secQ697 FORM 10-Q QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 10 OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1997 Commission file number 0-17077 PENNS WOODS BANCORP, INC. Incorporated in Pennsylvania Main office 115 South Main Street Jersey Shore, Pennsylvania 17740 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO[ ] On June 30, 1997 there were 1,278,724 shares of the Registrant's common stock outstanding. PART I FINANCIAL STATMENTS <TABLE> <CAPTION> PENNS WOODS BANCORP, INC. CONSOLIDATED BALANCE SHEET AT DATES INDICATED June 30, December 31, 1997 1996 -------------------------------- <S> <C> <C> ASSETS: Cash and due from banks $12,278,039 $8,014,461 Federal funds sold $4,000,000 0 Investment securities available-for-sale 67,552,791 81,272,404 Investment Securities held-to-maturity 3,102,218 3,105,408 Loans, net of unearned discount 168,258,968 162,266,721 Allowance for loan losses (2,509,433) (2,413,021) Loans, net 165,749,535 159,853,700 Bank premises and equipment 3,584,038 3,614,924 Foreclosed assets held for sale 237,083 252,710 Accrued interest receivable 1,611,596 1,676,206 Other assets 3,763,171 1,934,280 -------------------------------- TOTAL ASSETS $261,878,471 $259,724,093 ================================ LIABILITIES: Demand Deposits $31,704,710 $29,000,674 Interest-bearing demand deposits 35,698,263 38,122,803 Savings deposits 44,397,527 45,381,900 Time deposits 100,007,784 90,555,626 -------------------------------- Total deposits $211,808,284 $203,061,003 Federal funds purchased 0 14,490,477 Securities sold under repurchase agreements 8,200,104 5,628,067 Accrued interest payable 997,894 884,096 Other Liabilities 3,558,530 2,103,813 Total liabilities -------------------------------- $224,564,812 $226,167,456 -------------------------------- SHAREHOLDERS' EQUITY: Common stock, par value $10 per share, 10,000,000 shares authorized; 1,278,724 and 1,277,298 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively $12,787,240 $12,772,980 Additional paid-in capital 4,584,280 4,558,910 Retained earnings 17,008,755 13,873,040 Net unrealized gain (loss) on securities available for sale 2,933,384 2,351,707 -------------------------------- Total shareholders' equity $37,313,659 $33,556,637 -------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $261,878,471 $259,724,093 ================================ </TABLE> PENNS WOODS BANCORP, INC. CONSOLIDATED STATEMENT OF INCOME FOR THE PERIODS INDICATED <TABLE> <CAPTION> SIX MONTHS SIX MONTHS QUARTER QUARTER ENDED ENDED ENDED ENDED June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 ------------------------------------------------------------------ <S> <C> <C> <C> <C> INTEREST INCOME: Interest and fees on loans $7,683,521 $7,273,763 $3,864,739 $3,633,657 Interest and dividends on investments: ------------------------------------------------------------------ Taxable interest 1,407,035 1,610,098 683,577 877,136 Nontaxable interest 748,152 511,554 311,042 247,309 Dividends 253,116 248,766 121,671 127,182 ------------------------------------------------------------------ Total interest and dividends on investments 2,408,303 2,370,418 1,116,290 1,251,627 Interest on Federal funds sold 52,993 25,331 52,993 2,542 ------------------------------------------------------------------ Total interest income 10,144,817 9,669,512 5,034,022 4,887,826 ------------------------------------------------------------------ INTEREST EXPENSE: Interest on deposits 3,825,993 3,758,864 1,940,981 1,861,576 Interest on Federal funds purchased 99,857 37,671 788 36,851 Interest on securities sold under repurchase agreements 225,374 151,074 127,628 79,340 Interest on other borrowings 0 0 0 0 ------------------------------------------------------------------ Total interest expense 4,151,224 3,947,609 2,069,397 1,977,767 ------------------------------------------------------------------ Net interest income 5,993,593 5,721,903 2,964,625 2,910,059 Provision for loan losses 120,000 63,000 60,000 21,000 ------------------------------------------------------------------ Net interest income after provision for loan losses 5,873,593 5,658,903 2,904,625 2,889,059 ------------------------------------------------------------------ OTHER OPERATING INCOME: Service charges 415,498 408,056 214,967 205,856 Securities gains 2,325,027 290,524 1,148,801 254,047 Other income 152,280 158,127 77,166 97,833 ------------------------------------------------------------------ Total other operating income 2,892,805 856,707 1,440,934 557,736 ------------------------------------------------------------------ OTHER OPERATING EXPENSES: Salaries and employee benefits 1,895,518 1,777,326 948,058 903,454 Occupancy expense, net 243,359 247,045 122,726 116,631 Furniture and equipment expense 342,024 232,271 192,789 104,148 Other expenses 1,044,583 1,250,935 486,537 623,282 ------------------------------------------------------------------ Total other operating expenses 3,525,484 3,507,577 1,750,110 1,747,515 ------------------------------------------------------------------ INCOME BEFORE TAXES 5,240,914 3,008,033 2,595,449 1,699,280 INCOME TAX PROVISION 1,402,257 759,772 702,887 433,447 ------------------------------------------------------------------ NET INCOME $3,838,657 $2,248,261 $1,892,562 $1,265,833 ================================================================== EARNINGS PER SHARE 3.00 1.77 1.48 1.00 ================================================================== TOTAL SHARES OUTSTANDING 1,277,500 1,271,620 1,277,500 1,271,620 ================================================================== </TABLE> PENNS WOODS BANCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997 <TABLE> UNREALIZED APPRECIATION ADDITIONAL (DEPRECIATION) O TOTAL COMMON PAID-IN RETAINED SECURITIES SHAREHOLDERS' STOCK CAPITAL EARNINGS AVAILABLE-FOR-SA EQUITY ---------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balance, December 31, 1996 $12,772,980 $4,558,910 $13,873,040 $2,351,707 $33,556,637 Net income for the six months ended June 30, 1997 3,838,657 3,838,657 Dividends declared and paid (702,942) (702,942) Net change in unrealized gain on marketable equity securities 581,677 581,677 Stock options exercised 14,260 25,370 39,630 ---------------------------------------------------------------------------------- Balance, June 30, 1997 $12,787,240 $4,584,280 $17,008,755 $2,933,384 $37,313,659 ================================================================================== </TABLE> PENNS WOODS BANCORP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE QUARTERS ENDED JUNE 30, 1997 AND JUNE 30, 1996 <TABLE> <CAPTION> JUNE 30, JUNE 30, 1997 1996 -------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $3,838,657 $2,248,261 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 267,767 202,324 Provision for loan losses 120,000 63,000 Amortization of investment security premiums 10,597 9,590 Accretion of investment security discounts (64,707) (27,435) Securities gains (2,325,027) (290,524) Increase in all other assets (1,791,778) (1,515,233) Increase (decrease) in all other liabilities 1,296,360 1,750,115 -------------------------------- Net cash provided by operating activities 1,351,869 2,440,098 -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of securities available-for-sale (31,962,260) (24,803,603) Proceeds from sale of securities available-for-sale 48,917,500 10,137,260 Purchase of securities held-to-maturity 0 (647,599) Proceeds from calls and maturities of securities held-to-maturity 28,029 795,601 Net increase in loans (6,015,835) (3,116,608) Decrease in foreclosed assets 15,627 567,650 Acquisition of bank premises and equipment (236,881) (292,162) -------------------------------- Net cash provided by (used in) investing activities 10,746,180 (17,359,461) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in interest-bearing deposits 6,043,245 377,582 Net increase in noninterest-bearing deposits 2,704,036 2,094,826 Net increase (decrease) in sec. sold under repurch. agree. 2,572,037 935,907 Increase (decrease) in other borrowed funds (14,490,477) 5,740,000 Dividends paid (702,942) (559,630) Stock options exercised 39,630 29,929 -------------------------------- Net cash (used in) provided by financing activities (3,834,471) 8,618,614 -------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,263,578 (6,300,749) CASH AND CASH EQUIVALENTS, BEGINNING 8,014,461 14,853,649 -------------------------------- CASH AND CASH EQUIVALENTS, ENDING $16,278,039 $8,552,900 ================================ </TABLE> The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with financial statements and notes thereto contained in the Company's annual report for the year ended December 31, 1996. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNINGS SUMMARY Interest Income For the six months ended June 30, 1997, total interest income increased by $475,305 or 4.92% compared to the same period in 1996. This increase is due to an increase of $409,758 in interest and fees on loans, an increase in total interest and dividends on investments of $37,885 and a $27,662 increase in income on federal funds sold. The increase in interest and fees on loans of $409,758 was primarily due to an increase in the loan volume during the first six months, ended June 30, 1997 of $5,992,247, and also due to fees and late charges collected. The increase in interest on federal funds sold of $27,662 was due to an increase in the amount of funds sold during the second quarter of 1997. Interest and dividends on investments increased primarily due to the net effect of a $203,063 decrease in taxable interest, and a $236,598 increase in nontaxable interest. In addition, there was a slight increase in dividend income of $4,350. Interest Expense For the six months ended June 30, 1997 total interest expense increased $203,615 or 5.16% over the same period in 1996. The increase in interest expense can be attributed to the interest paid on time deposits, due to the increase in volume of such deposits. In addition, there was an increase in the amount of interest paid on federal funds purchased, and on securities sold under repurchase agreements due to the increase in volume of these accounts. Provision for Loan Losses The provision for losses for the six months ended June 30, 1997 increased $57,000 from the corresponding period in 1996. This increase reflects an anticipated rise in consumer loan losses throughout the remainder of the year. As of the second quarter of 1997, charge offs exceeded recoveries by $24,000 compared to the second quarter of 1996 when recoveries exceeded charge offs by $9,000. Provisions to date total $120,000 as compared to provisions through June 30, 1996 of $63,000. Senior Management utilizes several different methods to determine the adequacy of the loan loss allowance and to establish quarterly provisions. Among these methods is the analysis of the most recent five year average loss history, the coverage of non-performing loans provided by the allowance, an estimate of potential loss in homogeneous pools of loans and the internal credit rating assigned to watch and problem loans. In addition to the preceding, senior management also reviews macro portfolio risks such as the absence of concentrations, absence of foreign credit exposure and growth objectives in fine tuning the allowance and provisions. The ratio of non-accruing loans and those accruing but delinquent more than 90 days (collectively called "non-performing" loans) to the allowance for loan losses stood at .51 times at June 30, 1997 a decrease in coverage from the .42 times at December 31, 1996. The increase in non-performing loans occurred mainly in the commercial loan portfolio. Based upon this analysis as well as the others noted above, senior management has concluded that the allowance for loan losses is adequate. Other Operating Income Other operating income for the six months ended June 30, 1997 increased $2,036,098 This increase is due to the net effect of a slight increase in service charges collected of $7,442, an increase in securities gains realized of $2,034,503 and a slight decrease in other income of $5,847. The increase in service charges was a result of an increase in service charges collected on deposit accounts. As compared to the second quarter of 1996, there were fewer gains on foreclosed assets during the first six months of 1997, resulting in the slight decrease in other income. The primary increase in other operating income was due to the increase in securities gains recognized of $2,034,503. Realized gains were on sales of bonds that were sold in effort to better match the Bank's rate-sensitive assets and rate-sensitive liabilities given the current economic conditions. In addition, gains were realized on partial sales of equity securities that have been in the portfolio long-term that had reached what management had determined to be their maximum potential. Other Operating Expense For the six months ended June 30, 1997 total other operating expenses increased $17,907 over the same period in 1996. Employee salaries and benefits increased $118,192 as a result of increases in salary levels and the hiring of additional employees. Occupancy expense decreased $3,686 and furniture and equipment expense increased $109,753. The minimal decrease in occupancy expense is the result of a decrease in the amount of maintenance and repairs expense incurred. The $109,753 increase in furniture and equipment expense can be attributed to an increase in the amount of repairs and maintenance incurred and also to an increase in depreciation. Expenses included under the other expenses heading are such items as: advertising, postage, maintenance, FDIC, SAIF and other insurance, Pennsylvania State shares tax, legal and professional fees, telephone, printing and supplies and other general and administrative expenses. Decreases in other expenses totalled $206,352. As compared to the first quarter of 1996, FDIC Insurance declined considerably due to the decrease in the Bank's "Bank Insurance Fund" assessment rate. There was also a decrease in the amount of repairs and maintenance expense on the foreclosed assets incurred during the first six months of 1997 compared to the same period in 1996. These savings, netted against increases in other expenses, mainly legal, supplies and Pennsylvania Capital shares tax, account for the $206,352 decrease in other expenses. Provision for Income Taxes Provision for income taxes for the six months ended June 30, 1997 resulted in an effective income tax rate of 26.76% compared to 25.26% for the corresponding period in 1996. The increase noted is primarily a result of an increase in the amount of security gains included in taxable income. ASSET/LIABILITY MANAGEMENT Assets At June 30, 1997, cash, federal funds sold, and investment securities totalled $86,933,048, or a net decrease of $5,459,225 over the corresponding balance at December 31, 1996. Investment securities decreased, $13,722,803, while cash increased $4,263,578. During this period, net loans increased by $5,895,835 to $165,749,535. The decrease in investment securities from December 31, 1996 to June 30, 1997 can be attributed to the net effect of various purchases and sales of investments during the first two quarters with the main transactions being; purchases of United States Treasury Notes and sales of agency securities and municipal securities. Management evaluates credit risk, anticipated economic conditions and other relevant factors impacting the quality of the loan portfolio in order to establish an adequate loan-loss allowance. An internal credit review committee monitors loans in accordance with Federal supervisory standards In addition, management frequently reviews and utilizes the results of examinations and reports provided by the committee, regulators, and independent loan review consultants, on the adequacy of the loan loss allowance. Accordingly, on a quarterly basis, management determines an appropriate provision for possible loan losses from earnings in order to maintain allowance coverage relative to potential losses. The allowance for loan losses totalled $2,509,433 at June 30, 1997, an increase of $96,412 over the balance at December 31, 1996. For the six months ended June 30, 1997, the provision for loan losses totalled $120,000. As a percent of loans, the allowance for loan losses at June 30, 1997 totalled 1.49% versus 1.49% at December 31, 1996. Loans accounted for on a non-accrual basis totalled $1,142,000 and $748,000 at June 30, 1997 and December 31, 1996 respectively. Accruing loans, contractually delinquent 90 days or more were $139,000 at June 30, 1997 and $256,000 at December 31, 1996. These loans are predominately secured by first lien mortgages on residential real estate where appraisal values mitigate any potential loss of interest and principal. The ratio of non-accruing loans and those accruing but delinquent more than 90 days to the allowance for loan losses stood at .51 times at June 30, 1997 and .42 times at December 31, 1996. Presently the portfolio has no loans that meet the definition of "trouble debt restructurings" under FAS 15. A watch list of potential problem loans is maintained and updated quarterly by an internal credit review committee. At this time there are no credits of substance that have the potential to become more than 90 days delinquent. The Bank has not had nor presently has any foreign outstandings. In addition, no known concentrations of credit presently exist. At June 30, 1997 the balance of other real estate was $237,083 compared to $252,710 at December 31, 1996. Two properties were transferred into the account during the first quarter of 1997. In addition, three properties that were on the books at December 31, 1996 were sold during the first six months of 1997. Deposits At June 30, 1997 total deposits amounted to $211,808,284 representing an increase of $8,747,281 or a 4.31% increase from total deposits at December 31, 1996. Other Liabilities At June 30, 1997, other liabilities totalled $3,558,530 or a $1,454,717 increase over the balance at December 31, 1996. This increase is primarily due to an increase in accrued taxes and accrued expenses. Capital The adequacy of the Company's capital is reviewed on an ongoing basis with reference to the size, composition and quality of the Company's resources and regulatory guidelines. Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets and preserve high quality credit ratings. The capital requirements of the Pennsylvania Department of Banking are 6%. The capital requirements of the Federal Deposit Insurance Corporation are: 1. Regulatory capital to total assets 6%. 2. Primary capital to total assets 5 1/2%. At June 30, 1997, regulatory capital to total assets was 14.25% compared to 12.92% at December 31, 1996. Primary capital to total assets at June 30, 1997 was 15.21% compared to 13.85% at December 31, 1996. The Federal Reserve Board, the FDIC and the OCC have issued certain risk-based capital guidelines, which supplement existing capital requirements. The guidelines require all United States banks and bank holding companies to maintain a minimum risk-based capital ratio of 8.00% (of which at least 4.00% must be in the form of common stockholders' equity). Assets are assigned to five risk categories, with higher levels of capital being required for the categories perceived as representing greater risk. The required capital will represent equity and (to the extent permitted) nonequity capital as a percentage of total risk-weighted assets. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets. Capital is being maintained in compliance with risk-based capital guidelines. The Company's Tier 1 Capital to total risk weighted assets ratio is 20.99% and the total capital ratio to total risk weighted assets ratio is 22.25%. Liquidity and Interest Rate Sensitivity The asset/liability committee addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook. The following liquidity measures are monitored and kept within the limits cited. 1. Net Loans to Total Assets, 70% maximum 2. Net Loans to Total Deposits, 85% maximum 3. Net Loans to Core Deposits, 90% maximum 4. Investments to Total Assets, 40% maximum 5. Investments to Total Deposits, 50% maximum 6. Total Liquid Assets to Total Assets, 25% minimum 7. Total Liquid Assets to Total Liabilities, 25% minimum 8. Volatility Liability Dependence Ratio, 10% maximum The Bank has maintained a liquidity level at or above the guidelines of the FDIC and the Pennsylvania Department of Banking. The Bank has available to it Federal Funds lines of credit totalling $8,000,000 from correspondent banks. In addition, the Bank has an agreement with the Federal Home Loan Bank of Pittsburgh that enables the Bank to receive advances up to $77,042,000 for terms of 1 to 120 days under the Federal Home Loan Bank's "Repo Plus" credit program. All of the funding mentioned is available to the Bank, should the need for short-term funds arise. The following table sets forth the Bank's interest rate sensitivity as of June 30, 1997: <TABLE> <CAPTION> AFTER ONE AFTER THREE AFTER WITHIN BUT WITHIN BUT WITHIN FIVE ONE YEAR THREE YEARS FIVE YEARS YEARS <S> <C> <C> <C> <C> Earning assets: (1) (2) Investment securities (1) $ 13,521 $ 8,132 $21,103 $ 29,528 Loans (2) 68,369 21,774 61,042 17,074 -------------------------------------------------------------- Total earning assets 81,890 29,906 82,145 46,602 Deposits (3) 100,114 22,870 52,209 13,111 Borrowings 0 0 0 0 -------------------------------------------------------------- Total interest bearing lia 100,114 22,870 52,209 13,111 Net non-interest bearing funding (4) 9,112 7,542 16,377 19,208 -------------------------------------------------------------- Total net funding sources 109,226 30,412 68,586 32,319 Excess assets (liabilities (27,336) ( 506) 13,559 14,283 Cumulative excess assets (liabilities) (27,336) (27,842) (14,283) 0 <FN> (1) Investment balances reflect estimated prepayments on mortgage-backed securities. (2) Loan balances include annual repayment assumptions based on projected cash flow from the loan portfolio. The cash flow projections are based on the terms of the credit facilities and estimated prepayments on fixed rate mortgage loans. Loans include loans held for resale. (3) Adjustments to the interest sensitivity of Savings, NOW and MMDA account balances reflect managerial assumptions based on historical experience, expected behavior in future rate environments and JSSB's positioning for these products. (4) Net non-interest bearing funds is the sum of non-interest bearing liabilities and shareholders' equity minus non-interest earning assets and reflect managerial assumptions as to the appropriate investment maturities for these sources. </FN> </TABLE> In reference to the attached financial statements, all adjustments are of a normal recurring nature pursuant to Rule 10-01 (b) (8) of Regulation S-X. Part II. OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K. a. Exhibits: Number Description - -------------------------- (11) Statement Regarding Computation of Per Share Earnings (27) Financial Data Schedule b. RepNo reports on Form 8-K were filed in the second quarter of 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENNS WOODS BANCORP, INC. (Registrant) Date: August 13, 1997 -------------------------------- Theodore H. Reich, President Date: August 13, 1997 -------------------------------- Sonya E. Hartranft, Secretary Description - -------------------------- (11) Statement Regarding Computation of Per Share Earnings (27) Financial Data Schedule EXHIBIT 11 <TABLE> <CAPTION> STATEMENT OF COMPUTATION OF EARNING PER SHARE FOR THE PERIOD ENDED 6/30/97 LESS FRACTION SHARES FRACTIONAL OF WEIGHTED DATE OUTSTANDING RESTATEMENT SHARES YEAR SHARES - ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 1/01/97-5/28 1,277,298 - - 148/181 1,044,420 5/29/97-6/04 1,277,598 - - 7/181 49,410 6/5/97-6/10/ 1,278,278 - - 6/181 42,374 6/11/97-6/30 1,278,724 - - 20/181 141,296 WEIGHTED SHARES OUTSTANDING 6/30/97 1,277,500 ================ <CAPTION> <S> <C> <C> NET INCOME 6/30/97 $3,838,657 WEIGHTED SHARES OUTSTANDING 6/30/97 1,277,500 EARNINGS PER SHARE 6/30/97 $3.00 ================ <CAPTION> </TABLE>