================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------
Commission file number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
Incorporated pursuant to the laws of Pennsylvania
------------------
Internal Revenue Service -- Employer Identification No. 23-2939222
150 North Washington Avenue, Scranton, Pennsylvania 18503-1848
(570) 346-7741
------------------
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 checkmark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding on July 27, 2007 was 2,148,000.
================================================================================
PENSECO FINANCIAL SERVICES CORPORATION
Page
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements - Consolidated
Balance Sheets:
June 30, 2007..........................................3
December 31, 2006......................................3
Statements of Income:
Three Months Ended June 30, 2007.......................4
Three Months Ended June 30, 2006.......................4
Six Months Ended June 30, 2007.........................5
Six Months Ended June 30, 2006.........................5
Statements of Cash Flows:
Six Months Ended June 30, 2007.........................6
Six Months Ended June 30, 2006.........................6
Notes to Financial Statements..............................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....25
Item 4. Controls and Procedures.......................................25
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings.............................................26
Item 1A. Risk Factors..................................................26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...28
Item 3. Defaults Upon Senior Securities...............................28
Item 4. Submission of Matters to a Vote of Security Holders...........28
Item 5. Other Information.............................................28
Item 6. Exhibits......................................................28
Signatures ..............................................................29
Certifications ..............................................................30
PART I. FINANCIAL INFORMATION, Item 1 -- Financial Statements
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
June 30, December 31,
2007 2006
---------------- ----------------
ASSETS
Cash and due from banks $ 11,099 $ 12,999
Interest bearing balances with banks 7,493 1,779
Federal funds sold 16,000 -
---------------- ----------------
Cash and Cash Equivalents 34,592 14,778
Investment securities:
Available-for-sale, at fair value 75,059 91,705
Held-to-maturity (fair value of $70,798
and $75,120, respectively) 71,090 74,375
---------------- ----------------
Total Investment Securities 146,149 166,080
Loans, net of unearned income 385,868 369,922
Less: Allowance for loan losses 4,320 4,200
---------------- ----------------
Loans, Net 381,548 365,722
Bank premises and equipment 9,795 9,471
Other real estate owned 31 -
Accrued interest receivable 3,667 3,632
Cash surrender value of life insurance 7,209 7,054
Other assets 3,783 3,084
---------------- ----------------
Total Assets $ 586,774 $ 569,821
================ ================
LIABILITIES
Deposits:
Non-interest bearing $ 73,686 $ 71,585
Interest bearing 350,464 342,215
---------------- ----------------
Total Deposits 424,150 413,800
Other borrowed funds:
Repurchase agreements 28,560 13,441
Short-term borrowings 418 5,486
Long-term borrowings 60,953 65,853
Accrued interest payable 1,561 1,472
Other liabilities 2,981 3,198
---------------- ----------------
Total Liabilities 518,623 503,250
---------------- ----------------
STOCKHOLDERS' EQUITY
Common stock ($ .01 par value, 15,000,000 shares
authorized, 2,148,000 shares issued and outstanding) 21 21
Surplus 10,819 10,819
Retained earnings 58,173 56,393
Accumulated other comprehensive income (862) (662)
---------------- ----------------
Total Stockholders' Equity 68,151 66,571
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 586,774 $ 569,821
================ ================
(See accompanying Notes to Consolidated Financial Statements)
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Three Months Ended Three Months Ended
June 30, 2007 June 30, 2006
-------------------- --------------------
INTEREST INCOME
Interest and fees on loans $ 6,559 $ 5,718
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 952 1,399
States & political subdivisions 724 636
Other securities 97 106
Interest on Federal funds sold 219 -
Interest on balances with banks 102 39
-------------------- --------------------
Total Interest Income 8,653 7,898
-------------------- --------------------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 527 287
Interest on other deposits 1,915 1,533
Interest on other borrowed funds 869 866
-------------------- --------------------
Total Interest Expense 3,311 2,686
-------------------- --------------------
Net Interest Income 5,342 5,212
Provision for loan losses 124 27
-------------------- --------------------
Net Interest Income After Provision for Loan Losses 5,218 5,185
-------------------- --------------------
OTHER INCOME
Trust department income 367 351
Service charges on deposit accounts 260 227
Merchant transaction income 873 732
Other fee income 323 303
Other operating income 157 42
Realized gains (losses) on securities, net - -
-------------------- --------------------
Total Other Income 1,980 1,655
-------------------- --------------------
OTHER EXPENSES
Salaries and employee benefits 2,330 2,340
Expense of premises and fixed assets 725 582
Merchant transaction expenses 671 602
Other operating expenses 1,385 1,308
-------------------- --------------------
Total Other Expenses 5,111 4,832
-------------------- --------------------
Income before income taxes 2,087 2,008
Applicable income taxes 387 447
-------------------- --------------------
Net Income 1,700 1,561
Other comprehensive income, net of taxes:
Unrealized securities gains (losses) (222) (153)
-------------------- --------------------
Comprehensive Income $ 1,478 $ 1,408
==================== ====================
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.79 $ 0.73
Cash Dividends Declared Per Common Share $ 0.37 $ 0.35
(See accompanying Notes to Consolidated Financial Statements)
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Six Months Ended Six Months Ended
June 30, 2007 June 30, 2006
-------------------- --------------------
INTEREST INCOME
Interest and fees on loans $ 12,852 $ 11,233
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 1,963 2,911
States & political subdivisions 1,445 1,261
Other securities 238 164
Interest on Federal funds sold 304 -
Interest on balances with banks 193 48
-------------------- --------------------
Total Interest Income 16,995 15,617
-------------------- --------------------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 1,036 506
Interest on other deposits 3,727 2,959
Interest on other borrowed funds 1,645 1,769
-------------------- --------------------
Total Interest Expense 6,408 5,234
-------------------- --------------------
Net Interest Income 10,587 10,383
Provision for loan losses 220 154
-------------------- --------------------
Net Interest Income After Provision for Loan Losses 10,367 10,229
-------------------- --------------------
OTHER INCOME
Trust department income 739 705
Service charges on deposit accounts 511 416
Merchant transaction income 1,920 1,840
Other fee income 583 558
Other operating income 272 174
Realized gains (losses) on securities, net 51 -
-------------------- --------------------
Total Other Income 4,076 3,693
-------------------- --------------------
OTHER EXPENSES
Salaries and employee benefits 4,705 4,780
Expense of premises and fixed assets 1,350 1,234
Merchant transaction expenses 1,495 1,454
Other operating expenses 2,793 2,487
-------------------- --------------------
Total Other Expenses 10,343 9,955
-------------------- --------------------
Income before income taxes 4,100 3,967
Applicable income taxes 730 832
-------------------- --------------------
Net Income 3,370 3,135
Other comprehensive income, net of taxes:
Unrealized securities gains (losses) (200) (252)
-------------------- --------------------
Comprehensive Income $ 3,170 $ 2,883
==================== ====================
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 1.57 $ 1.46
Cash Dividends Declared Per Common Share $ 0.74 $ 0.70
(See accompanying Notes to Consolidated Financial Statements)
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended Six Months Ended
June 30 2007 June 30 2006
-------------------- --------------------
OPERATING ACTIVITIES
Net Income $ 3,370 $ 3,135
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 418 349
Provision for loan losses 220 154
Deferred income tax provision (benefit) 7 44
Amortization of securities, (net of accretion) 196 266
Net realized losses (gains) on securities (51) -
(Gain) loss on other real estate (20) -
(Increase) decrease in interest receivable (35) 21
(Increase) decrease in cash surrender value of life insurance (155) -
(Increase) decrease in other assets (602) (1,969)
Increase (decrease) in income taxes payable 96 200
Increase (decrease) in interest payable 89 31
(Decrease) increase in other liabilities (313) (286)
-------------------- --------------------
Net cash provided by operating activities 3,220 1,945
-------------------- --------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (10,922) (1,564)
Proceeds from sales and maturities of investment securities
available-for-sale 21,366 32,251
Purchase of investment securities to be held-to-maturity - -
Proceeds from repayments of investment securities available-for-sale 5,941 6,692
Proceeds from repayments of investment securities held-to-maturity 3,097 3,803
Net loans (originated) repaid (16,122) (14,256)
Proceeds from other real estate 65 91
Investment in premises and equipment (742) (277)
-------------------- --------------------
Net cash provided (used) by investing activities 2,683 26,740
-------------------- --------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 9,290 (16,773)
Net proceeds (payments) on time deposits 1,060 18,538
Increase (decrease) in federal funds purchased - -
Increase (decrease) in repurchase agreements 15,119 (10,026)
Net (decrease) increase in short-term borrowings (5,068) (4,626)
Repayments of long-term borrowings (4,900) (4,732)
Cash dividends paid (1,590) (1,504)
-------------------- --------------------
Net cash provided (used) by financing activities 13,911 (19,123)
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents 19,814 9,562
Cash and cash equivalents at January 1 14,778 11,573
-------------------- --------------------
Cash and cash equivalents at June 30 $ 34,592 $ 21,135
==================== ====================
The Company paid interest and income taxes of $6,319 and $640 and $5,203 and
$606, for the six month periods ended June 30, 2007 and 2006, respectively.
(See accompanying Notes to Consolidated Financial Statements)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 2007
(unaudited)
These Notes to Financial Statements reflect events subsequent to December 31,
2006, the date of the most recent Report of Independent Registered Public
Accounting Firm, through the date of this Quarterly Report on Form 10-Q. These
Notes to Financial Statements should be read in conjunction with Parts I and II
of this Report, in particular, (1) Management's Discussion and Analysis of
Financial Condition and Results of Operations for the three months ended June
30, 2007 and June 30, 2006 and for the six months ended June 30, 2007 and June
30, 2006, with respect to the Company's net interest income, capital
requirements and liquidity, (2) Part II, Item 6, Exhibits and (3) the Company's
Annual Report - Form 10-K for the year ended December 31, 2006, which was filed
with the Securities and Exchange Commission on March 16, 2007 and is
incorporated herein by reference.
FORWARD LOOKING INFORMATION
This Form 10-Q 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 risks 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. The Company undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
NOTE 1 -- Principles of Consolidation
Penseco Financial Services Corporation (Company) is a financial holding company
incorporated under the laws of Pennsylvania. It is the parent company of Penn
Security Bank and Trust Company (Bank), a Pennsylvania state chartered bank.
Intercompany transactions have been eliminated in preparing the consolidated
financial statements.
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.
NOTE 2 -- Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments that are of a normal recurring
nature and are considered necessary for a fair presentation have been included.
They are not, however, necessarily indicative of the results of consolidated
operations for a full year.
All information is presented in thousands of dollars, except per share amounts.
For further information, refer to the consolidated financial statements and
accompanying notes included in the Company's Annual Report - Form 10-K for the
year ended December 31, 2006.
NOTE 3 -- 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.
NOTE 4 -- 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.
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.
Realized 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. Unrealized gains
and losses are included as a separate item in computing comprehensive income.
The amortized cost and fair value of investment securities at June 30, 2007 and
December 31, 2006 are as follows:
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2007 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Agency securities $ 14,913 $ - $ 37 $ 14,876
Mortgage-backed securities 23,262 94 70 23,286
States & political subdivisions 29,286 612 1 29,897
- --------------------------------------------------------------------------------
Total Debt Securities 67,461 706 108 68,059
Equity securities 6,370 801 171 7,000
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 73,831 $ 1,507 $ 279 $ 75,059
- --------------------------------------------------------------------------------
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2006 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Agency securities $ 24,897 $ 9 $ 23 $ 24,883
Mortgage-backed securities 29,231 91 82 29,240
States & political subdivisions 29,281 939 - 30,220
- --------------------------------------------------------------------------------
Total Debt Securities 83,409 1,039 105 84,343
Equity securities 6,764 628 30 7,362
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 90,173 $ 1,667 $ 135 $ 91,705
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2007 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Mortgage-backed securities $ 41,844 $ 2 $ 1,607 $ 40,239
States & political subdivisions 29,246 1,313 - 30,559
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 71,090 $ 1,315 $ 1,607 $ 70,798
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2006 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Mortgage-backed securities $ 45,124 $ 4 $ 1,074 $ 44,054
States & political subdivisions 29,251 1,815 - 31,066
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 74,375 $ 1,819 $ 1,074 $ 75,120
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at June 30, 2007 by
contractual maturity are shown below. 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.
June 30, 2007 Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year or less:
U.S. Agency securities $ 4,949 $ 4,940 $ - $ -
After one year through five years:
U.S. Agency securities 9,964 9,936 - -
After five year through ten years:
States & political subdivisions 460 486 987 1,102
After ten years:
States & political subdivisions 28,826 29,411 28,259 29,457
- --------------------------------------------------------------------------------
Subtotal 44,199 44,773 29,246 30,559
Mortgage-backed securities 23,262 23,286 41,844 40,239
- --------------------------------------------------------------------------------
Total Debt Securities $ 67,461 $ 68,059 $ 71,090 $ 70,798
- --------------------------------------------------------------------------------
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 June 30, 2007 and
December 31, 2006 are as follows:
Less than twelve months Twelve months or more Totals
------------------------------ ------------------------------ ------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
June 30, 2007 Value Losses Value Losses Value Losses
- -------------------------------------------------------------- ------------------------------ ------------------------------
U.S. Agency securities $ 14,876 $ 37 $ - $ - $ 14,876 $ 37
Mortgage-backed securities 7,034 32 43,178 1,645 50,212 1,677
States & political subdivisions 244 1 - - 244 1
Equities 1,151 69 468 102 1,619 171
------------- ------------- ------------- ------------- ------------- -------------
Total $ 23,305 $ 139 $ 43,646 $ 1,747 $ 66,951 $ 1,886
============= ============= ============= ============= ============= =============
The table above at June 30, 2007, includes thirteen (13) securities that have
unrealized losses for less than twelve months and eight (8) securities that have
been in an unrealized loss position for twelve or more months.
Less than twelve months Twelve months or more Totals
------------------------------ ------------------------------ ------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2006 Value Losses Value Losses Value Losses
- -------------------------------------------------------------- ------------------------------ ------------------------------
U.S. Agency securities $ 9,868 $ 9 $ 9,985 $ 14 $ 19,853 $ 23
Mortgage-backed securities - - 50,379 1,156 50,379 1,156
Equities 160 1 541 29 701 30
------------- ------------- ------------- ------------- ------------- -------------
Total $ 10,028 $ 10 $ 60,905 $ 1,199 $ 70,933 $ 1,209
============= ============= ============= ============= ============= =============
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 June 30, 2007.
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 June 30,
2007. The Company's Mortgage-Backed Securities portfolio does not contain any
Sub-Prime or Alt-A credits.
States & 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 June 30, 2007.
Marketable Equity Securities
The unrealized losses on the Company's investment in marketable equity
securities were caused primarily by recent interest rate increases and other
market conditions. The Company's investments in marketable equity securities
consist primarily of investments in common stock of companies in the financial
services industry. Because the Company has the ability and intent to hold these
investments for a reasonable period of time sufficient for a forecasted recovery
of fair value, the Company does not consider these investments to be
other-than-temporarily impaired at June 30, 2007.
NOTE 5 -- Loan Portfolio
Details regarding the Company's loan portfolio:
June 30, December 31,
As of: 2007 2006
- --------------------------------------------------------------------------------
Real estate - construction and land development $ 25,910 $ 23,714
Real estate mortgages 296,870 284,323
Commercial 22,953 26,265
Credit card and related plans 3,259 3,282
Installment and other 30,295 25,532
Obligations of states & political subdivisions 6,581 6,806
- --------------------------------------------------------------------------------
Loans, net of unearned income 385,868 369,922
Less: Allowance for loan losses 4,320 4,200
- --------------------------------------------------------------------------------
Loans, net $ 381,548 $ 365,722
- --------------------------------------------------------------------------------
The Company does not engage in any Sub-Prime or Alt-A credit lending. Therefore,
the Company is not subject to any associated credit risks.
NOTE 6 -- 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.
NOTE 7 -- Long-Term Debt
In a prior year, the Bank borrowed $100,000 from the Federal Home Loan Bank of
Pittsburgh, in four loans with various maturity dates, to finance the purchase
of a mortgaged-backed security.
The loans are secured by a general collateral pledge of the Company.
A summary of the long-term debt at June 30, 2007 is as follows:
Note payable, due in monthly installments of $161, including
principal and interest at a fixed rate of 2.73%, maturing March, 2008. $ 1,430
Note payable, due in monthly installments of $253, including
principal and interest at a fixed rate of 3.22%, maturing March, 2010. 7,978
Note payable, due in monthly installments of $430, including
principal and interest at a fixed rate of 3.74%, maturing March, 2013. 26,663
Note payable, due in monthly installments of $186, including
principal and interest at a fixed rate of 4.69%, maturing March, 2023. 24,882
-------
Total long-term debt $60,953
=======
The Company has agreed to maintain sufficient qualifying collateral to fully
secure the above borrowings.
Aggregate maturities of long-term debt at June 30, 2007 are as follows:
June 30, Principal
-------- ----------
2008 $ 9,579
2009 8,455
2010 8,011
2011 5,996
2012 6,237
Thereafter 22,675
----------
$ 60,953
==========
NOTE 8 -- Employee Benefit Plans
The Company provides a defined benefit pension plan for eligible employees.
The components of the net periodic benefit costs are as follows:
Pension Benefits Other Benefits
---------------- ----------------
Six months ended June 30, 2007 2006 2007 2006
- ----------------------------------------------------------------------------
Service cost $ 218 $ 218 $ 2 $ 2
Interest cost 370 334 8 8
Expected return on plan assets (482) (445) - -
Amortization of prior service cost - - 4 4
Amortization of net loss (gain) 72 83 - -
- ----------------------------------------------------------------------------
Net periodic pension cost $ 178 $ 190 $ 14 $ 14
- ----------------------------------------------------------------------------
Contributions
The Company previously disclosed in its financial statements for the year ended
December 31, 2006, that it expected to contribute $250 to its pension plan and
$13 to its postretirement plan for 2007. As of July 15, 2007, $146 has been
contributed to the pension plan for 2007. The pension and postretirement
contribution estimates have not changed substantially since December 31, 2006.
Readers should refer to the Annual Report on Form 10K for further details on the
Company's defined benefit pension plan.
NOTE 9 -- 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 judgments 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 June 30, 2007, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
As of June 30, 2007, 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 June 30, 2007,
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.
Actual Regulatory Requirements
- --------------------------------------------------------- --------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
----------------- ------------------
As of June 30, 2007 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets)
PFSC (Company) $ 73,192 19.73% > $ 29,684 > 8.0% > $ 37,105 > 10.0%
- - - -
PSB (Bank) $ 68,259 18.50% > $ 29,518 > 8.0% > $ 36,897 > 10.0%
- - - -
Tier 1 Capital (to Risk Weighted Assets)
PFSC $ 68,872 18.56% > $ 14,842 > 4.0% > $ 22,263 > 6.0%
- - - -
PSB $ 63,939 17.33% > $ 14,759 > 4.0% > $ 22,138 > 6.0%
- - - -
Tier 1 Capital (to Average Assets)
PFSC $ 68,872 11.77% > * > * > $ 29,251 > 5.0%
- - - -
PSB $ 63,939 11.00% > * > * > $ 29,053 > 5.0%
- - - -
PFSC - *3.0% ($17,550), 4.0% ($23,401) or 5.0% ($29,251) depending on the bank's
CAMELS Rating and other regulatory risk factors.
PSB - *3.0% ($17,432), 4.0% ($23,242) or 5.0% ($29,053) depending on the bank's
CAMELS Rating and other regulatory risk factors.
Actual Regulatory Requirements
- --------------------------------------------------------- --------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
----------------- ------------------
As of December 31, 2006 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets)
PFSC (Company) $ 71,235 19.65% > $ 28,998 > 8.0% > $ 36,248 > 10.0%
- - - -
PSB (Bank) $ 68,029 18.84% > $ 28,882 > 8.0% > $ 36,103 > 10.0%
- - - -
Tier I Capital (to Risk Weighted Assets)
PFSC $ 67,035 18.49% > $ 14,499 > 4.0% > $ 21,749 > 6.0%
- - - -
PSB $ 63,829 17.68% > $ 14,441 > 4.0% > $ 21,662 > 6.0%
- - - -
Tier I Capital (to Average Assets)
PFSC $ 67,035 11.93% > $ * > * > $ 28,105 > 5.0%
- - -
PSB $ 63,829 11.36% > $ * > * > $ 28,083 > 5.0%
- - - -
PFSC - *3.0% ($16,863), 4.0% ($22,484) or 5.0% ($28,105) depending on the bank's
CAMELS Rating and other regulatory risk factors.
PSB - *3.0% ($16,850), 4.0% ($22,466) or 5.0% ($28,083) depending on the bank's
CAMELS Rating and other regulatory risk factors.
PART 1. FINANCIAL INFORMATION, Item 2 --
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial condition and
significant changes in the results of operations of Penseco Financial Services
Corporation and its subsidiary, Penn Security Bank and Trust Company, for the
three months ended June 30, 2007 and June 30, 2006 and for the six months ended
June 30, 2007 and June 30, 2006. All information is presented in thousands of
dollars, except as indicated.
Critical Accounting Policies
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.
Provision (allowance) for possible loan losses - 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 judgment, 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.
Actuarial assumptions associated with pension, post-retirement and other
employee benefit plans - These assumptions include discount rate, rate of future
compensation increases and expected return on plan assets.
Provision for income taxes - Management believes that the assumptions and
judgments used to record tax related assets or liabilities have been
appropriate.
Fair value of certain investment securities - Fair value of investment
securities are based on quoted market prices.
Loan servicing rights - 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.
Premium amortization - 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.
Executive Summary
Penseco Financial Services Corporation reported an increase in net income of
$139 or 8.9% for the three months ended June 30, 2007 to $1,700 or $.79 per
share compared with $1,561 or $.73 per share from the year ago period. Net
interest income after provision for loan losses increased $33 or .6%, to $5,218
for three months ended June 30, 2007 compared to $5,185 for the same quarter of
2006. Partly, the increase resulted from higher interest on loans due to net
loan growth of $49.8 million since June 30, 2006, including $15.8 million from
December 31, 2006. Interest on investments declined $86 or 3.9% due to maturing
investments being redeployed to fund future loan demand.
Other income increased $325 or 19.6% for the three months ended June 30, 2007 to
$1,980 compared with $1,655 for the three months ended June 30, 2006. Total
other expenses increased $279 or 5.8% to $5,111 for the three months ended June
30, 2007, compared with $4,832 for the same period of 2006. Applicable income
taxes decreased $60 or 13.4% to $387 due to more tax free income included in
overall operating income.
For the six months ended June 30, 2007, net income increased $235 or 7.5% to
$3,370 or $1.57 per share compared with the year ago period of $3,135 or $1.46
per share. Net interest income after provision for loan losses increased
$138 or 1.3% to $10,367 for the first half of 2007 from $10,229 for the same
period of 2006. Largely, the increase came from higher interest and fees on
loans of $1,619 or 14.4%, as net loans increased $49.8 million. Interest on
investments declined $241 or 5.5% due to maturing investments being redeployed
to fund future loan demand.
Other income increased $383 or 10.4% mostly in merchant transaction income as
volumes increased. Total other expenses increased $388 or 3.9% mainly due to an
increase in other operating expense. Applicable income taxes decreased $102 or
12.3% to $730 due to more tax free income included in overall operating income.
Net Interest Income and Net Interest Margin
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between interest income on assets and the cost of
funds supporting those assets. Average earning assets are composed primarily of
loans and investments while deposits, short-term and long-term borrowings
represent interest-bearing liabilities. Variations in the volume and mix of
these assets and liabilities, as well as changes in the yields earned and rates
paid, are determinants of changes in net interest income.
Net interest income after provision for loan losses increased $33 or .6% to
$5,218 for the three months ended June 30, 2007 compared to $5,185 for the three
months ended June 30, 2006. The average yield on earning assets increased 34
basis points, largely due to an increase in interest rates. Also, there was an
increase of $48.5 million in average loans from the comparable period of 2006.
The net interest margin represents the Company's net yield on its average
earning assets and is calculated as net interest income divided by average
earning assets. In the three months ended June 30, 2007, net interest margin was
3.85% decreasing 5 basis points from 3.90% in the same period of 2006.
Total average interest earning assets and average interest bearing funds
increased in the three months ended June 30, 2007 as compared to 2006. Average
interest earning assets increased $19.6 million or 3.7%, from $535.2 million in
2006 to $554.8 million in 2007 and average interest bearing funds increased
$29.7 million, or 7.3%, from $409.5 million to $439.2 million for the same
period, mainly due to higher loans and time and demand interest bearing
accounts, along with increased repurchase agreements. Long-term borrowings
decreased $9.7 million or 13.5%. As a percentage of average assets, earning
assets increased to 96.0% for the three months ended June 30, 2007 from 95.7%
for the year ago period. This increase was a result of average loan growth of
$48.5 million.
Changes in the mix of both earning assets and funding sources also impacted net
interest income in the three months ended June 30, 2007 and 2006. Average loans
as a percentage of average earning assets increased from 62.0% in 2006 to 68.6%
in 2007, due in part to the increase of new and refinanced residential mortgages
as well as an increase in commercial loans secured by real estate. Average
investments decreased $49.9 million from 37.4% to 27.1% of earning assets.
Average short-term investments, federal funds sold and interest bearing balances
with banks increased $21.1 million to $24.3 million from $3.2 million. Average
time deposits increased $15.6 million or 14.5% to $123.5 million from $107.9
million, average short-term borrowings decreased $3.1 million, average long-term
borrowings decreased $9.7 million, while repurchase agreements increased $9.4
million.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds as well as the yields earned on assets. The investment
securities tax equivalent yield increased 78 basis points from 4.94% in the
three months ended June 30, 2006 to 5.72% for 2007. Average loan yields
decreased 20 basis points, from 7.10% in the three months ended June 30, 2006 to
6.90% in 2007, partly due to the inverted yield curve and its impact on
residential mortgage loan rates.
The average time deposit costs increased 66 basis points from 3.76% in 2006 to
4.42% in 2007, along with the average cost of money market accounts increasing
50 basis points from 2.64% in 2006 to 3.14% in 2007.
Distribution of Assets, Liabilities and Stockholders' Equity / Interest Rates
and Interest Differential
The table below presents average 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 three months ended June
30, 2007 and June 30, 2006.
- ----------------------------------------------------------------------------------------------------------
June 30, 2007 June 30, 2006
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------
Investment Securities
Available-for-sale:
U.S. Treasury securities $ - $ - - $ - $ - -
U.S. Agency obligations 40,116 459 4.58% 91,738 838 3.65%
States & political subdivisions 30,248 335 6.71% 21,348 241 6.84%
Federal Home Loan Bank stock 3,925 63 6.42% 4,853 80 6.59%
Other 3,829 34 3.55% 3,140 26 3.31%
Held-to-maturity:
U.S. Agency obligations 42,698 493 4.62% 49,661 561 4.52%
States & political subdivisions 29,247 389 8.06% 29,253 395 8.18%
Loans, net of unearned income:
Real estate mortgages 316,514 5,296 6.69% 263,475 4,445 6.75%
Commercial 23,650 498 8.42% 29,783 628 8.43%
Consumer and other 40,287 765 7.60% 38,704 645 6.67%
Federal funds sold 16,579 219 5.28% - - -
Interest on balances with banks 7,734 102 5.28% 3,225 39 4.84%
- ----------------------------------------------------------------------------------------------------------
Total Interest Earning Assets/
Total Interest Income 554,827 $ 8,653 6.24% 535,180 $ 7,898 5.90%
- ----------------------------------------------------------------------------------------------------------
Cash and due from banks 10,284 10,509
Bank premises and equipment 9,855 9,466
Accrued interest receivable 3,259 2,940
Cash surrender value of life insurance 7,159 -
Other assets 3,977 4,868
Less: Allowance for loan losses 4,203 3,888
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 585,158 $ 559,075
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 57,555 $ 163 1.13% $ 39,397 $ 63 0.64%
Savings 81,528 241 1.18% 83,463 185 0.89%
Money markets 85,883 675 3.14% 84,613 558 2.64%
Time - Over $100 43,213 527 4.88% 30,441 287 3.77%
Time - Other 80,269 836 4.17% 77,505 727 3.75%
Federal funds purchased - - - - - -
Repurchase agreements 28,333 240 3.39% 18,872 107 2.27%
Short-term borrowings 281 4 5.69% 3,412 49 5.74%
Long-term borrowings 62,108 625 4.03% 71,793 710 3.96%
- ----------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 439,170 $ 3,311 3.02% 409,496 $ 2,686 2.62%
- ----------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 73,226 81,191
All other liabilities 4,636 3,588
Stockholders' equity 68,126 64,800
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 585,158 $ 559,075
- ----------------------------------------------------------------------------------------------------------
Interest Spread 3.22% 3.28%
- ----------------------------------------------------------------------------------------------------------
Net Interest Income $ 5,342 $ 5,212
- ----------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 3.85% 3.90%
Return on average assets 1.16% 1.12%
Return on average equity 9.98% 9.64%
Average equity to average assets 11.64% 11.59%
Dividend payout ratio 46.84% 47.95%
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses increased $138 or 1.3% to
$10,367 for the six months ended June 30, 2007, compared to $10,229 for the
first half of 2006. The average yield on earning assets increased 40 basis
points, largely due to higher interest rates and growth in our average loan
portfolio of $46.6 million from the similar period of 2006.
The net interest margin represents the Company's net yield on its average
earning assets and is calculated as net interest income divided by average
earning assets. For the six months ended June 30, 2007, net interest margin was
3.86% increasing one basis point from 3.85% in the same period of 2006.
Total average earning assets and average interest bearing funds increased for
the six months ended June 30, 2007 as compared to 2006. Average earning assets
increased $9.4 million or 1.7%, from $539.8 million in 2006 to $549.2 million in
2007 and average interest bearing funds increased $21.6 million, or 5.3%, from
$410.8 million to $432.4 million for the same period. As a percentage of average
assets, earning assets remained unchanged at 96.0% for the six months ended June
30, 2007 and 2006.
Changes in the mix of both earning assets and funding sources also impacted net
interest income in the six months ended June 30, 2007 and 2006. Average loans as
a percentage of average earning assets increased from 60.8% in 2006 to 68.2% in
2007, due in part to the increase of new and refinanced residential mortgages as
well as an increase in commercial loans secured by real estate. Average
investments decreased $54.3 million from 38.9% to 28.3%. Average short-term
investments, federal funds sold and interest bearing balances with banks
increased $17.1 million to $2.0 from $19.1 and also increased as a percentage of
average earning assets from .4% in 2006 to 3.5% in 2007. Average time deposits
increased $16.6 million or 15.5% from 26.3% of interest bearing liabilities in
2006 to 28.8% in 2007. Average short-term borrowings decreased $4.3 million;
average long-term borrowings decreased $9.7 million, while repurchase agreements
increased $3.1million.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds as well as the yields earned on assets. The investment
securities tax equivalent yield increased 90 basis points from 4.75% for the six
months ended June 30, 2006 to 5.65% for 2007. Also, average loan yields
increased one basis point, from 6.85% for the first half of 2006 to 6.86% in the
same period of 2007.
The average time deposit costs increased 78 basis points from 3.60% in 2006 to
4.38% in 2007, along with the average cost of money market accounts increasing
61 basis points from 2.47% in 2006 to 3.08% in 2007.
Distribution of Assets, Liabilities and Stockholders' Equity / Interest Rates
and Interest Differential
The table below presents average 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 six months ended June
30, 2007 and June 30, 2006.
- ----------------------------------------------------------------------------------------------------------
June 30, 2007 June 30, 2006
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------
Investment Securities
Available-for-sale:
U.S. Treasury securities $ - $ - - $ - $ - -
U.S. Agency obligations 42,964 977 4.55% 100,483 1,785 3.55%
States & political subdivisions 30,219 670 6.72% 21,492 476 6.71%
Federal Home Loan Bank stock 4,083 132 6.47% 4,850 109 4.49%
Other 5,448 106 3.89% 3,102 55 3.55%
Held-to-maturity:
U.S. Agency obligations 43,490 986 4.53% 50,611 1,126 4.45%
States & political subdivisions 29,248 775 8.03% 29,252 785 8.13%
Loans, net of unearned income:
Real estate mortgages 311,102 10,351 6.65% 252,818 8,634 6.83%
Commercial 23,359 987 8.45% 36,180 1,207 6.67%
Consumer and other 40,154 1,514 7.54% 39,002 1,392 7.14%
Federal funds sold 11,564 304 5.26% - - -
Interest on balances with banks 7,522 193 5.13% 1,991 48 4.82%
- ----------------------------------------------------------------------------------------------------------
Total Interest Earning Assets/
Total Interest Income 549,153 $ 16,995 6.19% 539,781 $ 15,617 5.79%
- ----------------------------------------------------------------------------------------------------------
Cash and due from banks 10,345 9,849
Bank premises and equipment 9,690 9,518
Accrued interest receivable 3,251 2,981
Cash surrender value of life insurance 7,120 -
Other assets 4,035 4,225
Less: Allowance for loan losses 4,197 3,839
- -----------------------------------------------------------------------------------------------------------
Total Assets $ 579,397 $ 562,515
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 54,425 $ 257 0.94% $ 35,552 $ 115 0.65%
Savings 80,688 455 1.13% 84,150 350 0.83%
Money markets 86,097 1,325 3.08% 85,697 1,060 2.47%
Time - Over $100 42,107 1,036 4.92% 29,439 506 3.44%
Time - Other 82,369 1,690 4.10% 78,443 1,434 3.66%
Federal funds purchased - - - - - -
Repurchase agreements 22,913 361 3.15% 19,754 198 2.00%
Short-term borrowings 458 12 5.25% 4,778 130 5.44%
Long-term borrowings 63,345 1,272 4.02% 72,994 1,441 3.95%
- ----------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 432,402 $ 6,408 2.96% 410,807 $ 5,234 2.55%
- ----------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 74,452 84,097
All other liabilities 4,864 2,883
Stockholders' equity 67,679 64,728
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 579,397 $ 562,515
- ----------------------------------------------------------------------------------------------------------
Interest Spread 3.23% 3.24%
- ----------------------------------------------------------------------------------------------------------
Net Interest Income $ 10,587 $ 10,383
- ----------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 3.86% 3.85%
Return on average assets 1.16% 1.11%
Return on average equity 9.96% 9.69%
Average equity to average assets 11.68% 11.51%
Dividend payout ratio 47.13% 47.95%
- ----------------------------------------------------------------------------------------------------------
Investments
The Company's investment portfolio consists primarily of two functions: To
provide liquidity and to contribute to earnings. To provide liquidity the
Company may invest in short-term securities such as Federal funds sold, interest
bearing deposits with banks, U.S. Treasury securities and U.S. Agency securities
all with maturities of one year or less. These funds are invested short-term to
ensure the availability of funds to meet customer demand for credit needs. The
Company enhances interest income by securing long-term investments within its
investment portfolio, by means of U.S. Treasury securities, U.S. Agency
securities, municipal securities and mortgage-backed securities generally with
maturities greater than one year. The Company's Mortgage-Backed Securities
portfolio does not contain any Sub-Prime or Alt-A credits.
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.
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.
Deposits
The Company is largely dependent on its core deposit base to fund operations.
Management has competitively priced its deposit products in checking, savings,
money market and time deposits to provide a stable source of funding.
As the economy shows strength and improves, there is migration of some deposits,
mainly to higher costing time deposits, as consumers become more prone to
increased yields. Historically, such changes in the Company's deposit base have
been minimal.
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 process of determining the adequacy of the
allowance is necessarily judgmental and subject to changes in external
conditions. The allowance for loan losses reflects management's judgment as to
the level considered appropriate to absorb such losses based upon a review of
many factors, including historical loss experience, adverse situations that may
affect the borrower's ability to repay (including the timing of future
payments), economic conditions and trends, loan portfolio volume and mix, loan
performance trends, the value and adequacy of collateral, and the Company's
internal credit review process. Accordingly, there can be no assurance that
existing levels of the allowance will ultimately prove adequate to cover actual
loan losses. The quarterly 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.
Based on this ongoing evaluation, management determines the provision necessary
to maintain an appropriate allowance.
For the three months ended June 30, 2007, the provision for loan losses
increased to $97 from $27 in the three months ended June 30, 2006 to $124 in the
three months ended June 30, 2007. Loans charged off totaled $4 and recoveries
were $0 for the three months ended June 30, 2007. In the same period of 2006,
loans charged off totaled $28 and recoveries were $1. For the six months ended
June 30, 2007, the provision for loan losses was $220, an increase from $154 in
the first six months of 2006. Loans charged-off totaled $102 and recoveries were
$2 for the six months ended June 30, 2007. In the same period of 2006 loans
charged off were $57, offset by recoveries of $3. At June 30, 2007 the allowance
for loan losses was set at $4,320 or 1.12% of gross loans based upon the Bank's
analysis.
Other Income
The following table sets forth information by category of other income for the
Company for three months ended June 30, 2007 and June 30, 2006, respectively:
June 30, June 30,
Three Months Ended: 2007 2006
- ---------------------------------------------------------------------
Trust department income $ 367 $ 351
Service charges on deposit accounts 260 227
Merchant transaction income 873 732
Other fee income 323 303
Other operating income 157 42
Realized gains (losses) on securities, net - -
- ---------------------------------------------------------------------
Total Other Income $ 1,980 $ 1,655
- ---------------------------------------------------------------------
Other income increased $325 or 19.6% to $1,980 for the three months ended June
30, 2007 compared with $1,655 for the similar period of 2006. Trust income
increased $16 or 4.6% from new business. Merchant transaction income increased
$141 or 19.3% due to higher transaction volume and new business. Service charges
on deposit accounts increased $33 or 14.5% primarily due to increased service
charge collections during 2007, while other fee income increased $20 from prior
year levels. Other operating income increased $115 largely due to Bank-Owned
Life Insurance income of $77, in addition to higher brokerage income compared to
the prior year period.
The following table sets forth information by category of other income for the
Company for six months ended June 30, 2007 and June 30, 2006, respectively:
June 30, June 30,
Six Months Ended: 2007 2006
- ---------------------------------------------------------------------
Trust department income $ 739 $ 705
Service charges on deposit accounts 511 416
Merchant transaction income 1,920 1,840
Other fee income 583 558
Other operating income 272 174
Realized gains (losses) on securities, net 51 -
- ---------------------------------------------------------------------
Total Other Income $ 4,076 $ 3,693
- ----------------------------------------------------------------------
Other income increased $383 or 10.4% to $4,076 during the first half of 2007
from $3,693 for the same period of 2006. Service charges on deposit accounts
increased $95 or 22.8% primarily due to increased service charge collections
during 2007. Merchant transaction income increased $80 or 4.3% mainly due to
higher transaction volume and new business. Other fee income increased $25 or
4.5%. Other operating income increased $98 mainly from Bank-Owned Life Insurance
income of $155 offset by lower brokerage income during the first quarter of
2007. The Company realized a gain of $51 due to the sale of equity securities in
the first quarter of 2007.
Other Expenses
The following table sets forth information by category of other expenses for the
Company for the three months ended June 30, 2007 and June 30, 2006,
respectively:
June 30, June 30,
Three Months Ended: 2007 2006
- ---------------------------------------------------------------------
Salaries and employee benefits $ 2,330 $ 2,340
Expense of premises and fixed assets 725 582
Merchant transaction expenses 671 602
Other operating expenses 1,385 1,308
- ---------------------------------------------------------------------
Total Other Expenses $ 5,111 $ 4,832
- ---------------------------------------------------------------------
Total other expenses increased $279 or 5.8% to $5,111 for the three months ended
June 30, 2007 compared with $4,832 for the same period of 2006. Salaries and
employee benefits decreased $10. Premises and fixed assets expense increased
$143 or 24.6% mainly due to higher depreciation expense related to the
conversion to a new computer system during the first quarter of 2006. Merchant
transaction expense increased $69 or 11.5% due to higher transaction volume.
Other operating expenses increased $77 or 5.9%, from increases in professional
fees and general operating expenses related to the promotion of our Totally Free
Checking program.
Applicable income taxes decreased $60 or 13.4% to $387 due to more tax free
income included in overall operating income.
The following table sets forth information by category of other expenses for the
Company for the six months ended June 30, 2007 and June 30, 2006, respectively:
June 30, June 30,
Six Months Ended: 2007 2006
- ---------------------------------------------------------------------
Salaries and employee benefits $ 4,705 $ 4,780
Expense of premises and fixed assets 1,350 1,234
Merchant transaction expenses 1,495 1,454
Other operating expenses 2,793 2,487
- ---------------------------------------------------------------------
Total Other Expenses $ 10,343 $ 9,955
- ---------------------------------------------------------------------
Total other expenses increased $388 or 3.9% to $10,343 during the first half of
2007 compared with $9,955 for the same period of 2006. Salaries and employee
benefits expense decreased $75 or 1.6%. Premises and fixed assets expense
increased $116 or 9.4% mainly due to the conversion to a new computer system
completed during the first quarter of 2006. Merchant transaction expenses
increased $41 or 2.8% due to higher transaction volume. Other operating expenses
increased $306 or 12.3% mostly from higher professional fees and general
operating expenses related to the promotion of our Totally Free Checking
program.
Applicable income taxes decreased $102 or 12.3% to $730 due to more tax free
income included in overall operating income.
Loan Portfolio
Details regarding the Company's loan portfolio:
June 30, December 31,
As of: 2007 2006
- ------------------------------------------------------------------------------
Real estate - construction and land development $ 25,910 $ 23,714
Real estate mortgages 296,870 284,323
Commercial 22,953 26,265
Credit card and related plans 3,259 3,282
Installment and other 30,295 25,532
Obligations of states & political subdivisions 6,581 6,806
- ------------------------------------------------------------------------------
Loans, net of unearned income 385,868 369,922
Less: Allowance for loan losses 4,320 4,200
- ------------------------------------------------------------------------------
Loans, net $ 381,548 $ 365,722
- ------------------------------------------------------------------------------
The Company does not engage in any Sub-Prime or Alt-A credit lending. Therefore,
the Company is not subject to any associated credit risks.
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.
Non-Performing Assets
The following table sets forth information regarding non-accrual loans and loans
past due 90 days or more and still accruing interest:
June 30, December 31, June 30,
As of: 2007 2006 2006
- -------------------------------------------------------------------------------------------
Non-accrual loans $ 2,825 $ 3,180 $ 1,822
Other real estate owned 31 - 2
- -------------------------------------------------------------------------------------------
Total non-performing assets $ 2,856 $ 3,180 $ 1,824
- -------------------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
Secured by real estate $ 494 $ 177 $ -
Guaranteed student loans 440 251 306
Credit card loans 7 6 6
- -------------------------------------------------------------------------------------------
Total loans past due 90 days or more and accruing $ 941 $ 434 $ 312
- -------------------------------------------------------------------------------------------
Non-accrual loans increased $1,003 to $2,825 at June 30, 2007 from $1,822 at
June of 2006. This increase was due to a single borrowing relationship being
placed into non-accrual during the third quarter of 2006. Management believes
that the Company is well secured and anticipates no loss of principal as we work
toward a resolution to this credit.
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 $2,825 and $1,822 at June 30, 2007 and June 30, 2006, respectively. If
interest on those loans had been accrued, such income would have been $209 and
$62 for the six months ended June 30, 2007 and June 30, 2006, respectively.
Interest income on those loans, which is recorded only when received, amounted
to $127 and $14 for June 30, 2007 and June 30, 2006, respectively. There are no
commitments to lend additional funds to individuals whose loans are in
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 June 30, 2007 there are no significant loans as to which management has
serious doubt about their collectibility other than what is included above.
At June 30, 2007 and December 31, 2006, 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:
June 30, June 30,
Three Months Ended: 2007 2006
- -------------------------------------------------------------------------
Balance at beginning of period $ 4,200 $ 3,900
Charge-offs:
Real estate mortgages - -
Commercial and all others - -
Credit card and related plans 4 26
Installment loans - 2
- -------------------------------------------------------------------------
Total charge-offs 4 28
- -------------------------------------------------------------------------
Recoveries:
Real estate mortgages - -
Commercial and all others - -
Credit card and related plans - 1
Installment loans - -
- -------------------------------------------------------------------------
Total recoveries - 1
- -------------------------------------------------------------------------
Net charge-offs (recoveries) 4 27
- -------------------------------------------------------------------------
Provision charged to operations 124 27
- -------------------------------------------------------------------------
Balance at End of Period $ 4,320 $ 3,900
- -------------------------------------------------------------------------
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.001% 0.008%
- -------------------------------------------------------------------------
June 30, June 30,
Six Months Ended: 2007 2006
- -------------------------------------------------------------------------
Balance at beginning of period $ 4,200 $ 3,800
Charge-offs:
Real estate mortgages 84 -
Commercial and all others - 8
Credit card and related plans 16 32
Installment loans 2 17
- -------------------------------------------------------------------------
Total charge-offs 102 57
- -------------------------------------------------------------------------
Recoveries:
Real estate mortgages - -
Commercial and all others - -
Credit card and related plans 1 3
Installment loans 1 -
- -------------------------------------------------------------------------
Total recoveries 2 3
- -------------------------------------------------------------------------
Net charge-offs (recoveries) 100 54
- -------------------------------------------------------------------------
Provision charged to operations 220 154
- -------------------------------------------------------------------------
Balance at End of Period $ 4,320 $ 3,900
- -------------------------------------------------------------------------
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.027% 0.016%
- -------------------------------------------------------------------------
The allowance for loan losses at June 30, 2007 was $4,320 or 1.12% of total
loans compared to $3,900 or 1.16% of total loans at June 30, 2006. Management
continues to believe the loan loss reserve is adequate.
The allowance for loan losses is allocated as follows:
As of: June 30, 2007 December 31, 2006 June 30, 2006
- --------------------------------------------------------------------------------------------
Amount %* Amount %* Amount %*
- --------------------------------------------------------------------------------------------
Real estate mortgages $ 1,200 84% $ 1,200 83% $ 1,200 81%
Commercial and all others 2,600 6% 2,500 9% 2,225 10%
Credit card and related plans 250 1% 250 1% 225 1%
Personal installment loans 270 9% 250 7% 250 8%
- --------------------------------------------------------------------------------------------
Total $ 4,320 100% $ 4,200 100% $ 3,900 100%
- --------------------------------------------------------------------------------------------
* Percent of loans in each category to total loans
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.
The Company remains in a highly liquid condition both in the short and long
term. Sources of liquidity include the Company's 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, which 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 maintains a collateralized maximum borrowing capacity of $174,019 with
the Federal Home Loan Bank of Pittsburgh.
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.
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 $6,248.
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 19.73% at June 30, 2007. 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.
PART 1. FINANCIAL INFORMATION, Item 3 --
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
PART 1. FINANCIAL INFORMATION, Item 4 --
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Controller, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
under the Securities Exchange Act of 1934. Based upon this evaluation, our Chief
Executive Officer and our Controller concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this quarterly
report.
The Company continually assesses the adequacy of its internal control over
financial reporting and enhances its controls in response to internal control
assessments, and internal and external audit and regulatory recommendations.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
None.
Item 1A -- Risk Factors
RISKS RELATED TO OUR BUSINESS
Credit Risk
Changes in the credit quality of our loan portfolio may impact the level of our
allowance for loan losses.
We make various judgments about the collectibility of our loans, including the
creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for our loans. In determining the amount of the
allowance for loan losses, we review our loans and our loan loss and delinquency
experience, and we evaluate economic conditions. If our judgments are incorrect,
our allowance for loan losses may not be sufficient to cover future losses,
which will result in additions to our allowance through increased provisions for
loan losses. In addition, bank regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan losses or
recognize further loan charge-offs. Increased provisions for loan losses would
increase our expenses and reduce our profits.
Nonetheless, to the best of management's knowledge, there are also no particular
risk elements in the local economy that put a group or category of loans at
increased risk. Also 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
also not materially affected by seasonal changes.
Market Risk
Changes in interest rates could affect our investment values and net interest
income.
At June 30, 2007, the Company owned approximately $75.1 million of marketable
securities available for sale. These securities are carried at fair value on the
consolidated balance sheet. Unrealized gains or losses on these securities, that
is, the difference between the fair value and the amortized cost of these
securities, are reflected in stockholders' equity, net of deferred taxes. As of
June 30, 2007, the Company's available for sale marketable securities portfolio
had a net unrealized gain, net of taxes, of $811. The fair value of the
Company's available for sale marketable securities is subject to interest rate
change, which would not affect recorded earnings, but would increase or decrease
comprehensive income and stockholders' equity.
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. 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.
The Company continually monitors the relationship of its interest rate sensitive
assets and liabilities through its Asset/Liability Committee.
Strong competition within our market could affect our profits and growth.
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 Company's competitors can be grouped
into two categories: pricing and services. In the Company'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.
Compliance Risk
We operate in a highly regulated environment and may be affected by changes in
laws and regulations.
The Company is registered as a financial 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 ("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.
Our banking subsidiary, Penn Security Bank and Trust Company, 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.
Operational Risk
The Company needs to continually attract and retain qualified personnel for its
operations.
High quality customer services, as well as efficient and profitable operations,
are dependent on the Company's ability to attract and retain qualified
individuals for key positions within the organization. As of June 30, 2007, the
Company employed 168 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.
Our operations could be affected if we do not have access to modern and reliable
technology.
The Company operates in a highly-automated environment, wherein almost all
transactions are processed by computer software to produce results. To remain
competitive, the Company must continually evaluate the adequacy of its data
processing capabilities and make revisions as needed.
The Company regularly tests its ability to restore data capabilities in the
event of a natural disaster, sustained power failure or other inability to
utilize its primary systems.
Liquidity Risk
Increased needs for disbursement of funds on loans and deposits can affect our
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.
Our future pension plan costs and contributions could be unfavorably impacted by
the factors that are used in the actuarial calculations.
Our costs of providing non-contributory defined benefit pension plans are
dependent upon a number of factors, such as the rates of return on plan assets,
discount rates, the level of interest rates used to measure the required minimum
funding levels of the plans, future government regulation and our required or
voluntary contributions made to the plans. Without sustained growth in the
pension investments over time to increase the value of our plan assets and
depending upon the other factors impacting our costs as listed above, we could
be required to fund our plans with higher amounts of cash than are anticipated
by our actuaries. Such increased funding obligations could have a material
impact on our liquidity by reducing our cash flows.
Item 2 -- Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Penseco Financial Services
Corporation was held on May 1, 2007.
The results of the items submitted for a vote are as follows:
The following three Directors, whose term will expire in 2011, were
elected:
Number of votes Number of votes Number of
cast for director cast against director votes not cast
----------------- --------------------- --------------
Edwin J. Butler 1,797,787 9,175 341,038
P. Frank Kozik 1,769,800 37,162 341,038
Steven L. Weinberger 1,798,230 8,732 341,038
The ratification of the appointment of McGrail Merkel Quinn and Associates
as independent auditors for the year ending December 31, 2007.
Votes for 1,796,910
Votes against 8,122
Votes abstained 1,930
Votes not cast 341,038
Item 5 -- Other Information
None.
Item 6 -- Exhibits
31 Certifications required under Section 302 of the Sarbanes-Oxley Act of
2002
32 Certifications required under Section 906 of the Sarbanes-Oxley Act of
2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENSECO FINANCIAL SERVICES CORPORATION
By /s/ CRAIG W. BEST
------------------------------
Craig W. Best
President and CEO
Dated: July 30, 2007
By /s/ PATRICK SCANLON
------------------------------
Patrick Scanlon
Controller
Dated: July 30, 2007