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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 September 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 October 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:
September 30, 2000........................................... 3
December 31, 1999.............................................. 3
Statements of Income:
Three Months Ended September 30, 2000......................... 4
Three Months Ended September 30, 1999......................... 4
Nine Months Ended September 30, 2000.......................... 5
Nine Months Ended September 30, 1999.......................... 5
Statements of Cash Flows:
Nine Months Ended September 30, 2000.......................... 6
Nine Months Ended September 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................................... 18
Signatures................................................................. 18
<PAGE>
PART I. FINANCIAL INFORMATION, ITEM 1-- FINANCIAL STATEMENTS
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,237 $ 10,275
Interest bearing balances with banks 63 3,961
Federal funds sold - 10,875
-------------- ---------------
Cash and Cash Equivalents 12,300 25,111
Investment securities:
Available-for-sale, at fair value 103,757 96,029
Held-to-maturity (fair value of $20,392
and $10,178, respectively) 20,456 10,482
-------------- ---------------
Total Investment Securities 124,213 106,511
Loans, net of unearned income 307,189 281,527
Less: Allowance for loan losses 3,100 2,950
-------------- ---------------
Loans, Net 304,089 278,577
Bank premises and equipment 11,925 12,296
Other real estate owned 201 33
Accrued interest receivable 4,124 2,927
Other assets 2,588 3,159
-------------- ---------------
Total Assets $ 459,440 $ 428,614
============== ===============
LIABILITIES
Deposits:
Non-interest bearing $ 61,755 $ 58,230
Interest bearing 322,072 309,102
-------------- ---------------
Total Deposits 383,827 367,332
Other borrowed funds:
Repurchase agreements 16,214 11,981
Short-term borrowings 7,470 887
Accrued interest payable 2,396 1,860
Other liabilities 890 811
-------------- ---------------
Total Liabilities 410,797 382,871
-------------- ---------------
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 38,005 35,996
Accumulated other comprehensive income (202) (1,093)
-------------- ---------------
Total Stockholders' Equity 48,643 45,743
-------------- ---------------
Total Liabilities and Stockholders' Equity $ 459,440 $ 428,614
============== ===============
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
----------------------- -----------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 6,113 $ 5,489
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 1,424 1,194
States & political subdivisions 354 227
Other securities 31 30
Interest on Federal funds sold 46 87
Interest on balances with banks 25 111
-------------- --------------
Total Interest Income 7,993 7,138
-------------- --------------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 602 460
Interest on other deposits 2,646 2,148
Interest on other borrowed funds 278 139
-------------- --------------
Total Interest Expense 3,526 2,747
-------------- --------------
Net Interest Income 4,467 4,391
Provision for loan losses 148 14
-------------- --------------
Net Interest Income After Provision for Loan Losses 4,319 4,377
-------------- --------------
OTHER INCOME
Trust department income 353 265
Service charges on deposit accounts 181 178
Merchant transaction income 1,869 1,736
Other fee income 322 212
Other operating income 20 6
Realized losses on securities, net (21) -
-------------- --------------
Total Other Income 2,724 2,397
-------------- --------------
OTHER EXPENSES
Salaries and employee benefits 1,983 1,824
Expense of premises and fixed assets 675 607
Merchant transaction expenses 1,650 1,485
Other operating expenses 933 905
-------------- --------------
Total Other Expenses 5,241 4,821
-------------- --------------
Income before income taxes 1,802 1,953
Applicable income taxes 373 546
-------------- --------------
Net Income 1,429 1,407
Other comprehensive income, net of taxes:
Unrealized securities gains (losses) 624 (146)
-------------- --------------
Comprehensive Income $ 2,053 $ 1,261
============== ==============
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.67 $ 0.65
Cash Dividends Declared Per Common Share $ 0.22 $ 0.21
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
----------------------- -----------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 17,457 $ 16,398
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 3,638 3,772
States & political subdivisions 938 595
Other securities 94 88
Interest on Federal funds sold 413 220
Interest on balances with banks 318 148
-------------- --------------
Total Interest Income 22,858 21,221
-------------- --------------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 1,724 1,623
Interest on other deposits 7,555 6,437
Interest on other borrowed funds 631 374
-------------- --------------
Total Interest Expense 9,910 8,434
-------------- --------------
Net Interest Income 12,948 12,787
Provision for loan losses 220 70
-------------- --------------
Net Interest Income After Provision for Loan Losses 12,728 12,717
-------------- --------------
OTHER INCOME
Trust department income 965 770
Service charges on deposit accounts 532 510
Merchant transaction income 4,301 4,014
Other fee income 702 554
Other operating income 66 70
Realized losses on securities, net (354) -
-------------- --------------
Total Other Income 6,212 5,918
-------------- --------------
OTHER EXPENSES
Salaries and employee benefits 5,873 5,596
Expense of premises and fixed assets 1,988 1,934
Merchant transaction expenses 3,831 3,459
Other operating expenses 2,932 2,855
-------------- --------------
Total Other Expenses 14,624 13,844
-------------- --------------
Income before income taxes 4,316 4,791
Applicable income taxes 889 1,305
-------------- --------------
Net Income 3,427 3,486
Other comprehensive income, net of taxes:
Unrealized securities gains (losses) 891 (1,153)
-------------- --------------
Comprehensive Income $ 4,318 $ 2,333
============== ==============
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 1.60 $ 1.62
Cash Dividends Declared Per Common Share $ 0.66 $ 0.63
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
----------------------- -----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,427 $ 3,486
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 917 885
Provision for loan losses 220 70
Deferred income tax (benefit) provision (18) (216)
Amortization of securities (net of accretion) 54 273
Net realized losses (gains) on securities 354 -
Loss (gain) on other real estate 19 -
(Increase) decrease in interest receivable (1,197) (12)
Decrease (increase) in other assets 113 (545)
Increase (decrease) in income taxes payable 40 66
Increase (decrease) increase in interest payable 536 (106)
Increase (decrease) in other liabilities 57 957
----------- -----------
Net cash provided by operating activities 4,522 4,858
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INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (44,561) (38,329)
Proceeds from maturities of investment securities available-for-sale 37,802 46,015
Purchase of investment securities to be held-to-maturity (10,689) -
Proceeds from repayments of investment securities to be held-to-maturity 687 1,303
Net loans (originated) repaid (26,023) 1,228
Proceeds from other real estate 104 169
Investment in premises and equipment (546) (674)
----------- -----------
Net cash (used) provided by investing activities (43,226) 9,712
----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 21,369 (435)
Net (payments) proceeds on time deposits (4,874) (12,439)
Increase (decrease) in federal funds purchased - -
Increase (decrease) in repurchase agreements 4,233 1,785
Net increase (decrease) in short-term borrowings 6,583 651
Cash dividends paid (1,418) (1,353)
----------- -----------
Net cash provided (used) by financing activities 25,893 (11,791)
----------- -----------
Net (decrease) increase in cash and cash equivalents (12,811) 2,779
Cash and cash equivalents at January 1 25,111 18,726
----------- -----------
Cash and cash equivalents at September 30 $ 12,300 $ 21,505
=========== ===========
</TABLE>
The Company paid interest and income taxes of $9,374 and $728 and $8,540 and
$1,104, for the nine month periods ended September 30, 2000 and 1999,
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 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 nine month period
ended September 30, 2000. These Notes to Financial Statements should be read in
conjunction with Financial Information and Other Information required to be
furnished as part of this Report, in particular, (1) Management's Discussion and
Analysis of Financial Condition and Results of Operations for the three months
ended September 30, 2000 and September 30, 1999 and for the nine months ended
September 30, 2000 and September 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 are considered necessary for a fair presentation have been included.
They are not, however, necessarily indicative of the results of consolidated
operations for a full year.
For further information, refer to the consolidated financial statements and
accompanying notes included in the Company's Annual Report - Form 10-K for the
year ended December 31, 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 September 30, 2000
and December 31, 1999 are as follows:
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2000 Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Treasury securities $ 54,152 $ 255 $ 392 $ 54,015
U.S. Agency securities 34,636 326 128 34,834
States & political subdivisions 13,457 - 367 13,090
--------------------------------------------------------------------------------
Total Debt Securities 102,245 581 887 101,939
Equity securities 1,818 - - 1,818
--------------------------------------------------------------------------------
Total Available-for-Sale $ 104,063 $ 581 $ 887 $ 103,757
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2000 Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Agency Obligations:
Mortgage-backed securities $ 4,126 $ - $ 134 $ 3,992
States & political subdivisions 16,330 136 66 16,400
--------------------------------------------------------------------------------
Total Held-to-Maturity $ 20,456 $ 136 $ 200 $ 20,392
--------------------------------------------------------------------------------
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 September 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>
September 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 $ 19,015 $ 18,889 $ - $ -
States & political subdivisions - - - -
After one year through five years:
U.S. Treasury securities 35,137 35,126 - -
U.S. Agency securities 34,636 34,834 - -
States & political subdivisions 11,917 11,617 - -
After five years through ten years:
States & political subdivisions 1,540 1,473 - -
After ten years:
States & political subdivisions - - 16,330 16,400
-----------------------------------------------------------------------------------------------
Subtotal 102,245 101,939 16,330 16,400
Mortgage-backed securities - - 4,126 3,992
-----------------------------------------------------------------------------------------------
Total Debt Securities $ 102,245 $ 101,939 $ 20,456 $ 20,392
-----------------------------------------------------------------------------------------------
</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 September 30, 2000, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of September 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 September 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
<PAGE>
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.
<TABLE>
<CAPTION>
Actual Regulatory Requirements
------------------------------------------------ -------------------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of September 30, 2000 Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets) $ 51,945 18.03% > $ 23,043 > 8.0% > $ 28,804 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $ 48,845 16.96% > $ 11,521 > 4.0% > $ 17,282 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $ 48,845 10.74% > $ * > * > $ 22,732 > 5.0%
- - - -
*3.0% ($13,639), 4.0% ($18,186) or 5.0% ($22,732) depending on the bank's CAMELS
Rating and other regulatory risk factors.
As of December 31, 1999
-------------------------------------------------------------------------------------------------------------
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%
- - - -
*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.
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION, ITEM 2--
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial condition and
significant changes in the results of the operations of Penseco Financial
Services Corporation and its subsidiary ("Penn Security Bank and Trust Company")
for the three months ended September 30, 2000 and September 30, 1999 and for the
nine months ended September 30, 2000 and September 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 $1,429 or $0.67
per share for the three months ended September 30, 2000, an increase of $22 or
1.6% from the $1,407 or $0.65 per share reported for the same three month period
of 1999. Included in the three month period ended September 30, 2000 was $70 or
$.03 per share after tax, attributable to a one-time change from a quarterly
charging of fees to a monthly charging of fees for many of our trust customers.
Without this change net income for the three month period would have been $1,359
or $0.63 per share.
Net income of $3,427 or $1.60 per share was reported for the nine months ended
September 30, 2000, a decrease of $59 or 1.7%, compared with $3,486 or $1.62 per
share reported for the nine months ended September 30, 1999. Included in the
nine month period ended September 30, 2000 was $70 or $.03 per share after tax,
attributable to a one-time change from a quarterly charging of fees to a monthly
charging of fees for many of our trust customers. Without this change net income
for the nine month period would have been $3,357 or $1.57 per share. Included
also in the nine month period ended September 30, 2000 are aggregate after tax
losses of $234 or $0.11 per share on the sales of securities incurred mainly in
the second quarter of 2000 as the bank sold short-term municipal securities and
re-invested the proceeds into longer term, higher yielding municipal securities.
Without this change, the bank would have earned $3,582 or $1.67 per share, an
increase of 2.8% over the year earlier period.
The Company is experiencing strong loan demand in addition to deposit growth,
largely due to pricing products competitively in our market area. Investments
increased $17.7 million or 16.6% since December 31, 1999. Net loans increased
$25.5 million or 9.0%. Deposits increased $16.5 million or 4.5%, while
repurchase agreements increased $4.2 million or 35.0% since December 31, 1999.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between income on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and
investments while deposits and short-term borrowings, in the form of securities
sold under agreements to repurchase, represent interest-bearing liabilities.
Variations in the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, are determinants of changes in net
interest income.
Net interest income increased $76 or 1.7% to $4,467 for the three months ended
September 30, 2000 from $4,391 in 1999. For the first nine months of 2000, net
interest income increased $161 or 1.3% to $12,948 from $12,787 in 1999. This
increase is due mainly to significant growth in earning assets; offset somewhat
by higher funding costs.
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 nine months of 2000, the net interest margin was 4.02%, decreasing 22
basis points from 4.24% in the same period of 1999, the result of an increase in
the yield on earning assets of 6 basis points offset by a larger increase in
funding costs of 41 basis points.
<PAGE>
Changes in the volume and rate of interest bearing assets and interest bearing
liabilities were key determinants of the increase in net interest income for
both the three months and nine months ended September 30, 2000 and 1999. Total
average earning assets and total average interest bearing funds increased in the
first nine months of 2000 as compared to the same period in 1999. Average
earning assets increased $27.2 million or 6.7%, from $401.9 million in 1999 to
$429.1 million in 2000 and average interest bearing funds increased $16.0
million or 4.9%, from $325.2 million to $341.2 million for the same periods. As
a percentage of average assets, earning assets increased from 93.0% in the first
nine months of 1999 to 94.4% in 2000. Average interest bearing funding sources
decreased from 75.2% of total funding sources in the first nine months of 1999
to 75.1% in the same period in 2000. The average interest rate on earning assets
increased from 7.04% in 1999 to 7.10% in 2000, while the average rate on
interest bearing liabilities increased by a greater amount from 3.46% in 1999 to
3.87% in 2000.
Changes in the mix of earning assets and funding sources also impacted net
interest income for both the three months and nine months ended September 30,
2000 and 1999. Average loans as a percentage of average earning assets decreased
slightly from 70.4% in 1999 to 70.0% in 2000; average investments decreased from
27.1% to 26.3%; U.S. Agency Securities increased from 2.6% to 4.7%; U.S.
Treasury Securities decreased from 18.2% to 14.4% and Municipal Securities
increased from 5.9% to 6.9%. Short-term investments, federal funds sold, and
interest on balances with banks, increased from 2.5% of earning assets to 3.7%.
Changes in the mix of interest bearing funds produced higher interest costs as
funds shifted from time deposit accounts, while the Company concentrated on
maintaining core deposits by not pricing time deposits aggressively. Monies
shifted from lower cost deposits to higher cost deposits, mainly tiered money
market and repurchase agreements. Time deposits decreased $1.0 million, from
47.6% of funding sources to 45.1% in 2000. This change in deposit composition
resulted in a significant increase in the cost of funds.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds as well as the yields earned on assets. The main increase
in rates was from U.S. Agency Securities, long-term Municipal Securities and
fixed rate real estate mortgages, which were offset by an increase in funding
costs. Largely time-other, tiered money markets and repurchase agreements had
the greatest impact on the increase in funding costs.
(THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY 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 September 30, 2000 and
September 30, 1999.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
September 30, 2000 September 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 $ 61,621 $ 2,686 5.81% $ 73,349 $ 3,341 6.07%
U.S. Agency obligations 15,665 751 6.39% 5,000 214 5.71%
States & political subdivisions 17,407 447 5.19% 23,640 595 5.08%
Federal Home Loan Bank stock 1,798 93 6.90% 1,798 87 6.45%
Other 20 1 5.00% 20 1 5.00%
Held-to-maturity:
U.S. Agency obligations 4,281 200 6.23% 5,252 217 5.51%
States & political subdivisions 11,996 492 8.29% - - -
Loans, net of unearned income:
Real estate mortgages 229,748 13,353 7.75% 219,261 12,873 7.83%
Commercial 19,293 1,347 9.31% 22,775 1,405 8.23%
Consumer and other 51,197 2,757 7.18% 40,879 2,120 6.92%
Federal funds sold 9,365 413 5.88% 5,990 220 4.90%
Interest on balances with banks 6,683 318 6.34% 3,958 148 4.99%
--------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 429,074 $ 22,858 7.10% 401,922 $ 21,221 7.04%
--------------------------------------------------------------------------------------------------------------
Cash and due from banks 11,657 11,355
Bank premises and equipment 12,089 12,552
Accrued interest receivable 3,577 3,062
Other assets 1,256 6,352
Less: Allowance for loan losses 3,007 2,919
--------------------------------------------------------------------------------------------------------------
Total Assets $ 454,646 $ 432,324
--------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 22,863 $ 187 1.09% $ 23,985 $ 191 1.06%
Savings 65,424 743 1.51% 71,073 801 1.50%
Money markets 81,384 2,038 3.34% 61,376 1,188 2.58%
Time - Over $100 38,033 1,724 6.04% 39,720 1,624 5.45%
Time - Other 115,875 4,587 5.28% 115,178 4,257 4.93%
Federal funds purchased 22 1 6.06% 85 3 4.71%
Repurchase agreements 16,485 578 4.67% 13,343 352 3.52%
Short-term borrowings 1,151 52 6.02% 471 18 5.10%
--------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 341,237 $ 9,910 3.87% 325,231 $ 8,434 3.46%
--------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 63,613 59,474
All other liabilities 1,847 1,550
Stockholders' equity 47,949 46,069
--------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 454,646 $ 432,324
--------------------------------------------------------------------------------------------------------------
Interest Spread 3.23% 3.58%
--------------------------------------------------------------------------------------------------------------
Net Interest Income $ 12,948 $ 12,787
--------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.02% 4.24%
Return on average assets 1.01% 1.08%
Return on average equity 9.53% 10.09%
Average equity to average assets 10.55% 10.66%
Dividend payout ratio 41.31% 38.89%
--------------------------------------------------------------------------------------------------------------
</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 three months ended September 30, 2000, the provision for loan losses was
$148, an increase from $14 for the three months ended September 30, 1999. The
increase was due to one specific credit and management believes asset quality
remains strong. In the first nine months of 2000, the provision for loan losses
was $220, an increase from $70 in the first nine months of 1999. Loans
charged-off totalled $118 and recoveries were $48. In the same period of 1999,
recoveries of $188 offset loans charged off of $164.
OTHER INCOME
The following table sets forth information by category of other income for the
Company for three months ended September 30, 2000 and September 30, 1999,
respectively:
September 30, September 30,
Three Months Ended: 2000 1999
----------------------------------------------------------------------------
Trust department income $ 353 $ 265
Service charges on deposit accounts 181 178
Merchant transaction income 1,869 1,736
Other fee income 322 212
Other operating income 20 6
Realized losses on securities, net (21) -
----------------------------------------------------------------------------
Total Other Income $ 2,724 $ 2,397
----------------------------------------------------------------------------
Other income increased $327 or 13.6% for the three month period ended September
30, 2000 to $2,724, from $2,397 for the three months ended September 30, 1999.
Largely this increase was due to improved growth in merchant transaction income
of $133 or 7.7% to $1,869 from $1,736, by expanding our customer base. Also,
other fee income increased $110 or 51.9%, of which $108 is attributable to our
brokerage division that commenced operations in April of 2000. Trust fee income
increased a net of $88 or 33.2%. Included in the three month period ended
September 30, 2000 was $107, which is attributable to a one-time change from a
quarterly charging of fees to a monthly charging of fees for many of our trust
customers.
The following table sets forth information by category of other income for the
Company for nine months ended September 30, 2000 and September 30, 1999,
respectively:
September 30, September 30,
Nine Months Ended: 2000 1999
----------------------------------------------------------------------------
Trust department income $ 965 $ 770
Service charges on deposit accounts 532 510
Merchant transaction income 4,301 4,014
Other fee income 702 554
Other operating income 66 70
Realized losses on securities, net (354) -
----------------------------------------------------------------------------
Total Other Income $ 6,212 $ 5,918
----------------------------------------------------------------------------
Other income increased $294 or 5.0% for the first nine months of 2000 to $6,212
from $5,918 for the same period of 1999. Contributing increases came from trust
fee income of $195 or 25.3%, of which $107 is attributable to a one-time change
from a quarterly charging of fees to a monthly charging of fees for many of our
trust customers. Also, merchant transaction income increased $287 or 7.1% to
$4,301 from $4,014, along with increases in other fee income of $148 of which
$114 is due to our brokerage division, which continues to exceed our
expectations. The loss on the sales of securities occurred mainly in the second
quarter of 2000, of which was a $333 loss on the sale of ten million dollars of
short-term municipal securities. The benefit of the sale and subsequent
re-investment into longer term, higher yielding municipal securities is
benefiting current and future periods.
<PAGE>
OTHER EXPENSES
The following table sets forth information by category of other expenses for the
Company for the three months ended September 30, 2000 and September 30, 1999,
respectively:
September 30, September 30,
Three Months Ended: 2000 1999
----------------------------------------------------------------------------
Salaries and employee benefits $ 1,983 $ 1,824
Expense of premises and fixed assets 675 607
Merchant transaction expenses 1,650 1,485
Other operating expenses 933 905
----------------------------------------------------------------------------
Total Other Expenses $ 5,241 $ 4,821
----------------------------------------------------------------------------
Other expenses increased $420 or 8.7% for the three month period ended September
30, 2000 to $5,241 from $4,821 for the three month period ended September 30,
1999. Salaries and employee benefit expenses increased $159 or 8.7% due to
additional staffing in our newly opened brokerage division and higher health
care costs. Also, merchant transaction expenses increased $165 or 11.1% 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 nine months ended September 30, 2000 and September 30, 1999,
respectively:
September 30, September 30,
Nine Months Ended: 2000 1999
----------------------------------------------------------------------------
Salaries and employee benefits $ 5,873 $ 5,596
Expense of premises and fixed assets 1,988 1,934
Merchant transaction expenses 3,831 3,459
Other operating expenses 2,932 2,855
----------------------------------------------------------------------------
Total Other Expenses $ 14,624 $ 13,844
----------------------------------------------------------------------------
Other expenses increased $780 or 5.6% for the nine months ended September 30,
2000 to $14,624 from $13,844 for the nine months ended September 30, 1999.
Salaries and benefits increased $277 or 4.9% to $5,873 for the nine months ended
September 30, 2000, from $5,596 over the first nine months of 1999 due to higher
health care coverage provided by the company its employees and further staff
additions for our brokerage division, which commenced operations in April of
2000. Merchant transaction expenses increased $372 or 10.8%, due to
authorization interchange expenses passed on by Mastercard and Visa
International.
LOAN PORTFOLIO
September 30, December 31,
As Of: 2000 1999
--------------------------------------------------------------------------------
Real estate - construction
and land development $ 6,736 $ 3,241
Real estate mortgages 228,572 216,574
Commercial 21,692 18,995
Credit card and related plans 2,104 2,203
Installment 30,211 28,693
Obligations of states & political subdivisions 17,874 11,821
--------------------------------------------------------------------------------
Loans, net of unearned income 307,189 281,527
Less: Allowance for loan losses 3,100 2,950
--------------------------------------------------------------------------------
Loans, net $ 304,089 $ 278,577
--------------------------------------------------------------------------------
<PAGE>
LOAN QUALITY
The lending activities of the Company are guided by the basic lending policy
established by the Board of Directors. Loans must meet criteria, which include
consideration of the character, capacity and capital of the borrower, collateral
provided for the loan, and prevailing economic conditions.
Regardless of credit standards, there is risk of loss inherent in every loan
portfolio. The allowance for loan losses is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of the loans. The
evaluations take into consideration such factors as change in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, industry experience, collateral value and current economic
conditions that may affect the borrower's ability to pay. Management believes
that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
The allowance for loan losses is increased by periodic charges against earnings
as a provision for loan losses, and decreased periodically by charge-offs of
loans (or parts of loans) management has determined to be uncollectible, net of
actual recoveries on loans previously charged-off.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and other real estate owned. The following
table sets forth information regarding non-performing assets as of the dates
indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
As Of: 2000 1999 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $ 1,696 $ 836 $ 884
Loans past due 90 days or more and accruing:
Guaranteed student loans 312 476 432
Credit card and home equity loans 27 - 4
-----------------------------------------------------------------------------------------------
Total non-performing loans 2,035 1,312 1,320
Other real estate owned 201 33 53
-----------------------------------------------------------------------------------------------
Total non-performing assets $ 2,236 $ 1,345 $ 1,373
-----------------------------------------------------------------------------------------------
</TABLE>
Loans are generally placed on a non-accrual status when principal or interest is
past due 90 days or when payment in full is not anticipated. When a loan is
placed on nonaccrual status, all 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 $1,696 and $884 at September 30, 2000 and September 30, 1999, respectively.
If interest on those loans had been accrued, such income would have been $145
and $123 for the nine months ended September 30, 2000 and September 30, 1999,
respectively. Interest income on those loans, which is recorded only when
received, amounted to $87 and $17 for September 30, 2000 and September 30, 1999,
respectively. There are no commitments to lend additional funds to individuals
whose loans are in non-accrual status. The increase was due to one specific
credit and management believes the overall credit quality remains strong.
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
September 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 September 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.
<PAGE>
LOAN LOSS EXPERIENCE
The following tables present the Company's loan loss experience during the
periods indicated:
September 30, September 30,
Nine 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 13
Credit card and related plans 20 50
Installment loans 13 19
--------------------------------------------------------------------------------
Total charge-offs 118 164
--------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 24 -
Commercial and all others - 168
Credit card and related plans 8 9
Installment loans 16 11
--------------------------------------------------------------------------------
Total recoveries 48 188
--------------------------------------------------------------------------------
Net charge-offs (recoveries) 70 (24
--------------------------------------------------------------------------------
Provision charged to operations 220 70
--------------------------------------------------------------------------------
Balance at End of Period $ 3,100 $ 2,924
--------------------------------------------------------------------------------
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.023% -0.008%
--------------------------------------------------------------------------------
The allowance for loan losses is allocated as follows:
<TABLE>
<CAPTION>
As Of: September 30, 2000 December 31, 1999 September 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 1,100 13% 950 10% 924 11%
Credit card and related plans 150 1% 150 1% 150 1%
Personal installment loans 350 9% 350 11% 350 10%
-----------------------------------------------------------------------------------------------------
Total $ 3,100 100% $ 2,950 100% $ 2,924 100%
-----------------------------------------------------------------------------------------------------
</TABLE>
* Percent of loans in each category to total loans
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.
<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 18.03% at September 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
None.
ITEM 5 -- OTHER INFORMATION
None.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27.0 Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed in the quarter ended September 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
By /s/ RICHARD E. GRIMM
------------------------------
Richard E. Grimm
Executive Vice-President
Dated: November 9, 2000
By /s/ PATRICK SCANLON
------------------------------
Patrick Scanlon
Controller
Dated: November 9, 2000
