Customer Services
-----------------
A detailed listing of the services offered by the Company is as follows:
DEPOSIT ACCOUNTS
All Purpose Clubs
Certificates of Deposit
Christmas Clubs
Demand Accounts
Individual Retirement Accounts
Money Market Accounts
NOW Accounts
Savings Accounts
Time Open Accounts
Vacation Clubs
LENDING
Appliance Loans
Automobile Loans
Business Loans
Collateral Loans
Commercial Equipment Leasing
Construction Loans
Cosmic Card (Debit Card)
Credit Lines
Educational Loans
Home Equity Loans
Home Repair and Remodeling Loans
Installment Loans
MasterCard and VISA (Credit Card)
Mortgage Loans (Residential and Commercial)
Personal Loans
OTHER SERVICES
ATM Services
Bank Money Orders
Cash Management
Cashier's Checks
College Campus Card Interface
Data Processing Services
Direct Deposit of Recurring Payments
EDI-ACH Service
Foreign Remittance
Home Banking Services
Internet Banking
Investor Services
(a) Brokerage
(b) Insurance
Lockbox Services
Night Depository
Point-of-Sale Banking
Repurchase Agreements
Safe Deposit Boxes
Travelers Checks
Trust Department Services
(a) Administrator (b) Agent
(c) Custodian and Trustee for Pension Plans
(d) Executor (e) Guardian
(f) Securities Depository Service (g) Trustee (h) Trustee for Public Bond
Issues
U.S. Savings Bonds
BRANCH LOCATIONS (with ATMs)
Abington
1100 Northern Boulevard
Clarks Summit, PA
Carl M. Baruffaldi, Manager
(570) 587-4898
East Scranton
Prescott Avenue & Ash Street
Scranton, PA
Frank Gardner, Manager
(570) 342-9101
East Stroudsburg
Route 209 & Route 447
East Stroudsburg, PA
Denise M. Cebular, Manager
(570) 420-0432
Gouldsboro
Main & Second Streets
Gouldsboro, PA
Robin L. Jenkins, Branch Operations Manager
(570) 842-6473
Green Ridge
1901 Sanderson Avenue
Scranton, PA
Jeffrey Solimine, Manager
(570) 346-4695
Central City
150 North Washington Avenue
Scranton, PA
Andrew A. Kettel, Jr., Manager
(570) 346-7741
Mount Pocono
Route 611 & Route 940
Mount Pocono, PA
Thomas J. Malinchak, Manager
(570) 839-8732
North Pocono
Main & Academy Streets
Moscow, PA
Beth S. Wolff, Manager
(570) 842-7626
South Scranton
526 Cedar Avenue
Scranton, PA
J. Patrick Dietz, Manager
(570) 343-1151
OTHER ATM LOCATIONS
Acorn Market
Route 611
Swiftwater, PA
Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA
Dino & Francesco's Restaurant
Birney Plaza
Moosic, PA
Drive-Up ATM
Meadow Avenue & Hemlock Street
Scranton, PA
Hilton Hotel & Conference Center
Adams Avenue
Scranton, PA
Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA
One Stop Quick Mart, Inc.
Milford Road
East Stroudsburg, PA
Red Barn Village
Newton Ransom Boulevard
Newton, PA
Skytop Lodge
One Skytop
Skytop, PA
www.pennsecurity.com
Financial Highlights
--------------------
In thousands, except per share data
2004 2003 2002
- --------------------------------------------------------------
Earnings per share $ 2.61 $ 2.78 $ 3.14
Dividends per share $ 1.35 $ 1.35 $ 1.35
Total Capital $ 62,376 $ 60,807 $ 58,975
Total Deposits $ 395,301 $ 407,944 $ 414,664
Total Assets $ 563,708 $ 584,590 $ 496,956
Contents
--------
Customer Services.............................................Inside Front Cover
President's Letter.............................................................2
Board of Directors.............................................................4
Promotions and Appointments....................................................5
Form 10-K
Part I, Item 1 Business.....................................................7
Item 2 Properties...................................................8
Item 3 Legal Proceedings............................................8
Item 4 Submission of Matters to a Vote of Security Holders..........8
Part II, Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases
of Equity Securities.......................................9
Item 6 Selected Financial Data.....................................10
Item 7 Management Discussion and Analysis of Financial
Condition and Results of Operations.......................11
Item 7A Quantitative and Qualitative Disclosures About
Market Risk...............................................20
Item 8 Financial Statements and Supplementary Data.................22
Consolidated Balance Sheets.................................22
Consolidated Statements of Income...........................23
Consolidated Statements of Stockholders' Equity.............24
Consolidated Statements of Cash Flows.......................25
General Notes to Financial Statements.......................26
Report of Independent Registered Public Accounting Firm.....37
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.........................38
Item 9A Controls and Procedures.....................................38
Item 9B Other Information...........................................38
Part III, Item 10 Directors and Executive Officers of the Registrant..........38
Item 11 Executive Compensation......................................39
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................39
Item 13 Certain Relationships and Related Transactions..............39
Item 14 Principal Accountant Fees and Services......................39
Part IV, Item 15 Exhibits and Financial Statements Schedules.................39
Signatures....................................................................40
Certifications................................................................41
Index to Exhibits.............................................................43
Company Officers..............................................................44
Company Board Members..........................................Inside Back Cover
Penseco Financial Services Corporation / 2004 Annual Report 1
President's Letter
------------------
Dear Shareholder
Net income in 2004 was $2.61 per share as opposed to $2.78 for year 2003.
Dividends for the two years remained the same at $1.35 per share. Capital
increased to $62.4 million from $60.8 million at the prior year end. Although
our total deposits declined from $407.9 million at year end 2003 to $395.3
million at year end 2004 and total assets declined from $584.6 million year end
2003 to $563.7 million for year end 2004, net loans outstanding increased from
$236.9 million at year end 2003 to $276.6 million at year end 2004. Net loans
outstanding still are $44 million below their peak in 2001. A 26% decline in net
loans outstanding from December 31, 2001, to December 31, 2003, was brought
about by the flood of refinancing of mortgages during that period and
management's reluctance to portfolio these longer-term, low-rate fixed
mortgages.
During the first part of 2004, interest rates continued at historical lows.
Beginning in July and continuing through the end of 2004, the Federal Reserve
raised the Federal Funds target rate from 1.00% to 2.25%. It is anticipated that
the Federal Reserve will continue to raise rates during 2005. It is encouraging
that our loans grew 17% for 2004 and we are focusing on ways to continue loan
growth this year. The increase in short-term rates, later in 2004, in
conjunction with the loan growth in 2004 resulted in increased net interest
income, from which the bank receives most of its earnings. The effect of the
rate changes and changes in net loans outstanding is more easily seen by
referring to the following graphs of net interest income and prime rate in each
quarter from the beginning of 2001 through the end of 2004. As you can see, net
interest income is again increasing which should bode well for the future. With
loans growing, we should be able to keep pace with increasing interest costs on
deposits.
Chart 1
Prime Rate Movement
2001 1st Qtr. 9.50%
2nd Qtr. 8.00%
3rd Qtr. 6.75%
4th Qtr. 4.75%
2002 1st Qtr. 4.75%
2nd Qtr. 4.75%
3rd Qtr. 4.75%
4th Qtr. 4.25%
2003 1st Qtr. 4.25%
2nd Qtr. 4.00%
3rd Qtr. 4.00%
4th Qtr. 4.00%
2004 1st Qtr. 4.00%
2nd Qtr. 4.00%
3rd Qtr. 4.75%
4th Qtr. 5.25%
2 Penseco Financial Services Corporation / 2004 Annual Report
Chart 2
Net Interest Income Comparison
(in thousands)
2001 1st Qtr $4,461
2nd Qtr $4,795
3rd Qtr $5,124
4th Qtr $4,956
2002 1st Qtr $5,173
2nd Qtr $5,100
3rd Qtr $4,927
4th Qtr $4,688
2003 1st Qtr $4,686
2nd Qtr $4,731
3rd Qtr $4,246
4th Qtr $4,123
2004 1st Qtr $4,216
2nd Qtr $4,363
3rd Qtr $4,591
4th Qtr $4,636
Last year in my letter to you, I stated that under the Sarbanes-Oxley Act,
we were considered to be an accelerated filer. A recalculation of stock
ownership showed us to be slightly less than the required level, but we
nevertheless have been meeting the accelerated filing dates. Also, since we are
not an accelerated filer, Section 404 of the Sarbanes-Oxley Act is not
applicable to us until the Annual Report (Form 10K) to be filed for the 2005
year.
During the summer of this year, I informed the Board of Directors,
primarily due to my health (I had broken a hip and was still having problems
after two major surgeries), that they needed to begin a search for my
replacement a little earlier than originally anticipated. A search committee was
established and a firm was hired to assist the Board. This matter should be
resolved sometime this year.
During the year, the following appointments and promotions were made: Beth
S. Wolff was named Assistant Vice-President and Branch Manager of the Moscow
Office, Frank Gardner was named Assistant Vice-President and Branch Manager of
the East Scranton Office, Thomas J. Malinchak was named Assistant Vice-President
and Branch Manager of the Mount Pocono Office, Deborah A. Wright was named
Assistant Vice-President, Outside Sales, Robin L. Jenkins was named Branch
Operations Manager of the Gouldsboro Office, Kathleen Griffiths was named Branch
Operations Officer of the Abington Office and Tanya L. Frable was named
Assistant Branch Operations Officer of the Gouldsboro Office. We are fortunate
to have such a fine group of people assuming greater responsibilities in the
Company.
We think that our strong capital position, good earnings, advanced
technology and solid customer base, both in our traditional geographic market
and niche national markets, provide an excellent foundation for our continued
success. In this endeavor you can help us by recommending us to your family,
friends, and business organizations. This is your institution - let it serve
you.
Sincerely yours,
Otto P. Robinson, Jr.
President
Penseco Financial Services Corporation / 2004 Annual Report 3
Board of Directors
------------------
This page of the 2004 Annual Report to Shareholders contains one picture. A
description of the picture follows:
Seated left to right:
Emily S. Perry, Richard E. Grimm, Executive Vice-President and Treasurer;
Attorney Otto P. Robinson, Jr., President; Edwin J. Butler, and Sandra C.
Phillips
Standing left to right:
James B. Nicholas, Steven L. Weinberger, P. Frank Kozik, Secretary; Russell C.
Hazelton, D. William Hume, Robert W. Naismith, Ph.D., and James G. Keisling
4 Penseco Financial Services Corporation / 2004 Annual Report
Promotions & Appointments
-------------------------
This page of the 2004 Annual Report to Shareholders contains seven pictures. A
description of each picture follows, starting at the top, from left to right:
Beth S. Wolff
Assistant Vice-President
Frank Gardner
Assistant Vice-President
Thomas J. Malinchak
Assistant Vice-President
Deborah A. Wright
Assistant Vice-President
Outside Sales
Robin L. Jenkins
Branch Operations Manager
Kathleen Griffiths
Branch Operations Officer
Tanya L. Frable
Assistant Branch Operations Officer
Penseco Financial Services Corporation / 2004 Annual Report 5
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 2004
Commission File Number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
Scranton, Pennsylvania
Commonwealth of Pennsylvania
I.R.S. Employer Identification Number 23-2939222
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
Telephone number 570-346-7741
Securities Registered Under
Section 12(g) of the Act
Common Stock, Par Value $ .01 per share
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ( ) No (X)
THE AGGREGATE MARKET VALUE OF THE COMPANY'S VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT ON JUNE 30, 2004, BASED ON THE CLOSING PRICE OF SUCH STOCK ON
THAT DATE, EQUALS APPROXIMATELY $68,680,954. THE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING AS OF JUNE 30, 2004 EQUALS 2,148,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation's definitive proxy statement relating to the 2005
Annual Meeting of Stockholders are incorporated by reference in Part III.
6 Penseco Financial Services Corporation / 2004 Annual Report
PENSECO FINANCIAL SERVICES CORPORATION
PART I
------
ITEM 1 Business
GENERAL
PENSECO FINANCIAL SERVICES CORPORATION, (the "Company"), which is headquartered
in Scranton, Pennsylvania, was formed under the general corporation laws of the
State of Pennsylvania in 1997 and is registered as a financial holding company.
The Company became a holding company upon the acquisition of all of the
outstanding shares of Penn Security Bank and Trust Company (the "Bank"), a state
chartered bank, on December 31, 1997. The Company is subject to supervision by
the Federal Reserve Board. The Bank, as a state chartered financial institution,
is subject to supervision by the Federal Deposit Insurance Corporation and the
Pennsylvania Department of Banking.
The Company's principal banking office is located at 150 North Washington
Avenue, Scranton, Pennsylvania, containing trust, investor services, marketing,
audit, credit card, human resources, executive, data processing and central
bookkeeping offices. There are eight additional offices.
Through its banking subsidiary, the Company generates interest income from
its outstanding loans receivable and its investment portfolio. Other income is
generated primarily from merchant transaction fees, trust fees and service
charges on deposit accounts. The Company's primary costs are interest paid on
deposits and borrowings and general operating expenses. The Bank provides a
variety of commercial and retail banking services to business and professional
customers, as well as retail customers, on a personalized basis. The Bank's
primary lending products are real estate, commercial and consumer loans. The
Bank also offers ATM access, credit cards, active investment accounts, trust
department services and other various lending, depository and related financial
services. The Bank's primary deposit products are savings and demand deposit
accounts and certificates of deposit.
The Bank has a third party marketing agreement with Fiserv Investor
Services, Inc. that allows the bank to offer a full range of securities,
brokerage and annuity sales to its customers. The Investor Services division is
located in the headquarters building and the services are offered throughout the
entire branch system.
The Company is not dependent upon a single customer, or a few customers,
the loss of one or more of which would have a material adverse effect on its
operations. The operations and earnings of the Corporation are not materially
affected by seasonal changes or by Federal, state or local environmental laws or
regulations.
COMPETITION
The Bank operates in a competitive environment in which it must share its market
with many local independent banks as well as several banks which are affiliates
or branches of very large regional holding companies. The Bank encounters
competition from diversified financial institutions, ranging in size from small
banks to the nationwide banks operating in its region. The competition includes
commercial banks, savings and loan associations, credit unions, other lending
institutions and mortgage originators.
The principal competitive factors among the Bank's competitors can be
grouped into two categories: pricing and services. In the Bank's primary service
area, interest rates on deposits, especially time deposits, and interest rates
and fees charged to customers on loans are very competitive. From a service
perspective, the Bank competes in areas such as convenience of location, types
of services, service costs and banking hours.
EMPLOYEES
As of December 31, 2004, the Company employed 198 full-time equivalent
employees. The employees of the Company are not represented by any collective
bargaining group. Management of the Company considers relations with its
employees to be good.
Penseco Financial Services Corporation / 2004 Annual Report 7
SUPERVISION AND REGULATION
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended, and, as such, is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board" or "FRB"). The Company is required to file quarterly reports of
its operations with the FRB.
As a financial holding company, the Company is permitted to engage in
banking-related activities as authorized by the Federal Reserve Board, directly
or through subsidiaries or by acquiring companies already established in such
activities subject to the FRB regulations relating to those activities.
The Bank, as a Pennsylvania state-chartered financial institution, is
subject to supervision, regulation and examination by the Commonwealth of
Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation (the "FDIC"), which insures the Bank's deposits to the maximum
extent permitted by law.
FORWARD LOOKING INFORMATION
This Form 10-K contains forward-looking informational statements, in addition to
the historical financial information required by the Securities and Exchange
Commission. There are certain risks and uncertainties associated with these
forward-looking statements which could cause actual results to differ materially
from those stated herein. Such differences are discussed in the section entitled
"Management Discussion and Analysis of Financial Condition and Results of
Operations". These forward-looking statements reflect management's analysis as
of this point in time. Readers should review the other documents the Company
periodically files with the Securities and Exchange Commission in order to keep
apprised of any material changes.
ITEM 2 Properties
There are nine offices positioned throughout the greater Northeastern
Pennsylvania region. They are located in the South Scranton, East Scranton,
Green Ridge, and Central City sections of Scranton, the Borough of Moscow, the
Town of Gouldsboro, South Abington Township, the Borough of Mount Pocono and the
Borough of East Stroudsburg at Eagle Valley Corners. Through these offices, the
Company provides a full range of banking and trust services primarily to
Lackawanna, Wayne, Monroe and the surrounding counties. All offices are owned by
the Bank or through a wholly owned subsidiary of the Bank, Penseco Realty, Inc.,
with the exception of the Mount Pocono Office, which is owned by the Bank but is
located on land occupied under a long-term lease. During 2003, the Company
purchased property in the Borough of Dalton, Lackawanna County, to use for
potential future expansion.
The principal office, located at the corner of North Washington Avenue and
Spruce Street in the "Central City" of Scranton's business district, houses the
operations, trust, investor services, marketing, credit card and audit
departments as well as the Company's executive offices. Several remote ATM
locations are leased by the Bank, which are located throughout Northeastern
Pennsylvania. All branches and ATM locations are equipped with closed circuit
television monitoring.
ITEM 3 Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of the Company, as to which the Company or
subsidiary is a party or of which any of their property is subject.
ITEM 4 Submission of Matters to a Vote of Security Holders
No matter was submitted by the Company to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
8 Penseco Financial Services Corporation / 2004 Annual Report
PART II
-------
ITEM 5 Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
This Annual Report is the Company's annual disclosure statement as required
under Section 13 or 15(d) of the Securities Exchange Act of 1934. Questions may
be directed to any branch location of the Company or by contacting the
Controller's office at:
Patrick Scanlon, Controller
Penseco Financial Services Corporation
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
1-800-327-0394
Management of the Company is aware of the following securities dealers who make
a market in the Company stock:
Arthurs, Lestrange & Company, Inc. Knight Equity Markets, LP
Boenning & Scattergood, Inc. Monroe Securities, Inc.
Ferris, Baker, Watts, Inc. Ryan, Beck & Company, Inc.
Hill Thompson Magid, LP Schwab Capital Markets, LP
Jefferies & Company, Inc.
The Company's capital stock is traded on the "Over-the-Counter" BULLETIN BOARD
under the symbol "PFNS". The following table sets forth the price range together
with dividends paid for each of the past two years. These quotations do not
necessarily reflect the value of actual transactions.
Dividends Paid
2004 High Low Per Share
- ---------------------------------------------
First Quarter $ 41 $ 38 $ .30
Second Quarter 41 35 .30
Third Quarter 41 34 .30
Fourth Quarter 42 40 .45
------
$ 1.35
======
Dividends Paid
2003 High Low Per Share
- ---------------------------------------------
First Quarter $ 40 $ 34 $ .30
Second Quarter 41 38 .30
Third Quarter 41 39 .30
Fourth Quarter 42 41 .45
------
$ 1.35
======
DIVIDENDS PAID (in millions) YEAR
- -------------------------------------------
$ 2,900 2004
2,900 2003
2,899 2002
2,685 2001
2,470 2000
As of February 11, 2005 there were approximately 942 stockholders of the Company
based on the number of holders of record.
Reference should be made to the information about the Company's dividend policy
and regulatory guidelines on pages 18 and 35.
TRANSFER AGENT
Penn Security Bank and Trust Company, Trust Department, 150 North Washington
Avenue, Scranton, Pennsylvania 18503-1848. Stockholders' questions should be
directed to the Bank's Trust Department at 570-346-7741.
QUARTERLY FINANCIAL AMOUNTS (unaudited)
(in thousands, except per share amounts)
First Second Third Fourth
2004 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------
Net Interest Income $ 4,216 $ 4,363 $ 4,591 $ 4,636
Provision for Loan Losses 18 3 114 9
Other Income 2,414 2,006 2,830 2,344
Other Expenses 5,315 4,827 5,386 5,056
Net Income 1,145 1,363 1,615 1,478
Earnings Per Share $ .53 $ .64 $ .75 $ .69
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------
Net Interest Income $ 4,686 $ 4,731 $ 4,246 $ 4,123
Provision for Loan Losses 239 216 1 20
Other Income 2,746 2,345 3,234 2,418
Other Expenses 5,269 4,840 5,422 4,923
Net Income 1,559 1,585 1,603 1,224
Earnings Per Share $ .73 $ .73 $ .75 $ .57
Penseco Financial Services Corporation / 2004 Annual Report 9
ITEM 6 Selected Financial Data
(in thousands, except per share amounts)
RESULTS OF OPERATIONS:
2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Interest Income $ 25,385 $ 26,014 $ 27,899 $ 31,860 $ 31,043
Interest Expense 7,579 8,228 8,011 12,524 13,698
- -----------------------------------------------------------------------------------------------
Net Interest Income 17,806 17,786 19,888 19,336 17,345
Provision for Loan Losses 144 476 813 954 233
- -----------------------------------------------------------------------------------------------
Net Interest Income
after Provision for
Loan Losses 17,662 17,310 19,075 18,382 17,112
Other Income 9,594 10,743 11,032 9,186 8,233
Other Expenses 20,584 20,454 21,098 20,077 19,306
Income Taxes 1,071 1,628 2,256 1,869 1,296
- -----------------------------------------------------------------------------------------------
Net Income $ 5,601 $ 5,971 $ 6,753 $ 5,622 $ 4,743
===============================================================================================
BALANCE SHEET AMOUNTS:
Assets $ 563,708 $ 584,590 $ 496,956 $ 482,551 $ 467,230
Investment Securities $ 262,678 $ 293,125 $ 139,132 $ 128,623 $ 125,808
Net Loans $ 276,576 $ 236,882 $ 285,509 $ 320,208 $ 304,641
Deposits $ 395,301 $ 407,944 $ 414,664 $ 406,531 $ 387,439
Stockholders' Equity $ 62,376 $ 60,807 $ 58,975 $ 54,648 $ 50,067
PER SHARE AMOUNTS:
Earnings per Share $ 2.61 $ 2.78 $ 3.14 $ 2.62 $ 2.21
Dividends per Share $ 1.35 $ 1.35 $ 1.35 $ 1.25 $ 1.15
Book Value per Share $ 29.04 $ 28.31 $ 27.46 $ 25.44 $ 23.31
Common Shares Outstanding 2,148,000 2,148,000 2,148,000 2,148,000 2,148,000
FINANCIAL RATIOS:
Net Interest Margin 3.18% 3.24% 4.21% 4.30% 4.08%
Return on Average Assets .96% 1.05% 1.37% 1.18% 1.06%
Return on Average Equity 9.11% 9.87% 11.79% 10.57% 9.96%
Average Equity to Average Assets 10.57% 10.59% 11.58% 11.19% 10.60%
Dividend Payout Ratio 51.72% 48.56% 42.99% 47.71% 52.04%
10 Penseco Financial Services Corporation / 2004 Annual Report
ITEM 7 Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes and trends related to the
financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. All information is
presented in thousands of dollars, except as indicated.
SUMMARY
Net earnings for 2004 totalled $5,601, a decrease of 6.2% from the $5,971 earned
in 2003, which was a decrease of 11.6% from the $6,753 earned in 2002. Net
earnings per share were $2.61 in 2004, compared with $2.78 in 2003 and $3.14 in
2002. Net earnings for 2004 decreased from 2003 mainly due to the reduction of
other operating income from the sale of fixed-rate loans which peaked during the
third quarter of 2003. This was offset by a lower provision for loan losses and
lower income taxes. The Company has experienced strong loan growth during the
second half of 2004 which will provide higher net interest income. Net earnings
for 2003 decreased from 2002 mainly due to the refinancing of the Company's
high-yield residential mortgage loan portfolio into lower fixed-rate
obligations, which then were sold in the secondary market, rather than held in
the Company's portfolio.
NET INCOME (in millions) YEAR
- -------------------------------------------
$ 5,601 2004
5,971 2003
6,753 2002
5,622 2001
4,743 2000
The Company's return on average assets was .96 % in 2004 compared to 1.05% in
2003 and 1.37% in 2002. Return on average equity was 9.11 %, 9.87% and 11.79% in
2004, 2003 and 2002, respectively.
RETURN ON AVERAGE ASSETS YEAR
- -------------------------------------------
.96% 2004
1.05% 2003
1.37% 2002
1.18% 2001
1.06% 2000
RETURN ON AVERAGE EQUITY YEAR
- -------------------------------------------
9.11% 2004
9.87% 2003
11.79% 2002
10.57% 2001
9.96% 2000
Penseco Financial Services Corporation / 2004 Annual Report 11
RESULTS OF OPERATIONS
NET INTEREST INCOME
The principal component of the Company's earnings is net interest income, which
is the difference between interest and fees earned on interest-earning assets
and interest paid on deposits and other borrowings.
Net interest income was basically unchanged at $17.8 million. Loan income
was lower overall for 2004 since the volume of new loans and rate increases
occurred primarily in the second half of the year. Investment income increased
due to purchases of tax-exempt securities at favorable tax-equivalent yields.
Interest expense for 2004 remained low as to deposits, offset by an increase in
long-term borrowing costs in 2004 versus 2003, since the long-term debt was not
incurred until March 2003.
Net interest income was $17.8 million in 2003, compared with $19.9 million
in 2002, a decrease of 10.6%. The decrease in net interest income in 2003
resulted from the refinancing of the Company's high-yield residential mortgage
loans into lower fixed-rate obligations, which were then sold in the secondary
market. Also net interest income was negatively impacted by accelerated purchase
premium write-downs from unprecedented pre-payments of the Company's
mortgage-backed securities portfolio due to interest rates hovering at
forty-five year lows.
In 2003, the Company purchased a FHLMC (Freddie Mac) pool of new twenty
year residential mortgages, with a 5 1/2% coupon and a face value of $100
million. The Company financed the purchase by borrowing $100 million from the
Federal Home Loan Bank with maturities ranging from 5 to 20 years. The interest
spread will vary depending on various interest rate scenarios which affect
prepayment speeds.
Net interest income, when expressed as a percentage of average
interest-earning assets, is referred to as net interest margin. The Company's
net interest margin for the year ended December 31, 2004 was 3.2% compared with
3.2% for the year ended December 31, 2003, and 4.2% for the year ended December
31, 2002.
Interest income in 2004 totalled $25.4 million, compared to $26.0 million
in 2003, a decrease of 2.3%. The yield on average interest-earning assets was
4.5% in 2004, compared to 4.8% in 2003. Average interest-earning assets
increased in 2004 to $560.3 million from $548.2 million in 2003. Average loans,
which are typically the Company's highest yielding earning assets, decreased
$6.4 million in 2004, while investment securities increased on average by $51.9
million. Average loans represented 45.7% of 2004 average interest-earning
assets, compared to 47.9% in 2003.
Interest expense also decreased in 2004 to $7.6 million from $8.2 million
in 2003, a decrease of $.6 million or 7.3%.
The average rate paid on interest-bearing liabilities during 2004 was 1.7%,
compared to 1.9%, a decrease of 10.5% from 2003.
Interest income in 2003 totalled $26.0 million, compared to $27.9 million
in 2002, a decrease of 6.8%. The yield on average interest-earning assets was
4.8% in 2003, compared to 5.9% in 2002. Average interest-earning assets
increased in 2003 to $548.2 million from $472.8 million in 2002. Average loans,
which are typically the Company's highest yielding earning assets, decreased
$54.2 million in 2003, while investment securities increased on average by
$103.4 million. Average loans represented 47.9% of 2003 average interest-earning
assets, compared to 67.0% in 2002.
Interest expense also increased in 2003 to $8.2 million from $8.0 million
in 2002, an increase of $.2 million or 2.5%. The increase resulted from the
Company entering into a leveraged transaction during the first quarter of 2003,
which increased long-term interest expense. Despite this increase, the average
rate paid on interest-bearing liabilities during 2003 was 1.9%, compared to
2.2%, a decrease of 13.6% from 2002.
The most significant impact on net interest income between periods is
derived from the interaction of changes in the volume of and rates earned or
paid on interest-earning assets and interest-bearing liabilities. The volume of
earning dollars in loans and investments, compared to the volume of
interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
NET INTEREST INCOME (in millions) YEAR
- ---------------------------------------------
$ 17,806 2004
17,786 2003
19,888 2002
19,336 2001
17,345 2000
12 Penseco Financial Services Corporation / 2004 Annual Report
Distribution of Assets, Liabilities and Stockholders' Equity/Interest Rates and
Interest Differential
The table below presents average weekly 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 the years 2004,
2003 and 2002.
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury securities $ 6,206 $ 370 5.96% $ 30,127 $ 1,250 4.15% $ 36,550 $ 1,575 4.31%
U.S. Agency obligations 133,231 4,340 3.26 79,520 3,660 4.60 57,544 3,267 5.68
States & political subdivisions 41,142 1,931 7.11 20,433 947 7.02 8,962 439 7.42
Federal Home Loan Bank stock 5,704 94 1.65 4,911 97 1.98 1,960 69 3.52
Other 549 13 2.37 435 11 2.53 391 10 2.56
Held-to-maturity:
U.S. Agency obligations 74,291 3,334 4.49 75,194 3,365 4.48 1,862 58 3.11
States & political subdivisions 31,103 1,545 7.53 29,730 1,621 8.26 29,715 1,641 8.37
Loans, net of unearned income:
Real estate mortgages 185,440 10,044 5.42 194,135 11,246 5.79 245,016 16,412 6.70
Commercial 36,312 1,814 5.00 31,288 1,497 4.78 32,168 1,751 5.44
Consumer and other 34,287 1,774 5.17 36,997 1,890 5.11 39,405 2,390 6.07
Federal funds sold 5,434 58 1.07 35,620 340 .95 12,995 189 1.45
Interest on balances with banks 6,589 68 1.03 9,781 90 .92 6,277 98 1.56
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 560,288 $ 25,385 4.53% 548,171 $ 26,014 4.75% 472,845 $ 27,899 5.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 8,732 8,760 8,234
Bank premises and equipment 9,593 9,984 10,411
Accrued interest receivable 3,225 3,144 3,432
Other assets 3,040 4,482 3,083
Less: Allowance for loan losses 3,523 3,411 3,662
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 581,355 $ 571,130 $ 494,343
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 31,425 $ 115 .37% $ 28,738 $ 144 .50% $ 26,204 $ 159 .61%
Savings 81,812 346 .42 76,983 472 .61 71,470 700 .98
Money markets 89,161 707 .79 87,973 737 .84 91,561 1,329 1.45
Time - Over $100 28,067 806 2.87 32,525 844 2.59 37,741 1,398 3.70
Time - Other 92,752 1,985 2.14 105,858 2,873 2.71 116,659 4,139 3.55
Repurchase agreements 22,817 167 .73 22,266 183 .82 20,278 276 1.36
Short-term borrowings 595 10 1.68 699 11 1.57 562 10 1.78
Long-term borrowings 88,955 3,443 3.87 76,401 2,964 3.88 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 435,584 $ 7,579 1.74% 431,443 $ 8,228 1.91% 364,475 $ 8,011 2.20%
- ------------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 82,757 76,421 69,482
All other liabilities 1,545 2,763 3,124
Stockholders' equity 61,469 60,503 57,262
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 581,355 $ 571,130 $ 494,343
====================================================================================================================================
Interest Spread 2.79% 2.84% 3.70%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 17,806 $ 17,786 $ 19,888
====================================================================================================================================
FINANCIAL RATIOS
Net interest margin 3.18% 3.24% 4.21%
Return on average assets .96% 1.05% 1.37%
Return on average equity 9.11% 9.87% 11.79%
Average equity to average assets 10.57% 10.59% 11.58%
Dividend payout ratio 51.72% 48.56% 42.99%
Penseco Financial Services Corporation / 2004 Annual Report 13
DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE
Dollar Change
Amount Change in Change in in Rate-
2003 compared to 2002 of Change Volume Rate Volume
----------------------------------------------------------------------------------
EARNING Investment securities:
ASSETS Available-for-sale:
U.S. Treasury securities $ (880) $ (993) $ 545 $ (432)
U.S. Agency obligations 680 2,471 (1,066) (725)
States & political subdivisions 984 959 12 13
Equity securities (1) 19 (17) (3)
Held-to-maturity:
U.S. Agency obligations (31) (40) 9 -
States & political subdivisions (76) 75 (169) 18
Loans, net of unearned income:
Real estate mortgages (1,202) (503) (718) 19
Commercial 317 240 69 8
Consumer and other (116) (138) 22 -
Federal funds sold (282) (287) 43 (38)
Interest bearing balances with banks (22) (29) 11 (4)
----------------------------------------------------------------------------------
Total Interest Income (629) 1,774 (1,259) (1,144)
----------------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand - Interest bearing (29) 13 (37) (5)
LIABILITIES Savings (126) 29 (146) (9)
Money markets (30) 10 (44) 4
Time - Over $100 (38) (115) 91 (14)
Time - Other (888) (355) (603) 70
Repurchase agreements (16) 5 (20) (1)
Short-term borrowings (1) (2) 1 -
Long-term borrowings 479 487 (7) (1)
----------------------------------------------------------------------------------
Total Interest Expense (649) 72 (765) 44
----------------------------------------------------------------------------------
Net Interest Income $ 20 $ 1,702 $ (494) $(1,188)
==================================================================================
Dollar Change
Amount Change in Change in in Rate-
2003 compared to 2002 of Change Volume Rate Volume
----------------------------------------------------------------------------------
EARNING Investment securities:
ASSETS Available-for-sale:
U.S. Treasury securities $ (325) $ (277) $ (58) $ 10
U.S. Agency obligations 393 1,248 (621) (234)
States & political subdivisions 508 562 (24) (30)
Equity securities 29 105 (30) (46)
Held-to-maturity:
U.S. Agency obligations 3,307 2,281 26 1,000
States & political subdivisions (20) 1 (21) -
Loans, net of unearned income:
Real estate mortgages (5,166) (3,415) (2,230) 479
Commercial (254) (48) (212) 6
Consumer and other (500) (146) (378) 24
Federal funds sold 151 328 (65) (112)
Interest bearing balances with banks (8) 55 (41) (22)
----------------------------------------------------------------------------------
Total Interest Income (1,885) 694 (3,654) 1,075
----------------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand - Interest bearing (15) 15 (28) (2)
LIABILITIES Savings (228) 54 (264) (18)
Money markets (592) (52) (559) 19
Time - Over $100 (554) (193) (419) 58
Time - Other (1,266) (378) (980) 92
Repurchase agreements (93) 27 (110) (10)
Short-term borrowings 1 2 (1) -
Long-term borrowings 2,964 - - 2,964
----------------------------------------------------------------------------------
Total Interest Expense 217 (525) (2,361) 3,103
----------------------------------------------------------------------------------
Net Interest Income $ (2,102) $ 1,219 $ (1,293) $(2,028)
==================================================================================
14 Penseco Financial Services Corporation / 2004 Annual Report
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 Company believes that the judgments used in establishing the Allowance
for Loan Losses are based on reliable information. In assessing the sufficiency
of the Allowance for Loan Losses, management considers, among other things
described above, how well prior estimates have related to actual experience. The
Company has not found it necessary to change the allowance by material amounts,
which would call into question the reliability of the judgments used in its
calculation.
There are also no particular risk elements in the local economy that put a
group or category of loans at increased risk, however the Company has increased
its portfolio of commercial loans, which typically bear a higher risk. These
loans are typically secured by real estate to minimize this risk.
The process of determining the adequacy of the allowance is necessarily
judgmental and subject to changes in external conditions. Accordingly, there can
be no assurance that existing levels of the allowance will ultimately prove
adequate to cover actual loan losses.
OTHER INCOME
The following table sets forth information by category of other income for the
Company for the past three years:
Years Ended December 31, 2004 2003 2002
- --------------------------------------------------------------
Trust department income $ 1,353 $ 1,311 $ 1,266
Service charges on
deposit accounts 1,056 1,133 1,123
Merchant transaction income 5,001 5,005 5,519
Other fee income 1,650 1,630 1,562
Other operating income 177 1,323 553
Realized gains on
securities, net 357 341 1,009
- --------------------------------------------------------------
Total Other Income $ 9,594 $ 10,743 $ 11,032
==============================================================
Other income decreased $1,149 or 10.7% during 2004 to $9,594 from $10,743 for
2003. Service charge income decreased $77 or 6.8%. Other operating income
decreased $1,146, mostly due to a reduction of $1,083 in gains on the sale of
refinanced mortgage loans in the secondary market, which peaked during the third
quarter of 2003, while interest rates were falling. Refinancing activity slowed
as interest rates increased during 2004. Offsetting the decrease in other
operating income were increases in trust income of $42 or 3.2% and brokerage
income of $85 or 20.0%, mainly from increased business.
Other income decreased $289 or 2.6% during 2003 to $10,743 from $11,032 for
2002. Merchant transaction income decreased $514 or 9.3%, due to a loss of
service to a major merchant. Other fee income increased $68 or 4.4%, partly from
increased fees from mortgage loans serviced for others and offset by a decrease
in brokerage income due to the softness in the economy. Other operating income
increased $770, mainly due to a $624 increase in gains on sale of low-yield,
fixed-rate, non-portfolio mortgage loans. The Company also realized a security
gain of $341 due to the sale of a $5 million, short-term U.S. Treasury and $10
million of short-term U.S. Agency securities, which were re-deployed into longer
term U.S. Agency securities.
OTHER EXPENSES
The following table sets forth information by category of other expenses for the
Company for the past three years:
Years Ended December 31, 2004 2003 2002
- --------------------------------------------------------------
Salaries and employee
benefits $ 9,165 $ 9,010 $ 9,048
Occupancy expenses, net 1,255 1,388 1,384
Furniture and equipment
expenses 1,136 1,175 1,208
Merchant transaction
expenses 4,058 4,158 4,731
Other operating expenses 4,970 4,723 4,727
- --------------------------------------------------------------
Total Other Expenses $ 20,584 $ 20,454 $ 21,098
==============================================================
Other expenses increased $130 or 1% for 2004 to $20,584 from $20,454 for 2003.
Salaries and employee benefits increased $155 to $9,165 for 2004 from $9,010 for
2003, primarily due to merit increases and health care costs. Occupancy expense
decreased $133, largely from lower depreciation expense. Other operating
expenses increased $247 or 5.2%, mainly due to increased professional expenses.
Other expenses decreased $644 or 3.1% for 2003 to $20,454 from $21,098 for
2002. Salaries and employee benefits decreased $38 to $9,010 for 2003 from
$9,048 for 2002, despite increased pension costs of $361. Merchant transaction
expenses decreased $573 or 12.1%, the result of a loss of service to a major
merchant.
INCOME TAXES
Federal income tax expense decreased $557 or 34.2% to $1,071 in 2004 compared to
$1,628 in 2003, due to increased tax free income and decreased operating income.
Federal income tax expense decreased $628 or 27.8% to $1,628 in 2003
compared to $2,256 in 2002, due to increased tax free income and decreased
operating income.
The Company's effective income tax rate for 2004, 2003 and 2002 was 16.1%,
21.4% and 25.0%, respectively.
The Company uses the asset and liability method of accounting for deferred
income taxes. If current available information raises doubt as to the
realization of deferred tax assets, a valuation allowance is established. The
Company evaluates the recoverability of deferred tax assets based on its ability
to generate future profits. The Company employs budgeting and periodic reporting
processes to continually monitor its progress. Historically, the Company has had
sufficient profits for recovery of deferred tax benefits.
For further discussion pertaining to Federal income taxes, see Note 14 to
the Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets decreased $20.9 million or 3.6% during 2004 to $563.7 million at
December 31, 2004 compared to $584.6 million at December 31, 2003. For the year
ended December 31, 2003, total assets increased $87.6 million to $584.6 million
or a 17.6% increase over $497.0 million at December 31, 2002, largely due to a
leveraged transaction during 2003 as described elsewhere in this report.
INVESTMENT PORTFOLIO
The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.
The following table presents the carrying value, by security type, for the
Company's investment portfolio:
December 31, 2004 2003 2002
- --------------------------------------------------------------------
U.S.Treasury securities $ 5,077 $ 15,387 $ 36,456
U.S. Agency obligations 190,547 221,156 52,026
States & political subdivisions 60,789 50,228 49,294
Equity securities 6,265 6,354 1,356
- --------------------------------------------------------------------
Total Investment Securities $ 262,678 $ 293,125 $ 139,132
===================================================================
Penseco Financial Services Corporation / 2004 Annual Report 15
LOAN PORTFOLIO
Details regarding the Company's loan portfolio for the past five years are as
follows:
December 31, 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------
Real estate - construction
and land development $ 6,805 $ 3,078 $ 5,031 $ 9,124 $ 9,321
Real estate mortgages 196,149 172,964 217,883 246,486 234,212
Commercial 41,560 30,056 30,077 30,001 21,566
Credit card and related plans 2,872 2,403 2,320 2,377 2,267
Installment 25,679 25,855 27,306 30,142 30,290
Obligations of states &
political subdivisions 7,111 6,026 6,239 5,678 10,085
- -------------------------------------------------------------------------------------------
Loans, net of unearned income 280,176 240,382 288,856 323,808 307,741
Less: Allowance for loan losses 3,600 3,500 3,347 3,600 3,100
- -------------------------------------------------------------------------------------------
Loans, net $ 276,576 $ 236,882 $ 285,509 $ 320,208 $ 304,641
===========================================================================================
LOANS
Total net loans increased $39.7 million to $276.6 million at December 31, 2004
from $236.9 million at December 31, 2003, an increase of 16.8%. This increase is
mainly due to strong loan demand with a mix of fixed and variable rate loans.
Total net loans decreased $48.6 million to $236.9 million at December 31,
2003 from $285.5 million at December 31, 2002, a decrease of 17.0%. The decrease
is due to the refinancing of higher yielding residential portfolio mortgage
loans with low fixed-rate obligations, which then were sold in the secondary
market.
NET LOANS (in millions) YEAR
- -------------------------------------------
$ 276,576 2004
236,882 2003
285,509 2002
320,208 2001
304,641 2000
Loan Quality
The lending activities of the Company are guided by the comprehensive 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.
16 Penseco Financial Services Corporation / 2004 Annual Report
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:
December 31, 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------
Non-accrual loans $ 1,991 $ 1,533 $ 2,245 $ 1,917 $ 1,210
Loans past due 90 days or more and accruing:
Guaranteed student loans 253 169 394 304 313
Credit card and home equity loans 13 3 - 22 23
- ---------------------------------------------------------------------------------------------
Total non-performing loans 2,257 1,705 2,639 2,243 1,546
Other real estate owned 176 121 59 143 201
- ---------------------------------------------------------------------------------------------
Total non-performing assets $ 2,433 $ 1,826 $ 2,698 $ 2,386 $ 1,747
=============================================================================================
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 non-accrual 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.
Loans on which the accrual of interest has been discontinued or reduced
amounted to $1,991, $1,533 and $2,245 at December 31, 2004, 2003 and 2002,
respectively. If interest on those loans had been accrued, such income would
have been $199, $198 and $171 for 2004, 2003 and 2002, respectively. Interest
income on those loans, which is recorded only when received, amounted to $16,
$29 and $77 for 2004, 2003 and 2002, respectively. There are no commitments to
lend additional funds to borrowers whose loans are on 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 portfolio quality,
and current economic conditions that may affect the borrower's ability to pay.
As of December 31, 2004, there are no significant loans as to which management
has serious doubt about their collectibility.
At December 31, 2004, 2003 and 2002, 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:
Years Ended December 31, 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------
Balance at beginning of year $ 3,500 $ 3,347 $ 3,600 $ 3,100 $ 2,950
- ----------------------------------------------------------------------------------------
Charge-offs:
Real estate mortgages - 11 91 38 37
Commercial and all others 12 289 944 389 51
Credit card and related plans 34 51 44 37 27
Installment loans 7 4 22 19 24
- ----------------------------------------------------------------------------------------
Total charge-offs 53 355 1,101 483 139
- ----------------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 3 24 31 20 30
Commercial and all others - 6 - - -
Credit card and related plans 2 2 1 1 9
Installment loans 4 - 3 8 17
- ----------------------------------------------------------------------------------------
Total recoveries 9 32 35 29 56
- ----------------------------------------------------------------------------------------
Net charge-offs 44 323 1,066 454 83
- ----------------------------------------------------------------------------------------
Provision charged to operations 144 476 813 954 233
- ----------------------------------------------------------------------------------------
Balance at End of Year $ 3,600 $ 3,500 $ 3,347 $ 3,600 $ 3,100
========================================================================================
Ratio of net charge-offs
to average loans outstanding 0.02% 0.12% 0.34% 0.14% 0.03%
========================================================================================
Penseco Financial Services Corporation / 2004 Annual Report 17
The allowance for loan losses is allocated as follows:
December 31, 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Amount %1 Amount %1 Amount %1 Amount %1 Amount %1
- ---------------------------------------------------------------------------------------------------------------
Real estate mortgages $ 1,100 72% $ 1,100 73% $ 1,600 77% $ 1,700 79% $ 1,500 79%
Commercial
and all others 2,070 18 1,970 15 1,222 13 1,375 11 1,100 10
Credit card and
related plans 180 1 180 1 175 1 175 1 150 1
Personal installment loans 250 9 250 11 350 9 350 9 350 10
- ---------------------------------------------------------------------------------------------------------------
Total $ 3,600 100% $ 3,500 100% $ 3,347 100% $ 3,600 100% $ 3,100 100%
===============================================================================================================
Note: 1 - Percent of loans in each category to total loans
DEPOSITS
The primary source of funds to support the Company's operations is its deposit
base. Company deposits decreased $12.6 million to $395.3 million at December 31,
2004 from $407.9 million at December 31, 2003, a decrease of 3.1%, mainly due to
a decrease in higher rate time deposits. Company deposits decreased $6.8 million
to $407.9 million at December 31, 2003 from $414.7 million at December 31, 2002,
a decrease of 1.6%, due to a decrease in time deposits.
The maturities of time deposits of $100,000 or more are as follows:
Three months or less $ 6,079
Over three months through six months 2,918
Over six months through twelve months 3,835
Over twelve months 10,947
--------
Total $ 23,779
========
DEPOSITS (in millions) YEAR
- --------------------------------------
$ 395,301 2004
407,944 2003
414,664 2002
406,531 2001
387,439 2000
DIVIDEND POLICY
Payment of future dividends will be subject to the discretion of the Board of
Directors and will depend upon the earnings of the Company, its financial
condition, its capital requirements, its need for funds and other matters as the
Board deems appropriate.
Dividends on the Company common stock, if approved by the Board of
Directors, are customarily paid on or about March 15, June 15, September 15 and
December 15.
ASSET/LIABILITY MANAGEMENT
The Company's policy is to match its level of rate-sensitive assets and
rate-sensitive liabilities within a limited range, thereby reducing its exposure
to interest rate fluctuations. While no single measure can completely identify
the impact of changes in interest rates on net interest income, one gauge of
interest rate-sensitivity is to measure, over a variety of time periods, the
differences in the amounts of the Company's rate-sensitive assets and
rate-sensitive liabilities. These differences, or "gaps", provide an indication
of the extent to which net interest income may be affected by future changes in
interest rates. A positive gap exists when rate-sensitive assets exceed
rate-sensitive liabilities and indicates that a greater volume of assets than
liabilities will reprice during a given period. This mismatch may enhance
earnings in a rising interest rate environment and may inhibit earnings when
interest rates decline. Conversely, when rate-sensitive liabilities exceed
rate-sensitive assets, referred to as a negative gap, it indicates that a
greater volume of liabilities than assets may reprice during the period. In this
case, a rising interest rate environment may inhibit earnings and declining
interest rates may enhance earnings. However, because interest rates for
different asset and liability products offered by financial institutions respond
differently, the gap is only a general indicator of interest rate sensitivity.
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. Management does not
foresee any adverse trends in liquidity.
18 Penseco Financial Services Corporation / 2004 Annual Report
LIQUIDITY (continued)
The Company remains in a highly liquid condition both in the short and long
term. Sources of liquidity include the Company's U.S. Treasury and U.S. Agency
bond portfolios, 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 Company is not a party to any commitments,
guarantees or obligations that could materially affect its liquidity.
The Company offers collateralized repurchase agreements, that have a one
day maturity, as an alternative deposit option for its customers. The Company
also has long-term debt outstanding to the FHLB, which was used to purchase a
Freddie Mac pool of residential mortgages, as described earlier in this report.
The Company continues to have $186,243 of available borrowing capacity with the
FHLB.
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, created under prevailing terms and collateral
requirements such as commitments to extend credit, financial guarantees and
letters of credit, which are not reflected in the accompanying Financial
Statements. The Company does not anticipate any losses as a result of these
transactions. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 2004 and 2003 are as follows:
2004 2003
- ----------------------------------------------------
Commitments to extend credit:
Fixed rate $ 21,152 $ 19,147
Variable rate $ 67,502 $ 52,188
Standby letters of credit $ 17,662 $ 15,363
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
RELATED PARTIES
The Company does not have any material transactions involving related persons or
entities, other than traditional banking transactions, which are made on the
same terms and conditions as those prevailing at the time for comparable
transactions with unrelated parties. The Bank has issued standby letters of
credit for the accounts of related parties in the amount of $6,932.
ASSETS (in millions) YEAR
- -------------------------------------
$ 563,708 2004
584,590 2003
496,956 2002
482,551 2001
467,230 2000
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 20.03% at December 31,
2004. 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.
STOCKHOLDERS' EQUITY (in millions) YEAR
- ----------------------------------------------
$ 62,376 2004
60,807 2003
58,975 2002
54,648 2001
50,067 2000
Penseco Financial Services Corporation / 2004 Annual Report 19
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
The objective is to measure the
effect on net interest income and to
adjust the balance sheet to
minimize the inherent risk while at
the same time maximizing income.
The Company currently does not enter into derivative financial instruments,
which include futures, forwards, interest rate swaps, option contracts and other
financial instruments with similar characteristics. However, the Company is
party to traditional financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, financial guarantees
and letters of credit. These traditional instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Balance Sheets. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Standby letters of credit
are conditional commitments issued to guarantee the performance of a customer to
a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximizing income. Management realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and an interest rate shock simulation report. The Company
has no market risk sensitive instruments held for trading purposes. It appears
the Company's market risk is reasonable at this time.
The following table provides information about the Company's market rate
sensitive instruments used for purposes other than trading that are sensitive to
changes in interest rates. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (e.g., DDA, interest checking, savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates based on
the Company's historical experience, management's judgment, and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.
20 Penseco Financial Services Corporation / 2004 Annual Report
MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2004
The table below presents States and political subdivisions securities on a fully
taxable equivalent basis.
Non-Rate
2005 2006 2007 2008 2009 Thereafter Sensitive Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed interest rate securities:
U.S. Treasury securities $ 5,077 $ - $ - $ - $ - $ - $ - $ 5,077 $ 5,077
Yield 6.80% - - - - - - 6.80%
U.S. Agency obligations 32,386 42,842 2,392 2,498 2,609 53,508 - 136,235 135,879
Yield 4.48% 2.80% 4.37% 4.37% 4.37% 4.37% - 3.90%
States & political subdivisions - - - - 7,828 52,961 - 60,789 63,659
Yield - - - - 8.21% 7.24% - 7.36%
Variable interest rate securities:
U.S. Agency obligations 15,629 15,544 16,001 3,511 3,627 - - 54,312 54,321
Yield 2.93% 2.90% 2.90% 3.28% 3.28% - - 2.96%
Federal Home Loan Bank stock - - - - - 5,604 - 5,604 5,604
Yield - - - - - 2.43% - 2.43%
Other - - - - - 661 - 661 661
Yield - - - - - 2.03% - 2.03%
Fixed interest rate loans:
Real estate mortgages 5,690 5,534 6,317 5,288 7,749 56,142 - 86,720 87,190
Yield 6.19% 6.21% 6.38% 6.46% 5.97% 6.24% - 6.23%
Consumer and other 1,567 1,413 1,289 1,095 919 1,575 - 7,858 7,875
Yield 6.52% 6.34% 6.12% 5.84% 5.70% 6.56% - 6.24%
Variable interest rate loans:
Real estate mortgages 20,348 10,380 11,407 9,989 9,913 54,197 - 116,234 111,054
Yield 5.22% 5.09% 5.09% 5.06% 5.06% 5.05% - 5.09%
Commercial 41,560 - - - - - - 41,560 41,560
Yield 5.00% - - - - - - 5.00%
Consumer and other 12,544 3,882 3,444 2,908 3,053 1,973 - 27,804 28,016
Yield 5.62% 6.85% 6.12% 4.98% 4.97% 5.06% - 5.68%
Less: Allowance for loan losses 606 320 339 291 326 1,718 - 3,600
Interest bearing deposits with banks 534 - - - - - - 534 534
Yield 1.97% - - - - - - 1.97%
Cash and due from banks - - - - - - 7,763 7,763 7,763
Other assets - - - - - - 16,157 16,157
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 134,729 $ 79,275 $ 40,511 $ 24,998 $ 35,372 $ 224,903 $ 23,920 $ 563,708 $ 549,193
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
Demand - Interest bearing $ - $ 31,161 $ - $ - $ - $ - $ - $ 31,161 $ 31,161
Yield - .32% - - - - - .32%
Savings - 80,307 - - - - - 80,307 80,307
Yield - .34% - - - - - .34%
Money markets 91,604 - - - - - - 91,604 91,604
Yield .92% - - - - - - .92%
Time - Other 9,102 - - - - - - 9,102 9,102
Yield 3.49% - - - - - - 3.49%
Fixed interest rate deposits:
Time - Over $100,000 12,832 4,143 3,999 2,093 712 - - 23,779 24,184
Yield 1.83% 3.20% 3.95% 3.77% 3.62% - - 2.65%
Time - Other 38,877 11,498 14,409 6,673 3,853 1,100 - 76,410 77,667
Yield 1.62% 2.74% 4.10% 3.61% 3.35% 3.75% - 2.55%
Demand - Non-interest bearing - - - - - - 82,938 82,938 82,938
Repurchase agreements 18,398 - - - - - - 18,398 18,398
Yield .75% - - - - - - .75%
Short-term borrowings 886 - - - - - - 886 886
Yield 1.72% - - - - - - 1.72%
Long-term borrowings 9,220 9,547 9,887 8,780 8,612 38,574 - 84,620 84,655
Yield 3.50% 3.50% 3.50% 3.64% 3.69% 4.27% - 3.88%
Other liabilities - - - - - - 2,127 2,127
Stockholders' equity - - - - - - 62,376 62,376
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 180,919 $ 136,656 $ 28,295 $ 17,546 $ 13,177 $ 39,674 $ 147,441 $ 563,708 $ 500,902
====================================================================================================================================
Excess of (liabilities) assets
subject to interest rate change $ (46,190) $ (57,381) $ 12,216 $ 7,452 $ 22,195 $ 185,229 $(123,521) $ -
====================================================================================================================================
Penseco Financial Services Corporation / 2004 Annual Report 21
ITEM 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets
(in thousands, except per share amounts)
December 31, 2004 2003
---------------------------------------------------------------
ASSETS Cash and due from banks $ 7,763 $ 10,062
Interest bearing balances with banks 534 4,693
Federal funds sold - 23,600
---------------------------------------------------------------
Cash and Cash Equivalents 8,297 38,355
Investment securities:
Available-for-sale, at fair value 167,410 179,600
Held-to-maturity (fair value of $97,791
and $115,672, respectively) 95,268 113,525
---------------------------------------------------------------
Total Investment Securities 262,678 293,125
Loans, net of unearned income 280,176 240,382
Less: Allowance for loan losses 3,600 3,500
---------------------------------------------------------------
Loans, Net 276,576 236,882
Bank premises and equipment 9,233 9,935
Other real estate owned 176 121
Accrued interest receivable 3,406 3,298
Other assets 3,342 2,874
---------------------------------------------------------------
Total Assets $ 563,708 $ 584,590
===============================================================
LIABILITIES Deposits:
Non-interest bearing $ 82,938 $ 79,726
Interest bearing 312,363 328,218
---------------------------------------------------------------
Total Deposits 395,301 407,944
Other borrowed funds:
Repurchase agreements 18,398 19,454
Short-term borrowings 886 823
Long-term borrowings 84,620 93,523
Accrued interest payable 886 1,158
Other liabilities 1,241 881
---------------------------------------------------------------
Total Liabilities 501,332 523,783
---------------------------------------------------------------
STOCKHOLDERS' Common stock, $.01 par value, 15,000,000
EQUITY shares authorized, 2,148,000
shares issued and outstanding 21 21
Surplus 10,819 10,819
Retained earnings 50,832 48,131
Accumulated other comprehensive income 704 1,836
---------------------------------------------------------------
Total Stockholders' Equity 62,376 60,807
---------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 563,708 $ 584,590
===============================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
22 Penseco Financial Services Corporation / 2004 Annual Report
Consolidated Statements of Income
(in thousands, except per share amounts)
Years Ended December 31, 2004 2003 2002
-------------------------------------------------------------------------
INTEREST Interest and fees on loans $ 13,632 $ 14,632 $ 20,553
INCOME Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 8,044 8,275 4,900
States & political subdivisions 3,476 2,569 2,080
Other securities 107 108 79
Interest on Federal funds sold 58 340 189
Interest on balances with banks 68 90 98
-------------------------------------------------------------------------
Total Interest Income 25,385 26,014 27,899
-------------------------------------------------------------------------
INTEREST Interest on time deposits
EXPENSE of $100,000 or more 806 844 1,398
Interest on other deposits 3,153 4,226 6,327
Interest on other borrowed funds 3,620 3,158 286
-------------------------------------------------------------------------
Total Interest Expense 7,579 8,228 8,011
-------------------------------------------------------------------------
Net Interest Income 17,806 17,786 19,888
Provision for loan losses 144 476 813
-------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 17,662 17,310 19,075
-------------------------------------------------------------------------
OTHER Trust department income 1,353 1,311 1,266
INCOME Service charges on deposit accounts 1,056 1,133 1,123
Merchant transaction income 5,001 5,005 5,519
Other fee income 1,650 1,630 1,562
Other operating income 177 1,323 553
Realized gains on securities, net 357 341 1,009
-------------------------------------------------------------------------
Total Other Income 9,594 10,743 11,032
-------------------------------------------------------------------------
OTHER Salaries and employee benefits 9,165 9,010 9,048
EXPENSES Occupancy expenses, net 1,255 1,388 1,384
Furniture and equipment expenses 1,136 1,175 1,208
Merchant transaction expenses 4,058 4,158 4,731
Other operating expenses 4,970 4,723 4,727
-------------------------------------------------------------------------
Total Other Expenses 20,584 20,454 21,098
-------------------------------------------------------------------------
Income before income taxes 6,672 7,599 9,009
Applicable income taxes 1,071 1,628 2,256
-------------------------------------------------------------------------
NET INCOME Net Income $ 5,601 $ 5,971 $ 6,753
=========================================================================
PER SHARE Earnings Per Share $ 2.61 $ 2.78 $ 3.14
=========================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Penseco Financial Services Corporation / 2004 Annual Report 23
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2004, 2003 and 2002
- --------------------------------------------
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(in thousands except per share data) Stock Surplus Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 21 $ 10,819 $ 41,206 $ 2,602 $ 54,648
Comprehensive income:
Net income, 2002 - - 6,753 - 6,753
Unrealized gains on securities,
net of reclassification adjustment
and taxes - - - 473 473
-------
Comprehensive income 7,226
Cash dividends declared ($1.35 per share) - - (2,899) - (2,899)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 21 10,819 45,060 3,075 58,975
Comprehensive income:
Net income, 2003 - - 5,971 - 5,971
Unrealized losses on securities,
net of reclassification adjustment
and taxes - - - (1,239) (1,239)
-------
Comprehensive income 4,732
Cash dividends declared ($1.35 per share) - - (2,900) - (2,900)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 21 10,819 48,131 1,836 60,807
Comprehensive income:
Net income, 2004 - - 5,601 - 5,601
Unrealized losses on securities,
net of reclassification adjustment
and taxes - - - (1,132) (1,132)
-------
Comprehensive income 4,469
Cash dividends declared ($1.35 per share) - - (2,900) - (2,900)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 21 $ 10,819 $ 50,832 $ 704 $ 62,376
==========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
24 Penseco Financial Services Corporation / 2004 Annual Report
Consolidated Statements of Cash Flows
(in thousands) Years Ended December 31, 2004 2003 2002
------------------------------------------------------------------------------------------
OPERATING Net Income $ 5,601 $ 5,971 $ 6,753
ACTIVITIES Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 813 1,119 1,240
Provision for loan losses 144 476 813
Deferred income tax (benefit) provision (119) (182) 95
Amortization of securities
(net of accretion) 1,573 1,050 201
Net realized gains on securities (357) (341) (1,009)
(Gain) loss on other real estate (2) 15 2
Loss on disposition of fixed assets - - 7
(Increase) decrease in interest receivable (108) 101 200
Decrease (increase) in other assets 366 1,441 (2,419)
Increase (decrease) in income taxes payable 117 252 (252)
Decrease in interest payable (272) (159) (260)
Increase (decrease) in other liabilities 110 (239) (34)
------------------------------------------------------------------------------------------
Net cash provided by
operating activities 7,866 9,504 5,337
------------------------------------------------------------------------------------------
INVESTING Purchase of investment securities
ACTIVITIES available-for-sale (49,975) (122,157) (34,798)
Proceeds from sales and maturities of investment
securities available-for-sale 41,938 41,407 24,797
Purchase of investment securities to be held-to-maturity - (103,031) -
Proceeds from repayments of investment
securities available-for-sale 17,893 7,308 -
Proceeds from repayments of investment
securities to be held-to-maturity 17,661 19,894 1,017
Net loans (originated) repaid (40,015) 47,677 33,629
Proceeds from other real estate 124 397 339
Proceeds from sale of fixed assets - - 5
Investment in premises and equipment (111) (1,134) (389)
------------------------------------------------------------------------------------------
Net cash (used) provided by
investing activities (12,485) (109,639) 24,600
------------------------------------------------------------------------------------------
FINANCING Net increase in demand and savings deposits 5,977 6,862 18,906
ACTIVITIES Net (payments) proceeds on time deposits (18,620) (13,582) (10,773)
(Decrease) increase in repurchase agreements (1,056) 35 1,279
Net increase (decrease) in short-term borrowings 63 (67) 873
Proceeds from long-term borrowings - 100,000 -
Payments on long-term borrowings (8,903) (6,477) -
Cash dividends paid (2,900) (2,900) (2,899)
------------------------------------------------------------------------------------------
Net cash (used) provided by
financing activities (25,439) 83,871 7,386
------------------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (30,058) (16,264) 37,323
Cash and cash equivalents at January 1 38,355 54,619 17,296
------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 8,297 $ 38,355 $ 54,619
==========================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Penseco Financial Services Corporation / 2004 Annual Report 25
General Notes To Financial Statements
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Penseco Financial Services Corporation (Company) is a financial holding company,
incorporated in 1997 under the laws of Pennsylvania. It is the parent company of
Penn Security Bank and Trust Company (Bank), a state chartered bank.
The Company operates from nine banking offices under a state bank charter
and provides full banking services, including trust services, to individual and
corporate customers primarily in Northeastern Pennsylvania. The Company's
primary deposit products are savings and demand deposit accounts and
certificates of deposit. Its primary lending products are real estate,
commercial and consumer loans.
The Company's revenues are attributable to a single reportable segment,
therefore segment information is not presented.
The accounting policies of the Company conform with accounting principles
generally accepted in the United States of America and with general practices
within the banking industry.
BASIS OF PRESENTATION
The Financial Statements of the Company have been consolidated with those of its
wholly-owned subsidiary, Penn Security Bank and Trust Company, eliminating all
intercompany items and transactions.
The Statements are presented on the accrual basis of accounting.
All information is presented in thousands of dollars, except per share
amounts.
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.
EMERGING ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No.51 (FIN 46). This interpretation provides guidance for
identifying a controlling interest in a variable interest entity established by
means other than voting interests. FIN 46 also requires consolidation of a
variable interest entity (VIE) by an enterprise that holds such a controlling
interest. In December 2003, the FASB issued FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities - an Interpretation of ARB 51 (FIN
46(R)). This revision to FIN 46 primarily classifies the required accounting for
VIEs and included a deferral of the effective date and provisions for additional
scope exceptions for certain types of variable interests. Application of FIN 46
(R) was required in financial statements of public entities that have interests
in variable interest entities or potential variable interest entities commonly
referred to as special - purpose entities for periods ending after December 15,
2003. Application by public entities (other than small business users) for all
other types of entities was required in financial statements for periods ending
after March 15, 2004. The adoption of FIN 46 (R) did not have a material impact
on the Company's consolidated financial position, results of operations or cash
flows.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (Revised 2004), Share-Based Payment. Statement No. 123
(Revised 2004) is a revision of FASB Statement 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. Statement No. 123 (Revised 2004)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award, except in certain circumstances. That cost will be recognized over
the period during which an employee is required to provide service in exchange
for the award. This statement is effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005.
The Company has not issued any shared-based payments that will be required
to be accounted under Statement No. 123 (Revised 2004).
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 153, Exchanges of Nonmonetary Assets--An Amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions. Statement No. 153 eliminates
the exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with
an exception for exchanges that do not have commercial substance. Statement No.
153 specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. The Statement is effective for fiscal periods beginning after June 15,
2005.
The Company has not been a party to any nonmonetary exchanges that would be
impacted by the adoption of Statement No. 153.
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, which approximates
the interest method, over the remaining period to maturity.
Securities Available-for-Sale Bonds, notes, debentures, mortgage-backed
securities 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.
26 Penseco Financial Services Corporation / 2004 Annual Report
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The amortization of premiums on mortgage-backed securities is done based on
management's estimate of the lives of the securities, adjusted, when necessary,
for advanced prepayments in excess of those estimates.
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.
LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES
Loans are stated at the principal amount outstanding, net of any unearned
income, deferred loan fees and the allowance for loan losses. Interest is
accrued daily on the outstanding balances.
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 non-accrual 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.
The provision for loan losses is based on past loan loss experience,
management's evaluation of the potential loss in the current loan portfolio
under current economic conditions and such other factors as, in management's
best judgement, deserve current recognition in estimating loan losses. The
annual 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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Provision for depreciation and amortization, computed principally on the
straight-line method, is charged to operating expenses over the estimated useful
lives of the assets. Maintenance and repairs are charged to current expense as
incurred.
LONG-LIVED ASSETS
The Company reviews the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that carrying amounts of
the assets might not be recoverable, as prescribed in Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144).
LOAN SERVICING
The Company generally retains the right to service mortgage loans sold to
others. The cost allocated to the mortgage servicing rights retained has been
recognized as a separate asset and is being amortized in proportion to and over
the period of estimated net servicing income.
Mortgage servicing rights are evaluated for impairment based on the fair
value of those rights. Fair values are estimated using discounted cash flows
based on current market rates of interest and current expected future prepayment
rates. For purposes of measuring impairment, the rights must be stratified by
one or more predominant risk characteristics of the underlying loans. The
Company stratifies its capitalized mortgage servicing rights based on the
product type, interest rate and term of the underlying loans. The amount of
impairment recognized is the amount, if any, by which the amortized cost of the
rights for each stratum exceed the fair value.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expenses for the years
ended December 31, 2004, 2003 and 2002, amounted to $476, $473 and $650,
respectively.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) as well as deferred taxes on temporary differences,
between the amount of taxable income and pre-tax financial income and between
the tax bases of assets and liabilities and their reported amounts in the
Financial Statements. Deferred tax assets and liabilities are included in the
Financial Statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes (SFAS 109). As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
PENSION EXPENSE
Pension expense has been determined in accordance with Statement of Financial
Accounting Standards No. 87, Employers Accounting for Pensions (SFAS 87).
POSTRETIREMENT BENEFITS EXPENSE
Postretirement benefits expense has been determined in accordance with Statement
of Financial Accounting Standards No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions (SFAS 106).
CASH FLOWS
For purposes of the Statements of Cash Flows, cash and cash equivalents include
cash on hand, due from banks, interest bearing balances with banks and Federal
funds sold for a one-day period.
The Company paid interest and income taxes during the years ended December 31,
2004, 2003 and 2002 as follows:
2004 2003 2002
- -----------------------------------------------------
Income taxes paid $ 802 $ 1,698 $ 2,636
Interest paid $ 7,851 $ 8,387 $ 8,271
Non-cash transactions during the years ended December 31, 2004, 2003 and 2002,
comprised entirely of the net acquisition of real estate in the settlement of
loans, amounted to $177, $474 and $257, respectively.
TRUST ASSETS AND INCOME
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the Financial Statements since such items are not assets of
the Company. Trust income is reported on the accrual basis of accounting.
EARNINGS PER SHARE
Basic earnings per share is computed on the weighted average number of common
shares outstanding during each year (2,148,000) as prescribed in Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). A
calculation of diluted earnings per share is not applicable to the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2004
Penseco Financial Services Corporation / 2004 Annual Report 27
2 CASH AND DUE FROM BANKS
Cash and due from banks are summarized as follows:
December 31, 2004 2003
- -----------------------------------------------------------
Cash items in process of collection $ 2,951 $ 5,452
Non-interest bearing balances 1,952 1,371
Cash on hand 2,860 3,239
- -----------------------------------------------------------
Total $ 7,763 $ 10,062
===========================================================
The Company may, from time to time, maintain bank balances with other financial
institutions in excess of $100,000 each. Management is not aware of any evidence
that would indicate that such deposits are at risk.
- --------------------------------------------------------------------------------
3 INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at December 31, 2004
and 2003 are as follows:
AVAILABLE-FOR-SALE
Gross Gross
Amortized Unrealized Unrealized Fair
2004 Cost Gains Losses Value
- ---------------------------------------------------------------------------
U.S. Treasury securities $ 5,000 $ 77 $ - $ 5,077
U.S. Agency securities 70,777 510 541 70,746
Mortgage-backed
securities 53,782 36 36 53,782
States & political
subdivisions 30,910 686 56 31,540
Total Debt Securities 160,469 1,309 633 161,145
Equity securities 5,873 392 - 6,265
- ---------------------------------------------------------------------------
Total Available -
for-Sale $ 166,342 $ 1,701 $ 633 $ 167,410
===========================================================================
AVAILABLE-FOR-SALE
Gross Gross
Amortized Unrealized Unrealized Fair
2003 Cost Gains Losses Value
- ---------------------------------------------------------------------------
U.S. Treasury securities $ 15,008 $ 379 $ - $ 15,387
U.S. Agency securities 63,568 1,435 - 65,003
Mortgage-backed
securities 71,975 147 107 72,015
States & political
subdivisions 20,158 683 - 20,841
- ---------------------------------------------------------------------------
Total Debt Securities 170,709 2,644 107 173,246
Equity securities 6,109 245 - 6,354
- ---------------------------------------------------------------------------
Total Available -
for-Sale $ 176,818 $ 2,889 $ 107 $179,600
===========================================================================
Equity securities at December 31, 2004 and 2003, consisted primarily of Federal
Home Loan Bank stock, which is a required investment in order to participate in
an available line of credit program. The stock is stated at par value as there
is no readily determinable fair value.
A summary of transactions involving available-for-sale debt securities in 2004,
2003 and 2002 are as follows:
December 31, 2004 2003 2002
- ------------------------------------------------------------
Proceeds from sales $ 18,380 $ 15,640 $ 13,832
Gross realized gains 385 341 1,009
Gross realized losses 28 - -
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
2004 Cost Gains Losses Value
- ---------------------------------------------------------------------------
Mortgage-backed
securities $ 66,019 $ 10 $ 357 $ 65,672
States & political
subdivisions 29,249 2,870 - 32,119
- ---------------------------------------------------------------------------
Total Held-to-
Maturity $ 95,268 $ 2,880 $ 357 $ 97,791
===========================================================================
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
2003 Cost Gains Losses Value
- ---------------------------------------------------------------------------
Mortgage-backed
securities $ 84,138 $ 8 $ 580 $ 83,566
States & political
subdivisions 29,387 2,719 - 32,106
- ---------------------------------------------------------------------------
Total Held-to-
Maturity $ 113,525 $ 2,727 $ 580 $ 115,672
===========================================================================
Investment securities with amortized costs and fair values of $104,700 and
$107,574 at December 31, 2004 and $81,461 and $85,653 at December 31, 2003, were
pledged to secure trust funds, public deposits and for other purposes as
required by law.
The amortized cost and fair value of debt securities at December 31, 2004
by contractual maturity, are shown in the following table. 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.
Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 5,000 $ 5,077 $ - $ -
U.S. Agency securities 30,019 30,364 - -
After one year through
five years:
U.S. Agency securities 40,758 40,382 - -
After ten years:
States & political
subdivisions 30,910 31,540 29,249 32,119
- --------------------------------------------------------------------------------
Subtotal 106,687 107,363 29,249 32,119
Mortgage-backed
securities 53,782 53,782 66,019 65,672
- --------------------------------------------------------------------------------
Total Debt Securities $ 160,469 $ 161,145 $ 95,268 $ 97,791
================================================================================
28 Penseco Financial Services Corporation / 2004 Annual Report
3 INVESTMENT SECURITIES (CONTINUED)
The gross fair value and unrealized losses of the Company's investments,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at December 31, 2004 and
2003 are as follows:
Less than twelve months Twelve months or more Totals
- ------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2004 Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------
U.S. Agency securities $ 35,064 $ 541 $ - $ - $ 35,064 $ 541
Mortgage-backed securities 93,527 393 - - 93,527 393
States & political subdivisions 3,257 24 4,889 32 8,146 56
- ------------------------------------------------------------------------------------------------------------
Total $ 131,848 $ 958 $ 4,889 $ 32 $ 136,737 $ 990
============================================================================================================
Less than twelve months Twelve months or more Totals
- ------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2003 Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 130,285 $ 687 $ - $ - $ 130,285 $ 687
- ------------------------------------------------------------------------------------------------------------
Total $ 130,285 $ 687 $ - $ - $ 130,285 $ 687
============================================================================================================
The table above at December 31, 2004, includes seventeen (17) securities that
have unrealized losses for less than twelve months and ten (10) securities that
have been in an unrealized loss position for twelve or more months.
U.S. Agency Securities
The unrealized losses on the Company's investments in these obligations were
caused by recent interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less
than the par value of the investment. Because the Company has the ability to
hold these investments until a recovery of fair value, which may be maturity,
the Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2004.
Mortgage-Backed Securities
The unrealized losses on the Company's investment in mortgage-backed securities
were caused by recent interest rate increases. The contractual cash flows of
these investments are guaranteed by an agency of the U.S. government.
Accordingly, it is expected that these securities would not be settled at a
price less than the amortized cost of the Company's investment. Because the
decline in market value is attributable to changes in interest rates and not
credit quality and because the Company has the ability to hold these investments
until a recovery of fair value, which may be maturity, the Company does not
consider these investments to be other-than-temporarily impaired at December 31,
2004.
State and Political Subdivisions
The unrealized losses on the Company's investments in these obligations were
caused by recent interest rate increases. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less
than the par value of the investment. Because the Company has the ability to
hold these investments until a recovery of fair value, which may be maturity,
the Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2004.
Penseco Financial Services Corporation / 2004 Annual Report 29
4 LOANS
Major classifications of loans are as follows:
December 31, 2004 2003
- -------------------------------------------------------------------
Loans secured by real estate:
Construction and land development $ 6,805 $ 3,078
Secured by farmland - -
Secured by 1-4 family residential
properties:
Revolving, open-end loans 19,356 18,945
Secured by first liens 102,583 93,380
Secured by junior liens 17,761 15,588
Secured by multi-family properties 411 165
Secured by non-farm, non-residential
properties 56,038 44,886
Commercial and industrial loans
to U.S. addressees 41,560 30,056
Loans to individuals for household, family
and other personal expenditures:
Credit card and related plans 2,872 2,403
Other (installment and
student loans, etc.) 24,091 25,192
Obligations of states &
political subdivisions 7,111 6,026
All other loans 1,588 663
- -------------------------------------------------------------------
Gross Loans 280,176 240,382
Less: Unearned income on loans - -
- -------------------------------------------------------------------
Loans, Net of Unearned Income $ 280,176 $ 240,382
===================================================================
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,991, $1,533 and $2,245 at December 31, 2004, 2003 and 2002, respectively.
If interest on those loans had been accrued, such income would have been $199,
$198 and $171 for 2004, 2003 and 2002, respectively. Interest income on those
loans, which is recorded only when received, amounted to $16, $29 and $77 for
2004, 2003 and 2002, respectively. Also, at December 31, 2004 and 2003, the Bank
had loans totalling $266 and $172, respectively, which were past due 90 days or
more and still accruing interest (credit card and guaranteed student loans).
- --------------------------------------------------------------------------------
5 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Years Ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------
Balance at beginning of year $ 3,500 $ 3,347 $ 3,600
Provision charged to operations 144 476 813
Recoveries credited to allowance 9 32 35
- ---------------------------------------------------------------------
3,653 3,855 4,448
Losses charged to allowance (53) (355) (1,101)
- ---------------------------------------------------------------------
Balance at End of Year $ 3,600 $ 3,500 $ 3,347
=====================================================================
A comparison of the provision for loan losses for Financial Statement purposes
with the allowable bad debt deduction for tax purposes is as follows:
Years Ended December 31, Book Provision Tax Deduction
- ------------------------ -------------- -------------
2004 $ 144 $ 44
2003 $ 476 $ 323
2002 $ 813 $ 1,066
The balance of the Reserve for Bad Debts as reported for Federal income tax
purposes was $664, $948 and $948 at December 31, 2004, 2003 and 2002,
respectively.
- --------------------------------------------------------------------------------
6 LOAN SERVICING
The Company services $61,767 in mortgage loans for Freddie Mac which are not
included in the accompanying Consolidated Balance Sheets.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in deposits, were approximately $620 and $709, at
December 31, 2004 and 2003, respectively. The balance of the servicing rights
was $450 and $647 at December 31, 2004 and 2003, respectively, net of
amortization.
The Company recorded $0 and $569 in new mortgage servicing rights in 2004
and 2003, respectively. Amortization expense of $197 and $149 was recorded for
the years ended December 31, 2004 and 2003, respectively.
There was no allowance for impairment recorded at December 31, 2004 or
2003.
- --------------------------------------------------------------------------------
7 BANK PREMISES AND EQUIPMENT
December 31, 2004 2003
- --------------------------------------------------------
Land $ 3,122 $ 3,122
Buildings and improvements 14,550 14,531
Furniture and equipment 12,550 12,458
- --------------------------------------------------------
30,222 30,111
- --------------------------------------------------------
Less: Accumulated depreciation 20,989 20,176
- --------------------------------------------------------
Net Bank Premises
and Equipment $ 9,233 $ 9,935
========================================================
Buildings and improvements are being depreciated over 10 to 39.5 year periods
and equipment over 3 to 10 year periods. Depreciation expense amounted to $813
in 2004, $1,119 in 2003 and $1,240 in 2002.
Occupancy expenses were reduced by rental income received in the amount of
$63, $64 and $63 in the years ended December 31, 2004, 2003 and 2002,
respectively.
- --------------------------------------------------------------------------------
8 OTHER REAL ESTATE OWNED
Real estate acquired through foreclosure is recorded at the lower of cost or
market at the time of acquisition. Any subsequent write-downs are charged
against operating expenses. The other real estate owned as of December 31, 2004
and 2003 was $176 and $121, respectively, supported by appraisals of the real
estate involved.
- --------------------------------------------------------------------------------
9 INVESTMENT IN AND LOAN TO, INCOME FROM DIVIDENDS AND EQUITY IN EARNINGS OR
LOSSES OF SUBSIDIARY
Penseco Realty, Inc. is a wholly-owned subsidiary of the Bank which owns certain
banking premises. Selected financial information is presented below:
Equity in
underlying Bank's
Percent Total net assets Amount proportionate
of voting investment at balance of part of loss
Year stock owned and loan sheet date dividends for the period
- --------------------------------------------------------------------------
2004 100% $ 3,350 $ 3,335 None $ -
2003 100% $ 3,450 $ 3,435 None $ -
2002 100% $ 3,550 $ 3,535 None $ -
30 Penseco Financial Services Corporation / 2004 Annual Report
10 DEPOSITS
December 31, 2004 2003
- ---------------------------------------------------------
Demand - Non-interest
bearing $ 82,938 $ 79,726
Demand - Interest bearing 31,161 30,515
Savings 80,307 80,689
Money markets 91,604 89,103
Time - Over $100,000 23,779 30,321
Time - Other 85,512 97,590
- ---------------------------------------------------------
Total $ 395,301 $ 407,944
=========================================================
Scheduled maturities of time deposits are as follows:
2005 $ 60,811
2006 15,641
2007 18,408
2008 8,766
2009 4,565
2010 and thereafter 1,100
- --------------------------------------
Total $ 109,291
======================================
- --------------------------------------------------------------------------------
11 OTHER BORROWED FUNDS
At December 31, 2004 and 2003, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase agreements.
Short-term borrowings generally have original maturity dates of thirty days
or less.
Investment securities with amortized costs and fair values of $28,007 and
$28,360 at December 31, 2004 and $28,025 and $29,289 at December 31, 2003, were
pledged to secure repurchase agreements.
Years Ended December 31, 2004 2003
- ------------------------------------------------------------
Amount outstanding at year end $ 19,284 $ 20,277
Average interest rate at year end .75% .75%
Maximum amount outstanding at
any month end $ 30,176 $ 19,948
Average amount outstanding $ 22,776 $ 22,176
Weighted average interest rate
during the year:
Federal funds purchased 2.21% 2.12%
Repurchase agreements .75% .88%
Demand notes to U.S. Treasury 1.11% .90%
The Company has an available credit facility with the Federal Reserve Bank in
the amount of $10,000, secured by pledged securities with amortized costs and
fair values of $10,287 and $10,231 at December 31, 2004 and $10,298 and $10,226
at December 31, 2003 and with interest rates of 3.25% and 2.00% at December 31,
2004 and December 31, 2003, respectively. There is no stated expiration date for
the credit facility as long as the Company maintains the pledged securities at
the Federal Reserve Bank. There was no outstanding balance as of December 31,
2004 and 2003, respectively.
The Company has the availability of a $5,000 overnight Federal funds line
of credit with Wachovia Bank, N.A. There was no balance outstanding as of
December 31, 2004 and 2003, respectively.
The Company maintains a collateralized maximum borrowing capacity of
$186,243 with the Federal Home Loan Bank of Pittsburgh (FHLB).
- --------------------------------------------------------------------------------
12 LONG-TERM DEBT
The loans from the Federal Home Loan Bank, which were borrowed to purchase a
mortgage-backed security, are secured by a general collateral pledge of the
Company's assets.
A summary of long-term debt, including amortizing principal and interest
payments, at December 31, 2004 is as follows:
Monthly Fixed Maturity
Installment Rate Date Balance
- ------------------------------------------------
$ 161 2.73% 03/13/08 $ 5,989
253 3.22% 03/13/10 14,643
430 3.74% 03/13/13 36,585
186 4.69% 03/13/23 27,403
- ------------------------------------------------
Total $ 84,620
================================================
The Company has agreed to maintain sufficient qualifying collateral to fully
secure the above borrowings.
Aggregate maturities of long-term debt at December 31, 2004 are as follows: 2005
$9,220, 2006 $9,547, 2007 $9,887, 2008 $8,780, 2009 $8,612 and thereafter
$38,574 for a total of $84,620.
- --------------------------------------------------------------------------------
13 EMPLOYEE BENEFIT PLANS
The Company provides an Employee Stock Ownership Plan (ESOP), a Retirement
Profit Sharing Plan, an Employees' Pension Plan, as well as an unfunded
supplemental executive pension plan and a Postretirement Life Insurance Plan,
all non-contributory, covering all eligible employees.
Under the Employee Stock Ownership Plan (ESOP), amounts voted by the Board
of Directors are paid into the ESOP and each employee is credited with a share
in proportion to their annual compensation. All contributions to the ESOP are
invested in or will be invested primarily in Company stock. Distribution of a
participant's ESOP account occurs upon retirement, death or termination in
accordance with the plan provisions.
At December 31, 2004 and 2003, the ESOP held 89,316 and 89,204 shares,
respectively of the Company's stock, all of which were acquired as described
above and allocated to specific participant accounts. These shares are treated
the same for dividend purposes and earnings per share calculations as are any
other outstanding shares of the Company's stock. The Company contributed $0, $0
and $140 to the plan during the years ended December 31, 2004, 2003 and 2002,
respectively.
Under the Retirement Profit Sharing Plan, amounts voted by the Board of
Directors are paid into a fund and each employee is credited with a share in
proportion to their annual compensation. Upon retirement, death or termination,
each employee is paid the total amount of their credits in the fund in one of a
number of optional ways in accordance with the plan provisions. The Company
contributed $60, $70 and $0 to the plan during the years ended December 31,
2004, 2003 and 2002, respectively.
Under the Pension Plan, amounts computed on an actuarial basis are paid by
the Company into a trust fund. Provision is made for fixed benefits payable for
life upon retirement at the age of 65, based on length of service and
compensation levels as defined in the plan. Plan assets of the trust fund are
invested and administered by the Trust Department of Penn Security Bank and
Trust Company.
The unfunded supplemental executive pension plan provides certain officers
with additional retirement benefits to replace benefits lost due to limits
imposed on qualified plans by Federal tax law.
The postretirement life insurance plan is an unfunded, non-vesting defined
benefit plan. The plan is non-contributory and provides for a reducing level of
term life insurance coverage following retirement.
For the unfunded plans above, amounts calculated on an actuarial basis are
recorded as a liability.
Penseco Financial Services Corporation / 2004 Annual Report 31
13 EMPLOYEE BENEFIT PLANS (CONTINUED)
A reconciliation of the funded status of the plans with amounts reported on the
Consolidated Balance Sheets is as follows:
Pension Benefits Other Benefits
------------------ ----------------
December 31, 2004 2003 2004 2003
- ----------------------------------------------------------------------------
Change in benefit
obligation:
Benefit obligation,
beginning $ 10,884 $ 9,855 $ 269 $ 250
Service cost 385 385 6 6
Interest cost 664 635 16 15
Change in assumptions 256 237 3 7
Actuarial (loss) gain (59) 88 - -
Benefits paid (330) (316) (9) (9)
- ----------------------------------------------------------------------------
Benefit obligation,
ending 11,800 10,884 285 269
- ----------------------------------------------------------------------------
Change in plan assets:
Fair value of plan
assets, beginning 8,713 7,804 - -
Actual return on plan
assets 713 897 - -
Employer contribution 373 328 - -
Benefits paid (330) (316) - -
- ----------------------------------------------------------------------------
Fair value of plan
assets, ending 9,469 8,713 - -
- ----------------------------------------------------------------------------
Funded status (2,331) (2,171) (285) (269)
Unrecognized net actuarial
loss (gain) 2,775 2,723 (23) (27)
Unrecognized prior service
cost 54 55 49 57
- ----------------------------------------------------------------------------
Prepaid (accrued) benefit
cost $ 498 $ 607 $ (259) $ (239)
============================================================================
A reconciliation of net periodic pension and other benefit costs is as follows:
Pension Benefits
------------------
Years Ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------
Components of net periodic
pension cost:
Service cost $ 385 $ 385 $ 370
Interest cost 664 635 588
Expected return on plan assets (700) (624) (726)
Amortization of prior service cost - - (104)
Amortization of unrecognized
net loss 114 175 82
- ---------------------------------------------------------------------
Net periodic pension cost $ 463 $ 571 $ 210
=====================================================================
Other Benefits
------------------
Years Ended December 31, 2004 2003 2002
- ---------------------------------------------------------------------
Components of net periodic
other benefit cost:
Service cost $ 6 $ 6 $ 5
Interest cost 16 15 15
Amortization of prior service cost 7 8 7
Amortization of unrecognized
net gain - (1) (1)
- ---------------------------------------------------------------------
Net periodic other benefit cost $ 29 $ 28 $ 26
=====================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $142, $142 and $0, respectively at December 31, 2004
and $153, $153 and $0, respectively at December 31, 2003.
Weighted-average assumptions used to determine benefit obligations were as
follows:
Pension Benefits Other Benefits
---------------- --------------
December 31, 2004 2003 2004 2003
- -----------------------------------------------------------------------
Discount rate 6.00% 6.25% 6.00% 6.25%
Rate of compensation
increase 4.00% 4.25% 4.50% 4.50%
Pension Benefits Other Benefits
---------------- --------------
Years Ended December 31, 2004 2003 2004 2003
- -----------------------------------------------------------------------
Discount rate 6.00% 6.25% 6.00% 6.25%
Expected return on
plan assets 8.00% 8.00% - -
Rate of compensation
increase 4.00% 4.25% 4.50% 4.50%
The expected long-term return on plan assets was determined using average
historical returns of the Company's plan assets. The rate was reduced during
2003 due to the reduction in returns for the prior year.
The Company's pension plan weighted-average asset allocations at December
31, 2004 and 2003 by asset category are as follows:
Plan Assets at December 31,
---------------------------
2004 2003
- ---------------------------------------------------------
Asset Category
- --------------
Equity securities 54.4% 52.4%
Corporate bonds 35.1% 33.3%
U.S. Government securities 8.1% 13.1%
Cash and cash equivalents 2.4% 1.2%
- ---------------------------------------------------------
100.0% 100.0%
=========================================================
The Company investment policies and strategies include:
1.) The Trust and Investment Division's equity philosophy is Large-Cap Core with
a value bias. We invest in individual high-grade common stocks that are selected
from our approved list.
2.) Diversification is maintained by having no more than 20% in any industry
sector and no individual equity representing more than 10% of the portfolio.
3.) The fixed income style is conservative but also responsive to the various
needs of our individual clients. For our "Fixed Income" securities, we buy U.S.
Government bonds and Agencies or high-grade Corporate rated "A" or better. The
Company targets the following allocation percentages: cash equivalents 10%,
fixed income 40% and equities 50%.
There is no Company stock included in equity securities at December 31,
2004 or 2003.
Contributions
- -------------
The Company expects to contribute $375 to its pension plan and $13 to its other
postretirement plan in 2005.
Estimated Future Benefit Payments
- ---------------------------------
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid in the next five years and in the aggregate
for the five years thereafter:
Pension Benefits Other Benefits
---------------- --------------
2005 $ 481 $ 13
2006 482 13
2007 488 13
2008 485 13
2009 494 13
2010-2014 $ 3,412 82
32 Penseco Financial Services Corporation / 2004 Annual Report
14 INCOME TAXES
The total income taxes in the Statements of Income are as follows:
Years Ended December 31, 2004 2003 2002
- ------------------------------------------------------------------
Currently payable $ 1,190 $ 1,810 $ 2,161
Deferred (benefit) provision (119) (182) 95
- ------------------------------------------------------------------
Total $ 1,071 $ 1,628 $ 2,256
==================================================================
A reconciliation of income taxes at statutory rates to applicable income taxes
reported in the Statements of Income is as follows:
Years Ended December 31, 2004 2003 2002
- ------------------------------------------------------------------
Tax at statutory rate $ 2,268 $ 2,584 $ 3,063
Reduction for non-taxable
interest (1,262) (978) (828)
Other additions 65 22 21
- ------------------------------------------------------------------
Applicable Income Taxes $ 1,071 $ 1,628 $ 2,256
==================================================================
The components of the deferred income tax (benefit) provision, which result from
temporary differences, are as follows:
Years Ended December 31, 2004 2003 2002
- ------------------------------------------------------------------
Accretion of discount on bonds $ 24 $ (121) $ 53
Accelerated depreciation 21 67 (36)
Supplemental benefit plan (1) (16) 4
Allowance for loan losses (130) (53) 86
Prepaid pension cost (33) (59) (12)
- ------------------------------------------------------------------
Total $ (119) $ (182) $ 95
==================================================================
The significant components of deferred tax assets and liabilities are as
follows:
December 31, 2004 2003
- -----------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 998 $ 868
Accumulated depreciation 318 339
Accrued supplemental benefit plan 48 47
- -----------------------------------------------------------------
Total Deferred Tax Assets 1,364 1,254
=================================================================
Deferred tax liabilities:
Unrealized securities gains 364 946
Prepaid pension costs 251 284
Accumulated accretion 51 27
- -----------------------------------------------------------------
Total Deferred Tax Liabilities 666 1,257
- -----------------------------------------------------------------
Net Deferred Tax Assets (Liabilities) $ 698 $ (3)
=================================================================
In management's opinion, the deferred tax assets are realizable in as much as
there is a history of strong earnings and a carryback potential greater than the
deferred tax assets. Management is not aware of any evidence that would preclude
the realization of the benefit in the future and, accordingly, has not
established a valuation allowance against the deferred tax assets.
- --------------------------------------------------------------------------------
15 ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income of $704, $1,836 and $3,075 at December
31, 2004, 2003 and 2002, respectively consisted entirely of unrealized gains or
losses on available-for-sale securities, net of tax.
A reconciliation of other comprehensive income for the years ended December
31, 2004 and 2003 is as follows:
Tax
Before-Tax (Expense) Net-of-Tax
2004 Amount Benefit Amount
- ------------------------------------------------------------------------------
Unrealized losses on
available-for-sale securities:
Unrealized losses arising during
the year $(1,357) $ 461 $ (896)
Less: Reclassification adjustment
for gains realized in income 357 (121) 236
- ------------------------------------------------------------------------------
Net unrealized losses $(1,714) $ 582 $(1,132)
==============================================================================
Tax
Before-Tax (Expense) Net-of-Tax
2003 Amount Benefit Amount
- ------------------------------------------------------------------------------
Unrealized losses on
available-for-sale securities:
Unrealized losses arising during
the year $(1,536) $ 522 $(1,014)
Less: Reclassification adjustment
for gains realized in income 341 (116) 225
- ------------------------------------------------------------------------------
Net unrealized losses $(1,877) $ 638 $(1,239)
==============================================================================
- --------------------------------------------------------------------------------
16 COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, created under prevailing terms and collateral
requirements such as commitments to extend credit, financial guarantees and
letters of credit, which are not reflected in the accompanying Financial
Statements. The Company does not anticipate any losses as a result of these
transactions. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 2004 and 2003 are as follows:
2004 2003
- --------------------------------------------------------
Commitments to extend credit:
Fixed rate $ 21,152 $ 19,147
Variable rate $ 67,502 $ 52,188
Standby letters of credit $ 17,662 $ 15,363
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
Various actions and proceedings are presently pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
financial position of the Company.
Penseco Financial Services Corporation / 2004 Annual Report 33
17 FAIR VALUE DISCLOSURE
GENERAL
Statement of Financial Accounting Standards No.107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires the disclosure of the
estimated fair value of on and off-balance sheet financial instruments.
VALUATION METHODS AND ASSUMPTIONS
Estimated fair values have been determined using the best available data, an
estimation methodology suitable for each category of financial instruments. For
those loans and deposits with floating interest rates it is presumed that
estimated fair values generally approximate the carrying amount balances.
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices. Those with stated maturities have
been valued using a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities. Those
liabilities with no stated maturities have an estimated fair value equal to both
the amount payable on demand and the carrying amount balance. The net loan
portfolio has been valued using a present value discounted cash flow. The
discount rate used in these calculations is the current loan rate adjusted for
non-interest operating costs, credit loss and assumed prepayment risk. Off
balance sheet carrying amounts and fair value of letters of credit represent the
deferred income fees arising from those unrecognized financial instruments.
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
All assets and liabilities which are not considered financial instruments
have not been valued differently than has been customary with historical cost
accounting.
December 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 7,763 $ 7,763 $ 10,062 $ 10,062
Interest bearing balances with banks 534 534 4,693 4,693
Federal funds sold - - 23,600 23,600
- --------------------------------------------------------------------------------------------
Cash and cash equivalents 8,297 8,297 38,355 38,355
Investment Securities:
Available-for-sale:
U.S. Treasury securities 5,077 5,077 15,387 15,387
U.S. Agency obligations 124,528 124,528 137,018 137,018
States & political subdivisions 31,540 31,540 20,841 20,841
Federal Home Loan Bank stock 5,604 5,604 5,840 5,840
Other securities 661 661 514 514
Held-to-maturity:
U.S. Agency obligations 66,019 65,672 84,138 83,566
States & political subdivisions 29,249 32,119 29,387 32,106
- --------------------------------------------------------------------------------------------
Total investment securities 262,678 265,201 293,125 295,272
Loans, net of unearned income:
Real estate mortgages 202,954 198,244 176,042 177,519
Commercial 41,560 41,560 30,056 30,056
Consumer and other 35,662 35,891 34,284 34,524
Less: Allowance for loan losses 3,600 3,500
- --------------------------------------------------------------------------------------------
Loans, net 276,576 275,695 236,882 242,099
- --------------------------------------------------------------------------------------------
Total Financial Assets 547,551 $ 549,193 568,362 $ 575,726
Other assets 16,157 16,228
- --------------------------------------------------------------------------------------------
Total Assets $ 563,708 $ 584,590
============================================================================================
Financial Liabilities:
Demand - Non-interest bearing $ 82,938 $ 82,938 $ 79,726 $ 79,726
Demand - Interest bearing 31,161 31,161 30,515 30,515
Savings 80,307 80,307 80,689 80,689
Money markets 91,604 91,604 89,103 89,103
Time 109,291 110,953 127,911 129,307
- --------------------------------------------------------------------------------------------
Total Deposits 395,301 396,963 407,944 409,340
Repurchase agreements 18,398 18,398 19,454 19,454
Short-term borrowings 886 886 823 823
Long-term borrowings 84,620 84,655 93,523 93,549
- --------------------------------------------------------------------------------------------
Total Financial Liabilities 499,205 $ 500,902 521,744 $ 523,166
Other Liabilities 2,127 2,039
Stockholders' Equity 62,376 60,807
- --------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 563,708 $ 584,590
============================================================================================
Standby Letters of Credit $ (177) $ (177) $ (153) $ (153)
34 Penseco Financial Services Corporation / 2004 Annual Report
18 OPERATING LEASES
The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several locations which are being used as remote banking
facilities. Rental expense was $90 in 2004, $86 in 2003 and $80 in 2002. All
leases contain renewal options. The Mount Pocono and the Meadow Avenue leases
contain the right of first refusal for the purchase of the properties and
provisions for annual rent adjustments based upon the Consumer Price Index.
Future minimum rental commitments under these leases at December 31, 2004
are as follows:
Mount Meadow ATM
Pocono Avenue Sites Total
- -----------------------------------------------------------
2005 $ 50 $ 20 $ 16 $ 86
2006 50 14 6 70
2007 50 - - 50
2008 51 - - 51
2009 51 - - 51
2010 to 2012 72 - - 72
- -----------------------------------------------------------
Total minimum
payments required $ 324 $ 34 $ 22 $ 380
===========================================================
- --------------------------------------------------------------------------------
19 LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. A summary of loans to directors,
principal officers and related parties is as follows:
Years Ended December 31, 2004 2003
- -------------------------------------------------
Beginning Balance $ 5,265 $ 4,483
Additions 4,899 2,065
Collections (532) (1,283)
- -------------------------------------------------
Ending Balance $ 9,632 $ 5,265
=================================================
In addition to the loan amounts shown above, the Bank has issued a standby
letters of credit for the accounts of related parties in the amount of $6,932.
- --------------------------------------------------------------------------------
20 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 and the Bank's capital amounts and classifications 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 I and Total
Capital to risk-weighted assets and of Tier I 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 December 31, 2004, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2004, 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 I
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 December 31,
2004, 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 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.
Penseco Financial Services Corporation / 2004 Annual Report 35
20 REGULATORY MATTERS (CONTINUED)
Actual Regulatory Requirements
- ---------------------------------------------- --------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $ 64,822 20.03% > $ 25,890 > 8.0% > $ 32,362 > 10.0%
- - -
Tier I Capital
(to Risk Weighted Assets) $ 61,222 18.92% > $ 12,945 > 4.0% > $ 19,417 > 6.0%
- - -
Tier I Capital
(to Average Assets) $ 61,222 10.53% > * > * > $ 29,068 > 5.0%
- - -
* 3.0% ($17,441), 4.0% ($23,254) or 5.0% ($29,068) depending on the bank's
CAMELS Rating and other regulatory risk factors.
Actual Regulatory Requirements
- ---------------------------------------------- --------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $ 61,824 21.99% > $ 22,490 > 8.0% > $ 28,112 > 10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 58,324 20.75% > $ 11,245 > 4.0% > $ 16,867 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 58,324 10.21% > * > * > $ 28,556 > 5.0%
- - - -
* 3.0% ($17,134), 4.0% ($22,845) or 5.0% ($28,556) depending on the bank's
CAMELS Rating and other regulatory risk factors.
- --------------------------------------------------------------------------------
21 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)
The condensed Company-only information follows:
BALANCE SHEETS
December 31, 2004 2003
- ----------------------------------------------------------------------
Cash $ 8 $ 7
Investment in bank subsidiary 61,859 60,389
Equity Investments 642 494
- ----------------------------------------------------------------------
Total Assets $ 62,509 $ 60,890
======================================================================
Total Liabilities $ 133 $ 83
Total Stockholders' Equity 62,376 60,807
- ----------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 62,509 $ 60,890
======================================================================
STATEMENTS OF INCOME
Years Ended December 31, 2004 2003 2002
- -------------------------------------------------------------------
Dividends from bank subsidiary $ 2,900 $ 2,900 $ 2,899
Dividends on investment securities 11 10 9
- -------------------------------------------------------------------
Total Income 2,911 2,910 2,908
Other non-interest expense 10 10 8
- -------------------------------------------------------------------
Net income before undistributed
earnings of bank subsidiary 2,901 2,900 2,900
Undistributed earnings of bank
subsidiary 2,700 3,071 3,853
- -------------------------------------------------------------------
Net Income $ 5,601 $ 5,971 $ 6,753
===================================================================
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 2003 2002
- --------------------------------------------------------------------------
Operating Activities:
Net Income $ 5,601 $ 5,971 $ 6,753
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed net
income of bank subsidiary (2,700) (3,071) (3,853)
- --------------------------------------------------------------------------
Net cash provided by
operating activities 2,901 2,900 2,900
- --------------------------------------------------------------------------
Investing Activities:
Purchase of equity investment - - -
- --------------------------------------------------------------------------
Net cash used by
investing activities - - -
- --------------------------------------------------------------------------
Financing Activities:
Cash dividends paid (2,900) (2,900) (2,899)
- --------------------------------------------------------------------------
Net cash used by
financing activities (2,900) (2,900) (2,899)
- --------------------------------------------------------------------------
Net increase in cash and
cash equivalents 1 - 1
Cash and cash equivalents at January 1 7 7 6
- --------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 8 $ 7 $ 7
==========================================================================
36 Penseco Financial Services Corporation / 2004 Annual Report
Francis J. Merkel, CPA
Josephn J. Quinn, CPA, CVA
John H. Marx, Jr., CPA
Daniel J. Gerrity, CPA
Mary Ann E. Novak, CPA
McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants
Report of Independent Registeres Public Accounting Firm
To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania
We have audited the accompanying consolidated balance sheets of Penseco
Financial Services Corporation and subsidiary as of December 31, 2004 and 2003,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and the significant estimates made by managements, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Penseco
Financial Services Corporation and subsidiary as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/ McGrail, Merkel, Quinn & Associates
Scranton, Pennsylvania
March 4, 2005
RSM McGladrey Network
An Indepently Owned Member
Clay Avenue Professional Plaza, 1173 Clay Avenue, Scranton, PA 18510
570 961-0345 Fax: 570 961-8650
www.mmq.com
Penseco Financial Services Corporation / 2004 Annual Report 37
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on matters of
accounting principles or practices or financial statement disclosures in 2004.
ITEM 9A Controls and Procedures
Based on the Company's principal executive officer, Otto P. Robinson, Jr.,
President and the Company's principal financial officer, Patrick Scanlon,
Controller, evaluations of the Company's Disclosure Controls and Procedures as
of February 17, 2005 (evaluation date), they have concluded that the Company's
disclosure controls are effective, reasonably ensure that material information
relating to the Company and its consolidated subsidiaries is made known to them
by others within those entities, particularly during the period in which this
report is being prepared, and identify significant deficiencies or material
weaknesses in internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data.
Based on information available to them, they are not aware of significant
deficiencies or material weaknesses in the Company's internal control system.
Based on information available to them, they are not aware of any
significant changes made in internal controls or in other factors that could
significantly affect those controls subsequent to February 17, 2005 (evaluation
date) and prior to the date of their certifications.
Based on information available to them, they are not aware of any fraud
that involves management or other employees of the Company.
Despite these and other controls and procedures, the Company's two hundred
or so employees process over 10 million financial transactions every year. The
Company's computer systems consist of some 17 million lines of code used in the
processing of this financial information. Financial accounting rules encompass
thousands of pages of instructions and contain many confusing and "gray" areas.
From time to time honest errors in the entry, processing, or reporting of this
information are discovered or a dishonest or disloyal employee surfaces.
Fortunately, in the past any such errors or discoveries have not been material
and therefore we have never had to restate the Company's financial results. The
probability is that we won't in the future, but the possibility does exist and
the certifications marked as exhibits 31 and 32 are made subject to these
contingencies.
ITEM 9B Other Information
There are no items required to be reported.
PART III
--------
ITEM 10 Directors and Executive Officers of the Registrant
CODE OF ETHICS
--------------
The Company has had for many years a Code of Ethics applicable to all employees
including the Company's principal Executive Officer and principal Financial
Officer (Controller). The purpose of the Code is to promote honest and ethical
conduct, full and fair disclosures of financial information, compliance with
laws and regulations and accountability for actions.
A copy of the Code of Ethics may be obtained, without charge, by
contacting:
Patrick Scanlon, Controller
Penseco Financial Services Corporation
150 North Washington Avenue
Scranton, PA 18503-1848
1-800-327-0394
AUDIT COMMITTEE FINANCIAL EXPERT
--------------------------------
The Sarbanes-Oxley Act of 2002 requires the Company to disclose whether or not
its Audit Committee has, as one of its members, an "Audit Committee Financial
Expert", as that term is defined by the U. S. Securities and Exchange Commission
(SEC).
The Board of Directors has elected not to designate any member as an "Audit
Committee Financial Expert". The audit program at our organization has always
been strong. We have our own, full-time, Internal Auditor reporting to the Audit
Committee who has a staff of four full-time assistants. Our financial statements
are audited by an independent public accounting firm, which has received
approval from the Public Company Accounting Oversight Board to audit financial
reports of SEC reporting companies. In addition to that, since we are a banking
company, our bank, Penn Security Bank & Trust Company, is examined every year on
an alternate basis by either the Pennsylvania Department of Banking or the
Federal Deposit Insurance Corporation and our parent holding company, Penseco
Financial Services Corporation, is examined yearly by the Federal Reserve. Our
four member Audit Committee includes three members with substantial education
and experience in accounting and financial management, of which, two are Chief
Executive Officers of Companies and one is a former Executive Vice-President of
our organization. The Audit Committee, as well as the entire Board of Directors,
are ethical people who will act responsibly if anything is wrong. We think that
our Committee members acting together have the expertise, information and advice
to assure that our financial statements are fairly presented.
Other information required by this Item as to Directors of the Company
contained under the headings "Voting Securities & Principal Holders Thereof",
"Election of Directors", "Board and Committee Meetings" and "Certain
Relationships and Related Transactions" within the definitive proxy statement
relating to the Company's Annual Meeting of Shareholders, to be held May 3,
2005, is incorporated herein by reference thereto.
38 Penseco Financial Services Corporation / 2004 Annual Report
ITEM 11 Executive Compensation
The information contained under the headings "Executive Compensation",
"Directors Compensation", "Compensation Committee Report on Executive
Compensation" and "Compensation Committee Interlocks and Insider Participation"
in the definitive proxy statement relating to the Company's Annual Meeting of
stockholders, to be held May 3, 2005, is incorporated herein by reference
thereto.
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information contained under the heading "Voting Securities & Principal
Holders Thereof" in the definitive proxy statement relating to the Company's
Annual Meeting of stockholders, to be held May 3, 2005, is incorporated herein
by reference thereto.
ITEM 13 Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and Related
Transactions" and "Transactions with Directors and Principal Officers" in the
definitive proxy statement relating to the Company's annual meeting of
stockholders, to be held May 3, 2005 is incorporated herein by reference
thereto.
ITEM 14 Principal Accountant Fees and Services
The information contained under the heading "Our Relationship with Our Auditors"
in the definitive proxy statement relating to the Company's Annual Meeting of
Stockholders, to be held May 3, 2005 is incorporated herein by reference
thereto.
PART IV
-------
ITEM 15 Exhibits and Financial Statements Schedules
(a) (1) Financial Statements - The following financial statements are
incorporated by reference in Part II, Item 8 hereof:
Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
General Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
(2) Financial Statement Schedules - The Financial Statement Schedules are
incorporated by reference in Part II, Item 8 hereof.
(3) Exhibits
The following exhibits are filed herewith or incorporated by reference
as part of this Annual Report.
3(i) Registrant's Articles of Incorporation (Incorporated herein by
reference to Exhibit 3(i) of Registrant's report on Form 10-K
filed with the SEC on March 30, 1998.)
3(ii)Registrant's By-Laws (Incorporated herein by reference to
Exhibit 3(ii) of Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.)
10 Material contracts - Supplemental Benefit Plan Agreement
(Incorporated herein by reference to Exhibit 10 of Registrant's
report on Form 10-Q filed with the SEC on May 10, 1999.)
13 Annual report to security holders (Included herein by reference
on pages 1- 40.)
21 Subsidiaries of the registrant (Incorporated herein by reference
to Exhibit 21 of Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.)
(b) No current report on Form 8-K was filed for the fourth quarter of the
fiscal year ended December 31, 2004.
(c) The exhibits required to be filed by this Item are listed under Item
15(a)(3), above.
(d) There are no financial statement schedules required to be filed under
this item.
Penseco Financial Services Corporation / 2004 Annual Report 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 8, 2005.
By: /s/ Otto P. Robinson, Jr.
-------------------------
Otto P. Robinson, Jr.
President
By: /s/ Richard E. Grimm
-------------------------
Richard E. Grimm
Executive Vice-President
By: /s/ Patrick Scanlon
-------------------------
Patrick Scanlon
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 8, 2005.
By: /s/ Edwin J. Butler By: /s/ Robert W. Naismith, Ph.D.
------------------------- -------------------------
Edwin J. Butler Robert W. Naismith, Ph.D.
Director Director
By: /s/ Richard E. Grimm By: /s/ James B. Nicholas
------------------------- -------------------------
Richard E. Grimm James B. Nicholas
Director Director
By: /s/ Russell C. Hazelton By: /s/ Emily S. Perry
------------------------- -------------------------
Russell C. Hazelton Emily S. Perry
Director Director
By: /s/ D. William Hume By: /s/ Sandra C. Phillips
------------------------- -------------------------
D. William Hume Sandra C. Phillips
Director Director
By: /s/ James G. Keisling By: /s/ Otto P. Robinson, Jr.
------------------------- -------------------------
James G. Keisling Otto P. Robinson, Jr.
Director Director
By: /s/ P. Frank Kozik By: /s/ Steven L. Weinberger
------------------------- -------------------------
P. Frank Kozik Steven L. Weinberger
Director Director
40 Penseco Financial Services Corporation / 2004 Annual Report
CERTIFICATIONS
I, Otto P. Robinson, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Penseco Financial Services
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: February 17, 2005
/s/ OTTO P. ROBINSON JR.
- -------------------------
Otto P. Robinson, Jr.
President
- --------------------------------------------------------------------------------
I, Patrick Scanlon, certify that:
1. I have reviewed this annual report on Form 10-K of Penseco Financial Services
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: February 17, 2005
/s/ PATRICK SCANLON
- --------------------
Patrick Scanlon
Controller
Penseco Financial Services Corporation / 2004 Annual Report 41
CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of Penseco Financial Services Corporation (the "Company")
certifies to his knowledge that:
(1) The Annual Report on Form 10-K of the Company for the year ended
December 31, 2004 (the "Form 10-K") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Act");
and
(2) The information contained in the Form 10-K fairly presents, in all
material respects, the financial conditions and results of operations of
the Company as for the dates and for the periods referred to in the Form
10-K.
/s/ OTTO P. ROBINSON JR
-----------------------
Otto P. Robinson, Jr.
President
February 17, 2005
The foregoing certification is being furnished solely pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code).
A signed original of the foregoing certification has been provided to the
Company and will be retained by the Company in accordance with Rule 12b-11(d) of
the Act and furnished to the Securities and Exchange Commission or its staff
upon request.
This certification is qualified in its entirety by the report to which it is
attached as an exhibit.
- --------------------------------------------------------------------------------
CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code), the
undersigned officer of Penseco Financial Services Corporation (the "Company")
certifies to his knowledge that:
(1) The Annual Report on Form 10-K of the Company for the year ended
December 31, 2004 (the "Form 10-K") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Act");
and
(2) The information contained in the Form 10-K fairly presents, in all
material respects, the financial conditions and results of operations of
the Company as for the dates and for the periods referred to in the Form
10-K.
/s/ PATRICK SCANLON
-----------------------
Patrick Scanlon
Controller
February 17, 2005
The foregoing certification is being furnished solely pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code).
A signed original of the foregoing certification has been provided to the
Company and will be retained by the Company in accordance with Rule 12b-11(d) of
the Act and furnished to the Securities and Exchange Commission or its staff
upon request.
This certification is qualified in its entirety by the report to which it is
attached as an exhibit.
42 Penseco Financial Services Corporation / 2004 Annual Report
INDEX TO EXHIBITS
Exhibit Number
Referred to
Item 601 of Prior Filing or Exhibit
Regulation S-K DESCRIPTION OF EXHIBIT Page Number Herein
- ----------------------------------------------------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3 (i) Articles of Incorporation Incorporated herein by reference to Exhibit 3 (i) of
Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.
(ii) By-Laws Incorporated herein by reference to Exhibit 3 (ii) of
Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.
4 Instruments defining the rights of security holders, None
including indentures
9 Voting trust agreement None
10 Material contracts - Supplemental Benefit Plan Incorporated herein by reference to Exhibit 10 of
Agreement Registrant's report on Form 10-Q filed with the
SEC on May 10, 1999.
11 Statement re: Computation of per share earnings None
12 Statements re: Computation of ratios None
13 Annual report to security holders, Form 10-Q or Included herein by reference on pages 1-40,
quarterly report to security holders including the cover.
14 Code of Ethics Included herein by reference on page 38.
16 Letter re: Change in certifying accountant None
18 Letter re: Change in accounting principles None
21 Subsidiaries of the registrant Incorporated herein by reference to Exhibit 21 of
Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.
22 Published report regarding matters submitted to None
vote of security holders
23 Consents of experts and counsel None
24 Power of attorney None
31 Rule 13a-14(a)/15d-14(a) Certifications Included herein by reference on page 41.
32 Section 1350 Certifications Included herein by reference on page 42.
99 Additional Exhibits None
Penseco Financial Services Corporation / 2004 Annual Report 43
Company Officers
----------------
EXECUTIVE OFFICERS
Otto P. Robinson, Jr.
President and General Counsel
Richard E. Grimm
Executive Vice-President, Treasurer and Cashier
Peter F. Moylan
Executive Vice-President Non-Deposit Services and Trust Officer
William J. Calpin, Jr.
Senior Vice-President, Trust Services
Andrew A. Kettel, Jr.
Senior Vice-President
Christe A. Casciano
Vice-President, Director of Marketing
Audrey F. Markowski
Vice-President
Michael G. Ostermayer
Vice-President, Chief Investment Officer, Trust Services
Richard P. Rossi
Vice-President, Director of Human Resources
Lynn Peters Thiel
Vice-President and Compliance Officer
James Tobin
Vice-President, Charge Card Manager
John H. Warnken
Vice-President, Operations
Robert P. Heim
Director of Internal Audit
Patrick Scanlon
Controller
P. Frank Kozik
Secretary
ASSISTANT VICE-PRESIDENTS
John R. Anderson III
Carl M. Baruffaldi
Mark M. Bennett
and Assistant Secretary
Denise M. Cebular
Carol Curtis McMullen
Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
and Assistant Treasurer
J. Patrick Dietz
Frank Gardner
Lisa A. Kearney
Eleanor Kruk
Thomas J. Malinchak
Caroline Mickelson
Louis J. Rizzo
Aleta Sebastianelli
and Assistant Secretary
Jeffrey Solimine
Jennifer S. Wohlgemuth
Linda Wolf
and Training Officer
Beth S. Wolff
Deborah A. Wright
and Outside Sales
Mark J. Zakoski
ASSISTANT CASHIERS
Pamela Edwards
Barbara Garofoli
Susan T. Holweg
Susan A. Kopp
Jacqueline Lucke
Kristen A. McGoff
and Branch Operations Officer
Candace F. Quick
Nereida Santiago
Sharon Thauer
ACCOUNTING OFFICER
Luree M. Waltz
ASSISTANT BRANCH OPERATIONS OFFICERS
Carolyn E. Brown
Tanya L. Frable
ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak
ASSISTANT CONTROLLER
Susan M. Bray
and Assistant Treasurer
ASSISTANT DIRECTOR OF INTERNAL AUDIT
Paula A. Ralston Nenish
ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua
ASSISTANT TRUST OFFICER
Dominick P. Gianuzzi
Audit OFFICER
Ellen M. Evans
BRANCH OPERATIONS MANAGER
Robin L. Jenkins
BRANCH OPERATIONS OFFICERS
Patricia A. Bruno
Kathleen Griffiths
Stephen A. Hoffman
BUSINESS DEVELOPMENT OFFICER
Mary Carol Cicco
COLLECTIONS OFFICER
Robert E. Diehl
COMPUTER OPERATIONS OFFICER
Charles Penn
COST ACCOUNTING OFFICER
David R. Weiland
DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay
DIRECTOR OF SYSTEMS / NETWORKING
Robert J. Saslo
FINANCIAL ANALYST
Chad J. Hazelton
LOAN ADMINISTRATION OFFICERs
Susan D. Blascak
Carol J. Ives
LOAN OFFICER
Denise Belton
MERCHANT OFFICER
Jill Ross
OPERATIONS OFFICER
Patricia Pliske
TAX OFFICER
Robert W. McDonald
TRUST ADMINISTRATOR
Kristen R. Noll
TRUST OPERATIONS OFFICER
Carol Trezzi
TRUST INVESTMENT OFFICER
Katherine M. Oven
44 Penseco Financial Services Corporation / 2004 Annual Report
(INSIDE BACK COVER)
Company Board Members
---------------------
PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY
BOARD OF DIRECTORS
Edwin J. Butler
Retired Bank Officer
Richard E. Grimm
Executive Vice-President, Treasurer and Cashier
Russell C. Hazelton
Retired Captain, Trans World Airlines
D. William Hume
Retired Bank Officer
James G. Keisling
CEO Compression Polymers Corp. and Vycom Corp.,
Manufacturers of Plastic Sheet Products
P. Frank Kozik
President & CEO, Scranton Craftsmen, Inc., Manufacturer of
Ornamental Iron and Precast Concrete Products
Robert W. Naismith, Ph.D.
Chairman & CEO, Life Science Analytics, Inc.
James B. Nicholas
President, D. G. Nicholas Co., Wholesale Auto Parts Company
Emily S. Perry
Retired Insurance Account Executive & Community Volunteer
Sandra C. Phillips
Penn State Master Gardener & Community Volunteer
Otto P. Robinson, Jr.
Attorney-at-Law, President
Steven L. Weinberger
President of G. Weinberger Company, Mechanical Contractor
Specializing in Commercial & Industrial Construction
PENN SECURITY BANK AND TRUST COMPANY
ADVISORY BOARDS
ABINGTON OFFICE
Carl M. Baruffaldi
James L. Burne, DDS
Keith Eckel
Richard C. Florey
C. Lee Havey, Jr.
Attorney Patrick J. Lavelle
Sandra C. Phillips
EAST SCRANTON OFFICE
Marie W. Allen
J. Conrad Bosley
Judge Carmen Minora
Mark R. Sarno
Frank Gardner
EAST STROUDSBURG OFFICE
Denise M. Cebular
Robert J. Dillman, Ph.D.
Attorney Kirby Upright
Jeffrey Weichel
GREEN RIDGE OFFICE
Joseph N. Connor
Everett Jones
Caroline Mickelson
George Noone
Howard J. Snowdon
Jeffrey Solimine
MOUNT POCONO OFFICE
Bruce Berry
Francis Cappelloni
Robert C. Hay
David Lansdowne
Thomas J. Malinchak
NORTH POCONO OFFICE
Jacqueline A. Carling
Anthony J. Descipio
George F. Edwards
James A. Forti
Attorney David Z. Smith
Beth S. Wolff
SOUTH SIDE OFFICE
Attorney Zygmunt R. Bialkowski, Jr.
Michael P. Brown
J. Patrick Dietz
Lois Ferrari
Jeffrey J. Leventhal
Ted M. Stampien, DDS
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