Penseco Financial Services (PFNS) 8-K Results of Operations and Financial Condition

Exhibit 99.1

NEWS RELEASE

CONTACT:          Patrick Scanlon, Senior Vice President, Controller

Penseco Financial Services Corporation

(570) 346-7741

FOR RELEASE:     4:00 P.M. Eastern Time: April 28, 2010

Penseco Financial Services Corporation Reports Earnings as of March 31, 2010

SCRANTON, PA, April 28, 2010 -- Penseco Financial Services Corporation (OTC Bulletin Board: PFNS) (the “Company”), the Scranton, Pennsylvania based financial holding company of Penn Security Bank & Trust Company, reported an increase in net income of $2,540,000 for the three months ended March 31, 2010 to $2,981,000 or $.91 per share compared with $441,000 or $.21 per share from the year ago period. The increase in net income was primarily attributed to the Company’s acquisition of Old Forge Bank, which was completed on April 1, 2009 (the “Merger”).

Net income from core operations (“operating earnings”), which is a non-GAAP measure of net income, increased $1,520,000 for the three months ended March 31, 2010 to $2,981,000 compared to $1,461,000 for the same period of 2009. Operating earnings for the three months ended March 31, 2010 have been positively impacted by the Merger. A reconciliation of the non-GAAP financial measures of operating earnings, operating return on assets, operating return on equity and dividend payout ratio are described within the non-GAAP reconciliation schedule included within this press release.

Net Interest Income

Pre-provision net interest income increased $2,453,000 or 40.9% largely due to an increased loan portfolio of $155.4 million from Old Forge Bank. Net interest income, after provision for loan losses, increased $3,121,000 or 62.4% during the 2010 period, partly from a $668,000 reduction in the provision for loan losses, increased interest and fees on loans and reduced interest expense from lower borrowing costs.

Non-Interest Income

Total non-interest income increased $301,000 or 12.5% to $2,711,000 for the three months ended March 31, 2010, compared with $2,410,000 for the same period in 2009. Trust department income increased $70,000 or 22.6% due to increased business coupled with higher market values. Service charges on deposit accounts increased $193,000 or 56.9% primarily due to the increased number of accounts resulting from the Merger and increased service charge activity. Brokerage fee income decreased $47,000 or 40.2% mostly due to a lower volume of investor activity. Other fee income increased $63,000 or 22.0% mainly from increased debit card discounts related to the increased number of accounts resulting from the Merger. Bank-owned life insurance income increased $43,000 or 54.4% due to the Merger.

Non-Interest Expenses

Total non-interest expenses decreased $87,000 or 1.2% to $7,037,000 for the three months ended March 31, 2010 compared with $7,124,000 for the same period of 2009. Salaries and employee benefits expense increased $695,000 or 28.0% mainly due to increased salaries resulting from additional employees as a result of the Merger. Expense of premises and fixed assets increased $159,000 or 20.1% due to information technology system upgrades along with additional depreciation as a result of the Merger. Merchant transaction expenses decreased $46,000 or 5.4% due to lower processing costs. Merger related costs decreased $1,335,000 from the year ago period. FDIC insurance assessments increased $105,000 or 65.2% in 2010. Other operating expenses increased $335,000 or 22.3% partly from increased bank shares tax of $64,000, increased professional se rvices of $80,000, and amortization of core deposit intangible expense of $93,000 along with increased general operating expenses.

Asset Quality

The allowance for loan losses at March 31, 2010 was $6,500,000 or 1.07% of total loans compared to $6,050,000 or 1.41% of total loans at March 31, 2009. Management believes the allowance for loan losses is adequate. The reserve for credit losses, which includes the allowance for loan losses plus a credit discount for loans acquired in the Merger, equaled $11,983,000 or 1.96% of total loans at March 31, 2010.

                                                                                                                                             
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Non-accrual loans equaled $2,269,000 or 0.38% of loans at March 31, 2010 an increase of $1,387,000 from $882,000 or 0.21% of loans at March 31, 2009. If interest on those loans had been accrued, such income would have been $311,000 and $85,000 for the three months ended March 31, 2010 and March 31, 2009, respectively. There were no commitments to lend additional funds to individuals whose loans are in non-accrual status.

Net loan charge-offs amounted to $128,000 or 0.02% of average outstanding loans for the three months ended March 31, 2010 compared to $221,000 or 0.05% at March 31, 2009 and were primarily student loans of $116,000 in 2010 as compared to real estate loans of $162,000 in 2009.

During the second quarter of 2008, the Company was notified that The Education Resources Institute, Inc. (TERI), a guarantor of a portion of our student loan portfolio, had filed for reorganization under Chapter 11 of the Federal Bankruptcy Act. At March 31, 2010, the Company had $7.8 million of TERI loans out of a total student loan portfolio of $17.9 million. These loans are placed on non-accrual status when they become more than 90 days past due. At March 31, 2010 there was $137,000 of such loans placed on non-accrual status.

Income Tax Expense

Applicable income taxes increased $969,000 for the three months ended March 31, 2010 primarily due to higher earnings and the effect of $1,335,000 of costs associated with the Merger recorded in the first quarter of 2009.

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PENSECO FINANCIAL SERVICES CORPORATION

FINANCIAL HIGHLIGHTS

(unaudited)

(in thousands, except per share amounts)

	March 31,			March 31,			Inc / (Dec)			%
	2010			2009			$			Change
PERFORMANCE RATIOS
Return on Average Assets		1.35	%		0.28	%				382.14	%
Return on Average Equity		10.04	%		2.37	%				323.63	%
Net Interest Margin		4.19	%		3.99	%				5.01	%
Efficiency Ratio		63.04	%		84.73	%				-25.60	%
STOCKHOLDERS' VALUE
Net Income	$	2,981		$	441		$	2,540		575.96	%
Earnings per share		0.91			0.21			0.70		333.33	%
Dividends Per Share		0.42			0.42			-		0.00	%
Book Value Per Share		36.35			34.14			2.21		6.47	%
Tangible Book Value Per Share		27.74			34.12			(6.38	)	-18.70	%
Market Value Per Share		34.10			33.90			0.20		0.59	%
Market Value/Book Value		93.81	%		99.30	%				-5.53	%
Market Value/Tangible Book Value		122.93	%		99.36	%				23.72	%
Price Earnings Multiple		9.37	x		40.36	x				-76.78	%
Dividend Payout Ratio		46.15	%		200.00	%				-76.93	%
Dividend Yield		4.93	%		4.96	%				-0.60	%
SAFETY AND SOUNDNESS
Stockholders' Equity/Assets		13.49	%		11.31	%				19.27	%
Tangible Equity/Tangible Assets		10.63	%		11.31	%				-6.01	%
Total Capital/Risk Weighted Assets		17.16	%		19.09	%				-10.11	%
Tier 1 Capital/Risk Weighted Assets		16.01	%		17.84	%				-10.26	%
Tier 1 Capital/Average Assets		10.59	%		11.90	%				-11.01	%
Non-performing Assets/Total Assets		0.36	%		0.21	%				71.43	%
Non-performing loans to period end loans		0.38	%		0.21	%				80.95	%
Allowance for loan losses to period end loans		1.07	%		1.41	%				-24.11	%
Allowance for credit losses to total loans		1.96	%		1.41	%				39.01	%
BALANCE SHEET HIGHLIGHTS
Total Assets	$	882,828		$	648,293		$	234,535		36.18	%
Total Investments		198,088			168,852			29,236		17.31	%
Net Loans		598,315			423,236			175,079		41.37	%
Allowance for Loan Losses		6,500			6,050			450		7.44	%
Total Deposits		648,527			435,087			213,440		49.06	%
Stockholders' Equity		119,092			73,331			45,761		62.40	%

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PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except per share amounts)

	March 31,		March 31,
	2010		2009
ASSETS
Cash and due from banks	$	12,781	$	9,186
Interest bearing balances with banks		2,161		2,114
Federal funds sold		-		-
Cash and Cash Equivalents		14,942		11,300
Investment securities:
Available-for-sale, at fair value		154,902		108,272
Held-to-maturity (fair value of $45,289
and $63,170, respectively)		43,186		60,580
Total Investment Securities		198,088		168,852
Loans, net of unearned income		604,815		429,286
Less: Allowance for loan losses		6,500		6,050
Loans, Net		598,315		423,236
Bank premises and equipment		12,701		10,647
Other real estate owned		1,058		474
Accrued interest receivable		3,867		3,344
Goodwill		26,398		-
Cash surrender value of life insurance		14,514		7,762
Other assets		12,945		22,678
Total Assets	$	882,828	$	648,293
LIABILITIES
Deposits:
Non-interest bearing	$	109,524	$	72,621
Interest bearing		539,003		362,466
Total Deposits		648,527		435,087
Other borrowed funds:
Repurchase agreements		19,195		35,319
Short-term borrowings		25,988		28,468
Long-term borrowings		63,291		70,141
Accrued interest payable		1,300		1,042
Other liabilities		5,435		4,905
Total Liabilities		763,736		574,962
STOCKHOLDERS' EQUITY
Common stock; $ .01 par value, 15,000,000 shares authorized,
3,276,079 shares issued and outstanding at March 31, 2010 and
2,148,000 shares issued and outstanding at March 31, 2009		33		21
Surplus		48,865		10,819
Retained earnings		69,691		64,284
Accumulated other comprehensive income		503		(1,793	)
Total Stockholders' Equity		119,092		73,331
Total Liabilities and Stockholders' Equity	$	882,828	$	648,293

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PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended
	March 31,
	2010		2009
INTEREST INCOME
Interest and fees on loans	$	8,686	$	6,284
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations		719		878
States & political subdivisions		1,139		861
Other securities		11		14
Interest on Federal funds sold		-		-
Interest on balances with banks		2		3
Total Interest Income		10,557		8,040
INTEREST EXPENSE
Interest on time deposits of $100,000 or more		433		278
Interest on other deposits		974		943
Interest on other borrowed funds		699		821
Total Interest Expense		2,106		2,042
Net Interest Income		8,451		5,998
Provision for loan losses		328		996
Net Interest Income After Provision for Loan Losses		8,123		5,002
NON-INTEREST INCOME
Trust department income		380		310
Service charges on deposit accounts		532		339
Merchant transaction income		1,194		1,208
Brokerage fee income		70		117
Other fee income		350		287
Bank-owned life insurance income		122		79
Other operating income		61		70
Realized gains (losses) on securities, net		2		-
Total Non-Interest Income		2,711		2,410
NON-INTEREST EXPENSES
Salaries and employee benefits		3,173		2,478
Expense of premises and fixed assets		950		791
Merchant transaction expenses		811		857
Merger related costs		-		1,335
FDIC insurance assessments		266		161
Other operating expenses		1,837		1,502
Total Non-Interest Expenses		7,037		7,124
Income before income taxes		3,797		288
Applicable income taxes		816		(153	)
Net Income	$	2,981	$	441
Weighted average shares outstanding		3,276,079		2,148,000
Earnings per Common Share	$	0.91	$	0.21
Cash Dividends Declared Per Common Share	$	0.42	$	0.42

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PENSECO FINANCIAL SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(unaudited)

(in thousands, except per share amounts)

	Common Stock		Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders' Equity
Balance, December 31, 2008	$	21	$	10,819	$	64,745		$	(1,943	)	$	73,642
Comprehensive income:
Net income		-		-		441			-			441
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment		-		-		-			150			150
Other comprehensive income									150			150
Comprehensive income												591
Cash dividends declared ($0.42 per share)		-		-		(902	)		-			(902	)
Balance, March 31, 2009	$	21	$	10,819	$	64,284		$	(1,793	)	$	73,331
Balance, December 31, 2009	$	33	$	48,865	$	68,086		$	413		$	117,397
Comprehensive income:
Net income		-		-		2,981			-			2,981
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment		-		-		-			90			90
Other comprehensive income									90			90
Comprehensive income												3,071
Cash dividends declared ($0.42 per share)		-		-		(1,376	)		-			(1,376	)
Balance, March 31, 2010	$	33	$	48,865	$	69,691		$	503		$	119,092
(See accompanying Notes to Unaudited Consolidated Financial Statements)

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Penseco Financial Services Corporation, through its subsidiary Penn Security Bank & Trust Company, operates twelve offices in Lackawanna, Luzerne, Wayne and Monroe counties. The Company’s stock is traded on the OTC Bulletin Board Market, under the symbol, “PFNS”.

Safe Harbor Forward-Looking Statements

This press release, as well as other written communications made from time to time by the Company and its subsidiaries and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend" and "potential". For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

The Company cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. Such factors include, but are not limited to: prevailing economic and geopolitical conditions; changes in interest rates, loan demand, real estate values and competition; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; and other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services and other factors that may be described in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q as filed with the Securities and Exchange Commission. The forward-lo oking statements are made as of the date of this release, and, except as may be required by applicable law or regulation, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

Non-GAAP Financial Measures

Certain financial measures for 2009 contained in this Form 8-K exclude costs related to the Company’s acquisition of Old Forge Bank on April 1, 2009. Financial measures which exclude the above referenced items have not been determined in accordance with generally accepted accounting principles (“GAAP”) and are therefore non-GAAP financial measures. Management of the Company believes that investors’ understanding of the Company’s performance is enhanced by disclosing these non-GAAP financial measures as a reasonable basis for comparison of the Company’s ongoing results of operations. These non-GAAP measures should not be considered a substitute for GAAP-basis measures and results. Our non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Non-GAAP Reconciliation Schedule provides a reconciliation of these non-GAAP financial measures to the most closely analogous measure determined in accordance with GAAP.

Merger costs of $1,335,000 for the three months ended March 31, 2009, related to the acquisition of Old Forge Bank, consist primarily of investment banking costs, system conversion costs, valuation services, legal and accounting fees and severance payments.

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NON-GAAP RECONCILIATION SCHEDULE

PENSECO FINANCIAL SERVICES CORPORATION

(unaudited)

(in thousands)

The following tables present the reconciliation of non-GAAP financial measures to reported GAAP financial measures.

	Three Months Ended
	March 31,
	2010			2009			Change
Net interest income after provision for loan losses	$	8,123		$	5,002		$	3,121
Non-interest income		2,711			2,410			301
Non-interest expense		(7,037	)		(7,124	)		87
Income tax (provision) benefit		(816	)		153			(969	)
Net income		2,981			441			2,540
Adjustments
Non-interest expense
Merger related costs		-			(1,335	)		1,335
Total Adjustments pre-tax		-			(1,335	)		1,335
Income tax provision (benefit)1		-			315			(315	)
After tax adjustments to GAAP		-			(1,020	)		1,020
Adjusted net income	$	2,981		$	1,461		$	1,520
Return on Average Assets		1.35	%		0.93	%
Return on Average Equity		10.04	%		7.84	%
Dividend Payout Ratio		46.15	%		61.76	%

Return on average equity (ROE) and return on average assets (ROA) for the three months ended March 31, 2010 was 10.04% and 1.35%, respectively. ROE was 2.37% (7.84% excluding the Merger costs) and ROA was 0.28% (0.93% excluding the Merger costs) for the same period last year. The dividend payout ratio was 46.15% and was 200.00% (61.76% excluding the Merger costs) for the same period last year.

 

1 Income tax effect calculation is 34% except for the portion of the merger costs that are non-deductible.

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