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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 30, 2008
PENSECO FINANCIAL SERVICES CORPORATION REPORTS 1ST QUARTER 2008 EARNINGS
SCRANTON, PA, April 30, 2008 Penseco Financial Services Corporation (OTC
Bulletin Board: PFNS), the Scranton, Pennsylvania based financial holding
company of Penn Security Bank & Trust Company reported an increase in net income
of $1,287,000 or 77.1% for the three months ended March 31, 2008 to $2,957,000
or $1.38 per share compared with $1,670,000 or $.78 per share from the year ago
period. Largely, the increase in net income was attributed to a one time after
tax gain of $1,129,000 ($.53 per share) related to VISA Inc.'s Initial Public
Offering, which consisted of a gain from the mandatory partial share redemption
by VISA and also the reversal of a litigation liability accrual that had been
recorded by the Company in the fourth quarter of 2007. Excluding this gain, net
income increased $158,000 or 9.5% from the first quarter of 2007 (1). Net
interest income increased $332,000 or 6.3% to $5,577,000 for the three months
ended March 31, 2008 compared to $5,245,000 for the same quarter of 2007. The
increase resulted from higher interest on loans due to net loan growth of $30.5
million since March 31, 2007, including $4.1 million from December 31, 2007.
Interest on investments declined due to maturing investments being redeployed to
fund future loan demand and total interest expense declined mainly from lower
deposit costs. Net interest income after provision for loan losses increased
$193,000 or 3.7% as the provision for loan losses increased $139,000 from the
year ago period. While the Company's asset quality improved, management felt it
prudent to increase the allowance for loan losses due to the decline of general
market economic conditions.
NON-INTEREST INCOME
Other income increased $1,522,000 to $3,618,000 for the three months ended March
31, 2008, compared with $2,096,000 for the similar period of 2007. Merchant
transaction income increased $137,000 or 13.1% due to higher transaction volume
and new business. Service charges on deposit accounts increased $12,000 or 4.8%,
while other fee income increased $198,000 from prior year levels. This increase
was partly due to increases in brokerage income of $160,000 and ATM transaction
income of $23,000. The Company realized a gain of $1,213,000 related to VISA
Inc.'s Initial Public Offering, which consisted of a mandatory partial share
redemption.
NON-INTEREST EXPENSES
Total other expense decreased $174,000 or 3.3% to $5,058,000 for the first
quarter ended March 31, 2008 compared with $5,232,000 for the same period of
2007. Salaries and employee benefits expense increased $40,000 or 1.7%. Expense
of premises and equipment increased $143,000 or 22.9% due to computer system
upgrades and increased occupancy expense. Merchant transaction expense increased
by $78,000 or 9.5% due to higher transaction volume. Other operating expenses
decreased $435,000 or 30.9% due to the reversal of the $497,000 VISA litigation
accrual recorded by the Company in the fourth quarter of 2007.
(1) See page 6 for a reconciliation of GAAP net income to net income excluding
the gain related to the VISA, Inc. initial public offering during the three
months ended March 31, 2008.
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ASSET QUALITY
The allowance for loan losses at March 31, 2008 was $4,925,000 or 1.20% of total
loans compared to $4,200,000 or 1.12% of total loans at March 31, 2007.
Management continues to believe the loan loss reserve is adequate.
Loans on which the accrual of interest has been discontinued amounted to
$301,000 at March 31, 2008 and $3,011,000 at March 31, 2007. This decrease was
due to two borrowing relationships being resolved in the first quarter of 2008.
If interest on those loans had been accrued, such additional income would have
been $33,000 and $202,000 for the three months ended March 31, 2008 and March
31, 2007, respectively. Interest income on those loans, which is recorded only
when received, amounted to $14,000 and $73,000 for March 31, 2008 and March 31,
2007, respectively. There are no commitments to lend additional funds to
borrowers whose loans are on non-accrual status.
Net loan charge-offs amounted to $10,000 or .002% of average outstanding loans
at March 31, 2008 compared to $96,000 or .026% at March 31, 2007.
As of March 31, 2008 there are no significant loans as to which management has
serious doubt about their collectibility. Subsequent to the closing of the first
quarter, on April 7, 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 Bankruptcy Act. Currently,
the Company holds $8,600,000 of TERI loans out of a total student loan portfolio
of $21,400,000. The Company does not anticipate that TERI's bankruptcy filing
will significantly impact the Company's financial statements. These loans will
now be placed on non-accrual status if they become more than 90 days past due.
Currently, there are $58,000 of such loans. At March 31, 2008 and December 31,
2007, the Company did not have any loans specifically classified as impaired.
The Company does not engage in any sub-prime or ALT-A credit lending. Therefore,
the Company is not subject to any credit risks associated with such loans.
INCOME TAX EXPENSE
Applicable income taxes increased $602,000 primarily due to the gain on VISA
stock and overall higher income.
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31, March 31,
----------------------- Increase %
(in thousands, except per 2008 2007 $ Change
share amounts)
- -------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on Average Assets 2.00% 1.16% 72.41%
Return on Average Equity 16.77% 9.94% 68.71%
STOCKHOLDERS' VALUE
Net Income $ 2,957 $ 1,670 $ 1,287 77.07%
Earnings per share 1.38 0.78 0.60 76.92%
Dividends Per Share 0.41 0.37 0.04 10.81%
Book Value Per Share 33.61 31.41 2.20 7.00%
Market Value Per Share 38.00 39.10 (1.10) -2.81%
Market Value/Book Value Ratio 113.06% 124.48% -9.17%
Price Earnings Multiple 6.88x 12.53x -45.09%
Dividend Payout Ratio 29.71% 49.44% -39.91%
Dividend Yield 4.32% 3.79% 13.98%
SAFETY AND SOUNDNESS
Stockholders' Equity/Assets Ratio 11.68% 11.58% 0.86%
Total Capital/Risk Weighted Assets 20.11% 19.36% 3.87%
Tier 1 Capital/Risk Weighted Assets 18.86% 18.23% 3.46%
Tier 1 Capital/Average Assets 12.28% 11.85% 3.63%
Allowance for Loan Loss as a
Percent of Loans 1.20% 1.12% 7.14%
Non-accrual Loans/Total Loans 0.07% 0.80% -91.25%
BALANCE SHEET HIGHLIGHTS
Total Assets $ 618,089 582,722 35,367 6.01%
Total Investments 163,511 159,933 3,578 2.24%
Net Loans 404,050 370,272 33,778 9.12%
Allowance for Loan Losses 4,925 4,200 725 17.26%
Total Deposits 421,314 424,588 (3,274) -0.77%
Stockholders' Equity 72,197 67,468 4,729 7.01%
</Table>
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, March 31,
2008 2007
------------ ------------
ASSETS
Cash and due from banks $ 21,095 $ 11,866
Interest bearing balances with banks 6,345 8,797
Federal funds sold - 8,050
------------ ------------
Cash and Cash Equivalents 27,440 28,713
Investment securities:
Available-for-sale, at fair value 96,888 87,168
Held-to-maturity (fair value of
$68,662 and $73,592, respectively) 66,623 72,765
------------ ------------
Total Investment Securities 163,511 159,933
Loans, net of unearned income 408,975 374,472
Less: Allowance for loan losses 4,925 4,200
------------ ------------
Loans, Net 404,050 370,272
Bank premises and equipment 9,200 9,835
Other real estate owned - 73
Accrued interest receivable 3,335 3,314
Cash surrender value of life insurance 7,446 7,132
Other assets 3,107 3,450
------------ ------------
Total Assets $618,089 $582,722
============ ============
LIABILITIES
Deposits:
Non-interest bearing $ 78,668 $ 72,870
Interest bearing 342,646 351,718
------------ ------------
Total Deposits 421,314 424,588
Other borrowed funds:
Repurchase agreements 40,520 21,423
Short-term borrowings 203 482
Long-term borrowings 79,310 63,414
Accrued interest payable 1,550 1,656
Other liabilities 2,995 3,691
------------ ------------
Total Liabilities 545,892 515,254
------------ ------------
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 61,773 57,268
Accumulated other comprehensive income (416) (640)
------------ ------------
Total Stockholders' Equity 72,197 67,468
------------ ------------
Total Liabilities and Stockholders' $ 618,089 $ 582,722
============ ============
</Table>
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-----------------------
2008 2007
INTEREST INCOME
Interest and fees on loans $ 6,661 $ 6,293
Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 905 1,011
States & political subdivisions 836 721
Other securities 74 141
Interest on Federal funds sold - 85
Interest on balances with banks 11 91
--------- ---------
Total Interest Income 8,487 8,342
--------- ---------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 451 509
Interest on other deposits 1,533 1,812
Interest on other borrowed funds 926 776
--------- ---------
Total Interest Expense 2,910 3,097
--------- ---------
Net Interest Income 5,577 5,245
Provision for loan losses 235 96
--------- ---------
Net Interest Income After Provision
for Loan Losses 5,342 5,149
--------- ---------
OTHER INCOME
Trust department income 365 372
Service charges on deposit accounts 263 251
Merchant transaction income 1,184 1,047
Other fee income 479 281
Bank-owned life insurance income 78 78
Other operating income 36 16
VISA mandatory share redemption 1,213 -
Realized (losses) gains on securities, net - 51
--------- ---------
Total Other Income
3,618 2,096
--------- ---------
OTHER EXPENSES
Salaries and employee benefits 2,415 2,375
Expense of premises and equipment, net 768 625
Merchant transaction expenses 902 824
Other operating expenses 973 1,408
--------- ---------
Total Other Expenses 5,058 5,232
--------- ---------
Income before income taxes 3,902 2,013
Applicable income taxes 945 343
--------- ---------
Net Income $ 2,957 $ 1,670
========= =========
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 1.38 $ 0.78
Cash Dividends Declared Per Common Share 0.41 0.37
</Table>
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Penseco Financial Services Corporation, through its subsidiary Penn Security
Bank & Trust Company, operates nine offices in Lackawanna, Wayne and Monroe
counties. The Company's stock is traded on the OTC Bulletin Board Market, under
the symbol, "PFNS".
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-looking 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: (VISA TRANSACTION)
Certain financial measures contained in the Form 10-Q exclude the decrease of
the liability accrual related to VISA's covered litigation provision as well as
the gain from the mandatory redemption of a portion of the Company's class B
shares in VISA. Financial measures which exclude the above-referenced items have
not been determined in accordance with generally accepted accounting principles
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 attached Non-GAAP Reconciliation Schedule provides a
reconciliation of these non-GAAP financial measures to the most closely
analogous measure determined in accordance with GAAP.
In March 2008, VISA Inc. (VISA) completed its initial public offering. Penn
Security Bank & Trust Company and certain other VISA member banks are
shareholders in VISA. Following the initial public offering, the Company
received $1.2 million in proceeds from the offering, as a mandatory partial
redemption of 28,351 shares, reducing the Company's holding from 73,333 to
44,982 shares of Class B common stock. Using proceeds from this offering, VISA
established a $3.0 billion escrow account to cover the resolution of pending
litigation and related claims. The partial redemption proceeds are reflected in
other non-interest income in the first quarter of 2008.
The remaining unredeemed shares of VISA Class B common stock are restricted and
may not be transferred until the later of (1) three years from the date of the
initial public offering or (2) the period of time necessary to resolve the
covered litigation. A conversion ratio of 0.71429 was established for the
conversion rate of Class B shares into Class A shares. If the funds in the
escrow account are insufficient to settle all the covered litigation, VISA may
sell additional Class A shares, use the proceeds to settle litigation, and
further reduce the conversion ratio. If funds remain in the escrow account after
all litigation, is settled the Class B conversion ratio will be increased to
reflect that surplus. As of March 31, 2008, the value of the Class A shares was
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$62.36 per share. The value of unredeemed Class A equivalent shares owned by the
Company was $2.0 million as of March 31, 2008, and has not yet been reflected in
the accompanying financial statements.
In connection with VISA's establishment of the litigation escrow account, the
Company reversed a $497,000 reserve in the first quarter of 2008, reflected as
a reduction of other non-interest expense. This reserve was created in the
fourth quarter of 2007, pending completion of the VISA Inc. initial public
offering as a charge to other non-interest expense.
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.
<Table>
<Caption>
Three Months Ended
March 31,
2008 2007 Change
------------ ------------ ------------
Net interest income after provision $ 5,342 $ 5,149 $ 193
for loan losses
Non-interest income 3,618 2,096 1,522
Non-interest expense (5,058) (5,232) 174
Income tax provision (945) (343) (602)
------------ ------------ ------------
Net income 2,957 1,670 1,287
ADJUSTMENTS
- -----------
Non-interest income
Gain on mandatory redemption of VISA, Inc.
class B common stock (1,213) - (1,213)
Non-interest expense
Covered litigation provision (497) - (497)
------------ ------------ ------------
Total Adjustments pre-tax (1,710) - (1,710)
Income tax provision 581 - 581
------------ ------------ ------------
After tax adjustments to GAAP (1,129) - (1,129)
------------ ------------ ------------
Adjusted net income $ 1,828 $ 1,670 $ 158
============ ============ ============
Return on Average Assets 1.24% 1.16%
Return on Average Equity 10.37% 9.94%
</Table>
Return on average equity (ROE) and return on average assets (ROA) for the
quarter ended March 31, 2008 was 16.77% (10.37% excluding the VISA gain) and
2.00% (1.24% excluding the VISA gain), respectively. ROE was 9.94% and ROA was
1.16% for the same period last year.