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| PWOD > SEC Filings for PWOD > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
EARNINGS SUMMARY
Comparison of the Three and Nine Months Ended September 30, 2009 and 2008
Summary Results
Net income for the three months ended September 30, 2009 was $1,922,000 compared to $1,552,000 for the same period of 2008 as after-tax securities losses decreased $658,000 (from a loss of $993,000 to a loss of $335,000). Included within the change in after-tax securities losses was an other than temporary impairment charge relating to certain equity securities held in the investment portfolio of $30,000. Basic and diluted earnings per share for the three months ended September 30, 2009 were $0.50 compared to $0.40 for the three months ended September 30, 2008. Return on average assets and return on average equity were 1.15% and 12.08% for the three months ended September 30, 2009 compared to 0.98% and 9.43% for the corresponding period of 2008. Net income from core operations ("operating earnings") decreased to $2,257,000 for the three months ended September 30, 2009 compared to $2,545,000 for the same period of 2008. Operating earnings per share for the three months ended September 30, 2009 were $0.59 basic and dilutive compared to $0.66 basic and dilutive for the three months ended September 30, 2008.
The nine months ended September 30, 2009 generated net income of $3,593,000 compared to $5,740,000 for the same period of 2008. Comparable results were impacted by an increase in after-tax securities losses of $2,142,000 (from a loss of $1,133,000 to a loss of $3,275,000). Earnings per share, basic and diluted, for the nine months ended September 30, 2009 were $0.94 as compared to $1.49 for the comparable period of 2008. Return on average assets and return on average equity were 0.73% and 7.80% for the nine months ended September 30, 2009 compared to 1.21% and 11.10% for the corresponding period of 2008. Operating earnings remained stable at $6,868,000 for the nine months ended September 30, 2009 compared to $6,873,000 for the comparable period of 2008, resulting in basic and dilutive operating earnings per share increasing to $1.79 from $1.78 for the nine month periods ended September 30, 2009 and 2008, respectively.
Management uses the non-GAAP measure of net income from core operations, or operating earnings, in its analysis of the Company's performance. This measure, as used by the Company, adjusts net income by excluding 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, or operating earnings, 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.
Reconciliation of GAAP and non-GAAP Income
(In Thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
GAAP net income $ 1,922 $ 1,552 $ 3,593 $ 5,740
Securities losses, net of tax (335 ) (993 ) (3,275 ) (1,133 )
Non-GAAP operating earnings $ 2,257 $ 2,545 $ 6,868 $ 6,873
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Interest and Dividend Income
Interest and dividend income for the three months ended September 30, 2009 remained stable at $9,113,000 compared to $9,108,000 for the same period of 2008. The increase in interest income was the result of an increase in loan interest of $146,000 which offset the decline in investment securities income of $141,000. The increase in loan interest is the result of growth in the average gross loan portfolio of $25,843,000. The growth offset a decline in the average taxable equivalent yield of 27 basis points ("bp") caused by the low interest rate environment that has existed over the past year. Dividend income decreased as a direct result of the current status of the economy that has caused many of the issuers of equity holdings in our portfolio to decrease or suspend their dividend. In addition, the Federal Home Loan Bank of Pittsburgh ("FHLB") has suspended payment of dividends on shares of its common stock, which resulted in a decrease of approximately $81,000 in dividend income for the third quarter of 2009 compared to 2008. On a taxable equivalent basis, total interest income increased $74,000 due to volume increases that offset the decline in yield.
During the nine months ended September 30, 2009, interest and dividend income
was $27,043,000, a decrease of $49,000 over the same period in 2008. Interest
income on the loan portfolio increased $89,000 as the growth in the portfolio
countered a 38 bp decline in average yield. The investment portfolio interest
income was negatively impacted by approximately $240,000 due to the suspension
of FHLB dividends which resulted in total interest income from investment
securities decreasing $138,000 from the comparable period of 2008.
Tax-equivalent interest income increased $144,000 due to an overall increase in
earning assets of $21,368,000, and a shift in the earning asset portfolio
towards loans from investments.
Interest and dividend income composition for the three and nine months ended September 30, 2009 and 2008 was as follows:
(In Thousands) For The Three Months Ended
September 30, 2009 September 30, 2008 Change
Amount % Total Amount % Total Amount %
Loans including fees $ 6,457 70.9 % $ 6,311 69.3 % $ 146 2.3 %
Investment securities:
Taxable 1,368 15.0 1,391 15.3 (23 ) (1.7 )
Tax-exempt 1,253 13.7 1,205 13.2 48 4.0
Dividend and other
interest income 35 0.4 201 2.2 (166 ) (82.6 )
Total interest and
dividend income $ 9,113 100.0 % $ 9,108 100.0 % $ 5 0.1 %
(In Thousands) For The Nine Months Ended
September 30, 2009 September 30, 2008 Change
Amount % Total Amount % Total Amount %
Loans including fees $ 19,025 70.4 % $ 18,936 69.9 % $ 89 0.5 %
Investment securities:
Taxable 4,105 15.2 3,857 14.2 248 6.4
Tax-exempt 3,748 13.9 3,641 13.5 107 2.9
Dividend and other
interest income 165 0.5 658 2.4 (493 ) (74.9 )
Total interest and
dividend income $ 27,043 100.0 % $ 27,092 100.0 % $ (49 ) (0.2 )%
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Interest Expense
Interest expense for the three months ended September 30, 2009 decreased $427,000 to $3,168,000 compared to $3,595,000 for the same period of 2008. The decreased expense of $262,000 associated with deposits is primarily the result of a reduction of 86 bp in rates paid on time deposits. Factors that led to the rate decreases include, but are not limited to, Federal Open Market Committee ("FOMC") interest rate actions and campaigns conducted by the Company during the past two years to attract short-term CDs resulting in an increased repricing frequency. Short-term borrowings interest expense decreased $228,000 as the average balance of such borrowings decreased $35,758,000, while the rate paid declined 25 bp. Long-term borrowing interest expense increased $63,000 as the average balance of such borrowings increased slightly, while the average rate decreased 10 bp to 4.23%.
Interest expense for the nine months ended September 30, 2009 decreased $2,086,000 from the same period of 2008. The reasons noted for the decline in interest expense for the three month period comparison also apply to the nine month period.
Interest expense composition for the three and nine months ended September 30, 2009 and 2008 was as follows:
(In Thousands) For The Three Months Ended
September 30, 2009 September 30, 2008 Change
Amount % Total Amount % Total Amount %
Deposits $ 2,148 67.8 % $ 2,410 67.0 % $ (262 ) (10.9 )%
Short-term borrowings 82 2.6 310 8.6 (228 ) (73.5 )
Long-term borrowings, FHLB 938 29.6 875 24.4 63 7.2
Total interest expense $ 3,168 100.0 % $ 3,595 100.0 % $ (427 ) (11.9 )%
(In Thousands) For The Nine Months Ended
September 30, 2009 September 30, 2008 Change
Amount % Total Amount % Total Amount %
Deposits $ 6,357 67.2 % $ 7,502 65.0 % $ (1,145 ) (15.3 )%
Short-term borrowings 318 3.4 996 8.6 (678 ) (68.1 )
Long-term borrowings, FHLB 2,781 29.4 3,044 26.4 (263 ) (8.6 )
Total interest expense $ 9,456 100.0 % $ 11,542 100.0 % $ (2,086 ) (18.1 )%
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Net Interest Margin
The net interest margin ("NIM") for the three months ended September 30, 2009 was 4.35% compared to 4.23% for the corresponding period of 2008. The increase in the NIM was driven by a 52 bp decline in the rate paid on interest bearing liabilities that more than compensated for a 27 bp decline in the yield on earning assets. The decrease in earning asset yield is due to the impact on the loan and investment portfolios of the current low rate environment. The decrease in the cost of interest bearing liabilities to 2.41% from 2.93% was driven by a reduction in the rate paid on time deposits of 86 bp. The reduction in the rate paid on time deposits was the result of a shortening of the time deposit portfolio that has resulted in an increasing repricing frequency during this period of decreasing rates. The duration of the time deposit portfolio began to be lengthened during the second and through the third quarter of 2009 due to the apparent bottoming or near bottoming of deposit rates.
The NIM for the nine months ended September 30, 2009 was 4.39% compared to 4.04% for the same period of 2008. The impact of the items mentioned in the three month discussion also applies to the nine month period. A 113 bp decline in the rate paid on time deposits served as the foundation for an 78 bp decline in rate paid on deposits, while the FOMC and general market actions affected the yield on earning assets and cost of borrowings.
The following is a schedule of average balances and associated yields for the three and nine months ended September 30, 2009 and 2008:
(In Thousands) AVERAGE BALANCES AND INTEREST RATES
Three Months Ended Three Months Ended
September 30, 2009 September 30, 2008
Average Average
Balance Interest Average Rate Balance Interest Average Rate
Assets:
Tax-exempt loans $ 17,207 $ 279 6.43 % $ 9,108 $ 148 6.46 %
All other loans 382,670 6,273 6.50 % 364,926 6,213 6.77 %
Total loans 399,877 6,552 6.50 % 374,034 6,361 6.77 %
Taxable investment
securities 104,905 1,402 5.35 % 107,751 1,592 5.91 %
Tax-exempt investment
securities 104,719 1,898 7.25 % 103,431 1,826 7.06 %
Total securities 209,624 3,300 6.30 % 211,182 3,418 6.47 %
Interest bearing
deposits 4,218 1 0.09 % 34 - 0.00 %
Total
interest-earning
assets 613,719 9,853 6.39 % 585,250 9,779 6.66 %
Other assets 54,284 50,225
Total assets $ 668,003 $ 635,475
Liabilities and
shareholders' equity:
Savings $ 62,265 85 0.54 % $ 62,792 120 0.76 %
Super Now deposits 60,476 127 0.83 % 52,970 175 1.31 %
Money market deposits 71,204 345 1.92 % 34,915 208 2.37 %
Time deposits 222,816 1,591 2.83 % 205,346 1,907 3.69 %
Total deposits 416,761 2,148 2.04 % 356,023 2,410 2.69 %
Short-term borrowings 15,457 82 2.13 % 51,215 310 2.38 %
Long-term borrowings,
FHLB 86,778 938 4.23 % 79,061 875 4.33 %
Total borrowings 102,235 1,020 3.91 % 130,276 1,185 3.57 %
Total
interest-bearing
liabilities 518,996 3,168 2.41 % 486,299 3,595 2.93 %
Demand deposits 75,114 75,863
Other liabilities 10,256 7,467
Shareholders' equity 63,637 65,846
Total liabilities and
shareholders' equity $ 668,003 $ 635,475
Interest rate spread 3.97 % 3.73 %
Net interest
income/margin $ 6,685 4.35 % $ 6,184 4.23 %
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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.
(In Thousands) AVERAGE BALANCES AND INTEREST RATES
Nine Months Ended Nine Months Ended
September 30, 2009 September 30, 2008
Average Average
Balance Interest Average Rate Balance Interest Average Rate
Assets:
Tax-exempt loans $ 16,682 $ 817 6.55 % $ 8,534 $ 411 6.43 %
All other loans 378,043 18,486 6.54 % 359,570 18,665 6.93 %
Total loans 394,725 19,303 6.54 % 368,104 19,076 6.92 %
Taxable securities 102,937 4,269 5.53 % 104,604 4,514 5.75 %
Tax-exempt securities 103,418 5,679 7.32 % 108,877 5,517 6.76 %
Total securities 206,355 9,948 6.43 % 213,481 10,031 6.27 %
Interest bearing
deposits 1,886 1 0.07 % 13 1 10.28 %
Total
interest-earning
assets 602,966 29,252 6.48 % 581,598 29,108 6.68 %
Other assets 55,080 49,638
Total assets $ 658,046 $ 631,236
Liabilities and
shareholders' equity:
Savings $ 61,106 244 0.53 % $ 60,857 343 0.75 %
Super Now deposits 57,028 387 0.91 % 51,228 513 1.34 %
Money market deposits 59,061 924 2.09 % 28,372 481 2.26 %
Time deposits 217,679 4,802 2.95 % 201,950 6,165 4.08 %
Total Deposits 394,874 6,357 2.15 % 342,407 7,502 2.93 %
Short-term borrowings 31,491 318 1.39 % 47,894 996 2.75 %
Other borrowings 86,778 2,781 4.23 % 90,088 3,044 4.44 %
Total borrowings 118,269 3,099 3.47 % 137,982 4,040 3.85 %
Total
interest-bearing
liabilities 513,143 9,456 2.46 % 480,389 11,542 3.19 %
Demand deposits 73,469 73,205
Other liabilities 10,018 8,672
Shareholders' equity 61,416 68,970
Total liabilities and
shareholders' equity $ 658,046 $ 631,236
Interest rate spread 4.02 % 3.49 %
Net interest
income/margin $ 19,796 4.39 % $ 17,566 4.04 %
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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 months ended September 30, 2009 and 2008.
(In Thousands) For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Total interest income $ 9,113 $ 9,108 $ 27,043 $ 27,092
Total interest expense 3,168 3,595 9,456 11,542
Net interest income 5,945 5,513 17,587 15,550
Tax equivalent adjustment 740 671 2,209 2,016
Net interest income (fully
taxable equivalent) $ 6,685 $ 6,184 $ 19,796 $ 17,566
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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, 2009 and 2008:
(In Thousands) Three Months Ended September 30, Nine Months Ended September 30,
2009 vs 2008 2009 vs 2008
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
Interest income:
Loans, tax-exempt $ 132 $ (1 ) $ 131 $ 398 $ 8 $ 406
Loans 306 (246 ) 60 916 (1,095 ) (179 )
Taxable investment
securities (40 ) (150 ) (190 ) (71 ) (174 ) (245 )
Tax-exempt investment
securities 22 50 72 (268 ) 430 162
Interest bearing
deposits 1 - 1 144 (144 ) -
Total
interest-earning
assets 421 (347 ) 74 1,119 (975 ) 144
Interest expense:
Savings deposits (1 ) (34 ) (35 ) 1 (100 ) (99 )
Super Now deposits 22 (70 ) (48 ) 53 (179 ) (126 )
Money market deposits 182 (45 ) 137 483 (40 ) 443
Time deposits 152 (468 ) (316 ) 450 (1,813 ) (1,363 )
Short-term borrowings (193 ) (35 ) (228 ) (9 ) (669 ) (678 )
Long-term borrowings,
FHLB 83 (20 ) 63 (106 ) (157 ) (263 )
Total
interest-bearing
liabilities 245 (672 ) (427 ) 872 (2,958 ) (2,086 )
Change in net
interest income $ 176 $ 325 $ 501 $ 247 $ 1,983 $ 2,230
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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, 2009, 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 $4,356,000 at December 31, 2008 to $4,478,000 at September 30, 2009. At September 30, 2009 and December 31, 2008, the allowance for loan losses to total loans was 1.12% and 1.14%, respectively.
The provision for loan losses totaled $270,000 and $582,000 for the three and nine months ended September 30, 2009, compared to $110,000 and $230,000 for the same period in 2008. The amount of the increase in the provision was the result of several factors, including but not limited to, an increase in gross loans of $19,347,000 since December 31, 2008, a ratio of net charge offs to average loans of 0.12% for the nine months ended September 30, 2009, a ratio of nonperforming loans to total loans of 1.46%, and a ratio of the allowance for loan losses to nonperforming loans of 76.63% at September 30, 2009. As noted in the following schedules, there has been an increase in nonperforming loans and net charge-offs over the past year. Nonperforming loans increased to $5,844,000 at September 30, 2009 from $1,735,000 at December 31, 2008 due primarily to a commercial real estate loan of approximately $2,800,000 being classified as 90 days past due as of September 30, 2009. The loan is collateralized with no loss anticipated at this time. Continued uncertainty surrounding the economy and internal loan review and analysis, coupled with the ratios noted previously, dictated an increase in the provision for loan losses. The increase did not equate to the increase in charge-offs and nonperforming loans due to the collateral status of the nonperforming loans and overall loan portfolio in general, which limits the loan specific allocation of the allowance for loan losses.
Following is a table showing the changes in the allowance for loan losses for the nine month periods ended September 30, 2009 and 2008:
(In Thousands) 2009 2008 Balance at beginning of period $ 4,356 $ 4,130 . . . |
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