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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: August 5, 2008
PENSECO FINANCIAL SERVICES CORPORATION REPORTS 2ND QUARTER 2008 EARNINGS
SCRANTON, PA, August 5, 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 $228,000 or 13.4% for the three months ended June 30, 2008 to
$1,928,000 or $.89 per share compared with $1,700,000 or $.79 per share from the
year ago period. Largely, the increase in net income was attributed to increased
net interest income of $325,000 or 6.1% and higher non interest income. Interest
on investments increased mainly due to purchases of securities of states &
political subdivisions and U.S. Agencies while total interest expense declined
mainly from lower deposit costs. The provision for loan losses increased $92,000
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 general
decline in market and economic conditions.
For the six months ended June 30, 2008, net income increased $1,515,000 or 45%,
to $4,885,000 or $2.27 per share compared with the year ago period of $3,370,000
or $1.57 per share. Largely, the increase in net income was attributed to one
time after tax income 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 the reversal of a litigation liability accrual that
had been recorded by the Company in the fourth quarter of 2007. Excluding the
impact of the VISA transaction, net income increased $386,000 or 11.5% from the
first six months of 2007(1). Net interest income increased $657,000 or 6.2% to
$11,244,000 for the six months ended June 30, 2008 compared to $10,587,000 for
the same quarter of 2007. The increase resulted from higher interest income on
loans of $245,000 or 1.9% due to net loan growth of $35.7 million since June 30,
2007, including $17.2 million from December 31, 2007. Interest on investments
declined due to maturing investments being redeployed to fund loan demand and
total interest expense declined mainly from lower deposit costs. Net interest
income after provision for loan losses increased $426,000 or 4.1% as the
provision for loan losses increased $231,000 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 general decline in market and economic
conditions.
NON-INTEREST INCOME
Other non-interest income increased $384,000 or 19.4% to $2,364,000 for the
three months ended June 30, 2008, compared with $1,980,000 for the same period
of 2007. Merchant transaction income increased $62,000 or 7.1% due to higher
transaction volume and new business. Service charges on deposit accounts
increased $136,000 or 52.3% primarily due to increased service charge fees.
Other fee income increased $116,000 or 31.1% from prior year levels mostly due
to increases in brokerage income of $119,000.
Other non-interest income increased $1,906,000 or 46.8% to $5,982,000 during the
first half of 2008 from $4,076,000 for the same period of 2007. Service charges
on deposit accounts increased $148,000 or 29.0%. Merchant transaction income
increased $199,000 or 10.4%, mainly due to higher transaction volume and new
business. Other fee income increased $314,000 or 48.0% mainly from increased
brokerage fee income of $280,000 compared to last year. Other operating income
increased $72,000 or 156.5% due to a gain in other real estate owned of $43,000,
gains on the sale of mortgage loans of $16,000, along with an increase in
general operating income. 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, during the first quarter of 2008, discussed earlier, compared
to a realized gain of $51,000 due to the sale of equity securities in the first
quarter of 2007.
- ----------------------
1 See pages 8 & 0 for a reconciliation of GAAP net income excluding the
gain related to the VISA, Inc. Initial Public Offering during the six months
ended June 30, 2008.
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NON-INTEREST EXPENSES
Total non-interest expenses increased $346,000 or 6.8% to $5,457,000 for the
three months ended June 30, 2008 compared with $5,111,000 for the same period of
2007. Salaries and employee benefits expense increased $179,000 or 7.7% mainly
due to increased salaries resulting from additional employees from year ago
levels, along with increased commissions related to our wealth management
division. Expense of premises and equipment decreased $58,000 or 8.0% due to a
reduction of general occupancy expenses. Merchant transaction expense increased
$32,000 or 4.8% due to higher transaction volume. Other operating expenses
increased $193,000 or 13.9% with the largest increases in advertising expenses
of $35,000, professional services of $44,000 and general operating expenses.
Total non-interest expenses increased $172,000 or 1.7% to $10,515,000 during the
first half of 2008 compared with $10,343,000 for the same period of 2007.
Salaries and employee benefits expense increased $219,000 or 4.7% mainly due to
increased salaries resulting from additional employees from year ago levels,
along with increased commissions related to our wealth management division.
Premises and fixed assets expense increased $85,000 or 6.3% due to computer
system upgrades and increased occupancy expense. Merchant transaction expenses
increased $110,000 or 7.4% due to higher transaction volume. Other operating
expenses decreased $242,000 or 8.7% due to the reversal in the first quarter of
2008 of the $497,000 VISA litigation accrual recorded by the Company in the
fourth quarter of 2007, offset by an increase in advertising expenses of
$69,000, professional services of $62,000 and increased general operating
expenses. Without the impact of the VISA reversal, total other expenses would
have increased $669,000 or 6.5%.
ASSET QUALITY
The allowance for loan losses at June 30, 2008 was $5,140,000 or 1.22% of total
loans compared to $4,320,000 or 1.12% of total loans at June 30, 2007.
Management believes the loan loss reserve is adequate.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $550,000 at June 30, 2008 down from $2,825,000 at June 30, 2007. If interest
on those loans had been accrued, such income would have been $28,000 and
$209,000 for the six months ended June 30, 2008 and June 30, 2007, respectively.
Interest income on those loans, which is recorded only when received, amounted
to $15,000 and $127,000 for June 30, 2008 and June 30, 2007, respectively. There
are no commitments to lend additional funds to individuals whose loans are in
non-accrual status.
Net loan charge-offs amounted to $1,000 or .000% of average outstanding loans
for the three months ended June 30, 2008 compared to $4,000 or .001% at June 30,
2007. Net loan charge-offs amounted to $11,000 or .003% of average outstanding
loans for the six months ended June 30, 2008 compared to $100,000 or .027% at
June 30, 2007.
As of June 30, 2008 there are no significant loans as to which management has
serious doubt about their collectibility. 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 Bankruptcy Act. Currently, the Company
holds $8.6 million of TERI loans out of a total student loan portfolio of $21.2
million. The Company does not anticipate that TERI's bankruptcy filing will
significantly impact the Company's financial statements. These loans are placed
on non-accrual status when they become more than 90 days past due. At June 30,
2008 there were $162,000 of such loans placed on non-accrual status.
At June 30, 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 $43,000 or 11.1% to $430,000 for the three
months ended June 30, 2008 due to increased overall operating income. Also,
applicable income taxes increased $645,000 or 88.4% during the first half of
2008 primarily due to the income on the VISA Initial Public Offering and overall
higher income.
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six Months Ended
June 30, June 30,
---------------------- Increase %
(in thousands, except per share amounts 2008 2007 $ Change
- --------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on Average Assets 1.62% 1.16% 39.66%
Return on Average Equity 13.59% 9.96% 36.45%
STOCKHOLDERS' VALUE
Net Income $ 4,885 $ 3,370 $ 1,515 44.96%
Earnings per share 2.27 1.57 0.70 44.59%
Dividends Per Share 0.82 0.74 0.08 10.81%
Book Value Per Share 33.70 31.73 1.97 6.21%
Market Value Per Share 39.90 37.00 2.90 7.84%
Market Value/Book Value Ratio 118.40% 116.61% 1.53%
Price Earnings Multiple 8.79x 11.78x -25.38%
Dividend Payout Ratio 36.12% 47.13% -23.36%
Dividend Yield 4.11% 4.00% 2.75%
SAFETY AND SOUNDNESS
Stockholders' Equity/Assets Ratio 11.51% 11.61% -0.86%
Total Capital/Risk Weighted Assets 19.67% 19.73% -0.30%
Tier 1 Capital/Risk Weighted Assets 18.42% 18.56% -0.75%
Tier 1 Capital/Average Assets 12.19% 11.77% 3.57%
Allowance for Loan Loss as
a Percent of Loans 1.22% 1.12% 8.93%
Non-accrual Loans/Total Loans 0.13% 0.73% -82.19%
Non-performing Assets/Total Assets 0.09% 0.49% -81.63%
BALANCE SHEET HIGHLIGHTS
Total Assets $628,896 $586,774 $ 42,122 7.18%
Total Investments 167,824 146,149 21,675 14.83%
Net Loans 417,153 381,548 35,605 9.33%
Allowance for Loan Losses 5,140 4,320 820 18.98%
Total Deposits 437,029 424,150 12,879 3.04%
Stockholders' Equity 72,391 68,151 4,240 6.22%
</Table>
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, June 30,
2008 2007
------------ ------------
ASSETS
Cash and due from banks $ 15,054 $ 11,099
Interest bearing balances with banks 4,171 7,493
Federal funds sold - 16,000
------------ ------------
Cash and Cash Equivalents 19,225 34,592
Investment securities:
Available-for-sale, at fair value 103,154 75,059
Held-to-maturity (fair value of
$65,685 and $70,798, respectively) 64,670 71,090
------------ ------------
Total Investment Securities 167,824 146,149
Loans, net of unearned income 422,293 385,868
Less: Allowance for loan losses 5,140 4,320
------------ ------------
Loans, Net 417,153 381,548
Bank premises and equipment 9,092 9,795
Other real estate owned - 31
Accrued interest receivable 3,641 3,667
Cash surrender value of life insurance 7,525 7,209
Other assets 4,436 3,783
------------ ------------
Total Assets $628,896 $586,774
============ ============
LIABILITIES
Deposits:
Non-interest bearing $ 75,049 $ 73,686
Interest bearing 361,980 350,464
------------ ------------
Total Deposits 437,029 424,150
Other borrowed funds:
Repurchase agreements 38,376 28,560
Short-term borrowings 454 418
Long-term borrowings 77,807 60,953
Accrued interest payable 1,423 1,561
Other liabilities 1,416 2,981
------------ ------------
Total Liabilities 556,505 518,623
------------ ------------
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 62,820 58,173
Accumulated other comprehensive income (1,269) (862)
------------ ------------
Total Stockholders' Equity 72,391 68,151
------------ ------------
Total Liabilities and Stockholders' Equity $628,896 $586,774
============ ============
</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 Six Months Ended
June 30, June 30,
----------------------- --------- ---------
2008 2007 2008 2007
---------- ---------- --------- ---------
INTEREST INCOME
Interest and fees on loans $ 6,436 $ 6,559 $ 13,097 $ 12,852
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 1,100 952 2,005 1,963
States & political subdivisions 836 724 1,672 1,445
Other securities 69 97 143 238
Interest on Federal funds sold - 219 - 304
Interest on balances with banks 23 102 34 193
---------- ---------- --------- ---------
Total Interest Income 8,464 8,653 16,951 16,995
---------- ---------- --------- ---------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 355 527 806 1,036
Interest on other deposits 1,424 1,915 2,957 3,727
Interest on other borrowed funds 1,018 869 1,944 1,645
---------- ---------- --------- ---------
Total Interest Expense 2,797 3,311 5,707 6,408
---------- ---------- --------- ---------
Net Interest Income 5,667 5,342 11,244 10,587
Provision for loan losses 216 124 451 220
---------- ---------- --------- ---------
Net Interest Income After Provision for Loan Losses 5,451 5,218 10,793 10,367
---------- ---------- --------- ---------
NON-INTEREST INCOME
Trust department income 382 367 747 739
Service charges on deposit accounts 396 260 659 511
Merchant transaction income 935 873 2,119 1,920
Other fee income 489 373 968 654
Bank-owned life insurance income 80 77 158 155
Other operating income 82 30 118 46
VISA mandatory share redemption - - 1,213 -
Realized (losses) gains on securities, net - - - 51
---------- ---------- --------- ---------
Total Non-Interest Income 2,364 1,980 5,982 4,076
---------- ---------- --------- ---------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,509 2,330 4,924 4,705
Expense of premises and equipment, net 667 725 1,435 1,350
Merchant transaction expenses 703 671 1,605 1,495
Other operating expenses 1,578 1,385 2,551 2,793
---------- ---------- --------- ---------
Total Non-Interest Expenses 5,457 5,111 10,515 10,343
---------- ---------- --------- ---------
Income before income taxes 2,358 2,087 6,260 4,100
Applicable income taxes 430 387 1,375 730
---------- ---------- --------- ---------
Net Income $ 1,928 $ 1,700 $ 4,885 $ 3,370
========== ========== ========= =========
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.89 $ 0.79 $ 2.27 $ 1.57
Cash Dividends Declared Per Common Share $ 0.41 $ 0.37 $ 0.82 $ 0.74
</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 OTS 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 from time to
time by authorized officers of the Company, may contain statments 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 statement, the Company claims the protection of the safe
harbor for forward-looking statments 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 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 of $1.2 million
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 June 30, 2008, the value of the Class A shares was
$81.31 per share. The value of unredeemed Class A equivalent shares owned by the
Company was $2.6 million as of June 30, 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.
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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.
<Table>
<Caption>
Six Months Ended
June 30,
2008 2007 Change
--------------- --------------- ---------------
Net interest income after provision for loan losses $ 10,793 $ 10,367 $ 426
Non-interest income 5,982 4,076 1,906
Non-interest expense (10,515) (10,343) (172)
Income tax provision (1,375) (730) (645)
--------------- --------------- ---------------
Net income 4,885 3,370 1,515
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 $ 3,756 $ 3,370 $ 386
=============== =============== ===============
Return on Average Assets 1.24% 1.16%
Return on Average Equity 10.45% 9.96%
</Table>
Return on average equity (ROE) and return on average assets (ROA) for the six
months ended June 30, 2008 was 13.59% (10.45% excluding the VISA IPO impact) and
1.62% (1.24% excluding the VISA IPO impact), respectively. ROE was 9.96% and ROA
was 1.16% for the same period last year.