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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 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:
March 31, 2000..................................................3
December 31, 1999...............................................3
Statements of Income:
Three Months Ended March 31, 2000...............................4
Three Months Ended March 31, 1999...............................4
Statements of Cash Flows:
Three Months Ended March 31, 2000...............................5
Three Months Ended March 31, 1999...............................5
Notes to Financial Statements......................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................10
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings...................................................15
Item 2. Changes in Securities...............................................15
Item 3. Defaults Upon Senior Securities.....................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures..................................................................16
<PAGE>
PART I. FINANCIAL INFORMATION, ITEM 1-- FINANCIAL STATEMENTS
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
March 31, December 31,
2000 1999
----------- -----------
ASSETS
Cash and due from banks $ 12,971 $ 10,275
Interest bearing balances with banks 18,117 3,961
Federal funds sold 12,175 10,875
----------- -----------
Cash and Cash Equivalents 43,263 25,111
Investment securities:
Available-for-sale, at fair value 90,851 96,029
Held-to-maturity (fair value of $10,648
and $10,178, respectively) 10,776 10,482
----------- -----------
Total Investment Securities 101,627 106,511
Loans, net of unearned income 288,959 281,527
Less: Allowance for loan losses 2,950 2,950
----------- -----------
Loans, Net 286,009 278,577
Bank premises and equipment 12,177 12,296
Other real estate owned 28 33
Accrued interest receivable 3,164 2,927
Other assets 3,381 3,159
----------- -----------
Total Assets $ 449,649 $ 428,614
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $ 62,489 $ 58,230
Interest bearing 322,886 309,102
----------- -----------
Total Deposits 385,375 367,332
Other borrowed funds:
Repurchase agreements 14,472 11,981
Short-term borrowings 705 887
Accrued interest payable 1,899 1,860
Other liabilities 942 811
----------- -----------
Total Liabilities 403,393 382,871
----------- -----------
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 36,593 35,996
Accumulated other comprehensive income (1,177) (1,093)
----------- -----------
Total Stockholders' Equity 46,256 45,743
----------- -----------
Total Liabilities and Stockholders' Equity $ 449,649 $ 428,614
=========== ===========
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 5,574 $ 5,478
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 1,003 1,319
States & political subdivisions 285 197
Other securities 31 30
Interest on Federal funds sold 132 78
Interest on balances with banks 136 25
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Total Interest Income 7,161 7,127
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INTEREST EXPENSE
Interest on time deposits of $100,000 or more 577 607
Interest on other deposits 2,262 2,185
Interest on other borrowed funds 164 109
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Total Interest Expense 3,003 2,901
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Net Interest Income 4,158 4,226
Provision for loan losses 40 56
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Net Interest Income After Provision for Loan Losses 4,118 4,170
-------------- --------------
OTHER INCOME
Trust department income 307 258
Service charges on deposit accounts 173 165
Merchant transaction income 1,626 1,484
Other fee income 175 160
Other operating income 27 47
Realized gains on securities, net - -
-------------- --------------
Total Other Income 2,308 2,114
-------------- --------------
OTHER EXPENSES
Salaries and employee benefits 1,940 1,921
Expense of premises and fixed assets 675 645
Merchant transaction expenses 1,440 1,258
Other operating expenses 991 983
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Total Other Expenses 5,046 4,807
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Income before income taxes 1,380 1,477
Applicable income taxes 311 401
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Net Income 1,069 1,076
Other comprehensive income, net of taxes:
Unrealized securities losses (84) (350)
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Comprehensive Income $ 985 $ 726
============== ==============
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.50 $ 0.50
Cash Dividends Declared Per Common Share $ 0.22 $ 0.21
</TABLE>
<PAGE>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 1,069 $ 1,076
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 288 297
Provision for loan losses 40 56
Deferred income tax provision (4) 78
Amortization of securities (net of accretion) 44 96
Net realized (gains) losses on securities - -
Loss (gain) on other real estate - -
(Increase) decrease in interest receivable (237) (497)
(Increase) decrease in other assets (178) (563)
Increase (decrease) in income taxes payable 23 321
Increase (decrease) increase in interest payable 39 (117)
Increase (decrease) in other liabilities 112 56
----------- -----------
Net cash provided by operating activities 1,196 803
----------- -----------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (9,984) (15,327)
Proceeds from maturities of investment securities available-for-sale 15,000 15,000
Purchase of investment securities to be held-to-maturity (469) -
Proceeds from repayments of investment securities to be held-to-maturity 165 572
Net loans (originated) repaid (7,499) (1,000)
Proceeds from other real estate 32 1
Investment in premises and equipment (169) (363)
----------- -----------
Net cash (used) provided by investment activities (2,924) (1,117)
----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 20,852 (757)
Net (payments) proceeds on time deposits (2,809) (1,693)
Increase (decrease) in federal funds purchased - -
Increase (decrease) in repurchase agreements 2,491 (839)
Net (decrease) increase in short-term borrowings (182) 351
Cash dividends paid (472) (451)
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Net cash provided (used) by financing activities 19,880 (3,389)
----------- -----------
Net increase (decrease) in cash and cash equivalents 18,152 (3,703)
Cash and cash equivalents at January 1 25,111 18,726
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Cash and cash equivalents at March 31 $ 43,263 $ 15,023
=========== ===========
The Company paid interest and income taxes of $2,964 and $176 and $3,018 and
$78, for the three month periods ended March 31, 2000 and 1999, respectively.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 2000
(UNAUDITED)
These Notes to 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 three month period ended
March 31, 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 March 31, 2000 and March 31, 1999, in respect to the Company's capital
requirements and liquidity, (2) Part II, Item 6, Reports on Form 8-K and (3) the
Company's Annual Report - Form 10-K for the year ended December 31, 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.
The Company has no derivative financial instruments required to be disclosed
under SFAS No. 119.
<PAGE>
The amortized cost and fair value of investment securities at March 31, 2000 and
December 31, 1999 are as follows:
AVAILABLE-FOR-SALE
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2000 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 62,194 $ 12 $ 848 $ 61,358
U.S. Agency securities 5,000 - 222 4,778
States & political subdivisions 23,623 - 726 22,897
- --------------------------------------------------------------------------------
Total Debt Securities 90,817 12 1,796 89,033
Equity securities 1,818 - - 1,818
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 92,635 $ 12 $ 1,796 $ 90,851
- --------------------------------------------------------------------------------
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
March 31, 2000 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Agency Obligations:
Mortgage-backed securities $ 4,668 $ - $ 122 $ 4,546
States & political subdivisions 6,108 34 40 6,102
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 10,776 $ 34 $ 162 $ 10,648
- --------------------------------------------------------------------------------
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 March 31, 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>
March 31, 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 $ 4,001 $ 3,998 $ - $ -
States & political subdivisions 1,100 1,095 - -
After one year through five years:
U.S. Treasury securities 58,193 57,360 - -
U.S. Agency securities 5,000 4,778 - -
States & political subdivisions 20,984 20,360 - -
After five years through ten years:
States & political subdivisions 747 702 - -
After ten years:
States & political subdivisions 792 740 6,108 6,102
- ---------------------------------------------------------------------------------------------
Subtotal 90,817 89,033 6,108 6,102
Mortgage-backed securities - - 4,668 4,546
- ---------------------------------------------------------------------------------------------
Total Debt Securities $ 90,817 $ 89,033 $ 10,776 $ 10,648
- ---------------------------------------------------------------------------------------------
</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 March 31, 2000, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
As of March 31, 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 March 31, 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
<PAGE>
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 March 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(TO RISK WEIGHTED ASSETS) $ 50,383 18.55% > $ 21,733 > 8.0% > $ 27,166 > 10.0%
- - - -
Tier 1 Capital
(TO RISK WEIGHTED ASSETS) $ 47,433 17.46% > $ 10,866 > 4.0% > $ 16,299 > 6.0%
- - - -
Tier 1 Capital
(TO AVERAGE ASSETS) $ 47,433 10.89% > $ * > * > $ 21,773 > 5.0%
- - - -
*3.0% ($13,064), 4.0% ($17,418) or 5.0% ($21,773) depending on the bank's CAMELS
Rating and other regulatory risk factors.
</TABLE>
<TABLE>
<CAPTION>
ACTUAL REGULATORY REQUIREMENTS
- ----------------------------------------------- --------------------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
----------------- ------------------
As of December 31, 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%
- - - -
*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 March 31, 2000 and March 31, 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 $1,069 for three
months ending March 31, 2000, a decrease of $7 from the $1,076 reported for the
first quarter of 1999. The decrease in earnings is attributed to lower interest
margins as well as increases in operating expenses.
As the second quarter begins, the Company is experiencing strong loan demand
which will increase margins. Also, deposits are increasing which will fund loan
demand and bode well for the remainder of this year. The Bank sold 10 million
dollars of municipal securities in the second quarter, which had maturities less
than two years, to reinvest into longer term municipal securities with higher
rates, increasing yields and expanding margins.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between income on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and
investments while deposits and short-term borrowings, in the form of securities
sold under agreements to repurchase, represent interest-bearing liabilities.
Variations in the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, are determinants of changes in net
interest income.
Net interest income after provision for loan losses decreased $52 or 1.2%, from
$4,170 for the first quarter of 1999 to $4,118 in 2000, the net result of a
lower net interest margin, largely due to the competition vying for deposits,
thus increasing the costs of funds.
The net interest margin represents the Company's net yield on its earning assets
and is calculated as net interest income divided by average earning assets. In
the first three months of 2000, the net interest margin was 4.05%, falling 8
basis points from 4.13% in the same period of 1999, the result of increased
funding costs. Consumers are taking advantage of increased rates on deposit
products, as financial intermediaries compete for funds.
Total average earning assets increased while total average interest bearing
funds decreased in the first quarter of 2000 as compared to 1999. Average
earning assets increased $1.7 million, from $409.1 million in 1999 to $410.8
million in 2000 and average interest bearing funds decreased $5.4 million, or
1.6%, from $331.4 million to $326.0 million for the same periods. As a
percentage of average assets, earning assets increased from 93.8% in the first
quarter of 1999 to 94.3% in 2000. Average interest bearing funding sources
decreased from 76.0% of total funding sources in the first quarter of 1999 to
74.9% in the same period in 2000, resulting in a slightly higher cost of funds.
Changes in the mix of both earning assets and funding sources also impacted net
interest income in the first quarter of both 2000 and 1999; however, the changes
in the mix of earning assets were more significant than the change in the
composition of funding sources. Average loans as a percentage of average earning
assets increased slightly from 69.2% in 1999 to 70.2% in 2000; average
investments fell from 28.7% to 25.2%. Short-term investments, federal funds sold
and interest bearing balances with banks, increased from 2.1% of earning assets
to 4.6%. Time deposits decreased $9.2 million from 50.2% in 1999 to 48.2% in
2000, which helped slow the increase in funding costs.
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 equivalent yield increased 7 basis points from 5.04% in the first
quarter of 1999 to 5.11% for 2000. Also, average loan yields increased 12 basis
points, from 7.74% in the first three months of 1999 to 7.86% in 2000. The
average certificate of deposit cost of funds increased from 5.01% in 1999 to
5.19% in 2000, along with money market accounts increasing 50 basis points from
2.58% in 1999 to 3.08% in 2000. This is the primary cause of the increase in the
total cost of funds from 3.50% in 1999 to 3.68% in 2000.
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY / INTEREST RATES
AND INTEREST DIFFERENTIAL
The table below presents average balances, interest income on a fully taxable
equivalent basis and interest expense, as well as average rates earned and paid
on the Company's major asset and liability items for March 31, 2000 and March
31, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
March 31, 2000 March 31, 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 $ 62,098 $ 861 5.55% $ 80,957 $ 1,170 5.78%
U.S. Agency obligations 5,000 71 5.68% 5,000 70 5.60%
States & political subdivisions 23,519 197 5.08% 23,667 197 5.04%
Federal Home Loan Bank stock 1,798 30 6.67% 1,790 29 6.48%
Other 20 1 5.00% 20 1 5.00%
Held-to-maturity:
U.S. Agency obligations 4,765 71 5.96% 6,107 79 5.17%
States & political subdivisions 6,108 88 5.76% - - -
Loans, net of unearned income:
Real estate mortgages 219,274 4,292 7.83% 224,056 4,283 7.65%
Commercial 19,164 416 8.68% 18,734 384 8.20%
Consumer and other 50,051 866 6.92% 40,270 811 8.06%
Federal funds sold 9,279 132 5.69% 6,617 78 4.71%
Interest on balances with banks 9,709 136 5.60% 1,857 25 5.37%
- --------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 410,785 $ 7,161 6.97% 409,075 $ 7,127 6.97%
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 11,617 10,614
Bank premises and equipment 12,296 12,748
Accrued interest receivable 2,998 3,426
Other assets 713 3,193
Less: Allowance for loan losses 2,949 2,831
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 435,460 $ 436,225
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 23,381 $ 64 1.09% $ 23,703 $ 64 1.08%
Savings 67,463 250 1.48% 71,819 267 1.49%
Money markets 63,746 491 3.08% 58,403 377 2.58%
Time - Over $100 42,877 577 5.38% 46,824 607 5.19%
Time - Other 114,074 1,458 5.11% 119,414 1,477 4.95%
Federal funds purchased 4 - - 17 - -
Repurchase agreements 13,862 156 4.50% 10,871 104 3.83%
Short-term borrowings 555 7 5.04% 353 5 5.67%
- --------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 325,962 $ 3,003 3.68% 331,404 $ 2,901 3.50%
- --------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 61,509 56,655
All other liabilities 1,510 2,322
Stockholders' equity 46,479 45,844
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 435,460 $ 436,225
- --------------------------------------------------------------------------------------------------------------------------
Interest Spread 3.29% 3.47%
- --------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 4,158 $ 4,226
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.05% 4.13%
Return on average assets 0.98% 0.99%
Return on average equity 9.20% 9.39%
Average equity to average assets 10.67% 10.51%
Dividend payout ratio 44.00% 42.00%
- --------------------------------------------------------------------------------------------------------------------------
</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 three months of 2000, the provision for loan losses was $40, a
decrease from $56 in the first three months of 1999. Loans charged-off totaled
$54 and recoveries were $14 for the three months ended March 31, 2000. In the
same period of 1999, recoveries of $36 offset loans charged off of $125.
OTHER INCOME
The following table sets forth information by category of other income for the
Company for three months ended March 31, 2000 and March 31, 1999, respectively:
March 31, March 31,
Three Months Ended: 2000 1999
- ----------------------------------------------------------------------------
Trust department income $ 307 $ 258
Service charges on deposit accounts 173 165
Merchant transaction income 1,626 1,484
Other fee income 175 160
Other operating income 27 47
Realized gains on securities, net - -
- ----------------------------------------------------------------------------
Total Other Income $ 2,308 $ 2,114
- ----------------------------------------------------------------------------
Trust department income increased $49 or 19.0% from the first quarter of 1999.
Merchant transaction income increased $142 or 9.6% from the first quarter of
1999. Most of the increase in merchant transaction income is the result of
attracting new business along with transaction volume growth.
OTHER EXPENSES
The following table sets forth information by category of other expenses for the
Company for the three months ended March 31, 2000 and March 31, 1999,
respectively:
March 31, March 31,
Three Months Ended: 2000 1999
- ----------------------------------------------------------------------------
Salaries and employee benefits $ 1,940 $ 1,921
Expense of premises and fixed assets 675 645
Merchant transaction expenses 1,440 1,258
Other operating expenses 991 983
- ----------------------------------------------------------------------------
Total Other Expenses $ 5,046 $ 4,807
- ----------------------------------------------------------------------------
Other expenses increased $239 or 5.0% to $5,046, in the first three months of
2000 as compared to $4,807 in the same period of 1999. Salaries and benefits
increased over the first quarter of 1999, due to higher health care coverage
provided by the Company to its employees. Merchant transaction expenses
increased primarily due to Mastercard and Visa authorization expenses which
increased $182 or 14.5%.
<PAGE>
LOAN PORTFOLIO
DETAILS REGARDING THE COMPANY'S LOAN PORTFOLIO
March 31, December 31,
As Of: 2000 1999
- -------------------------------------------------------------------------------
Real estate - construction
and land development $ 3,176 $ 3,241
Real estate mortgages 217,644 216,574
Commercial 18,634 18,995
Credit card and related plans 2,027 2,203
Installment 29,428 28,693
Obligations of states & political subdivisions 18,050 11,821
- -------------------------------------------------------------------------------
Loans, net of unearned income 288,959 281,527
Less: Allowance for loan losses 2,950 2,950
- -------------------------------------------------------------------------------
Loans, net $ 286,009 $ 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:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
As Of: 2000 1999 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $ 2,146 $ 836 $ 709
Loans past due 90 days or more and accruing:
Guaranteed student loans 392 476 251
Credit card and home equity loans 25 - 26
- -------------------------------------------------------------------------------------------
Total non-performing loans 2,563 1,312 986
Other real estate owned 28 33 168
- -------------------------------------------------------------------------------------------
Total non-performing assets $ 2,591 $ 1,345 $ 1,154
- -------------------------------------------------------------------------------------------
</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.
<PAGE>
Loans on which the accrual of interest has been discontinued or reduced amounted
to $2,146 and $709 at March 31, 2000 and March 31, 1999, respectively. The
increase is attributed to one loan, which became non-performing late in the
first quarter. A full recovery is expected to be realized in the second quarter.
If interest on those loans had been accrued, such income would have been $194
and $103 for the three months ended March 31, 2000 and March 31, 1999,
respectively. Interest income on those loans, which is recorded only when
received, amounted to $2 and $2 for March 31, 2000 and March 31, 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
March 31, 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 March 31, 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:
March 31, March 31,
Three Months Ended: 2000 1999
- --------------------------------------------------------------------------------
Balance at beginning of year $ 2,950 $ 2,830
Charge-offs:
Real estate mortgages - 82
Commercial and all others 51 7
Credit card and related plans 2 29
Installment loans 1 7
- --------------------------------------------------------------------------------
Total charge-offs 54 125
- --------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 7 -
Commercial and all others - 75
Credit card and related plans 6 8
Installment loans 1 6
- --------------------------------------------------------------------------------
Total recoveries 14 89
- --------------------------------------------------------------------------------
Net charge-offs (recoveries) 40 36
- --------------------------------------------------------------------------------
Provision charged to operations 40 56
- --------------------------------------------------------------------------------
Balance at End of Period $ 2,950 $ 2,850
- --------------------------------------------------------------------------------
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.014% 0.010%
- --------------------------------------------------------------------------------
The allowance for loan losses is allocated as follows:
<TABLE>
<CAPTION>
As Of: March 31, 2000 December 31, 1999 March 31, 1999
- ---------------------------------------------------------------------------------------------
Amount % * Amount % * Amount % *
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages $ 1,500 76% $ 1,500 78% $ 1,500 78%
Commercial and all others 950 13% 950 10% 850 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% $ 2,850 100%
- ---------------------------------------------------------------------------------------------
</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 18.55% at March 31, 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 March 31, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENSECO FINANCIAL SERVICES
By /s/ RICHARD E. GRIMM
------------------------------
Richard E. Grimm
Executive Vice-President
Dated: May 11, 2000
By /s/ PATRICK SCANLON
------------------------------
Patrick Scanlon
Controller
Dated: May 11, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001054508
<NAME> PENSECO FINANCIAL SERVICES CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 12,971
<INT-BEARING-DEPOSITS> 18,117
<FED-FUNDS-SOLD> 12,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 90,851
<INVESTMENTS-CARRYING> 10,776
<INVESTMENTS-MARKET> 10,648
<LOANS> 288,959
<ALLOWANCE> 2,950
<TOTAL-ASSETS> 449,649
<DEPOSITS> 385,375
<SHORT-TERM> 15,177
<LIABILITIES-OTHER> 2,841
<LONG-TERM> 0
0
0
<COMMON> 21
<OTHER-SE> 46,235
<TOTAL-LIABILITIES-AND-EQUITY> 449,649
<INTEREST-LOAN> 5,574
<INTEREST-INVEST> 1,319
<INTEREST-OTHER> 268
<INTEREST-TOTAL> 7,161
<INTEREST-DEPOSIT> 2,839
<INTEREST-EXPENSE> 3,003
<INTEREST-INCOME-NET> 4,158
<LOAN-LOSSES> 40
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,046
<INCOME-PRETAX> 1,380
<INCOME-PRE-EXTRAORDINARY> 1,380
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,069
<EPS-BASIC> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 6.97
<LOANS-NON> 2,146
<LOANS-PAST> 417
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,950
<CHARGE-OFFS> 54
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 2,950
<ALLOWANCE-DOMESTIC> 2,950
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
