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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
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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
(570) 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 |_|
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding on April 30, 1999, 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, 1999............................................. 3
December 31, 1998.......................................... 3
Statements of Income:
Three Months Ended March 31, 1999.......................... 4
Three Months Ended March 31, 1998.......................... 4
Statements of Cash Flows:
Three Months Ended March 31, 1999.......................... 5
Three Months Ended March 31, 1998.......................... 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............17
Item 5. Other Information..............................................17
Item 6. Exhibits and Reports on Form 8-K...............................17
Signatures.............................................................17
<PAGE>
PART I. FINANCIAL INFORMATION, Item 1 -- Financial Statements
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars)
March 31, December 31,
1999 1998
--------- ---------
ASSETS
Cash and due from banks $ 11,241 $ 11,731
Interest-bearing balances with banks 352 345
Federal funds sold 3,430 6,650
--------- ---------
Cash and Cash Equivalents 15,023 18,726
Investment securities:
Available-for-sale, at fair value 112,056 112,346
Held-to-maturity (fair value of
$5,695 and $6,266, respectively) 5,835 6,416
--------- ---------
Total Investment Securities 117,891 118,762
Loans, net of unearned income 284,125 283,219
Less: Allowance for loan losses 2,850 2,830
--------- ---------
Loans, Net 281,275 280,389
Bank premises and equipment 12,697 12,631
Other real estate owned 168 111
Accrued interest receivable 3,731 3,234
Other assets 2,809 2,246
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Total Assets $ 433,594 $ 436,099
========= =========
LIABILITIES
Deposits:
Non-interest bearing $ 55,999 $ 56,398
Interest bearing 319,077 321,128
--------- ---------
Total Deposits 375,076 377,526
Other borrowed funds:
Repurchase agreements 10,120 10,959
Short-term borrowings 351 -
Accrued interest payable 1,922 2,039
Other liabilities 889 614
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Total Liabilities 388,358 391,138
--------- ---------
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 34,313 33,688
Accumulated other comprehensive income 83 433
--------- ---------
Total Stockholders' Equity 45,236 44,961
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Total Liabilities and Stockholders' Equity $ 433,594 $ 436,099
========= =========
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
INTEREST INCOME
Interest and fees on loans $ 5,478 $ 5,756
Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 1,319 1,817
States & political subdivisions 197 -
Other securities 30 1
Interest on Federal funds sold 78 172
Interest on balances with banks 25 -
------------------ ------------------
Total Interest Income 7,127 7,746
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INTEREST EXPENSE
Interest on time deposits of $100,000
or more 607 539
Interest on other deposits 2,185 2,773
Interest on other borrowed funds 109 78
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Total Interest Expense 2,901 3,390
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Net Interest Income 4,226 4,356
Provision for loan losses 56 106
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Net Interest Income After Provision
for Loan Losses 4,170 4,250
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OTHER INCOME
Trust department income 258 218
Service charges on deposit accounts 165 158
Other fee income 1,644 1,507
Other operating income 47 28
Realized gains on securities, net - -
------------------ ------------------
Total Other Income 2,114 1,911
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OTHER EXPENSES
Salaries and employee benefits 1,921 1,810
Expense of premises and fixed assets 645 550
Other operating expenses 2,241 2,014
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Total Other Expenses 4,807 4,374
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Income before income taxes 1,477 1,787
Applicable income taxes 401 539
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Net Income 1,076 1,248
Other comprehensive income, net of taxes:
Unrealized securities losses (350) (37)
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Comprehensive Income $ 726 $ 1,211
================== ==================
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.50 $ 0.58
Cash Dividends Declared Per Common Share $ 0.21 $ 0.21
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,076 $ 1,248
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 297 237
Provision for loan losses 56 106
Deferred income tax provision 78 9
Amortization of securities (net of accretion) 96 40
Net (gains) losses on sale of investment securities - -
Loss (gain) on other real estate - 16
(Increase) decrease in interest receivable (497) 145
(Increase) decrease in other assets (563) (683)
Increase (decrease) in income taxes payable 321 485
(Decrease) increase in interest payable (117) 149
Increase (decrease) in other liabilities 56 63
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Net cash provided by operating activities 803 1,815
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INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (15,327) (6,033)
Proceeds from sales and maturities of investment securities available-for-sale 15,000 14,000
Proceeds from repayments of investment securities to be held-to-maturity 572 980
Net loans (originated) repaid (1,000) (6,749)
Proceeds from other real estate 1 95
Investment in premises and equipment (363) (867)
------------------ ------------------
Net cash provided (used) by investment activities (1,117) 1,426
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FINANCING ACTIVITIES
Net (decrease) increase in demand and savings deposits (757) 2,213
Net (payments) proceeds on time deposits (1,693) (2,419)
Increase (decrease) in federal funds purchased - -
(Decrease) increase in repurchase agreements (839) 98
Net increase (decrease) in short-term borrowings 351 (152)
Cash dividends paid (451) (451)
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Net cash (used) provided by financing activities (3,389) (711)
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Net (decrease) increase in cash and cash equivalents (3,703) 2,530
Cash and cash equivalents at January 1 18,726 18,578
------------------ ------------------
Cash and cash equivalents at March 31 $ 15,023 $ 21,108
================== ==================
</TABLE>
The Company paid interest and income taxes of $3,018 and $78 and $3,241 and $90,
for the three month periods ended March 31, 1999 and 1998, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended March 31, 1999
(unaudited)
These Notes to Financial Statements reflect events subsequent to December 31,
1998, the date of the most recent Report of Independent Auditors, through the
date of this Quarterly Report on Form 10-Q for the three month period ended
March 31, 1999. 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, 1999, in respect to the Company's capital requirements and
liquidity, (2) Part II, Item 6, Reports on Form 8-K and (3) the Company's Annual
Report - Form 10-K for the year ended December 31, 1998, incorporated herein by
reference.
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 - Form 10-K for the
year ended December 31, 1998.
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, which approximates the interest method.
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.
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. Unrealized gains
and losses are included as a separate item in computing comprehensive income.
The Company has no derivative financial instruments required to be disclosed
under SFAS No. 119.
<PAGE>
The amortized cost and fair value of investment securities at March 31, 1999 and
December 31, 1998 are as follows:
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1999 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 81,457 $ 393 $ 119 $ 81,731
U.S. Agency securities 5,000 - 44 4,956
States & political subdivisions 23,663 3 107 23,559
- --------------------------------------------------------------------------------
Total Debt Securities 110,120 396 270 110,246
Equity securities 1,810 - - 1,810
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 111,930 $ 396 $ 270 $ 112,056
- --------------------------------------------------------------------------------
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 81,210 $ 706 $ - $ 81,916
U.S. Agency securities 5,000 - 14 4,986
States & political subdivisions 23,669 15 50 23,634
- --------------------------------------------------------------------------------
Total Debt Securities 109,879 721 64 110,536
Equity securities 1,810 - - 1,810
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 111,689 $ 721 $ 64 $ 112,346
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1999 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Obligations of U.S. Agencies:
Mortgage-backed securities $ 5,835 $ - $ 140 $ 5,695
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 5,835 $ - $ 140 $ 5,695
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Obligations of U.S. Agencies:
Mortgage-backed securities $ 6,416 $ - $ 150 $ 6,266
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 6,416 $ - $ 150 $ 6,266
- --------------------------------------------------------------------------------
<PAGE>
The amortized cost and fair value of debt securities at March 31, 1999 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.
March 31, 1999 Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 62,134 $ 62,474 $ - $ -
After one year through five years:
U.S. Treasury securities 19,323 19,257 - -
U.S. Agency securities 5,000 4,956 - -
States & political subdivisions 15,976 15,945 - -
After five years through ten years:
States & political subdivisions 6,148 6,102 - -
After ten years:
States & political subdivisions 1,539 1,512 - -
- --------------------------------------------------------------------------------
Subtotal 110,120 110,246 - -
Mortgage-backed securities 1,810 1,810 5,835 5,695
- --------------------------------------------------------------------------------
Total Debt Securities $ 111,930 $ 112,056 $ 5,835 $ 5,695
- --------------------------------------------------------------------------------
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, 1999, that the Company and the
Bank meet all capital adequacy requirements to which they are subject.
As of March 31, 1999, 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, 1999,
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
<PAGE>
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.
<TABLE>
<CAPTION>
Actual Regulatory Requirements
- ----------------------------------------------- --------------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of March 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 47,939 18.57% > $ 20,654 > 8.0% > $ 25,817 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $ 45,089 17.46% > $ 10,327 > 4.0% > $ 15,490 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $ 45,089 10.34% > $ * > * > $ 21,811 > 5.0%
- - - -
*3.0% ($13,087), 4.0% ($17,449) or 5.0% (21,811) depending on the bank's CAMELS
Rating and other regulatory risk factors.
</TABLE>
<TABLE>
<CAPTION>
Actual Regulatory Requirements
- ----------------------------------------------- --------------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 47,289 18.36% > $ 20,610 > 8.0% > $ 25,764 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $ 44,459 17.26% > $ 10,305 > 4.0% > $ 15,458 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $ 44,459 10.29% > $ * > * > $ 21,610 > 5.0%
- - - -
*3.0% ($12,966), 4.0% ($17,288) or 5.0% (21,610) depending on the bank's CAMELS
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, 1999 and March 31, 1998. 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 $1,076 for three
months ending March 31, 1999, a decrease of $172 or 13.8% from the $1,248
reported for the first quarter of 1998. The decrease in earnings is attributed
to lower interest margins as well as increases in operating expenses.
The significant asset and liability accounts, consisting of investment
securities, loans and customer deposits were relatively unchanged from the
amounts at December 31, 1998.
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 decreased $80 or 1.9%, from
$4,250 for the first quarter of 1998 to $4,170 in 1999, the net result of
securities and loans repricing at lower rates. In addition, interest bearing
liabilities are also repricing downward, but not as sharply as the asset side of
the balance sheet.
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 1999, the net interest margin was 4.13%, falling 10
basis points from 4.23% in the same period of 1998, the result of a decrease in
the yield on earning assets and a slightly smaller decrease in funding costs.
Consumers are taking advantage of lower interest rates by refinancing long term
fixed rates, which is offset by somewhat smaller decreases on deposit products
as consumers seek higher yielding products.
Total average earning assets and total average interest bearing funds decreased
in the first quarter of 1999 as compared to 1998. Average earning assets
declined $3.0 million, or 1.0%, from $412.0 million in 1998 to $409.0 million in
1999 and average interest bearing funds decreased $6.8 million, or 2.0%, from
$338.2 million to $331.4 million for the same periods. As a percentage of
average assets, earning assets decreased from 94.6% in the first quarter of 1998
to 93.8% in 1999. Average interest bearing funding sources decreased from 77.7%
of total funding sources in the first quarter of 1998 to 76.0% in the same
period in 1999, resulting in a slightly lower 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 1999 and 1998; however, the changes
in the mix of earning assets were more significant than the change in the
composition of funding sources. Average loans as a percentage of average earning
assets increased slightly from 67.5% in 1998 to 69.2% in 1999; average
investments fell slightly from 29.3% to 28.7%. Short-term investments, federal
funds sold and interest bearing balances with banks, decreased from 3.1% of
earning assets to 2.1%. Time deposits decreased $2.5 million. This change in
deposit composition resulted in a decrease in the cost of funds.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds as well as the yields earned on assets. The investment
securities tax effect yield decreased 33 basis points from 6.01% in the first
quarter of 1998 to 5.68% for 1999. Also, average loan yields decreased 53 basis
points, from 8.27% in the first three months of 1998 to 7.74% in 1999. The
average certificate of deposit cost of funds decreased from 5.63% in 1998 to
5.01% in 1999. This is the primary cause of the decrease in the total cost of
funds from 4.01% in 1998 to 3.50% in 1999.
<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, 1999 and March
31, 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
March 31, 1999 March 31, 1998
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Available-for-sale:
U.S. Treasury securities $ 80,957 $ 1,170 5.78% $ 111,205 $ 1,665 5.99%
U.S. Agency obligations 5,000 70 5.60% - - -
States & political subdivisions 23,667 197 5.04% - - -
Federal Home Loan Bank stock 1,790 29 6.48% - - -
Other 20 1 5.00% 20 1 5.00%
Held-to-maturity:
U.S. Agency obligations 6,107 79 5.17% 9,681 152 6.28%
Loans, net of unearned income:
Real estate mortgages 224,056 4,283 7.65% 216,985 4,436 8.18%
Commercial 18,734 384 8.20% 17,625 376 8.53%
Consumer and other 40,270 811 8.06% 43,690 944 8.64%
Federal funds sold 6,617 78 4.71% 12,750 172 5.40%
Interest on balances with banks 1,857 25 5.38% - - -
- ----------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 409,075 $ 7,127 6.97% 411,956 $ 7,746 7.52%
- ----------------------------------------------------------------------------------------------------------------
Cash and due from banks 10,614 10,841
Bank premises and equipment 12,748 8,977
Accrued interest receivable 3,426 3,631
Other assets 3,193 2,512
Less: Allowance for loan losses 2,831 2,607
- ----------------------------------------------------------------------------------------------------------------
Total Assets $ 436,225 $ 435,310
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 23,703 $ 64 1.08% $ 22,881 $ 86 1.50%
Savings 71,819 267 1.49% 71,401 349 1.95%
Money markets 58,403 377 2.58% 68,449 499 2.92%
Time - Over $100 46,824 607 5.19% 37,976 539 5.68%
Time - Other 119,414 1,477 4.95% 130,704 1,839 5.63%
Federal funds purchased 17 - - 41 1 5.00%
Repurchase agreements 10,871 104 3.83% 6,089 69 4.53%
Short-term borrowings 353 5 5.68% 637 8 5.02%
- ----------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 331,404 $ 2,901 3.50% 338,178 $ 3,390 4.01%
- ----------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 56,655 50,139
All other liabilities 2,322 3,273
Stockholders' equity 45,844 43,720
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 436,225 $ 435,310
- ----------------------------------------------------------------------------------------------------------------
Interest Spread 3.47% 3.51%
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income $ 4,226 $ 4,356
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.13% 4.23%
Return on average assets 0.99% 1.14%
Return on average equity 9.39% 11.42%
Average equity to average assets 10.51% 10.04%
Dividend payout ratio 42.00% 36.21%
- ----------------------------------------------------------------------------------------------------------------
</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 1999, the provision for loan losses was $56, a
decrease from $106 in the first quarter of 1998. Loans charged-off totaled $125
and recoveries were $89. In the same period of 1998, recoveries of $10 offset
loans charged off of $16.
Other Income
The following table sets forth information by category of other income for the
Company for three months ended March 31, 1999 and
March 31, 1998, respectively:
March 31, March 31,
Three Months Ended : 1999 1998
- -------------------------------------------------------------------
Trust department income $ 258 $ 218
Service charges on deposit accounts 165 158
Other fee income 1,644 1,507
Other operating income 47 28
Realized gains on securities, net - -
- -------------------------------------------------------------------
Total Other Income $ 2,114 $ 1,911
- -------------------------------------------------------------------
Trust department income increased $40.0 or 18.3% from the first quarter of 1998.
Other fee income increased 9.1% from the first quarter of 1998, due to an
increase in merchant transaction income, along with ATM service charges
commencing in 1999. Most of the $137 increase in other fee income is attributed
to growth in merchant transaction income of $101 which is the result of
attracting new business.
Other Expenses
The following table sets forth information by category of other expenses for the
Company for the three months ended March 31, 1999 and March 31, 1998,
respectively:
March 31, March 31,
Three Months Ended : 1999 1998
- -------------------------------------------------------------------
Salaries and employee benefits $ 1,921 $ 1,810
Expense of premises and fixed assets 645 550
Other operating expenses 2,241 2,014
- -------------------------------------------------------------------
Total Other Expenses $ 4,807 $ 4,374
- -------------------------------------------------------------------
Other expenses increased $433 or 9.9% to $4,807, in the first three months of
1999 as compared to $4,374 in the same period of 1998. Salaries and benefits
increased over the first quarter of 1998, 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 increased due to the
addition of two branches which were not operational in the first quarter of
1998. Other non interest expenses increased primarily due to Mastercard and Visa
authorization expenses which increased $160 or 14.5% due to competition forcing
the industry to live with smaller margins.
<PAGE>
Loan Portfolio
March 31, December 31,
As Of: 1999 1998
- ------------------------------------------------------------------------------
Real estate - construction
and land development $ 3,473 $ 4,152
Real estate mortgages 218,624 221,879
Commercial 20,809 18,169
Credit card and related plans 2,028 2,286
Installment 28,916 28,538
Obligations of states
and political subdivisions 10,275 8,195
- ------------------------------------------------------------------------------
Loans, net of unearned income 284,125 283,219
Less: Allowance for loan losses 2,850 2,830
- ------------------------------------------------------------------------------
Loans, net $ 281,275 $ 280,389
- ------------------------------------------------------------------------------
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 for loan losses 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
judgment 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 charge-offs of
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:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
As Of: 1999 1998 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $ 709 $ 929 $ 1,098
Loans past due 90 days or more and accruing:
Guaranteed student loans 251 348 249
Credit card and home equity loans 26 27 20
- -------------------------------------------------------------------------------------
Total non-performing loans 986 1,304 1,367
Other real estate owned 168 111 227
- -------------------------------------------------------------------------------------
Total non-performing assets $ 1,154 $ 1,415 $ 1,594
- -------------------------------------------------------------------------------------
</TABLE>
<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 $709 and $1,098 at March 31, 1999 and March 31, 1998, respectively. If
interest on those loans had been accrued, such income would have been $103 and
$101 for the three months ended March 31, 1999 and March 31, 1998, respectively.
Interest income on those loans, which is recorded only when received, amounted
to $2 and $5 for March 31, 1999 and March 31, 1998, 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, 1999 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, 1999 and December 31, 1998, 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 : 1999 1998
- ------------------------------------------------------------------------------
Balance at beginning of year $ 2,830 $ 2,600
Charge-offs:
Real estate mortgages 82 -
Commercial (time and demand)
and all others 7 6
Credit card and related plans 29 8
Installment loans 7 2
- ------------------------------------------------------------------------------
Total charge-offs 125 16
- ------------------------------------------------------------------------------
Recoveries:
Real estate mortgages - -
Commercial (time and demand) and all others 75 -
Credit card and related plans 8 5
Installment loans 6 5
- ------------------------------------------------------------------------------
Total recoveries 89 10
- ------------------------------------------------------------------------------
Net charge-offs 36 6
- ------------------------------------------------------------------------------
Provision charged to operations 56 106
- ------------------------------------------------------------------------------
Balance at End of Period $ 2,850 $ 2,700
- ------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans outstanding 0.010% 0.002%
- ------------------------------------------------------------------------------
<PAGE>
The allowance for loan losses is allocated as follows:
<TABLE>
<CAPTION>
As Of: March 31, 1999 December 31, 1998 March 31, 1998
- ------------------------------------------------------------------------------------------------
Amount % * Amount % * Amount % *
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages $ 1,500 78% $ 1,550 80% $ 1,375 78%
Commercial (time and demand)
and all others 850 11% 830 9% 875 12%
Credit card and related plans 150 1% 150 1% 150 1%
Personal installment loans 350 10% 300 10% 300 9%
- ------------------------------------------------------------------------------------------------
Total $ 2,850 100% $ 2,830 100% $ 2,700 100%
- ------------------------------------------------------------------------------------------------
* Percent of loans in each category to total loans
</TABLE>
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, nonrecurring 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 18.57% at March 31, 1999. 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.
Year 2000 Compliance
The "Year 2000" (Y2K) issue is the result of computer programs and files being
written using a two digit as opposed to a four digit year field. Programs which
use two digit year fields in comparing dates, sorting dates or using dates in
calculations can result in system failures or significant miscalculations if not
corrected.
The Company's formal written Y2K Readiness Plan was developed in early 1998,
although much systems and programming work on existing and new systems had been
accomplished long before that date. The plan has awareness, assessment,
renovation, validation and implementation phases. The Company has completed the
awareness and assessment phases of the plan and has nearly completed the
renovation, validation and implementation phases.
<PAGE>
Most of the Company's software used in conducting its business has been
internally developed, although the Company does license a minor portion from
third party software vendors. The Company has developed a comprehensive list of
all software and hardware in use within the organization, as well as all systems
that may be affected by computer chip failures such as heating and lighting
systems, elevators, etc.
All mission critical software has been modified, tested and is in production.
Modification, testing and placing in production of all non-mission critical
software is expected to be finished by June 30, 1999.
The Company is closely tracking the progress each vendor is making in resolving
the problems associated with Y2K. Testing has commenced with third parties such
as MasterCard and Visa, MAC ATM Network and Federal Reserve FedLine.
Additionally, the Company has contacted its major borrowers to determine the
level of progress each has made in addressing the Y2K problem.
The Company has developed and is continually updating a Y2K Contingency Plan.
This Plan is separate and distinct from, but takes into account, the Company's
Disaster Recovery Plan. The Y2K Contingency Plan covers two situations. First,
it provides for the contingency that despite the conclusion that a system has
been remediated, validated and implemented and is Y2K ready, that nevertheless,
the system fails (Business Resumption Contingency Plan). Second, it provides for
the contingency that the remediation, validation and implementation of any
system fails to be accomplished within the time frame specified in our overall
schedule for remediation, validation and implementation (Remediation Contingency
Plan). To date no remediation, validation or implementation has failed to be
accomplished within our overall schedule or within guidelines issued by the
Federal regulators which regulate this Company or any of its subsidiaries.
Therefore, no Remediation Contingency Plan exists, although, the framework is
there to produce such a Plan if it were to become necessary. Extensive Business
Resumption Contingency Plans have been generated.
The overall Contingency Plan identifies the Company's core business processes
and analyzes the effect of failures of systems on the ability to perform the
various business processes. It further identifies those systems which are
mission critical - those which the Company cannot do without for more than a day
or two, and those that the Company can alternately process on a manual basis or
not process at all for a week or two - non-mission critical. For all systems,
the Plan identifies how the Company's other systems can be processed without the
failing systems and what must be done to bring the failed system up to date when
it is repaired.
The Contingency Plan also covers what the Company will do if electricity and/or
communications fail. It also provides for coverage of additional funding and
cash needs which may arise before and after the century date change and provides
for the possible temporary closing of offices due to loss of security systems,
electricity, etc.
The responsibility of validating the Contingency Plan lies with the Company's
Director of Internal Audit. The scheduled completion date for the Contingency
Plan is June 30, 1999, although, it is a document that will be continually
updated as systems change in the future.
The estimated cost for resolving the Y2K issues is $120,000, and $100,000 has
been spent so far. These costs are, to a large degree, absorbed as ordinary
operating expenses as most of the work is being performed by regular Company
staff. This concentrated effort has forced the postponement of a number of
projects, including, but not limited to, fully implementing the new continuous
form laser printer, image processing and Internet access.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
None.
Item 2 -- Changes in Securities
None.
Item 3 -- Defaults Upon Senior Securities
None.
<PAGE>
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
10.0 Material contracts - Supplemental Benefit Plan
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, 1999.
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 10, 1999
By /s/ PATRICK SCANLON
------------------------------
Patrick Scanlon
Controller
Dated: May 10, 1999
Penn Security Bank & Trust Company
Excess Benefit Plan
Effective as of January 1, 1994
RECITALS
This Penn Security Bank & Trust Company Supplemental Benefit Plan for Otto P.
Robinson, Jr, hereinafter referred to as (the "Plan") is adopted by Penn
Security Bank & Trust Company, (hereinafter referred to as the "Employer") for
Otto P. Robinson, Jr., (hereinafter referred to as the Participant). The purpose
of the Plan is to grant additional benefits in excess of those accrued in the
pension plan due to the limit on compensation contained in Section 401 (a)(17)
of the code. The Plan is intended to be an unfunded excess benefit plan under
Section 3(36) of the Employee Retirement Income Security Act of 1974 (ERISA).
Accordingly, the following Plan is Adopted.
ARTICLE I - DEFINITIONS
1.1 ACCRUED BENEFIT means the benefit accrued on behalf of the Participant as of
the date of reference.
1.2 BENEFICIARY means any person or persons so designated in accordance with the
provisions of Article VII.
1.3 CODE means the Internal Revenue Code of 1986 and the regulations thereunder,
as amended from time to time
1.4 EARLY RETIREMENT DATE means the Early Retirement Date as defined under the
Pension Plan.
1.5 EFFECTIVE DATE means the effective date of the Plan, which shall be January
1, 1994.
1.6 ELIGIBLE EMPLOYEE means, for any Plan Year, (or applicable portion thereof),
a person employed by the Employer who is a participant in the Pension Plan.
1.7 EMPLOYER means Penn Security Bank & Trust Company and its successors and
assigns unless otherwise herein provided, or any other corporation or business
organization which, with the consent of Penn Security Bank & Trust Company, or
its successors or assigns, assumes the Employer's obligations hereunder, or any
other corporation.
1.8 ENTRY DATE means with respect to the participant the first day of the pay
period following the date on which he first becomes an eligible Employee.
1.9 NORMAL RETIREMENT DATE means the Normal Retirement Date as defined under the
Pension Plan.
1.10 PARTICIPANT means Otto P. Robinson, Jr.
1.11 PENSION PLAN means the Penn Security Bank & Trust Company Employee's
Pension Plan Number 001, as may be amended from time to time.
1.12 PLAN means this Penn Security Bank & Trust Company Excess Benefit Plan, as
amended from time to time.
1.13 PLAN YEAR means the twelve (12) month period ending on December 31 of each
year during which the Plan is in effect.
1.14 VALUATION DATE means December 31 of each Plan Year and such other date as
the Employer, in its sole discretion, designates as a Valuation Date.
1.15 ACTUARIAL EQUIVALENT as used in this document will mean the same as the
Section 1.2 in the Penn Security Bank & Trust Company Pension Plan.
<PAGE>
ARTICLE II -- ELIGIBILITY AND PARTICIPATION
2.1 REEMPLOYMENT. If the participant whose employment with the Employer is
terminated is subsequently reemployed, he shall become a participant in the Plan
2.2 CHANGE OF EMPLOYMENT CATEGORY. During any period in which the Participant
remains in the employ of the Employer, but ceases to be an Eligible Employee, he
or she shall not participate in the Plan.
ARTICLE Ill -- BENEFITS
3.1 NORMAL SUPPLEMENTAL BENEFIT. If the Participant retires from employment with
the Employer at his Normal Retirement Date, he shall be entitled to receive a
benefit equal to (a) the benefit which would have accrued under the provisions
of the Pension Plan, if the Pension Plan were administered without regard to the
limitations under Code Section 401(a)(17), less (b) the amount of the Normal
Retirement Benefit which he is entitled to receive under the Pension Plan.
3.2 EARLY RETIREMENT SUPPLEMENTAL BENEFIT. If the Participant retires from
employment with the Employer at his Early Retirement Date, he shall be entitled
to receive a benefit equal to (a) the benefit which would have accrued under the
provisions of the Pension Plan computed in accordance with Section 3.1 to his
Early Retirement Date, less (b) the amount of his Early Retirement Benefit which
he is entitled to receive under the Plan. If Early Retirement Benefits commence
prior to the Participant's Normal Retirement Date, the benefits payable under
the Plan and the Pension Plan shall be actuarially reduced for such early
commencement to the extent provided under the terms of the Pension Plan.
3.3 DEFERRED RETIREMENT SUPPLEMENT BENEFIT. If the Participant retires from
employment with the Employer after his Normal Retirement Date, he shall be
entitled to receive a benefit equal to (a) the benefit which would have accrued
under the provisions of the Pension Plan, computed in accordance with Section
3.1 to his Deferred Retirement Date, less (b) the amount of Deferred Retirement
Benefit which he is entitled to receive under the Pension Plan.
3.4 LIMITATIONS ON BENEFITS. In no event shall the Participant be entitled to
receive total benefits from the Plan and the Pension Plan in excess of the
benefit he would have received from the Pension Plan if the limitations under
Code Section 401(a)(17) were not applicable to the Pension Plan.
ARTICLE IV - ENTITLEMENT TO BENEFITS
4.1 TERMINATION OF EMPLOYMENT. If the Participant terminates employment with the
Employer for any reason, the Participant's Accrued Benefit at the date of
termination shall be valued and payable according to the provisions of Article
V.
4.2 CHANGE OF CONTROL. If a Change of Control of the Employer occurs, the
Participant's Accrued Benefit at the date of the Change of Control shall be
valued and payable according to the provisions of Article V. For purposes of
this Section, a "Change of Control" shall occur when any person other than the
Employer obtains ownership or voting power with respect to greater than 50
percent of the aggregate value or voting power, as applicable, of the Employer's
capital stock.
4.3 REEMPLOYMENT OF RECIPIENT. If the Participant receiving installment
distributions pursuant to Section 5.2 is reemployed by the Employer, the
remaining distributions due to the Participant shall be suspended until the
Participant (or his Beneficiary) once again becomes eligible for benefits under
Section 4.1 or 4.2, at which time such distribution shall commence, subject to
the limitations and conditions in this Plan.
<PAGE>
ARTICLE V DISTRIBUTION OF BENEFITS
5.1 AMOUNT. The Participant (or his beneficiary) shall become entitled to
receive, on or about the date of the Participant's termination of employment
with the Employer, a distribution in an aggregate amount equal to the
Participant's Accrued Benefit. Any payment due hereunder will be paid by the
Employer from its general assets.
5.2 METHOD OF PAYMENT.
a) Cash Payments. All payments under the Plan shall be made in cash.
(b) Timing and Manner of Payment In the case of distributions to the
Participant or his Beneficiary by virtue of an entitlement pursuant to
Section 4.2, an aggregate amount equal to the Participant's Monthly Accrued
Benefit will be paid by the Employer, as provided by Section 5.1, in a lump
sum. In the event a Participant becomes entitled to benefits under Section
4.1, an aggregate amount equal to the Participant's Accrued Benefit will be
paid by the Employer, as provided by Section 5.1, in a lump sum, on or
about the date of the Participant's termination, or in annual installments
made over a period selected by the Participant, or in the form of an
annuity for the life of the Participant (or the joint lives of the
Participant and his spouse) of actuarially equivalent value to the
Participant's lump sum benefit, as selected by the Participant prior to his
termination of employment. If a Participant fails to designate properly the
manner of payments of the Participant's benefit under the Plan, such
payment will be in a lump sum on or about the date of the Participant's
termination.
5.3 DEATH BENEFITS. If a Participant dies before terminating his employment with
the Employer and before the commencement of payments to the Participant
hereunder, the entire value of the Participant's Accrued Benefit shall be paid,
as provided in Section 5.2, to the person or persons designated in accordance
with Section 6.1.
Upon the death of the Participant after payments hereunder have begun but before
he has received all payments to which he is entitled under the Plan, the
remaining benefit payments shall be paid to the person or persons designated in
accordance with Section 6.1, in the manner in which such benefits were payable
to the Participant, unless the Beneficiary elects a more rapid form or schedule
of distribution.
ARTICLE VI BENEFICIARIES; PARTICIPANT DATA
6.1 DESIGNATION OF BENEFICIARIES. Each Participant from time to time may
designate any person or persons (who may be named contingently or successively)
to receive such benefits as may be payable under the Plan upon or after the
Participant's death, and such designation may be changed from time to time by
the Participant by filing a new designation. Each designation will revoke all
prior designations by the same Participant, shall be in a form prescribed by the
Employer, and will be effective only when filed in writing with the Employer
during the Participant's lifetime.
In the absence of a valid Beneficiary designation, or if, at the time any
benefit payment is due to a Beneficiary, there in no living Beneficiary validly
named by the Participant, the Employer shall pay any such benefit payment to the
Participant's spouse, if then living, but otherwise to the Participant's then
living descendants, if any, per stripes, but, if none, to the Participant's
estate. In determining the existence of identity of anyone entitled to a benefit
payment, the Employer may rely conclusively upon information supplied by the
Participant's personal representative, executor or administrator. If a question
arises as to the existence or identity of anyone entitled to receive a benefit
payment as aforesaid, or if a dispute arises with respect to any such payment,
then, notwithstanding the foregoing, the Employer, in its sole discretion, may
distribute such payment to the Participant's estate without liability for any
tax or other consequences which might flow therefrom, or may take such other
action as the Employer deems to be appropriate.
6.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES; INABILITY TO
LOCATE PARTICIPANTS OR BENEFICIARIES. Any communication, statement or notice
addressed to the Participant or to a Beneficiary at his last post office address
as shown on the Employer's records shall be binding on the Participant or
Beneficiary for all purposes of the Plan. The Employer shall not be obligated to
search for any Participant or Beneficiary beyond the sending of a registered
letter to such last known address. If the Employer notifies any Participant or
Beneficiary that he is entitled to an amount under the Plan and the Participant
or Beneficiary fails to claim such amount or make his location known to the
Employer within three (3) years thereafter,
<PAGE>
then, except as otherwise required by law, if the location of one or more of the
next of kin of the Participant is known to the Employer, the Employer may direct
distribution of such amount to any one or more or all of such next of kin, and
such proportions as the Employer determines. If the location of note of the
foregoing persons can be determined, the Employer shall have the right to direct
that the amount payable shall be deemed to be a forfeiture, except that the
dollar amount of the forfeiture, unadjusted for deemed gains or losses in the
interim, shall be paid by the Employer if a claim for the benefit subsequently
is made by the Participant or the Beneficiary to whom it was payable. If a
benefit payable to an unlocated Participant or Beneficiary is subject to escheat
pursuant to applicable state law, the Employer shall not be liable to any person
for any payment made in accordance with such law.
ARTICLE VII -- ADMINISTRATION
7.1 ADMINISTRATIVE AUTHORITY. Except as otherwise specifically provided herein,
the Employer shall have the sole responsibility for and the sole control of the
operation and administration of the Plan, and shall have the power and authority
to take all action and to make all decisions and interpretations which may be
necessary or appropriate in order to administer and operate the Plan, including,
without limiting the generality of the foregoing, the power, duty and
responsibility to:
(a) Resolve and determine all disputes or questions arising under the Plan,
including the power to determine the rights of the Participant and
Beneficiaries, their respective benefits, and to remedy any ambiguities,
inconsistencies or omissions in the Plan.
(b) Adopt such rules or procedures and regulations as in its opinion may be
necessary for the proper and efficient administration of the Plan and are
consistent with the Plan.
(c) Implement the Plan in accordance with the terms and the rules and
regulations adopted as above.
(d) Make determinations with respect to the Participant and make determinations
concerning the crediting and distribution of Plan Accounts.
(e) Appoint any persons or firms, or otherwise act to secure specialized advice
or assistance, as it deems necessary or desirable in connection with the
administration and operation of the Plan, and the Employer shall be
entitled to rely conclusively upon, and shall be fully protected in any
action or omission taken by it in good faith reliance upon, the advice or
opinion of such firms or persons. The Employer shall have the power and
authority to delegate from time to time by written instrument all or any
part of its duties, powers or responsibilities under the Plan, both
ministerial and discretionary, as it deems appropriate, to any person or
committee, and in the same manner to revoke any such delegation of duties,
powers or responsibilities. Any action of such person or committee in the
exercise of such delegated duties, powers or responsibilities shall have
the same force and effect for all purposes hereunder as if such action had
been taken by the Employer. Further, the Employer may authorize one or more
persons to execute any certificate or document on behalf of the Employer,
in which any person notified by the Employer of such authorization shall be
entitled to accept and conclusively rely upon any such certificate or
document executed by such person as representing action by the Employer
until such third person shall have been notified of the revocation of such
authority.
7.2 UNIFORMITY OF DISCRETIONARY ACTS. Whenever in the administration or
operation of the Plan discretionary actions by the Employer are required or
permitted, such actions shall be consistently and uniformly applied to all
persons similarly situated, and no such action shall be taken which shall
discriminate in favor of any particular person or group of persons.
7.3 LITIGATION. Except as may be otherwise required by law, in any action or
judicial proceeding affecting the Plan, the Participant or his Beneficiary shall
be entitled to any notice or service or process, and any final judgement entered
in such action shall be binding on all persons interested in, or claiming under,
the Plan.
7.4 PAYMENT OF ADMINISTRATION EXPENSES. All expenses incurred in the
administration and operation of the Plan, including any taxes payable by the
Employer in respect of the Plan, shall be paid by the Employer.
<PAGE>
ARTICLE VIII AMENDMENT
8.1 RIGHT TO AMEND. The Employer, by written instrument executed by the
Employer, shall have the right to amend the Plan, at any time and with respect
to any provisions hereof, and all parties hereto or claiming any interest
hereunder shall be bound by such amendment; provided, however, that no such
amendment shall deprive the Participant or his Beneficiary of a right accrued
hereunder prior to the date of the amendment.
8.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF THE PLAN. Notwithstanding
the provisions of Section 9.1, the Plan agreement may be amended by the Employer
at any time, retroactively if required, if found necessary, in the opinion of
the Employer, in order to conform the Plan to the provision and requirements of
any applicable law (including ERISA and the Code). No such amendment shall be
considered prejudicial to any interest of the Participant or a Beneficiary
hereunder.
ARTICLE IX -- TERMINATION
9.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN. The Employer reserves the
right, at any time, to terminate the Plan and/or its obligation to make further
credits to the Plan Participant. The Employer also reserves the right, at any
time, to suspend the operation of the Plan for a fixed or indeterminate period
of time.
9.2 AUTOMATIC TERMINATION OF PLAN. The Plan, but not its accrued benefits,
automatically shall terminate upon the dissolution of the Employer, or upon its
merger into or consolidation with any other corporation or business organization
if there is a failure by the surviving cooperation or business organization to
adopt specifically and agree to continue the Plan.
9.3 SUSPENSION OF DEFERRALS. In the event of a suspension of the Plan, the
Employer shall continue all aspects of the Plan, other than benefit accruals,
during the period of the suspension in accordance with Articles IV and V.
9.4 ALLOCATION AND DISTRIBUTION. This Section shall become operative on a
complete termination of the Plan. The provisions of this Section also shall
become operative in the event of a partial termination of the Plan, as
determined by the Employer, but only with respect to that portion of the Plan
attributable to the Participant.
ARTICLE X MISCELLANEOUS
10.1 LIMITATIONS ON LIABILITY OF THE EMPLOYER. Neither the establishment of the
Plan nor any modification thereof, nor the creation of any account under the
Plan, nor the payment of any benefits under the Plan shall be construed as
giving to any Participant or other person any legal or equitable right against
the Employer, or any officer or employer thereof except as provided by law or by
any Plan provision. In no event shall the Employer, or any successor, employee,
officer, director, or stockholder of the Employer, be liable to any person on
account of any claim arising by reason of the provision of the Plan or of any
instrument or instruments implementing its provisions, or for the failure of the
Participant, Beneficiary, or other person to be entitled to any particular tax
consequences with respect to the Plan, or any credit or distribution hereunder.
10.2 CONSTRUCTION. If any provision of the Plan is held to be illegal or void,
such illegality or invalidity shall not affect the remaining provisions of the
Plan, but shall be fully severable, and the Plan shall be construed and enforced
as if said illegal or invalid provision had never been inserted herein. For all
purposes of the Plan, where the context admits, the singular shall include the
plural, and the plural shall include the singular. The headings of articles and
sections herein are inserted only for convenience of reference and are not to be
considered in the construction of the Plan. Participation under this Plan will
not give the Participant the right to be retained in the service of the Employer
nor any right or claim to any benefit under the Plan unless such right or claim
has specifically accrued hereunder.
<PAGE>
The Plan is intended to be and at all time shall be interpreted and administered
so as to qualify as an unfunded deferred compensation plan, and no provision of
the Plan shall be interpreted so as to give any individual any right in any
assets of the Employer which right is greater than the rights of a general
unsecured creditor of the Employer.
10.3 SPENDTHRIFT PROVISION. No amount payable to the Participant or Beneficiary
under the Plan will, except as otherwise specifically provided by law, be
subject in any manner to anticipation, alienation, attachment, garnishment,
sale, transfer, assignment (either at law or in equity), levy execution, pledge,
encumbrance, charge, or any other legal or equitable process, and any attempt to
do so will be void; nor will any benefit be in any manner liable for or subject
to the debts, contracts, liabilities, engagements, or torts of the person
entitled thereto. Further, (i) the withholding of taxes from Plan benefits, (ii)
the recovery under the Plan of overpayments of benefits previously made to the
Participant or Beneficiary, (iii) if applicable, the transfer of benefit rights
from the Plan to another plan, or (iv) the direct deposit of benefit payments to
an account in a banking institution (if not actually part of an arrangement
constituting an assignment or alienation) shall not be construed as an
assignment or alienation.
In the event that the Participant's or Beneficiary's benefits hereunder are
garnished or attached by order of any court, the Employer may bring an action or
a declaratory judgement in a court of competent jurisdiction to determine the
proper recipient of the benefits to be paid under the Plan. During the pendency
of said action, any benefits that become payable shall be held as credits to the
Participant's or Beneficiary's Account or, if the Employer prefers, paid into
the court as they become payable, to be distributed by the court to the
recipient as the court deems proper at close of said action.
IN WITNESS WHEREOF, the Employer has caused the Plan to be executed and its seal
to be affixed hereto, effective as of the 1 day of January 1994 .
ATTEST/WITNESS NAME OF EMPLOYER
Penn Security Bank & Trust Company
/s/ D. William Hume /s/ Richard Grimm
- ------------------------------ ------------------------------
D. William Hume Richard Grimm
Assistant Secretary Executive Vice President
[SEAL]
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