UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2006,

 

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.)

 

 

 

300 Market Street, Williamsport, Pennsylvania

 

17701-0967

(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 x

 

NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES o

 

NO x

 

On August 1, 2006 there were 3,931,787 of the Registrant’s common stock outstanding.

 

 



 

PENNS WOODS BANCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

Consolidated Balance Sheet (unaudited) as of June 30, 2006 and December 31, 2005

 

 

 

 

Consolidated Statement of Income (unaudited) for the Three and Six Months ended June 30, 2006 and 2005

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months ended June 30, 2006 and 2005

 

 

 

 

Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months ended June 30, 2006 and 2005

 

 

 

 

Consolidated Statement of Cash Flows (unaudited) for the Six Months ended June 30, 2006 and 2005

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

Item 4.

Controls and Procedures

 

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

Item 1A.

Risk Factors

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3.

Defaults Upon Senior Securities

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

Item 5.

Other Information

 

Item 6.

Exhibits

 

Signatures

 

Exhibit Index and Exhibits

 

 

2



 

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

June 30,

 

December 31,

 

(In Thousands, Except Share Data)

 

2006

 

2005

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Noninterest-bearing balances

 

$

14,181

 

$

14,065

 

Interest-bearing deposits in other financial institutions

 

27

 

25

 

Total cash and cash equivalents

 

14,208

 

14,090

 

 

 

 

 

 

 

Investment securities, available for sale, at fair value

 

180,553

 

187,018

 

Investment securities held to maturity (fair value of $284 and $238)

 

281

 

265

 

Loans held for sale

 

5,777

 

3,545

 

Loans

 

346,569

 

338,438

 

Less: Allowance for loan losses

 

3,995

 

3,679

 

Loans, net

 

342,574

 

334,759

 

Premises and equipment, net

 

6,605

 

6,409

 

Accrued interest receivable

 

2,649

 

2,828

 

Bank-owned life insurance

 

10,896

 

10,718

 

Investment in limited partnerships

 

4,988

 

3,549

 

Goodwill

 

3,032

 

3,032

 

Other assets

 

4,742

 

2,455

 

TOTAL ASSETS

 

$

576,305

 

$

568,668

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Interest-bearing deposits

 

$

302,634

 

$

281,150

 

Noninterest-bearing deposits

 

74,310

 

71,379

 

Total deposits

 

376,944

 

352,529

 

 

 

 

 

 

 

Short-term borrowings

 

40,925

 

54,003

 

Long-term borrowings, Federal Home Loan Bank (FHLB)

 

82,878

 

84,478

 

Accrued interest payable

 

1,171

 

1,108

 

Other liabilities

 

2,755

 

2,631

 

TOTAL LIABILITIES

 

504,673

 

494,749

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Common stock, par value $8.33, 10,000,000 shares authorized; 4,002,159 shares issued

 

33,351

 

33,351

 

Additional paid-in capital

 

17,772

 

17,772

 

Retained earnings

 

24,471

 

22,938

 

Accumulated other comprehensive income (loss)

 

(1,273

)

850

 

Less: Treasury stock at cost, 70,372 and 26,372 shares

 

(2,689

)

(992

)

TOTAL SHAREHOLDERS’ EQUITY

 

71,632

 

73,919

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

576,305

 

$

568,668

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands, Except Per Share Data)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

Loans including fees

 

$

6,086

 

$

5,455

 

$

11,895

 

$

10,739

 

Investment Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

896

 

1,214

 

1,819

 

2,478

 

Tax-exempt

 

1,000

 

688

 

1,989

 

1,277

 

Dividend

 

365

 

297

 

666

 

595

 

TOTAL INTEREST AND DIVIDEND INCOME

 

8,347

 

7,654

 

16,369

 

15,089

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

1,968

 

1,420

 

3,805

 

2,614

 

Short-term borrowings

 

509

 

144

 

915

 

346

 

Long-term borrowings, FHLB

 

944

 

893

 

1,890

 

1,746

 

TOTAL INTEREST EXPENSE

 

3,421

 

2,457

 

6,610

 

4,706

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

4,926

 

5,197

 

9,759

 

10,383

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

198

 

180

 

396

 

360

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

4,728

 

5,017

 

9,363

 

10,023

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

Deposit service charges

 

587

 

536

 

1,177

 

991

 

Securities gains, net

 

265

 

687

 

824

 

1,298

 

Bank-owned life insurance

 

90

 

93

 

178

 

187

 

Gain on sale of loans

 

210

 

178

 

360

 

368

 

Insurance commissions

 

670

 

652

 

1,230

 

1,295

 

Other

 

394

 

329

 

784

 

643

 

TOTAL NON-INTEREST INCOME

 

2,216

 

2,475

 

4,553

 

4,782

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,214

 

2,135

 

4,446

 

4,129

 

Occupancy, net

 

275

 

286

 

518

 

577

 

Furniture and equipment

 

288

 

234

 

585

 

455

 

Pennsylvania shares tax

 

151

 

140

 

296

 

279

 

Other

 

1,150

 

1,054

 

2,184

 

2,004

 

TOTAL NON-INTEREST EXPENSE

 

4,078

 

3,849

 

8,029

 

7,444

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAX PROVISION

 

2,866

 

3,643

 

5,887

 

7,361

 

INCOME TAX PROVISION

 

432

 

883

 

998

 

1,886

 

NET INCOME

 

$

2,434

 

$

2,760

 

$

4,889

 

$

5,475

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

 

$

0.63

 

$

0.70

 

$

1.25

 

$

1.38

 

EARNINGS PER SHARE - DILUTED

 

$

0.63

 

$

0.70

 

$

1.25

 

$

1.38

 

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC

 

3,879,052

 

3,973,988

 

3,923,923

 

3,973,756

 

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED

 

3,879,539

 

3,976,255

 

3,924,409

 

3,976,179

 

DIVIDENDS PER SHARE

 

$

0.43

 

$

0.38

 

$

0.85

 

$

0.76

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



 

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 (LOSS)

 

STOCK

 

EQUITY

 

Balance, December 31, 2005

 

4,002,159

 

$

33,351

 

$

17,772

 

$

22,938

 

$

850

 

$

(992

)

$

73,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

4,889

 

 

 

 

 

4,889

 

Net change in unrealized gain (loss) on investments available for sale, net of tax benefit of $1,094

 

 

 

 

 

 

 

 

 

(2,123

)

 

 

(2,123

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,766

 

Dividends declared, ($0.85 per share)

 

 

 

 

 

 

 

(3,356

)

 

 

 

 

(3,356

)

Purchase of treasury stock (44,000 shares)

 

 

 

 

 

 

 

 

 

 

 

(1,697

)

(1,697

)

Balance, June 30, 2006

 

4,002,159

 

$

33,351

 

$

17,772

 

$

24,471

 

$

(1,273

)

$

(2,689

)

$

71,632

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

COMMON

 

ADDITIONAL

 

 

 

OTHER

 

 

 

TOTAL

 

 

 

STOCK

 

PAID-IN

 

RETAINED

 

COMPREHENSIVE

 

TREASURY

 

SHAREHOLDERS’

 

 

 

SHARES

 

AMOUNT

 

CAPITAL

 

EARNINGS

 

INCOME

 

STOCK

 

EQUITY

 

Balance, December 31, 2004

 

3,998,204

 

$

33,318

 

$

17,700

 

$

18,262

 

$

4,331

 

$

(446

)

$

73,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

5,475

 

 

 

 

 

5,475

 

Net change in unrealized gain on investments available for sale, net of tax of $83

 

 

 

 

 

 

 

 

 

161

 

 

 

161

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

5,636

 

Dividends declared, ($0.76 per share)

 

 

 

 

 

 

 

(3,023

)

 

 

 

 

(3,023

)

Stock options exercised

 

674

 

6

 

11

 

 

 

 

 

 

 

17

 

Balance, June 30, 2005

 

3,998,878

 

$

33,324

 

$

17,711

 

$

20,714

 

$

4,492

 

$

(446

)

$

75,795

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(In Thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

2,434

 

$

2,760

 

$

4,889

 

$

5,475

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on available for sale securities

 

(3,581

)

4,695

 

(2,393

)

1,542

 

Less: Reclassification adjustment for net gains included in net income

 

265

 

687

 

824

 

1,298

 

Other comprehensive income (loss) before tax

 

(3,846

)

4,008

 

(3,217

)

244

 

Income tax expense (benefit) related to other comprehensive income (loss)

 

(1,308

)

1,363

 

(1,094

)

83

 

Other comprehensive income (loss), net of tax

 

(2,538

)

2,645

 

(2,123

)

161

 

Comprehensive income (loss)

 

$

(104

)

$

5,405

 

$

2,766

 

$

5,636

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



 

PENNS WOODS BANCORP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

Six Months Ended

 

 

 

June 30,

 

(In Thousands)

 

2006

 

2005

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net Income

 

$

4,889

 

$

5,475

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

176

 

271

 

Provision for loan losses

 

396

 

360

 

Accretion and amortization of investment security discounts and premiums

 

(381

)

(202

)

Securities gains, net

 

(824

)

(1,298

)

Originations of loans held for sale

 

(17,466

)

(14,395

)

Proceeds of loans held for sale

 

15,594

 

15,314

 

Gain on sale of loans

 

(360

)

(368

)

Increases in bank-owned life insurance

 

(178

)

(187

)

Other, net

 

(641

)

546

 

Net cash provided by operating activities

 

1,205

 

5,516

 

INVESTING ACTIVITIES

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

Proceeds from sales

 

19,680

 

88,475

 

Proceeds from calls and maturities

 

3,702

 

9,824

 

Purchases

 

(19,045

)

(110,693

)

Investment securities held to maturity:

 

 

 

 

 

Proceeds from calls and maturities

 

 

325

 

Purchases

 

 

(35

)

Net increase in loans

 

(8,262

)

(3,697

)

Acquisition of bank premises and equipment

 

(372

)

(1,240

)

Proceeds from the sale of foreclosed assets

 

61

 

67

 

Investment in limited partnership

 

(1,535

)

 

Net cash used for investing activities

 

(5,771

)

(16,974

)

FINANCING ACTIVITIES

 

 

 

 

 

Net increase in interest-bearing deposits

 

21,484

 

27,401

 

Net increase (decrease) in noninterest-bearing deposits

 

2,931

 

(1,963

)

Proceeds of long-term borrowings

 

 

10,000

 

Repayment of long-term borrowings

 

(1,600

)

(1,400

)

Net decrease in short-term borrowings

 

(13,078

)

(15,230

)

Dividends paid

 

(3,356

)

(3,023

)

Stock options exercised

 

 

17

 

Purchase of treasury stock

 

(1,697

)

 

Net cash provided by financing activities

 

4,684

 

15,802

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

118

 

4,344

 

CASH AND CASH EQUIVALENTS, BEGINNING

 

14,090

 

12,626

 

CASH AND CASH EQUIVALENTS, ENDING

 

$

14,208

 

$

16,970

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

6,547

 

$

4,506

 

Income taxes paid

 

2,000

 

2,050

 

Transfer of loans to foreclosed assets

 

51

 

126

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



 

PENNS WOODS BANCORP, INC. AND SUBSIDIARIES

NOTES TO

CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Basis of Presentation

 

The consolidated financial statements include the accounts of Penns Woods Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries: Woods Investment Company, Inc., Woods Real Estate Development Company, Inc., and Jersey Shore State Bank (the “Bank”) and its wholly-owned subsidiary The M Group, Inc. D/B/A The Comprehensive Financial Group (“The M Group”). All significant inter-company balances and transactions have been eliminated in the consolidation.

 

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, 2005.

 

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 38 thru 43 of the Annual Report on Form 10-K for the year ended December 31, 2005.

 

Note 2. Recent Accounting Pronouncements

 

In June 2006, the FASB issued staff position FIN 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

In April 2006, the FASB issued Staff Position FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)”(Staff Position FIN 46(R)-6). This staff position addresses how an entity should determine the variability to be considered in applying FASB Interpretation No. FIN 46(R) (FIN 46). The variability that is to be considered in applying FIN 46 affects the determination of (a) whether the entity is a variable interest entity (VIE), (b) which interests are “variable interests” in the entity and (c) which party, if any is the primary beneficiary of the VIE. The requirements prescribed by this staff position are to be applied prospectively for all new arrangements at the commencement of the first reporting period that begins after June 15, 2006, or July 1, 2006 for the Company. The new requirements need not be applied to entities that have previously been analyzed under FIN 46 unless a

 

7



 

reconsideration event occurs. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

 

Note 3. 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.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

3,941,787

 

3,986,360

 

3,975,787

 

3,986,128

 

 

 

 

 

 

 

 

 

 

 

Average treasury stock shares

 

(62,735

)

(12,372

)

(51,864

)

(12,372

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and common stock equivalents used to calculate basic earnings per share

 

3,879,052

 

3,973,988

 

3,923,923

 

3,973,756

 

 

 

 

 

 

 

 

 

 

 

Additional common stock equivalents (stock options) used to calculate diluted earnings per share

 

487

 

2,267

 

486

 

2,423

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share

 

3,879,539

 

3,976,255

 

3,924,409

 

3,976,179

 

 

Options to purchase 8,999 shares and 9,728 shares of common stock at the price of $40.29 were outstanding during the three and six months ended June 30, 2006 and 2005, respectively, 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 June 30, 2006 and 2005, respectively.

 

Note 4. 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 2005 Annual Report on Form 10-K.

 

The following sets forth the components of the net periodic benefit cost of the domestic non-contributory defined benefit plan for the three and six months ended June 30, 2006 and 2005, respectively.

 

8



 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands)

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

117

 

$

127

 

$

232

 

$

252

 

Interest cost

 

108

 

112

 

217

 

223

 

Expected return on plan assets

 

(121

)

(101

)

(242

)

(201

)

Amortization of transition

 

 

 

(1

)

(1

)

Amortization of prior service cost

 

6

 

6

 

13

 

13

 

Amortization of net loss

 

6

 

16

 

11

 

33

 

Net periodic cost

 

$

116

 

$

160

 

$

230

 

$

319

 

 

Employer Contributions

 

The Company previously disclosed in its consolidated financial statements, included in the 2005 Annual Report on Form 10-K, that it expected to contribute $500,000 to its defined benefit plan in 2006. As of June 30, 2006, there were no contributions made for the 2006 plan year. This is the result of the contributions made during 2005 being above the required minimum in order to benefit from a current tax and future financial perspective and an increase in the market value of plan assets. In effect, the excess 2005 contributions eliminated the requirement for minimum funding during 2006. The Company, however, is evaluating the amount, if any, of funds to contribute during the remainder of 2006.

 

Note 5. 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 are primarily comprised of 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.

 

Outstanding financial instruments with off balance sheet risk are as follows:

 

 

 

June 30,

 

December 31,

 

(In Thousands)

 

2006

 

2005

 

Commitments to extend credit

 

$

78,480

 

$

72,583

 

Standby letters of credit

 

1,377

 

2,193

 

 

9



 

Note 6. Reclassification of Comparative Amounts

 

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.

 

Note 7. Stock Split

 

During the fourth quarter of 2005 the Company initiated a 6 for 5 stock split. Previously reported share and per share amounts have been adjusted to reflect the split.

 

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.

 

10



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

EARNINGS SUMMARY

 

Comparison of the Three and Six Months Ended June 30, 2006 and 2005

 

Summary Results

 

Net income for the three months ended June 30, 2006 was $2,434,000 compared to $2,760,000 for the same period of 2005. Basic and diluted earnings per share for the three months ended June 30, 2006 were $0.63 as compared to $0.70 for the three months ended June 30, 2005. Return on average assets and return on average equity were 1.70% and 13.34% for the three months ended June 30, 2006 as compared to 2.02% and 14.81% for the corresponding periods of 2005. Net income from core operations for the three months ended June 30, 2006 and 2005, excluding after-tax net securities gains of $175,000 and $453,000, respectively, were $2,259,000 and $2,307,000.

 

The six months ended June 30, 2006 generated net income of $4,889,000 compared to $5,475,000 for the same period of 2005. Earnings per share, basic and diluted, for the six months ended June 30, 2006 were $1.25 as compared to $1.38 for the comparable periods of 2005. Return on average assets and return on average equity were 1.71% and 13.12% for the six months ended June 30, 2006 as compared to 2.02% and 14.68% for the corresponding period of 2005. Net income from core operations for the six months ended June 30, 2006, excluding after-tax securities gains of $544,000, declined to $4,345,000 from $4,618,000 for the six months ended June 30, 2005. (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

 

Interest income for the three months ended June 30, 2006 increased $693,000 to $8,347,000 as compared to $7,654,000 for the same period of 2005. The increase in total interest income was primarily the result of growth in average loans of $24,839,000 for the three months ended June 30, 2006 as compared to 2005. The average loan growth and a 27 basis point increase in loan portfolio yields accounted for $631,000 of the total interest income growth. Over this time frame the average balance of investment securities increased $3,173,000. The average investment portfolio growth coupled with a shift to tax-exempt municipal bonds resulted in interest income from the investment portfolio increasing $62,000. On a taxable equivalent basis the interest income from the investment portfolio increased by $223,000. The shift within the investment

 

11



 

securities portfolio was strategically designed to ladder cash flows and to enhance management’s ability to manage the net interest margin. 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 six months ended June 30, 2006, interest and dividend income was $16,369,000, an increase of $1,280,000 over the same period in 2005. The reasons for the 8.5% growth in interest income for this six month period are identical to those for the three month period ending June 30, 2006 discussed above. The growth in average loans of $20,593,000 coupled with a 31 basis point increase in the loan portfolio yield resulted in an increase of $1,156,000 in loan interest and fee income. Average investment securities increased to $186,719,000 resulting in interest income on the investment portfolio increasing $124,000 when compared to June 30, 2005, which resulted in taxable equivalent interest income increasing $491,000.

 

Interest income composition for the three and six months ended June 30, 2006 and 2005 were as follows:

 

 

 

For The Three Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Loans including fees

 

$

6,086

 

72.9

%

$

5,455

 

71.2

%

$

631

 

11.6

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

896

 

10.7

 

1,214

 

15.9

 

(318

)

(26.2

)

Tax-exempt

 

1,000

 

12.0

 

688

 

9.0

 

312

 

45.3

 

Dividend

 

365

 

4.4

 

297

 

3.9

 

68

 

22.9

 

Total interest and dividend income

 

$

8,347

 

100.0

%

$

7,654

 

100.0

%

$

693

 

9.1

%

 

 

 

For The Six Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Loans including fees

 

$

11,895

 

72.7

%

$

10,739

 

71.2

%

$

1,156

 

10.8

%

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,819

 

11.1

 

2,478

 

16.4

 

(659

)

(26.6

)

Tax-exempt

 

1,989

 

12.1

 

1,277

 

8.5

 

712

 

55.8

 

Dividend

 

666

 

4.1

 

595

 

3.9

 

71

 

11.9

 

Total interest and dividend income

 

$

16,369

 

100.0

%

$

15,089

 

100.0

%

$

1,280

 

8.5

%

 

Interest Expense

 

Interest expense for the three months ended June 30, 2006 increased $964,000 to $3,421,000 as compared to $2,457,000 for the same period of 2005. The increased expense associated with deposits is primarily the result of rate increases for time deposits, which are comprised of various certificates of deposit (“CD”) accounts, from the three months ended June 30, 2005 to the corresponding period of 2006. Factors that led to the rate increases include, but are not limited to, several period prime rate increases, competitive market pricing pressure, and attracting new deposit customers while retaining existing accounts. The increase in CD interest rates has

 

12



 

exceeded the increase for other deposit accounts. This has led to a shift of a portion of the money market and savings deposit portfolios into higher yielding CDs.

 

Short-term borrowing costs increased as a direct result of the prime rate increases over the past year and an increase in the average balance of $23,227,000. This increase in short-term borrowings was utilized to fund earning asset growth for the three months ended June 30, 2006 as compared to the same period of 2005. Long-term FHLB borrowing expense increased due to $10,000,000 that was borrowed from the FHLB during the latter portion of the second quarter of 2005. The advance was at a fixed rate of 3.97% for 5 years with a final maturity of 10 years and is responsible for the increase in long-term interest expense.

 

Interest expense for the six months ended June 30, 2006 increased $1,904,000 to $6,610,000 from $4,706,000 for the comparable period of 2005. Interest on deposits accounted for $1,191,000 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 and increased average borrowings that were used to fund the growth in average earning assets.

 

Interest expense composition for the three and six months ended June 30, 2006 and 2005 were as follows:

 

 

 

For The Three Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposits

 

$

1,968

 

57.5

%

$

1,420

 

57.8

%

$

548

 

38.6

%

Short-term borrowings

 

509

 

14.9

 

144

 

5.9

 

365

 

253.5

 

Long-term borrowings

 

944

 

27.6

 

893

 

36.3

 

51

 

5.7

 

Total interest expense

 

$

3,421

 

100.0

%

$

2,457

 

100.0

%

$

964

 

39.2

%

 

 

 

For The Six Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposits

 

$

3,805

 

57.6

%

$

2,614

 

55.5

%

$

1,191

 

45.6

%

Short-term borrowings

 

915

 

13.8

 

346

 

7.4

 

569

 

164.5

 

Long-term borrowings

 

1,890

 

28.6

 

1,746

 

37.1

 

144

 

8.2

 

Total interest expense

 

$

6,610

 

100.0

%

$

4,706

 

100.0

%

$

1,904

 

40.5

%

 

Net Interest Margin

 

The net interest margin (“NIM”) for the three months ended June 30, 2006 was 4.12% as compared to 4.41% for the corresponding period of 2005. The decrease in the NIM was the result of the yield on earning assets increasing 33 basis points (“bp”) to 6.69% for the three months ended June 30, 2006, as compared to 2005, however, interest bearing liabilities increased 72 bp over the same period. The increase in the yield on earning assets is attributable to a change in the mix of earning assets as previously discussed in the Interest Income section of this Earnings Summary. The average tax-exempt investment securities portfolio grew by $29,124,000, the direct result of a shift in investment strategy which also resulted in a decline in

 

13



 

taxable investment securities of $25,951,000. The average loan growth of $24,839,000 was predominately comprised of commercial real estate loans. The yield on total loans increased to 7.04% from 6.77% due to the impact of the Federal Open Market Committee rate increases enacted over the past year. The investment portfolio yield increased to 6.01% from 5.63% primarily from the previously noted shift in the portfolio to tax-exempt investments. The average interest rates paid on deposit accounts increased to 2.66% as compared to 1.93% for the 2005 period. This increase was driven by growth in average time deposits of $16,386,000 and an increase in the rate paid on time deposits of 87 bp. A portion of the increase in deposit volume and the average interest yield paid is due to several CD promotions during the past year to attract new customers while retaining existing customers. The promotions were designed to gather deposits that would have maturities of two years or less. In addition, the promotions served as a catalyst to cross sell other deposit products and to implement management’s strategy regarding the CD portfolio allocation among various maturities and therefore, reducing the concentration of time deposit maturities within any single month.

 

Short-term borrowings realized an increase of 188 bp in interest rates charged for the three months ended June 30, 2006. The prime rate increased to 8.25% at June 30, 2006 from 6.25% at June 30, 2005, as further evidence of the correlation between the Company’s primary source of borrowed funds, the FHLB, and the primary lending rate indicator used on a national basis.

 

The NIM for the six months ended June 30, 2006 was 4.10% as compared to 4.39% for the corresponding period of 2005. The decrease in the NIM was the result of the before mentioned growth and change in mix of the earnings assets offset by increased rates paid on interest bearing liabilities and growth in total borrowings of $20,360,000.

 

Following is a schedule of average balances and associated yields for the three and six month periods ended June 30, 2006 and 2005:

 

14



 

 

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

(In Thousands)

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

7,887

 

$

123

 

6.26

%

$

4,119

 

$

35

 

3.41

%

All other loans

 

341,091

 

6,005

 

7.06

%

320,020

 

5,432

 

6.81

%

Total loans

 

348,978

 

6,128

 

7.04

%

324,139

 

5,467

 

6.77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable investment securities

 

94,134

 

1,261

 

5.36

%

120,085

 

1,511

 

5.03

%

Tax-exempt investment securities

 

90,530

 

1,515

 

6.69

%

61,406

 

1,042

 

6.79

%

Total securities

 

184,664

 

2,776

 

6.01

%

181,491

 

2,553

 

5.63

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

533,642

 

8,904

 

6.69

%

505,630

 

8,020

 

6.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

39,175

 

 

 

 

 

38,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

572,817

 

 

 

 

 

$

543,796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

60,161

 

125

 

0.83

%

$

65,912

 

126

 

0.77

%

Super Now deposits

 

48,282

 

169

 

1.40

%

51,571

 

111

 

0.86

%

Money market deposits

 

24,165

 

121

 

2.01

%

30,252

 

106

 

1.41

%

Time deposits

 

164,464

 

1,553

 

3.79

%

148,078

 

1,077

 

2.92

%

Total deposits

 

297,072

 

1,968

 

2.66

%

295,813

 

1,420

 

1.93

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

44,793

 

509

 

4.56

%

21,566

 

144

 

2.68

%

Long-term borrowings

 

82,878

 

944

 

4.57

%

75,754

 

893

 

4.73

%

Total borrowings

 

127,671

 

1,453

 

4.56

%

97,320

 

1,037

 

4.27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

424,743

 

3,421

 

3.23

%

393,133

 

2,457

 

2.51

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

70,961

 

 

 

 

 

68,784

 

 

 

 

 

Other liabilities

 

4,129

 

 

 

 

 

7,344

 

 

 

 

 

Shareholders’ equity

 

72,984

 

 

 

 

 

74,535

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

572,817

 

 

 

 

 

$

543,796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.46

%

 

 

 

 

3.85

%

Net interest income/margin

 

 

 

$

5,483

 

4.12

%

 

 

$

5,563

 

4.41

%

 

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.

 

15



 

 

 

AVERAGE BALANCES AND INTEREST RATES

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

6/30/2006

 

6/30/2005

 

 

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt loans

 

$

8,038

 

$

248

 

6.22

%

$

1,869

 

$

57

 

6.15

%

All other loans

 

338,041

 

11,731

 

7.00

%

323,617

 

10,701

 

6.67

%

Total loans

 

346,079

 

11,979

 

6.98

%

325,486

 

10,758

 

6.67

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

95,880

 

2,485

 

5.18

%

125,153

 

3,073

 

4.91

%

Tax-exempt securities

 

90,839

 

3,014

 

6.64

%

55,370

 

1,935

 

6.99

%

Total securities

 

186,719

 

5,499

 

5.89

%

180,523

 

5,008

 

5.55

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

532,798

 

17,478

 

6.60

%

506,009

 

15,766

 

6.27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

38,691

 

 

 

 

 

36,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

571,489

 

 

 

 

 

$

542,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings

 

$

60,360

 

238

 

0.80

%

$

66,418

 

257

 

0.78

%

Super Now deposits

 

48,223

 

318

 

1.33

%

52,533

 

218

 

0.84

%

Money market deposits

 

24,642

 

237

 

1.94

%

31,400

 

197

 

1.27

%

Time deposits

 

163,312

 

3,012

 

3.72

%

138,576

 

1,942

 

2.83

%

Total Deposits

 

296,537

 

3,805

 

2.59

%

288,927

 

2,614

 

1.82

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

43,100

 

915

 

4.28

%

29,242

 

346

 

2.39

%

Other borrowings

 

83,603

 

1,890

 

4.56

%

77,101

 

1,746

 

4.57

%

Total borrowings

 

126,703

 

2,805

 

4.46

%

106,343

 

2,092

 

3.97

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

423,240

 

$

6,610

 

3.15

%

395,270

 

$

4,706

 

2.40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

69,381

 

 

 

 

 

68,571

 

 

 

 

 

Other liabilities

 

4,324

 

 

 

 

 

4,017

 

 

 

 

 

Shareholders’ equity

 

74,544

 

 

 

 

 

74,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

571,489

 

 

 

 

 

$

542,428

 

 

 

 

 

Interest rate spread

 

 

 

 

 

3.45

%

 

 

 

 

3.87

%

Net interest income/margin

 

 

 

$

10,868

 

4.10

%

 

 

$

11,060

 

4.39

%

 

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.

 

16



 

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 six month periods ended June 30, 2006 and 2005.

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In Thousands)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

8,347

 

$

7,654

 

$

16,369

 

$

15,089

 

Total interest expense

 

3,421

 

2,457

 

6,610

 

4,706

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

4,926

 

5,197

 

9,759

 

10,383

 

Tax equivalent adjustment

 

557

 

366

 

1,109

 

677

 

 

 

 

 

 

 

 

 

 

 

Net interest income (fully taxable equivalent)

 

$

5,483

 

$

5,563

 

$

10,868

 

$

11,060

 

 

The following table sets forth the respective impact that both volume and rate changes have had on net interest income on a fully taxable equivalent basis and the net interest margin for the three and six month periods ended June 30, 2006 and 2005:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2006 vs 2005

 

2006 vs 2005

 

 

 

Increase (Decrease)

 

Increase (Decrease)

 

 

 

Due to

 

Due to

 

(In Thousands)

 

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, tax-exempt

 

$

42

 

$

46

 

$

88

 

$

190

 

$

1

 

$

191

 

Loans

 

366

 

207

 

573

 

488

 

542

 

1,030

 

Taxable investment securities

 

(355

)

105

 

(250

)

(768

)

180

 

(588

)

Tax-exempt investment securities

 

487

 

(14

)

473

 

1,168

 

(89

)

1,079

 

Total interest-earning assets

 

540

 

344

 

884

 

1,078

 

634

 

1,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

(22

)

21

 

(1

)

(24

)

4

 

(19

)

Super Now deposits

 

(6

)

64

 

58

 

(16

)

117

 

100

 

Money market deposits

 

(8

)

23

 

15

 

(19

)

59

 

40

 

Time deposits

 

128

 

348

 

476

 

383

 

687

 

1,070

 

Short-term borrowings

 

201

 

164

 

365

 

202

 

367

 

569

 

Long-term borrowings

 

79

 

(28

)

51

 

147

 

(3

)

144

 

Total interest-bearing liabilities

 

372

 

592

 

964

 

673

 

1,231

 

1,904

 

Change in net interest income

 

$

168

 

$

(248

)

$

(80

)

$

405

 

$

(597

)

$

(192

)

 

Provision for Loan Losses

 

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.

 

17



 

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 June 30, 2006, 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 $3,679,000 at December 31, 2005 to $3,995,000 at June 30, 2006. At June 30, 2006, the allowance for loan losses was 1.15% of total loans compared to 1.09% of total loans at December 31, 2005. Management’s conclusion is that the allowance for loan losses is adequate to provide for possible losses inherent in the loan portfolio as of the balance sheet date.

 

The provision for loan losses totaled $198,000 and $396,000 for the three and six months ended June 30, 2006, respectively, as compared to $180,000 and $360,000 for the same periods in 2005. The increase was the result of loan growth of $18,699,000.

 

An overall increase of $381,000 was experienced in non-performing loans (non-accrual and 90 days past due) from December 31, 2005 to $983,000 at June 30, 2006.

 

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 June 30, 2006 compared to the same period in 2005 decreased $259,000 to $2,216,000. Excluding net security gains, an increase of $163,000 was realized in non-interest income. Deposit service charges increased due to the

 

18



 

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 which resulted in an approximate $68,000 increase in service income over the 2005 period. Gain on the sale of loans from secondary market originations increased due to an increase in volume.

 

Insurance commissions increased slightly due to increased volume offset by a reduction in the overall commission earned from the underwriter that The M Group receives on each insurance contract written. The management of The M Group continued to gather new and build upon current relationships. The sales cycle for insurance and investment products can take typically from six months to one year or more to complete. The sales call program continues to expand to other financial institutions, and results in shared revenue with The M Group.

 

Other income increased due primarily to revenue generated from increased debit card transactions, title insurance fees, and the income recognized related to the origination of secondary market residential loans.

 

Total non-interest income for the six months ended June 30, 2006 compared to the same period in 2005 decreased $229,000. Excluding net security gains, the increase from period to period was $245,000. The implementation of Bounce Protection during May 2005 as noted above, resulted in an increase of $209,000 in service fees. The increase in other income is the result of the items noted above for the three month period discussion.

 

Non-interest income composition for the three and six months ended June 30, 2006 and 2005 were as follows:

 

 

 

For The Three Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposit service charges

 

$

587

 

26.5

%

$

536

 

21.7

%

$

51

 

9.5

%

Security gains, net

 

265

 

12.0

 

687

 

27.7

 

(422

)

(61.4

)

Bank-owned life insurance

 

90

 

4.1

 

93

 

3.8

 

(3

)

(3.2

)

Gain on sale of loans

 

210

 

9.5

 

178

 

7.2

 

32

 

18.0

 

Insurance commissions

 

670

 

30.1

 

652

 

26.3

 

18

 

2.8

 

Other

 

394

 

17.8

 

329

 

13.3

 

65

 

19.8

 

Total non-interest income

 

$

2,216

 

100.0

%

$

2,475

 

100.0

%

$

(259

)

(10.5

)%

 

 

 

For The Six Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Deposit service charges

 

$

1,177

 

25.9

%

$

991

 

20.7

%

$

186

 

18.8

%

Security gains, net

 

824

 

18.1

 

1,298

 

27.2

 

(474

)

(36.5

)

Bank-owned life insurance

 

178

 

3.9

 

187

 

3.9

 

(9

)

(4.8

)

Gain on sale of loans

 

360

 

7.9

 

368

 

7.7

 

(8

)

(2.2

)

Insurance commissions

 

1,230

 

27.0

 

1,295

 

27.1

 

(65

)

(5.0

)

Other

 

784

 

17.2

 

643

 

13.4

 

141

 

21.9

 

Total non-interest income

 

$

4,553

 

100.0

%

$

4,782

 

100.0

%

$

(229

)

(4.8

)%

 

19



 

Non-interest Expenses

 

Total non-interest expenses increased $229,000 from the three months ended June 30, 2005 as compared to the same period of 2006. The increase in salaries and employee benefits was attributable to several items including: standard cost of living wage adjustments for employees, new additions to our staff and increased health insurance cost. Furniture and equipment expense increased due to the new branch in State College and increased cost of maintenance. The decrease in occupancy expenses was attributable to a reduction in leasehold improvements amortization and facilities maintenance amounts. Other expenses increased primarily due to normal anticipated inflationary adjustments to ongoing business operating costs and the Company’s share of operating results incurred through a limited partnership arrangement which was initiated during the fourth quarter of 2005 for the purposes of funding the construction of affordable housing in the Company’s primary market area.

 

Total non-interest expenses increased $585,000 from the six months ended June 30, 2005 as compared to the same period of 2006. As noted in the three month discussion, the new State College branch and normal increases in general business expenses impacted the level of non-interest expenses. Decreased amortization of leasehold improvements resulted in occupancy expense declining for the six month period ended June 30, 2006 as compared to 2005. Furniture and equipment expenses increased due in part to the new State College branch.

 

Non-interest expense composition for the three and six months ended June 30, 2006 and 2005 were as follows:

 

 

 

For The Three Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Salaries and employee benefits

 

$

2,214

 

54.3

%

$

2,135

 

55.5

%

$

79

 

3.7

%

Occupancy, net

 

275

 

6.7

 

286

 

7.4

 

(11

)

(3.8

)

Furniture and equipment

 

288

 

7.1

 

234

 

6.1

 

54

 

23.1

 

Pennsylvania shares tax

 

151

 

3.7

 

140

 

3.6

 

11

 

7.9

 

Other

 

1,150

 

28.2

 

1,054

 

27.4

 

96

 

9.1

 

Total non-interest expense

 

$

4,078

 

100.0

%

$

3,849

 

100.0

%

$

229

 

5.9

%

 

 

 

For The Six Months Ended

 

 

 

June 30, 2006

 

June 30, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Salaries and employee benefits

 

$

4,446

 

55.3

%

$

4,129

 

55.5

%

$

317

 

7.7

%

Occupancy, net

 

518

 

6.5

 

577

 

7.8

 

(59

)

(10.2

)

Furniture and equipment

 

585

 

7.3

 

455

 

6.1

 

130

 

28.6

 

Pennsylvania shares tax

 

296

 

3.7

 

279

 

3.7

 

17

 

6.1

 

Other

 

2,184

 

27.2

 

2,004

 

26.9

 

180

 

9.0

 

Total non-interest expense

 

$

8,029

 

100.0

%

$

7,444

 

100.0

%

$

585

 

7.9

%

 

20



 

Provision for Income Taxes

 

Income taxes decreased $451,000 and $888,000 for the three and six month periods ended June 30, 2006 compared to the same periods of 2005. The effective tax rate for the three months ended June 30, 2006 and 2005 were 15.1% and 24.2%, respectively. The six months ended June 30, 2006 had an effective tax rate of 17.0% as compared to 25.6% for the comparable period of 2005. The decline in the effective tax rate is consistent with management’s repositioning of the investment portfolio from taxable investment securities to tax-exempt investment securities and tax credits related to investments in low income housing projects.

 

ASSET/LIABILITY MANAGEMENT

 

Cash and cash equivalents increased $118,000 from $14,090,000 at December 31, 2005, and are the results of the following activities which have occurred during the six months ended June 30, 2006:

 

Operating Activities

 

The significant components of operating activities are net income and the origination and proceeds of loans held for sale. Cash provided by net income, as adjusted for loans held for sale activity, amounted to $3,077,000. Activity regarding loans held for sale resulted in sale proceeds, less $360,000 in realized gains, exceeding loan origination disbursements by $2,232,000 for the period.

 

Loans

 

Gross loans increased $8,131,000 since December 31, 2005 as residential real estate mortgages increased 3.5% or $5,282,000 in part due to the active marketing of a new home equity line of credit product during 2006. Residential real estate loans increased due to promotion of home equity loans and lines. The growth in commercial real estate mortgages is part of the Company’s strategy to originate high quality, well secured commercial loans.

 

The allocation of the loan portfolio, by category, as of June 30, 2006 and December 31, 2005 is presented below:

 

 

 

June 30,

 

December 31,

 

Change

 

(In Thousands)

 

2006

 

2005

 

Amount

 

%

 

Commercial and agricultural

 

$

33,838

 

$

34,407

 

$

(569

)

(1.7

)%

Real estate mortgage:

 

 

 

 

 

 

 

 

 

Residential

 

155,282

 

150,000

 

5,282

 

3.5

 

Commercial

 

128,986

 

127,131

 

1,855

 

1.5

 

Construction

 

11,996

 

10,681

 

1,315

 

12.3

 

Installment loans to individuals

 

17,517

 

17,281

 

236

 

1.4

 

Less: Net deferred loan fees

 

1,050

 

1,062

 

(12

)

(1.1

)

Gross loans

 

$

346,569

 

$

338,438

 

$

8,131

 

2.4

%

 

21



 

The recorded investment in loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, amounted to $572,000 at June 30, 2006, as compared to no impaired loans at December 31, 2005. The valuation allowance related to impaired loans amounted to $60,000 at June 30, 2006.

 

A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.

 

Investments

 

The amortized cost and fair market value of the investment securities portfolio in total has declined modestly since December 31, 2005. Over the first six months of 2006, the amortized cost of state and political securities has increased $1,955,000, while U.S. Government and agency securities decreased $4,228,000. This shift is the result of a repositioning of the security portfolio that began during 2005. The shift from taxable to tax exempt bonds has been undertaken as a strategy to build call protection, maintain the taxable equivalent yield, reduce the effective federal income tax rate, and to invest in communities across the Commonwealth of Pennsylvania and the country.

 

The amortized cost of investment securities and their approximate fair values are as follows:

 

22



 

 

 

June 30, 2006

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for Sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

61,268

 

$

 

$

(3,201

)

$

58,067

 

State and political securities

 

95,724

 

950

 

(1,924

)

94,750

 

Other debt securities

 

1,924

 

4

 

(103

)

1,825

 

Total debt securities

 

158,916

 

954

 

(5,228

)

154,642

 

Equity securities

 

23,575

 

2,718

 

(382

)

25,911

 

Total Investment Securities AFS

 

$

182,491

 

$

3,672

 

$

(5,610

)

$

180,553

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity (HTM)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

27

 

$

2

 

$

 

$

29

 

Other debt securities

 

254

 

1

 

 

255

 

Total Investment Securities HTM

 

$

281

 

$

3

 

$

 

$

284

 

 

 

 

December 31, 2005

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In Thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for Sale (AFS)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

65,496

 

$

30

 

$

(1,573

)

$

63,953

 

State and political securities

 

93,769

 

1,390

 

(1,068

)

94,091

 

Other debt securities

 

1,750

 

12

 

(43

)

1,719

 

Total debt securities

 

161,015

 

1,432

 

(2,684

)

159,763

 

Equity securities

 

24,715

 

2,951

 

(411

)

27,255

 

Total Investment Securities AFS

 

$

185,730

 

$

4,383

 

$

(3,095

)

$

187,018

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity (HTM)

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

28

 

$

2

 

$

 

$

30

 

Other debt securities

 

237

 

 

(29

)

208

 

Total Investment Securities HTM

 

$

265

 

$

2

 

$

(29

)

$

238

 

 

23



 

Financing Activities

 

Deposits

 

Total deposits increased 6.9% or $24,415,000 from December 31, 2005 as both interest and noninterest bearing deposit categories increased from December 31, 2005 to June 30, 2006. The mix of deposits has remained constant from December 31, 2005 to June 30, 2006 with demand deposits holding steady at 19.7% of total deposits. During the second half of 2005 the Bank began utilizing brokered deposits (time deposits) to supplement the funding of loan originations and investment purchases. These time deposits are generally for a term of either four or thirteen weeks with interest rates presently at or below the cost of alternative funding sources, such as short term borrowing instruments from the FHLB. The amount of brokered deposits is continuously monitored and is used to supplement deposits, not as a primary source of deposits.

 

Deposit balances and their changes for the periods being discussed follow:

 

 

 

June 30, 2006

 

December 31, 2005

 

Change

 

(In Thousands)

 

Amount

 

% Total

 

Amount

 

% Total

 

Amount

 

%

 

Demand deposits

 

$

74,310

 

19.7

%

$

71,379

 

20.2

%

$

2,931

 

4.1

%

NOW Accounts

 

48,739

 

12.9

 

48,678

 

13.8

 

61

 

0.1

 

Money market deposits

 

23,712

 

6.3

 

24,446

 

6.9

 

(734

)

(3.0

)

Savings deposits

 

59,619

 

15.8

 

61,906

 

17.6

 

(2,287

)

(3.7

)

Time deposits

 

160,643

 

42.7

 

137,373

 

39.0

 

23,270

 

16.9

 

Time deposits - brokered

 

9,921

 

2.6

 

8,747

 

2.5

 

1,174

 

13.4

 

Total deposits

 

$

376,944

 

100.0

%

$

352,529

 

100.0

%

$

24,415

 

6.9

%

 

Borrowed Funds

 

Total borrowed funds decreased 10.6% to $123,803,000 at June 30, 2006 as compared to December 31, 2005. The decrease in borrowed funds is the result of deposit growth that occurred primarily in time deposits since December 31, 2005. FHLB short-term borrowings were utilized during the first six months of 2006; however, there were no such borrowings outstanding at June 30, 2006. Long-term borrowings declined due to a maturity of $1,600,000 that carried a fixed rate of 2.67%.

 

 

 

June 30,

 

December 31,

 

(In Thousands)

 

2006

 

2005

 

Short-term borrowings:

 

 

 

 

 

FHLB repurchase agreements

 

$

25,085

 

$

1,740

 

Short-term borrowings, FHLB

 

 

37,000

 

Securities sold under agreement to repurchase

 

15,840

 

15,263

 

Total short-term borrowings

 

40,925

 

54,003

 

Long-term borrowings, FHLB

 

82,878

 

84,478

 

Total borrowed funds

 

$

123,803

 

$

138,481

 

 

24



 

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.

 

Bank holding companies are required to comply with the Federal Reserve Board’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. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total risk-based, Tier I risk-based, and Tier I leverage capital requirements. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvements Act (FDICIA) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” To be classified as “well capitalized”, Total risk-based, Tier I risked-based, and Tier I leverage capital ratios must be at least 10%, 6%, and 5%, respectively.

 

 

25



Capital ratios as of June 30, 2006 and December 31, 2005 were as follows:

 

 

 

June 30, 2006

 

December 31, 2005

 

(In Thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Total Capital

 

 

 

 

 

 

 

 

 

  (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

72,212

 

20.2

%

$

73,210

 

21.0

%

For Capital Adequacy Purposes

 

28,552

 

8.0

 

27,937

 

8.0

 

To Be Well Capitalized

 

35,691

 

10.0

 

34,921

 

10.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital

 

 

 

 

 

 

 

 

 

  (to Risk-weighted Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

67,162

 

18.8

%

$

68,388

 

19.6

%

For Capital Adequacy Purposes

 

14,276

 

4.0

 

13,968

 

4.0

 

To Be Well Capitalized

 

21,414

 

6.0

 

20,952

 

6.0

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital

 

 

 

 

 

 

 

 

 

  (to Average Assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

$

67,162

 

11.9

%

$

68,388

 

12.2

%

For Capital Adequacy Purposes

 

22,603

 

4.0

 

22,495

 

4.0

 

To Be Well Capitalized

 

28,254

 

5.0

 

28,119

 

5.0

 

 

Liquidity and Interest Rate Sensitivity

 

The asset/liability committee addresses the liquidity needs of the Company 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 for compliance within the limits cited:

 

1. Net Loans to Total Assets, 100% maximum

2. Net Loans to Total Deposits, 100% maximum

3. Cumulative 90 day Maturity GAP %, +/- 20% maximum

4. Cumulative 1 Year Maturity GAP %, +/- 20%, 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

 

26



 

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 originations, 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. Management believes the Bank 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 $217,357,000. In addition to this credit arrangement, the Company has additional lines of credit with correspondent banks of $25,500,000. Management believes it has sufficient liquidity to satisfy estimated short-term and long-term funding needs. Federal Home Loan Bank borrowings totaled $107,963,000 as of June 30, 2006.

 

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 sheet.

 

27



 

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, 2005.

 

Generally, management believes the Company is well positioned to respond in a timely manner 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 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.

 

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 Annual Report on Form 10-K for the period ended December 31, 2005. 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.

 

Generally, management believes the Company is well positioned to respond in a timely manner when the market interest rate outlook changes.

 

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 June 30, 2006. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

28



 

Part II. OTHER INFORMATION

 

Item 1.           Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.

 

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

 

On April 25, 2006 the Board of Directors authorized the repurchase of approximately 5% of the outstanding shares of the Registrant. The repurchase plan is for a one year period and allows for the repurchase of 197,000 shares of the 3,941,787 shares outstanding.

 

During the three months ended June 30, 2006 there were 10,000 shares of the Company’s common stock repurchased as part of a previously announced 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

 

Purchased

 

Plans or Programs

 

Under the Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

Month#1(April 1-April 30, 2006)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Month#2 (May 1-May 31, 2006)

 

5,000

 

$

38.40

 

5,000

 

192,000

 

 

 

 

 

 

 

 

 

 

 

 

Month#3 (June 1,-June 30, 2006)

 

5,000

 

39.15

 

5,000

 

187,000

 

 

Item 3.           Defaults Upon Senior Securities

 

None

 

Item 4.           Submission of Matters to a Vote of Security Holders

 

Penns Woods Bancorp, Inc.’s annual meeting of the shareholders was held on April 26, 2006. The results of the items voted on are listed below:

 

29



 

Issue

 

Description

 

For

 

Withhold

 

1.

 

Election of Directors for a Three Year Term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

James M. Furey, II

 

3,252,674

 

66,623

 

 

 

Leroy H. Keiler, III

 

3,288,226

 

31,071

 

 

 

James E. Plummer

 

3,255,468

 

63,829

 

 

 

Hubert A. Valencik

 

3,136,949

 

182,348

 

 

Issue

 

Description

 

For

 

Against

 

Abstain

 

Non-Vote

 

2.

 

Proposal to Approve the Penns Woods Bancorp, Inc. 2006 Employee Stock Purchase Plan

 

2,129,270

 

400,088

 

18,333

 

771,606

 

 

Issue

 

Description

 

For

 

Against

 

Abstain

 

3.

 

Ratification of S.R. Snodgrass A.C., Certified Public Accountants as independent auditors

 

3,285,068

 

13,513

 

20,716

 

 

Item 5.           Other Information

 

None

 

Item 6.           Exhibits

 

(3)  (i)

 

Articles of Incorporation of the Registrant, as presently in effect (incorporated by reference to Exhibit 3(i) of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).

(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)

 

Form of First Amendment to the Jersey Shore State Bank Amendment and Restatement of the Director Fee Agreement, dated as of October 1, 2004 (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K filed June 29, 2006).

(31) (i)

 

Rule 13a-14(a) Certification of Chief Executive Officer.

(31) (ii)

 

Rule 13a-14(a) Certification of Principal Accounting Officer.

(32) (i)

 

Certification of Chief Executive Officer Section 1350.

(32) (ii)

 

Certification of Principal Accounting Officer Section 1350.

 

30



 

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 8, 2006

/s/ Ronald A. Walko

 

 

Ronald A. Walko, President and Chief Executive Officer

 

 

 

 

Date:  August 8, 2006

/s/ Brian L. Knepp

 

 

Brian L. Knepp, Vice President of Finance (Principal
Financial Officer)

 

31



 

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 Accounting Officer

Exhibit 32(i)

 

Section 1350 Certification of Chief Executive Officer

Exhibit 32(ii)

 

Section 1350 Certification of Principal Accounting Officer

 

32