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PWOD > SEC Filings for PWOD > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for PENNS WOODS BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PENNS WOODS BANCORP INC


12-Nov-2013

Quarterly Report


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

EARNINGS SUMMARY

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

Summary Results

Net income for the three months ended September 30, 2013 was $3,246,000 compared to $3,667,000 for the same period of 2012 as after-tax securities gains decreased $297,000 (from a gain of $295,000 to a loss of $2,000). The results for the three months ended September 30, 2013 were negatively impacted by $684,000 in expenses related to the acquisition of Luzerne. Basic and diluted earnings per share for the three months ended September 30, 2013 and 2012 were $0.67 and $0.96, respectively. Return on average assets and return on average equity were 1.08% and 10.39% for the three months ended September 30, 2013 compared to 1.77% and 15.94% for the corresponding period of 2012. Net income from core operations ("operating earnings") decreased to $3,248,000 for the three months ended September 30, 2013 compared to $3,372,000 for the same period of 2012. Operating earnings per share for the three months ended September 30, 2013 were $0.67 basic and dilutive compared to $0.88 basic and dilutive for the three months ended September 30, 2012.

The nine months ended September 30, 2013 generated net income of $10,589,000 compared to $10,754,000 for the same period of 2012. Comparable results were impacted by an increase in after-tax securities gains of $694,000 (from a gain of $796,000 to a gain of $1,490,000). In addition, a gain of $109,000 on death benefit related to bank owned life insurance was recorded during the nine months ended September 30, 2013. The results for the nine months ended September 30, 2013 were negatively impacted by $1,307,000 in expenses related to the acquisition of Luzerne. Earnings per share, basic and dilutive, for the nine months ended September 30, 2013 were $2.48 compared to $2.80 for the comparable period of 2012. Return on average assets and return on average equity were 1.39% and 12.90% for the nine months ended September 30, 2013 compared to 1.78% and 16.25% for the corresponding period of 2012. Operating earnings decreased to $9,099,000 for the nine months ended September 30, 2013 compared to $9,849,000 for the comparable period of 2012. Operating earnings per share for the nine months ended September 30, 2013 were $2.13 basic and dilutive compared to $2.57 basic and dilutive for the nine months ended September 30, 2012.

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 and bank-owned life insurance gains on death benefit. 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 Financial Measures

(Dollars in Thousands, Except Per Share Data)      Three Months Ended September        Nine Months Ended
                                                                30,                      September 30,
                                                       2013             2012           2013          2012
GAAP net income                                    $   3,246         $   3,667     $   10,589     $ 10,754
Less: net securities and bank-owned life
insurance (losses) gains, net of tax                      (2 )             295          1,490          905
Non-GAAP operating earnings                        $   3,248         $   3,372     $    9,099     $  9,849



                                                      Three Months Ended          Nine Months Ended
                                                         September 30,              September 30,
                                                      2013           2012         2013          2012
Return on average assets (ROA)                       1.08 %         1.77 %       1.39 %         1.78 %
Less: net securities and bank-owned life
insurance (losses) gains, net of tax                    - %         0.14 %       0.20 %         0.15 %
Non-GAAP operating ROA                               1.08 %         1.63 %       1.19 %         1.63 %


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                                                      Three Months Ended          Nine Months Ended
                                                         September 30,              September 30,
                                                       2013           2012        2013          2012
Return on average equity (ROE)                      10.39  %         15.94 %    12.90 %        16.25 %
Less: net securities and bank-owned life
insurance (losses) gains, net of tax                (0.01 )%          1.28 %     1.82 %         1.37 %
Non-GAAP operating ROE                              10.40  %         14.66 %    11.08 %        14.88 %


                                                     Three Months Ended         Nine Months Ended
                                                        September 30,             September 30,
                                                      2013         2012         2013         2012
Basic earnings per share (EPS)                     $    0.67     $  0.96     $    2.48     $  2.80
Less: net securities and bank-owned life
insurance (losses) gains, net of tax                       -        0.08          0.35        0.23
Non-GAAP basic operating EPS                       $    0.67     $  0.88     $    2.13     $  2.57



                                                     Three Months Ended         Nine Months Ended
                                                        September 30,             September 30,
                                                      2013         2012         2013         2012
Dilutive EPS                                       $    0.67     $  0.96     $    2.48     $  2.80
Less: net securities and bank-owned life
insurance (losses) gains, net of tax                       -        0.08          0.35        0.23
Non-GAAP dilutive operating EPS                    $    0.67     $  0.88     $    2.13     $  2.57

Interest and Dividend Income

Interest and dividend income for the three months ended September 30, 2013 increased to $11,979,000 compared to $9,267,000 for the same period of 2012. The increase was due to loan portfolio income increasing as the impact of portfolio growth, due primarily due to the acquisition of Luzerne, offset a reduction in yield of 77 basis points ("bp") due to the competitive landscape and the continued low rate environment that is impacting new loan rates as well as the variable rate segment of the loan portfolio. The loan portfolio income increase was partially offset by a decrease in investment portfolio interest due to a decline in the average taxable equivalent yield of 38 bp as the duration in the investment portfolio continues to be shortened in order to reduce interest rate and market risk in the future.

During the nine months ended September 30, 2013, interest and dividend income was $31,537,000, an increase of $3,705,000 over the same period in 2012. Interest income on the loan portfolio increased as the growth in the portfolio, primarily due to the acquisition of Luzerne, was countered by a 74 bp decline in average yield. The investment portfolio interest income decreased as the increase in portfolio size was more than offset by the decline in yield.

Interest and dividend income composition for the three and nine months ended September 30, 2013 and 2012 was as follows:

                                                          Three Months Ended
                             September 30, 2013            September 30, 2012                 Change
(In Thousands)              Amount        % Total         Amount         % Total       Amount          %
Loans including fees     $     9,211        76.89 %   $    6,346           68.47 %   $  2,865       45.15   %
Investment securities:
Taxable                        1,570        13.11          1,486           16.04           84        5.65
Tax-exempt                     1,124         9.38          1,339           14.45         (215 )    (16.06 )
Dividend and other
interest income                   74         0.62             96            1.04          (22 )    (22.92 )
Total interest and
dividend income          $    11,979       100.00 %   $    9,267          100.00 %   $  2,712       29.27   %


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                                                        Nine Months Ended
                             September 30, 2013           September 30, 2012               Change
(In Thousands)              Amount        % Total        Amount        % Total       Amount         %
Loans including fees     $    23,256        73.74 %   $    18,954        68.10 %   $  4,302       22.70   %
Investment securities:
Taxable                        4,520        14.33           4,477        16.09           43        0.96
Tax-exempt                     3,553        11.27           4,127        14.83         (574 )    (13.91 )
Dividend and other
interest income                  208         0.66             274         0.98          (66 )    (24.09 )
Total interest and
dividend income          $    31,537       100.00 %   $    27,832       100.00 %   $  3,705       13.31   %

Interest Expense

Interest expense for the three months ended September 30, 2013 decreased $227,000 to $1,350,000 compared to $1,577,000 for the same period of 2012. The substantial decrease associated with deposits is primarily the result of a reduction of 48 and 17 bps in the rate paid on time deposits and money markets, respectively, and a continued shift from higher cost time deposits to core deposits, with emphasis on money market and NOW accounts. Factors that led to the rate decreases include, but are not limited to, Federal Open Market Committee ("FOMC") actions to maintain low interest rates, campaigns conducted by the Company to focus on core deposit (non-time deposit) growth as the building block to solid customer relationships, and the acquisition of Luzerne. In addition, during the past two years the time deposit portfolio has been shortened in order to increase repricing frequency. The time deposit portfolio is now slowly being lengthened to build protection when interest rates begin to increase. In addition, the Marcellus Shale natural gas exploration in north central Pennsylvania is creating opportunities to gather new and build upon existing deposit relationships. Borrowing interest expense decreased as FHLB long-term borrowings have matured and have been replaced at rates less than 1% with maturities ranging from four to five years.

Interest expense for the nine months ended September 30, 2013 decreased 17.28% from the same period of 2012. 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, 2013 and 2012 was as follows:

                                                               Three Months Ended
                                  September 30, 2013             September 30, 2012                 Change
(In Thousands)                   Amount         % Total         Amount         % Total       Amount          %
Deposits                     $      855           63.33 %   $      902           57.20 %   $    (47 )     (5.21 ) %
Short-term borrowings                16            1.19             38            2.41          (22 )    (57.89 )
Long-term borrowings, FHLB          479           35.48            637           40.39         (158 )    (24.80 )
Total interest expense       $    1,350          100.00 %   $    1,577          100.00 %   $   (227 )    (14.39 ) %



                                                               Nine Months Ended
                                  September 30, 2013             September 30, 2012                 Change
(In Thousands)                   Amount         % Total         Amount         % Total       Amount          %
Deposits                     $    2,406           60.92 %   $    2,797           58.59 %   $   (391 )    (13.98 ) %
Short-term borrowings                63            1.60            100            2.09          (37 )    (37.00 )
Long-term borrowings, FHLB        1,480           37.48          1,877           39.32         (397 )    (21.15 )
Total interest expense       $    3,949          100.00 %   $    4,774          100.00 %   $   (825 )    (17.28 ) %

Net Interest Margin

The net interest margin ("NIM") for the three months ended September 30, 2013 was 4.07% compared to 4.34% for the corresponding period of 2012. The NIM declined as a 39 bp decline in the rate paid on interest bearing liabilities was countered by a 59 bp decline in the yield on interest earning assets. The decrease in earning asset yield is due to the impact of the current low rate environment on the loan and investment portfolios. In addition, the duration of the investment portfolio has been shortened by utilizing variable rate and intermediate term corporate bonds to offset the relatively longer duration of the municipal bonds within the portfolio. This shortening of the investment portfolio limits current earnings due to the low rates on


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the short end of the interest rate curve, but it also limits interest rate risk and will provide cash flow over the next few years as we anticipate a period of increasing rates. The decrease in the cost of interest bearing liabilities from 1.02% to 0.63% was driven by a reduction in the rate paid on time deposits of 48 bp. The reduction in the rate paid on time deposits was the result of shortening the time deposit portfolio, which has resulted in an increasing repricing frequency during this period of low rates. In addition, a focus on increasing core deposits has resulted in significant growth in lower cost core deposits. The duration of the time deposit portfolio has slowly started to be lengthened due to the apparent bottoming or near bottoming of deposit rates. The average rate on long-term borrowings declined due to the maturity of FHLB borrowings during 2012 and 2013 coupled with the addition of $30,000,000 in borrowings with terms ranging from four to five years at rates less than 1% during the second half of 2012.

The NIM for the nine months ended September 30, 2013 was 4.19% compared to 4.51% for the same period of 2012. The impact of the items mentioned in the three month discussion also applies to the nine month period. A 40 bp decline in the rate paid on time deposits served as the foundation for a 23 bp decline in the 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, 2013 and 2012:


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                                                                  AVERAGE BALANCES AND INTEREST RATES
                                      Three Months Ended September 30, 2013                 Three Months Ended September 30, 2012
(In Thousands)                    Average Balance      Interest      Average Rate      Average Balance       Interest      Average Rate
Assets:
Tax-exempt loans                $          22,688     $     263           4.60 %     $          22,916     $      302           5.24 %
All other loans                           774,355         9,037           4.63 %               452,370          6,147           5.41 %
Total loans                               797,043         9,300           4.63 %               475,286          6,449           5.40 %

Fed funds sold                                355             -              - %                     -              -              - %

Taxable securities                        184,325         1,637           3.55 %               162,822          1,580           3.88 %
Tax-exempt securities                     112,432         1,703           6.06 %               132,996          2,029           6.10 %
Total securities                          296,757         3,340           4.50 %               295,818          3,609           4.88 %

Interest-bearing deposits                  10,783             7           0.26 %                 8,966              2           0.09 %

Total interest-earning assets           1,104,938        12,647           4.55 %               780,070         10,060           5.14 %

Other assets                               94,928                                               48,096

Total assets                    $       1,199,866                                    $         828,166

Liabilities and shareholders'
equity:
Savings                         $         141,526            44           0.12 %     $          81,413             16           0.08 %
Super Now deposits                        163,422           177           0.43 %               120,135            158           0.52 %
Money market deposits                     207,684           144           0.28 %               151,307            173           0.45 %
Time deposits                             238,551           490           0.81 %               171,245            555           1.29 %
Total interest-bearing
deposits                                  751,183           855           0.45 %               524,100            902           0.68 %

Short-term borrowings                      20,568            16           0.31 %                18,607             38           0.81 %
Long-term borrowings, FHLB                 70,750           479           2.65 %                65,517            637           3.80 %
Total borrowings                           91,318           495           2.12 %                84,124            675           3.14 %

Total interest-bearing
liabilities                               842,501         1,350           0.63 %               608,224          1,577           1.02 %

Demand deposits                           214,897                                              116,582
Other liabilities                          17,513                                               11,355
Shareholders' equity                      124,955                                               92,005

Total liabilities and
shareholders' equity            $       1,199,866                                    $         828,166
Interest rate spread                                                      3.92 %                                                4.12 %
Net interest income/margin                            $  11,297           4.07 %                           $    8,483           4.34 %

1. Information on this table has been calculated using average daily balance sheets to obtain average balances.
2. Non-accrual 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.


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                                                             AVERAGE BALANCES AND INTEREST RATES
                                Nine Months Ended September 30, 2013                    Nine Months Ended September 30, 2012
(In Thousands)            Average Balance        Interest       Average Rate      Average Balance        Interest       Average Rate
Assets:
Tax-exempt loans        $          22,069     $        761           4.61 %     $          21,977     $        909           5.52 %
All other loans                   623,047           22,754           4.88 %               436,921           18,354           5.61 %
Total loans                       645,116           23,515           4.87 %               458,898           19,263           5.61 %

Fed funds sold                        152                -              - %                     -                -              - %

Taxable securities                174,977            4,714           3.59 %               157,791            4,747           4.01 %
Tax-exempt securities             119,799            5,383           5.99 %               131,306            6,253           6.35 %
Total securities                  294,776           10,097           4.57 %               289,097           11,000           5.07 %

Interest-bearing
deposits                            7,628               14           0.25 %                 8,098                4           0.07 %

Total
interest-earning
assets                            947,672           33,626           4.74 %               756,093           30,267           5.34 %

Other assets                       69,942                                                  49,702

Total assets            $       1,017,614                                       $         805,795

Liabilities and
shareholders' equity:
Savings                 $         111,242               96           0.12 %     $          78,180               44           0.08 %
Super Now deposits                150,220              521           0.46 %               116,205              452           0.52 %
Money market deposits             174,991              408           0.31 %               143,878              580           0.54 %
Time deposits                     200,688            1,381           0.92 %               173,578            1,721           1.32 %
Total
interest-bearing
deposits                          637,141            2,406           0.50 %               511,841            2,797           0.73 %

Short-term borrowings              21,235               63           0.40 %                19,293              100           0.69 %
Long-term borrowings,
FHLB                               72,607            1,480           2.69 %                62,701            1,877           3.93 %
Total borrowings                   93,842            1,543           2.17 %                81,994            1,977           3.17 %

Total
interest-bearing
liabilities                       730,983            3,949           0.72 %               593,835            4,774           1.07 %

Demand deposits                   161,948                                                 112,464
Other liabilities                  15,208                                                  11,258
Shareholders' equity              109,475                                                  88,238

Total liabilities and
shareholders' equity    $       1,017,614                                       $         805,795
Interest rate spread                                                 4.02 %                                                  4.27 %
Net interest
income/margin                                 $     29,677           4.19 %                           $     25,493           4.51 %

1. Information on this table has been calculated using average daily balance sheets to obtain average balances.
2. Non-accrual 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, 2013 and 2012.

                                     Three Months Ended September 30,       Nine Months Ended September 30,
(In Thousands)                             2013               2012               2013               2012
Total interest income              $           11,979     $     9,267     $          31,537     $    27,832
Total interest expense                          1,350           1,577                 3,949           4,774
Net interest income                            10,629           7,690                27,588          23,058
Tax equivalent adjustment                         668             793                 2,089           2,435
Net interest income (fully
taxable equivalent)                $           11,297     $     8,483     $          29,677     $    25,493


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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 months ended September 30, 2013 and 2012:

                                          Three Months Ended September 30,             Nine Months Ended September 30,
                                                   2013 vs. 2012                                2013 vs. 2012
                                             Increase (Decrease) Due to                  Increase (Decrease) Due to
(In Thousands)                           Volume            Rate          Net          Volume           Rate          Net
Interest income:
Tax-exempt loans                     $        (3 )     $     (36 )    $   (39 )   $         1       $    (149 )   $  (148 )
All other loans                            3,878            (988 )      2,890           5,794          (1,394 )     4,400
Fed funds sold                                 -               -            -               -               -           -
Taxable investment securities                198            (141 )         57             318            (351 )       (33 )
Tax-exempt investment securities            (312 )           (14 )       (326 )          (530 )          (340 )      (870 )
Interest bearing deposits                      -               5            5               -              10          10
Total interest-earning assets              3,761          (1,174 )      2,587           5,583          (2,224 )     3,359

Interest expense:
Savings deposits                              16              12           28              22              30          52
Super Now deposits                            50             (31 )         19              98             (29 )        69
Money market deposits                        102            (131 )        (29 )           152            (324 )      (172 )
. . .
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