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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
Incorporated pursuant to the Laws of Pennsylvania
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Internal Revenue Service -- Employer Identification No. 23-2939222
150 North Washington Avenue, Scranton, Pennsylvania 18503-1848
(570) 346-7741
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding on July 31, 2000, was 2,148,000.
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<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements - Consolidated
Balance Sheets:
June 30, 2000............................................ 3
December 31, 1999........................................ 3
Statements of Income:
Three Months Ended June 30, 2000......................... 4
Three Months Ended June 30, 1999......................... 4
Six Months Ended June 30, 2000........................... 5
Six Months Ended June 30, 1999........................... 5
Statements of Cash Flows:
Six Months Ended June 30, 2000........................... 6
Six Months Ended June 30, 1999........................... 6
Notes to Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................11
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings...................................................18
Item 2. Changes in Securities...............................................18
Item 3. Defaults Upon Senior Securities.....................................18
Item 4. Submission of Matters to a Vote of Security Holders.................18
Item 5. Other Information...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................19
Signatures..................................................................19
<PAGE>
PART I. FINANCIAL INFORMATION, ITEM 1-- FINANCIAL STATEMENTS
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,518 $ 10,275
Interest bearing balances with banks 53 3,961
Federal funds sold - 10,875
----------- ------------
Cash and Cash Equivalents 13,571 25,111
Investment securities:
Available-for-sale, at fair value 105,698 96,029
Held-to-maturity (fair value of $20,024
and $10,178, respectively) 20,239 10,482
----------- ------------
Total Investment Securities 125,937 106,511
Loans, net of unearned income 291,211 281,527
Less: Allowance for loan losses 2,950 2,950
----------- ------------
Loans, Net 288,261 278,577
Bank premises and equipment 12,156 12,296
Other real estate owned 204 33
Accrued interest receivable 3,399 2,927
Other assets 2,961 3,159
----------- ------------
Total Assets $ 446,489 $ 428,614
=========== ============
LIABILITIES
Deposits:
Non-interest bearing $ 60,149 $ 58,230
Interest bearing 318,127 309,102
----------- ------------
Total Deposits 378,276 367,332
Other borrowed funds:
Repurchase agreements 15,496 11,981
Short-term borrowings 2,756 887
Accrued interest payable 2,149 1,860
Other liabilities 749 811
----------- ------------
Total Liabilities 399,426 382,871
----------- ------------
STOCKHOLDERS' EQUITY
Common stock ($ .01 par value, 15,000,000 shares
authorized, 2,148,000 shares issued and outstanding) 21 21
Surplus 10,819 10,819
Retained earnings 37,049 35,996
Accumulated other comprehensive income (826) (1,093)
----------- ------------
Total Stockholders' Equity 47,063 45,743
----------- ------------
Total Liabilities and Stockholders' Equity $ 446,489 $ 428,614
=========== ============
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------------ ------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 5,770 $ 5,431
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 1,211 1,259
States & political subdivisions 299 171
Other securities 32 28
Interest on Federal funds sold 235 55
Interest on balances with banks 157 12
--------- ---------
Total Interest Income 7,704 6,956
--------- ---------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 545 556
Interest on other deposits 2,647 2,104
Interest on other borrowed funds 189 126
--------- ---------
Total Interest Expense 3,381 2,786
--------- ---------
Net Interest Income 4,323 4,170
Provision for loan losses 32 -
--------- ---------
Net Interest Income After Provision for Loan Losses 4,291 4,170
--------- ---------
OTHER INCOME
Trust department income 305 247
Service charges on deposit accounts 178 167
Merchant transaction income 806 794
Other fee income 205 181
Other operating income 19 18
Realized losses on securities, net (333) -
--------- ---------
Total Other Income 1,180 1,407
--------- ---------
OTHER EXPENSES
Salaries and employee benefits 1,950 1,851
Expense of premises and fixed assets 638 682
Merchant transaction expenses 741 705
Other operating expenses 1,008 978
--------- ---------
Total Other Expenses 4,337 4,216
--------- ---------
Income before income taxes 1,134 1,361
Applicable income taxes 205 358
--------- ---------
Net Income 929 1,003
Other comprehensive income, net of taxes:
Unrealized securities losses 351 (657)
--------- ---------
Comprehensive Income $ 1,280 $ 346
========= =========
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.43 $ 0.47
Cash Dividends Declared Per Common Share $ 0.22 $ 0.21
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------ -----------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 11,344 $ 10,909
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 2,214 2,578
States & political subdivisions 584 368
Other securities 63 58
Interest on Federal funds sold 367 133
Interest on balances with banks 293 37
--------- ---------
Total Interest Income 14,865 14,083
--------- ---------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 1,122 1,163
Interest on other deposits 4,909 4,289
Interest on other borrowed funds 353 235
--------- ---------
Total Interest Expense 6,384 5,687
--------- ---------
Net Interest Income 8,481 8,396
Provision for loan losses 72 56
--------- ---------
Net Interest Income After Provision for Loan Losses 8,409 8,340
--------- ---------
OTHER INCOME
Trust department income 612 505
Service charges on deposit accounts 351 332
Merchant transaction income 2,432 2,278
Other fee income 380 342
Other operating income 46 64
Realized losses on securities, net (333) -
--------- ---------
Total Other Income 3,488 3,521
--------- ---------
OTHER EXPENSES
Salaries and employee benefits 3,890 3,772
Expense of premises and fixed assets 1,313 1,327
Merchant transaction expenses 2,181 1,974
Other operating expenses 1,999 1,950
--------- ---------
Total Other Expenses 9,383 9,023
--------- ---------
Income before income taxes 2,514 2,838
Applicable income taxes 516 759
--------- ---------
Net Income 1,998 2,079
Other comprehensive income, net of taxes:
Unrealized securities losses 267 (1,007)
--------- ---------
Comprehensive Income $ 2,265 $ 1,072
========= =========
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.93 $ 0.97
Cash Dividends Declared Per Common Share $ 0.44 $ 0.42
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,998 $ 2,079
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 587 591
Provision for loan losses 72 56
Deferred income tax provision 8 (15)
Amortization of securities (net of accretion) 56 190
Net realized losses (gains) on securities 333 -
Loss (gain) on other real estate - -
(Increase) decrease in interest receivable (472) 202
Decrease (increase) in other assets 198 (483)
(Decrease) increase in income taxes payable (251) (232)
Increase (decrease) in interest payable 290 (306)
Increase (decrease) in other liabilities 43 779
---------------- ----------------
Net cash provided by operating activities 2,862 2,861
---------------- ----------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (34,464) (28,335)
Proceeds from maturities of investment securities available-for-sale 24,829 36,015
Purchase of investment securities to be held-to-maturity (10,189) -
Proceeds from repayments of investment securities to be held-to-maturity 413 975
Net loans (originated) repaid (9,960) (2,241)
Proceeds from other real estate 33 85
Investment in premises and equipment (447) (575)
---------------- ----------------
Net cash (used) provided by investment activities (29,785) 5,924
---------------- ----------------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 13,233 2,863
Net (payments) proceeds on time deposits (2,289) (14,263)
Increase (decrease) in federal funds purchased 2,000 -
Increase (decrease) in repurchase agreements 3,515 1,129
Net (decrease) increase in short-term borrowings (131) 582
Cash dividends paid (945) (902)
---------------- ----------------
Net cash provided (used) by financing activities 15,383 (10,591)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (11,540) (1,806)
Cash and cash equivalents at January 1 25,111 18,726
---------------- ----------------
Cash and cash equivalents at June 30 $ 13,571 $ 16,920
================ ================
</TABLE>
The Company paid interest and income taxes of $6,095 and $773 and $5,993 and
$781, for the six month periods ended June 30, 2000 and 1999, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED JUNE 30, 2000
(UNAUDITED)
These Notes to Consolidated Financial Statements reflect events subsequent to
December 31, 1999, the date of the most recent Report of Independent Auditors,
through the date of this Quarterly Report on Form 10-Q for the six month period
ended June 30, 2000. These Notes to Consolidated Financial Statements should be
read in conjunction with Financial Information and Other Information required to
be furnished as part of this Report, in particular, (1) Management's Discussion
and Analysis of Financial Condition and Results of Operations for the three
months ended June 30, 2000 and June 30, 1999 and for the six months ended June
30, 2000 and June 30, 1999, in respect to the Company's capital requirements and
liquidity, (2) Part II, Item 6, Reports on Form 8-K and (3) the Company's Annual
Report - Form 10-K for the year ended December 31, 1999, incorporated herein by
reference.
NOTE 1 -- PRINCIPLES OF CONSOLIDATION
Penseco Financial Services Corporation (Company) is a financial holding company,
incorporated under the laws of Pennsylvania. It is the parent company of Penn
Security Bank and Trust Company (Bank), a state chartered bank.
Intercompany transactions have been eliminated in preparing the consolidated
financial statements.
The accounting policies of the Company conform with generally accepted
accounting principles and with general practices within the banking industry.
NOTE 2 -- BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments that are of a normal recurring
nature and considered necessary for a fair presentation have been included. They
are not, however, necessarily indicative of the results of consolidated
operations for a full year.
For further information, refer to the consolidated financial statements and
accompanying notes included in the Company's Annual Report - Form 10-K for the
year ended December 31, 1999.
NOTE 3 -- USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
NOTE 4 -- INVESTMENT SECURITIES
Investments in securities are classified in two categories and accounted for as
follows:
SECURITIES HELD-TO-MATURITY. Bonds, notes, debentures and mortgage-backed
securities for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts computed on the straight-line basis over the period to
maturity, which approximates the interest method.
SECURITIES AVAILABLE-FOR-SALE. Bonds, notes, debentures, and certain equity
securities not classified as securities to be held-to-maturity are carried at
fair value with unrealized holding gains and losses, net of tax, reported as a
net amount in a separate component of stockholders' equity until realized.
Realized gains and losses on the sale of securities available-for-sale are
determined using the specific identification method and are reported as a
separate component of other income in the Statements of Income. Unrealized gains
and losses are included as a separate item in computing comprehensive income.
<PAGE>
The Company has no derivative financial instruments required to be disclosed
under SFAS No. 119.
The amortized cost and fair value of investment securities at June 30, 2000 and
December 31, 1999 are as follows:
AVAILABLE-FOR-SALE
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2000 Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Treasury securities $ 67,166 $ 143 $ 696 $ 66,613
U.S. Agency securities 24,506 16 217 24,305
States & political subdivisions 13,459 - 497 12,962
-------------------------------------------------------------------------------
Total Debt Securities 105,131 159 1,410 103,880
Equity securities 1,818 - - 1,818
-------------------------------------------------------------------------------
Total Available-for-Sale $ 106,949 $ 159 $ 1,410 $ 105,698
--------------------------------------------------------------------------------
Proceeds from the sales of available-for-sale debt securities for the period
ended June 30, 2000 were $9,829. Gross gains and gross losses amounted to $0 and
$333.
AVAILABLE-FOR-SALE
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Treasury securities $ 67,237 $ 9 $ 787 $ 66,459
U.S. Agency securities 5,000 - 200 4,800
States & political subdivisions 23,629 - 677 22,952
--------------------------------------------------------------------------------
Total Debt Securities 95,866 9 1,664 94,211
Equity securities 1,818 - - 1,818
--------------------------------------------------------------------------------
Total Available-for-Sale $ 97,684 $ 9 $ 1,664 $ 96,029
--------------------------------------------------------------------------------
There were no sales of debt securities for the period ended June 30, 1999.
HELD-TO-MATURITY
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2000 Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Agency Obligations:
Mortgage-backed securities $ 4,410 $ - $ 168 $ 4,242
States & political subdivisions 15,829 54 101 15,782
--------------------------------------------------------------------------------
Total Held-to-Maturity $ 20,239 $ 54 $ 269 $ 20,024
--------------------------------------------------------------------------------
HELD-TO-MATURITY
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Agency Obligations:
Mortgage-backed securities $ 4,843 $ - $ 152 $ 4,691
States & political subdivisions 5,639 - 152 5,487
--------------------------------------------------------------------------------
Total Held-to-Maturity $ 10,482 $ - $ 304 $ 10,178
--------------------------------------------------------------------------------
<PAGE>
The amortized cost and fair value of debt securities at June 30, 2000 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
June 30, 2000 Available-for-Sale Held-to-Maturity
----------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less:
U.S. Treasury securities $ 22,025 $ 21,844 $ - $ -
After one year through five years:
U.S. Treasury securities 45,141 44,769 - -
U.S. Agency securities 24,506 24,305 - -
States & political subdivisions 11,919 11,514 - -
After five years through ten years:
States & political subdivisions 1,256 1,184 - -
After ten years:
States & political subdivisions 284 264 15,829 15,782
----------------------------------------------------------------------------------------------------------
Subtotal 105,131 103,880 15,829 15,782
Mortgage-backed securities - - 4,410 4,242
----------------------------------------------------------------------------------------------------------
Total Debt Securities $ 105,131 $ 103,880 $ 20,239 $ 20,024
----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5 -- REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company and the Bank's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the Capital Adequacy table on the following page) of Tier 1 and Total
Capital to risk-weighted assets and of Tier 1 Capital to average assets
(Leverage ratio). The table also presents the Company's actual capital amounts
and ratios. The Bank's actual capital amounts and ratios are substantially
identical to the Company's. Management believes, as of June 30, 2000, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
As of June 30, 2000, 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 1 Capital, Total
Capital and Leverage ratios as set forth in the Capital Adequacy table. There
are no conditions or events since that notification that management believes
have changed the Company's categorization by the FDIC.
The Company and Bank are also subject to minimum capital levels which could
limit the payment of dividends, although the Company and Bank currently have
capital levels which are in excess of minimum capital level ratios required.
The Pennsylvania Banking Code restricts capital funds available for payment of
dividends to the Retained Earnings of the Bank. Accordingly, at June 30, 2000,
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
<PAGE>
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.
<TABLE>
<CAPTION>
Actual Regulatory Requirements
------------------------------------------------ -------------------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of June 30, 2000 Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 50,839 18.67% > $ 21,787 > 8.0% > $ 27,233 > 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $ 47,889 17.58% > $ 10,893 > 4.0% > $ 16,340 > 6.0%
Tier 1 Capital
(to Average Assets) $ 47,889 10.84% > $ * > * > $ 22,095 > 5.0%
</TABLE>
*3.0% ($13,257), 4.0% ($17,676) or 5.0% ($22,095) depending on the bank's CAMELS
Rating and other regulatory risk factors.
<TABLE>
<CAPTION>
Actual Regulatory Requirements
------------------------------------------------ -------------------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 49,786 18.96% > $ 21,006 > 8.0% > $ 26,259 > 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $ 46,836 17.84% > $ 10,503 > 4.0% > $ 15,755 > 6.0%
Tier 1 Capital
(to Average Assets) $ 46,836 10.87% > $ * > * > $ 21,553 > 5.0%
</TABLE>
*3.0% ($12,931), 4.0% ($17,242) or 5.0% ($21,553) depending on the bank's CAMELS
Rating and other regulatory risk factors.
<PAGE>
PART 1. FINANCIAL INFORMATION, ITEM 2--
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial condition and
significant changes in the results of the operations of Penseco Financial
Services Corporation and its subsidiary ("Penn Security Bank and Trust Company")
for the three months ended June 30, 2000 and June 30, 1999 and for the six
months ended June 30, 2000 and June 30,1999. Throughout this review the
subsidiary of Penseco Financial Services Corporation, Penn Security Bank and
Trust Company, is referred to as the "Company". All intercompany accounts and
transactions have been eliminated in preparing the consolidated financial
statements. All information is presented in thousands of dollars, except as
indicated.
OVERVIEW OF FINANCIAL CONDITION
Penseco Financial Services Corporation reported net income of $929 or $.43 per
share for the three months ended June 30, 2000, a decrease of $74 or 7.4% from
the $1,003 or $.47 per share reported for the three months ended June 30, 1999.
The decrease was the result of a $333 realized loss on the sale of ten million
dollars of short term municipal securities. The benefits of this sale and
subsequent reinvestment in longer term, higher yielding municipal securities
will be recognized in future quarters. Excluding the loss, net income would have
increased $146 or 14.6% for the three month period ending June 30, 2000.
The Company reported net income of $1,998 for the six months ended June 30,
2000, a decrease of $81, or 3.9% from the $2,079 reported for the six months
ended June 30, 1999. The decrease in earnings is attributed to a realized loss
of $333 due to the sale of ten million dollars of municipal securities having
maturities of less than two years. The benefits of the sale and subsequent
reinvestment in longer term, higher yielding municipal securities will be
recognized in future periods. Without the realized loss, net income would total
$2,218, an increase of $139, or 6.7% over the six months ended June 30, 1999.
Since December 31, 1999, loans increased $9.7 million, or 3.5%, investments
increased $19.4 million, or 18.2%, deposits increased $11.0 million, or 3.0%,
and repurchase agreements increased $3.5 million, or 29.2%.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between income earned on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and
investments while deposits and short-term borrowings, in the form of securities
sold under agreements to repurchase, represent interest-bearing liabilities.
Variations in the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, are determinants of changes in net
interest income.
Net interest income after provision for loan losses increased $69, or 0.8% from
$8,340 for the first half of 1999 to $8,409 in 2000. This increase is the result
of the interest spread between the new loans being originated and the funding
sources for these loans. In addition, earning assets repriced upward 17 basis
points due to investments and loans repricing at higher rates, offset by
interest bearing liabilities repricing upward 33 basis points, as shown on the
following schedule. Primarily the increase was due to the higher yields of
earning assets offset by higher funding costs in the rising interest rate
environment of the second quarter.
The net interest margin represents the Company's net yield on its earning assets
and is calculated as net interest income divided by average earning assets. In
the first six months of 2000, the net interest margin was 4.06%, falling 8 basis
points from 4.14% in the same period of 1999, the result of an increase in the
yield on earning assets offset, however, by a larger increase in funding costs.
Consumers are taking advantage of higher interest rates on deposit products, as
financial intermediaries compete for funds.
Total average earning assets and total average interest bearing funds increased
in the second quarter of 2000 as compared to 1999. Significantly, average
earning assets increased $12.4 million, or 3.1%, from $405.3 million in 1999 to
$417.7 million in 2000 while average interest bearing funds increased somewhat
less, $7.8 million, or 2.4%, from $326.1 million to $333.9 million for the same
periods. As a percentage of average assets, earning assets remained relatively
unchanged from 94.6% in the first half of 1999, to 94.5% in 2000. However,
average interest bearing funding sources decreased from 76.1% of total funding
sources in the first half of 1999 to 75.6% in the same period in 2000.
Changes in the mix of both earning assets and funding sources also impacted net
interest income in the first half of 1999 and 2000. The changes in the
composition of the funding sources were more significant than the changes in the
mix of earning assets. Average loans as a percentage of average earning assets
decreased slightly from 70.5% in
<PAGE>
1999 to 69.5% in 2000; average investments fell from 27.8% to 25.3%. Short-term
investments, federal funds sold and interest bearing balances with banks,
increased from 1.8% of earning assets to 5.2%. Time deposits decreased $4.6
million, or 2.9% over the period ended June 30, 1999, savings accounts decreased
$5.2 million, or 7.2%, however, money market accounts increased $15.4 million,
or 26.3% in that same period. This change in deposit composition contributed to
the increase in the cost of funds by 33 basis points from the year ago period.
However, while experiencing increases in funding costs from the year ago period,
earning assets continue to increase more significantly.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds as well as the yields earned on assets. The investment
securities tax effect yield increased 128 basis points from 4.71% in the first
half of 1999 to 5.99% for 2000. Also, average loan yields increased 18 basis
points, from 7.64% in the first half of 1999 to 7.82% in 2000. The average
certificate of deposit cost of funds increased from 5.06% in 1999 to 5.37% in
2000, and the money market cost of funds increased from 2.62%, to 3.40% in the
same period. These are the primary causes of the increase in the average rate of
return on earning assets and a larger increase in the average rate paid on
interest bearing liabilities.
(REST OF PAGE INTENTIONALLY LEFT BLANK)
<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 June 30, 2000 and June 30,
1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
June 30, 2000 June 30, 1999
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Available-for-sale:
U.S. Treasury securities $ 64,873 $ 1,809 5.58% $ 76,497 $ 2,285 5.97%
U.S. Agency obligations 8,732 267 6.12% 5,000 142 5.68%
States & political subdivisions 16,707 330 5.99% 23,653 368 4.71%
Federal Home Loan Bank stock 1,798 61 6.79% 1,798 57 6.34%
Other 20 1 5.00% 20 1 5.00%
Held-to-maturity:
U.S. Agency obligations 4,553 138 6.06% 5,624 150 5.33%
States & political subdivisions 9,050 255 8.54% - - -
Loans, net of unearned income:
Real estate mortgages 222,188 8,714 7.84% 222,095 8,554 7.70%
Commercial 18,875 863 9.14% 22,826 940 8.24%
Consumer and other 49,189 1,767 7.18% 40,633 1,415 6.96%
Federal funds sold 12,189 367 6.02% 5,604 133 4.75%
Interest on balances with banks 9,486 293 6.18% 1,516 38 5.01%
-------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 417,660 $ 14,865 7.12% 405,266 $ 14,083 6.95%
-------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 11,235 10,969
Bank premises and equipment 12,168 12,652
Accrued interest receivable 3,221 2,377
Other assets 566 97
Less: Allowance for loan losses 2,957 2,905
-------------------------------------------------------------------------------------------------------------------------
Total Assets $ 441,893 $ 428,456
-------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 23,652 $ 126 1.07% $ 23,772 $ 127 1.07%
Savings 66,827 498 1.49% 72,042 534 1.48%
Money markets 73,968 1,258 3.40% 58,627 768 2.62%
Time - Over $100 38,617 1,122 5.81% 42,991 1,163 5.41%
Time - Other 115,837 3,027 5.23% 116,071 2,860 4.93%
Federal funds purchased 50 1 5.00% 146 3 4.11%
Repurchase agreements 14,324 335 4.67% 11,710 221 3.77%
Short-term borrowings 578 17 5.88% 703 11 3.13%
-------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 333,853 $ 6,384 3.82% 326,062 $ 5,687 3.49%
-------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 60,041 54,676
All other liabilities 1,239 1,805
Stockholders' equity 46,760 45,913
-------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 441,893 $ 428,456
-------------------------------------------------------------------------------------------------------------------------
Interest Spread 3.30% 3.46%
-------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 8,481 $ 8,396
-------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.06% 4.14%
Return on average assets 0.90% 0.97%
Return on average equity 8.55% 9.06%
Average equity to average assets 10.58% 10.72%
Dividend payout ratio 47.31% 43.30%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for loan losses to a level that
management considers adequate to reflect the risk of future losses inherent in
the Company's loan portfolio. The process of determining the adequacy of the
allowance is necessarily judgmental and subject to changes in external
conditions. The allowance for loan losses reflects management's judgment as to
the level considered appropriate to absorb such losses based upon a review of
many factors, including historical loss experience, adverse situations that may
affect the borrower's ability to repay (including the timing of future
payments), economic conditions and trends, loan portfolio volume and mix, loan
performance trends, the value and adequacy of collateral, and the Company's
internal credit review process. Accordingly, there can be no assurance that
existing levels of the allowance will ultimately prove adequate to cover actual
loan losses. The quarterly provision for loan losses charged to operating
expense is that amount which is sufficient to bring the balance of the allowance
for possible loan losses to an adequate level to absorb anticipated losses.
Based on this ongoing evaluation, management determines the provision necessary
to maintain an appropriate allowance.
In the first six months of 2000, the provision for loan losses was $72, an
increase from $56 in the first six months of 1999. Loans charged-off totaled $99
and recoveries were $27 for the six months ended June 30, 2000. In the same
period of 1999, recoveries of $183 offset loans charged off of $145.
OTHER INCOME
The following table sets forth information by category of other income for the
Company for three months ended June 30, 2000 and June 30, 1999, respectively:
June 30, June 30,
Three Months Ended : 2000 1999
---------------------------------------------------------------------
Trust department income $ 305 $ 247
Service charges on deposit accounts 178 167
Merchant transaction income 806 794
Other fee income 205 181
Other operating income 19 18
Realized losses on securities, net (333) -
---------------------------------------------------------------------
Total Other Income $ 1,180 $ 1,407
---------------------------------------------------------------------
Other income decreased $227, or 16.1% for the three month period ending June 30,
2000 to $1,180, from $1,407 for the three months ended June 30, 1999. This
decrease is primarily the result of a $333 realized loss on the sale of
municipal securities. Excluding the loss, other income would have increased
$106, or 7.5% over the same period last year. Trust department income increased
$58, or 23.5%, reflecting new business. Also, increases in other fee income of
$24 or 13.3% was due largely to cardholder discounts which is the fee received
when our cardholders use non-Penn Security Bank merchants.
The following table sets forth information by category of other income for the
Company for six months ended June 30, 2000 and June 30, 1999, respectively:
June 30, June 30,
Six Months Ended : 2000 1999
---------------------------------------------------------------------
Trust department income $ 612 $ 505
Service charges on deposit accounts 351 332
Merchant transaction income 2,432 2,278
Other fee income 380 342
Other operating income 46 64
Realized losses on securities, net (333) -
---------------------------------------------------------------------
Total Other Income $ 3,488 $ 3,521
---------------------------------------------------------------------
<PAGE>
Other income decreased $33, or .9% for the first half of 2000 to $3,488 from
$3,521 for the same period of 1999. This decrease is attributed to a realized
loss on the sale of municipal securities of $333, offset, however, by an
increase in trust department income of $107, or 21.2%, and merchant transaction
income increasing $154, or 6.8%. In both the trust department and merchant areas
the bank realized improved efficiencies, as well as, increases in our customer
base. Other fee income also increased $38, or 11.1%, largely due to cardholder
discounts, which is the fee received when our cardholders use non-Penn Security
Bank merchants.
OTHER EXPENSES
The following table sets forth information by category of other expenses for the
Company for the three months ended June 30, 2000 and June 30, 1999,
respectively:
June 30, June 30,
Three Months Ended : 2000 1999
---------------------------------------------------------------------
Salaries and employee benefits $ 1,950 $ 1,851
Expense of premises and fixed assets 638 682
Merchant transaction expenses 741 705
Other operating expenses 1,008 978
---------------------------------------------------------------------
Total Other Expenses $ 4,337 $ 4,216
---------------------------------------------------------------------
Other expenses increased $121, or 2.9% to $4,337, in the three month period
ending June 30, 2000 as compared to $4,216 in the same period of 1999. Salaries
and employee benefit expenses increased $99, or 5.3% due to additional staffing
in our newly opened brokerage division, and higher health care costs. Also,
merchant transaction expenses increased $36, or 5.1% due to Mastercard and Visa
International imposing higher transaction costs.
The following table sets forth information by category of other expenses for the
Company for the six months ended June 30, 2000 and June 30, 1999, respectively:
June 30, June 30,
Six Months Ended : 2000 1999
---------------------------------------------------------------------
Salaries and employee benefits $ 3,890 $ 3,772
Expense of premises and fixed assets 1,313 1,327
Merchant transaction expenses 2,181 1,974
Other operating expenses 1,999 1,950
---------------------------------------------------------------------
Total Other Expenses $ 9,383 $ 9,023
---------------------------------------------------------------------
Other expenses increased $360, or 4.0% to $9,383, in the first six months of
2000 as compared to $9,023 in the same period of 1999. Salaries and employee
benefits increased $118, or 3.1% due to staff additions, along with higher
health care costs. Merchant transaction expenses increased primarily due to
Mastercard and Visa authorization interchange expenses that increased $207, or
10.5%.
<PAGE>
LOAN PORTFOLIO
DETAILS REGARDING THE COMPANY'S LOAN PORTFOLIO
June 30, December 31,
As Of: 2000 1999
------------------------------------------------------------------------------
Real estate - construction
and land development $ 4,261 $ 3,241
Real estate mortgages 219,540 216,574
Commercial 20,387 18,995
Credit card and related plans 2,040 2,203
Installment 28,985 28,693
Obligations of states & political subdivisions 15,998 11,821
------------------------------------------------------------------------------
Loans, net of unearned income 291,211 281,527
Less: Allowance for loan losses 2,950 2,950
------------------------------------------------------------------------------
Loans, net $ 288,261 $ 278,577
------------------------------------------------------------------------------
LOAN QUALITY
The lending activities of the Company are guided by the basic lending policy
established by the Board of Directors. Loans must meet criteria which include
consideration of the character, capacity and capital of the borrower, collateral
provided for the loan, and prevailing economic conditions.
Regardless of credit standards, there is risk of loss inherent in every loan
portfolio. The allowance for loan losses is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of the loans. The
evaluations take into consideration such factors as change in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, industry experience, collateral value and current economic
conditions that may affect the borrower's ability to pay. Management believes
that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
The allowance for loan losses is increased by periodic charges against earnings
as a provision for loan losses, and decreased periodically by charge-offs of
loans (or parts of loans) management has determined to be uncollectible, net of
actual recoveries on loans previously charged-off.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and other real estate owned. The following
table sets forth information regarding non-performing assets as of the dates
indicated:
June 30, December 31, June 30,
As Of: 2000 1999 1999
--------------------------------------------------------------------------------
Non-accrual loans $ 524 $ 836 $ 770
Loans past due 90 days or more and accruing:
Guaranteed student loans 271 476 328
Credit card and home equity loans 43 - 4
--------------------------------------------------------------------------------
Total non-performing loans 838 1,312 1,102
Other real estate owned 204 33 137
--------------------------------------------------------------------------------
Total non-performing assets $ 1,042 $ 1,345 $ 1,239
--------------------------------------------------------------------------------
<PAGE>
Loans are generally placed on a non-accrual status when principal or interest is
past due 90 days or when payment in full is not anticipated. When a loan is
placed on non-accrual 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 $524 and $770 at June 30, 2000 and June 30, 1999, respectively. If interest
on those loans had been accrued, such income would have been $101 and $107 for
the six months ended June 30, 2000 and June 30, 1999, respectively. Interest
income on those loans, which is recorded only when received, amounted to $6 and
$7 for June 30, 2000 and June 30, 1999, respectively. There are no commitments
to lend additional funds to individuals whose loans are in non-accrual status.
The management process for evaluating the adequacy of the allowance for loan
losses includes reviewing each month's loan committee reports which list all
loans that do not meet certain internally developed criteria as to collateral
adequacy, payment performance, economic conditions and overall credit risk.
These reports also address the current status and actions in process on each
listed loan. From this information, adjustments are made to the allowance for
loan losses. Such adjustments include both specific loss allocation amounts and
general provisions by loan category based on present and past collection
experience, nature and volume of the loan portfolio, overall quality, and
current economic conditions that may affect the borrower's ability to pay. As of
June 30, 2000 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 June 30, 2000 and December 31, 1999, the Company did not have any loans
specifically classified as impaired.
Most of the Company's lending activity is with customers located in the
Company's geographic market area and repayment thereof is affected by economic
conditions in this market area. LOAN LOSS EXPERIENCE The following tables
present the Company's loan loss experience during the periods indicated:
June 30, June 30,
Six Months Ended : 2000 1999
-------------------------------------------------------------------------------
Balance at beginning of year $ 2,950 $ 2,830
Charge-offs:
Real estate mortgages 34 82
Commercial and all others 51 7
Credit card and related plans 4 43
Installment loans 10 13
-------------------------------------------------------------------------------
Total charge-offs 99 145
-------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 6 -
Commercial and all others - 168
Credit card and related plans 6 8
Installment loans 15 7
-------------------------------------------------------------------------------
Total recoveries 27 183
-------------------------------------------------------------------------------
Net charge-offs (recoveries) 72 (38)
-------------------------------------------------------------------------------
Provision charged to operations 72 56
-------------------------------------------------------------------------------
Balance at End of Period $ 2,950 $ 2,924
-------------------------------------------------------------------------------
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.025% -0.013%
-------------------------------------------------------------------------------
The allowance for loan losses is allocated as follows:
<TABLE>
<CAPTION>
As Of: June 30, 2000 December 31, 1999 June 30, 1999
------------------------------------------------------------------------------------------------------------------
Amount % * Amount % * Amount % *
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages $ 1,500 77% $ 1,500 78% $ 1,500 78%
Commercial and all others 950 12% 950 10% 924 11%
Credit card and related plans 150 1% 150 1% 150 1%
Personal installment loans 350 10% 350 11% 350 10%
------------------------------------------------------------------------------------------------------------------
Total $ 2,950 100% $ 2,950 100% $ 2,924 100%
------------------------------------------------------------------------------------------------------------------
</TABLE>
* Percent of loans in each category to total loans
<PAGE>
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 and
the Federal Home Loan Bank. The designation of securities as "Held-To-Maturity"
lessens the ability of banks to sell securities so classified, except in regard
to certain changes in circumstances or other events that are isolated,
nonrecurring and unusual.
CAPITAL RESOURCES
A strong capital position is important to the continued profitability of the
Company and promotes depositor and investor confidence. The Company's capital
provides a basis for future growth and expansion and also provides additional
protection against unexpected losses.
Additional sources of capital would come from retained earnings from the
operations of the Company and from the sale of additional common stock.
Management has no plans to offer additional common stock at this time.
The Company's total risk-based capital ratio was 18.67% at June 30, 2000. 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.
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
None.
ITEM 2 -- CHANGES IN SECURITIES
None.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Penseco Financial Services
Corporation was held on May 2, 2000.
The results of the items submitted for a vote are as follows:
The following three Directors, whose term will expire in 2004, were
elected:
NUMBER OF VOTES NUMBER OF VOTES NUMBER OF
CAST FOR DIRECTOR CAST AGAINST DIRECTOR VOTES NOT CAST
----------------- --------------------- --------------
Russell C. Hazelton 1,942,715 43,786 161,499
Robert W. Naismith, Ph.D. 1,889,738 96,763 161,499
Emily S. Perry 1,929,939 56,562 161,499
ITEM 5 -- OTHER INFORMATION
None.
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27.0 Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the quarter ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENSECO FINANCIAL SERVICES CORPORATION
By /s/ RICHARD E. GRIMM
------------------------------
Richard E. Grimm
Executive Vice-President
Dated: August 9, 2000
By /s/ PATRICK SCANLON
------------------------------
Patrick Scanlon
Controller
Dated: August 9, 2000
