SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2005,
o Transition report pursuant to Section 13 or 15 (d) of the Exchange Act for the Transition Period from to .
No. 0-17077
(Commission File Number)
PENNS WOODS BANCORP, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA
23-2226454
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
(Address of principal executive offices)
(Zip Code)
(570) 322-1111
Registrant’s telephone number, including area code
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 ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
YES o NO ý
On October 27, 2005 there were 3,320,414 of the Registrant’s common stock outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
Consolidated Balance Sheet (unaudited) as of September 30, 2005 and December 31, 2004
Consolidated Statement of Income (unaudited) for the Three and Nine Months ended September 30, 2005 and 2004
4
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) For the Nine Months ended September 30, 2005 and 2004
5
Consolidated Statement of Comprehensive Income (unaudited) for the Three and Nine Months ended September 30, 2005 and 2004
6
Consolidated Statement of Cash Flows (unaudited) for the Nine Months ended September 30, 2005 and 2004
7
Notes to Consolidated Financial Statements(unaudited)
8
Item 1. Legal Proceedings
29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
30
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
31
Exhibit Index and Exhibits
32
2
PENNS WOODS BANCORP, INC.CONSOLIDATED BALANCE SHEET(UNAUDITED)
September 30,
December 31,
(In Thousands, Except Share Data)
2005
2004
ASSETS:
Noninterest-bearing balances
$
13,113
12,602
Interest-bearing deposits in other financial institutions
27
24
Total cash and cash equivalents
13,140
12,626
Investment securities, available for sale, at fair value
192,039
184,163
Investment securities held to maturity (fair value of $241 and $561)
266
558
Loans held for sale
3,908
4,624
Loans, net of unearned discount of $1,025 and $1,096
330,651
324,505
Less: Allowance for loan and lease losses
3,492
3,338
Loans, net
327,159
321,167
Premises and equipment, net
6,141
4,882
Accrued interest receivable
2,520
2,246
Bank-owned life insurance
10,627
10,976
Goodwill
3,032
Other assets
11,587
2,429
TOTAL ASSETS
570,419
546,703
LIABILITIES:
Interest-bearing deposits
291,137
282,786
Noninterest-bearing deposits
72,053
74,050
Total deposits
363,190
356,836
Short-term borrowings
40,410
36,475
Long-term borrowings, Federal Home Loan Bank(FHLB)
84,478
75,878
Accrued interest payable
1,118
850
Other liabilities
6,733
3,499
TOTAL LIABILITIES
495,929
473,538
SHAREHOLDERS’ EQUITY:
Common stock, par value $10.00, 10,000,000 shares authorized; 3,332,399 and 3,331,837 shares issued
33,324
33,318
Additional paid-in capital
17,711
17,700
Retained earnings
22,102
18,262
Accumulated other comprehensive gain
1,914
4,331
Less: Treasury stock at cost, 12,810 and 10,310 shares
(561
)
(446
TOTAL SHAREHOLDERS’ EQUITY
74,490
73,165
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes to the unaudited consolidated financial statements.
3
PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF INCOME(UNAUDITED)
Three Months Ended
Nine Months Ended
(In Thousands, Except Per Share Data)
INTEREST AND DIVIDEND INCOME:
Loans including fees
5,899
5,550
17,070
15,578
Investment Securities:
Taxable
967
1,698
3,445
5,278
Tax-exempt
969
422
1,133
Dividend
278
254
873
794
TOTAL INTEREST AND DIVIDEND INCOME
8,113
7,924
23,634
22,783
INTEREST EXPENSE:
Deposits
1,537
1,227
4,151
3,544
199
131
545
367
Long-term borrowings
965
871
2,711
2,584
TOTAL INTEREST EXPENSE
2,701
2,229
7,407
6,495
NET INTEREST INCOME
5,412
5,695
16,227
16,288
PROVISION FOR LOAN LOSSES
180
165
540
315
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
5,232
5,530
15,687
15,973
NON-INTEREST INCOME:
Service charges
612
499
1,603
1,497
Securities gains, net
556
407
1,854
1,535
288
90
475
270
Insurance commissions
507
637
1,802
1,796
Other operating income
321
322
964
944
TOTAL NON-INTEREST INCOME
2,284
1,955
6,698
6,042
NON-INTEREST EXPENSES:
Salaries and employee benefits
2,130
1,948
6,323
5,813
Occupancy expense, net
261
231
838
704
Furniture and equipment expense
262
226
717
721
Pennsylvania shares tax expense
138
417
377
Other operating expenses
1,031
973
3,035
2,820
TOTAL NON-INTEREST EXPENSES
3,822
3,509
11,330
10,435
INCOME BEFORE INCOME TAX PROVISION
3,694
3,976
11,055
11,580
INCOME TAX PROVISION
746
1,150
2,632
3,277
NET INCOME
2,948
2,826
8,423
8,303
EARNINGS PER SHARE - BASIC
0.89
0.85
2.54
2.50
EARNINGS PER SHARE - DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC
3,310,719
3,319,457
3,311,213
3,320,249
WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED
3,312,464
3,323,608
3,313,141
3,323,908
DIVIDNEDS PER SHARE
0.47
0.35
1.38
1.05
PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY(UNAUDITED)
ACCUMULATED
COMMON
ADDITIONAL
OTHER
TOTAL
STOCK
PAID-IN
RETAINED
COMPREHENSIVE
TREASURY
SHAREHOLDERS’
(In Thousands Except Per Share Data)
SHARES
AMOUNT
CAPITAL
EARNINGS
INCOME
EQUITY
Balance, December 31, 2004
3,331,837
Net income
Dividends declared, $1.38
(4,583
Treasury Stock acquired (2,500 shares)
(115
Net change in unrealized gain on investments available for sale, net of reclassification adjustment, net of income tax benefit of $1,245
(2,417
Stock options exercised
562
11
17
Balance, September 30, 2005
3,332,399
Balance, December 31, 2003
3,326,560
33,265
17,559
13,022
6,132
(209
69,769
Dividends declared, $1.05
(3,486
Treasury Stock acquired (3,000 shares)
(130
Net change in unrealized gain on investments available for sale, net of tax benefit of $1,084
(2,105
897
9
22
Balance, September 30, 2004
3,327,457
33,274
17,581
17,839
4,027
(339
72,382
PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME(UNAUDITED)
Three Months Ended September 30,
(In Thousands)
Net Income
Other comprehensive income:
Net unrealized (losses) gains on available for sale securities
(3,350
4,165
Less: Reclassification adjustment for gain included in net income
Other comprehensive (loss) income before tax
(3,906
3,758
Income tax (benefit) expense related to other comprehensive (loss) income
(1,328
1,278
Other comprehensive (loss) income, net of tax
(2,578
2,480
Comprehensive income
370
5,306
Nine Months Ended September 30,
Net unrealized losses on available for sale securities
(1,808
(1,654
Other comprehensive loss before tax
(3,662
(3,189
Income tax benefit related to other comprehensive (loss)
(1,245
(1,084
Other comprehensive loss, net of tax
6,006
6,198
PENNS WOODS BANCORP, INC.CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED)
OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Provision for loan losses
Accretion and amortization of investment security discounts and premiums
(319
(28
(1,854
(1,535
Originations of loans held for sale
(21,562
(27,785
Proceeds of loans held for sale
22,278
25,913
Earnings on bank-owned life insurance
(475
(270
Other, net
200
718
Net cash provided by operating activities
7,608
6,038
INVESTING ACTIVITIES:
Investment securities available for sale:
Proceeds from sales
109,889
131,196
Proceeds from calls and maturities
10,697
22,104
Purchases
(130,575
(138,020
Investment securities held to maturity:
327
42
(35
(14
Net increase in loans
(6,918
(41,145
Acquisition of bank premises and equipment
(1,636
(474
Proceeds from the sale of foreclosed assets
67
177
Proceeds from redemption of regulatory stock
3,118
2,100
Purchases of regulatory stock
(3,112
(1,895
Investment in limited partnership
(3,124
—
Net cash used in investing activities
(21,302
(25,929
FINANCING ACTIVITIES:
Net increase in interest-bearing deposits
8,351
33,598
Net (decrease) increase in noninterest-bearing deposits
(1,997
5,171
Proceeds of long-term borrowings
10,000
5,000
Repayment of long-term borrowings
(1,400
Net increase (decrease) in short-term borrowings
3,935
(13,596
Dividends paid
Purchase of treasury stock
Net cash provided by financing activities
14,208
26,588
NET INCREASE IN CASH AND CASH EQUIVALENTS
514
6,697
CASH AND CASH EQUIVALENTS, BEGINNING
10,230
CASH AND CASH EQUIVALENTS, ENDING
16,927
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
7,139
6,452
Income taxes paid
2,475
3,250
Transfer of loans to foreclosed assets
386
106
PENNS WOODS BANCORP, INC. AND SUBSIDIARIESNOTES TOCONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
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. All of those adjustments are of a normal, recurring nature. 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, 2004.
The accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis. These policies are presented on pages 9 thru 11 of the 2004 Annual Report and Form 10K with additional policies listed below in Note 2, Significant Accounting Policies.
The M Group (d/b/a Comprehensive Financial Group) Products and Income Recognition
The M Group product line is comprised primarily of annuities, life insurance, and mutual funds. The revenues generated from life insurance sales are commission only as The M Group does not underwrite the policies. Life insurance sales include permanent and term policies with the majority of the policies written being permanent. Term life insurance policies are written for 10, 15, 20, and 30 year terms with the majority of the policies being written for 20 years. None of these products are offered as an integral part of lending activities.
Commissions from the sale of annuities is recognized at the time notice is received from the broker/dealer or an insurance company that the transaction is final, which is also the time a commission check is received. Until this notice is received, the completion of the sale is on hold as the broker/dealer or an insurance company may choose to not accept the application.
Life insurance commissions are recognized at varying points based on the payment option chosen by the consumer. Commissions from monthly and annual payment plans are recognized at the start of each annual period for the life insurance, while quarterly and semi-annual premium payments are recognized quarterly and semi-annually when the earnings process is complete. For example, semi-annual payments on the first of January and July would result in commission recognition on the first of January and July, while payments on the first of January, April, July,
and October would result in commission recognition on those dates. The potential for chargebacks only exists for those policies on a monthly payment plan due to the income being recognized at the beginning of the annual period versus at the time of each monthly payment. No liability is maintained for chargebacks as any chargeback is removed from income at the time of the chargeback.
NOTE 3. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123R). FAS No. 123R revised FAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statement (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recogniz ed over the period that an employee provides service in exchange for the award.
In April, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for FAS No. 123R. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.
In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of FAS No. 123R, and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s financial condition, results of operations, and cash flows.
In December 2004, FASB issued FAS No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply
the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impractical. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS No.154 improves the financial reporting because its requirements enhance the consistency of financial reporting between periods. The provisions of FAS No. 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
NOTE 4. Per Share Data
The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and dilutive per share computation. There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share, therefore, net income as presented on the consolidated statement of income will be used as the numerator.
Weighted average common shares outstanding
3,322,089
3,321,880
3,327,406
Average treasury stock shares
(11,370
(8,000
(10,667
(7,157
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
Additional common stock equivalents (stock options) used to calculate diluted earnings per share
1,745
1,928
3,659
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share
Options to purchase 8,107 shares of common stock at the price of $48.35 were outstanding during the three and nine months ended September 30, 2005 and 8,713 shares of common stock at the price of $48.35 were outstanding for the three and nine months ended September 30, 2004, but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of the end of the quarter.
10
Note 5. Net Periodic Benefit Cost-Defined Benefit Plans
For a detailed disclosure on the Company’s pension and employee benefits plans, please refer to Note 11 of the Company’s Consolidated Financial Statements included in the 2004 Annual Report on Form 10-K.
The following sets forth the components of net periodic benefit cost of the domestic non-contributory defined benefit plans for the three and nine months ended September 30, 2005 and 2004, respectively.
Service cost
125
116
379
349
Interest cost
110
100
335
299
Expected return on plan assets
(112
(81
(302
(245
Amortization of transition obligation
(1
(2
Amortization of prior service cost
19
Amortization of net (gain) loss
16
49
Net periodic cost
144
150
478
451
Employer Contributions
The Company previously disclosed in its consolidated financial statements included in the 2004 Annual Report on Form 10-K that it expected to contribute $575,000 to its defined benefit plan in 2005. However, as of September 30, 2005, contributions of $1,420,000 have been made as the Company determined that contributing an amount above the minimum required was beneficial from a current tax and future financial perspective. Of the contribution $1,100,000 was related to the 2004 pension period. The Company is evaluating the amount, if any, of additional funds to contribute in the final quarter of 2005.
Note 6. Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
Financial instruments whose contract amounts represent credit risk are as follows:
Commitments to extend credit
74,483
54,313
Standby letters of credit
760
Certain comparative amounts for the prior periods have been reclassified to conform to current period presentations. Such reclassifications had no effect on net income or shareholders’ equity.
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 Company wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company’s actual results and could cause the Company’s actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, which the Company must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Company’s organization, compensation and benefit plans; (iii) the effect on the Company’s competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (iv) the effect of changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies.
12
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Comparison of the Three and Nine Months Ended September 30, 2005 and 2004
Summary Results
Net income for the three months ended September 30, 2005 was $2,948,000 compared to $2,826,000 for the same period of 2004. Basic and diluted earnings per share for the three months ended September 30, 2005 were $0.89 as compared to $0.85 for the three months ended September 30, 2004. Return on average assets and return on average equity were 2.12% and 16.54% for the three months ended September 30, 2005 as compared to 2.06% and 16.07% for the corresponding period of 2004. Net income from core operations for the three months ended September 30, 2005, excluding after-tax securities gains of $367,000, increased to $2,581,000 from $2,557,000 for the three months ended September 30, 2004.
The nine months ended September 30, 2005 generated net income of $8,423,000 compared to $8,303,000 for the same period of 2004. Earnings per share, basic and diluted, for the nine months ended September 30, 2005 were $2.54 as compared to $2.50 for the comparable period of 2004. Return on average assets and return on average equity were 2.05% and 14.94% for the nine months ended September 30, 2005 as compared to 2.07% and 15.62% for the corresponding period of 2004. Net income from core operations for the nine months ended September 30, 2005, excluding after-tax securities gains of $1,224,000, declined to $7,199,000 from $7,290,000 for the nine months ended September 30, 2004. (Management uses the non-GAAP measure of net income from core operations in its analysis of the Company’s performance. This measure, as used by the Company, adjusts net income by significant gains or losses that are unusual in nature. Because certain of these items and their impact on the Company’s performance are difficult to predict, management believes the presentation of financial measures excluding the impact of such items provides useful supplemental information in evaluating the operating results of the Company’s core businesses. These disclosures should not be viewed as a substitute for net income determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.)
Interest Income
During the third quarter of 2005, interest and dividend income was $8,113,000, an increase of $189,000 over the same quarter of 2004. The increase in total interest income was primarily the result of growth in average loans of $18,671,000 for the third quarter of 2005 as compared to 2004. Over this time frame the average balance of investment securities declined $10,503,000, while the investment portfolio continued to shift from taxable mortgage-backed securities to tax-exempt municipal bonds. The shift in earning assets increased loan interest and fee income by $349,000 while decreasing interest and dividend income on investment securities by $160,000. On a taxable equivalent basis, the shift in the investment portfolio resulted in an increase of $122,000 in interest and dividend income despite a decline in average balance of $10,503,000.
13
This shift within the investment securities portfolio was undertaken to ladder cash flows, maintain the interest margin, and to invest at the community level. The increase in dividends received is the result of an increase in the level of dividends from the Federal Home Loan Bank of Pittsburgh coupled with an emphasis on purchasing stocks consistently having an above average dividend yield.
During the nine months ended September 30, 2005, interest and dividend income was $23,634,000, an increase of $851,000 over the same period in 2004. The reasons for the 3.7% growth in interest income for the nine month period are identical to those for the three month period discussed above. The growth in average loans of $32,089,000 offset a 7 basis point (bp) decline in the loan yield resulting in an increase of $1,492,000 in loan interest and fee income. Average investment securities declined $21,682,000 causing total investment security interest and dividend income to decline $641,000. The change in the mix of investment securities offset the effect on interest income of the average balance decrease as taxable equivalent interest remained flat at $7,721,000 for the nine month period ended September 30, 2005.
Interest income composition for the three and nine months ended September 30, 2005 and 2004 were as follows:
For The Three Months Ended
September 30, 2005
September 30, 2004
Change
Amount
% Total
72.8
%
70.1
6.3
Investment securities:
11.9
21.4
(731
(43.1
5.3
547
129.6
3.4
3.2
9.4
Total interest income
100.0
189
2.4
For The Nine Months Ended
72.2
68.3
1,492
9.6
14.6
23.2
(1,833
(34.7
9.5
5.0
1,113
98.2
3.7
3.5
79
9.9
851
Interest Expense
Interest expense during the third quarter of 2005 increased $472,000 to $2,701,000 from $2,229,000 for the third quarter of 2004. The increased expense associated with deposits is primarily the result of rate increases for time deposit accounts from the third quarter of 2004 to the corresponding period of 2005. Factors that led to the rate increases include, but are not limited to, prime rate increases, competitive pressure, attracting municipal deposits, and a CD campaign run in conjunction with the opening of the North Atherton Street, State College branch. The increase in CD rates has been greater than the increase in rates related to non-
14
maturity deposits. This has led to some non-maturity accounts being transferred into higher rate CDs. For example, the CD campaign related to the North Atherton Street branch opening witnessed approximately a third of the funds being transferred from non-maturity deposit accounts held with the Company. Short-term borrowing costs increased despite a decrease of $3,218,000 in average balances due to the 200 basis point increase in the prime rate over the past year. This increase affected the rate paid on FHLB overnight borrowings, FHLB short-term borrowings, and the rate paid to cash management customers. Long-term FHLB borrowing expense increased slightly as during the second quarter of 2005 $10 million was borrowed from the FHLB at a fixed rate of 3.97% for 5 years with a final maturity of 10 years. This borrowing replaced the debt that matured at the end of the first quarter of 2005 and was used to pay off a portion of the short-term borrowings.
Interest expense for the nine months ended September 30, 2005 increased $912,000 to $7,407,000 from $6,495,000 for the comparable period of 2004. The majority of the increase, $787,000, occurred during the second ($315,000 increase) and third quarters ($472,000 increase) as discussed above. Total deposits accounted for $607,000 of the increase due to the reasons noted in the above three month analysis. Borrowing costs increased due to the rate increases over the past year as the borrowing average balance remained table for the 2005 and 2004 nine month periods.
Interest expense composition for the three and nine months ended September 30, 2005 and 2004 is as follows:
56.9
55.0
310
25.3
7.4
5.9
68
51.9
35.7
39.1
94
10.8
Total interest expense
472
21.2
56.0
54.6
607
17.1
5.6
178
48.5
36.6
39.8
127
4.9
912
14.0
Net Interest Margin
The net interest margin (NIM) for the three months ended September 30, 2005 was 4.49% as compared to 4.54% for the corresponding period of 2004. The decrease in the NIM was the result of the yield on earning assets increasing 28 basis points (bp) to 6.52% for the three months ended September 30, 2005 as compared to 2004 offset by a 44 bp increase in interest bearing liabilities over the same period. The increase in the yield on earning assets is attributable to a change in the mix of earning assets from taxable investment securities to loans and tax-exempt investment securities. Over the time periods being compared, total average loans, yielding
15
7.10%, increased $18,671,000, while the lower yielding investment securities portfolio, yielding 5.54%, average balance declined $10,503,000. In addition, within the investment portfolio, average tax-exempt investment securities accounted for 46.3% of the portfolio for the three months ended September 30, 2005 as compared to 16.9% during the comparable period of 2004. The NIM impact of the earning asset mix improvement and volume increase in total loans was reduced by rate increases on interest bearing liabilities. The rates paid on deposit accounts increased to 2.04% as compared to 1.62% for the 2004 period. This increase was driven by growth in time deposits of $23,565,000 and an increase in the rate paid on time deposits to 3.06% from 2.58% for the three months ended September 30, 2004. A portion of the increase in volume and rate is due to a CD campaign that was run in conjunction with the opening of the North Atherton Street, State College branch. The campaign was centered on 13 and 17 month term CD’s with rates slightly above market. Short-term borrowings incurred a rate increase of 120 bp to 2.92% for the three months ended September 30, 2005 as the prime rate increased to 6.75% at September 30, 2005.
The NIM for the nine months ended September 30, 2005 was 4.52% as compared to 4.47% for the corresponding period of 2004. The increase in the NIM was the result of the before mentioned growth and change in mix of the earnings assets along with the growth in demand deposits. The NIM increased for the time periods being compared despite the rate paid on interest bearing liabilities increasing 29 bp, while the yield on earning assets increased 25 bp. Offsetting the spread compression was an increase in demand deposits that funded $5,658,000 of the $10,407,000 increase in earning assets.
Following is a schedule of average balances and associated yields for the three and nine month periods ended September 30, 2005 and 2004:
AVERAGE BALANCES AND INTEREST RATES
9/30/2005
9/30/2004
Average Balance
Interest
Average Rate
Tax-exempt loans
7,959
126
6.28
1,446
20
5.49
All other loans
323,952
5,816
7.12
311,794
5,537
7.05
Total loans
331,911
5,942
7.10
313,240
5,557
7.04
Taxable securities
105,186
1,245
4.73
171,440
1,952
4.55
Tax-exempt securities
90,551
1,468
6.48
34,800
639
7.34
Total securities
195,737
2,713
5.54
206,240
2,591
5.03
Total interest-earning assets
527,648
8,655
6.52
519,480
8,148
6.24
28,941
27,588
Total assets
556,589
547,068
Savings
64,786
0.77
71,081
148
0.83
Super Now deposits
50,001
0.84
63,017
0.79
Money market deposits
28,427
109
1.52
35,031
98
1.11
Time deposits
155,144
1,196
3.06
131,579
855
2.58
Total Deposits
298,358
2.04
300,708
1.62
27,069
2.92
30,287
1.72
Other borrowings
4.53
Total borrowings
111,547
1,164
4.14
106,165
1,002
3.74
Total interest bearing liabilities
409,905
2.61
406,873
2.17
Demand deposits
70,472
65,717
4,906
4,137
Shareholders’ equity
71,306
70,341
Interest rate spread
3.91
4.07
Net interest income/margin
5,954
4.49
5,919
4.54
1. Information on this table has been calculated using average daily balance sheets to obtain average balances.
2. Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
3. 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.
4,500
186
5.53
1,385
85
8.21
323,151
16,947
7.01
294,177
15,522
Total Loans
327,651
17,133
6.99
295,562
15,607
7.06
120,425
4,318
4.78
177,572
6,072
4.56
Tax-exempt securitites
67,226
3,403
6.75
31,761
1,717
7.21
187,651
7,721
209,333
7,789
4.96
515,302
24,854
6.44
504,895
23,396
6.19
33,361
29,393
548,663
534,288
65,868
382
0.78
69,776
432
51,680
324
53,868
276
0.69
30,398
306
1.35
35,264
292
144,159
3,139
2.91
130,293
2,544
292,105
1.90
289,201
1.64
28,268
31,683
1.55
79,587
75,403
4.58
107,855
3,256
4.04
107,086
2,951
3.68
399,960
2.48
396,287
2.19
68,547
62,889
4,988
4,252
75,168
70,860
3.97
4.00
17,447
4.52
16,901
4.47
18
The following table presents the adjustment to convert net interest income to net interest income on a fully taxable equivalent basis for the three and nine month periods ended September 30, 2005 and 2004.
For the Three Months Ended
For the Nine Months Ended
Net interest income
Tax equivalent adjustment
542
224
1,220
613
Net interest income (fully taxable equivalent)
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2005 vs 2004
Increase (Decrease)
Due to
Volume
Rate
Net
Interest income:
Loans
328
57
385
1,651
(124
1,527
Taxable investment securities
(781
74
(707
(2,037
283
(1,754
Tax-exempt investment securities
913
(83
830
(116
1,686
460
48
508
1,416
43
1,459
Interest expenses:
Savings deposits
(9
(13
(22
(36
(49
(27
(19
(11
60
Money Market deposits
(20
(43
58
(576
915
339
(113
708
595
(15
84
69
(44
221
99
(4
95
142
(16
Total interest-bearing liabilities
(548
1,021
473
(105
1,018
Change in net interest income
1,008
(973
35
1,521
(975
546
The provision for loan losses is based upon management’s quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management’s consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers
industry standards and trends with respect to non-performing loans and its knowledge and experience with specific lending segments.
Although management believes it uses the best information available to make such determinations and that the allowance for loan losses is adequate at September 30, 2005, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy, employment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions, and reductions in income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank’s loan loss allowance. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.
While determining the appropriate allowance level management has attributed the allowance for loan losses to various portfolio segments; however, the allowance is available for the entire portfolio as needed.
The allowance for loan losses increased from $3,338,000 at December 31, 2004 to $3,492,000 at September 30, 2005. At September 30, 2005, the allowance for loan losses was 1.06% of total loans compared to 1.03% of total loans at December 31, 2004. Management’s conclusion is that the allowance for loan losses is adequate to provide for probable losses inherent in its loan portfolio as of the balance sheet date.
The provision for loan losses totaled $180,000 and $540,000 for the three and nine months ended September 30, 2005 as compared to $165,000 and $315,000 the same periods in 2004. The increases were the result of gross loan growth of $13,920,000, primarily in the commercial category, from September 2004 to September 2005.
An overall decrease of $669,000 was experienced in non-performing loans (non-accrual and 90 days past due) from December 31, 2004 to $1,056,000 at September 30, 2005. The decrease is the result of several commercial loans being brought to current status due to collection efforts along with other commercial loans being reclassified to other real estate owned, which is presented within other assets on the balance sheet.
Based upon this analysis, as well as the others noted above, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in its loan portfolio.
Non-interest Income
Total non-interest income for the quarter ended September 30, 2005 compared to the same period in 2004 increased $329,000. Excluding net security gains, the increase from period to period was $180,000. Bank-owned life insurance income increased $198,000 due to a gain on death benefit of $196,000. The gain is the result of the difference between the cash value of the insurance policy and the actual benefit received. Service charge on deposit accounts increased
due to the implementation of Bounce Protection during May 2005. This product provides overdraft protection up to a predetermined amount to non-commercial customers for a per event fee. The approximate 50% increase in overdraft charges over the 2004 period is attributable to the Bounce Protection program. Insurance commissions decreased as The M Group enters the slower portion of its sales year. The management of The M Group continued to gather new and build upon current relationships during the third quarter of 2005, however, the sales cycle for insurance products can take time to complete. The relationship gathering and building has been facilitated by The M Group’s continued ability to align with other banks and credit unions to serve the needs of their customers. In addition, The M Group has been able to hire additional sales representatives to better cover and expand the current geographic area.
Total non-interest income for the nine months ended September 30, 2005 compared to the same period in 2004 increased $656,000. Excluding net security gains, the increase from period to period was $337,000. Insurance commissions represented the majority of the increase as The M Group continued to expand in terms of customer base and geographic area. The increase in service charge on deposit accounts was driven by the implementation of Bounce Protection during May 2005 as noted above. The increase in bank-owned life insurance was the result of the previously noted gain on death benefit recognized during the third quarter of 2005.
Non-interest income composition for the three and nine months ended September 30, 2005 and 2004 were as follows:
Service charge on deposit accounts
26.8
25.5
113
22.6
Net security gains
24.3
20.8
149
Bank owned life insurance
12.6
4.6
198
220.0
22.2
32.6
(20.4
Other income
14.1
16.5
(0.3
Total non-interest income
329
16.8
23.9
24.8
7.1
27.7
25.4
319
4.5
205
75.9
26.9
29.7
0.3
14.4
15.6
2.1
656
10.9
Non-interest Expenses
Total non-interest expenses increased $313,000 from the three months ended September 30, 2004 as compared to the same period of 2005. The increase in salaries and employee benefits was attributable to several items including; standard cost of living salary increases for employees, staffing for the new State College branch, and increased accruals related to incentive
21
and bonus payments. Occupancy expenses increased due to the new branch opened in May 2005 and due to general increases in utility costs, property taxes, and depreciation. Other expenses increased primarily due to normal increases in business expenses and expenses surrounding the opening of the new branch.
Total non-interest expenses increased $895,000 from the nine months ended September 30, 2004 as compared to the same period of 2005. As noted in the three month discussion, the new State College branch impacted the level of non-interest expenses. In addition, normal increases in business expenses aided the increase in occupancy and other expenses. Furniture and equipment expenses declined as amortization of software and maintenance on equipment declined as compared to the 2004 period.
Non-interest expense composition for the three and nine months ended September 30, 2005 and 2004 was as follows:
55.7
55.5
182
9.3
6.8
6.6
13.0
Furniture and equipment expenses
6.9
6.4
36
15.9
Pennsylvania shares tax
3.6
Other expense
27.0
6.0
Total non-interest expense
313
8.9
55.8
510
8.8
6.7
134
19.0
(0.6
40
10.6
215
7.6
895
8.6
Provision for Income Taxes
Income taxes decreased $404,000 and $645,000 for the three and nine month periods ended September 30, 2005 compared to the same periods of 2004. The effective tax rate for the three months ended September 30, 2005 and 2004 were 20.2% and 28.9%, respectively. The nine months ended September 30, 2005 had an effective tax rate of 23.8% as compared to 28.3% for the comparable period of 2004. The decreasing effective tax rate is consistent with management’s repositioning of the investment portfolio from taxable investment securities to tax-exempt investment securities. In addition, increased bank-owned life insurance related to a gain on death benefit aided in reducing the effective tax rate for the three and nine month periods of 2005.
Cash and cash equivalents increased $514,000 from $12,626,000 at December 31, 2004. The increase was the result of an increase in the cash letter (items in process of clearing between the bank and other financial institutions).
The allocation of the loan portfolio, by category, as of September 30, 2005 and December 31, 2004 are presented below:
Commercial and agricultural
35,093
30,103
Real estate mortgage:
Residential
149,150
147,461
Commercial
120,410
123,757
Construction
10,040
8,364
Installment loans to individuals
16,983
15,915
Less: Net deferred loan fees
1,025
1,096
Gross loans
324,504
Investments
Total investment securities increased $7,584,000 as deposit growth in excess of loan growth was invested in tax-exempt investment securities. Since December 31, 2004, tax-exempt bond holdings have increased $44,394,000 as the cash flows from mortgage-backed investment securities funded the increase. The growth in tax-exempt investment securities was undertaken to maintain tax equivalent yield, liquidity, provide call option protection, reduce the overall corporate effective tax rate, and to invest in communities across the Commonwealth of Pennsylvania and the country.
During the nine months ended September 30, 2005, $1,854,000 in net security gains were recognized from the $6,563,000 in net unrealized gains at December 31, 2004 for the available for sale investment portfolio. The bond portfolio incurred a net realized gain of $45,000 as the portfolio was shifted slightly in light of the current rising rate environment and the desire to increase the use of the investment portfolio as a vehicle to manage the corporate tax rate. The equity portfolio had recognized gains of $1,809,000 during the nine months ended September 30,
23
2005. The gains were the result of management’s intention to diversify, increase dividend yield, or to reduce ownership in companies that management felt had reached their full potential.
The amortized cost of investment securities and their approximate fair values are as follows:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Available for Sale (AFS)
U.S. Government and agency securities
66,947
(1,063
65,908
State and political securities
94,951
1,929
(490
96,390
Other debt securities
1,381
(12
1,393
Total debt securities
163,279
1,977
(1,565
163,691
Equity securities
25,860
3,070
(582
28,348
Total Investment Securities AFS
189,139
5,047
(2,147
Held to Maturity (HTM)
237
210
Total Investment Securities HTM
241
December 31, 2004
104,248
207
(430
104,025
46,829
766
(527
47,068
1,302
47
(7
1,342
152,379
1,020
(964
152,435
25,221
6,579
(72
31,728
177,600
7,599
(1,036
248
251
561
The increase in other assets of $9,158,000 since December 31, 2004 is the result of two events. During September 2004, an investment in a low income housing complex was undertaken as part of the company’s reinvestment into the community and for corporate tax planning purposes. The $3,124,000 investment will generate federal income tax credits for 10 years beginning when the complex reaches 95% occupancy. The majority of the remaining increase is the result of a receivable in the amount $4,960,000 related to investment portfolio trades that were initiated during September 2005 but did not settle until October 2005.
At September 30, 2005, total deposits were $363,190,000, an increase of $6,354,000 from December 31, 2004. Non-time deposits decreased $20,895,000 from December 31, 2004 with the decrease occurring in all non-time deposit account categories. The increase in time deposits of $27,249,000 is the result of a combination of a CD gathering campaign run in conjunction with the Atherton Street, State College branch opening, transfer of funds from non-time to time deposit accounts, and the obtainment of municipal funds which mature in under a year.
19.8
(2.7
)%
NOW Accounts
49,064
13.5
55,211
15.5
(6,147
(11.1
Insured MMDA
26,757
32,377
9.1
(5,620
(17.4
62,676
17.3
69,807
19.6
(7,131
(10.2
152,640
42.0
125,391
35.0
27,249
21.7
6,354
1.8
Total borrowed funds increased to $124,888,000 at September 30, 2005 as compared to December 31, 2004. The increase in short-term borrowings are being utilized to supplement deposits in the day to day funding of the loan portfolio and normal operations. Long-term borrowings were utilized to replace maturing long-term advances, while locking in a competitive rate in advance of projected rate increases.
September 30
December 31
Short-term borrowings:
FHLB repurchase agreements
5,465
22,630
Short-term borrowings, FHLB
19,855
Securities sold under agreement to repurchase
15,090
13,845
Total short-term borrowings
Long-term borrowings, FHLB
Total borrowed funds
124,888
112,353
25
Capital ratios as of September 30, 2005 and 2004 were as follows:
Ratio
Total Capital (to Risk-weighted Assets)
Actual
73,683
21.0
71,225
22.1
For Capital Adequacy Purposes
28,130
8.0
25,768
To Be Well Capitalized
35,162
10.0
32,210
Tier I Capital (to Risk-weighted Assets)
69,071
65,286
20.3
14,065
4.0
12,884
21,097
19,326
Tier I Capital (to Average Assets)
12.1
22,008
21,655
27,510
27,068
26
The following liquidity measures are monitored for compliance within the limits cited.
1. Net Loans to Total Assets, 70% maximum
2. Net Loans to Total Deposits, 92.5% maximum
3. Net Loans to Core Deposits, 100% maximum
4. Investments to Total Assets, 40% maximum
5. Investments to Total Deposits, 50% maximum
6. Total Liquid Assets to Total Assets, 25% minimum
7. Total Liquid Assets to Total Liabilities, 25% minimum
8. Net Core Funding Dependence, 35% maximum
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 shareholders. 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.
The Bank, like other financial institutions, must have sufficient funds available to meet its liquidity needs for deposit withdrawals, loan commitments, and expenses. In order to control cash flow, the Bank estimates future flows of cash from deposits, loan payments, and investment security payments. The primary sources of funds are deposits, principal and interest payments on loans and investment securities, as well as Federal Home Loan Bank borrowings. Funds generated are used principally to fund loans and purchase investment securities. Management believes the Company has adequate resources to meet its normal funding requirements.
Management monitors the Company’s liquidity on both a long and short-term basis, thereby providing management necessary information to react to current balance sheet trends. Cash flow needs are assessed and sources of funds are determined. Funding strategies consider both
customer needs and economical cost. Both short and long-term funding needs are addressed by maturities and sales of available for sale investment securities, loan repayments and maturities, and liquidating money market investments such as federal funds sold. The use of these resources, in conjunction with access to credit provides core ingredients to satisfy depositor, borrower, and creditor needs.
Management monitors and determines the desirable level of liquidity. Consideration is given to loan demand, investment opportunities, deposit pricing and growth potential, as well as the current cost of borrowing funds. The Company has a current borrowing capacity at the Federal Home Loan Bank of $206,685,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $25,500,000. Management believes that it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. Federal Home Loan Bank advances totaled $109,798,000 as of September 30, 2005.
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 an asset/liability management policy which incorporates a market value at risk calculation which is used to determine the effects of interest rate movements on shareholders’ equity and a simulation analysis to monitor the effects of interest rate changes on the Company’s balance sheets.
There have been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s Form 10-K for the period ended December 31, 2004.
Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.
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 Company’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.
28
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Market risk for the Company is comprised primarily from interest rate risk exposure and liquidity risk. Interest rate risk and liquidity risk management is performed at the Bank level as well as the Company level. The Company’s interest rate sensitivity is monitored by management through selected interest rate risk measures produced by an independent third party. There have been no substantial changes in the Company’s GAP analyses or simulation analyses compared to the information provided in the Company’s SEC 10-K for the period ended December 31, 2004. Additional information and details are provided in the Liquidity and Interest Rate Sensitivity section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
An analysis was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2005. There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
The Company announced a repurchase program on August 10, 2000 which was approved by the Board of Directors on August 8, 2000 for the repurchase of 171,600 shares which was set to expire on August 8, 2005. However, on July 27, 2005, the Company announced that the Board of Directors had elected to extend the terms of the repurchase program by one year with a new expiration date of August 8, 2006. During the three months ended September 30, 2005 there were 2,500 shares repurchased as part of the repurchase program.
Total
Average
Total Number of
Maximum Number (or
Number of
Price Paid
Shares (or Units)
Approximate Dollar Value)
Shares (or
per Share
Purchased as Part of
of Shares (or Units) that
Units)
(or Units)
Publicly Announced
May Yet Be Purchased
Period
Purchased
Plans or Programs
Under the Plans or Programs
July 1, 2005 to July 31, 2005
49,809
August 1, 2005 to August 31, 2005
2,500
46.00
September 1, 2005 to September 30, 2005
None
On October 25, 2005 the Board of Directors declared a 6 for 5 stock split. The split will increase shares outstanding by 20% or approximately 663,917 shares. Total outstanding shares after the split will total approximately 3,983,506. The split is payable November 18, 2005 to shareholders of record November 4, 2005. Cash will be paid in lieu of fractional shares.
(3) (i)
Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-4, No. 333-65821).
(3) (ii)
Bylaws of the Registrant as presently in effect (incorporated by reference to Exhibit 3 (ii) of the Registrant’s current report on Form 8-K filed June 17, 2005.
(10) (i)
Consulting Agreement, dated July 15, 2005, between Hubert A. Valencik and the Registrant (incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed on July 18, 2005).
(31) (i)
Rule 13a-14(a) Certification of Chief Executive Officer
(31) (ii)
Rule 13a-14(a) Certification of Principal Financial Officer
(32) (i)
Certification of Chief Executive Officer Section 1350
(32) (ii)
Certification of Principal Financial Officer Section 1350
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.
(Registrant)
Date:
November 8, 2005
/s/ Ronald A. Walko
Ronald A. Walko, President and Chief Executive Officer
/s/ Brian L. Knepp
Brian L. Knepp, Vice President of Finance (PrincipalFinancial Officer)
EXHIBIT INDEX
Exhibit 31(i)
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer
Exhibit 31(ii)
Rule 13a-14(a)/Rule 15d-14(a) Certification of Principal Financial Officer
Exhibit 32(i)
Section 1350 Certification of Chief Executive Officer
Exhibit 32(ii)
Section 1350 Certification of Principal Financial Officer