The cover for our 1998 Annual Report depicts the ribbon cutting ceremonies and
portrays indoor and outdoor views of the new banking offices at Green Ridge in
Scranton, and at East Stroudsburg.
COVER PAGE
<PAGE>
CUSTOMER SERVICES
A detailed listing of the services offered by the Company is as follows:
DEPOSIT ACCOUNTS
All Purpose Clubs
Certificates of Deposit
Christmas Clubs
Demand Accounts
Individual Retirement Accounts
Money Market Accounts
NOW Accounts
Savings Accounts
Time Open Accounts
Vacation Clubs
LENDING
Appliance Loans
Automobile Loans
Business Loans
Collateral Loans
Construction Loans
Credit Lines
Educational Loans
Home Equity Loans
Home Repair and Remodeling Loans
Installment Loans
MasterCard and VISA (Cosmic Card)
Mortgage Loans (Residential and Commercial)
Personal Loans
OTHER SERVICES
ATM Services
Bank Money Orders
Cashier's Checks
College Campus Card Interface
Credit Card Merchant Draft Capture
Data Processing Services
Direct Deposit of Recurring Payments
EDI-ACH Service
Foreign Remittance
Home Banking and Videotex Services
Lockbox Services
Night Depository
Repurchase Agreements
Safe Deposit Boxes
Travelers Checks
Trust Department Services
(a) Executor
(b) Administrator
(c) Trustee
(d) Guardian
(e) Agent
(f) Custodian and Trustee for
Pension Plans
(g) Trustee for Public Bond Issues
(h) Securities Depository Service
U.S. Savings Bonds
BRANCH LOCATIONS (with ATMs)
ABINGTON CENTRAL CITY
1100 Northern Boulevard 150 North Washington Avenue
Clarks Summit, PA Scranton, PA
(570) 587-4898 (570) 346-7741
EAST SCRANTON MOUNT POCONO
Prescott Ave. & Ash Street Route 611 & Route 940
Scranton, PA Mount Pocono, PA
(570) 342-9101 (570) 839-8732
EAST STROUDSBURG NORTH POCONO
Route 209 & Route 247 Main & Academy Streets
East Stroudsburg, PA Moscow, PA
(570) 420-0432 (570) 842-7626
GOULDSBORO SOUTH SCRANTON
Main & Second Streets 526 Cedar Avenue
Gouldsboro, PA Scranton, PA
(570) 842-6473 (570) 343-1151
GREEN RIDGE
1901 Sanderson Ave.
Scranton, PA
(570) 346-4695
OTHER ATM LOCATIONS
Acorn Market
Route 209
Marshall's Creek, PA
Acorn Market
Route 611
Swiftwater, PA
Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA
Kutztown University
Student Center and
South Dining Hall
Kutztown, PA
Meadow Ave & Hemlock St.
Scranton, PA
Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA
Red Barn Village
Newton Ransom Blvd
Newton, PA
ON THE COVER
The cover for our 1998 Annual Report depicts the ribbon cutting ceremonies and
portrays indoor and outdoor views of the new banking offices at Green Ridge in
Scranton, and at East Stroudsburg.
To the left of this description is a picture of the cover.
INSIDE FRONT COVER
<PAGE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------
In thousands, except
per share data 1998 1997 1996
- -----------------------------------------------------------------
Earnings per share $ 1.99 $ 2.20 $ 2.14
Dividends per share $ 1.05 $ 1.05 $ 1.00
Total Capital $ 44,961 $ 42,924 $ 40,585
Total Deposits $ 377,526 $ 374,488 $ 352,026
Total Assets $ 436,099 $ 427,577 $ 398,035
- -----------------------------------------------------------------
CONTENTS
Customer Services Inside Front Cover
President's Letter 2
Board of Directors / New Advisory Board Members 4
Promotions and Appointments 6
Events of 1998 8
Form 10-K
Part 1, Item 1 Business 13
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part 2, Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6 Selected Financial Data 16
Item 7 Management Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk 26
Item 8 Financial Statements and Supplementary Data 28
Consolidated Balance Sheets 28
Consolidated Statements of Income 29
Consolidated Statements of Changes in Stockholders' Equity 30
Consolidated Statements of Cash Flows 31
General Notes to Financial Statements 32
Independent Auditor's Report 42
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 43
Part 3, Item 10 Directors and Executive Officers of the Registrant 43
Item 11 Executive Compensation 43
Item 12 Security Ownership of Certain Beneficial Owners and Management 43
Item 13 Certain Relationships and Related Transactions 43
Part 4, Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K 44
Signatures 45
Index to Exhibits 46
Company Officers 47
1
<PAGE>
PRESIDENT'S LETTER
Dear Shareholder
Despite a reduction in earnings from $2.20 per share in 1997 to $1.99 per
share in 1998, Penseco Financial Services Corporation had another good year.
Total assets increased from $428 million at the end of 1997 to $436 million at
the end of 1998. Total deposits increased from $374 million at the end of 1997
to $378 million at the end of 1998 and total capital increased from $42.9
million at the end of 1997 to $44.9 million at the end of 1998.
As, no doubt, you have already noticed from our front cover, we completed
and put into operation two new offices. Our new modern office in Green Ridge
contains adjacent customer parking, three drive-up teller lanes and a drive-up
ATM and has been made larger than an ordinary branch office to provide for sales
of non-banking products including trust, investments and insurance services.
Inside are five private offices, a board room, tellers stations, vault, new
accounts/safe deposit area, coupon booths, etc. A large storage area exists in
the basement. We took great pains architecturally so the new office would "fit"
into the existing neighborhood. As we were finishing the construction, we were
fortunate to be able to acquire the adjacent property for additional parking,
bringing the total parking spaces to fifty-three. This office replaces the
existing branch in Green Ridge which was constructed in 1914 as the Green Ridge
Bank and which lacked adjacent customer parking, drive-up tellers and an
efficient floor plan.
Our new branch office in East Stroudsburg Borough is located at the
intersection of business Route 209 and Route 447. This intersection has one of
the highest traffic counts in Monroe County. This office contains three drive-up
teller lanes, two drive-up ATMs and parking for twenty-eight automobiles.
Inside, the branch contains four private offices, a board room, an operations
area, an employee lounge, a vault with safe deposit boxes, and teller stations.
Again, the "sales" area of the branch includes room for non-deposit type
services such as trust, investment and insurance services.
At year end, we had completed the replacement of all of our existing IBM
ATMs with state of the art NCR ATMs. These new machines provide us with the
ability to implement new automated services for our customers. Going forward, we
are interested in providing, through these ATMs, the same services we have
available through home/office banking. Among these are interbank funds
transfers, certificate of deposit purchases and redemptions, and instant
statements. During the year we also installed new ATMs at several convenience
store locations as a test of this market. It is too early to tell whether this
endeavor will be a profitable one.
By the time you are reading this letter, we will have finished the
installation of on-line teller terminals at all of our branches. This new system
prints deposit receipts and has the capability to display signatures, images of
checks and, ultimately, images of our customers. The installation has progressed
smoothly and our tellers have told us that the system is great.
This year we installed two new ATMs on the campus at Kutztown University
for use in conjunction with their new campus ID card. Their card provides access
to bank accounts held at Penn Security and we created a number of unique
services for them. It will be several years before we will be able to fully
evaluate the profitability of this new service but the systems developed for
this interface seem to be functioning well. Several other colleges are also
interested in developing similar campus card systems.
Our Y2K effort remains on schedule and we expect to meet all regulatory
preparedness deadlines without difficulty.
Our new check processing machine and image capture system had been placed
on hold pending completion of our Y2K effort. We now expect to install this new
system in the second quarter of this year.
We now also expect our home/office banking system to be accessible through
the Internet in the third quarter of this year.
We have targeted a number of areas where cost savings can be realized
through computer related systems. At the top of our priority list, after Y2K is
behind us, is form production and postal bar code savings, utilizing our new
continuous form laser printer. As one can see, we have been very busy at Penseco
Financial Services Corporation. The costs associated with these projects
negatively impacted our earnings on a short term basis, however, over the longer
term, we believe them to be beneficial to future earnings. In addition to these
costs, the net interest margin has been shrinking, due largely to the
securitization of loans. Net interest margin was impacted further by the flat
slope of the yield curve which, ordinarily, slopes positively.
There are two graph's depicted here:
(1) Positive sloping yield curve
(2) Flay yield curve
a = Spread between deposit rate and loan rate
b = Spread between shorter and longer term obligations
2
<PAGE>
PRESIDENT'S LETTER
Graph at the top of the page plots the following numbers:
<TABLE>
<CAPTION>
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ROE 11.94% 11.56% 12.80% 13.32% 11.63% 11.60% 11.95% 11.99% 9.81% 11.49% 11.88%
Inflation Adj. ROE 2.92% -1.74% 0.28% 4.39% 7.80% 7.81% 8.00% 8.19% 8.71% 7.06% 7.46%
Inflation Rate 9.02% 13.29% 12.52% 8.92% 3.83% 3.79% 3.95% 3.80% 1.10% 4.43% 4.42%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
ROE 12.49% 11.73% 11.12% 12.38% 11.92% 11.05% 11.36% 11.34% 11.01% 9.52%
Inflation Adj. ROE 7.84% 5.62% 8.06% 9.48% 9.17% 8.37% 8.82% 8.02% 9.31% 7.91%
Inflation Rate 4.65% 6.11% 3.06% 2.90% 2.75% 2.67% 2.54% 3.32% 1.70% 1.61%
</TABLE>
Although the flat yield curve may be considered transient, over the longer
term the distance between the loan and deposit curve will narrow thus giving
rise to the need over the longer term to obtain additional revenue sources. We
believe that an attempt to increase the interest margin through higher risk
sub-prime loans or highly leveraging the balance sheet or substituting higher
risk securities for virtually all of our substantial treasury bond portfolio may
increase the risk to the Bank to unacceptable levels. Our long term solution is
through additional fee income from trust and asset management services, credit
and debit card merchant services, electronic transaction services, insurance,
stock brokerage and estate planning and tax services to name a few. While we get
these new services up and running we may experience lower returns than
historically recorded as the pump is primed for future revenues.
On the other hand, as the graph above indicates, since 1992 our inflation
adjusted return on equity has been averaging 9%, the highest return over the
past 20 years. It is not unusual to expect a lower absolute return on equity as
the inflation rate declines.
At year end, our Senior Vice-President, D. William Hume retired. Mr. Hume's
vast experience over a life of banking greatly benefitted our institution since
he joined us nineteen years ago. We are indeed fortunate that his counsel will
continue to be available to us since he continues in his role as a director and
serves on many of the Bank's committees.
Also at year end, a number of appointments were made. Peter F. Moylan was
named Executive Vice-President, Non-Deposit Services and Trust Officer. Mr.
Moylan comes to us after a long and successful career in Trust Services at a
local, then by merger regional, bank where he managed their Private Bank in the
Northeastern Pennsylvania area. In addition to the Trust Department, he will be
responsible for integrating insurance sales and securities activities into the
already existing non-deposit services.
Andrew A. Kettel, Jr. was named Senior Vice-President. Mr. Kettel, in
addition to managing our Central City office, is in charge of our retail branch
operations. John R. Anderson III was named Financial Reporting Officer, Lisa A.
Kearney, Loan Officer, Jeffrey Solimine, Assistant Vice-President, Aleta
Sebastianelli, Assistant Vice-President and Assistant Secretary, Anne M.
Cottone, Vice-President and Compliance Officer, Deborah A. Wright, Assistant
Vice-President and North Pocono Office Branch Manager, Paula A. Ralston Nenish,
Assistant Director of Internal Audit, and Beth S. Wolff, Assistant
Vice-President and East Scranton Office Branch Manager. In addition, Carl M.
Baruffaldi was appointed as Branch Manager of our new Green Ridge Office, and,
in our new East Stroudsburg Office, Denise M. Cebular was appointed as Branch
Manager and Nereida Santiago as Assistant Branch Manager and Assistant Cashier.
In our Advisory Boards, Anthony J. Descipio and James A. Forti were added
to our North Pocono Office Advisory Board, Everett Jones and George Noone to our
Green Ridge Advisory Board, and Attorney Brian Golden and David Lansdowne to our
Mount Pocono Advisory Board. We named a new Advisory Board for our East
Stroudsburg Office consisting of Mary Citro, Robert J. Dillman, Ph.D., Jere
Dunkelberger, Attorney Kirby Upright and Jeffrey Weichel. We are indeed
fortunate to have such outstanding people to assist us in running our Bank in
their respective communities.
In the economy, the year saw the economic expansion in the United States
continue. It is now the longest period of economic expansion ever. This
performance of the economy is truly extraordinary in light of the financial
turmoil in other parts of the world. But now the Federal Reserve is ruminating
about whether their rate reductions last year were prudent, focusing on the very
rapid economic growth and indications of renewed inflation and increases in the
producer price index. It would not be surprising to see the Federal Reserve
increase rates this year to keep inflation under control even though it would
most likely trigger the end of the current expansion, pop the bubble in the
equity markets and begin a recessionary period.
In looking to the future, we see our Company's strong capital position,
good earnings, technological resources, our positioning in the marketplace with
regard to niche national markets, as well as our traditional geographic market,
all providing an excellent foundation for continued success. In this endeavor,
you can help us by recommending us to your family, friends and business
acquaintances. This is your institution - let it serve you.
Sincerely yours,
/s/ Otto P. Robinson Jr.
Otto P. Robinson, Jr.
President
3
<PAGE>
BOARD OF DIRECTORS
The top portion of this page of the 1998 Annual Report to Shareholders contains
one picture. A description of the picture follows:
Seated left to right:
Russell C. Hazelton,
P. Frank Kozik, Secretary;
Attorney Otto P. Robinson, Jr., President;
Richard E. Grimm, Executive Vice-President and Treasurer;
and Edwin J. Butler
Standing left to right:
Sandra C. Phillips,
James G. Keisling,
Robert W. Naismith, Ph.D.,
James B. Nicholas,
D. William Hume, Senior Vice-President;
and Emily S. Perry
NEW ADVISORY BOARD MEMBERS
The remainder of this page of the 1998 Annual Report to Shareholders contains
three pictures. A description of each picture follows, starting from left to
right:
Mary Citro
East Stroudsburg Branch
Anthony J. Descipio
North Pocono Branch
Robert J. Dillman, Ph.D.
East Stroudsburg Branch
4
<PAGE>
NEW ADVISORY BOARD MEMBERS
This page of the 1998 Annual Report to Shareholders contains eight pictures. A
description of each picture follows, starting at the top, from left to right:
Jere Dunkelberger
East Stroudsburg Branch
James A. Forti
North Pocono Branch
Atty. Brian Golden
Mount Pocono Branch
Everett Jones
Green Ridge Branch
David Lansdowne
Mount Pocono Branch
George Noone
Green Ridge Branch
Atty. Kirby Upright
East Stroudsburg Branch
Jeffrey Weichel
East Stroudsburg Branch
5
<PAGE>
PROMOTIONS & APPOINTMENTS
This page of the 1998 Annual Report to Shareholders contains seven pictures. A
description of each picture follows, starting at the top, from left to right:
Peter F. Moylan
Executive Vice-President, Non-Deposit Services and Trust Officer
Andrew A. Kettel, Jr.
Senior Vice-President
Anne M. Cottone
Vice-President and Compliance Officer
Carl M. Baruffaldi
Assistant Vice-President
Denise M. Cebular
Assistant Vice-President
Beth S. Wolff
Assistant Vice-President
Deborah A. Wright
Assistant Vice-President
6
<PAGE>
PROMOTIONS & APPOINTMENTS
This page of the 1998 Annual Report to Shareholders contains six pictures. A
description of each picture follows, starting at the top, from left to right:
Aleta Sebastianelli
Assistant Vice-President and Assistant Secretary
Jeffrey Solimine
Assistant Vice-President
Paula A. Ralston Nenish
Assistant Director
of Internal Audit
Nereida Santiago
Assistant Cashier
John R. Anderson III
Financial Reporting Officer
Lisa A. Kearney
Loan Officer
7
<PAGE>
EVENTS OF 1998
This page of the 1998 Annual Report to Shareholders contains two pictures. A
description of each picture follows:
(1) Bank officials and other dignitaries look on as Attorney Otto P.
Robinson, Jr., President of Penn Security Bank and Trust Company,
commences the ribbon cutting for the opening of the new drive-up
facility at our Central City Office in Scranton.
(2) Part of the crowd that helped us celebrate the grand opening of our
new Green Ridge Office this past summer at an old-fashioned block
party, which was held on the Bank's property.
8
<PAGE>
EVENTS OF 1998
This page of the 1998 Annual Report to Shareholders contains four pictures. A
description of each picture follows. left to right, starting at the top:
(1&2)The photos (above and right) are of the newly-remodeled teller and
lobby areas in our Central City Office.
(3) During the year, the Bank replaced its existing automated teller
machines with new, state-of-the-art, multi-function ATMs like the one
above.
(4) During the year, Penn Security purchased sophisticated teller machines
which are being installed in all of our banking offices to make our
teller operations more efficient.
9
<PAGE>
EVENTS OF 1998
This page of the 1998 Annual Report to Shareholders contains four pictures. A
description of each picture follows, left to right, starting at the top:
(1) In the photo at left, Shikha Vyas, Manager of Administrative
Services at Kutztown University, (left) and Douglas R. Duguay,
Director of Campus Banking at Penn Security, (right) look over
the newly installed Automated Teller Machine in the South Dining
Hall at Kutztown University.
(2) In the photo at right, Arianne Naismith (left) and Robert
Robinson (right), part of the Penn Security team that worked
during freshman orientation this past summer at Kutztown
University, explain the benefits of the "KU Card" to a group of
new Kutztown students.
(3&4)This is a sample picture of the new "KU Card," with a student
picture and name, that is being used by students, faculty and
staff at Kutztown University. The "KU Card" at the University
serves as a campus card for dining privileges, door access and
library access as well as a banking card for ATM and
point-of-sale access through Penn Security Bank.
10
<PAGE>
EVENTS OF 1998
This page of the 1998 Annual Report to Shareholders contains three pictures. A
description of each picture follows, starting at the top:
(1) During the year, Penn Security purchased new, state-of-the-art,
item processing equipment that makes use of both MICR (magnetic
ink character recognition) and OCR (optical character
recognition) technologies to process transactions. Documents can
be retrieved and viewed on the screen, and customers will be able
to retrieve copies of pertinent documents through the Internet
when Penn Security has its web site established.
(2) Dr. Virginia Hughson-Otte, President of the American Association
of Women Dentists, visited Penn Security last summer. She is
pictured here with Otto P. Trostel, Vice-President, Marketing.
(3) Attorney Otto P. Robinson, Jr. welcomes a young visitor to our
new East Stroudsburg Office which opened in late November.
11
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
Scranton, Pennsylvania
Commonwealth of Pennsylvania
I.R.S. Employer Identification Number 23-2939222
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
Telephone number 570-346-7741
Securities Registered Under
Section 12(G) of the Act
Common Stock, Par Value $ .01 per share
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the Company's voting stock held by non-affiliates
of the registrant on March 1, 1999, based on the average of the closing bid and
asked prices of such stock on that date equals Approximately $90,216,000. The
number of shares of common stock outstanding as of March 1, 1999 equals
2,148,000
Documents Incorporated by Reference
Portions of the Corporations 1998 Annual Report to Stockholders are incorporated
by reference in Parts I and II.
Portions of the Corporation's definitive proxy statement relating to the 1999
Annual Meeting of Stockholders are incorporated by reference in Part III.
12
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
PART I
------
ITEM 1 BUSINESS
GENERAL
PENSECO FINANCIAL SERVICES CORPORATION, (the "Company" or "PFNS"), which is
headquartered in Scranton, Pennsylvania, was formed under the general
corporation laws of the State of Pennsylvania in 1997 and is registered as a
bank holding company. The Company became a bank holding company upon the
acquisition of all of the outstanding shares of Penn Security Bank and Trust
Company (the "Bank"), a state chartered bank, on December 31, 1997. The Company
is subject to supervision by the Federal Reserve Board. The Bank, as a state
chartered financial institution, is subject to supervision by the Federal
Deposit Insurance Corporation and the Pennsylvania Department of Banking.
The Company's principal banking office is located at 150 North Washington
Avenue, Scranton, Pennsylvania, containing trust, marketing, audit, credit card,
human resources, executive, data processing and central bookkeeping offices.
There are eight additional offices.
Through its banking subsidiary, the Company generates interest income from
its outstanding loans receivable and its investment portfolio. Other income is
generated primarily from merchant transaction fees, trust fees and service
charges on deposit accounts. The Company's primary costs are interest paid on
deposits and general operating expenses. The Bank provides a variety of general
commercial and retail banking services to business and professional customers,
as well as retail customers, on a personalized basis. The Bank's primary lending
products are real estate, commercial and consumer loans. The Bank also offers
ATM access, credit cards, active investment accounts, trust department services
and other various lending, depository and related financial services. The Bank's
primary deposit products are savings and demand deposit accounts and
certificates of deposit.
The Company is not dependent upon a single customer, or a few customers,
the loss of one or more of which would have a material adverse effect on its
operations. The operations and earnings of the Corporation are not materially
affected by seasonal changes or by Federal, state or local environmental laws or
regulations.
COMPETITION
The Bank operates in a competitive environment in which it must share its market
with many local independent banks as well as several banks which are affiliates
or branches of very large regional holding companies. The Bank encounters
competition from diversified financial institutions, ranging in size from small
banks to the nationwide banks operating in this region, and include commercial
banks, savings and loan associations, credit unions and other lending
institutions.
The principal competitive factors among the Company's competitors can be
grouped into two categories: pricing and services. In the Bank's primary service
area, interest rates on deposits, especially time deposits, and interest rates
and fees charged to customers on loans are very competitive. From a service
perspective, the Bank competes in other areas such as convenience of location,
types of services, service costs and banking hours.
EMPLOYEES
As of March 1, 1999, the Company employed 206 full-time equivalent employees.
The employees of the Company are not represented by any collective bargaining
group. Management of the Company considers relations with its employees to be
good.
SUPERVISION AND REGULATION
OVERVIEW
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended, and, as such, is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board" or "FRB"). The Company is required to file quarterly reports of
its operations with the FRB.
13
<PAGE>
The Bank, as a Pennsylvania state-chartered non-member financial institution, is
subject primarily to supervision, regulation and examination by the Commonwealth
of Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation (the "FDIC"), which insures the Bank's deposits to the maximum
extent permitted by law.
BANK HOLDING COMPANY REGULATIONS
As a bank holding company, the Company is permitted to engage in banking-related
activities as authorized by the Federal Reserve Board, directly or through
newly-formed subsidiaries or by acquiring companies already established in such
activities subject to the FRB regulations relating to those activities.
FORWARD LOOKING INFORMATION
This Form 10-K contains forward-looking informational statements, in addition to
the historical financial information required by the Securities and Exchange
Commission. There are certain risks and uncertainties associated with these
forward-looking statements which could cause actual results to differ materially
from those stated herein. Such differences are discussed in the section entitled
"Management Discussion and Analysis of Financial Condition and Results of
Operations". These forward-looking statements reflect management's analysis as
of this point in time. Readers should review the other documents the Company
periodically files with the Securities and Exchange Commission in order to keep
apprised of any material changes.
ITEM 2 PROPERTIES
Thereare nine offices positioned throughout the greater Northeastern
Pennsylvania Region. They are located in the South Scranton, East Scranton,
Green Ridge, and Central City sections of Scranton, the Borough of Moscow, the
Town of Gouldsboro, South Abington Township, the Borough of Mount Pocono and the
Borough of East Stroudsburg at Eagle Valley Corners. Through these offices, the
Company provides a full range of banking and trust services to the Lackawanna,
Wayne, Monroe, Pike and Wyoming County areas. All offices are owned by the Bank
or through a wholly owned subsidiary of the Bank, Penseco Realty, Inc., with the
exception of the Mount Pocono Office which is owned by the Bank but is located
on land occupied under a long-term lease.
The principal office, located at the corner of North Washington Avenue and
Spruce Street in the "Central City" of Scranton's business district, houses the
operations, trust, marketing, credit card and audit departments as well as the
Company's executive offices. Several remote ATM locations are leased by the
Bank, which are located throughout Northeastern Pennsylvania. All branches have
ATMs, mostly drive-ups. Also, all branches and remote ATM locations are equipped
with closed circuit television monitoring.
Additional Bank assets held for sale consist of residential properties in
Scranton, Pennsylvania and Buck Hill Falls, Pennsylvania and the Bank's former
Green Ridge office located at the corner of East Market Street and Boulevard
Avenue, Scranton, Pennsylvania.
ITEM 3 LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine
litigation incidental to the business of the Company as to which the Company or
subsidiary is a party or of which any of their property is subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
14
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
This Annual Report is the Company's annual disclosure statement as required
under Section 13 or 15(d) of the Securities Exchange Act of 1934. Questions may
be directed to any branch location of the Company or by contacting the
Controller's office at:
Patrick Scanlon, Controller
Penseco Financial Services Corporation
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
1-800-327-0394
Management of the Company is aware of the following securities dealers who make
a market in the Company stock:
Baird, Patrick & Company, Inc. Legg Mason Wood Walker, Inc.
Ferris, Baker, Watts, Inc. Monroe Securities, Inc.
F.J. Morrissey & Company, Inc. Ryan, Beck & Company, Inc.
Hopper Soliday & Company, Inc. Sandler, O'Neill & Partners, LP
Janney Montgomery Scott, Inc.
The Company's capital stock is traded on the "Over-the-Counter" BULLETIN BOARD
under the symbol "PFNS". The following table sets forth the price range together
with dividends paid for each of the past two years. These quotations do not
necessarily reflect the value of actual transactions.
Dividends
Paid
1998 High Low Per Share
- ---------------------------------------------
First Quarter $ 35 $ 28 $ .21
Second Quarter 41 35 .21
Third Quarter 43 39 .21
Fourth Quarter 44 40 .42
-------
$ 1.05
=======
Dividends
Paid
1997 High Low Per Share
- ---------------------------------------------
First Quarter $ 23 $ 22 $ .20
Second Quarter 23 23 .20
Third Quarter 25 23 .20
Fourth Quarter 29 25 .45
-------
$ 1.05
=======
DIVIDENDS PAID (in millions) YEAR
- -------------------------------------------
$ 2,255 1998
2,256 1997
2,148 1996
2,014 1995
1,745 1994
As of March 1 , 1999 there were approximately 1,014 stockholders of the Company
based on the number of recordholders. Reference should be made to the
information about the Company's dividend policy and regulatory guidelines on
pages 24 and 39.
TRANSFER AGENT
Penseco Financial Services Corporation, 150 North Washington Avenue, Scranton,
Pennsylvania 18503-1848. Stockholders' questions should be directed to the
Company's corporate headquarters at 570-346-7741.
QUARTERLY FINANCIAL DATA (unaudited)
(in thousands, except per share amounts)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------
Net Interest Income $ 4,356 $ 4,141 $ 4,283 $ 4,016
Provision for Loan Losses 106 104 75 310
Other Income 1,911 1,340 2,116 1,471
Other Expenses 4,374 3,876 4,632 4,104
Net Income 1,248 1,047 1,180 806
Earnings Per Share $ .58 $ .49 $ .55 $ .37
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------
Net Interest Income $ 4,235 $ 4,263 $ 4,382 $ 4,834
Provision for Loan Losses 130 46 63 77
Other Income 1,745 1,196 1,959 1,385
Other Expenses 4,171 3,892 4,278 4,543
Net Income 1,172 1,079 1,376 1,098
Earnings Per Share $ .55 $ .50 $ .64 $ .51
15
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
(in thousands, except per share data)
RESULTS OF OPERATIONS:
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Interest Income $ 29,975 $ 30,099 $ 27,893 $ 27,474 $ 23,907
Interest Expense 13,179 12,385 11,201 11,218 8,832
- --------------------------------------------------------------------------------
Net Interest Income 16,796 17,714 16,692 16,256 15,075
Provision for Loan Losses 595 316 334 321 337
- --------------------------------------------------------------------------------
Net Interest Income
after Provision for
Loan Losses 16,201 17,398 16,358 15,935 14,738
Other Income 6,838 6,285 5,952 6,202 6,249
Other Expenses 16,986 16,884 15,733 15,672 15,935
Income Tax 1,772 2,074 1,975 2,009 1,414
- --------------------------------------------------------------------------------
Net Income $ 4,281 $ 4,725 $ 4,602 $ 4,456 $ 3,638
- --------------------------------------------------------------------------------
BALANCE SHEET DATA:
Assets $ 436,099 $ 427,577 $ 398,035 $ 378,968 $ 363,317
Investment Securities $ 118,762 $ 125,048 $ 125,263 $ 146,246 $ 160,585
Net Loans $ 280,389 $ 269,446 $ 237,915 $ 207,708 $ 178,605
Deposits $ 377,526 $ 374,488 $ 352,026 $ 336,386 $ 326,482
Stockholders' Equity $ 44,961 $ 42,924 $ 40,585 $ 39,239 $ 32,927
PER SHARE DATA: (1)
Earnings per Share $ 1.99 $ 2.20 $ 2.14 $ 2.07 $ 1.69
Dividends per Share $ 1.05 $ 1.05 $ 1.00 $ .937 $ .812
Book Value per Share $ 20.93 $ 19.98 $ 18.89 $ 18.27 $ 15.33
Common Shares Outstanding 2,148,000 2,148,000 2,148,000 2,148,000 2,148,000
FINANCIAL RATIOS:
Net Interest Margin 4.12% 4.51% 4.51% 4.57% 4.51%
Return on Average Assets .99% 1.14% 1.17% 1.19% 1.02%
Return on Average Equity 9.54% 11.22% 11.54% 11.86% 10.76%
Average Equity to Average
Assets 10.38% 10.16% 10.14% 10.01% 9.47%
Dividend Payout Ratio 52.76% 47.73% 46.67% 45.18% 48.01%
(1) Per share data is based on 2,148,000 shares outstanding, giving effect to
the common stock reorganization on December 31, 1997.
16
<PAGE>
ITEM 7 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes and trends related to the
financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. All information is
presented in thousands of dollars, except as indicated.
SUMMARY
Net earnings for 1998 totalled $4.3 million, a decrease of 8.5% from the $4.7
million earned in 1997, which in turn was an increase of 2.7% from the $4.6
million earned in 1996. Net earnings per share were $1.99 in 1998, compared with
$2.20 in 1997 and $2.14 in 1996. Net earnings for 1998 decreased from 1997
results primarily due to a narrowing of the net interest margin based on lower
yields on earning assets and increases in funding costs, together with a higher
provision for loan losses. Net earnings for 1997 were improved over 1996 results
primarily due to an increase in net interest income from better yields on
earning assets and higher levels of average earning assets.
NET INCOME (in millions) YEAR
- -------------------------------------------
$ 4,281 1998
4.725 1997
4.602 1996
4.456 1995
3.638 1994
The Company's return on average assets was .99% in 1998 compared to 1.14% in
1997 and 1.17% in 1996. Return on average equity was 9.54%, 11.22% and 11.54% in
1998, 1997 and 1996, respectively.
RETURN ON AVERAGE ASSETS YEAR
- -------------------------------------------
.99% 1998
1.14% 1997
1.17% 1996
1.19% 1995
1.02% 1994
RETURN ON AVERAGE EQUITY YEAR
- -------------------------------------------
9.54% 1998
11.22% 1997
11.54% 1996
11.86% 1995
10.76% 1994
17
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
The principal component of the Company's earnings is net interest income, which
is the difference between interest and fees earned on interest-earning assets
and interest paid on deposits and other borrowings.
Net interest income was $16.8 million in 1998, compared with $17.7 million
in 1997, a decrease of 5.1%. The decrease in net interest income in 1998
resulted from the Federal Reserve lowering rates throughout the year and local
competitive pricing, forcing banks to live with smaller margins.
Net interest income was $17.7 million in 1997, compared with $16.7
million in 1996, an increase of 6.0%. The improvement in net interest income in
1997 resulted from an increase in the loan portfolio of the Company.
Net interest income, when expressed as a percentage of average
interest-earning assets, is referred to as net interest margin. The Company's
net interest margin for the year ended December 31, 1998 was 4.12% compared with
4.51% for the year ended December 31, 1997, and 4.51% for the year ended
December 31, 1996.
NET INTEREST INCOME (in millions) YEAR
- ---------------------------------------------
$ 16,796 1998
17,714 1997
16,692 1996
16,256 1995
15,075 1994
Interest income in 1998 totalled $30.0 million, compared to $30.1 million in
1997, remaining essentially unchanged from the prior year. The yield on average
interest-earning assets was 7.35% in 1998, compared to 7.66% in 1997. Average
interest-earning assets increased in 1998 to $407.8 million from $392.8 million
in 1997. Average loans, which are the Company's highest yielding earning assets,
increased $23.7 million in 1998, while investment securities and other earning
assets decreased on average by $8.7 million. Average loans represented 69.7% of
1998 average interest-earning assets, compared to 66.3% in 1997.
Interest expense also increased in 1998 to $13.2 million from $12.4 million
in 1997, an increase of $.8 million or 6.5%. This increase resulted from higher
time deposit volume and rate increases. The average rate paid on
interest-bearing liabilities during 1998 was 3.95%, compared to 3.86% in 1997.
Interest income in 1997 totalled $30.1 million, compared to $27.9 million
in 1996 an increase of $2.2 million or 7.9%. This increase resulted primarily
from increased loan volume. The yield on average interest-earning assets was
7.66% in 1997, compared to 7.54% in 1996. Average interest-earning assets
increased in 1997 to $392.8 million from $370.0 million in 1996. Average loans
increased $29.1 million in 1997, while investment securities and other earning
assets decreased on average by $6.3 million. Average loans represented 66.3% of
1997 average interest-earning assets, compared to 62.5% in 1996.
Interest expense increased in 1997 to $12.4 million from $11.2 million in
1996, an increase of $1.2 million or 10.7%. This increase resulted from higher
time deposit volume and rate increases. The average rate paid on
interest-bearing liabilities during 1997 was 3.86%, compared to 3.72% in 1996.
The most significant impact on net interest income between periods is
derived from the interaction of changes in the volume of and rates earned or
paid on interest-earning assets and interest-bearing liabilities. The volume of
earning dollars in loans and investments, compared to the volume of
interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
18
<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 the years 1998, 1997 and
1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities
Available-for-sale:
U.S. Treasury securities $ 99,405 $ 6,024 6.06% $ 113,559 $ 7,092 6.25% $ 125,114 $ 7,880 6.30%
U.S. Agency obligations 1,250 71 5.68 - - - - - -
States & political
subdivisions 2,683 89 5.03 - - - - - -
Federal Home Loan Bank
stock 619 43 6.95 - - - - - -
Other 20 1 5.00 20 1 5.00 20 1 5.00
Held-to-maturity:
U.S. Agency obligations 8,228 505 6.14 11,342 712 6.28 8,401 548 6.52
Loans, net of unearned income:
Real estate mortgages 221,601 17,642 7.96 204,705 16,734 8.17 179,315 14,190 7.91
Commercial 18,508 1,562 8.44 13,465 1,207 8.96 9,876 884 8.95
Consumer and other 43,931 3,405 7.75 42,205 3,943 9.34 42,080 4,086 9.71
Federal funds sold 9,994 521 5.21 7,535 410 5.44 5,191 304 5.86
Interest on balances with banks 1,565 112 7.16 - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 407,804 $ 29,975 7.35% 392,831 $ 30,099 7.66% 369,997 $ 27,893 7.54%
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 10,642 9,629 7,985
Bank premises and equipment 10,532 7,950 6,275
Accrued interest receivable 3,544 3,573 3,603
Other assets 2,398 2,988 7,728
Less: Allowance for loan losses 2,711 2,439 2,230
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 432,209 $ 414,532 $ 393,358
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 23,371 $ 347 1.48% $ 23,057 $ 349 1.51% $ 22,312 $ 366 1.64%
Savings 71,001 1,409 1.98 72,815 1,447 1.99 76,898 1,724 2.24
Money markets 63,489 1,818 2.86 68,437 2,039 2.98 73,626 2,347 3.19
Time - Over $100 39,769 2,165 5.44 30,697 1,616 5.26 19,695 975 4.95
Time - Other 126,737 7,035 5.55 121,201 6,729 5.55 107,019 5,736 5.36
Federal funds purchased 265 11 4.15 278 14 5.04 559 23 4.11
Repurchase agreements 8,051 364 4.52 3,971 161 4.05 100 4 4.00
Short-term borrowings 638 30 4.70 558 30 5.38 497 26 5.23
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 333,321 $ 13,179 3.95% 321,014 $ 12,385 3.86% 300,706 $ 11,201 3.72%
- ----------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 51,159 48,241 46,885
All other liabilities 2,868 3,154 5,882
Stockholders' equity 44,861 42,123 39,885
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 432,209 $ 414,532 $ 393,358
- ----------------------------------------------------------------------------------------------------------------------------
Interest Spread 3.40% 3.80% 3.82%
Net Interest Income $ 16,796 $ 17,714 $ 16,692
Financial Ratios
Net interest margin 4.12% 4.51% 4.51%
Return on average assets .99% 1.14% 1.17%
Return on average equity 9.54% 11.22% 11.54%
Average equity to average assets 10.38% 10.16% 10.14%
Dividend payout ratio 52.76% 47.73% 46.67%
19
<PAGE>
DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE
Dollar Change
Amount Change in Change in in Rate-
1998 compared to 1997 of Change Volume Rate Volume
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNING Investment securities:
ASSETS Available-for-sale:
U.S. Treasury securities $ (1,068) $ (883) $ (204) $ 19
U.S. Agency obligations 71 - - 71
States & political subdivisions 89 - - 89
Federal Home Loan Bank stock 43 - - 43
Other - - - -
Held-to-maturity:
U.S. Agency obligations (207) (196) 11 (22)
Loans, net of unearned income:
Real estate mortgages 908 1,380 (430) (42)
Commercial 355 452 (70) (27)
Consumer and other (538) 161 (671) (28)
Federal funds sold 111 134 (17) (6)
Interest bearing balances with banks 112 - - 112
----------------------------------------------------------------------------------
Total Interest Income (124) 1,048 (1,381) 209
----------------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand - Interest bearing (2) 5 (7) -
LIABILITIES Savings (38) (36) (2) -
Money markets (221) (149) (82) 10
Time - Over $100 549 478 52 19
Time - Other 306 306 - -
Federal funds purchased (3) (1) (2) -
Repurchase agreements 203 166 18 19
Short-term borrowings - - - -
----------------------------------------------------------------------------------
Total Interest Expense 794 769 (23) 48
----------------------------------------------------------------------------------
Net Interest Income $ (918) $ 279 $ (1,358) $ 161
==================================================================================
- -----------------------------------------------------------------------------------------------
Dollar Change
Amount Change in Change in in Rate-
1997 compared to 1996 of Change Volume Rate Volume
----------------------------------------------------------------------------------
EARNING Investment securities:
ASSETS U.S. Treasury securities $ (788) $ (728) $ (75) $ 15
U.S. Agency obligations 164 192 (20) (8)
Other - - - -
Loans, net of unearned income:
Real estate mortgages 2,544 2,008 532 4
Commercial 323 321 2 -
Consumer and other (143) 12 (156) 1
Federal funds sold 106 137 (22) (9)
----------------------------------------------------------------------------------
Total Interest Income 2,206 1,942 261 3
----------------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand - Interest bearing (17) 12 (29) -
LIABILITIES Savings (277) (91) (192) 6
Money markets (308) (166) (155) 13
Time - Over $100 641 545 63 33
Time - Other 993 760 203 30
Federal funds purchased (9) (12) 5 (2)
Repurchase agreements 157 160 - (3)
Short-term borrowings 4 4 - -
----------------------------------------------------------------------------------
Total Interest Expense 1,184 1,212 (105) 77
----------------------------------------------------------------------------------
Net Interest Income $ 1,022 $ 730 $ 366 $ (74)
==================================================================================
</TABLE>
20
<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. Accordingly, there can be no assurance that existing levels of the
allowance will ultimately prove adequate to cover actual loan losses.
OTHER INCOME
The following table sets forth information by category of other income for the
Company for the past three years:
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------
Trust department income $ 1,001 $ 858 $ 730
Service charges on
deposit accounts 657 648 664
Merchant transaction
income 4,500 4,083 4,043
Other fee income 539 602 438
Other operating income 141 94 77
Realized gains on
securities, net - - -
- -----------------------------------------------------------
Total Other Income $ 6,838 $ 6,285 $ 5,952
===========================================================
Total other income increased $553 during 1998. Most of the increase came
from new trust business which was up $143 from 1997, a 16.7% increase. Also,
there was a strong improvement in our merchant transaction income of $417 or
10.2% due to an increase in our customer base and increased business with our
existing customers. Total other income increased $333 during 1997. Most of the
increase came from new trust business which was up $128 from 1996, a 17.5%
increase. Also, there was a slight improvement in our merchant transaction
income of $40 due to an increase in our customer base and increased business
with our existing customers.
Total other income increased $333 during 1997. Most of the increase came
from new trust business which was up $128 from 1996, a 17.5% increase. Also,
there was a slight improvement in our merchant transaction income of $40 due to
an increase in our customer base and increased business with our existing
customers.
OTHER EXPENSES
The following table sets forth information by category of other expenses for the
Company for the past three years:
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------
Salaries and employee
benefits $ 7,331 $ 7,578 $ 6,860
Occupancy expenses, net 1,274 1,278 1,221
Furniture and equipment
expenses 908 850 806
FDIC assessments 45 44 2
Merchant transaction
expenses 3,764 3,365 3,412
Other operating expenses 3,664 3,769 3,432
- -------------------------------------------------------------
Total Other Expenses $ 16,986 $ 16,884 $ 15,733
=============================================================
Salaries and employee benefits decreased by $247 or 3.3% in 1998 from 1997
and increased by $718 or 10.4% in 1997 from 1996. The Company employed 209
people on a full-time equivalent basis at December 31, 1998, compared with 202
at December 31, 1997 and 197 at December 31, 1996. The salary and benefits
expense in 1998 reflects cost of living increases granted to employees, offset
by a lower cost of employee benefits. The salary and benefits expense increase
in 1997 was due to significantly higher health care coverage provided by the
Company to its employees, merit increases, and staff additions.
Occupancy expenses, furniture and equipment, and FDIC assessment expenses
were not significantly different during the years 1998, 1997 and 1996. However,
the Company did incur additional expense in its merchant transaction business in
1998 due to additional growth. Other operating expenses increased in 1997
primarily due to costs associated with foreclosed properties.
INCOME TAXES
Federal income tax expense amounted to $1,772 in 1998 compared to $2,074
recorded in 1997. The $302 decrease in the Company's tax provision was due to
lower taxable income. The Company's effective income tax rate for 1998 was 29.3%
compared to 30.5% for 1997. In 1997, income tax expense increased $99 from
$1,975 in 1996 due to an increase in pre-tax income. The effective income tax
rate for 1997 was 30.5% compared to 30.0% for 1996.
For further discussion pertaining to Federal income taxes, see Note 13 to
the Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets increased $8.5 million or 2.0% during 1998 and amounted to $436.1
million at December 31, 1998 compared to $427.6 million at December 31, 1997.
Also, for the year ended December 31, 1997 total assets increased $29.6 million
to $427.6 million or a 7.4% increase over $398.0 million at December 31, 1996.
ASSETS (in millions) YEAR
- ---------------------------------------
$ 436,099 1998
427,577 1997
398,035 1996
378,968 1995
363,317 1994
INVESTMENT PORTFOLIO
The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.
The following table presents the carrying value by security type for the
Company's investment portfolio.
December 31, 1998 1997 1996
- -------------------------------------------------------------------
U.S.Treasury securities $ 81,916 $ 114,922 $ 112,904
U.S. Agency obligations 11,402 10,106 12,339
State & political subdivisions 23,634 - -
Other securities 1,810 20 20
- -------------------------------------------------------------------
Total Investment Securities $ 118,762 $ 125,048 $ 125,263
===================================================================
21
<PAGE>
LOAN PORTFOLIO
Details regarding the Company's loan portfolio for the past five years are as
follows:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate - construction
and land development $ 4,152 $ 3,731 $ 3,770 $ 4,042 $ 4,174
Real estate mortgages 221,879 213,128 184,577 161,217 137,947
Commercial 18,169 17,173 13,476 11,770 10,136
Credit card and related plans 2,286 2,293 2,298 2,404 2,520
Installment 28,538 26,811 26,667 20,663 17,796
Obligations of states &
political subdivisions 8,195 8,910 9,427 9,712 8,132
- -------------------------------------------------------------------------------------
Loans, net of unearned income 283,219 272,046 240,215 209,808 180,705
Less: Allowance for loan losses 2,830 2,600 2,300 2,100 2,100
- -------------------------------------------------------------------------------------
Loans, net $ 280,389 $ 269,446 $ 237,915 $ 207,708 $ 178,605
=====================================================================================
</TABLE>
LOANS
Total net loans increased $11.0 million to $280.4 million at December 31, 1998
from $269.4 million at December 31, 1997, an increase of 4.1%. Total net loans
increased $31.5 million to $269.4 million at December 31, 1997 from $237.9
million at December 31, 1996, an increase of 13.2%. The increase in both years
is due to continued growth in the Company's real estate, commercial and
installment loan portfolios.
NET LOANS (in millions) YEAR
- -------------------------------------------
$ 280,389
269,446 1997
237,915 1996
207,708 1995
178,605 1994
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.
22
<PAGE>
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>
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 929 $ 1,031 $ 866 $ 940 $ 1,435
Loans past due 90 days or more and accruing:
Guaranteed student loans 348 343 342 166 187
Credit card and home equity loans 27 98 93 133 101
- -------------------------------------------------------------------------------------------
Total non-performing loans 1,304 1,472 1,301 1,239 1,723
Other real estate owned 111 339 610 306 496
- -------------------------------------------------------------------------------------------
Total non-performing assets $ 1,415 $ 1,811 $ 1,911 $ 1,545 $ 2,219
===========================================================================================
</TABLE>
Loans are generally placed on a nonaccrual 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 interest previously accrued but not collected
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 $929, $1,031 and $866 at December 31, 1998, 1997 and 1996,
respectively. If interest on those loans had been accrued, such income would
have been $108, $89 and $66 for 1998, 1997 and 1996, respectively. Interest
income on those loans, which is recorded only when received, amounted to $30,
$35 and $45 for 1998, 1997 and 1996, respectively. There are no commitments to
lend additional funds to individuals whose loans are on 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 portfolio quality,
and current economic conditions that may affect the borrower's ability to pay.
As of December 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 December 31, 1998, 1997 and 1996,
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.
The following tables present the Company's loan loss experience during the
periods indicated:
Years Ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------
Balance at beginning of year $ 2,600 $ 2,300 $ 2,100 $ 2,100 $ 2,100
Charge-offs:
Real estate mortgages 69 38 87 300 341
Commercial (time and demand)
and all others 252 - - 11 -
Credit card and related plans 37 52 64 67 55
Installment loans 25 32 32 3 12
- ----------------------------------------------------------------------------
Total charge-offs 383 122 183 381 408
- ----------------------------------------------------------------------------
Recoveries:
Real estate mortgages 1 79 22 2 3
Commercial (time and demand)
and all others - 1 2 1 25
Credit card and related plans 9 17 16 11 18
Installment loans 8 9 9 46 25
- ----------------------------------------------------------------------------
Total recoveries 18 106 49 60 71
- ----------------------------------------------------------------------------
Net charge-offs 365 16 134 321 337
- ----------------------------------------------------------------------------
Provision charged to operations 595 316 334 321 337
- ----------------------------------------------------------------------------
Balance at End of Year $ 2,830 $ 2,600 $ 2,300 $ 2,100 $ 2,100
============================================================================
Ratio of net charge-offs
to average loans outstanding 0.13% 0.01% 0.06% 0.17% 0.19%
============================================================================
23
<PAGE>
The allowance for loan losses is allocated as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Amount %1 Amount %1 Amount %1 Amount %1 Amount %1
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
mortgages $ 1,550 80% $ 1,350 71% $ 1,125 71% $ 1,100 72% $ 1,100 74%
Commercial
(time and demand)
and all others 830 9 850 19 875 22 750 23 700 22
Credit card and
related plans 150 1 150 1 150 1 150 1 200 2
Personal installment loans 300 10 250 9 150 6 100 4 100 2
- ----------------------------------------------------------------------------------------------------
Total $ 2,830 100% $ 2,600 100% $ 2,300 100% $ 2,100 100% $ 2,100 100%
====================================================================================================
</TABLE>
Note: 1 - Percent of loans in each category to total loans
DEPOSITS
The primary source of funds to support the Company's growth is its deposit base.
Company deposits increased $3.0 million to $377.5 million at December 31, 1998
from $374.5 million at December 31, 1997, an increase of .8%. Company deposits
increased $22.5 million to $374.5 million at December 31, 1997 from $352.0
million at December 31, 1996, an increase of 6.4%. This growth occurred despite
the trend of customers finding alternate repositories for their funds,
principally the equity market via mutual funds. Management is responding to the
competition for these funds by offering competitively priced or alternative
banking products.
The maturities of time deposits of $100,000 or more are as follows:
Three months or less $ 12,427
Over three months through six months 23,308
Over six months through twelve months 6,512
Over twelve months 3,944
--------
Total $ 46,191
========
DEPOSITS (in millions) YEAR
- --------------------------------------
$ 377,526 1998
374,488 1997
352,026 1996
336,386 1995
326,482 1994
ASSET/LIABILITY MANAGEMENT
The Company's policy is to match its level of rate-sensitive assets and
rate-sensitive liabilities within a limited range, thereby reducing its exposure
to interest rate fluctuations. While no single measure can completely identify
the impact of changes in interest rates on net interest income, one gauge of
interest rate-sensitivity is to measure, over a variety of time periods, the
differences in the amounts of the Company's rate-sensitive assets and
rate-sensitive liabilities. These differences, or "gaps", provide an indication
of the extent to which net interest income may be affected by future changes in
interest rates. A positive gap exists when rate-sensitive assets exceed
rate-sensitive liabilities and indicates that a greater volume of assets than
liabilities will reprice during a given period. This mismatch may enhance
earnings in a rising interest rate environment and may inhibit earnings when
interest rates decline. Conversely, when rate-sensitive liabilities exceed
rate-sensitive assets, referred to as a negative gap, it indicates that a
greater volume of liabilities than assets may reprice during the period. In this
case, a rising interest rate environment may inhibit earnings and declining
interest rates may enhance earnings. However, because interest rates for
different asset and liability products offered by financial institutions respond
differently, the gap is only a general indicator of interest rate sensitivity.
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.
24
<PAGE>
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 18.36% at December 31,
1998. The Company's risk-based capital ratio is more than 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.
DIVIDEND POLICY
Payment of future dividends will be subject to the discretion of the Board of
Directors and will depend upon the earnings of the Company, its financial
condition, its capital requirements, its need for funds and other matters as the
Board deems appropriate.
Dividends on the Company common stock, if approved by the Board of
Directors, are customarily paid on or about March 15, June 15, September 15 and
December 15.
STOCKHOLDERS' EQUITY (in millions) YEAR
- --------------------------------------------------
$ 44,961 1998
42,924 1997
40,585 1996
39,239 1995
32,927 1994
YEAR 2000 COMPLIANCE (Y2K)
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.
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 internally developed software has been modified,
tested and is in production. As of the end of 1998, our only mission critical
vendor supplied system is under modification. It is presently being tested and
is expected to be in production by March 31, 1999. 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 $80,000
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.
25
<PAGE>
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
The Company currently does not enter into derivative financial instruments,
which include futures, forwards, interest rate swaps, option contracts and other
financial instruments with similar characteristics. However, the Company is
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, financial guarantees and
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
Consolidated Balance Sheets. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Standby letters of credit
are conditional commitments issued to guarantee the performance of a customer to
a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximizing income. Management realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and a recently instituted interest rate shock simulation
report. The Company has no market risk sensitive instruments held for trading
purposes. It appears the Company's market risk is reasonable at this time.
The following table provides information about the Company's market rate
sensitive instruments used for purposes other than trading that are sensitive to
changes in interest rates. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (e.g., DDA, interest checking, savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates based on
the Company's historical experience, management's judgment, and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.
26
<PAGE>
MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Non-Rate Fair
1999 2000 2001 2002 2003 Thereafter Sensitive Total Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment securities:
Fixed interest rate securities:
U.S. Treasury securities $ 62,557 $ 19,359 $ - $ - $ - $ - $ - $ 81,916 $ 81,916
Yield 6.40% 6.33% - - - - - 6.38%
U.S. Agency obligations - - - - 4,986 - - 4,986 4,986
Yield - - - - 5.71% - - 5.71%
States & political subdivisions - 1,102 3,465 5,639 4,211 9,217 - 23,634 23,634
Yield - 5.45% 6.08% 5.82% 5.27% 5.26% - 5.62%
Variable interest rate securities:
U.S. Agency obligations 3,000 3,000 416 - - - - 6,416 6,266
Yield 6.14% 6.14% 6.14% - - - - 6.14%
Federal Home Loan Bank stock - - - - - 1,790 - 1,790 1,790
Yield - - - - - 6.50% - 6.50%
Other - - - - - 20 - 20 20
Yield - - - - - 5.00% - 5.00%
Loans, net of unearned income:
Fixed interest rate loans:
Real estate mortgages 20,556 14,494 13,545 12,473 11,757 96,556 - 169,381 169,955
Yield 7.88% 7.63% 7.61% 7.57% 7.56% 7.51% - 7.58%
Consumer and other 1,734 1,612 1,121 704 597 3,594 - 9,362 9,169
Yield 7.87% 7.64% 7.67% 7.88% 7.62% 7.52% - 7.66%
Variable interest rate loans:
Real estate mortgages 4,934 6,561 6,476 5,671 5,624 27,384 - 56,650 56,650
Yield 8.18% 8.12% 8.09% 8.21% 8.23% 8.15% - 8.16%
Commercial 18,169 - - - - - - 18,169 18,169
Yield 8.44% - - - - - - 8.44%
Consumer and other 11,103 3,236 3,255 3,164 3,372 5,527 - 29,657 29,657
Yield 7.89% 8.25% 8.28% 8.33% 8.35% 8.19% - 8.13%
Less: Allowance for loan losses 564 259 244 220 213 1,330 - 2,830
Federal funds sold 6,650 - - - - - - 6,650 6,650
Yield 5.21% - - - - - - 5.21%
Cash and due from banks - - - - - - 12,076 12,076 12,076
Other assets - - - - - - 18,222 18,222
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 128,139 $ 49,105 $ 28,034 $ 27,431 $ 30,334 $ 142,758 $ 30,298 $ 436,099 $ 420,938
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Variable interest rate deposits:
Demand - Interest bearing $ - $ 25,438 $ - $ - $ - $ - $ - $ 25,438 $ 25,438
Yield - 1.48% - - - - - 1.48%
Savings - 71,771 - - - - - 71,771 71,771
Yield - 1.98% - - - - - 1.98%
Money markets 56,707 - - - - - - 56,707 56,707
Yield 2.86% - - - - - - 2.86%
Time - Other 13,657 - - - - - - 13,657 13,657
Yield 5.32% - - - - - - 5.32%
Fixed interest rate deposits:
Time - Over $100,000 42,246 2,469 970 206 300 - - 46,191 46,418
Yield 5.45% 5.82% 6.49% 5.99% 6.00% - - 5.50%
Time - Other 96,321 7,100 1,807 1,457 669 10 109 107,473 108,013
Yield 5.24% 5.45% 5.47% 5.90% 5.36% 5.39% - 5.27%
Demand - Non-interest bearing - - - - - - 56,289 56,289 56,289
Repurchase agreements 10,959 - - - - - - 10,959 10,959
Yield 4.52% - - - - - - 4.52%
Other liabilities - - - - - - 2,653 2,653
Stockholders' equity - - - - - - 44,961 44,961
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 219,890 $ 106,778 $ 2,777 $ 1,663 $ 969 $ 10 $ 104,012 $ 436,099 $ 389,252
====================================================================================================================================
Excess of (liabilities) assets
subject to interest rate change $ (91,751) $ (57,673) $ 25,257 $ 25,768 $ 29,365 $ 142,748 $ (73,714) $ -
====================================================================================================================================
</TABLE>
27
<PAGE>
ITEM 8 Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, 1998 1997
-----------------------------------------------------------------
ASSETS Cash and due from banks $ 12,076 $ 10,928
Federal funds sold 6,650 7,650
-----------------------------------------------------------------
Cash and Cash Equivalents 18,726 18,578
Investment securities:
Available-for-sale, at fair value 112,346 114,942
Held-to-maturity (fair value of $6,266
and $10,102, respectively) 6,416 10,106
-----------------------------------------------------------------
Total Investment Securities 118,762 125,048
Loans, net of unearned income 283,219 272,046
Less: Allowance for loan losses 2,830 2,600
-----------------------------------------------------------------
Loans, Net 280,389 269,446
Bank premises and equipment 12,631 8,646
Other real estate owned 111 339
Accrued interest receivable 3,234 3,895
Other assets 2,246 1,625
-----------------------------------------------------------------
Total Assets $ 436,099 $ 427,577
=================================================================
LIABILITIES Deposits:
Non-interest bearing $ 56,398 $ 46,127
Interest bearing 321,128 328,361
-----------------------------------------------------------------
Total Deposits 377,526 374,488
Other borrowed funds:
Repurchase agreements 10,959 5,922
Short-term borrowings - 893
Accrued interest payable 2,039 2,524
Other liabilities 614 826
-----------------------------------------------------------------
Total Liabilities 391,138 384,653
-----------------------------------------------------------------
STOCKHOLDER'S Common stock, $.01 par value, 15,000,000
EQUITY shares authorized, 2,148,000
shares issued and outstanding 21 21
Surplus 10,819 10,819
Retained earnings 33,688 31,662
Accumulated other comprehensive income 433 422
-----------------------------------------------------------------
Total Stockholders' Equity 44,961 42,924
-----------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 436,099 $ 427,577
=================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended December 31, 1998 1997 1996
-------------------------------------------------------------------
INTEREST Interest and fees on loans $ 22,609 $ 21,884 $ 19,160
INCOME Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 6,600 7,804 8,428
States & political subdivisions 89 - -
Other securities 44 1 1
Interest on Federal funds sold 521 410 304
Interest on balances with banks 112 - -
-------------------------------------------------------------------
Total Interest Income 29,975 30,099 27,893
-------------------------------------------------------------------
INTEREST Interest on time deposits
EXPENSE of $100,000 or more 2,165 1,616 975
Interest on other deposits 10,609 10,564 10,173
Interest on other borrowed funds 405 205 53
-------------------------------------------------------------------
Total Interest Expense 13,179 12,385 11,201
-------------------------------------------------------------------
Net Interest Income 16,796 17,714 16,692
Provision for loan losses 595 316 334
-------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 16,201 17,398 16,358
-------------------------------------------------------------------
OTHER Trust department income 1,001 858 730
INCOME Service charges on deposit accounts 657 648 664
Merchant transaction income 4,500 4,083 4,043
Other fee income 539 602 438
Other operating income 141 94 77
Realized gains on securities, net - - -
-------------------------------------------------------------------
Total Other Income 6,838 6,285 5,952
-------------------------------------------------------------------
OTHER Salaries and employee benefits 7,331 7,578 6,860
EXPENSES Occupancy expenses, net 1,274 1,278 1,221
Furniture and equipment expenses 908 850 806
FDIC assessments 45 44 2
Merchant transaction expenses 3,764 3,365 3,412
Other operating expenses 3,664 3,769 3,432
-------------------------------------------------------------------
Total Other Expenses 16,986 16,884 15,733
-------------------------------------------------------------------
NET INCOME Income before income taxes 6,053 6,799 6,577
Applicable income taxes 1,772 2,074 1,975
-------------------------------------------------------------------
Net Income $ 4,281 $ 4,725 $ 4,602
===================================================================
Earnings Per Share $ 1.99 $ 2.20 $ 2.14
===================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(in thousands except per share data) Stock Surplus Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 21 $ 10,819 $ 26,739 $ 1,660 $ 39,239
Comprehensive income:
Net income, 1996 - - 4,602 - 4,602
Unrealized losses on securities,
net of taxes of $571 - - - (1,108) (1,108)
-------
Comprehensive income 3,494
Cash dividends declared ($1.00 per share) - - (2,148) - (2,148)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 21 10,819 29,193 552 40,585
Comprehensive income:
Net income, 1997 - - 4,725 - 4,725
Unrealized losses on securities,
net of taxes of $67 - - - (130) (130)
-------
Comprehensive income 4,595
Cash dividends declared ($1.05 per share) - - (2,256) - (2,256)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 21 10,819 31,662 422 42,924
Comprehensive income:
Net income, 1998 - - 4,281 - 4,281
Unrealized gains on securities,
net of taxes of $6 - - - 11 11
-------
Comprehensive income 4,292
Cash dividends declared ($1.05 per share) - - (2,255) - (2,255)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 21 $ 10,819 $ 33,688 $ 433 $ 44,961
==========================================================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31, 1998 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING Net Income $ 4,281 $ 4,725 $ 4,602
ACTIVITIES Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,005 972 929
Provision for loan losses 595 316 334
Deferred income tax (benefit) provision (284) (8) 17
Amortization of securities
(net of accretion) 232 296 510
Net realized gains on securities - - -
Loss on other real estate 41 176 52
Decrease (increase) in interest receivable 661 (387) 885
(Increase) decrease in other assets (475) (136) 98
(Decrease) increase in income taxes payable (182) 51 65
(Decrease) increase in interest payable (485) 523 105
Increase (decrease) in other liabilities 102 (105) 172
------------------------------------------------------------------------------------
Net cash provided by
operating activities 5,491 6,423 7,769
------------------------------------------------------------------------------------
INVESTING Purchase of investment securities
ACTIVITIES available-for-sale (53,579) (48,472) (14,793)
Proceeds from maturities of investment
securities available-for-sale 56,000 46,000 37,000
Purchase of investment securities to be
held-to-maturity - - (5,002)
Proceeds from repayments of investment
securities to be held-to-maturity 3,650 2,194 1,590
Net loans originated (11,664) (32,274) (31,040)
Proceeds from other real estate 313 523 143
Investment in premises and equipment (4,990) (3,196) (1,163)
------------------------------------------------------------------------------------
Net cash used in
investing activities (10,270) (35,225) (13,265)
------------------------------------------------------------------------------------
FINANCING Net increase (decrease) in demand and
ACTIVITIES savings deposits 6,236 (12,393) (647)
Net (payments) proceeds on time deposits (3,198) 34,855 16,287
Increase in repurchase agreements 5,037 3,925 1,997
Net (decrease) increase in short-term borrowings (893) 422 295
Cash dividends paid (2,255) (2,256) (2,148)
------------------------------------------------------------------------------------
Net cash provided by
financing activities 4,927 24,553 15,784
------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 148 (4,249) 10,288
Cash and cash equivalents at January 1 18,578 22,827 12,539
------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 18,726 $ 18,578 $ 22,827
====================================================================================
</TABLE>
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
31
<PAGE>
GENERAL NOTES TO FINANCIAL STATEMENTS
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
The Company operates from nine banking offices under a state bank
charter and provides full banking services, including trust services, to
individual and corporate customers primarily in Northeastern Pennsylvania. The
Company's primary deposit products are savings and demand deposit accounts and
certificates of deposit. Its primary lending products are real estate,
commercial and consumer loans.
The Company's revenues are attributable to a single reportable segment,
therefore segment information is not presented.
The accounting policies of the Company conform with generally accepted
accounting principles and with general practices within the banking industry.
BASIS OF PRESENTATION
The Financial Statements of the Company have been consolidated with those of its
wholly owned subsidiary, Penn Security Bank and Trust Company, eliminating all
intercompany items and transactions.
On December 31, 1997, the Bank was reorganized into a holding company
structure. Each outstanding share of the Bank's common stock, par value of
$10.00 per share, was exchanged for four shares of Penseco Financial Services
Corporation common stock, par value of $.01 per share. As a result of the
reorganization, the Bank became a wholly-owned subsidiary of the Company.
This reorganization among entities under common control was accounted for
at historical cost in a manner similar to a pooling of interests. Prior
financial statements have been restated to reflect the transaction.
The Statements are presented on the accrual basis of accounting, except for
Trust Department income which is recorded when payment is received.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which
was issued in June 1997. SFAS 130 established new rules for the reporting and
display of comprehensive income and its components, but had no effect on the
Company's net income or total stockholders' equity. SFAS 130 requires unrealized
gains and losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income. Prior years financial statements have been reclassified to
conform to the requirements of SFAS 130.
All information is presented in thousands of dollars, except per share
data.
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.
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.
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.
The Company has no derivative financial instruments required to be
disclosed under SFAS No. 119.
LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN
Losses Loans are stated at the principal amount outstanding, net of any unearned
income, deferred loan fees and the allowance for loan losses. Interest on
discounted loans is generally recognized as income based on methods that
approximate the interest method. For all other loans, interest is accrued daily
on the outstanding balances.
Loans are generally placed on a nonaccrual 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 interest previously accrued but not
collected is charged against current income. Loans are returned to accrual
status when past due interest is collected and the collection of principal is
probable.
The provision for loan losses is based on past loan loss experience,
management's evaluation of the potential loss in the current loan portfolio
under current economic conditions and such other factors as, in management's
best judgement, deserve current recognition in estimating loan losses. The
annual 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Provision for depreciation and amortization, computed principally on the
straight-line method, is charged to operating expenses over the estimated useful
lives of the assets. Maintenance and repairs are charged to current expense as
incurred.
LONG-LIVED ASSETS
The Company reviews the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that carrying amounts of
the assets might not be recoverable, as prescribed in Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).
32
<PAGE>
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
PENSION EXPENSE
Pension expense has been determined in accordance with Statement of Financial
Accounting Standards No. 87, "Employers Accounting for Pensions" (SFAS 87).
POSTRETIREMENT BENEFITS EXPENSE
Postretirement benefits expense has been determined in accordance with Statement
of Financial Accounting Standards No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106).
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) as well as deferred taxes on temporary differences,
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported amounts in the Financial
Statements. Deferred tax assets and liabilities are included in the Financial
Statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
CASH FLOWS
For purposes of the Statements of Cash Flows, cash and cash equivalents include
cash on hand, due from banks, interest bearing balances with banks and Federal
funds sold for a one-day period.
The Company paid interest and income taxes during the years ended December 31,
1998, 1997 and 1996 as follows:
1998 1997 1996
- ---------------------------------------------------
Income taxes paid $ 2,238 $ 1,985 $ 1,935
Interest paid $ 13,664 $ 11,861 $11,097
Non-cash transactions during the years ended December 31, 1998, 1997 and 1996,
comprised entirely of the net acquisition of real estate in the settlement of
loans, amounted to $126, $427, and $498, respectively.
TRUST ASSETS AND INCOME
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the Financial Statements since such items are not assets of
the Company. Trust income is reported on the cash basis and is not materially
different than if it were reported on the accrual basis.
EARNINGS PER SHARE
Basic earnings per share is computed on the weighted average number of common
shares outstanding during each year (2,148,000) as prescribed in Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). A
calculation of diluted earnings per share is not applicable to the Company.
PENDING ACCOUNTING PRONOUNCEMENTS
Management does not believe that any pending accounting pronouncements will have
a material impact on the Consolidated Financial Statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
2 CASH AND DUE FROM BANKS
Cash and due from banks are summarized as follows:
December 31, 1998 1997
- ----------------------------------------------------------
Cash items in process of collection $ 66 $ 1,796
Non-interest bearing deposits 6,982 4,131
Interest bearing deposits with banks 345 -
Cash on hand 4,683 5,001
- ----------------------------------------------------------
Total $ 12,076 $ 10,928
==========================================================
3 INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at December 31, 1998
and 1997 are as follows:
AVAILABLE-FOR-SALE
Gross Gross
Amortized Unrealized Unrealized Fair
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
==========================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
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
- --------------------------------------------------------------------------
There were no sales of available-for-sale debt securities in 1998, 1997 and
1996.
33
<PAGE>
3 INVESTMENT SECURITIES (continued)
HELD-TO-MATURITY
Gross Gross
Amortized Unrealized Unrealized Fair
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
- -------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
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
- -------------------------------------------------------------------------
Investment securities with amortized costs and fair values of $56,194 and
$56,697 at December 31, 1998 and $56,026 and $56,381 at December 31, 1997, were
pledged to secure trust funds, public deposits and for other purposes as
required by law.
The amortized cost and fair value of debt securities at December 31,
1998 by contractual maturity, are shown in the following table. 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.
Available-for-Sale Held-to-Maturity
- -------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 62,124 $ 62,557 $ - $ -
After one year through
five years:
U.S. Treasury
securities 19,086 19,359 - -
U.S. Agency
securities 5,000 4,986 - -
States & political
subdivisions 14,409 14,417 - -
After five years
through ten years:
States & political
subdivisions 7,721 7,693 - -
After ten years:
States & political
subdivisions 1,539 1,524 - -
- -------------------------------------------------------------------------------
Subtotal 109,879 110,536 - -
Mortgage-backed
securities - - 6,416 6,266
- -------------------------------------------------------------------------------
Total Debt Securities $ 109,879 $ 110,536 $ 6,416 $ 6,266
===============================================================================
4 LOANS
Major classifications of loans are as follows:
December 31, 1998 1997
- --------------------------------------------------------------------------
Loans secured by real estate:
Construction and land development $ 4,152 $ 3,731
Secured by farmland 5 7
Secured by 1-4 family residential
properties:
Revolving, open-end loans 7,901 9,932
Secured by first liens 131,564 131,112
Secured by junior liens 33,063 26,620
Secured by multi-family properties 829 561
Secured by non-farm, non-residential
properties 48,517 44,896
Commercial and industrial loans
to U.S. addressees 18,169 17,173
Loans to individuals for household, family
and other personal expenditures:
Credit card and related plans 2,286 2,293
Other (installment and student loans, etc.) 28,486 26,593
Obligations of states &
political subdivisions 8,195 8,910
All other loans 58 240
- --------------------------------------------------------------------------
Gross Loans 283,225 272,068
Less: Unearned income on loans 6 22
- --------------------------------------------------------------------------
Loans, Net of Unearned Income $ 283,219 $ 272,046
==========================================================================
Loans on which the accrual of interest has been discontinued or reduced amounted
to $929, $1,031 and $866 at December 31, 1998, 1997 and 1996, respectively. If
interest on those loans had been accrued, such income would have been $108, $89
and $66 for 1998, 1997 and 1996, respectively. Interest income on those loans,
which is recorded only when received, amounted to $30, $35 and $45 for 1998,
1997 and 1996, respectively. Also, at December 31, 1998 and 1997, the Bank had
loans totalling $375 and $441, respectively, which were past due 90 days or more
and still accruing interest (credit card, home equity and guaranteed student
loans).
5 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Balance at beginning of year $ 2,600 $ 2,300 $ 2,100
Provision charged to operations 595 316 334
Recoveries credited to allowance 18 106 49
3,213 2,722 2,483
Losses charged to allowance (383) (122) (183)
- -------------------------------------------------------------------------
Balance at End of Year $ 2,830 $ 2,600 $ 2,300
- -------------------------------------------------------------------------
A comparison of the provision for loan losses for Financial Statement purposes
with the allowable bad debt deduction for tax purposes is as follows:
Years Ended December 31, Book Provision Tax Deduction
- ------------------------ -------------- -------------
1998 $ 595 $ 365
1997 $ 316 $ 16
1996 $ 334 $ 134
The balance of the Reserve for Bad Debts as reported for Federal income tax
purposes was $948 at December 31, 1998, 1997 and 1996.
34
<PAGE>
6 BANK PREMISES AND EQUIPMENT
December 31, 1998 1997
- -------------------------------------------------------
Land $ 2,929 $ 2,764
Buildings and improvements 14,178 10,853
Furniture and equipment 9,634 8,134
- -------------------------------------------------------
26,741 21,751
Less: Accumulated depreciation 14,110 13,105
- -------------------------------------------------------
Net Bank Premises
and Equipment $ 12,631 $ 8,646
- -------------------------------------------------------
Buildings and improvements are being depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods. Depreciation expense amounted to $1,005 in
1998, $972 in 1997 and $929 in 1996.
Occupancy expenses were reduced by rental income received in the amount of
$58, $58 and $60 in the years ended December 31, 1998, 1997 and 1996,
respectively.
7 OTHER REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded at the lower of cost or
market at the time of acquisition. Any subsequent write-downs are charged
against operating expenses. The other real estate owned as of December 31, 1998
and 1997 was $111 and $339, respectively, supported by appraisals of the real
estate involved.
8 INVESTMENT IN AND LOAN TO, INCOME FROM DIVIDENDS AND EQUITY IN EARNINGS OR
LOSSES OF SUBSIDIARY
Penseco Realty, Inc. is a wholly owned subsidiary of the Bank which owns certain
banking premises. Selected financial information is presented below:
Equity in
underlying Bank's
Percent Total net assets Amount proportionate
of voting investment at balance of part of loss
stock owned and loan sheet date dividends for the period
- -------------------------------------------------------------------------
1998 100% $ 3,950 $ 3,936 None $ -
1997 100% $ 3,950 $ 3,936 None $ -
1996 100% $ 2,055 $ 2,041 None $ -
9 DEPOSITS
December 31, 1998 1997
- -------------------------------------------------------
Demand - Non-interest
bearing $ 56,289 $ 46,127
Demand - Interest bearing 25,438 23,826
Savings 71,771 71,722
Money markets 56,707 63,055
Time - Over $100,000 46,191 38,152
Time - Other 121,130 131,606
- -------------------------------------------------------
Total $ 377,526 $ 374,488
- -------------------------------------------------------
9 DEPOSITS (continued)
Scheduled maturities of time deposits are as follows:
1999 $ 152,333
2000 9,569
2001 2,777
2002 1,663
2003 969
2004 and thereafter 10
- -------------------------------
Total $ 167,321
===============================
10 OTHER BORROWED FUNDS
At December 31, 1998 and 1997, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase Agreements.
Short-term borrowings generally have original maturity dates of thirty days
or less.
Investment securities with amortized costs of $13,069 and $7,987 and fair
values of $13,200 and $8,023 were pledged to secure repurchase agreements at
December 31, 1998 and 1997, respectively.
Years Ended December 31, 1998 1997
- ----------------------------------------------------------
Amount outstanding at year end $ 10,959 $ 6,815
Average interest rate at year end 4.37% 4.57%
Maximum amount outstanding at
any month end $ 12,382 $ 6,815
Average amount outstanding $ 8,849 $ 4,807
Weighted average interest rate
during the year:
Federal funds purchased 4.15% 5.04%
Repurchase agreements 4.52% 4.05%
Demand notes to U.S. Treasury 4.70% 5.38%
The Company has an available credit facility with the Federal Reserve Bank in
the amount of $10,000, secured by pledged securities with amortized costs and
fair values of $10,002 and $10,044 at December 31, 1998 and $9,971 and $9,919 at
December 31, 1997 with an interest rate of 4.50% and 5.00% for 1998 and 1997,
respectively. There is no stated expiration date for the credit facility as long
as the Company maintains the pledged securities at the Federal Reserve Bank.
There was no outstanding balance as of December 31, 1998 and 1997, respectively.
The Company has the availability of a $5,000 overnight Federal funds
line of credit with First Union Bank. There was no balance outstanding as of
December 31, 1998 and 1997, respectively
The Company maintains a collateralized maximum borrowing capacity of
$165,943 with the Federal Home Loan Bank of Pittsburgh (FHLB). There was no
balance outstanding or assets pledged as of December 31, 1998.
35
<PAGE>
11 EMPLOYEE BENEFIT PLANS
The Company provides an Employee Stock Ownership Plan (ESOP), a Retirement
Profit Sharing Plan, an Employees' Pension Plan and a Postretirement Life
Insurance Plan, all non-contributory, covering all eligible employees.
The Company also maintains an unfunded supplemental executive pension plan,
that provides certain officers with additional retirement benefits to replace
benefits lost due to limits imposed on qualified plans by Federal tax law.
Under the Employee Stock Ownership Plan (ESOP), amounts voted by the Board
of Directors are paid into the ESOP and each employee is credited with a share
in proportion to their annual compensation. All contributions to the ESOP are
invested in or will be invested primarily in Company stock. Distribution of a
participant's ESOP account occurs upon retirement, death or termination in
accordance with the plan provisions.
At December 31, 1998 and 1997, the ESOP held 94,725 and 92,448 shares,
respectively of the Company's stock, all of which were acquired as described
above and allocated to specific participant accounts. These shares are treated
the same for dividend purposes and earnings per share calculations as are any
other outstanding shares of the Company's stock. The Company contributed $0,
$140 and $140 to the plan during the years ended December 31, 1998, 1997 and
1996, respectively.
Under the Retirement Profit Sharing Plan, amounts voted by the Board of
Directors are paid into a fund and each employee is credited with a share in
proportion to their annual compensation. Upon retirement, death or termination,
each employee is paid the total amount of their credits in the fund in one of a
number of optional ways in accordance with the plan provisions. The Company
contributed $20, $0 and $0 to the plan during the years ended December 31, 1998,
1997 and 1996, respectively.
Under the Pension Plan, amounts computed on an actuarial basis are paid by
the Company into a trust fund. Provision is made for fixed benefits payable for
life upon retirement at the age of 65, based on length of service and
compensation levels as defined in the plan. Plan assets of the trust fund are
invested and administered by the Trust Department of Penn Security Bank and
Trust Company.
The postretirement life insurance plan is an unfunded, non-vesting defined
benefit plan. The plan is non-contributory and provides for a reducing level of
term life insurance coverage following retirement.
In determining the benefit obligation the following assumptions were made:
Pension Benefits Other Benefits
- ----------------------------------------------------------------
December 31, 1998 1997 1998 1997
- ----------------------------------------------------------------
Weighted - average
assumptions:
Discount rate 6.50% 6.75% 6.50% 6.75%
Expected return on
plan assets 9.00% 9.00% - -
Rate of compensation
increase 4.50% 4.50% - -
- ---------------------------------------------------------------
A reconciliation of the funded status of the plans with amounts reported on the
Balance Sheet is as follows:
Pension Benefits Other Benefits
- ------------------------------------------------------------------------
December 31, 1998 1997 1998 1997
- ------------------------------------------------------------------------
Change in benefit
obligation:
Benefit obligation, beginning $ 6,764 $ 6,013 $ 48 $ 42
Service cost 295 267 2 2
Interest cost 444 414 3 3
Actuarial gain 206 254 2 2
Benefits paid (221) (184) (2) (1)
- ------------------------------------------------------------------------
Benefit obligation, ending 7,488 6,764 53 48
- ------------------------------------------------------------------------
Change in plan assets:
Fair value of plan
assets, beginning 6,872 5,967 - -
Actual return on plan
assets 911 850 - -
Employer contribution 65 239 2 1
Benefits paid (221) (184) (2) (1)
- ------------------------------------------------------------------------
Fair value of plan
assets, ending 7,627 6,872 - -
- ------------------------------------------------------------------------
Funded status 139 108 (53) (48)
Unrecognized net transition
asset (198) (265) - -
Unrecognized net actuarial
Loss 1,008 1,124 (121) (131)
Unrecognized prior service
cost (45) (43) 6 6
- ------------------------------------------------------------------------
Prepaid (accrued) benefit
cost $ 904 $ 924 $ (168) $ (173)
- ------------------------------------------------------------------------
A reconciliation of net periodic pension and other benefit costs is as follows:
Pension Benefits
----------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------
Components of net periodic
pension cost:
Service cost $ 295 $ 267 $ 249
Interest cost 444 414 361
Expected return on plan assets (615) (540) (487)
Amortization of transition
asset (66) (66) (66)
Amortization of unrecognized
net loss 26 48 61
- -------------------------------------------------------------
Net periodic pension cost $ 84 $ 123 $ 118
- -------------------------------------------------------------
Other Benefits
--------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
Components of net periodic
other benefit cost:
Service cost $ 2 $ 2 $ 2
Interest cost 3 3 3
Amortization of prior service
cost 1 1 1
Amortization of unrecognized
net loss (9) (10) (9)
- ------------------------------------------------------------------
Net periodic other benefit cost $ (3) $ (4) $ (3)
- ------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $144, $97 and $0, respectively at December 31, 1998
and $153, $77 and $0, respectively at December 31, 1997.
36
<PAGE>
12 INCOME TAXES
The total income taxes in the Statements of Income are as follows:
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
Currently payable $ 2,056 $ 2,082 $ 1,958
Deferred (benefit) provision (284) (8) 17
- ----------------------------------------------------------------
Total $ 1,772 $ 2,074 $ 1,975
- -----------------------------------------------------------------
A reconciliation of income taxes at statutory rates to applicable income taxes
reported in the Statements of Income is as follows:
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
Tax at statutory rate $ 2,058 $ 2,312 $ 2,236
Reduction for non-taxable
interest (269) (299) (256)
Other (reductions) additions (17) 61 (5)
- -----------------------------------------------------------------
Applicable Income Taxes $ 1,772 $ 2,074 $ 1,975
- -----------------------------------------------------------------
The components of the deferred income tax (benefit) provision, which result from
temporary differences, are as follows:
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
Accretion of discount on bonds $ (147) $ 73 $ 47
Accelerated depreciation (32) (54) (61)
Supplemental benefit plan (7) (8) -
Allowance for loan losses (78) (102) (68)
Prepaid pension cost (20) 48 47
Loan fees/costs - 35 52
- -----------------------------------------------------------------
Total $ (284) $ (8) $ 17
- -----------------------------------------------------------------
The significant components of deferred tax assets and liabilities are as
follows:
December 31, 1998 1997
- -----------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 640 $ 562
Depreciation 131 99
Supplemental Benefit Plan 15 8
- -----------------------------------------------------------------
Total Deferred Tax Assets 786 669
- -----------------------------------------------------------------
Deferred tax liabilities:
Unrealized securities gains 223 217
Prepaid pension costs 352 372
Accretion 65 212
- -----------------------------------------------------------------
Total Deferred Tax Liabilities 640 801
- -----------------------------------------------------------------
Net Deferred Tax Asset (Liability) $ 146 $ (132)
- -----------------------------------------------------------------
In management's opinion, the deferred tax assets are realizable in as much as
there is a history of strong earnings and a carryback potential greater than the
deferred tax assets. Management is not aware of any evidence that would preclude
the realization of the benefit in the future and, accordingly, has not
established a valuation allowance against the deferred tax assets.
13 COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, created under prevailing terms and collateral
requirements such as commitments to extend credit, financial guarantees and
letters of credit, which are not reflected in the accompanying Financial
Statements. The Company does not anticipate any losses as a result of these
transactions. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1998 and 1997 are as follows:
1998 1997
- ------------------------------------------------------------
Commitments to extend credit:
Fixed rate $ 11,722 $ 12,604
Variable rate $ 36,990 $ 30,340
Standby letters of credit $ 614 $ 849
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
Various actions and proceedings are presently pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
financial position of the Company.
The Company may, from time to time, maintain bank balances with other
financial institutions in excess of $100,000 each. Management is not aware of
any evidence that would indicate that such deposits are at risk.
14 FAIR VALUE DISCLOSURE
GENERAL
Statement of Financial Accounting Standards No.107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires the disclosure of the
estimated fair value of on and off - balance sheet financial instruments.
VALUATION METHODS AND ASSUMPTIONS
Estimated fair values have been determined using the best available data, an
estimation methodology suitable for each category of financial instruments. For
those loans and deposits with floating interest rates it is presumed that
estimated fair values generally approximate the carrying amount balances.
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices. Those with stated maturities have
been valued using a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities. Those
liabilities with no stated maturities have an estimated
37
<PAGE>
14 FAIR VALUE DISCLOSURE (continued)
fair value equal to both the amount payable on demand and the carrying amount
balance. The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is the current loan rate
adjusted for non-interest operating costs, credit loss and assumed prepayment
risk. Off balance sheet carrying amounts and fair value of letters of credit
represent the deferred income fees arising from those unrecognized financial
instruments.
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
All assets and liabilities which are not considered financial instruments
have not been valued differently than has been customary with historical cost
accounting.
Management is concerned that reasonable comparability between companies may
not be likely due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of active secondary
markets for many of the financial instruments. This lack of uniform valuation
methodologies also introduces a greater degree of subjectivity to these
estimated fair values.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 12,076 $ 12,076 $ 10,928 $ 10,928
Federal funds sold 6,650 6,650 7,650 7,650
- ---------------------------------------------------------------------------------------
Cash and cash equivalents 18,726 18,726 18,578 18,578
Investment Securities:
Available-for-sale:
U.S. Treasury securities 81,916 81,916 114,922 114,922
U.S. Agency obligations 4,986 4,986 - -
States & political subdivisions 23,634 23,634 - -
Federal Home Loan Bank stock 1,790 1,790 - -
Other securities 20 20 20 20
Held-to-maturity:
U.S. Agency obligations 6,416 6,266 10,106 10,102
- ---------------------------------------------------------------------------------------
Total investment securities 118,762 118,612 125,048 125,044
Loans, net of unearned income:
Real estate mortgages 226,031 226,605 194,389 194,757
Commercial 18,169 18,169 26,841 26,841
Consumer and other 39,019 38,826 50,816 50,652
Less: Allowance for loan losses 2,830 2,600
- ---------------------------------------------------------------------------------------
Loans, net 280,389 283,600 269,446 272,250
- ---------------------------------------------------------------------------------------
Total Financial Assets 417,877 $ 420,938 413,072 $ 415,872
Other assets 18,222 14,505
- ---------------------------------------------------------------------------------------
Total Assets $ 436,099 $ 427,577
=======================================================================================
Financial Liabilities:
Demand - Non-interest bearing $ 56,289 $ 56,289 $ 46,127 $ 46,127
Demand - Interest bearing 25,438 25,438 23,826 23,826
Savings 71,771 71,771 71,722 71,722
Money markets 56,707 56,707 63,055 63,055
Time 167,321 168,088 169,758 170,019
- ---------------------------------------------------------------------------------------
Total Deposits 377,526 378,293 374,488 374,749
Repurchase agreements 10,959 10,959 5,922 5,922
Short-term borrowings - - 893 893
- ---------------------------------------------------------------------------------------
Total Financial Liabilities 388,485 $ 389,252 381,303 $ 381,564
Other Liabilities 2,653 3,350
Stockholders' Equity 44,961 42,924
- ---------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 436,099 $ 427,577
=======================================================================================
Standby Letters of Credit $ (6) $ (6) $ (8) $ (8)
</TABLE>
38
<PAGE>
15 OPERATING LEASES
The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several locations which are being used as remote banking
facilities. Rental expense was $71 in 1998, $67 in 1997 and $66 in 1996. All
leases contain renewal options. The Mount Pocono and the Meadow Avenue leases
contain the right of first refusal for the purchase of the properties and
provisions for annual rent adjustments based upon the Consumer Price Index.
Future minimum rental commitments under these leases at December 31, 1998
are as follows:
Mount Meadow ATM
Pocono Avenue Sites Total
- ---------------------------------------------------------
1999 $ 44 $ 18 $ 18 $ 80
2000 44 18 - 62
2001 44 12 - 56
2002 44 - - 44
2003 44 - - 44
2004 to 2011 331 - - 331
- ---------------------------------------------------------
Total minimum
payments required $ 551 $ 48 $ 18 $ 617
- ---------------------------------------------------------
16 LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. A summary of loans to directors,
principal officers and related parties is as follows:
Years Ended December 31, 1998 1997
- ---------------------------------------------
Beginning Balance $ 4,658 $ 4,550
Additions 4,787 3,383
Collections (5,437) (3,275)
- ---------------------------------------------
Ending Balance $ 4,008 $ 4,658
- ---------------------------------------------
17 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 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 I and Total Capital to
risk-weighted asset and of Tier I 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 December 31, 1998, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation (FDIC) 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 I
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 December 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.
39
<PAGE>
17 REGULATORY MATTERS (continued)
Actual Regulatory Requirements
- ------------------------------------------ ----------------------------------
For Capital To Be "Well
Adequacy Purposes Capitalized"
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
- -------------------------------------------- ----------------------------------
Total Capital
(to Risk Weighted Assets $47,289 18.36% >$20,610 >8.0% >$25,764 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $44,459 17.26% >$10,305 >4.0% >$15,458 > 6.0%
- - - -
Tier I 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.
Actual Regulatory Requirements
- ------------------------------------------ ----------------------------------
For Capital To Be "Well
Adequacy Purposes 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 I Capital
(to Risk Weighted Assets) $42,502 18.11% >$ 9,388 >4.0% >$14,082 > 6.0%
- - - -
Tier I 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
CAMELS Rating and other regulatory risk factors.
40
<PAGE>
18 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)
On December 31, 1997, the Bank was reorganized into a holding company structure.
Each outstanding share of the Bank's common stock, par value of $10.00 per
share, was exchanged for four shares of Penseco Financial Services Corporation
common stock, par value of $.01 per share. As a result of the reorganization,
the Bank became a wholly-owned subsidiary of the Company.
This reorganization among entities under common control was accounted
for at historical cost in a manner similar to a pooling of interests. Prior
financial statements have been restated to reflect the transaction.
The condensed Company-only information follows:
BALANCE SHEETS
December 31, 1998 1997
- ------------------------------------------------------
Investment in subsidiary $ 44,961 $ 42,924
- ------------------------------------------------------
Total Assets $ 44,961 $ 42,924
======================================================
Total Stockholders' Equity $ 44,961 $ 42,924
======================================================
STATEMENTS OF INCOME
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
Earnings of subsidiary:
Dividends received $ 2,255 $ 2,256 $ 2,148
Undistributed net income
of subsidiary 2,026 2,469 2,454
- ------------------------------------------------------------------
Net Income $ 4,281 $ 4,725 $ 4,602
==================================================================
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------
Operating Activities:
Net Income $ 4,281 $ 4,725 $ 4,602
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed net
income of subsidiary (2,026) (2,469) (2,454)
- -------------------------------------------------------------------------
Net cash provided by
operating activities 2,255 2,256 2,148
- -------------------------------------------------------------------------
Investing Activities:
Investment in Interim Bank subsidiary - (465) -
Special dividend from subsidiary - 465 -
- -------------------------------------------------------------------------
Net cash provided by
investing activities - - -
- -------------------------------------------------------------------------
Financing Activities:
Proceeds from short-term debt - 470 -
Payment of short-term debt - (470) -
Proceeds from sale of stock - 5 -
Purchase of stock - (5) -
Cash dividends paid (2,255) (2,256) (2,148)
- -------------------------------------------------------------------------
Net cash used by
financing activities (2,255) (2,256) (2,148)
- -------------------------------------------------------------------------
Net increase in cash and
cash equivalents - - -
Cash and cash equivalents at January 1 - - -
- -------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ - $ - $ -
=========================================================================
41
<PAGE>
February 19, 1999
To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania
Independent Auditor's Report
----------------------------
We have audited the accompanying consolidated balance sheets of Penseco
Financial Services Corporation and its wholly owned subsidiary, Penn Security
Bank and Trust Company as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Penseco
Financial Services Corporation and subsidiary as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the years in the three year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ McGrail, Merkel, Quinn & Associates
Scranton, Pennsylvania
42
<PAGE>
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on matters of
accounting principles or practices or financial statement disclosures in 1998.
PART III
ITEM 10 Directors and Executive Officers of the Registrant
The information on Directors of the Company on pages 4 and 5 in the definitive
proxy statement relating to the Company's 1999 meeting of stockholders is
incorporated herein by reference thereto.
The information on Executive Officers on pages 6 and 7 in the definitive proxy
statement relating to the Company's 1999 meeting of stockholders is incorporated
herein by reference thereto.
ITEM 11 Executive Compensation
The information contained under the heading "Executive Compensation" on page 6
in the definitive proxy statement relating to the Company's 1999 meeting of
stockholders is incorporated herein by reference thereto.
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Voting Securities & Principal
Holders Thereof" on pages 2,3 and 4 in the definitive proxy statement relating
to the Company's 1999 meeting of stockholders is incorporated herein by
reference thereto.
ITEM 13 Certain Relationships and Related Transactions
The information contained in Note 16 under Item 8 on page 39 under the heading
"General Notes to Financial Statements" in the Company's 1998 Annual Report to
Shareholders is incorporated herein by reference thereto.
43
<PAGE>
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - The following financial statements are
incorporated by reference in Part II, Item 8 hereof:
Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
General Notes to Financial Statements
Independent Auditor's Report
(2) Financial Statement Schedules - The Financial Statement Schedules are
incorporated by reference in Part II, Item 8 hereof.
(3) Exhibits
The following exhibits are filed herewith or incorporated by
reference as part of this Annual Report.
3(i) Registrant's Articles of Incorporation (Incorporated herein
by reference to 3(i) of Registrant's report on Form 10-K
filed with the SEC on March 30, 1998.)
3(ii)Registrant's By-Laws (Incorporated herein by reference to
3(ii) of Registrant's report on Form 10-K filed with the SEC
on March 30, 1998.)
10 Material contracts - Supplemental Benefit Plan Agreement
(The information contained on page 8 in the Company's
definitive proxy statement relating to the Company's 1999
meeting of stockholders is incorporated herein by reference
thereto).
13 Annual report to security holders (Included herein by
reference on pages 1-48, including the cover.)
21 Subsidiaries of the registrant (Incorporated herein by
reference to Exhibit 21 of Registrant's report on Form 10-K
filed with the SEC on March 30, 1998.)
27 Financial Data Schedule
(b) No current Report on Form 8-K was filed for the fourth quarter of 1998 of
the fiscal year ended December 31, 1998.
(c) The exhibits required to be filed by this Item are listed under Item 14.
(a) 3, above.
(d) There are no financial statement schedules required to be filed under this
item.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 9, 1999.
By: /s/ Otto P. Robinson, Jr.
- ----------------------------------
Otto P. Robinson, Jr.
President
By: /s/ Richard E. Grimm
- ----------------------------------
Richard E. Grimm
Executive Vice-President
By: /s/ Patrick Scanlon
- ----------------------------------
Patrick Scanlon
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 9, 1999.
By: /s/ Edwin J. Butler By: /s/ Robert W. Naismith, Ph.D.
- ---------------------------------- ----------------------------------
Edwin J. Butler Robert W. Naismith, Ph.D.
Director Director
By: /s/ Richard E. Grimm By: /s/ James B. Nicholas
- ---------------------------------- ----------------------------------
Richard E. Grimm James B. Nicholas
Director Director
By: /s/ Russell C. Hazelton By: /s/ Emily S. Perry
- ---------------------------------- ----------------------------------
Russell C. Hazelton Emily S. Perry
Director Director
By: /s/ D. William Hume By: /s/ Sandra C. Phillips
- ---------------------------------- ----------------------------------
D. William Hume Sandra C. Phillips
Director Director
By: /s/ James G. Keisling By: /s/ Otto P. Robinson, Jr.
- ---------------------------------- ----------------------------------
James G. Keisling Otto P. Robinson, Jr.
Director Director
By: /s/ P. Frank Kozik
- ----------------------------------
P. Frank Kozik
Director
45
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
Referred to
Item 601 of Prior Filing or Exhibit
Regulation S-K DESCRIPTION OF EXHIBIT Page Number Herein
- --------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3 (i) Articles of Incorporation Incorporated herein by
reference to Exhibit 3 (i) of
Registrant's report on Form
10-K filed with the SEC on
March 30, 1998.
(ii) By-Laws Incorporated herein by reference
to Exhibit 3 (ii)of Registrant's
report on Form 10-K filed with
the SEC on March 30, 1998.
4 Instruments defining the rights of None
security holders, including indentures
9 Voting trust agreement None
10 Material contracts - Supplemental Page 8 of the Definitive Proxy
Benefit Plan Agreement Statement relating to the
Company's 1999 Meeting of Stock-
holders is incorporated herein
by reference thereto.
11 Statement re: Computation of per None
share earnings
12 Statements re: Computation of ratios None
13 Annual report to security holders, Included herein by reference on
Form 10-Q or quarterly report to pages 1-48, including the cover.
security holders
16 Letter re: Change in certifying None
accountant
18 Letter re: Change in accounting None
principles
21 Subsidiaries of the registrant Incorporated herein by reference
to Exhibit 21 of Registrant's
report on Form 10-K filed with
the SEC on March 30, 1998.
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of experts and counsel None
24 Power of attorney None
27 Financial Data Schedule None
99 Additional Exhibits None
</TABLE>
46
<PAGE>
COMPANY OFFICERS
PENSECO FINANCIAL SERVICES CORPORATION AND
PENN SECURITY BANK AND TRUST COMPANY
EXECUTIVE OFFICERS
Otto P. Robinson, Jr.
President and General Counsel
Richard E. Grimm
Executive Vice-President and Treasurer
Peter F. Moylan
Executive Vice-President, Non-Deposit Services and Trust Officer
Robert F. Duguay
Senior Vice-President, Trust Department
D. William Hume
Senior Vice-President and Assistant Secretary
Andrew A. Kettel, Jr.
Senior Vice-President
Thomas E. Clewell
Vice-President and Assistant Trust Officer
Anne M. Cottone
Vice-President and Compliance Officer
Michael Kosh
Vice-President and Assistant Trust Officer
Audrey F. Markowski
Vice-President
Richard P. Rossi
Vice-President, Director of Human Resources
James Tobin
Vice-President, Charge Card Department Manager
Otto P. Trostel
Vice-President, Marketing
John H. Warnken
Vice-President, Operations
P. Frank Kozik
Secretary
Patrick Scanlon
Controller
Robert P. Heim
Director of Internal Audit
Gerard P. Vasil
Manager, Data Processing
Henry V. Janoski
Chief Investment Officer, Trust Department
PENN SECURITY BANK AND TRUST COMPANY OFFICERS
ASSISTANT VICE-PRESIDENTS
Carl M. Baruffaldi
Nancy Burns
Denise M. Cebular
Carol Curtis McMullen, Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
J. Patrick Dietz
Geraldine Hughes
Ann M. Kennedy
Eleanor Kruk
Donald F. Latorre
Caroline Mickelson
Aleta Sebastianelli, and Assistant Secretary
OFFICERS (continued)
Jeffrey Solimine
Beth S. Wolff
Deborah A. Wright
ASSISTANT CASHIERS
Pamela Edwards
Karyn Gaus
Susan T. Holweg
Jacqueline Lucke
Kristen A. McGoff, and Branch Operations Officer
Candace F. Quick
Nereida Santiago
Sharon Thauer
Eileen Walsh
ACCOUNTING OFFICER
Luree M. Waltz
ASSISTANT CONTROLLER
Susan M. Bray
ASSISTANT DIRECTOR OF INTERNAL AUDIT
Paula A. Ralston Nenish
ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua
BRANCH OPERATIONS OFFICER
Lauren L. Lankford
BUSINESS DEVELOPMENT OFFICER
Christe A. Casciano
CHARGE CARD OPERATIONS OFFICER
Eileen Yanchak
COMPUTER OPERATIONS OFFICER
Charles Penn
CREDIT REVIEW OFFICER
Mark M. Bennett, and Assistant Secretary
DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay
DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo
FINANCIAL REPORTING OFFICER
John R. Anderson III
HUMAN RESOURCES OFFICER
Sharon Rosar
LOAN OFFICERS
Denise Belton
Frank Gardner
Barbara Garofoli
Lisa A. Kearney
OPERATIONS OFFICER
Patricia Pliske
TELLER TRAINING OFFICER
Linda A. Wolf
TRUST ACCOUNTING OFFICER
Joseph Woytovich
TRUST OPERATIONS OFFICER
Carol Trezzi
47
<PAGE>
COMPANY OFFICERS
PENSECO FINANCIAL SERVICES CORPORATION AND
PENN SECURITY BANK AND TRUST COMPANY
BOARD OF DIRECTORS
Edwin J. Butler
Retired Bank Officer
Richard E. Grimm
Executive Vice-President and Treasurer
Russell C. Hazelton
Captain, Trans World Airlines
D. William Hume
Senior Vice-President and Assistant Secretary
James G. Keisling
Partner, Compression Polymers Group, Manufacturer of Plastic Sheet Products
P. Frank Kozik
President, Scranton Craftsmen, Inc., Manufacturer of Ornamental Iron and Precast
Concrete Products
Robert W. Naismith, Ph.D.
Chairman & CEO, Genome Securities, Inc.
James B. Nicholas
President, D. G. Nicholas Co., Wholesale Auto Parts Company
Emily S. Perry
Account Executive, Murray Insurance Company
Sandra C. Phillips
Penn State Master Gardener Community Volunteer
Otto P. Robinson, Jr.
Attorney-at-Law, President
PENN SECURITY BANK AND TRUST COMPANY
ADVISORY BOARDS
ABINGTON OFFICE
James L. Burne, DDS
Nancy Burns
Keith Eckel
Richard C. Florey
C. Lee Havey, Jr.
Atty. Patrick J. Lavelle
Sandra C. Phillips
EAST SCRANTON OFFICE
Marie W. Allen
J. Conrad Bosley
Judge Carmen Minora
Mark R. Sarno
Beth S. Wolff
EAST STROUDSBURG OFFICE
Denise M. Cebular
Mary Citro
Robert J. Dillman, Ph.D.
Jere Dunkelberger
Atty. Kirby Upright
Jeffrey Weichel
GREEN RIDGE OFFICE
Carl M. Baruffaldi
Joseph N. Connor
Everett Jones
Atty. Patrick J. Mellody
Caroline Mickelson
George Noone
Howard J. Snowdon
MOUNT POCONO OFFICE
Bruce Berry
Francis Cappelloni
J. Patrick Dietz
Atty. Brian Golden
Robert C. Hay
David Lansdowne
NORTH POCONO OFFICE
Anthony J. Descipio
George F. Edwards
James A. Forti
Atty. David Z. Smith
Deborah A. Wright
SOUTH SIDE OFFICE
Atty. Zygmunt R. Bialkowski, Jr.
Michael P. Brown
Lois Ferrari
Donald F. LaTorre
Jeffrey J. Leventhal
Dr. Ted M. Stampien
48
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,076
<INT-BEARING-DEPOSITS> 8,345
<FED-FUNDS-SOLD> 6,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,416
<INVESTMENTS-MARKET> 112,346
<LOANS> 283,219
<ALLOWANCE> 2,830
<TOTAL-ASSETS> 436,099
<DEPOSITS> 377,526
<SHORT-TERM> 0
<LIABILITIES-OTHER> 614
<LONG-TERM> 0
0
0
<COMMON> 21
<OTHER-SE> 44,940
<TOTAL-LIABILITIES-AND-EQUITY> 436,099
<INTEREST-LOAN> 22,609
<INTEREST-INVEST> 6,600
<INTEREST-OTHER> 766
<INTEREST-TOTAL> 29,975
<INTEREST-DEPOSIT> 12,774
<INTEREST-EXPENSE> 13,179
<INTEREST-INCOME-NET> 16,796
<LOAN-LOSSES> 595
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,986
<INCOME-PRETAX> 6,053
<INCOME-PRE-EXTRAORDINARY> 6,053
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,281
<EPS-PRIMARY> 1.99
<EPS-DILUTED> 1.99
<YIELD-ACTUAL> 7.35
<LOANS-NON> 929
<LOANS-PAST> 375
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,600
<CHARGE-OFFS> 383
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 2,830
<ALLOWANCE-DOMESTIC> 2,830
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
