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| PWOD > SEC Filings for PWOD > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
NET INTEREST INCOME
Net interest income is determined by calculating the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. To compare the tax-exempt asset yields to taxable yields, amounts are adjusted to taxable equivalents based on the marginal corporate federal tax rate of 34%. The tax equivalent adjustments to net interest income for 2008, 2007, and 2006 were $2,714,000, $2,410,000, and $2,245,000, respectively.
2008 vs 2007
Reported net interest income increased $1,774,000 or 9.10% to $21,276,000 for the year ended December 31, 2008 compared to the year ended December 31, 2007, although the yield on earning assets decreased to 6.68% from 6.91%, respectively. On a tax equivalent basis the change in net interest income was an increase of $2,078,000 or 9.48% to $23,990,000 for the year ended December 31, 2008 compared to the year ended December 31, 2007. Total interest income increased $159,000 primarily due to growth in the average balance of the loan and securities portfolios. The increase in earning asset volume compensated for the negative impact on earning asset yields caused by the rate reductions enacted by the Federal Open Markets Committee ("FOMC"). Interest income recognized on the loan portfolio decreased $871,000 as a portion of the portfolio repriced downward due to the FOMC actions that lowered the prime rate from 7.25% at December 31, 2007 to 3.25% at December 31, 2008 coupled with the market dictating that new loan generation occurred at lower rates than during 2007. Interest and dividend income generated from the investment portfolio and interest bearing cash deposits increased $1,030,000. The increase was the result of the yield on the investment portfolio increasing 12 basis points ("bp") while the average balance of the investment portfolio increased by $17,067,000. The majority of the increase in the securities portfolio was from a leverage strategy undertaken during the second half of 2007.
Interest expense decreased $1,615,000 to $14,832,000 for the year ended December 31, 2008 as compared to 2007. Leading the decrease in interest expense was a decline of 11.70% or $1,281,000 related to deposits. The FOMC actions noted previously together with a strategic shortening of the duration of the portfolio led to an 81 bp decline in the rate paid on time deposits from 4.73% for the year ended December 31, 2007 to 3.92% for the year ended December 31, 2008 resulting in a $1,502,000 decline in expense. The economic turmoil experienced over the past year has led to a significant decline in short-term interest rates which has allowed for a 214 bp decline in the rate paid on short-term borrowings. Several long-term debt maturities paved the way for a decline in the rate paid on long-term borrowings of 23 bp to 4.39% for the year ended December 31, 2008 versus 4.62% for the year ended December 31, 2007.
2007 vs 2006
Reported net interest income decreased $41,000 or 0.21% to $19,502,000 for the year ended December 31, 2007 as compared to the year ended December 31, 2006 although the yield on earning assets increased to 6.91% from 6.70%, respectively. On a tax equivalent basis the change in net interest income was an increase of $124,000, which is primarily the result of the yield on investment securities increasing to 6.25% at December 31, 2007 from 5.93% at December 31, 2006. Total interest income increased 6.5% or $2,196,000 primarily due to growth in the average balance of the loan portfolio of $8,688,000 coupled with an increase in the loan yield to 7.27% at December 31, 2007 from 7.10% at December 31, 2006. Interest and dividend income generated from the investment portfolio and interest bearing cash deposits increased $975,000. The increase was the result of the yield on the investment portfolio increasing 32 basis points while the average balance of the investment portfolio increased by $8,749,000.
Interest expense increased $2,237,000 to $16,447,000 for the year ended December 31, 2007 as compared to 2006. The majority of the increase, 91% or $2,043,000, is related to increased levels of average deposits and increased
rates being paid on deposit accounts, which had an average rate paid of 3.35% and 2.88% for the years ended December 31, 2007 and 2006, respectively. The increases were driven by market competition and rate increases enacted throughout 2006 by the FOMC resulting in a higher average prime rate during 2007 than 2006. Interest expense related to time deposits increased $2,121,000 as the average rate paid on time deposits increased to 4.73% from 4.11% for the year ended December 31, 2006. The increase in time deposit rates was the result of competitive pressure, FOMC rate increases, rate specials related to the opening of a new branch and the one year anniversary of a second, and incentive to customers to invest in short-term time deposits. In addition, the average balance in time deposits increased $21,508,000 due to the before mentioned rate specials, transfer of dollars from transaction accounts due to the increasing rate disparity between products, and the use of brokered deposits to limit the reliance on short-term FHLB funding.
The rate paid on borrowings increased to 4.57% from 4.50% for the year ended December 31, 2007. The increase in rate resulted in interest expense on borrowings increasing $194,000 with the majority of the increase occurring in the short-term borrowing category. The short-term borrowing rate increased 11 basis points to 4.45% due to the FOMC rate increases since the start of 2006. Interest expense associated with long-term borrowings increased $58,000 due to the average balance of long-term FHLB borrowings increasing $253,000 and a weighted average interest rate on the long-term debt increase of 6 basis points to 4.62% at December 31, 2007.
The following tables set forth certain information relating to the Company's average balance sheet and reflect the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
(Dollars In Thousands)
2008
Average Balance Interest Average Rate
ASSETS:
Tax-exempt loans $ 9,230 $ 603 6.53 %
All other loans 361,945 24,830 6.86 %
Total loans 371,175 25,433 6.85 %
Taxable securities 104,245 6,008 5.76 %
Tax-exempt securities 106,030 7,380 6.96 %
Total securities 210,275 13,388 6.37 %
Interest-bearing deposits 10 1 10.00 %
Total interest-earning assets 581,460 38,822 6.68 %
Other assets 50,779
Total assets $ 632,239
LIABILITIES:
Savings $ 60,324 443 0.73 %
Super Now deposits 52,117 658 1.26 %
Money market deposits 30,921 699 2.26 %
Time deposits 200,572 7,870 3.92 %
Total deposits 343,934 9,670 2.81 %
Short-term borrowings 50,545 1,181 2.31 %
Long-term borrowings 89,256 3,981 4.39 %
Total borrowings 139,801 5,162 3.64 %
Total interest-bearing liabilities 483,735 14,832 3.05 %
Demand deposits 73,618
Other liabilities 8,282
Shareholders' equity 66,604
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 632,239
Interest rate spread 3.63 %
Net interest income/margin $ 23,990 4.14 %
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† Fees on loans are included with interest on loans. Loan fees are included in interest income as follows: 2008-$472,000, 2007-$453,000, 2006-$478,000.
† Information on this table has been calculated using average daily balance sheets to obtain average balances.
† Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
† 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.
2007 2006
Average Balance Interest Average Rate Average Balance Interest Average Rate
ASSETS:
Tax-exempt loans $ 7,857 $ 485 6.17 % $ 8,173 $ 503 6.15 %
All other loans 353,528 25,779 7.29 % 344,524 24,545 7.12 %
Total loans 361,385 26,264 7.27 % 352,697 25,048 7.10 %
Taxable securities 93,480 5,474 5.86 % 91,767 4,837 5.27 %
Tax-exempt
securities 99,728 6,602 6.62 % 92,692 6,102 6.58 %
Total securities 193,208 12,076 6.25 % 184,459 10,939 5.93 %
Interest-bearing
deposits 345 19 5.51 % 152 11 7.24 %
Total
interest-earning
assets 554,938 38,359 6.91 % 537,308 35,998 6.70 %
Other assets 42,602 40,413
Total assets $ 597,540 $ 577,721
LIABILITIES:
Savings $ 58,710 428 0.73 % $ 61,958 509 0.82 %
Super Now deposits 46,596 611 1.31 % 47,294 655 1.38 %
Money market
deposits 23,920 540 2.26 % 23,905 493 2.06 %
Time deposits 198,029 9,372 4.73 % 176,521 7,251 4.11 %
Total deposits 327,255 10,951 3.35 % 309,678 8,908 2.88 %
Short-term 36,816
borrowings 1,639 4.45 % 34,612 1,503 4.34 %
Long-term borrowings 83,490 3,857 4.62 % 83,237 3,799 4.56 %
Total borrowings 120,306 5,496 4.57 % 117,849 5,302 4.50 %
Total 447,561
interest-bearing
liabilities 16,447 3.67 % 427,527 14,210 3.32 %
Demand deposits 69,953 69,668
Other liabilities 6,924 5,899
Shareholders' equity 73,102 74,627
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $ 597,540 $ 577,721
Interest rate spread 3.24 % 3.38 %
Net interest
income/margin $ 21,912 3.95 % $ 21,788 4.06 %
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Reconcilement of Taxable Equivalent Net Interest Income
2008 2007 2006
Total interest income $ 36,108 $ 35,949 $ 33,753
Total interest expense 14,832 16,447 14,210
Net interest income 21,276 19,502 19,543
Tax equivalent adjustment 2,714 2,410 2,245
Net interest income
(fully taxable equivalent) $ 23,990 $ 21,912 $ 21,788
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Rate/Volume Analysis
The table below sets forth certain information regarding changes in our interest income and interest expense for the periods indicated. For interest-earning assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in average volume multiplied by old rate) and (ii) changes in rates (changes in rate multiplied by old average volume). Increases and decreases due to both interest rate and volume, which cannot be separated, have been allocated proportionally to the change due to volume and the change due to interest rate. Income and interest rates are on a taxable equivalent basis.
(In Thousands)
Year Ended December 31,
2008 vs 2007 2007 vs 2006
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
Interest income:
Loans, tax-exempt $ 92 $ 26 $ 118 $ (20 ) $ 2 $ (18 )
Loans 638 (1,587 ) (949 ) 650 584 1,234
Taxable investment securities 621 (87 ) 534 88 549 637
Tax-exempt investment securities 532 246 778 466 34 500
Interest-bearing deposits (27 ) 9 (18 ) 12 (4 ) 8
Total interest-earning assets 1,856 (1,393 ) 463 1,196 1,165 2,361
Interest expense:
Savings deposits 12 3 15 (30 ) (51 ) (81 )
Super Now deposits 71 (24 ) 47 (10 ) (34 ) (44 )
Money market deposits 158 1 159 - 47 47
Time deposits 119 (1,621 ) (1,502 ) 344 1,777 2,121
Short-term borrowings 484 (942 ) (458 ) 100 36 136
Long-term borrowings 260 (136 ) 124 12 46 58
Total interest-bearing liabilities 1,104 (2,719 ) (1,615 ) 416 1,821 2,237
Change in net interest income $ 752 $ 1,326 2,078 $ 780 $ (656 ) $ 124
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PROVISION FOR LOAN LOSSES
2008 vs 2007
The provision for loan losses is based upon management's quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets served. An external independent loan review is also performed annually for the Bank. Management remains committed to an aggressive program of problem loan identification and resolution.
The allowance is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management's consideration of the nature of the portfolio segments, changes in mix and volume of the loan portfolio, and historical loan loss experience. In addition, management considers industry standards and trends with respect to nonperforming loans and its knowledge and experience with specific lending segments.
Although management believes that it uses the best information available to make such determinations and that the allowance for loan losses is adequate at December 31, 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 or 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 interest income. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review the Bank's loan loss allowance adequacy. The banking regulators 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.
The allowance for loan losses increased from $4,130,000 at December 31, 2007 to $4,356,000 at December 31, 2008. At December 31, 2008, allowance for loan losses was 1.14% of total loans compared to 1.15% of total loans at December 31, 2007.
The provision for loan losses totaled $375,000 for the year ended December 31, 2008 compared to $150,000 for the year ended December 31, 2007. Management concluded that the increase of the provision was appropriate when considering
the gross loan growth experienced during 2008 of $21,000,000 coupled with net charge-offs to average loans for the year ended December 31, 2008 of 0.04%. Utilizing both internal and external resources, as noted, senior management has concluded that the allowance for loan losses remains at a level adequate to provide for probable losses inherent in the loan portfolio.
2007 vs 2006
The allowance for loan losses decreased 1.31% or $55,000 from December 31, 2006 after net charge-offs of $205,000 contributed to a year-end 2007 allowance for loan losses of $4,130,000 or 1.15% of total loans. Based upon this analysis, as well as the others noted above, senior management concluded that the allowance for loan losses was at a level adequate to provide for probable losses inherent in the loan portfolio at December 31, 2007.
Following is a table showing the changes in the allowance for loan losses for the years ended December 31, 2008, 2007, 2006, 2005, and 2004:
(In Thousands)
2008 2007 2006 2005 2004
Balance at beginning of
period $ 4,130 $ 4,185 $ 3,679 $ 3,338 $ 3,069
Charge-offs:
Real estate 48 - 50 132 121
Commercial and industrial 51 103 28 206 50
Installment loans to
individuals 214 201 249 108 112
Total charge-offs 313 304 327 446 283
Recoveries:
Real estate 17 13 68 45 50
Commercial and industrial 60 1 40 8 4
Installment loans to
individuals 87 85 90 14 33
Total recoveries 164 99 198 67 87
Net charge-offs 149 205 129 379 196
Additions charged to
operations 375 150 635 720 465
Balance at end of period $ 4,356 $ 4,130 $ 4,185 $ 3,679 $ 3,338
Ratio of net charge-offs
during the period to average
loans outstanding during the
period 0.04 % 0.06 % 0.04 % 0.11 % 0.06 %
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NON-INTEREST INCOME
2008 vs 2007
Total non-interest income decreased $2,022,000 from the year ended December 31, 2007 to 2008. Excluding security losses, non-interest income decreased $45,000. Service charges increased as overdraft protection fees increased $100,000 and offset customer migrations to checking accounts having reduced or no service charges. Earnings on bank-owned life insurance increased as additional policies were purchased. Insurance commissions decreased due to the general economic downturn, which has led to a decrease in volume of sales. Management of The M Group continues to pursue new and build upon current relationships. However, the sales cycle for insurance and investment products can take typically from six months to one year or more to complete. The increase in other income was primarily due to increases in revenues from debit card transactions, merchant card commissions, and title insurance.
(In Thousands)
2008 2007 Change
Amount % Total Amount % Total Amount %
Deposit service charges $ 2,289 41.95 % $ 2,246 30.03 % $ 43 1.91 %
Securities (losses) gains, net (2,031 ) (37.23 ) (54 ) (0.72 ) (1,977 ) 3,661.11
Bank-owned life insurance 472 8.65 410 5.48 62 15.12
Gain on sale of loans 882 16.17 921 12.32 (39 ) (4.23 )
Insurance commissions 1,928 35.34 2,222 29.72 (294 ) (13.23 )
Other income 1,916 35.12 1,733 23.17 183 10.56
Total non-interest income $ 5,456 100.00 % $ 7,478 100.00 % $ (2,022 ) (27.04 )%
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2007 vs 2006
Total non-interest income decreased $1,551,000 from the year ended December 31, 2007 to 2006. Excluding security (losses) gains and the gain on sale of loans, non-interest income increased $114,000. Service charges decreased $120,000 as overdraft protection fees declined and customers migrated to new checking accounts having reduced or no service charges. Earnings on bank-owned life insurance increased $36,000. Insurance commissions decreased $59,000 due to a reduction in the overall commission from the underwriter that The M Group receives on each insurance contract written. The increase in other income was primarily due to increases in revenues from debit card transactions, merchant card commissions, and commissions generated by The M Group for securities transactions.
(In Thousands)
2007 2006 Change
Amount % Total Amount % Total Amount %
Deposit service charges $ 2,246 30.03 % $ 2,366 26.20 % $ (120 ) (5.07 )%
Securities (losses) gains, net (54 ) (0.72 ) 1,679 18.60 (1,733 ) (103.22 )
Bank-owned life insurance 410 5.48 374 4.14 36 9.63
Gain on sale of loans 921 12.32 853 9.45 68 7.97
Insurance commissions 2,222 29.72 2,281 25.26 (59 ) (2.59 )
Other income 1,733 23.17 1,476 16.35 257 17.41
Total non-interest income $ 7,478 100.00 % $ 9,029 100.00 % $ (1,551 ) (17.18 )%
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NON-INTEREST EXPENSE
2008 vs 2007
Total non-interest expenses increased $633,000 from the year ended December 31, 2007 to December 31, 2008. Salaries and employee benefits increased due to several factors including standard cost of living wage adjustments for employees, increased benefit costs, and expenses associated with the post-retirement segment of split-dollar bank owned life insurance. Pennsylvania shares tax decreased due to tax credits associated with an investment in low income housing within the Lycoming County market. Other expenses increased primarily due to increases in legal and insurance costs coupled with our continued emphasis on giving back to the communities that we serve resulting in a doubling of donations during 2008 compared to 2007.
(In Thousands)
2008 2007 Change
Amount % Total Amount % Total Amount %
Salaries and employee
benefits $ 9,634 53.67 % $ 9,078 52.43 % $ 556 6.12 %
Occupancy, net 1,288 7.18 1,306 7.54 (18 ) (1.38 )
Furniture and
equipment 1,182 6.59 1,126 6.50 56 4.97
Pennsylvania shares
tax 421 2.35 643 3.71 (222 ) (34.53 )
Amortization of
investment in limited
partnership 712 3.97 761 4.39 (49 ) (6.44 )
Other expenses 4,712 26.24 4,402 25.43 310 7.04
Total non-interest
expense $ 17,949 100.00 % $ 17,316 100.00 % $ 633 3.66 %
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2007 vs 2006
Total non-interest expenses increased $987,000 from the year ended December 31, 2006 to December 31, 2007. Salaries and employee benefits increased by $245,000 and were attributed to several factors including standard cost of living wage adjustments for employees, full year impact of the Montoursville branch, and increased benefit costs. Occupancy expense increased due to the new branch in Montoursville, which opened in the third quarter of 2006, and increased cost of maintenance and property taxes. Amortization increase attributed to low income housing partnership that began operation during the fourth quarter of 2006.
(In Thousands)
2007 2006 Change
Amount % Total Amount % Total Amount %
Salaries and employee
benefits $ 9,078 52.43 % $ 8,833 54.09 % $ 245 2.77 %
Occupancy, net 1,306 7.54 1,137 6.96 169 14.86
Furniture and
equipment 1,126 6.50 1,201 7.36 (75 ) (6.24 )
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