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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
Incorporated pursuant to the Laws of Pennsylvania
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Internal Revenue Service -- Employer Identification No. 23-2939222
150 North Washington Avenue, Scranton, Pennsylvania 18503-1848
(717) 346-7741
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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 the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding on April 30, 1998, was 2,148,000.
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<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
Page
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Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements - Consolidated
Balance Sheets:
March 31, 1998............................................... 3
December 31, 1997............................................ 3
Statements of Income:
Three Months Ended March 31, 1998............................ 4
Three Months Ended March 31, 1997............................ 4
Statements of Cash Flows:
Three Months Ended March 31, 1998............................ 5
Three Months Ended March 31, 1997............................ 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 2. Changes in Securities........................................... 16
Item 3. Defaults Upon Senior Securities................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16
Item 5. Other Information............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 16
Signatures.............................................................. 16
<PAGE>
PART I. FINANCIAL INFORMATION, Item 1 -- Financial Statements
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars)
<TABLE>
March 31, December 31,
1998 1997
<S> <C> <C>
--------------- ---------------
ASSETS
Cash and due from banks $ 17,083 $ 10,928
Federal funds sold 4,025 7,650
--------------- ---------------
--------------- ---------------
Cash and Cash Equivalents 21,108 18,578
Investment securities:
Available-for-sale, at fair value 106,889 114,942
Held-to-maturity (fair value of $9,054
and $10,102, respectively) 9,117 10,106
--------------- ---------------
Total Investment Securities 116,006 125,048
Loans, net of unearned income 278,790 272,046
Less: Allowance for loan losses 2,700 2,600
--------------- ---------------
Loans, Net 276,090 269,446
Bank premises and equipment 9,276 8,646
Other real estate owned 227 339
Accrued interest receivable 3,750 3,895
Other assets 2,308 1,625
--------------- ---------------
Total Assets $ 428,765 $ 427,577
=============== ===============
LIABILITIES
Deposits:
Non-interest bearing $ 47,540 $ 46,127
Interest bearing 326,742 328,361
--------------- ---------------
Total Deposits 374,282 374,488
Other borrowed funds:
Repurchase agreements 6,020 5,922
Short-term borrowings 741 893
Accrued interest payable 2,673 2,524
Other liabilities 1,365 826
--------------- ---------------
Total Liabilities 385,081 384,653
STOCKHOLDERS' EQUITY
Common stock ($ .01 par value, 15,000,000 shares
authorized, 2,148,000 shares issued and outstanding) 21 21
Surplus 10,819 10,819
Retained earnings 32,459 31,662
Accumulated other comprehensive income 385 422
--------------- ---------------
Total Stockholders' Equity 43,684 42,924
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 428,765 $ 427,577
=============== ===============
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
<TABLE>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 5,756 $ 5,024
Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 1,817 1,914
Other securities 1 1
Interest on Federal funds sold 172 78
------------- -------------
Total Interest Income 7,746 7,017
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 539 321
Interest on other deposits 2,773 2,423
Interest on other borrowed funds 78 37
------------- -------------
Total Interest Expense 3,390 2,781
Net Interest Income 4,356 4,236
Provision for loan losses 106 130
------------- -------------
Net Interest Income After Provision
for Loan Losses 4,250 4,106
OTHER INCOME
Trust department income 218 213
Service charges on deposit accounts 158 163
Other fee income 1,507 1,349
Other operating income 28 20
Realized gains on securities, net - -
------------- -------------
Total Other Income 1,911 1,745
OTHER EXPENSES
Salaries and employee benefits 1,810 1,708
Expense of premises and fixed assets 550 548
Other operating expenses 2,014 1,915
------------- -------------
Total Other Expenses 4,374 4,171
------------- -------------
Income before income taxes 1,787 1,680
Applicable income taxes 539 508
------------- -------------
Net Income 1,248 1,172
Other comprehensive income, net of taxes:
Unrealized securities losses (37) (437)
------------- -------------
Comprehensive Income $ 1,211 $ 735
============= =============
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.58 $ 0.55
Cash Dividends Declared Per Common Share $ 0.21 $ 0.20
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of dollars)
<TABLE>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,248 $ 1,172
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 237 239
Provision for loan losses 106 130
Deferred income tax provision 9 26
Amortization of securities (net of accretion) 40 85
Net (gains) losses on sale of investment securities - -
Loss (gain) on other real estate 16 -
Decrease (increase) in interest receivable 145 (200)
(Increase) decrease in other assets (683) (459)
Increase (decrease) in income taxes payable 485 435
Increase (decrease) in interest payable 149 77
Increase (decrease) in other liabilities 63 36
----------- -----------
Net cash provided by operating activities 1,815 1,541
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INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (6,033) (4,964)
Proceeds from sales and maturities of investment securities available-for-sale 14,000 5,000
Proceeds from repayments of investment securities to be held-to-maturity 980 496
Net loans (originated) repaid (6,749) (11,997)
Proceeds from other real estate 95 87
Investment in premises and equipment (867) (1,615)
----------- -----------
Net cash provided (used) by investment activities 1,426 (12,993)
----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 2,213 (12,839)
Net (payments) proceeds on time deposits (2,419) 8,699
Increase (decrease) in federal funds purchased - 600
Increase (decrease) in repurchase agreements 98 957
Net (decrease) increase in short-term borrowings (152) 421
Cash dividends paid (451) (430)
----------- -----------
Net cash (used) provided by financing activities (711) (2,592)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,530 (14,044)
----------- -----------
Cash and cash equivalents at January 1 18,578 22,827
----------- -----------
Cash and cash equivalents at March 31 $ 21,108 $ 8,783
=========== ===========
The Company paid interest and income taxes of $3,241 and $90 and $2,703 and $46, for the three month
periods ended March 31, 1998 and 1997, respectively.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 1998
(unaudited)
These Notes to Financial Statements reflect events subsequent to December 31,
1997, the date of the most recent Report of Independent Auditors, through the
date of this Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
These Notes to Financial Statements should be read in conjunction with Financial
Information and Other Information required to be furnished as part of this
Report, in particular, (1) Management's Discussion and Analysis of Financial
Condition and Results of Operations for the three months ended March 31, 1998,
respecting the Company's capital requirements and liquidity, (2) Part II, Item
6, Reports on Form 8-K and (3) the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, incorporated herein by reference.
The financial statements furnished are unaudited. However, in the opinion of
management, the financial statements include all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the interim
periods presented. Operating results for these interim periods are not
necessarily indicative of results to be expected for the entire year.
NOTE 1 -- Principles of Consolidation
Penseco Financial Services Corporation (Company) is a bank holding company,
incorporated under the laws of Pennsylvania. It is the parent company of Penn
Security Bank and Trust Company (Bank), a state chartered bank.
Intercompany transactions have been eliminated in preparing the consolidated
financial statements.
The accounting policies of the Company conform with generally accepted
accounting principles and with general practices within the banking industry.
NOTE 2 -- Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments that are of a normal recurring
nature and are considered necessary for a fair presentation have been included.
They are not, however, necessarily indicative of the results of consolidated
operations for a full year.
For further information, refer to the consolidated financial statements and
accompanying notes included in the Company's "Annual Report and Form 10-K" for
the year ended December 31, 1997.
NOTE 3 -- Use Of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
NOTE 4 -- Investment Securities
Investments in securities are classified in two categories and accounted for as
follows:
Securities Held-to-Maturity. Bonds, notes, debentures and mortgage-backed
securities for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts computed on the straight-line basis over the period to
maturity.
Securities Available-for-Sale. Bonds, notes, debentures, and certain equity
securities not classified as securities to be held to maturity are carried at
fair value with unrealized holding gains and losses, net of tax, reported as a
net amount in a separate component of stockholders' equity until realized.
Gains and losses on the sale of securities available-for-sale are determined
using the specific identification method and are reported as a separate
component of other income in the Statements of Income.
<PAGE>
The Company has no derivative financial instruments required to be disclosed
under SFAS No. 119.
The amortized cost and fair value of investment securities at March 31, 1998 and
December 31, 1997 are as follows:
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 106,285 $ 587 $ 3 $ 106,869
Equity securities 20 - - 20
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 106,305 $ 587 $ 3 $ 106,889
- --------------------------------------------------------------------------------
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 114,283 $ 639 $ - $ 114,922
Equity securities 20 - - 20
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 114,303 $ 639 $ - $ 114,942
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Obligations of U.S. Agencies:
Mortgage-backed securities $ 9,117 $ - $ 63 $ 9,054
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 9,117 $ - $ 63 $ 9,054
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Obligations of U.S. Agencies:
Mortgage-backed securities $ 10,106 $ 3 $ 7 $ 10,102
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 10,106 $ 3 $ 7 $ 10,102
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at March 31, 1998 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<PAGE>
March 31, 1998 Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 56,952 $ 57,056 $ - $ -
After one year through five years:
U.S. Treasury securities 49,333 49,813 - -
- --------------------------------------------------------------------------------
Subtotal 106,285 106,869 - -
Mortgage-backed securities - - 9,117 9,054
- --------------------------------------------------------------------------------
Total Debt Securities $ 106,285 $ 106,869 $ 9,117 $ 9,054
- --------------------------------------------------------------------------------
NOTE 5 -- Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company and the Bank's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the Capital Adequacy table below) of Tier 1 and Total Capital to
risk-weighted assets and of Tier 1 Capital to average assets (Leverage ratio).
The table also presents the Company's actual capital amounts and ratios. The
Bank's actual capital amounts and ratios are substantially identical to the
Company's. Management believes, as of March 31, 1998, that the Company and the
Bank meet all capital adequacy requirements to which they are subject.
As of March 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized", the Company must maintain minimum Tier 1 Capital, Total Capital
and Leverage ratios as set forth in the Capital Adequacy table. There are no
conditions or events since that notification that management believes have
changed the Company's categorization by the FDIC.
The Company and Bank are also subject to minimum capital levels which could
limit the payment of dividends, although the Company and Bank currently have
capital levels which are in excess of minimum capital level ratios required.
The Pennsylvania Banking Code restricts capital funds available for payment of
dividends to the Retained Earnings of the Bank. Accordingly, at March 31, 1998,
the balances in the Capital Stock and Surplus accounts totalling $ 10,840 are
unavailable for dividends.
In addition, the Bank is subject to restrictions imposed by Federal law on
certain transactions with the Company's affiliates. These transactions include
extensions of credit, purchases of or investments in stock issued by the
affiliate, purchases of assets subject to certain exceptions, acceptance of
securities issued by an affiliate as collateral for loans, and the issuance of
guarantees, acceptances, and letters of credit on behalf of affiliates. These
restrictions prevent the Company's affiliates from borrowing from the Bank
unless the loans are secured by obligations of designated amounts. Further, the
aggregate of such transactions by the Bank with a single affiliate is limited in
amount to 10 percent of the Bank's capital stock and surplus, and the aggregate
of such transactions with all affiliates is limited to 20 percent of the Bank's
capital stock and surplus. The Federal Reserve System has interpreted "capital
stock and surplus" to include undivided profits.
<PAGE>
<TABLE>
Actual Regulatory Requirements
- ------------------------------------------------ ----------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of March 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 45,918 18.83% > $ 19,513 > 8.0% > $ 24,391 > 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $ 43,218 17.72% > $ 9,756 > 4.0% > $ 14,635 > 6.0%
Tier 1 Capital
(to Average Assets) $ 43,218 9.93% > $ * > * > $ 21,765 > 5.0%
*3.0% ($13,059), 4.0% ($17,412) or 5.0% (21,765) depending on the bank's CAMEL
Rating and other regulatory risk factors.
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------ ----------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $ 45,102 19.22% > $ 18,776 > 8.0% > $ 23,470 > 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $ 42,502 18.11% > $ 9,388 > 4.0% > $ 14,082 > 6.0%
Tier 1 Capital
(to Average Assets) $ 42,502 10.25% > $ * > * > $ 20,727 > 5.0%
*3.0% ($12,436), 4.0% ($16,581) or 5.0% (20,727) depending on the bank's CAMEL
Rating and other regulatory risk factors.
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION, Item 2 --
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial condition and
significant changes in the results of the operations of Penseco Financial
Services Corporation and its subsidiary ("Penn Security Bank and Trust Company")
for the three months ended March 31, 1998 and March 31, 1997. Throughout this
review the subsidiary of Penseco Financial Services Corporation, Penn Security
Bank and Trust Company, is referred to as "the Company". All intercompany
accounts and transactions have been eliminated in preparing the consolidated
financial statements. All information is presented in thousands of dollars,
except as indicated.
Overview of Financial Condition
Penseco Financial Services Corporation reported net income of $1,248 for three
months ending March 31, 1998, an increase of $76 or 6.5% over $1,172 reported
for the first quarter of 1997. Improvement in earnings is attributed to strong
loan growth.
Loans increased $6.8 million, or 2.5%, while investments decreased $9.0 million,
or 7.8% since December 31, 1997. Most of this change was due to an increase in
loan demand, which resulted in repricing assets at higher rates.
Net Interest Income and Net Interest Margin
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between income on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and
investments while deposits and short-term borrowings, in the form of securities
sold under agreements to repurchase, represent interest-bearing liabilities.
Variations in the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, are determinants of changes in net
interest income.
Net interest income after provision for loan losses rose $144 or 3.5%, from
$4,106 for the first quarter of 1997 to $4,250 in 1998, the net result of higher
loan volume and changes in the composition of funding sources.
The net interest margin represents the Company's net yield on its earning assets
and is calculated as net interest income divided by average earning assets. In
the first three months of 1998, the net interest margin was 4.23%, falling 26
basis points from 4.49% in the same period of 1997, the result of a slight
increase in the yield on earning assets and a somewhat higher increase in
funding costs.
A change in the volume of earning assets was the key determinant of the increase
in net interest income in the first quarter of 1998. Both total average earning
assets and total average interest bearing funds rose in the first quarter of
1998 as compared to 1997. Average earning assets rose $34.3 million, or 9.1%,
from $377.7 million in 1997 to $412.0 million in 1998 and average interest
bearing funds increased $30.9 million, or 10.1%, from $307.3 million to $338.2
million for the same periods. As a percentage of average assets, earning assets
increased from 94.4% in the first quarter of 1997 to 94.6% in 1998. Average
interest bearing funding sources increased from 76.8% of total funding sources
in the first quarter of 1997 to 77.7% in the same period in 1998, resulting in a
slightly higher cost of funds.
Changes in the mix of both earning assets and funding sources also impacted net
interest income in the first quarter of both 1998 and 1997; however, the changes
in the mix of earning assets were less significant than the change in
composition of funding sources. Average loans as a percentage of average earning
assets increased slightly from 65.7% in 1997 to 67.6% in 1998; average
investments fell slightly from 32.9% to 29.3%. Short-term investments, federal
funds sold, rose from 1.4% of earning assets to 3.1%. Changes in the mix of
interest-bearing funds were more pronounced as funds shifted from lower cost
deposits into higher funding sources mainly time deposit accounts. Time deposits
increased $30.8 million, from 44.9% of funding sources to 49.9% in 1998. This
change in deposit composition resulted in an increase in the cost of funds,
which was partially offset by a decrease in the cost of transaction savings
accounts.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds as well as the yields earned on assets. Average loan yields
rose 17 basis points, from 8.10% in the first three months of 1997 to 8.27% in
1998. Investments and federal funds yields remained fairly stable as the market
rates were approximately the same on average in both 1997 and 1998. Competition
for funds, principally from the equity markets via mutual funds, increased in
late 1997 and early 1998. Therefore, to compete for customers seeking
alternative repositories for their funds, the average certificate of deposit
cost of funds increased from 5.24% in 1997 to 5.63% in 1998. This is the primary
cause of the increase in the total cost of funds from 3.62% in 1997 to 4.01% in
1998.
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity / Interest Rates
and Interest Differential
The table below presents average balances, interest income on a fully taxable
equivalent basis and interest expense, as well as average rates earned and paid
on the Company's major asset and liability items for March 31, 1998 and March
31, 1997.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
March 31, 1998 March 31, 1997
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
U.S. Treasury securities $ 111,205 $ 1,665 5.99% $ 112,015 $ 1,723 6.15%
Other 20 1 5.00% 20 1 5.00%
U.S. Agency obligations 9,681 152 6.28% 12,111 191 6.31%
Loans, net of unearned income:
Real estate mortgages 216,985 4,436 8.18% 196,645 3,870 7.87%
Commercial 17,625 376 8.53% 11,280 237 8.40%
Consumer and other 43,690 944 8.64% 40,188 917 9.13%
Federal funds sold 12,750 172 5.40% 5,433 78 5.74%
- ---------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 411,956 $ 7,746 7.52% 377,692 $ 7,017 7.43%
- ---------------------------------------------------------------------------------------------------------------
Cash and due from banks 10,841 8,770
Bank premises and equipment 8,977 7,142
Accrued interest receivable 3,631 3,460
Other assets 2,512 5,310
Less: Allowance for loan losses 2,607 2,301
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 435,310 $ 400,073
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 22,881 $ 86 1.50% $ 22,949 $ 83 1.45%
Savings 71,401 349 1.95% 73,708 361 1.96%
Money markets 68,449 499 2.92% 69,101 492 2.85%
Time - Over $100 37,976 539 5.68% 24,441 321 5.25%
Time - Other 130,704 1,839 5.63% 113,448 1,487 5.24%
Federal funds purchased 41 1 5.00% 230 3 5.22%
Repurchase agreements 6,089 69 4.53% 2,875 27 3.76%
Short-term borrowings 637 8 5.02% 533 7 5.25%
- ---------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 338,178 $ 3,390 4.01% 307,285 $ 2,781 3.62%
- ---------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 50,139 48,877
All other liabilities 3,273 2,986
Stockholders' equity 43,720 40,925
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 435,310 $ 400,073
- ---------------------------------------------------------------------------------------------------------------
Interest Spread 3.51% 3.81%
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income $ 4,356 $ 4,236
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.23% 4.49%
Return on average assets 1.14% 1.17%
Return on average equity 11.42% 11.45%
Average equity to average assets 10.04% 10.23%
Dividend payout ratio 36.21% 36.70%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Provision for Loan Losses
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for loan losses to a level that
management considers adequate to reflect the risk of future losses inherent in
the Company's loan portfolio. The process of determining the adequacy of the
allowance is necessarily judgmental and subject to changes in external
conditions. The allowance for loan losses reflects management's judgment as to
the level considered appropriate to absorb such losses based upon a review of
many factors, including historical loss experience, adverse situations that may
affect the borrower's ability to repay (including the timing of future
payments), economic conditions and trends, loan portfolio volume and mix, loan
performance trends, the value and adequacy of collateral, and the Company's
internal credit review process. Accordingly, there can be no assurance that
existing levels of the allowance will ultimately prove adequate to cover actual
loan losses. The quarterly provision for loan losses charged to operating
expense is that amount which is sufficient to bring the balance of the allowance
for possible loan losses to an adequate level to absorb anticipated losses.
Based on this ongoing evaluation, management determines the provision or
reversal necessary to maintain an appropriate allowance.
In the first three months of 1998, the provision for loan losses was $106 a
decrease from the first quarter in 1997 of $130. Loans charged-off totaled $16
and recoveries were $10. In the same period of 1997, recoveries of $28 offset
loans charged off of $58.
Other Income
The following table sets forth information by category of other income for the
Company for three months ended March 31, 1998 and March 31, 1997, respectively:
March 31, March 31,
Three Months Ended : 1998 1997
- ---------------------------------------------------------------------
Trust department income $ 218 $ 213
Service charges on deposit accounts 158 163
Other fee income 1,507 1,349
Other operating income 28 20
Realized gains on securities, net - -
- ---------------------------------------------------------------------
Total Other Income $ 1,911 $ 1,745
- ---------------------------------------------------------------------
Trust department income, service charges on deposit accounts, and other
operating income were not significantly different between the first quarters of
1998 and 1997. Other fee income increased 11.7% from the first quarter of 1997,
due to an increase in merchant transaction income. Most of this $158 increase is
attributed to growth in merchant transaction income of $142 which is the result
of growth in the Company's customer base, as well as increased business with our
existing customers.
Other Expenses
Other expenses increased $203 or 4.9%, in the first three months of 1998 as
compared to the same period of 1997, to $4,374 from $4,171. Salaries and
benefits increased over the first quarter of 1997, due to significantly higher
health care coverage provided by the Company to its employees, merit increases,
and staff additions. Expense of premises and fixed assets were not significantly
different during the three months ended March 31, 1998 and March 31, 1997. Other
non interest expenses increased primarily due to Mastercard and Visa
authorization expenses.
The following table sets forth information by category of other expenses for the
Company for the three months ended March 31, 1998 and March 31, 1997,
respectively:
March 31, March 31,
Three Months Ended : 1998 1997
- ---------------------------------------------------------------------
Salaries and employee benefits $ 1,810 $ 1,708
Expense of premises and fixed assets 550 548
Other operating expenses 2,014 1,915
- ---------------------------------------------------------------------
Total Other Expenses $ 4,374 $ 4,171
- ---------------------------------------------------------------------
<PAGE>
Loan Portfolio
March 31, December 31,
As Of: 1998 1997
- --------------------------------------------------------------------------
Real estate - construction
and land development $ 2,359 $ 3,731
Real estate mortgages 214,689 213,128
Commercial 18,020 17,177
Credit card and related plans 2,063 2,293
Installment 27,330 26,807
Obligations of states
and political subdivisions 14,329 8,910
- --------------------------------------------------------------------------
Loans, net of unearned income 278,790 272,046
Less: Allowance for loan losses 2,700 2,600
- --------------------------------------------------------------------------
Loans, net $ 276,090 $ 269,446
- --------------------------------------------------------------------------
Loan Quality
The lending activities of the Company are guided by the basic lending policy
established by the Board of Directors. Loans must meet criteria which include
consideration of the character, capacity and capital of the borrower, collateral
provided for the loan, and prevailing economic conditions.
Regardless of credit standards, there is risk of loss inherent in every loan
portfolio. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of the loans. The evaluations take into
consideration such factors as change in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, industry
experience, collateral value and current economic conditions that may affect the
borrower's ability to pay. Management believes that the allowance for loan
losses is adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgement of information available to
them at the time of their examination.
The allowance for loan losses is increased by periodic charges against earnings
as a provision for loan losses, and decreased periodically by charged-off loans
(or parts of loans) management has determined to be uncollectible, net of actual
recoveries on loans previously charged-off.
Non-Performing Assets
Non-performing assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and other real estate owned. The following
table sets forth information regarding non-performing assets as of the dates
indicated:
March 31, March 31,
Three Months Ended: 1998 1997
- ------------------------------------------------------------------------
Non-accrual loans $ 1,098 $ 797
Loans past due 90 days or more and accruing:
Guaranteed student loans 249 341
Credit card and home equity loans 20 44
- ------------------------------------------------------------------------
Total non-performing loans 1,367 1,182
Other real estate owned 227 835
- ------------------------------------------------------------------------
Total non-performing assets $ 1,594 $ 2,017
- ------------------------------------------------------------------------
<PAGE>
Loans are generally placed on a non-accrual status when principal or interest is
past due 90 days or when payment in full is not anticipated. When a loan is
placed on nonaccrual status, all previously accrued but not collected interest
is charged against current income. Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,098 and $797 at March 31, 1998 and March 31, 1997, respectively. If
interest on those loans had been accrued, such income would have been $101 and
$56 for the three months ended March 31, 1998 and March 31, 1997, respectively.
Interest income on those loans, which is recorded only when received, amounted
to $5 and $7 for March 31, 1998 and March 31, 1997, respectively. There are no
commitments to lend additional funds to individuals whose loans are in
non-accrual status.
The management process for evaluating the adequacy of the allowance for loan
losses includes reviewing each month's loan committee reports which list all
loans that do not meet certain internally developed criteria as to collateral
adequacy, payment performance, economic conditions and overall credit risk.
These reports also address the current status and actions in process on each
listed loan. From this information, adjustments are made to the allowance for
loan losses. Such adjustments include both specific loss allocation amounts and
general provisions by loan category based on present and past collection
experience, nature and volume of the loan portfolio, overall quality, and
current economic conditions that may affect the borrower's ability to pay. As of
March 31, 1998 there are no significant loans as to which management has serious
doubt about their ability to continue to perform in accordance with their
contractual terms.
At March 31, 1998 and December 31, 1997, the Company did not have any loans
specifically classified as impaired.
Most of the Company's lending activity is with customers located in the
Company's geographic market area and repayment thereof is affected by economic
conditions in this market area.
Loan Loss Experience
The following tables present the Company's loan loss experience during the
periods indicated:
March 31, March 31,
Three Months Ended : 1998 1997
- ------------------------------------------------------------------------------
Balance at beginning of year $ 2,600 $ 2,300
Charge-offs:
Real estate mortgages - 38
Commercial (time and demand)
and all others 6 -
Credit card and related plans 8 14
Installment loans 2 6
- ------------------------------------------------------------------------------
Total charge-offs 16 58
- ------------------------------------------------------------------------------
Recoveries:
Real estate mortgages - 24
Commercial (time and demand) and all others - 1
Credit card and related plans 5 1
Installment loans 5 2
- ------------------------------------------------------------------------------
Total recoveries 10 28
- ------------------------------------------------------------------------------
Net charge-offs 6 30
- ------------------------------------------------------------------------------
Provision charged to operations 106 130
- ------------------------------------------------------------------------------
Balance at End of Period $ 2,700 $ 2,400
- ------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans outstanding 0.002% 0.001%
- ------------------------------------------------------------------------------
<PAGE>
Three Months Ended: March 31, 1998 March 31, 1997
- ---------------------------------------------------------------------------
Amount % * Amount % *
Real estate mortgages $ 1,375 78% $ 1,175 77%
Commercial (time and demand)
and all others 875 12% 875 12%
Credit card and related plans 150 1% 150 1%
Personal installment loans 300 9% 200 10%
- ---------------------------------------------------------------------------
Total $ 2,700 100% $ 2,400 100%
- ---------------------------------------------------------------------------
Liquidity
The objective of liquidity management is to maintain a balance between sources
and uses of funds in such a way that the cash requirements of customers for
loans and deposit withdrawals are met in the most economical manner. Management
monitors its liquidity position continuously in relation to trends of loans and
deposits for short-term as well as long-term requirements. Liquid assets are
monitored on a daily basis to assure maximum utilization. Management also
manages its liquidity requirements by maintaining an adequate level of readily
marketable assets and access to short-term funding sources.
The Company remains in a highly liquid condition both in the short and long
term. Sources of liquidity include the Company's substantial U.S. Treasury bond
portfolio, additional deposits, earnings, overnight loans to and from other
companies (Federal Funds) and lines of credit at the Federal Reserve Bank. The
designation of securities as "Held-To-Maturity" lessens the ability of banks to
sell securities so classified, except in regard to certain changes in
circumstances or other events that are isolated, non-recurring and unusual.
Capital Resources
A strong capital position is important to the continued profitability of the
Company and promotes depositor and investor confidence. The Company's capital
provides a basis for future growth and expansion and also provides additional
protection against unexpected losses.
Additional sources of capital would come from retained earnings from the
operations of the Company and from the sale of additional common stock.
Management has no plans to offer additional common stock at this time.
The Company's total risk-based capital ratio was 18.83% at March 31, 1998. The
Company's risk based capital ratio is almost double the 10.00% ratio that
Federal regulators use as the "well capitalized" threshold. This is the current
criteria which the FDIC uses in determining the lowest insurance rate for
deposit insurance. The Company's risk-based capital ratio is more than double
the 8.00% limit which determines whether a company is "adequately capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital requirements without the necessity of increasing its
equity capital.
The Company is completing site work to build a branch office, in the East
Stroudsburg area, at an approximate cost of $1,200,000. The Company also has a
new branch facility in the Green Ridge section of Scranton substantially
completed. This will replace its existing facility and is anticipated to open in
the second quarter of 1998.
Year 2000 Compliance
The "Year 2000" issue is the result of computer programs having been written
using a two-digit field as opposed to a four-digit field, to define the
applicable year. Programs that are time sensitive may recognize a date using
"00" as the year 1900 rather than the year 2000. Computer system failure or
significant miscalculations could result from this problem, if not corrected.
The Company licenses a minor portion of its software, used in conducting its
business, from third party software vendors, while most of the Company's
software has been internally developed. The Company has developed a
comprehensive list of all software and all hardware in use within the
organization. Every vendor has been contacted regarding the Year 2000 issue, and
the Company is closely tracking the progress each vendor is making in resolving
the problems associated with the issue. Software is upgraded as the vendors
resolve Year 2000 problems.
Internally developed software is undergoing modifications and many systems have
already been modified. Testing procedures are being formulated for comprehensive
testing of this software beginning in July, 1998, with
<PAGE>
completion of testing by the end of 1998. Additionally, the Company has begun
the process of contacting its borrowers to determine the level of progress they
have made in addressing the impact that the Year 2000 issue will have on their
respective businesses.
The Company does not anticipate any significant additional costs, over and above
normal operating costs, as the work will be largely accomplished by the
Company's computer systems and programming staff.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
None.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None.
Item 5 -- Other Information
None.
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
27.0 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended March 31, 1998.
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.
PENSECO FINANCIAL SERVICES
By /s/ RICHARD E. GRIMM
------------------------------
Richard E. Grimm
Executive Vice-President
Dated: May 13, 1998
By /s/ PATRICK SCANLON
------------------------------
Patrick Scanlon
Controller
Dated: May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 17,083
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,025
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 106,889
<INVESTMENTS-CARRYING> 9,117
<INVESTMENTS-MARKET> 9,054
<LOANS> 278,790
<ALLOWANCE> 2,700
<TOTAL-ASSETS> 428,765
<DEPOSITS> 374,282
<SHORT-TERM> 6,761
<LIABILITIES-OTHER> 4,038
<LONG-TERM> 0
0
0
<COMMON> 21
<OTHER-SE> 43,663
<TOTAL-LIABILITIES-AND-EQUITY> 428,765
<INTEREST-LOAN> 5,756
<INTEREST-INVEST> 1,817
<INTEREST-OTHER> 173
<INTEREST-TOTAL> 7,746
<INTEREST-DEPOSIT> 3,390
<INTEREST-EXPENSE> 3,390
<INTEREST-INCOME-NET> 4,356
<LOAN-LOSSES> (106)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,374
<INCOME-PRETAX> 1,787
<INCOME-PRE-EXTRAORDINARY> 1,787
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,248
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<YIELD-ACTUAL> 4.23
<LOANS-NON> 1,098
<LOANS-PAST> 1,367
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,600
<CHARGE-OFFS> 16
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 2,700
<ALLOWANCE-DOMESTIC> 2,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
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