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| PWOD > SEC Filings for PWOD > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
EARNINGS SUMMARY
Comparison of the Three and Nine Months Ended September 30, 2008 and 2007
Summary Results
Net income for the three months ended September 30, 2008 was $1,552,000 compared to $2,322,000 for the same period of 2007 as after-tax securities gains decreased $993,000 (from $0 to a loss of $993,000). Included within the change in after-tax securities gains was an other than temporary impairment charge relating to certain equity securities held in the investment portfolio of $1,222,000. Basic and diluted earnings per share for the three months ended September 30, 2008 were $0.40 compared to $0.60 for the three months ended September 30, 2007. Return on average assets and return on average equity were 0.98% and 9.43% for the three months ended September 30, 2008 compared to 1.57% and 13.21% for the corresponding period of 2007. Net income from core operations ("operating earnings") increased 9.6% to $2,545,000 for the three months ended September 30, 2008 compared to $2,322,000 for the same period of 2007. Operating earnings per share for the three months ended September 30, 2008 increased 10.0% to $0.66 basic and dilutive compared to $0.60 basic and dilutive for the three months ended September 30, 2007.
The nine months ended September 30, 2008 generated net income of $5,740,000 compared to $6,938,000 for the same period of 2007 due to a decline in after-tax securities gains of $1,542,000 (from a gain of $409,000 to a loss of $1,133,000). Included within the change in after-tax securities gains was an other than temporary impairment charge relating to certain equity securities held in the investment portfolio of $1,601,000. Earnings per share, basic and dilutive, for the nine months ended September 30, 2008 were $1.49 as compared to $1.78 for the comparable period of 2007. Return on average assets and return on average equity were 1.21% and 11.10% for the nine months ended September 30, 2008 compared to 1.57% and 12.63% for the corresponding period of 2007. Operating earnings increased 5.3% to $6,873,000 for the nine months ended September 30, 2008 compared to $6,529,000 for the comparable period of 2007 resulting in basic and dilutive operating earnings per share of $1.78 and $1.68 for the nine month periods ended September 30, 2008 and 2007, respectively.
(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. For purposes of this Quarterly Report on Form 10-Q, net income from core operations means net income adjusted to exclude after-tax net securities gains or losses. 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 And Dividend Income
Interest and dividend income for the three months ended September 30, 2008 increased $131,000 to $9,108,000 compared to $8,977,000 for the same period of 2007. The increase in interest income was primarily the result of growth in average taxable investment securities of $15,963,000 coupled with a 48 basis point ("bp") increase in the related securities yields for the three months ended September 30, 2008 over the same period of 2007. This combination resulted in a $345,000 increase in taxable investment securities interest income. Over the same time frame, the average balance of tax-exempt investment securities increased $8,048,000 with the portfolio yield remaining stable at 7.06% resulting in a $97,000 increase in tax-exempt interest income. On a taxable equivalent basis, the interest income from the investment portfolio increased $492,000 due to the portfolio composition and increase in taxable investment security balance and yield. The decrease in dividends received is the result of a decrease in equity investments coupled with a general decline in the dividends per share received from the equity holdings. Interest and fee income from the loan portfolio decreased $310,000 as the rate reduction actions of the Federal Reserve Board's Federal Open Market Committee ("FOMC") served as the foundation for the 54 bp decline in loan portfolio yield.
During the nine months ended September 30, 2008, interest and dividend income was $27,092,000, an increase of $643,000 over the same period of 2007. The reasons for the 2.4% growth in interest income for the nine month period are identical to those for the three month period ending September 30, 2008 discussed above. The growth in average loans of $6,972,000 coupled with a 37 bp decrease in the loan portfolio yield due to the decreasing prime rate resulted in a decrease of $624,000 in loan interest and fee income. Average investment securities and interest bearing deposit income increased $1,267,000 due to an increase in average balance of $27,636,000 and a 12 bp increase in yield. The increase in yield was due to an increase in yield on taxable and tax-exempt securities of 16 bp and 12 bp, respectively. The increased yield was primarily the result of approximately $30,000,000 in bonds that were added during the last half of 2007 as part of a leverage strategy. The asset allocation between loans and the investment portfolio composition resulted in taxable equivalent interest income increasing $849,000 for the nine months ended September 30, 2008 compared to the same period of 2007.
Interest and dividend income composition for the three and nine months ended September 30, 2008 and 2007 was as follows:
For The Three Months Ended
September 30, 2008 September 30, 2007 Change
(In Thousands) Amount % Total Amount % Total Amount %
Loans including fees $ 6,311 69.3 % $ 6,621 73.8 % $ (310 ) (4.7 )%
Investment securities:
Taxable 1,391 15.3 964 10.7 427 44.3
Tax-exempt 1,205 13.2 1,108 12.3 97 8.8
Dividend and other
interest income 201 2.2 284 3.2 (83 ) (29.2 )
Total interest and
dividend income $ 9,108 100.0 % $ 8,977 100.0 % $ 131 1.5 %
For The Nine Months Ended
September 30, 2008 September 30, 2007 Change
(In Thousands) Amount % Total Amount % Total Amount %
Loans including fees $ 18,936 69.9 % $ 19,560 74.0 % $ (624 ) (3.2 )%
Investment securities:
Taxable 3,857 14.2 2,711 10.2 1,146 42.3
Tax-exempt 3,641 13.5 3,271 12.4 370 11.3
Dividend and other
interest income 658 2.4 907 3.4 (249 ) (27.5 )
Total interest and
dividend income $ 27,092 100.0 % $ 26,449 100.0 % $ 643 2.4 %
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Interest Expense
Interest expense for the three months ended September 30, 2008 decreased $517,000 to $3,595,000 compared to $4,112,000 for the same period of 2007. The decreased expense of $425,000 associated with deposits is primarily the result of a reduction in rate paid of 106 bp on time deposits. Factors that led to the rate decreases include, but are not limited to, FOMC interest rate actions over the past year, campaigns conducted to attract 8 to 12 month maturity CDs that have resulted in an increased repricing frequency, and decreased average utilization of $10,038,000 in brokered CDs. Short-term borrowings interest expense decreased $58,000 as the increase in average balance of $18,305,000 was countered by a decrease in the rate paid of 206 bp due to the FOMC rate actions over the past year. Long-term borrowings interest expense decreased $34,000 as the average balance of such borrowings increased $1,270,000 for the three months ended September 30, 2008 compared to the same period of 2007, while the average rate decreased 31 bp to 4.33% for the 2008 period. The change in average balance and rate is reflective of $29,600,000 in long-term borrowing maturities during the first half of 2008 at an average rate of 4.77% offset by the acquisition of $10,000,000 in long-term borrowings at a rate of 3.18% during the third quarter of 2008.
Interest expense for the nine months ended September 30, 2008 decreased $508,000 to $11,542,000 compared to $12,050,000 for the same period of 2007. Interest on deposits decreased $713,000 due to the reasons noted in the three month analysis discussed in the proceeding paragraph. Borrowing costs increased primarily due to the addition of borrowings during the latter portion of 2007 as part of a program to increase net interest income through the purchase of fixed rate investment securities.
Interest expense composition for the three and nine months ended September 30, 2008 and 2007 was as follows:
For The Three Months Ended
September 30, 2008 September 30, 2007 Change
(In Thousands) Amount % Total Amount % Total Amount %
Deposits $ 2,410 67.0 % $ 2,835 68.9 % $ (425 ) (15.0 )%
Short-term borrowings 310 8.6 368 9.0 (58 ) (15.8 )
Long-term borrowings, FHLB 875 24.4 909 22.1 (34 ) (3.7 )
Total interest expense $ 3,595 100.0 % $ 4,112 100.0 % $ (517 ) (12.6 )%
For The Nine Months Ended
September 30, 2008 September 30, 2007 Change
(In Thousands) Amount % Total Amount % Total Amount %
Deposits $ 7,502 65.0 % $ 8,215 68.2 % $ (713 ) (8.7 )%
Short-term borrowings 996 8.6 1,100 9.1 (104 ) (9.5 )
Long-term borrowings, FHLB 3,044 26.4 2,735 22.7 309 11.3
Total interest expense $ 11,542 100.0 % $ 12,050 100.0 % $ (508 ) (4.2 )%
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Net Interest Margin
The net interest margin ("NIM") for the three months ended September 30, 2008 was 4.23% compared to 3.98% for the corresponding period of 2007. The increase in the NIM was driven by a 74 bp decline in the rate paid on interest bearing liabilities that more than compensated for a 29 bp decline in the yield on earning assets. The decrease in earning asset yield is due to the impact on the loan portfolio of the FOMC rate decreases over the past year offset in part by increases in yield and balance within the investment portfolio. The growth in the investment portfolio was driven by a strategic initiative in the third quarter of 2007 to increase tax equivalent net interest income by purchasing fixed rate instruments in anticipation of the decreasing rate environment that has continued to date. The decrease in the cost of interest bearing liabilities to 2.93% from 3.67% was driven primarily by a reduction in the rate paid on time deposits of 106 bp. The reduction was the result of a shortening of the time deposit portfolio initiated in the early stages of 2007 that has resulted in an increasing repricing frequency during this period of decreasing rates.
The NIM for the nine months ended September 30, 2008 and 2007 were 4.04% and 3.96%, respectively. The impact of the items mentioned in the three month discussion also applies to the nine month period. A 65 bp decline in the rate paid on time deposits served as the foundation for a 41 bp decline in rate paid on deposits, while the FOMC actions steered the yield on earning assets and cost of borrowings.
Following is a schedule of average balances and associated yields for the three and nine month periods ended September 30, 2008 and 2007:
AVERAGE BALANCES AND INTEREST RATES
Three Months Ended Three Months Ended
September 30, 2008 September 30, 2007
(In Thousands) Average Balance Interest Average Rate Average Balance Interest Average Rate
Assets:
Tax-exempt loans $ 9,108 $ 148 6.46 % $ 7,652 $ 118 6.12 %
All other loans 364,926 6,213 6.77 % 354,032 6,543 7.33 %
Total loans 374,034 6,361 6.77 % 361,684 6,661 7.31 %
Taxable investment
securities 107,751 1,592 5.91 % 91,788 1,247 5.43 %
Tax-exempt
investment
securities 103,431 1,826 7.06 % 95,383 1,679 7.04 %
Total securities 211,182 3,418 6.47 % 187,171 2,926 6.25 %
Interest bearing
deposits 34 - 0.00 % 40 1 9.92 %
Total
interest-earning
assets 585,250 9,779 6.66 % 548,895 9,588 6.95 %
Other assets 50,225 43,706
Total assets $ 635,475 $ 592,601
Liabilities:
Savings $ 62,792 120 0.76 % $ 60,262 114 0.75 %
Super Now deposits 52,970 175 1.31 % 46,531 153 1.30 %
Money market
deposits 34,915 208 2.37 % 23,183 131 2.24 %
Time deposits 205,346 1,907 3.69 % 203,690 2,437 4.75 %
Total deposits 356,023 2,410 2.69 % 333,666 2,835 3.37 %
Short-term
borrowings 51,215 310 2.38 % 32,910 368 4.44 %
Long-term
borrowings, FHLB 79,061 875 4.33 % 77,791 909 4.64 %
Total borrowings 130,276 1,185 3.57 % 110,701 1,277 4.58 %
Total
interest-bearing
liabilities 486,299 3,595 2.93 % 444,367 4,112 3.67 %
Demand deposits 75,863 70,689
Other liabilities 7,467 7,249
Shareholders' equity 65,846 70,296
Total liabilities
and shareholders'
equity $ 635,475 $ 592,601
Interest rate spread 3.73 % 3.28 %
Net interest
income/margin $ 6,184 4.23 % $ 5,476 3.98 %
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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.
AVERAGE BALANCES AND INTEREST RATES
Nine Months Ended Nine Months Ended
September 30, 2008 September 30, 2007
(In Thousands) Average Balance Interest Average Rate Average Balance Interest Average Rate
Assets:
Tax-exempt loans $ 8,534 $ 411 6.43 % $ 7,913 $ 365 6.17 %
All other loans 359,570 18,665 6.93 % 353,219 19,320 7.31 %
Total loans 368,104 19,076 6.92 % 361,132 19,685 7.29 %
Taxable securities 104,604 4,514 5.75 % 85,930 3,600 5.59 %
Tax-exempt
securities 108,877 5,517 6.76 % 99,497 4,956 6.64 %
Total securities 213,481 10,031 6.27 % 185,427 8,556 6.15 %
Interest bearing
deposits 13 1 10.28 % 431 18 5.58 %
Total
interest-earning
assets 581,598 29,108 6.68 % 546,990 28,259 6.90 %
Other assets 49,638 42,390
Total assets $ 631,236 $ 589,380
Liabilities:
Savings $ 60,857 343 0.75 % $ 59,726 329 0.74 %
Super Now deposits 51,228 513 1.34 % 46,309 455 1.31 %
Money market
deposits 28,372 481 2.26 % 24,362 414 2.27 %
Time deposits 201,950 6,165 4.08 % 198,401 7,017 4.73 %
Total Deposits 342,407 7,502 2.93 % 328,798 8,215 3.34 %
Short-term
borrowings 47,894 996 2.75 % 32,443 1,100 4.53 %
Other borrowings 90,088 3,044 4.44 % 78,818 2,735 4.64 %
Total borrowings 137,982 4,040 3.85 % 111,261 3,835 4.61 %
Total
interest-bearing
liabilities 480,389 11,542 3.19 % 440,059 12,050 3.66 %
Demand deposits 73,205 69,203
Other liabilities 8,672 6,866
Shareholders'
equity 68,970 73,252
Total liabilities
and shareholders'
equity $ 631,236 $ 589,380
Interest rate
spread 3.49 % 3.24 %
Net interest
income/margin $ 17,566 4.04 % $ 16,209 3.96 %
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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.
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, 2008 and 2007.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(In Thousands) 2008 2007 2008 2007
Total interest income $ 9,108 $ 8,977 $ 27,092 $ 26,449
Total interest expense 3,595 4,112 11,542 12,050
Net interest income 5,513 4,865 15,550 14,399
Tax equivalent adjustment 671 611 2,016 1,810
Net interest income (fully taxable
equivalent) $ 6,184 $ 5,476 $ 17,566 $ 16,209
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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 for the three and nine month periods ended September 30, 2008 and 2007:
Three Months Ended September 30, Nine Months Ended September 30,
2008 vs 2007 2008 vs 2007
Increase (Decrease) Increase (Decrease)
Due to Due to
(In Thousands) Volume Rate Net Volume Rate Net
Interest income:
Loans, tax-exempt $ 23 $ 7 $ 30 $ 30 $ 16 $ 46
Loans 220 (550 ) (330 ) 347 (1,002 ) (655 )
Taxable investment securities 229 116 345 803 111 914
Tax-exempt investment securities 142 5 147 474 87 561
Interest bearing deposits - (1 ) (1 ) (17 ) - (17 )
Total interest-earning assets 614 (423 ) 191 1,637 (788 ) 849
Interest expense:
Savings deposits 5 1 6 6 8 14
Super Now deposits 21 1 22 50 8 58
Money market deposits 69 8 77 68 (1 ) 67
Time deposits 21 (551 ) (530 ) 128 (980 ) (852 )
Short-term borrowings 522 (580 ) (58 ) 1,501 (1,605 ) (104 )
Long-term borrowings, FHLB 10 (44 ) (34 ) 437 (128 ) 309
Total interest-bearing liabilities 648 (1,165 ) (517 ) 2,190 (2,698 ) (508 )
Change in net interest income $ (34 ) $ 742 $ 708 $ (553 ) $ 1,910 $ 1,357
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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.
The allowance for loan losses is determined 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, 2008, 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, increased unemployment, and delays in receiving financial information from borrowers could result in increased levels of nonperforming assets, charge-offs, 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 $4,130,000 at December 31, 2007 to $4,268,000 at September 30, 2008. At September 30, 2008 and December 31, 2007, the allowance for loan losses to total loans was 1.15%.
The provision for loan losses totaled $110,000 and $230,000 for the three and nine months ended September 30, 2008, compared to $10,000 and $60,000 for the same periods in 2007. The amount of the increase in the provision was the result of several continuing positive factors, including but not limited to, an . . .
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