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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: February 9, 2009
PENSECO FINANCIAL SERVICES CORPORATION REPORTS 4TH QUARTER AND
2008 YEAR-TO-DATE EARNINGS
SCRANTON, PA, February 9, 2009 - 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 $339,000 or 29.6% for the three months ended December 31, 2008 to
$1,486,000 or $0.69 per share compared with $1,147,000 or $0.54 per share from
the year ago period. The increase in net income was primarily attributable to
increased net interest income of $523,000 or 9.6%, higher non-interest income
and lower non-interest expense, offset by higher applicable income taxes.
Interest on investments increased mainly due to increased volume 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 $114,000 from the year ago period. The allowance for loan losses at
December 31, 2008 was 1.20% of total loans compared to 1.21% of total loans at
September 30, 2008 and 1.16% of total loans at December 31, 2007. Also aiding in
the increase of net income of $339,000 for the three month period is a lower
non-interest expense of $57,000. This is primarily due to a $497,000 pre-tax
VISA litigation accrual ($328,000 net of tax) recorded by the Company in the
fourth quarter of 2007. Excluding the impact of the VISA transaction, net income
increased $11,000 or 0.7% from the three months ended December 31, 2007(1).
For the twelve months ended December 31, 2008, net income increased $1,915,000
or 28.6%, to $8,613,000 or $4.01 per share compared with the year ago period of
$6,698,000 or $3.12 per share. The increase in net income was primarily
attributable to a one time after tax increase in 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 $458,000 or 6.5% from the twelve months of 2007(2). Net interest
income increased $1,478,000 or 6.8% to $23,068,000 for the twelve months ended
December 31, 2008 compared to $21,590,000 for the same period of 2007. The
increase resulted from higher interest on investments of $504,000 or 7.1% due to
increased volume of securities of states & political subdivisions and U.S.
Agencies. Total interest expense declined $1,909,000 or 8.8% mainly due to lower
deposit costs. Net interest income after provision for loan losses increased
$1,274,000 or 6.1%. The provision for loan losses increased $204,000 to $861,000
during the twelve months of 2008 compared with $657,000 for the same period of
2007.
NON-INTEREST INCOME
Total non-interest income increased $87,000 or 4.4% to $2,068,000 for the three
months ended December 31, 2008, compared with $1,981,000 for the same period in
2007. Trust department income decreased $34,000 or 9.1% due to the decrease in
market value of trust assets. Service charges on deposit accounts increased
$157,000 or 60.9% primarily due to the increased number of accounts and
increased service charge activity. Merchant transaction income decreased $54,000
or 6.3% due to lower transaction volume mainly from the economic slowdown.
Realized losses on securities were $11,000 compared to $0 for the same period of
2007, due to the sale of equity securities.
Total non-interest income increased $2,316,000 or 26.6% to $11,036,000 during
the twelve months of 2008 from $8,720,000 for the same period of 2007. Trust
department income decreased $61,000 due to the decrease in market value of trust
assets. Service charges on deposit accounts increased $463,000 or 45.7%
primarily due to the increased number of accounts and increased service charge
activity. Merchant transaction income increased $246,000 or 5.8%, mainly due to
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(1) See pages 9 and 10 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 December 31, 2008.
(2) See pages 9 and 11 for a reconciliation of GAAP net income to net
income excluding the gain related to the VISA, Inc. initial public offering
during the twelve months ended December 31, 2008.
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higher transaction volume and new business. Brokerage fee income increased
$335,000 or 128.4% due to new and increased business in the wealth management
area. Other operating income increased $87,000 or 108.7% due to increased income
on other real estate owned of $49,000, 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. Realized gains
on securities decreased $37,000 to $12,000 during 2008 from $49,000 for 2007.
NON-INTEREST EXPENSES
Total non-interest expenses decreased $57,000 or 1.0% to $5,831,000 for the
three months ended December 31, 2008 compared with $5,888,000 for the same
period of 2007. Salaries and employee benefits expense increased $435,000 or
18.8% largely due to a $356,000 retirement contribution to fifty employees
negatively impacted by the pension freeze during the second quarter of 2008, and
an additional $70,000 401K profit sharing contribution benefiting all employees.
Other operating expenses decreased $405,000 or 18.2% largely due to the $497,000
VISA litigation charge accrual recorded by the Company during the fourth quarter
of 2007(3).
Total non-interest expenses increased $841,000 or 3.9% to $22,172,000 during the
twelve months of 2008 compared with $21,331,000 for the same period of 2007.
Salaries and employee benefits expense increased $1,039,000 or 11.4% largely due
to a $356,000 retirement contribution to fifty employees negatively impacted by
the pension freeze during the second quarter of 2008, and an additional $70,000
401K profit sharing contribution benefiting all employees, and increased
salaries resulting from additional employee hires and increased commissions
related to our wealth management division. Premises and fixed assets expense
increased $117,000 or 4.5% due to computer system upgrades and increased
occupancy expense. Merchant transaction expenses increased $45,000 or 1.3% due
to higher transaction volume. Other operating expenses decreased $360,000 or
5.7% largely due to the $497,000 VISA litigation charge accrual recorded by the
Company during the fourth quarter of 2007(4). Excluding this VISA litigation
accrual, other operating expenses increased year over year $634,000 mostly
related to the Company's new brand and logo expenses of $120,000, legal fees
related to loan collection efforts of $128,000, and professional expenses of
$134,000 related to the pension freeze, $82,000 related to outsourced audit and
compliance services, and $78,000 related to computer system updates.
ASSET QUALITY
The allowance for loan losses at December 31, 2008 was $5,275,000 or 1.20% of
total loans compared to $4,700,000 or 1.16% of total loans at December 31, 2007.
Management believes the loan loss reserve is adequate.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,454,000 at December 31, 2008, down from $1,610,000 at December 31, 2007.
If interest on those loans had been accrued, such income would have been
$192,000 and $153,000 for the twelve months ended December 31, 2008 and December
31, 2007, respectively. There were no commitments to lend additional funds to
individuals whose loans are in non-accrual status.
Net loan charge-offs amounted to $208,000 or .048% of average outstanding loans
for the three months ended December 31, 2008 compared to $29,000 or .007% at
December 31, 2007. Net loan charge-offs amounted to $285,000 or .068% of average
outstanding loans for the twelve months ended December 31, 2008 compared to
$157,000 or .041% at December 31, 2007.
As of December 31, 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 $8.4 million of TERI loans. The Company does not anticipate that TERI's
bankruptcy filing will significantly impact the Company's financial statements.
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(3) See pages 9 and 10 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 December 31, 2008.
(4) See pages 9 and 11 for a reconciliation of GAAP net income to net
income excluding the gain related to the VISA, Inc. initial public offering
during the twelve months ended December 31, 2008.
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These loans are placed on non-accrual status when they become more than 90 days
past due. At December 31, 2008 there was $144,000 in such loans placed on
non-accrual status, up from $128,000 at September 30, 2008.
At December 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. The
Company's lending is primarily residential and commercial secured mortgage
loans, in Northeastern Pennsylvania, based upon conservative underwriting
standards.
INCOME TAX EXPENSE
Applicable income taxes increased $214,000 or 73.8% for the three months ended
December 31, 2008 compared to the same period of 2007 due to higher income.
Also, applicable income taxes increased $834,000 or 51.4% during the twelve
months end December 31, 2008 primarily due to the income on the VISA initial
public offering and overall higher income.
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<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Twelve Months Ended
December 31, December 31,
------------------------------ Increase %
(in thousands, except per share amounts) 2008 2007 $ Change
- ------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
Return on Average Assets 1.40% 1.15% 21.74%
Return on Average Equity 11.89% 9.75% 21.95%
STOCKHOLDERS' VALUE
Net Income $ 8,613 $ 6,698 1,915 28.59%
Earnings per share 4.01 3.12 0.89 28.53%
Dividends Per Share 1.66 1.58 0.08 5.06%
Book Value Per Share 34.28 32.45 1.83 5.64%
Market Value Per Share 36.74 39.50 -2.76 -6.99%
Market Value/Book Value Ratio 107.18% 121.73% -11.95%
Price Earnings Multiple 9.16x 12.66x -27.65%
Dividend Payout Ratio 41.40% 50.64% -18.25%
Dividend Yield 4.52% 4.00% 13.00%
SAFETY AND SOUNDNESS
Stockholders' Equity/Assets Ratio 11.71% 12.00% -2.42%
Total Capital/Risk Weighted Assets 19.82% 19.89% -0.35%
Tier 1 Capital/Risk Weighted Assets 18.57% 18.65% -0.43%
Tier 1 Capital/Average Assets 12.26% 12.11% 1.24%
Allowance for Loan Loss as a
Percent of Loans 1.20% 1.16% 3.45%
Non-accrual Loans/Total Loans 0.33% 0.40% -17.50%
Non-performing Assets/Total Assets 0.41% 0.36% 13.89%
BALANCE SHEET HIGHLIGHTS
Total Assets $628,967 $580,793 $48,174 8.29%
Total Investments 157,480 145,448 12,032 8.27%
Net Loans 435,873 399,939 35,934 8.98%
Allowance for Loan Losses 5,275 4,700 575 12.23%
Total Deposits 424,725 416,533 8,192 1.97%
Stockholders' Equity 73,642 69,715 3,927 5.63%
</Table>
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<Table>
<Caption>
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, December 31,
2008 2007
------------ ------------
ASSETS
Cash and due from banks $ 7,246 $ 10,677
Interest bearing balances with banks 2,109 967
Federal funds sold -- --
------------ ------------
Cash and Cash Equivalents 9,355 11,644
Investment securities:
Available-for-sale, at fair value 94,996 77,328
Held-to-maturity (fair value of
$64,678 and $69,491, respectively) 62,484 68,120
------------ ------------
Total Investment Securities 157,480 145,448
Loans, net of unearned income 441,148 404,639
Less: Allowance for loan losses 5,275 4,700
------------ ------------
Loans, Net 435,873 399,939
Bank premises and equipment 10,391 9,323
Other real estate owned - -
Accrued interest receivable 3,518 3,558
Cash surrender value of life insurance 7,684 7,368
Other assets 4,666 3,513
------------ ------------
Total Assets $628,967 $580,793
============ ============
LIABILITIES
Deposits:
Non-interest bearing $ 72,456 $ 73,926
Interest bearing 352,269 342,607
------------ ------------
Total Deposits 424,725 416,533
Other borrowed funds:
Repurchase agreements 29,155 20,492
Short-term borrowings 24,204 13,201
Long-term borrowings 72,720 55,966
Accrued interest payable 975 1,498
Other liabilities 3,546 3,388
------------ ------------
Total Liabilities 555,325 511,078
------------ ------------
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 64,745 59,697
Accumulated other comprehensive income (1,943) (822)
------------ ------------
Total Stockholders' Equity 73,642 69,715
------------ ------------
Total Liabilities and Stockholders'
Equity $628,967 $580,793
============ ============
</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 Twelve Months Ended
December 31, December 31,
----------------------- -----------------------
2008 2007 2008 2007
--------- --------- --------- ---------
INTEREST INCOME
Interest and fees on loans $ 6,578 $ 6,808 $ 26,218 $ 26,429
Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 895 872 3,947 3,731
States & political subdivisions 859 766 3,380 2,944
Other securities 45 82 256 404
Interest on Federal funds sold (2) 23 29 456
Interest on balances with banks 6 51 68 365
--------- --------- --------- ---------
Total Interest Income 8,381 8,602 33,898 34,329
--------- --------- --------- ---------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 309 470 1,451 2,010
Interest on other deposits 1,180 1,780 5,522 7,365
Interest on other borrowed funds 896 879 3,857 3,364
--------- --------- --------- ---------
Total Interest Expense 2,385 3,129 10,830 12,739
--------- --------- --------- ---------
Net Interest Income 5,996 5,473 23,068 21,590
Provision for loan losses 243 129 861 657
--------- --------- --------- ---------
Net Interest Income After Provision
for Loan Losses 5,753 5,344 22,207 20,933
--------- --------- --------- ---------
NON-INTEREST INCOME
Trust department income 341 375 1,474 1,535
Service charges on deposit accounts 415 258 1,477 1,014
Merchant transaction income 800 854 4,502 4,256
Brokerage fee income 109 101 596 261
Other fee income 315 303 1,279 1,211
Bank-owned life insurance income 80 79 316 314
Other operating income 19 11 167 80
VISA mandatory share redemption -- -- 1,213 --
Realized (losses) gains on securities, net (11) -- 12 49
--------- --------- --------- ---------
Total Non-Interest Income 2,068 1,981 11,036 8,720
--------- --------- --------- ---------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,752 2,317 10,157 9,118
Expense of premises and equipment, net 642 631 2,703 2,586
Merchant transaction expenses 616 714 3,403 3,358
Other operating expenses 1,821 2,226 5,909 6,269
--------- --------- --------- ---------
Total Non-Interest Expenses 5,831 5,888 22,172 21,331
--------- --------- --------- ---------
Income before income taxes 1,990 1,437 11,071 8,322
Applicable income taxes 504 290 2,458 1,624
--------- --------- --------- ---------
Net Income $ 1,486 $ 1,147 $ 8,613 $ 6,698
========= ========= ========= =========
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.69 $ 0.54 $ 4.01 $ 3.12
Cash Dividends Declared Per Common Share $ 0.42 $ 0.47 $ 1.66 $ 1.58
</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 8-K 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 holdings 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 December 31, 2008, the value of the Class A shares
was $52.45 per share. The value of unredeemed Class A equivalent shares owned by
the Company was $1.7 million as of December 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.
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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>
Three Months Ended
December 31,
2008 2007 Change
--------------- -------------- ----------------
Net interest income after
provision for loan losses $ 5,753 $ 5,344 $ 409
Non-interest income 2,068 1,981 87
Non-interest expense (5,831) (5,888) 57
Income tax provision (504) (290) (214)
--------------- -------------- ----------------
Net income 1,486 1,147 339
ADJUSTMENTS
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Non-interest income Gain on
mandatory redemption of VISA, Inc.
class B common stock -- -- --
Non-interest expense
Covered litigation provision -- 497 497
--------------- -------------- ----------------
Total Adjustments pre-tax -- 497 497
Income tax provision -- (169) (169)
--------------- -------------- ----------------
After tax adjustments to GAAP -- 328 328
--------------- -------------- ----------------
Adjusted net income $ 1,486 $ 1,475 $ 11
=============== ============== ================
Return on Average Assets 0.95% 1.01%
Return on Average Equity 8.16% 8.40%
</Table>
Return on average equity (ROE) and return on average assets (ROA) for the three
months ended December 31, 2008 was 8.16% and 0.95%, respectively. ROE was 6.50%
(8.40% excluding the VISA IPO impact) and ROA was 0.79% (1.01% excluding the
VISA IPO impact) for the same period last year.
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<Table>
<Caption>
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.
Twelve Months Ended
December 31,
2008 2007 Change
--------------- -------------- ---------------
Net interest income after
provision for loan losses $ 22,207 $ 20,933 $ 1,274
Non-interest income 11,036 8,720 2,316
Non-interest expense (22,172) (21,331) (841)
Income tax provision (2,458) (1,624) (834)
--------------- -------------- ---------------
Net income 8,613 6,698 1,915
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 (994)
--------------- -------------- ---------------
Total Adjustments pre-tax (1,710) 497 (2,207)
Income tax provision 581 (169) 750
--------------- -------------- ---------------
After tax adjustments to GAAP (1,129) 328 (1,457)
--------------- -------------- ---------------
Adjusted net income $ 7,484 $ 7,026 $ 458
=============== ============== ===============
Return on Average Assets 1.21% 1.21%
Return on Average Equity 10.33% 10.23%
</Table>
Return on average equity (ROE) and return on average assets (ROA) for the twelve
months ended December 31, 2008 was 11.89% (10.33% excluding the VISA IPO impact)
and 1.40% (1.21% excluding the VISA IPO impact), respectively. ROE was 9.75%
(10.23% excluding the VISA IPO impact) and ROA was 1.15% (1.21% excluding the
VISA IPO impact) for the same period last year.