and become a
bank holding company, and a bank holding company
cannot own a subsidiary that is not engaged in
financial activities, as defined by the regulators.
The new legislation creates a new category of bank
holding company called a financial holding company.
In order to avail itself of the expanded financial
activities permitted under the new law, a bank holding
company must notify the Federal Reserve that it elects
to be a financial holding company. A bank holding
company can make this election if it, and all its bank
subsidiaries, are well capitalized, well managed, and
have at least a satisfactory Community Reinvestment
Act rating, each in accordance with the definitions
percribed by the Federal Reserve and the regulators of
the subsidiary banks. Once a bank holding company
makes such an election, and provided that the Federal
Reserve does not object to such election by such bank
holding company, the financial holding company may
engage in financial activities (i.e. securities
underwriting, insurance underwriting, and certain
other activities that are financial in nature as to be
determined by the Federal Reserve) by simply giving a
notice to the Federal Reserve within thirty days after
beginning such business or acquiring a company engaged
in such business. This makes the regulatory approval
process to engage in financial activities much more
streamlined than it was under prior law.
The Company believes it qualifies to become a
financial holding company, but has not yet determined
whether or not it will file to become treated as one.
It is too early to tell what effect the
Gramm-Leach-Bliley Act may have on the Company and the
Bank. The intent and scope of the act is posititve for
the financial industry, and is an attempt to modernize
federal banking laws and make U.S. institutions
competitive with those from other countries. While the
legislation makes significant changes in U.S. banking
law, such changes may not directly affect the
Company's business unless it decides to avail itself
of new opportunities available under the new law. The
Company does not expect any of the provisions of the
Act to have a material adverse effect on our existing
operations, or to significantly increase its costs.
Separately from the Gramm-Leach-Bliley Act, Congress
is often considering some financial industry
legislation. The Company cannot predict how any new
legislation, or new rules adopted by the federal
banking agencies, may affect its business in the
future.
Environmental Laws
Environmentally related hazards have become a source
of high risk and potential liability for financial
institutions relating to their loans. Environmentally
contaminated properties owned by an institution's
borrowers may result in a drastic reduction in the
value of the collateral securing the institution's
loans to such borrowers, high environmental clean up
costs to the borrower affecting its ability to repay
the loans, the subordination of any lien in favor of
the institution to a state or federal lien securing
clean up costs, and liability to the institution for
clean up costs if it forecloses on the contaminated
property or becomes involved in the management of the
borrower. The Company is not aware of any borrower
who is currently subject to any environmental
investigation or clean up proceeding which is likely
to have a material adverse effect on the financial
condition or results of operations of the Company.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected
by domestic economic conditions and the monetary and
fiscal policies of the United States Government and
its agencies.
The monetary policies of the FRB have had, and will
likely continue to have, an important impact on the
operating results of commercial banks through its
power to implement national monetary policy in order,
among other things, to curb inflation or combat a
recession. The FRB has a major effect upon the levels
of bank loans, investments and deposits through its
open market operations in the United States Government
securities and through its regulation of, among other
things, the discount rate on borrowing of member banks
and the reserve requirements against member bank
deposits. It is not possible to predict the nature
and impact of future changes in monetary and fiscal
policies.
DESCRIPTION OF BANK
a. History and Business
Jersey Shore State Bank (Bank) was incorporated under
the laws of the Commonwealth of Pennsylvania as a
state bank in 1934 and became a wholly-owned
subsidiary of the Company on July 12, 1983.
As of December 31, 1999, the Bank had total assets of
$362,286,000; total shareholders' equity of
$33,261,000 and total deposits of $255,668,000. The
Bank's deposits are insured by the Federal Deposit
Insurance Corporation for the maximum amount provided
under current law.
Jersey Shore State Bank engages in business as a
commercial bank, doing business at several locations
in Lycoming, Clinton and Centre Counties,
Pennsylvania.
Services offered by the Bank include accepting time,
demand and savings deposits including Super NOW
accounts, regular savings accounts, money market
certificates, investment certificates, fixed rate
certificates of deposit and club accounts. Its
services also include making secured and unsecured
commercial and consumer loans, financing commercial
transactions, making construction and mortgage loans
and the renting of safe deposit facilities.
Additional services include making residential
mortgage loans, revolving credit loans with overdraft
protection, small business loans, etc. Business loans
include seasonal credit collateral loans and term
loans, as well as accounts receivable and inventory
financing.
The Bank's loan portfolio mix can be classified into
four principal categories. They are real estate,
agricultural, commercial and consumer.
Real estate loans can be further segmented into
construction and land development, farm land,
one-to-four family residential, multi-family and
commercial or industrial. Qualified borrowers are
defined by policy or by industry underwriting
standards. Owner provided equity requirements range
from 20% to 30% with a first lien status required.
Terms are restricted to between 10 and 20 years with
the exception of construction and land development,
which is limited to one to five years. Appraisals,
verifications and visitations comply with industry
standards.
Financial information that is required on all
commercial mortgages includes the most current three
years' balance sheets and income statements and
projections on income to be developed through the
project. In the case of corporations and
partnerships, the principals are often asked to indebt
themselves personally as well. As regards residential
mortgages, repayment ability is determined from
information contained in the application and recent
income tax returns. Emphasis is on credit, employment,
income and residency verification. Broad hazard
insurance is always required and flood insurance where
applicable. In the case of construction mortgages,
builders risk insurance is requested. Adjustable rate
mortgages are not offered for residential mortgages.
Agricultural loans for the purchase or improvement
of real estate must meet the Bank's real estate
underwriting criteria. The only permissible exception
is when a Farmers Home Loan Administration guaranty is
obtained. Agricultural loans made for the purchase of
equipment are usually payable in five 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 three years, but a feeder operation
would require cleanup in intervals of less than one
year. Agricultural loans are also made for crop
production purposes. Such loans are structured to
repay within the production cycle and not carried over
into a subsequent year. General purpose working
capital loans are also a possibility with repayment
expected within one year. It is also a general policy
to collateralize non-real estate loans with not only
the asset purchased but also junior liens on all other
available assets. Insurance and credit criteria is
the same as mentioned previously. In addition, annual
visits are made to our agricultural customers to
determine the general condition of assets. Personal
credit requirements are handled as consumer loans.
Commercial loans are made for the acquisition and
improvement of real estate, purchase of equipment and
for working capital purposes on a seasonal or
revolving basis. Criteria was discussed under real
estate financing for such loans, but it is important
to note that such loans may be made in conjuction with
the Pennsylvania Industrial Development Authority.
Caution is also exercised in taking industrial
property for collateral by requiring, on a selective
basis, environmental audits.
Equipment loans are generally amortized over three
to seven years, with an owner equity contribution
required of at least 20% of the purchase price.
Unusually expensive pieces may be financed for a
longer period depending upon the asset's useful life.
The increased cash flow resulting from the additional
piece, through improved income or greater depreciation
expense, serves in establishing the terms. Insurance
coverage with the Bank as loss payee is required,
especially in the case where the equipment is rolling
stock.
Seasonal and revolving lines of credit are offered for
working capital purposes. Collateral for such a loan
includes the pledge of inventory and/or receivables.
Drawing availability is usually 50% of inventory and
75% of eligible receivables. Eligible receivables are
defined as invoices less than 90 days delinquent.
Exclusive reliance is very seldom placed on such
collateral, therefore, other lienable assets are also
taken into the collateral pool. Where reliance is
placed on inventory and accounts receivable, the
applicant must provide financial information including
agings on a monthly basis. In addition, the guaranty
of the principals is usually obtained.
It is unusual for Jersey Shore State Bank to make
unsecured commercial loans. But when such a loan is a
necessity, credit information in the file must support
that decision.
Letter of Credit availablity is limited to standbys
where the customer is well known to the Bank. Credit
criteria is the same as that utilized in making a
direct loan and collateral is obtained in most cases,
and whenever the expiration date is for more than one
year.
Consumer loan products include second mortgages,
automobile financing, small loan requests, overdraft
check lines and PHEAA referral loans. Our policy
includes standards used in the industry on debt
service ratios and terms are consistent with prudent
underwriting standards and the use of proceeds.
Verifications are made of employment and residency,
along with credit history. Second mortgages are
confined to equity borrowing and home improvements.
Terms are generally ten years or less and rates are
fixed. Loan to collateral value criteria is 80% or
less and verifications are made to determine values.
Automobile financing is generally restricted to four
years and done on a direct basis. The Bank, as a
practice, does not floor plan and therefore does not
discount dealer paper. Small loan requests are to
accommodate personal needs such as the purchase of
small appliances or for the payment of taxes.
Overdraft check lines are limited to $5,000 or less.
The Bank's investment portfolio is analyzed and priced
on a monthly basis. Investments are made in U.S.
Treasuries, U.S. Agency issues, bank qualified
municipal bonds, corporate bonds and corporate stocks
which consist of Pennsylvania bank stocks. Bonds with
BAA or better ratings are used, unless a local issue
is purchased that has a lesser or no rating.
Factors taken into consideration when investments are
made include liquidity, the company's tax position and
the policies of the Asset/Liability Committee.
The Bank has experienced deposit growth in the range
of .96% to 8.22% over the last five years. This
growth has primarily come in the form of core
deposits. Although the Bank has regular opportunities
to bid on pools of funds of $100,000 or more in the
hands of municipalities, hospitals and others, it does
not rely on these monies to fund loans on intermediate
or longer term investments. Minor seasonal growth in
deposits is experienced at or near the year end.
It is the policy of Jersey Shore State Bank to
generally maintain a rate sensitive asset (RSA) to
rate sensitive liability (RSL) ratio of 200% of equity
for a 6-month time horizon, 175% of equity for a
2-year time horizon and 150% of equity for a 5-year
time horizon.
The Bank operates 10 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 commerial 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 on deposits, and their use may also
affect interest rates charged on loans or paid for
deposits.
The policies and regulations of the Federal Reserve
Board have had and will probably continue to have a
significant effect on the Bank's deposits, loans and
investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Bank's
operation in the future. The effect of such policies
and regulations upon the future business and earnings
of the Bank cannot accurately be predicted.
EXECUTIVE OFFICERS OF THE REGISTRANT:
NAME AGE
Theodore H. Reich 61 President and Chairman
of the Company; the Bank; Woods
Real Estate Development Co., Inc.;
and Woods Investment Company, Inc.
Ronald A. Walko 53 Chief Executive Officer and Executive
Vice President of the Company; the Bank;
Senior Vice President of Woods
Invesment Company; Federal bank examiner
prior to 1986 for an eighteen-year
period.
Hubert A. Valencik 58 Senior Vice President of the Company;
Senior Vice President and Operations
Officer of the Bank; Vice President with
another bank prior to 1985 for a
fourteen-year period.
Sonya E. Scott 40 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:
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Office Address
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
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 Ross Hill Road, P.O. Box 66 Owned
Spring Mills, Pennsylvania 16875
Centre Hall RR 2, Route 45 West Land Under Lease
Centre Hall, Pennsylvania 16828 -- see below
Zion 100 Cobblestone Road Under Lease
Bellefonte, Pennsylvania 16823 -- see below
Mortgage/Loan Center
State College 300 Allen Street
State College, Pennsylvania 16801 Under Lease
-- see below
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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, 1999.
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, 1999.
The Mill Hall branch office (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 for the year
ended December 31, 1999 was $25,000.
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. The annual rent for the Centre
Hall branch office lot was $7,403 for the year ended
December 31, 1999.
The Zion branch office was leased for a ten-year
period beginning in May of 1999. After the intial
ten-year term, the Bank has the option of renewing
this lease for two additional ten-year terms. The Bank
is granted, at the end of the initial term of the
lease, or at any time during any renewal or extension,
an option to purchase the property at a price to be
determined in the following manner: Each party, the
Bank and the lessor, shall choose a commerical
appraiser to appraise the property; the two appraisers
shall also agree on a third independent commercial
appraiser to determine the fair market value of the
property. Each party, the Bank and the lessor, is
bound by the average of the three appraisals. The
annual rent for the Zion branch office for the year
ended December 31, 1999 was $36,000.
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 ended 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
$14,652 for the year ended December 31, 1999.
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 1999.
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, 1997. 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.
<TABLE>
<S> <C> <C> <C>
Dividends
HIGH LOW Declared
1997:
First quarter $ 22.73 $ 19.09 $ 0.13
Second quarter $ 26.06 $ 24.15 $ 0.13
Third quarter $ 27.73 $ 26.14 $ 0.35
Fourth quarter $ 28.86 $ 27.27 $ 0.14
1998:
First quarter $ 43.64 $ 29.44 $ 0.15
Second quarter $ 48.18 $ 42.73 $ 0.15
Third quarter $ 50.45 $ 49.09 $ 0.17
Fourth quarter $ 51.82 $ 48.64 $ 0.41
1999:
First quarter $ 56.36 $ 51.82 $ 0.18
Second quarter $ 54.32 $ 48.00 $ 0.20
Third quarter $ 50.75 $ 44.75 $ 0.20
Fourth quarter $ 47.50 $ 40.00 $ 0.43
</TABLE>
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 issued on January
15, 1998, and a 10% stock dividend on June 8, 1999.
The stock prices and dividends have also been adjusted
for the acquisition of First National Bank of Spring
Mills.
The Bank has paid cash dividends since December 31,
1941. The Registrant has paid dividends since the
effective date of its formation as a bank holding
company. It is the present intention of the
Registrant's Board of Directors to continue the
dividend payment policy; however, further dividends
must necessarily depend upon earnings, financial
condition, appropriate legal restrictions and other
factors relevant at the time the Board of Directors of
the Registrant considers dividend policy. Cash
available for dividend distributions to shareholders
of the Registrant must initially come from dividends
paid by the Bank to the Registrant. Therefore, the
restrictions on the Bank's dividend payments are
directly applicable to the Registrant.
Under the Pennsylvania Business Corporation Law of
1988 a corporation may not pay a dividend, if after
giving effect thereto, the corporation would be unable
to pay its debts as they become due in the usual
course of business and after giving effect thereto the
total assets of the Corporation would be less than the
sum of its total liabilities plus the amount that
would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy
the preferential rights upon dissolution of the
shareholders whose preferential rights are superior to
those receiving the dividend.
As of February 29, 1999, the Registrant had
approximately 1,187 shareholders of record.
ITEM 6 SELECTED FINANCIAL DATA
Information appearing in the Annual Report under the
caption "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of
Operations" at page 23 contains statistical and other
financial information in accordance with guidelines
for bank holding companies as issued by the Securities
and Exchange Commission.
SELECTED FINANCIAL DATA
The following table sets forth certain financial data
as of and for each of the years in the five-year
period ended December 31, 1999.
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
1999 1998 1997 1996 1995
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Interest income $26,030 $25,096 $23,146 $22,074 $20,548
Interest expense 10,518 10,529 9,324 8,985 8,548
Net interest income 15,512 14,567 13,822 13,089 12,000
Provision for loan
losses 286 305 274 137 300
Net interest income
after provision
for loan losses 15,226 14,262 13,548 12,952 11,700
Other income 3,527 3,435 5,921 2,611 2,264
Other expense 9,339 9,065 8,219 7,726 8,219
Income before income
taxes 9,414 8,632 11,250 7,837 5,745
Applicable income taxes 2,224 2,164 3,113 2,082 1,513
Net Income $7,190 $6,468 $8,137 $5,755 $4,232
Consolidated Balance Sheet at
End of Period:
Total assets $373,742 $341,601 $314,562 $287,787 $267,141
Loans 233,823 216,566 204,756 177,910 166,687
Allowance for loan
losses (2,823) (2,681) (2,579) (2,553) (2,473)
Deposits 255,573 253,134 242,806 224,356 221,324
Long-term debt
-- other 27,278 22,778 3,500 2,260 1,257
Stockholders' equity 46,085 49,896 47,392 27,734 33,622
Per Share Data:
Net income
Earnings per share
- Basic $2.30 $2.08 $2.62 $1.86 $1.38
Earnings per share
- Diluted $2.30 $2.07 $2.61 $1.86 $1.37
Cash dividends declared 1.01 0.88 0.75 0.54 0.45
Book Value 14.75 15.97 13.94 11.14 9.96
Number of shares
outstanding, at
end of period 3,128,332 2,840,823 1,545,250 1,539,769 1,533,810
Average number of
shares outstanding 3,121,413 3,114,376 3,101,203 3,087,735 3,077,302
Selected financial ratios:
Return on average
stockholders' equity 14.96% 13.06% 18.94% 16.37% 13.54%
Return on average
total assets 1.99% 1.94% 2.73% 2.06% 1.64%
Net interest income
to average
interest earning
assets 4.63% 4.77% 5.20% 5.05% 5.02%
Dividend payout ratio 43.91% 42.51% 31.33% 31.79% 35.88%
Average stockholders' equity to
average total assets 13.81% 15.04% 14.51% 12.61% 11.58%
Loans to deposits, at
end of period 90.39% 84.49% 83.27% 78.16% 74.20%
<FN>
</TABLE>
Per share data and number of shares outstanding have
been adjusted in each reporting period to give
retroactive effect to a stock split effective in the
form of a 50% stock dividend issued July 31, 1995, a
stock split effected in the form of a 100% stock
dividend issued January 15, 1998, and a 10% stock
dividend issued June 8, 1999. In addition, all
financial data has been adjusted for the acquisition
of the First National Bank of Spring Mills in 1999.
Management's Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
ITEM 7
NET INTEREST INCOME
Net interest income is determined by calculating the
difference between the yields earned on interest
earning assets and the rates paid on interest bearing
liabilities.
1999 vs 1998
Taxable equivalent net interest income increased 5.2%
or $804,000, to $16,396,000 from year end 1998 to year
end 1999. The increase is mostly attributable to an
increase in tax exempt investment securities volume of
$1,618,000 and a $167,000 decline in the rate creating
a net increase of $1,451,000. A net decrease in
taxable investment securities of $511,000 and a
$147,000 decrease in loans, moderates the increase of
total interest earning assets to $793,000.
Total average interest earning assets increased to
$334,680,000 in 1999. The $29,488,000 increase over
the previous year consisted of an $18,713,000 increase
in total average securities and an increase of
$10,775,000 in total average loans.
Total average interest bearing liabilities increased
$23,577,000 during 1999. The increase was primarily
due to an increase in borrowings of $9,878,000. Other
contributors include an increase of $8,442,000 and a
$5,257,000 increase to total deposits.
The effective interest differential declined 21 basis
points during 1999. The decrease was due to the net
effect of an interest rate decrease in total average
earning assets and a rate increase in total total
average interest bearing liabilities. Competitve
pressures and target interest rate increases by the
Federal Reserve have resulted in upward interest rate
pressure.
1998 vs 1997
Fully taxable equivalent net interest income increased
to $15,592,000 for the year ended December 31,1998, or
an increase of $976,000 or 6.7% over the previous
year.
The increase in total interest earning avaerage assets
from year end 1997 to year end 1998 was $39,327,000.
Total average securities increased $9,943,000, total
average loans increased $30,520,000, total average
federal funds sold decreased $1,136,000 and total
average other assets decreased $3,290,000.
The increase in tax equivalent net interest income,
related to the volume increase in average investment
securities, was $269,000, while the decrease due to a
decline in average interest rate of return was
$264,000. The resulting net increase of $5,000 to tax
equivalent net interest income was primarly due to two
leverage transactions completed in April and June of
1998; each transaction was $10,000,000.
Average net loans contributed $2,864,000 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 $626,000, resulting in a
net increase of $2,238,000. 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
$24,297,000.
Total average savings increased $2,502,000 and total
average other time deposits increased $6,691,000.
Total average short term borrowings increased
$2,355,000 and total average borrowings increased
$12,749,000.
Average total deposits increased by a total of
$9,193,000. The related increase in interest expense
due to volume increases was $437,000. The related
decrease in interest expense due to interest rate was
$73,000 for a net increase in interest expense of
$364,000 related to deposits.
Average short term borowings and other borrowings
increased $15,104,000 in total. Increases in interest
expense due to volume on the above accounts was
$848,000 and a decrease of $8,000 due to interest
rate. The net increase in interest expense related to
these items was $849,000.
In summary, the total effective interest differential
declined 39 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.
AVERAGE BALANCES AND INTEREST RATES
(INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999
------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
<S> <C> <C> <C>
ASSETS:
Interest earning assets:
Securities:
US. Treasury and federal agency. . . . . . $39,906 $2,513 6.30%
State and political subdivisions . . . . . 43,291 3,353 7.75%
Other . . . . . . . . . . . . . . . . . . 28,143 1,030 3.66%
------------------------
Total securities . . . . . . . . . . . . 111,340 6,896 6.19%
LOANS: ------------------------
Tax-exempt loans. . . . . . . . . . . . . . . . . 6,157 487 7.91%
All other loans, net of discount where applicable 217,183 19,531 8.99%
------------------------
Total loans . . . . . . . . . . . . . . . . 223,340 20,018 8.96%
------------------------
Federal funds sold. . . . . . . . . . . . . . . . - - 0.00%
------------------------
Total earning assets . . . . . . . . . . . 334,680 $26,914 8.04%
============
Other assets. . . . . . . . . . . . . . . . . . . 21,096
------------
TOTAL ASSETS . . . . . . . . . . . . . . $355,776
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Savings . . . . . . . . . . . . . . . . . . . $96,876 $1,965 2.03%
Other time. . . . . . . . . . . . . . . . . . 115,785 5,933 5.12%
------------------------
Total deposits . . . . . . . . . . . . . . . 212,661 7,898 3.71%
Short-term borrowings. . . . . 23,524 1,197 5.09%
Other borrowings. . . . . . . . . . . . . . . . . . 25,492 1,423 5.58%
------------------------
Total interest bearing liabilities 261,677 $10,518 4.02%
============
Demand deposits . . . . . . . . . . . . . . . . . 41,071
Other liabilities . . . . . . . . . . . . . . . . 3,912
Shareholders' equity . . . . . . . . . . . . . . . 49,116
------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY . . . . . . . $355,776
============
Interest income/earning assets . . . . . . . . $334,680 $26,914 8.04%
Interest expense/earning assets. . . . . . . . $334,680 10,518 3.14%
---------------------
Effective interest differential . . . . . . . . . $16,396 4.90%
======================
</TABLE>
1. Fees on loans are included with interest on loans.
2. Information on this table has been calculated using average
daily balance sheets to obtain average balances.
3. Nonaccrual loans have been included with loans for the
purpose of analyzing net interest earnings.
4. Loan fees are included in interest income as follows: 1999,
$601,000, 1998, $623,000, 1997, $527,000.
5. 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).
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES
(INCOME AND RATES ON A FULLY TAXABLE EQUIVALENT BASIS)
(IN THOUSANDS)
1998 1997
- ----------------------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C>
$48,970 $3,186 6.51% $42,977 $3,004 6.99%
22,134 1,902 8.59% 23,451 2,085 8.89%
21,523 868 4.03% 16,256 862 5.30%
- ---------------------------------- -----------------------
92,627 5,956 6.43% 82,684 5,951 7.20%
- ---------------------------------- -----------------------
6,742 520 7.71% 3,268 295 9.03%
205,823 19,645 9.54% 178,777 17,632 9.86%
- ---------------------------------- -----------------------
212,565 20,165 9.49% 182,045 17,927 9.85%
- ---------------------------------- -----------------------
- - 0.00% 1,136 62 5.46%
- --------------------------------- -----------------------
305,192 $26,121 8.56% 265,865 $23,940 9.00%
=============== ============
25,308 28,598
- ------------------- -----------
$330,500 $294,463
=================== ===========
$91,930 $2,475 2.69% $89,428 $2,426 2.71%
115,474 6,390 5.53% 108,783 6,075 5.58%
- ------------------------------- -----------------------
207,404 8,865 4.27% 198,211 8,501 4.29%
15,082 771 5.11% 12,727 649 5.10%
15,614 893 5.72% 2,865 174 6.07%
- ------------------------------- -----------------------
238,100 $10,529 4.42% 213,803 $9,324 4.36%
=============== ============
36,592 32,351
6,097 5,586
49,711 42,723
- ------------------ -----------
$330,500 $294,463
================== ===========
$305,192 $26,121 8.56% $265,865 $23,940 9.00%
$305,192 10,529 3.45% $265,865 9,324 3.51%
-------------------------- ------------------------
$15,592 5.11% $14,616 5.50%
========================== ========================
<FN>
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF CHANGES IN INTEREST EARNED AND INTEREST PAID
(IN THOUSANDS)
INTEREST EARNED ON
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TAXABLE TAX-EXEMPT FEDERAL TOTAL INTEREST
INVESTMENT INVESTMENT FUNDS EARNING
SECURITIES SECURITIES LOANS SOLD ASSETS
1999 compared to 1998
Increase (decrease)
Due to:
Volume . . . . . . . . . . . . . ($342) $1,618 $1,651 $ - $2,927
Rate. . . . . . . . . . . . . . (169) (167) (1,798) - ($2,134)
-----------------------------------------------------------
Net increase (decrease) ($511) $1,451 ($147) $ - $793
===========================================================
1998 compared to 1997
Increase (decrease)
Due to:
Volume . . . . . . . . . . . . . $384 ($115) $2,864 ($31) $3,102
Rate. . . . . . . . . . . . . . . (196) (68) (626) (31) (921)
-----------------------------------------------------------
Net increase (decrease) $188 ($183) $2,238 ($62) $2,181
===========================================================
</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
- ----------------------------------------------------------------------------------
TOTAL
OTHER SHORT INTEREST NET
SAVINGS TIME TERM OTHER BEARING INTEREST
DEPOSITS DEPOSITS BORROWINGS BORROWINGS LIABILITIES EARNINGS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$142 $17 $430 $551 $1,140 $1,787
(652) (474) (4) (21) ($1,151) ($983)
- ----------------------------------------------------------------------------------
($510) ($457) $426 $530 ($11) $804
==================================================================================
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$67 $370 $120 $729 $1,286 $1,816
(18) (55) 2 (10) (81) ($840)
- ----------------------------------------------------------------------------------
$49 $315 $122 $719 $1,205 $976
==================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
1999 vs 1998
The provision for loan losses decreased 6.2% from
fiscal 1998 to $286,000 for a year end allowance for loan
losses of $2,823,000. This allotment recongnized the
prior year end allowance for loan losses balance,
overall loan performance and anticipated recoveries.
Each quarter management conducts comprehensive,
detailed credit review of the loan portfolio to
determine the adequacy of the provision. Supplementing
the internal review is an external review. In so
doing, management remains committed to an aggressive
program of problem loan identification and resolution.
1998 vs 1997
The provision for loan losses was increased 11.3%
over the prior year to $305,000. This increase is
attributed to an anticipated significant rise in
consumer loan losses accompanied by a further decline
in recoveries. Each quarter management conducts
comprehensive, detailed credit review of the loan
portfolio to determine the adequacy of the provision.
Supplementing the internal review is an external
review. In so doing, management remains committed to
an aggressive program of problem loan identification
and resolution.
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
Balance at beginning of period. . . . . $2,681 $2,579 $2,553 $2,473 $2,247
Charge-offs:
Domestic:
Real estate . . . . . . . 50 - - 4 -
Commercial and industrial. . . . 28 91 183 100 44
Installment loans to individuals. . 98 180 176 152 210
Total charge-offs. . . . . . 176 271 359 256 254
Recoveries:
Real estate . . . . . . . . . 4 - 2 - -
Commercial and industrial. . . . 11 29 68 175 9
Installment loans to individuals. . 17 39 41 24 171
Total recoveries. . . . . . 32 68 111 199 180
Net charge-offs . . . . . . . . . . . 144 203 248 57 74
Additions charged to operations. . . . 286 305 274 137 300
Balance at end of period. . . . . $2,823 $2,681 $2,579 $2,553 $2,473
Ratio of net charge-offs during the
period to average loans 0.06% 0.09% 0.14% 0.03% 0.04%
outstanding during the period. . .
</TABLE>
OTHER INCOME
1999 vs 1998
Total other income at December 31, 1999 was $3,527,000
versus 1998's year end total of $3,435,000. This
$92,000 increase resulted from the net effect of an
increase in service charges collected of $258,000, a
decrease in securities gains realized of $130,000 and
a decrease in other operating income of $36,000. A
significant portion of the increase in service charge
income, of $105,000, is due to the growth in the
deposit base and an increase in charges collected on
deposit accounts. Other major factors include an
increase of $153,000 in income based upon ATM and
debit card usage. During 1999 securities gains
realized amounted to $1,946,000 versus $2,076,000
realized in 1998.
1998 vs 1997
Other income for the year ended December 31, 1998
decreased $2,486,000 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
$4,658,000 that were realized in 1997.
The increase in service charges from $903,000 in 1997
to $1,100,000 in 1998 was the result of increases in
charges collected on customers activity on their
deposit accounts and overall growth in the deposit
base.
Other operating income decreased in 1998 over that
reported in 1997 by $101,000. 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.
OTHER EXPENSES
1999 vs 1998
When comparing the year ended December 31, 1999 with
the year ended December 31, 1998, there was a $274,000
or 3% increase in other expenses.
Salaries and employee benefits expensed during 1999
increased by $72,000 over the amount expensed during
1998 due to normal wage increases.
Occupancy, furniture and equipment expense decreased
in 1999 by $11,000 compared to 1998. The net effect of
a $39,000 increase in occupancy expense and a decrease
of $50,000 in furniture and equipment expense account
for this decrease. The increase in occupancy expense
is related to the opening of a new branch office in
Zion. The decrease in furniture and equipment expense
is attributable to a decline in the monthly cost of
the IBM computer lease offset by the increase in
depreciation on new equipment.
Other operating expenses, the final component of total
other expenses increased by $213,000. The most
significant increases occurred in bookkeeping and data
processing, check imprinting, stationery and supplies
and ATM expenses.
1998 vs 1997
At December 31, 1998, other expenses had increased
$846,000, or 10% over 1997 expenses.
The amount of salaries and employee benefits expensed
during 1998 increased by $229,000 due to a special
bonus that was paid to all employees and wage
increases.
Occupancy expense increased $96,000 and furniture and
equipment expense increased slightly in 1998 by $2,000
compared to 1997. The increase in occupancy expense
is primarily due to an increase in depreciation
resulting from the purchase of an imaging system and
increased expenses that were incurred by First
National Bank of Spring Mills.
Other operating expenses increased by $519,000.
Acquisition costs, related to the agreement signed by
the Company to acquire First National Bank of Spring
Mills, accounted for the majority of the increase. It
should be noted that expenses related to the merger
are non-recurring.
INCOME TAXES
1999 vs 1998
Income tax expense recognized in 1999 was $2,224,000
compared to $2,164,000 in 1998, resulting in an
effective income tax rate of 23.6% and 25.1% for 1999
and 1998, respectively. The increase in tax-exempt
income from 1998 to 1999 caused 1.5% decline in the
effective tax rate.
1998 vs 1997
The provision for income taxes for the year ended
December 31, 1998 resulted in an effective income tax
rate of 25.1% compared to 27.8% for 1997. The decrease
in the effective income tax rate was primarily due to
a decline in the amount of securities gains realized
during 1998.
FINANCIAL CONDITION
INVESTMENTS
1999
The investment portfolio increased in 1999 by
$10,918,000 due to net increases in U.S. Government
agencies and state and political subdivisions of
$19,135,000 and a decrease in U.S. Treasury
securities, other bonds, notes and debentures and
corporate stock of $8,217,000. The total investment
portfolio at year end 1999 was comprised of 34% U.S.
Government and agency securities, 42% state and
political subdivions, 23% equity securities and 1%
other bonds notes and debentures. Held to maturity
securities had a carrying value of $3,014,000. The
largest portion of the portfolio is classified as
available for sale and had an amortized cost of
$117,740,000 with an estimated market value of
$113,305,000. Due to the unrealized loss on available
for sale securities of $4,435,000, shareholders equity
was effected by $(2,927,000), net of deferred taxes.
Management has significantly increased holdings in tax
free municipals which has served to increase its
after-tax yield. The decrease in corporate stock is
due to the net effect of purchases and sales in
addition to the change in the net unrealized gain from
year end
1998
The investment security portfolio increased in 1998
by $14,928,000 due to net increases in U.S. Government
agencies, state and political subdivisions and
corporate stock of $16,900,000 and a decrease in U.S.
Treasury securities of $1,972,000. 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% US Government and agency securities,
29% state and political subdivisions, 27% 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 $94,812,000 with an estimated market value of
$102,323,000.
The carrying amounts of investment securities at
the dates indicated are summarized as follows ( in
thousands):
<TABLE>
<S> <C> <C> <C>
DECEMBER 31,
1999 1998 1997
US. Treasury securities. . . . . . . . .
Held to Maturity $ - $ - $ -
Available for Sale 3,504 10,866 12,767
US. Government agencies. . . . . . . . .
Held to Maturity 259 339 513
Available for Sale 35,130 35,112 32,324
State and political subdivisions. . . . .
Held to Maturity 2,465 2,464 2,417
Available for Sale 46,829 27,633 17,162
Other bonds, notes and debentures . . . .
Held to Maturity 290 275 250
Available for Sale 1,213 701 797
Total bonds, notes and debentures.. 89,690 77,390 66,284
Corporate stock -Available for Sale. . . . 26,629 28,011 24,189
Total . . . . . . . . . . . . $116,319 $105,401 $90,473
</TABLE>
The following table shows the maturities and repricing
of investment securities at December 31, 1999 and the
weighted average yields (for tax-exempt obligations on
a fully taxable basis assuming a 34% tax rate) of such
securities (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
WITHIN AFTER ONE AFTER FIVE AFTER
ONE BUT WITHIN BUT WITHIN TEN
YEAR FIVE YEARS TEN YEARS YEARS
US. Treasury securities:
HTM Amount. . . . . . . . . . . . $ - $ - $ - $ -
Yield . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 0.00%
AFS Amount . . . . . . . . . . . 3,499 - - -
Yield . . . . . . . . . . . . . . 6.33% 0.00% 0.00% 0.00%
US. Government agencies:
HTM Amount. . . . . . . . . . . . - - - 259
Yield . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 8.82%
AFS Amount . . . . . . . . . . . 6,004 4,340 2,000 23,879
Yield . . . . . . . . . . . . . . 5.92% 5.97% 7.42% 7.30%
State and political subdivisions:
HTM Amount. . . . . . . . . . . . - 1,141 402 922
Yield . . . . . . . . . . . . . . 0.00% 7.13% 7.31% 7.39%
AFS Amount . . . . . . . . . . . - 200 170 49,854
Yield . . . . . . . . . . . . . . 0.00% 9.42% 9.63% 7.56%
Other bonds, notes and debentures:
HTM Amount. . . . . . . . . . . . 5 135 150 -
Yield . . . . . . . . . . . . . . 6.63% 7.14% 7.14% 0.00%
AFS Amount . . . . . . . . . . . - - - 1,229
Yield . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 6.59%
Total Amount. . . . . . . . . . . $9,508 $5,816 $2,722 $76,143
Total Yield . . . . . . . . 6.07% 6.35% 7.52% 7.48%
</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
1999
Gross loans totaled $233,823,000 at year end, an
increase of $17,257,000 or 8.0% over fiscal 1998. Our
commercial, agricultural loan portfolio declined
$1,185,000 (3.6%) and installment loans to individuals
delcined $986,000 (4.0%). These reductions were offset
by a $19,428,000 (12.2%) increase in our real estate
secured portfolio. Contributing to this volume are
increases of $11,687,000 (10.5%) in residential
mortgages, $7,883,000 (18.1%) in commercial mortgages
and a $142,000 (3.7%) decline in construction loans. A
viable local economy and marketable lending practices
are responsible for this overall increase.
1998
Gross loans totaled $216,566,000 at year end, an
increase of $8,979,000 or 4.3% over the prior year
end. While commercial and agricultural loans declined
by $5,711,000 or 14.8%, installment loans to
individuals grew by $997,000 or 4.2%, residential real
estate mortgages increased by $1,938,000 or 1.8%,
commercial real estate mortgages increased by
$10,892,000 or 33.3%, and construction real estate
mortgages grew $863,000 or 28.7%. Growth has leveled
off primarily because of aggressive pricing in the
market place.
The amount of loans outstanding at the indicated dates
are shown in the following table according to type of
loan (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C>
December 31,
1999 1998 1997 1996 1995
Domestic:
Commercial and agricultural $31,735 $32,920 $38,631 $38,999 $38,758
Real estate mortgage
Residential $123,392 $111,705 $109,767 $98,069 $86,289
Commercial $51,445 $43,562 $32,670 $21,600 $18,350
Construction $3,732 $3,874 $3,011 $1,512 $1,212
Installment loans to individuals $23,519 $24,505 $23,508 $20,452 $24,859
Gross loans $233,823 $216,566 $207,587 $180,632 $169,468
</TABLE>
The amounts of domestic loans at December 31, 1999 are
presented below by category and maturity (in
thousands):
<TABLE>
<S> <C> <C> <C> <C>
CATEGORY (1) (2)
COMMERCIAL INSTALLMENT
AND LOANS TO
REAL ESTATE OTHER INDIVIDUALS TOTAL
Loans with floating interest rates:
1 year or less . . . . . . . . . . . $2,930 $8,094 $1,767 $12,791
1 through 5 years. . . . . . . . . . 2,339 1,072 6 3,417
5 through 10 years. . . . . . . . .. . 5,967 846 233 7,046
After 10 years. . . . . . . . . . .. . 18,137 3,378 48 21,563
Sub Total. . . . . . . . . . . .. . 29,373 13,390 2,054 44,817
Loans with predetermined interest rates:
1 year or less. . . . . . . . . . . . . 3,865 1,214 1,750 6,829
1 through 5 years . . . . . . . . . . . 14,560 8,800 16,525 39,885
5 through 10 years. . . . . . . . . . . 35,654 5,011 1,526 42,191
After 10 years. . . . . . . . . . . . . 95,117 3,320 1,664 100,101
Sub Total. . . . . . . . . . . . . . 149,196 18,345 21,465 189,006
Total. . . . . . . . . . . . . . $178,569 $31,735 $23,519 $233,823
</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. The Bank does not have any foreign loans
outstanding at December 31, 1999.
ALLOWANCE FOR LOAN LOSSES
1999
At December 31, 1999, the allowance for loan losses
stood at $2,823,000 or 1.2% of gross loans. This was a
$142,000 (5.3%) increase over year end 1998. The
adequacy of the loan loss allowance is determined
quarterly in unison with management's comprehensive
rewiew of the loan portfolio of credit quality.
Reviews are further enhanced by anaylsis of recent 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.
Nonaccruing loans declined $362,000 (56.0%) to
$383,000 from year end 1998. Overall non-performing
loans were reduced $181,000 (25.6%) to 525,000 from
fiscal 1998. 37.3% of nonaccruing loans are meeting
contractual obligations and three of the five loans
are real estate secured.
1998
At December 31, 1998, the allowance for loan losses
stood at $2,681,000 or 1.2% of gross loans. This was
an increase of $102,000 or 4.0%.
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 while nonaccruing loans increased by $94,000
to $646,000, overall non-performing loans were in fact
declining. Twelve percent (12%) of nonaccruing loans
are meeting contractual obligations and all such loans
are real estate secured.
The following table presents information concerning
nonperforming loans. The accrual of interest will be
discontinued when the principal or interest of a loan
is in default for 90 days or more, or as soon as
payment is questionable, unless the loan is well
secured and in the process of collection. Consumer
loans and residential real estate loans secured by 1
to 4 family dwellings shall ordinarily not be subject
to those guidelines. The reversal of previously
accrued but uncollected interest applicable to any
loan placed in a nonaccrual status and the treatment
of subsequent payments of either principal or interest
will be handled in accordance with generally accepted
accounting principles. Generally accepted accounting
principles do not require a write-off of previously
accrued interest if principal and interest are
ultimately protected by sound collateral values. A
nonperforming loan may be restored to an accruing
status when:
1. Principal and interest is no longer due and unpaid.
2. It becomes well secured and in the process of collection.
3. Prospects for future contractual payments are no
longer in doubt.
TOTAL NONPERFORMING LOANS
(IN THOUSANDS)
90 DAYS
NONACCRUAL PAST DUE RENEGOTIATED
1999 $284 $241 $0
1998 $646 $60 $0
1997 $552 $430 $0
1996 $748 $278 $0
1995 $1,009 $798 $0
If interest had been recorded at the original rate on
nonaccrual loans, such income would have approximated
$48,000, $98,000 and $81,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Interest income on such loans, which is recorded when
received, amounted to approximately $38,000, $50,000
and $42,000 for the years ended December 31, 1999,
1998 and 1997, 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.
Presently there are no significant amounts of loans
where serious doubts exist as to the ability of the
borrower to comply with the current loan payment terms
which are not included in the nonperforming categories
as indicated above.
Management's judgment in determining the amount of the
additions to the allowance charged to operating
expense considers the following factors:
1. Economic conditions and the impact on the loan portfolio.
2. Analysis of past loan charge-offs experience by
category and comparison to outstanding loans.
3. Problem loans on overall portfolio quality.
4. Reports of examination of the loan portfolio by
the Pennsylvania State Banking Department and the
Federal Deposit Insurance Corporation.
ALLOCATION IN THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
PERCENT OF
LOANS IN
EACH
CATEGORY TO
AMOUNT TOTAL LOANS
DECEMBER 31, 1999:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $383 13.5%
Real estate mortgage
Residential $1,490 52.8%
Commercial $621 22.0%
Construction $45 1.6%
Installment loans to individuals $284 10.1%
Total $2,823 100.0%
DECEMBER 31, 1998:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $408 15.2%
Real estate mortgage
Residential $1,383 51.6%
Commercial $539 20.1%
Construction $48 1.8%
Installment loans to individuals $303 11.3%
Total $2,681 100.0%
DECEMBER 31, 1997:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $480 18.6%
Real estate mortgage
Residential $1,364 52.9%
Commercial $406 15.7%
Construction $37 1.5%
Installment loans to individuals $292 11.3%
Total $2,579 100.0%
DECEMBER 31, 1996:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $551 21.6%
Real estate mortgage
Residential $1,387 54.3%
Commercial $305 12.0%
Construction $21 0.8%
Installment loans to individuals $289 11.3%
Total $2,553 100.0%
DECEMBER 31, 1995:
Balance at end of period applicable to:
Domestic:
Commercial and agricultural $566 22.9%
Real estate mortgage
Residential $1,258 50.9%
Commercial $268 10.8%
Construction $18 0.7%
Installment loans to individuals $363 14.7%
Total $2,473 100.0%
</TABLE>
DEPOSITS
1999
All categories of deposits increased with demand
deposits showing the most significant growth of 12.2%.
Interest bearing deposits grew $5,257,000 while
noninterest-bearing deposits increased $4,479,000.
Together interest and noninterest-bearing deposits add
$9,736,000 to the increase of total average deposits.
Saving deposits increased $4,946,000 or 5.4% from year
end 1998 to year end 1999. Time deposits remained
stable, increasing only $311,000 in 1999.
The reduction of growth in time deposits from 1998 to
1999 as compared to 1997 to 1998 is reflective of a
highly competitive market for funds. Relatively high
consumer spending ignited growth in transaction
accounts.
1998
There was an increase in average deposits in 1998 of
$13,434,000, or 5.8% over 1997's average deposits.
An increase in other time deposits contributed
$6,691,000 to the overall increase. Movements in
demand deposits and savings deposits resulted in
increases of $6,332,000 and $411,000, respectively.
The $13,434,000 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.
Time deposits of $100,000 or more totaled
approximately $24,308,000 on December 31, 1999 and
$23,112,000 on December 31, 1998. Interest expense
related to such deposits was approximately $1,242,000,
$1,238,000 and $954,000 for the years ended December
31, 1999, 1998 and 1997, respectively. Time deposits
of $100,000 or more at December 31, 1999 mature as
follows: 2000 - $18,004,000; 2001 - $4,847,000; 2002 -
$538,000; 2003 - $219,000; thereafter - $700,000.
The average amount and the average rate paid on
deposits are summarized below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
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. . . . $41,071 0.00% $36,592 0.00% $32,351 0.00%
Interest-bearing . . . . . 45,095 2.15% 42,687 2.56% 40,596 2.58%
Savings deposits . . . . . . . 51,781 1.92% 49,243 2.81% 48,832 2.82%
Time deposits. . . . . . . . . 115,785 5.12% 115,474 5.53% 108,783 5.58%
Total average deposits . $253,732 $243,996 $230,562
<FN>
</TABLE>
SHAREHOLDERS' EQUITY
1999
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. Total Shareholders' Equity at
December 31, 1999 was $46,085,000, decreasing by
$3,811,000 from the balance at December 31, 1998 of
$49,896,000. Net income and the exercising of stock
options contributed $7,190,000 and $118,000,
respectively, to shareholders' equity. The overall
decline in total shareholders' equity is largely
attributed to the decrease in the unrealized
appreciation on securities. Additional reductions to
shareholders' equity included $3,178,000 that was paid
out in dividends and $56,000 for the purchase of
treasury stock.
1998
At December 31, 1998, total shareholders' equity
increased by $2,503,000 reaching $49,896,000 which is
up from $47,393,000 at December 31, 1997. Net income
of $6,468,000 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 $1,180,000. A purchase of treasury stock
also reduced shareholders' equity by $214,000.
Dividends that were paid from equity in 1998 totaled
$2,755,000.
Bank regulators have recently issued risk based
capital guidelines. Under these guidelines, banks are
required to maintain minimum ratios of core capital
and total qualifying capital as a percentage of risk
weighted assets and certain off-balance sheet items.
At December 31, 1999, the Company's required ratios
were well above the minimum ratios as follows:
1999
Minimum
Company Standards
Tier 1 capital ratio 20.33% 4.00%
Total capital ratio 21.51% 8.00%
For a more comprehensive discussion of these
requirements, see Regulations and Supervision on the
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:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
Percentage of net income to:
Average total assets. . . . . . . . . . 1.99% 1.94% 2.73%
Average shareholders' equity. . . . . 14.96% 13.06% 18.94%
Percentage of dividends declared per common share 43.91% 42.51% 31.33%
Percentage of average shareholders' equity to average 13.81% 15.04% 14.51%
Total assets
</TABLE>
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISK
Fundamental objectives of the Company's
asset/liability management process are to maintain
adequate liquidity while minimizing interest rate
risk. The maintenance of adequate liquidity provides
the Company with the ability to meet its financial
obligations to depositors, loan customers and
stockholders. Additionally, it provides funds for
normal operating expenditures and business
opportunities as they arise. The objective of
interest rate sensitivity management is to increase
net interest income by managing interest sensitive
assets and liabilities in such a way that they can be
repriced in response to changes in market interest
rates.
Liquidity is generated from transactions relating to
both the Company's assets and liabilities. Liquidity
from assets is achieved primarily through temporary
investments in Federal funds sold and time deposits
with financial institutions. Cash receipts arising
from normal customer loan payments provide another
important source of asset related liquidity. On the
liability side, deposit growth and temporary
borrowings from the Federal Home Loan Bank of
Pittsburgh's Repo Plus product provide liquidity. The
liquidity provided by these sources is more than
adequate to meet the Company's needs.
Interest rate sensitivity, which is closely related to
liquidity management, is a function of the repricing
characteristics of the Company's portfolio of assets
and liabilities. Asset/liability management strives
to match maturities and rates between loan and
investment security assets with the deposit
liabilities and borrowings that fund them. Successful
asset/liability management results in a balance sheet
structure which can cope effectively with market rate
fluctuations. The matching process is affected by
segmenting both assets and liabilities into future
time periods (usually 12 months, or less) based upon
when repricing can be effected. Repriceable assets are
subtracted from repriceable liabilities, for a
specific time period to determine the "gap", or
difference. Once known, the gap is managed based on
predictions about future market interest rates.
Intentional mismatching, or gapping, can enhance net
interest income if market rates move as predicted.
However, if market rates behave in a manner contrary
to predictions, net interest income will suffer. Gaps,
therefore, contain an element of risk and must be
prudently managed.
In addition to gap management, the Company has
recently developed an asset liability management
policy which incorporates two new tools in managing
interest rate risk. A market value at risk calculation
which is used to determine the effects of interest
rate movements on shareholders' equity is now being
utilized, as well as, simulation analysis to monitor
the effects of interest rate changes on the Company's
balance sheets.
INTEREST RATE SENSITIVITY
The following table sets forth the Bank's interest
rate sensitivity as of December 31, 1999:
<TABLE>
<S> <C> <C> <C> <C>
AFTER ONE AFTER TWO AFTER
WITHIN BUT WITHIN BUT WITHIN FIVE
ONE YEAR TWO YEARS FIVE YEARS YEARS
Earning assets (1) (2)
Investment securities (1) $16,523 $12,237 $21,631 $70,773
Loans (2) 79,378 31,176 98,447 24,822
Total earning assets 95,901 43,413 120,078 95,595
Interest-bearing liabilities:
Deposits (3) 100,301 29,573 67,203 15,452
Borrowings 39,641 - 29,278 -
Total interest-bearing liabilities 139,942 29,573 96,481 15,452
Net noninterest-bearing
funding (4) 12,827 9,781 24,044 26,887
Total net funding sources 152,769 39,354 120,525 42,339
Excess assets (liabilities) (56,868) 4,059 (447) 53,256
Cumulative excess (56,868) (52,809) (53,256) -
assets (liablilities)
</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 investment
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 mrotgage loans and mortgage securities. The
results of this rate shock are a useful tool to assist
the Company in assessing interest rate risk inherent
in its balance sheet. Below are the results of this
rate shock analysis as of December 31, 1999.
Changes in Net Interest
Rates Income change (after Tax)
-200 845
-100 437
+100 (444)
+200 (890)
The model utilized to create the report presented
above makes various estimates at each level of
interest rate change regarding cash flow from
principal repayment on loans and mortgage-backed
securities and or call activity on investment
securities. Actual results could differ significantly
from these estimates which would result in significant
differences in the calculated projected change. In
addition, the limits stated above do not necessarily
represent the level of change under which management
would undertake specific measure to realign its
portfolio in order to reduce the projected level of
change.
Generally, management believes the Company is well
positioned to respond expeditiously when the market
interest rate outlook changes.
INFLATION
The asset and liability structure of a financial
institution is primarily monetary in nature,
therefore, interest rates rather than inflation have a
more significant impact on the Corporation's
performance. Interest rates are not always affected
in the same direction or magnitude as prices of other
goods and services, but are reflective of fiscal
policy initiatives or economic factors which are not
measured by a price index.
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 (ie. 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, 1999, 1998, 1997 were (7,885,000),
(1,180,000) and 3,656,000, 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 expenditures; business
conditions in the banking industry; the regulatory
environment; rapidly changing technology and evolving
banking industry standards; the effect of changes in
accounting policies and practices, including increased
competition with community, regional and national
financial institutions; new service and product
offerings by competitors and price pressures; changes
in the Company's organization, compensation and
benefit plans; and similar items.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Penns Woods Bancorp, Inc.
We have audited the accompanying consolidated balance
sheet of Penns Woods Bancorp, Inc. and subsidiaries as
of December 31, 1999, and the related
consolidated statements of income, cash flows, and
changes in stockholders' equity for the year then
ended. 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. The financial statements
of Penns Woods Bancorp, Inc. and subsidiaries as of
December 31, 1998, and for the two years in the period
ended December 31, 1998, were audited by other auditors
whose report, dated January 15, 1999, expressed an unqualified
opinion on those financial statements.
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, 1999
and 1998, and the results of their operations and
their cash flows for the years then ended in
conformity with generally accepted accounting
principles.
/s/ S.R. Snodgrass A.C.
Wexford, PA
January 21, 2000
CONSOLIDATED BALANCE SHEET
December 31, 1999 and 1998
<TABLE>
<S> <C> <C>
1999 1998
(in thousands)
ASSETS
Cash and due from banks $ 12,474 12,297
Securities available for sale 113,305 102,323
Securities held to maturity (market value 3,014 3,078
of $2,992,000 and $3,141,000)
Loans, net of unearned discount 233,823 216,566
Less Allowance for loan losses 2,823 2,681
Loans, net 231,000 213,885
Bank premises and equipment, net 4,888 4,783
Accrued interest receivable 2,283 1,940
Foreclosed assets held for sale 67 40
Other assets 6,711 3,300
TOTAL $ 373,742 341,601
LIABILITIES
Interest-bearing deposits $ 212,528 210,901
Noninterest-bearing deposits 43,045 42,233
TOTAL DEPOSITS 255,573 253,134
Short-term borrowings 41,641 11,223
Other borrowings 27,278 22,778
Accrued interest payable 1,123 1,211
Other liabilities 2,042 3,359
TOTAL LIABILITIES 327,657 291,705
SHAREHOLDERS' EQUITY
Common stock, par value $10; 10,000,000 shares authorized
3,128,332 and 2,840,823 shares issued 31,283 28,409
Additional paid-in capital 18,165 4,768
Retained earnings -166 11,975
Accumulated other comprehensive income (loss) -2,927 4,958
Less: Treasury stock, at cost 4,960 and 3,656 -270 -214
TOTAL SHAREHOLDERS' EQUITY 46,085 49,896
TOTAL $ 373,742 $ 341,601
</TABLE>
See accompanying notes to the consolidated
financial statements.
CONSOLIDATED STATEMENT OF INCOME
December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
(in thousands)
INTEREST INCOME
Interest and fees on loans $ 19,990 $ 19,770 $ 17,827
Interest and dividends on investments:
Taxable interest 3,555 3,395 3,381
Tax-exempt interest 1,664 1,223 1,348
Dividends 821 708 528
Interest on federal funds sold - - 62
TOTAL INTEREST INCOME 26,030 25,096 23,146
INTEREST EXPENSE
Interest on deposits 7,898 8,865 8,501
Interest on short-term borrowings 1,197 771 649
Interest on other borrowings 1,423 893 174
TOTAL INTEREST EXPENSE 10,518 10,529 9,324
NET INTEREST INCOME 15,512 14,567 13,822
PROVISION FOR LOAN LOSSES 286 305 274
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,226 14,262 13,548
OTHER INCOME:
Service charges 1,358 1,100 903
Securities gains, net 1,946 2,076 4,658
Other operating income 223 259 360
TOTAL OTHER INCOME 3,527 3,435 5,921
OTHER EXPENSES
Salaries and employee benefits 4,860 4,788 4,559
Occupancy expense, net 673 634 538
Furniture and equipment expense 687 737 735
Other operating expenses 3,119 2,906 2,387
TOTAL OTHER EXPENSES 9,339 9,065 8,219
INCOME BEFORE INCOME TAX PROVISION 9,414 8,632 11,250
INCOME TAX PROVISION 2,224 2,164 3,113
NET INCOME $ 7,190 $ 6,468 $ 8,137
EARNINGS PER SHARE - BASIC $ 2.3 $ 2.08 $ 2.62
EARNINGS PER SHARE - DILUTED $ 2.3 $ 2.07 $ 2.61
</TABLE>
See accompanying notes to the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Stock Additional Other Total
Common Stock Dividend Paid-in Retained Comprehensive Treasury Shareholders'
Shares Amount Distributable Capital Earnings Income(loss) Stock Equity
(in thousands except share data)
Balance, December 31, 1996 1,539,769 $15,398 $ - $ 4,559 $ 15,290 $ 2,482 $ - $ 37,729
Comprehensive income:
Net income 8,137 8,137
Unrealized gain on securities,
net of reclassification
adjustments and
tax effect of $1,883 3,656 3,656
Total comprehensive income 11,793
Dividends declared, $0.75 -2,337 -2,337
Stock options exercised 5,481 55 153 208
Declaration of stock split in the form
of a 100 percent stock dividend 12,828 -12,828 -
Balance, December 31, 1997 1,545,250 15,453 12,828 4,712 8,262 6,138 - 47,393
Stock split effected in the form of a
100 percent stock dividend 1,282,779 12,828 -12,828 -
Comprehensive income:
Net income 6,468 6,468
Unrealized loss on securities, net of
reclassification adjustments and
tax benefit of $608 -1,180 -1,180
Total comprehensive income 5,288
Dividends declared, $0.88 -2,755 -2,755
Stock options exercised 12,794 128 56 184
Treasury stock acquired, 3,656 shares -214 -214
Balance, December 31, 1998 2,840,823 28,409 - 4,768 11,975 4,958 -214 49,896
10 percent stock dividend 283,393 2,833 13,320 -16,153 -
Comprehensive Loss:
Net income 7,190 7,190
Unrealized loss on securities, net of
reclassification adjustments and
tax benefit of $4,062 -7,885 -7,885
Total comprehensive loss -695
Dividends declared, $1.01 -3,178 -3,178
Stock options exercised 4,116 41 77 118
Treasury stock acquired, 1,304 shares -56 -56
Balance, December 31, 1999 3,128,33 $ 31,273 $ - $ 18,165 $ -166 $ -2,927 $ -270 $ 46,085
1999 1998 1997
Components of comprehensive income (loss):
Change in net unrealized gain (loss)
on investments held for sale $ -6,601 $ 190 $ 6,730
Realized gains included in net
income, net of tax $662, $706, -1,284 -1,370 -3,074
and $1,584
Total $ -7,885 $ -1,180 $ 3,656
</TABLE>
See accompanying notes to the consolidated
financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,1999,1998, and 1997
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,190 6,468 $ 8,137
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 512 431 456
Provision for loan losses 286 305 274
Accretion and amortization of investment -156 -34 -75
security discounts and premiums
Securities gains, net -1,946 -2,076 -4,658
Gain on sale of foreclosed assets -6 -12 -67
Decrease (increase) in all other assets -999 -964 420
Decrease in all other liabilities -121 -100 -721
Net cash provided by operating activities 4,760 4,018 3,766
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale -78,020 -48,469 -62,148
Proceeds from sale of securities available 53,521 27,371 74,584
for sale
Proceeds from calls and maturities of securities
available for sale 1,819 4,361 2,424
Purchase of securities held to maturity -25 -323 -200
proceed from calls and muturities of
securities held to maturities 2,010 2,473 96
Net increase in loans -17,502 -12,053 -27,235
Proceeds from the sale of foreclosed assets 80 47 426
Purchase of securities held to maturity -25 -323 -200
Acquisition of bank premises and equipment -662 -713 -502
Net cash used in investing activities -38,779 -27,306 -12,555
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in interest-bearing deposits 1,627 6,619 11,522
Net increase in noninterest-bearing deposits 812 3,709 6,928
Net increase (decrease) in short-term borrowings 30,418 -5,087 -3,809
Proceeds from other borrowings 5,000 20,528 1,500
Repayment of other borrowings -500 -500 -1,000
Dividends paid -3,178 -2,755 -2,337
Stock options exercised 40 56 197
Purchase of treasury stock -23 -109 -
Net cash provided by financing activities 34,196 22,461 13,001
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS 177 -827 4,212
CASH AND CASH EQUIVALENTS, BEGINNING 12,297 13,124 8,912
CASH AND CASH EQUIVALENTS, ENDING $ 12,474 12,297 $ 13,124
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
The Company paid approximately $10,606,000,
$10,374,000, and $9,284,000 in interest on
deposits and other borrowings during 1999,
1998, and 1997, respectively.
The Company made income tax payments of
approximately $1,972,000, $2,563,000, and
$3,221,000 during 1999, 1998, and 1997,
respectively.
Transfers from loans to foreclosed assets held
for sale amounted to approximately $102,000,
$40,000, and $142,000 in 1999, 1998, and 1997,
respectively.
See accompanying notes to the consolidated financial statements.
PENNS WOODS BANCORP, INC.
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 (the "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 ten offices and Mortgage/Loan
Center located in Clinton, Lycoming, and Centre
Counties, Pennsylvania.
Woods Real Estate Development Co., Inc. engages in
real estate transactions on behalf of Penns Woods
Bancorp, Inc. and the Bank.
Woods Investment Company, Inc. 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
period. Actual results may differ from those
estimates.
Material estimates that are particularly susceptible
to significant change relate to the determination of
the allowance for loan losses 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.
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, 1999 or 1998.
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 political
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 political 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 difference 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. Interest on
loans is recognized as income when earned on the
accrual method. The Company's general policy has been
to stop accruing interest on loans when it is
determined a reasonable doubt exists as to the
collectibility of additional interest. Income is
subsequently recognized only to the extent that cash
payments are received provided the loan is not
delinquent in payment and, in management's judgement,
the borrower has the ability and intent to make future
principal payments.
Allowance for Loan Losses
The allowance for loan losses represents the amount
which management estimates is adequate to provide for
potential losses in its portfolio. The allowance
method is used in providing for loan losses.
Accordingly, all loan losses are charged to the
allowance and all recoveries are credited to it. The
allowance for loan losses is established through a
provision for loan losses charged to operations. The
provision for loan losses is based on management's
periodic evaluation of individual loans, economic
factors, past loan loss experience, changes in the
composition and volume of the portfolio, and other
relevant factors. The estimates used in determining
the adequacy of the allowance for loan losses,
including the amounts and timing of future cash flows
expected on impaired loans, are particularly
susceptible to changes in the near term.
Impaired loans are commercial and commercial real
estate loans for which it is probable the Company will
not be able to collect all amounts due according to
the contractual terms of the loan agreement. The
Company individually evaluates such loans for
impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans"
is not the same as the definition of "nonaccrual
loans," although the two categories overlap. The
Company may choose to place a loan on nonaccrual
status due to payment delinquency or uncertain
collectibility, while not classifying the loan as
impaired if the loan is not a commercial or commercial
real estate loan. Factors considered by management in
determining impairment include payment status and
collateral value. The amount of impairment for these
types of impaired loans is determined by the
difference between the present value of the expected
cash flows related to the loan, using the original
interest rate, and its recorded value, or as a
practical expedient in the case of collateralized
loans, the difference between the fair value of the
collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based
on the fair value of the collateral.
Mortgage loans on one-to-four family properties and
all consumer loans are large groups of smaller-balance
homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant
payment delays, which are defined as 90 days or less,
generally are not classified as impaired. Management
determines the significance of payment delays on a
case-by-case basis taking into consideration all
circumstances surrounding the loan and the borrower
including the length of the delay, the borrower's
prior payment record, and the amount of shortfall in
relation to the principal and interest owed.
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.
Earnings Per Share
The Company provides dual presentation of basic and
diluted earnings per share. Basic earnings per share
is calculated utilizing net income as reported in the
numerator and average shares outstanding in the
denominator. The computation of diluted earnings per
share differs in that the dilutive effects of any
stock options are adjusted in the denominator.
Stock Options
The Company maintains a stock option plan for the
Directors, officers and employees. When the exercise
price of the Company's stock options is greater than
or equal to the market price of the underlying stock
on the date of the grant, no compensation expense is
recognized in the Company's financial statements. Pro
forma net income and earnings per share are presented
to reflect the impact of the stock option plan
assuming compensation expense had been recognized
based on the fair value of the stock options granted
under the plan.
Comprehensive Income
The Company is required to present comprehensive
income in a full set of general-purpose financial
statements for all periods presented. Other
comprehensive income is comprised exclusively of
unrealized holding gains (losses) on the available for
sale securities portfolio. The Company has elected to
report the effects of other comprehensive income as
part of the Statement of Changes in Shareholders'
Equity.
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 as cash
equivalents.
Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133 ". Accounting for
Derivative Instruments and Hedging Activities" as
amended by in June 1999 by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No.
133". The statement provides accounting and reporting
standards for derivative instruments, including
certain derivative instruments embedded in other
contracts, by requiring the recognition of those items
as assets or liabilities in the statement of financial
position, recorded at fair value.
Statement No. 133, precludes a held to maturity
security from being designated as a hedged item,
however, at the date of initial application of this
statement, an entity is permitted to transfer any held
to maturity security into the available for sale or
trading categories. The unrealized holding gain or
loss on such transferred securities shall be reported
consistent with the requirements of Statement No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities". Such transfers do not raise an issue
regarding an entity's intent to hold other debt
securities to maturity in the future. This statement
applies prospectively for all fiscal quarters of all
years beginning after June 15, 2000. Earlier adoption
is permitted for any fiscal quarter that begins after
the issue date of this statement.
NOTE B - PER SHARE DATA
Earnings per share is based on the weighted-average
number of shares of common stock outstanding. During
1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", which 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:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
Weighted average common shares
outstanding 3,125,292 3,114,396 3,101,203
Average treasury stock shares -3,879 -20 -
Weighted average common shares and
common stock equivalents used
to calculate basic earnings
per share 3,121,413 3,114,376 3,101,203
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 8,682 7,585 18,854
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings
per share 3,130,095 3,121,961 3,120,057
</TABLE>
NOTE C - CASH AND DUE FROM BANKS
Banks are required to maintain reserves consisting of
vault cash and deposit balances with the Federal
Reserve Bank in their district. The reserves are
based on deposit levels during the year and account
activity and other services provided by the Federal
Reserve Bank. Average daily currency, coin and cash
balances with the Federal Reserve Bank needed to cover
reserves against deposits for 1999 ranged from
$2,438,000 to $3,873,000. For 1998, these balances
ranged from $1,738,000 to $2,752,000. Average daily
cash balances with the Federal Reserve Bank required
to cover services provided to the Bank amounted to
$800,000 throughout 1999 and 1998. Total balances
restricted at December 1999 and 1998, respectively,
were $4,384,000 and $3,246,000.
NOTE D - INVESTMENT SECURITIES
The amortized cost of investment securities and their
approximate fair values at December 31, 1999 and 1998
were as follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
31-Dec-99
Gross Gross
Amortized Unrealize Unrealized Fair
Cost Gains Losses Value
Securities available for sale:
Equity surities $ 23,718 $ 3,122 $ -3,058 $ 23,782
U.S Government agency
securities 39,722 5 -1,093 38,634
State and political sec 50,224 66 -3,461 46,829
Restricted equity sec 2,847 - - 2,847
Other debt securities 1,229 2 -18 1,213
$ 117,740 $ 3,195 $ -7,630 $ 113,305
Securities held to maturity:
U.S Government and agency
securities $ 259 $ 7 $ - $ 266
State and polititical sec 2,465 8 -37 2,436
Other debt securities 290 - - 290
$ 3,014 $ 15 -37 2,992
31-Dec-98
Gross Gross
Amortized Unrealize Unrealized Fair
Cost Gains Losses Value
Securities available for sale:
Equity surities $ 20,297 $ 6,417 -579 26,135
U.S Government and agency
securities 45,60 447 -69 45,978
State and political sec 26,387 1,313 -67 27,633
Restricted equity securities 1,826 50 - 1,876
Other debt securities 702 - -1 701
$ 94,812 $ 8,227 -716 102,323
Securities held to maturity:
U.S Government and agency
securities $ 339 $ 15 - 354
State and political sec 2,464 49 -1 2,512
Other debt securities 275 - - 275
$ 3,078 $ 6 4 -1 3,141
</TABLE>
The amortized cost and fair value of debt securities
at December 31, 1999, 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.
<TABLE>
<S> <C> <C> <C> <C>
Securities Securities
Held to Maturity Available for Sale
Amoritized Fair Amoritized Fair
Cost Value Cost Value
Due in one year $ 5 $ 5 $ 9,503 $ 9,497
Due after one year to five 1,251 1,278 4,540 4,526
Due after five years to ten 577 556 2,170 2,167
Due after ten years 1,181 1,153 74,962 70,486
$ 3,014 $ 2,992 $ 91,175 $ 86,676
</TABLE>
Total gross proceeds from sales of securities
available for sale, were $53,521,000 $27,371,000 and
$74,584,000 for 1999, 1998 and 1997, respectively.
The following table represents gross realized gains
and gross realized losses on those transactions (in
thousands):
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
Gross realized gains:
U.S Government and agency sec $ 128 $ 72 $ 68
State and political securities 364 - 288
Equity securities 2,104 2,024 4,923
Other debt securities - - -
$ 2596 $ 2,096 $ 5,279
Gross realized losses:
U.S Government and agency sec $ 416 5 579
State and political securities 26 5 19
Equity securities 181 10 1
Other debt securities 27 - 22
$ 650 $ 20 $ 621
</TABLE>
Investment securities with a carrying value of
approximately $34,121,000 and $22,729,000 at December
31, 1999 and 1998, respectively, were pledged to
secure certain deposits, security repurchase
agreements, and for other purposes as required by law.
There is no concentration of investments that exceed
ten percent of shareholders' equity for any individual
issuer, excluding those guaranteed by the U.S.
Government.
NOTE E - LOANS
Major loan classifications loans are summarized as
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C>
December 31, 1999
Past Due Past Due
30 to 90 90 Days Non-
Current Days or More Accrual Total
Commercial and agricultural $ 31,189 $ 482 $ 25 $ 39 $ 31,735
Real estate mortgage
Residential 120,668 2,518 201 5 123,392
Commercial 51,102 343 - - 51,445
Construction 3,493 3 - 236 3,732
Installment loans to individuals23,141 359 15 4 23,519
$229,593 $ 3,705 241 284 233,823
Less: Allowance 2,823 2,823
Loans, net $226,770 $ 231,000
December 31, 1998
Past Due Past Due
30 to 90 90 Days Non-
Current Days or More Accrual Total
Commercial and agricultural $ 32,270 $ 583 23 44 $ 32,920
Real estate mortgage
Residential 109,130 2,480 32 63 111,705
Commercial 42,903 615 - 44 43,562
Construction 3,355 30 - 489 3,874
Installment loans to individual 24,036 458 5 6 24,505
$211,694 $ 4,166 60 646 216,566
Less: Allowance 2,681 2,681
Loans, net $209,013 $213,885
</TABLE>
Loans on which the accrual of interest has been
discontinued or reduced amounted to approximately
$284,000 and $646,000 at December 31, 1999 and 1998,
respectively. If interest had been recorded at the
original rate on those loans, such income would have
approximated $48,000, $98,000, and $81,000 for the
years ended December 31, 1999, 1998, and 1997,
respectively. Interest income on such loans, which is
recorded as received, amounted to approximately
$38,000, $50,000, and $42,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
Transactions in the allowance for loan losses are summarized
as follows (in thousands):
<TABLE>
<S> <C <C> <C>
Years Ended December 31,
1999 1998 1997
Balance, beginning of year $ 2,681 $ 2,579 $ 2,553
Provision charged to operations 286 305 274
Loans charged off -176 -271 -359
Recoveries 32 68 111
Balance, end of year $ 2,823 $ 2,681 $ 2,579
</TABLE>
The Company had no concentration of loans to borrowers
engaged in similar businesses or activities which
exceed five percent of total assets at December 31,
1999 or 1998.
The Company grants commercial, industrial,
residential, and installment loans to customers
throughout Northcentral Pennsylvania. Although the
Company has a diversified loan portfolio at December
31, 1999 and December 31,1998, a substantial portion
of its debtors' ability to honor their contracts is
dependent on the economic conditions within this
region.
NOTE F - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows
(in thousands):
December 31,
1999 1998
Land $ 566 $ 566
Bank premises 4,598 4,545
Furniture and equipment 4,813 4,356
Leasehold improvements 753 601
Total 10,730 10,068
Less accumulated depreciation 5,842 5,330
Net $ 4,888 $ 4,738
Depreciation expense for the years ended 1999, 1998
and 1997 was $512,000, $431,000, and $456,000,
respectively.
NOTE G - DEPOSITS
Time deposits of $100,000 or more totaled
approximately $24,308,000 on December 31, 1999 and
$23,112,000 on December 31, 1998. Interest expense
related to such deposits was approximately $1,242,000,
$1,238,000, and $954,000 for the years ended December
31, 1999, 1998, and 1997, respectively. These time
deposits at December 31, 1999 mature as follows: 2000
- - $18,004,000; 2001 - $4,847,000; 2002 - $538,000;
2003 - $219,000; thereafter -$700,000.
NOTE H - SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds
purchased, securities under agreements to repurchase,
and FHLB advances which generally represent overnight
or less than 30-day borrowings. The outstanding
balances and related information for short-term
borrowings are summarized as follows (in thousands):
<TABLE>
<S> <C> <C>
1999 1998
Federal Home Loan Bank:
Balance at year end $2,000 --
Maximum amount outstanding at any month end $2,000 --
Average balance outstanding during the year $2,000 --
Weighted-average interest rate:
At year end 6.12% --
Paid during the year 6.12% --
Open Repo Plus:
Balance at year end $23,590 --
Maximum amount outstanding at any month end $23,590 $10,460
Average balance outstanding during the year $ 6,108 $ 4,090
Weighted-average interest rate:
At year end 4.05% 4.46%
Paid during the year 5.26% 5.60%
Repurchase Agreements:
Balance at year end $16,051 $11,223
Maximum amount outstanding at any month end $17,147 $14,115
Average balance outstanding during the year $15,416 $10,992
Weighted-average interest rate:
At year end 4.62% 4.67%
Paid during the year 4.62% 4.67%
</TABLE>
NOTE I - OTHER BORROWINGS
Other borrowings are comprised of advances form the
FHLB. A schedule of other borrowings by maturity as
of December 31, 1999 and 1998 is summarized as follows
(in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Interest
Description Maturity Rate 1999 1998
FHLB Borrowing Nov 29,2000 5.21% $ 500 $ 500
FHLB Borrowing 14-Feb-02 5.48% - 500
FHLB Borrowing 14-Feb-02 5.87% 528 528
Convertible Select Advance 7-Apr-08 5.54% 10,000 10,000
Convertible Select Advance 16-Jun-08 5.56% 10,000 10,000
Convertible Select Advance 26-Feb-09 5.06% 5.000 -
FHLB Borrowing 17-Nov-11 6.92% 500 500
FHLB Borrowing May 25, 2015 6.92% 750 750
Total $27,278 $22,778
</TABLE>
The Bank maintains a credit arrangement which includes
a revolving line of credit with FHLB. Under this
credit arrangement, the Bank has a remaining borrowing
capacity of approximately $29,923,000 million at
December 31, 1999, is subject to annual renewal, and
typically incurs no service charges. Under terms of a
blanket agreement, collateral for the FHLB borrowings
must be secured by certain qualifying assets of the
Bank which consist principally of first mortgage
loans.
NOTE J - INCOME TAXES
The following temporary differences gave rise to the net
deferred tax asset (liability) at December 31, 1999
and 1998 (in thousands):
1999 1998
Deferred tax asset:
Allowance for loan losses $ 601 $ 546
Deferred compensation 260 234
Contingencies 83 75
Pension 202 136
Loan fees and costs 169 139
Unrealized losses on available for s 1,508 -
Stock option 14 18
Total $2,837 $1,148
Deferred tax liability:
Bond accretion 20 25
Depreciation 124 122
Unrealized gains on available for sale
securities - 2,486
Total 144 2,633
Deferred tax asset (liability) $2,693 $-1,485
No valuation allowance was established at December 31,
1999 and 1998, in the view of the Company's ability to
carry back to taxes paid in previous years and certain
tax strategies, coupled with the anticipated future
taxable income as evidenced by the Company's earning
potential.
The provision for income taxes is comprised of the
following (in thousands):
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1999 1998 1997
Currently payable $ 2,422 $ 2,263 $ 3,217
Deferred benefit -198 -99 -104
Total provision $ 2,224 $ 2,164 $ 3,113
</TABLE>
The effective federal income tax rate for the years
ended December 31, 1999, 1998, and 1997 was 23.6
percent, 25.1 percent, and 27.8 percent, 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>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
Amount % Amount % Amount %
Provision at expected rate $ 3,201 34 $ 2,935 34%$ $ 3,937 35%
Increase (decrease) in tax
resulting from:
Tax-exempt income -677 -7.2 -416 -4.8 -458 -4.2
Other, net -300 -3.2 -355 -4.1 -366 -3.0
Effective income tax
and rates $ 2,224 23.6 2,164 25.1% $ 3,113 27.80%
</TABLE>
NOTE K - 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.
The following tables show the funded status and
components of net periodic benefit cost from this
defined benefit plan (in thousands):
<TABLE>
<S> <C> <C>
1999 1998
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,459 $ 3,026
Service cost 254 222
Interest cost 236 213
Actuarial adjustment 253 59
Benefits paid -103 -61
Benefit obligation at end of year 4,099 3,459
Change in plan assets:
Fair value of plan assets at beginning of yr 3,476 2,819
Actual return on plan assets 268 547
Employer contribution - 171
Benefits paid -103 -61
Fair value of plan assets at end of year 3,641 3,476
Funded status -460 17
Unrecognized net actuarial gain -350 -619
Unrecognized transition asset -32 -35
Unrecognized prior service cost 248 268
Accrued benefit cost $ -594 $ -369
Weighted-average assumptions as of December 31:
Discount rate 6.50% 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 cost $ 254 $ 222
Interest cost 236 213
Actual return on plan assets -268 -224
Amortization of transition asset -3 -3
Amortization of prior service cost 20 18
Recognized net actuarial gain -15 -1
Net periodic benefit cost $ 224 $ 225
</TABLE>
401(k) Savings Plan
The Company also offers a 401(k) savings plan in which
eligible participating employees may elect to
contribute up to a maximum percentage allowable not to
exceed the limits of Code Sections 401(k), 404, and
415. The company may make matching contributions
equal to a discretionary percentage to be determined
by the Company. Participants are at all times fully
vested in their contributions and vest over a period
of five years in the employer contribution.
Contribution expense was approximately $64,000,
$114,000, and $100,000 for the years ended December
31, 1999, 1998, and 1997, respectively.
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 $128,000, $114,000 and $114,000 for the
years ended December 31, 1999, 1998 and 1997,
respectively. Benefits paid under the plan were
approximately $57,000 in 1999 and $45,000 in 1998 and
1997.
NOTE L- 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 amount equivalent to the intrinsic
value of the options (stock price less exercise price,
at measurement date). Had compensation costs for
these options been determined based on the fair values
at the grant dates for awards consistent with the
method of SFAS No. 123, the effect on the Company's
net income and earnings per share for 1999, 1998, and
1997 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 1999, 1998 and 1997, respectively:
dividend yield of 1.85 percent, 2.52 percent, and 3.45
percent, respectively; risk-free interest rates of
6.75 percent, 5.63 percent, and 5.69 percent,
respectively; and expected option lives of three years
and expected volatility of 18.73 percent, 14.51
percent, and 17.50 percent, respectively.
Also, in 1998, the Company adopted the "1998 Stock
Option Plan" for key employees and directors.
Incentive stock options and nonqualified stock options
may be granted to eligible employees of the Bank and
nonqualified options may be granted to directors of
the Company. In addition, non-employee directors are
eligible to receive grants of nonqualified stock
options. Incentive nonqualified stock options granted
under the 1998 Plan may be exercised not later than
ten years after the date of grant. Each option
granted under the 1998 Plan shall be exercisable only
after the expiration of six months following the date
of grant of such options.
A summary of the status of the Company's common stock
option plans, adjusted to reflect a stock split
effected in the form of a 100 percent stock dividend
issued January 15, 1998 and a 10 percent stock
dividend issued June 8, 1999, is presented below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
Weighted- Weighted- Weighted-
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding, beginning
of year 28,479 $ 34.27 32,652 $ 18.7 27,220 $12.97
Granted 10,450 42.00 9,900 53.18 17,490 25.98
Exercised 4,116 17.95 14,073 11.45 12,058 16.34
Forfeited - - - - - -
Outstanding, end 34,813 $ 38.52 28,479 $ 34.27 32,652$ 18.70
of year
Options exercisable
at year-end 24,363 18,579 32,652
</TABLE>
The following table summarizes information about
nonqualified and incentive stock options outstanding
at December 31, 1999.
Exercise Number Remaining Number
Prices Outstanding Contractual Exercisable
$ 25.98 14,463 4 years 14,463
53.18 9,900 9 years 9,900
42 10,450 10 years -
34,813 24,363
NOTE M - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the
Company and the Bank, including their immediate
families and companies in which they are principal
owners (more than ten percent), are indebted to the
Company. Such indebtedness was incurred in the
ordinary course of business on the same terms and at
those rates prevailing at the time for comparable
transactions with others.
A summary of loan activity with executive officers,
directors, principal shareholders, and associates of
such persons is listed below (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Beginning Retired/ Charge- Ending
Year Balance Additions Payments Resigned offs Balance
1999 $ 2,452 $ 6,775 $ 3,417 $ - $ - $ 5,810
1998 $ 2,096 $ 1,642 $ 1,074 $ 212 $ - $ 2,452
1997 $ 2,014 $ 900 $ 818 $ - $ - $ 2,096
</TABLE>
NOTE N - COMMITMENTS AND CONTINGENT LIABILITIES
The following schedule of future minimum rental
payments under operating leases with noncancellable
terms in excess of one year as of December 31, 1999
(in thousands):
Year Ending December 31,
2000 $ 185
2001 175
2002 127
2003 80
2004 56
Thereafter 249
Total $ 872
Total rental expense for all operating leases for the
years ended December 31, 1999, 1998, and 1997
approximated $197,000, $268,000, and $263,000,
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 0 - 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 letter of credit. These
instruments involve, to varying degrees, elements of
credit, interest rate or liquidity risk in excess of
the amount recognized in the consolidated balance
sheet. The contract amounts of these instruments
express the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss from
nonperformance by the other party to the financial
instruments for commitments to extend credit and
standby letters of credit is represented by the
contractual amount of these instruments. The Company
uses the same credit policies in making commitments
and conditional obligations as it does for on-balance
sheet instruments.
The Company may require collateral or other security
to support financial instruments with off-balance
sheet credit risk.
Financial instruments whose contract amounts represent
credit risk are as follows at December 31 (in
thousands):
1999 1998
Commitments to extend credit $ 25,917 $ 29,455
Standby letters of credit $ 1,564 $ 1,157
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 P - CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank
to maintain minimum amounts of capital. Specifically,
each is required to maintain certain minimum dollar
amounts and ratios of Total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average
total assets.
In addition to the capital requirements, the Federal
Deposit Insurance Corporation Improvement Act (FDICIA)
established five capital categories ranging form "well
capitalized" to "critically undercapitalized."
Should any institution fail to meet the requirements
to be considered "adequately capitalized," it would
become subject to a series of increasingly restrictive
regulatory actions.
As of December 31, 1999 and 1998, the FDIC
categorized the Bank as well capitalized under
the regulatory framework for prompt corrective
action. To be classified as a well capitalized
financial institution, Total risk-based, Tier 1
risk-based and Tier 1 leverage capital ratios
must be at least 10%, 6%, and 5%, respectively.
The Company's and the Bank's actual capital ratios are
presented in the following tables, which shows that
both met all regulatory capital requirements.
The Company's actual capital amounts and ratios are
presented in the following table (in thousands).
<TABLE>
<S> <C> <C> <C> <C>
1999 1998
Amount Ratio Amount Ratio
Total Capital
(to Risk-weighted Assets)
Actual $ 51,864 21.5 50,269 22.8%
For Capital Adequacy Pur 19,286 8 17,630 8
To Be Well Capitalized 24,108 10 22,038 10
Tier I Capital
(to Risk-weighted Assets)
Actual $ 49,012 20.3 44,938 20.4%
For Capital Adequacy Pur 9,643 4 8,815 4
To Be Well Capitalized 14,464 6 13,223 6
Tier I Capital
(to Average Assets)
Actual $ 49,012 13.5 44,938 13.5%
For Capital Adequacy Pur 14,481 4 13,326 4
To Be Well Capitalized 18,102 5 16,657 5
The Bank's actual capital amounts and ratios are presented
in the following table (in thousands).
1999 1998
Amount Ratio Amount Ratio
Total Capital
(to Risk-weighted Assets)
Actual $ 38,572 16.8 38,024 18.5%
For Capital Adequacy Purposes 18,332 8 16,475 8
To Be Well Capitalized 22,916 10 20,594 10
Tier I Capital
(to Risk-weighted Assets)
Actual $ 35,749 15.6 34,485 16.8%
For Capital Adequacy Pur 9,166 4 8,238 4
To Be Well Capitalized 13,749 6 12,356 6
Tier I Capital
(to Average Assets)
Actual $ 35,749 10.5 34,485 10.6%
For Capital Adequacy Pur 13,607 4 13,073 4
To Be Well Capitalized 17,009 5 16,341 5
</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 $10,057,000 at December 31,
1999, 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, 1999, the regulatory
lending limit amounted to approximately $3,716,000.
NOTE Q - ACQUISITION
On January 11, 1999 the Company completed the
acquisition of all the outstanding common stock of the
First National Bank of Spring Mills in exchange for
262,471 shares of the Company's common stock, in a
business combination accounted for as a pooling of
interest. As a result of this transaction, total
consolidated assets increased approximately
$31,834,000. Historical financial information has
been restated to include the First National Bank of
Spring Mills.
NOTE R - STOCK DIVIDEND
On April 28, 1999, the Board of Directors approved a
ten percent stock dividend to shareholders of record
as of May 10, 1999. As a result of the dividend, an
additional 283,393 shares of the Company were issued,
with fractional shares paid in cash.
On November 25, 1997 the Board of Directors approved a
two-for-one stock split issued to shareholders on
January 15, 1998. The additional shares resulting
from the split were effected in the form of a 100%
stock dividend.
Average shares and all pre share amounts included in
the consolidated financial statements are based on the
increased number of shares after giving retroactive
effect to the stock dividends.
NOTE S - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," requires that the Company
disclose estimated fair values for its financial
instruments. Fair value estimates are made at a
specific point in time, based on relevant market
information and information about the financial
instrument. These estimates do not reflect any
premium or discount that could result from offering
for sale at one time the Company's entire holdings of
a particular financial instrument. Also, it is the
Company's general practice and intention to hold most
of its financial instruments to maturity and not to
engage in trading or sales activities. Because no
market exists for a significant portion of the
Company's financial instruments, fair value estimates
are based on judgments regarding future expected loss
experience, current economic conditions, risk
characteristics of various financial instruments and
other factors. These estimates are subjective in
nature and involve uncertainties and matters of
significant judgment and therefore cannot be
determined with precision. Changes in assumptions can
significantly affect the estimates.
Estimated fair values have been determined by the
Company using historical data and an estimation
methodology suitable for each category of financial
instruments. The estimated fair value of the
Company's investment securities is described in Note
A. The Company's fair value estimates, methods, and
assumptions are set forth below for the Company's
other financial instruments.
Cash and Cash Equivalents
The carrying amounts for cash and due from banks
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.
<TABLE>
The following table presents information for loans (in
thousands):
<S> <C> <C> <C> <C> <C>
Average Average Estimated
Book Historica Maturity Discounted
Value Yield Years (1)Rate (2) Fair Value
31-Dec-99
Commercial and agricult $31,735 9.13% 4.48 9.25%$ 31,700
Real estate mortgage
Residential 123,392 8.28% 7.35 8.00% 123,712
Commercial 51,445 8.45% 6.05 8.75% 51,303
Construction 3,732 9.18% 2.7 9.00% 3,738
Installment loans to ind 23,519 9.02% 3.48 9.25% 23,469
31-Dec-98
Commercial and agricul $ 32,920 8.98% 4.27 9.00%$ 32,914
Real estate mortgage
Residential 111,705 8.50% 6.27 7.95% 112,274
Commercial 43,562 8.77% 5.21 8.00% 43,873
Construction 3,874 8.89% 1.7 8.50% 3,888
Installment loans to 24,505 8.65% 2.75 8.50% 24,539
individuals
</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, 1999 and 1998. 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
31-Dec-99
Interest-bearing deposits $ 212,528 $ 212,378
Noninterest-bearing deposits 43,045 43,045
31-Dec-98
Interest-bearing deposits $ 210,901 $ 211,559
Noninterest-bearing deposits 42,233 42,223
The fair value estimates above do not include the
benefit that results from the low-cost funding
provided by the deposit liabilities compared to the
cost of borrowing funds in the market, commonly
referred to as the core deposit intangible.
Securities Sold under Repurchase Agreements and
Short-term Borrowings
The carrying amounts for securities sold under
repurchase agreements and short-term borrowings
approximate fair value.
Other Borrowings:
The fair value of other borrowings is based on the discounted
value of contractual cash flows. The discount rate is estimated
using the rates currently offered for
borrowings of similar maturities (in thousands):
Book Value Fair Value
31-Dec-99 $ 27,278 $ 26,888
31-Dec-98 $ 22,778 $ 22,903
Commitments to Extend Credit, Standby Letters of
Credit, and Financial Guarantees Written:
There is no material difference between the notional
amount and the estimated fair value of off-balance
sheet items at December 31, 1999 and 1998
respectively.
NOTE T - PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial information for Penns Woods
Bancorp, Inc. follows
CONDENSED BALANCE SHEET, DECEMBER 31,
<TABLE>
<S> <C> <C> <C>
1999 1998
(in thousands)
ASSETS
$ 27 $ 51
Investment in subsidiaries:
Bank 33,261 36,973
Nonbank 13,224 13,221
Deferred tax asset 14 18
Prepaid taxes 13 149
Total Assets $ 46,539 $ 50,412
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 454 $ 516
Shareholders' equity 46,085 49,896
Total Liabilities and
Shareholders' Equity $ 46,.539 $ 50,412
CONDENSED STATEMENT OF INCOME, FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
(in thousands)
OPERATING INCOME
Dividends from subsidiaries $3,735 $ 3,789 $ 4,956
Equity in undistributed net income of subsidiaries
3,583 2,691 3,163
Other income 1 - 156
OPERATING EXPENSES -129 -12 -138
NET INCOME $ 7,190 $ 6,468 $ 8,137
CONDENSED STATEMENT OF CASH FLOWS, FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
(in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 7,190 $ 6,468 $ 8,137
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiaries 3,583 -2,691 -3,163
Increase in income taxes
payable 174 37 6
Increase (decrease) in
liabilities -24 -105 9
Stock option compensation
expense - - 7
Net cash provided by
operating activities $3,757 3,709 4,996
CASH FLOWS FROM INVESTING ACTIVITIES
Additional investment in
subsidiaries -620 -1,105 -2,638
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid -3,178 -2,755 -2,337
Proceeds from exercise of
stock options 40 56 197
Purchase of treasury stock -23 -109 -
Net cash used in
financing activities -3,161 -2,808 -2,140
NET INCREASE (DECREASE) IN CASH -24 -204 218
CASH, BEGINNING OF YEAR 51 255 37
CASH, END OF YEAR $ 27 $ 51 $ 255
</TABLE>
NOTE U - CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED
March June September December
1999 31 30 30 31
Interest income $ 6,214 6,368 6,580 $ 6,868
Interest expense 2,524 2,536 2,610 2,848
Net interest income 3,690 3,832 3,970 4,020
Provision for loan losses 78 52 78 78
Other income 377 397 389 418
Securities gains 185 94 272 1,395
Other expenses 2,268 2,220 2,233 2,618
Income before income tax provisi 1,906 2,051 2,320 3,137
Income tax provision 431 454 540 799
Net income $ 1,475 1,597 1,780 $ 2,338
Earnings per share - bas$ 0.52 0.46 0.57 $ 0.75
Earnings per share - dil$ 0.52 0.46 0.57 $ 0.75
FOR THE THREE MONTHS ENDED
March June September December
1998 31 30 30 31
Interest income $ 5,968 6,236 6,467 $ 6,425
Interest expense 2,399 2,581 2,800 2,749
Net interest income 3,569 3,655 3,667 3,676
Provision for loan losses 80 75 75 75
Other income 609 64 326 360
Securities gains 354 489 216 1,017
Other expenses 2,036 2,061 2,074 2,894
Income before income tax provisi 2,416 2,072 2,060 2,084
Income tax provision 619 471 574 500
Net income $ 1,797 1,601 1,486 $ 1,584
Earnings per share - basic 0.58 0.51 0.48 $ 0.51
Earnings per share - diluted 0.57 0.51 0.48 $ 0.51
</TABLE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
SCHEDULE 1
PENNS WOODS BANCORP, INC.
INDEBTEDNESS OF RELATED PARTIES
<S> <C> <C> <C> <C> <C> <C> <C>
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
1999 6 directors, 15 affiliated interests,
and 2 officers $2,452 $6,775 $3,417 $0 $0 $5,810
1998 7 directors, 18 affiliated interests,
and 3 officers $2,096 $1,642 $1,074 $212 $0 $2,452
1997 8 directors, 15 affiliated interests,
and 3 officers $2,014 $900 $818 $0 $0 $2,096
</TABLE>
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information appearing in the Proxy Statement under the
caption "Election of Directors" is incorporated herein
by reference. (a) Identification of directors. The
information appearing under the caption "Election of
Directors" in the Company's Proxy Statement dated
March 7, 2000 (at page 5 thereto) is incorporated by
reference.
ITEM 11 EXECUTIVE COMPENSATION
Information appearing under the caption
"Executive Compensation" in the Company's Proxy
Statement (at page 6 thereto) is incorporated
herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information appearing under the caption "Principal
Beneficial Owners of the Corporation's Common Stock"
in the Company's Proxy Statement (at page 3 thereto)
is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
There have been no material transactions between the
Corporation and the Bank, nor any material
transactions proposed, with any Director or executive
officer of the Corporation and the Bank, or any
associate of the foregoing persons. The Corporation
and the Bank have had, and intend to continue to have,
banking and financial transactions in the ordinary
course of business with Directors and Officers of the
Corporation and the Bank and their associates on
comparable terms and with similar interest rates as
those prevailing from time to time for other customers
of the Corporation and the Bank.
Total loans outstanding from the Bank at December 31,
1999 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 $5,810,000 or
approximately 17.47% of the total equity capital of
the Bank. Loans to such persons were made in the
ordinary course of business, were made on
substantially the same terms, including interest rates
and collateral, as those prevailing at the time for
comparable transactions with other persons, and did
not involve more than the normal risk of
collectability or present other unfavorable features.
See also the information appearing in footnote L to
the Consolidated Financial Statements included
elsewhere in the Annual Report.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The following consolidated financial statements
and reports 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
On January 26, 1999 Penns Woods Bancorp, Inc. filed
a Form 8-K, reporting completion of the Company's
acqusition of the First National Bank of Spring Mills.
In addition, on September 23, 1999 Penns Woods
Bancorp, Inc. filed a Form 8-K report under Item 4 of
Form 8-K reporting a change in the registrant's
independent certified public accountants.
The schedules not included are omitted because the
required matter or conditions are not present, the
data is insignificant or the required information is
submitted as part of the consolidated financial
statements and notes thereto.
(c) Exhibits:
(3) (i) Articles of Incorporation of the
Registrant, as presently in effect
(incorporated herein by reference to Exhibit
3.1 of Registration Statement No. 333-65821 on
Form S-4).
(3) (ii) Bylaws of the Registrant as presently
in effect(incorporated herein by reference
to Exhitit 3.2 of Registration
Statement No. 333-65821 on Form S-4).
(13) Annual Report to Shareholders
(22) Subsidiaries of the Registrant
(24) Consent of Independent Certified Public
Accountants
EXHIBIT INDEX
(3) (i) Articles of Incorporation of
the Registrant, as presently in effect
(incorporated herein by reference to
Exhibit 3.1 of Registration Statement
No. 333-65821 on Form S-4).
(3) (ii) Bylaws of the Registrant as
presently in effect (incorporated herein
by reference to Exhibit 3.2 of
Registration Statement No. 333-65821 on
Form S-4).
(13) Annual Report to Shareholders
(22) Subsidiaries of the Registrant
(24) Consent of Independent Certified Public
Accountants
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 14, 2000 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 14, 2000
Sonya E. Scott, Principal Accounting Officer & March 14, 2000
Principal Financial Officer
Phillip H. Bower, Director March 14, 2000
Lynn S. Bowes, Director March 14, 2000
Michael J. Casale, Jr., Director March 14, 2000
H. Thomas Davis, Jr., Director March 14, 2000
William S. Frazier, Director March 14, 2000
James M. Furey II, Director March 14, 2000
Allan W. Lugg, Director March 14, 2000
Jay H. McCormick, Director March 14, 2000
R. Edward Nestlerode, Jr., Director March 14, 2000
James E. Plummer, Director March 14, 2000
William H. Rockey, Sr. Vice President & March 14, 2000
Director
This statement has not been reviewed or confirmed for
accuracy or relevance, by the Federal Deposit
Insurance Corporation.
NAME STATE OF INCORPORATION
JERSEY SHORE STATE BANK PENNSYLVANIA
WOODS REAL ESTATE DEVELOPMENT COMPANY PENNSLYVANIA
WOODS INVESTMENT COMPANY, INC. DELAWARE
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
consolidated financial statements of Penns Woods
Bancorp, Inc. and subsidiaries (the "Company") as
of December 31, 1998 and for two years in the
period then ended, in the Company's 1999 Annual
Report to Shareholders and Form K.
/s/ Parente, Randolph, Orlando, Carey &
Associates
Williamsport, Pennsylvania
23-Mar-00
EXHIBIT 23.SN
Consent of Independent Auditors
Penns Woods Bancorp, Inc.
Jersey Shore, Pennsylvania
We consent to the use in the Annual Report
on Form 10-K under the Securities Exchange Act
of 1934 of Penns Woods Bancorp, Inc.
for the year ended December 31, 1999, of our
report dated January 21, 2000 insofar as such
report relates to the consolidated financial
statements of Penns Woods Bancorp, Inc.
as of and for the year ended December 31, 1999.
/s/ S.R. Snodgrass, A.C.
Wexford, Pennsylvania
March 24, 2000
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