EXHIBIT 13
PENSECO FINANCIAL SERVICES CORPORATION
1997 ANNUAL REPORT
INVESTOR INFORMATION
MARKET PRICES OF STOCK AND DIVIDENDS PAID
The Company's capital stock is traded "Over-the-Counter" BULLETIN BOARD under
the symbol "PFNS". The following table sets forth the price range together with
dividends paid for each of the past two years. These quotations do not
necessarily reflect the value of actual transactions.
Dividends
Paid
1997 High Low Per share
- -----------------------------------------------------
First Quarter $ 23 $ 22 $ 0.20
Second Quarter 23 23 0.20
Third Quarter 25 23 0.20
Fourth Quarter 29 25 0.45
--------
$ 1.05
========
Dividends
Paid
1996 High Low Per share
- -----------------------------------------------------
First Quarter $ 22 $ 22 $ 0.187
Second Quarter 22 22 0.187
Third Quarter 22 22 0.187
Fourth Quarter 22 22 0.439
---------
$ 1.000
=========
DIVIDENDS PAID (in millions) YEAR
- ---------------------------------------------
$ 2,256 1997
2,148 1996
2,014 1995
1,745 1994
1,745 1993
TRANSFER AGENT
Penseco Financial Services Corporation, 150 North Washington Avenue, Scranton,
Pennsylvania 18503-1848. Stockholders' questions should be directed to the
Company's corporate headquarters at 717-346-7741.
STOCKHOLDERS' INQUIRIES
Stockholders may obtain, without charge, a copy of the Company's Annual Report
on Form 10-K by writing to:
Patrick Scanlon, Controller
Penseco Financial Services Corporation
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
Copies of this Annual Report are also available to the public; said Annual
Report is the Company's annual disclosure statement as required under Section 13
or 15(d) of the Securities Exchange Act of 1934, and may be obtained at any
branch location of the Company or by contacting the Controller's office at the
above address.
MARKET MAKERS
Management of the Company is aware of the following securities dealers who make
a market in the Company stock:
Baird, Patrick & Company, Inc.
Ferris, Baker, Watts, Inc.
F.J. Morrissey & Company, Inc.
Hopper Soliday & Company, Inc.
Janney Montgomery Scott, Inc.
Legg Mason Wood Walker, Inc.
Monroe Securities, Inc.
Ryan, Beck & Company, Inc.
Sandler, O'Neill & Partners, L.P.
QUARTERLY FINANCIAL DATA (unaudited)
(in thousands, except per share amounts)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------
Net Interest Income $ 4,235 $ 4,263 $ 4,382 $ 4,834
Provision for Loan Losses 130 46 63 77
Other Income 1,745 1,196 1,959 1,385
Other Expenses 4,171 3,892 4,278 4,543
Net Income $ 1,172 $ 1,079 $ 1,376 $ 1,098
Earnings Per Share $ 0.55 $ 0.50 $ 0.64 $ 0.51
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------
Net Interest Income $ 4,111 $ 3,987 $ 4,307 $ 4,287
Provision for Loan Losses 122 133 64 15
Other Income 1,747 1,143 1,840 1,222
Other Expenses 4,024 3,639 4,111 3,959
Net Income $ 1,188 $ 975 $ 1,377 $ 1,062
Earnings Per Share $ 0.55 $ 0.46 $ 0.64 $ 0.49
(The remainder of this page left intentionally blank.)
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------
In thousands, except
per share data 1997 1996 1995
- -------------------------------------------------------------
Earnings per share $ 2.20 $ 2.14 $ 2.07
Dividends per share $ 1.05 $ 1.00 $ 0.937
Total Capital $ 42,924 $ 40,585 $ 39,239
Total Deposits $ 374,488 $ 352,026 $ 336,386
Total Assets $ 427,577 $ 398,035 $ 378,968
- -------------------------------------------------------------
CONTENTS
Investor Information..........................Inside Front Cover
President's Letter.............................................2
Board of Directors / Events of 1997............................4
Promotions and Appointments....................................9
Selected Financial Data.......................................10
Business of the Company.......................................11
Management Discussion and Analysis............................11
Consolidated Balance Sheets...................................23
Consolidated Statements of Income.............................24
Consolidated Statements of Changes in
Stockholders' Equity....................................25
Consolidated Statements of Cash Flows.........................26
General Notes to Financial Statements.........................27
Independent Auditor's Report..................................38
Officers and Directors........................................39
ON THE COVER
This year's Annual Report cover highlights the Visa Processor Service Quality
Performance Awards which Penn Security has received every year since the
inception of the Awards by Visa. This program recognizes the top financial
institutions, categorized by size, who consistently achieve the highest
performance standards in processing merchant credit card transactions. Penn
Security's 1997 Award appears in the center of the photo, reflecting our
achievement of first place among over 5,000 banks in our size classification.
President's Letter
Dear Shareholder:
In my first letter to you as President of Penseco Financial Services
Corporation, I am pleased to report that the Company, while investing heavily in
new technology and upgrading and expansion of its premises, had a good year
financially. Earnings per share increased to $2.20 per share for 1997 when
compared with $2.14 per share for 1996 (after adjusting for the 4 for 1 share
exchange ratio in the conversion to the holding company structure). Dividends
increased to $1.05 per share in 1997 from $1.00 per share for the year earlier.
Deposits increased to $374 million from $352 million the year earlier. Assets
increased to $428 million from $398 million for the year earlier and total
capital increased to $43 million from $41 million the year earlier.
As the world approached the beginning of the 21st century and the
end of the last, Penseco Financial Services Corporation was created to provide
additional powers and flexibility in delivering financial services in the future
to selected markets which could not be readily accomplished by our principal
subsidiary, Penn Security Bank and Trust Company, alone. People today are
looking for more than payment mechanisms and interest bearing investment
vehicles from their financial services provider. They are looking for a broader
range of investment vehicles to invest their excess funds. They are looking for
investment advice. They are looking for tax advice. They are looking for the
convenience of having all of their financial information in one place - in one
statement immediately accessible - with people whom they know and can trust. It
is really the marketplace that is driving the confluence of the banking,
securities and insurance industries.
The formation of the holding company was over-whelmingly approved
by the shareholders at the special meeting held December 16, 1997, the vote
being 485,312 shares approving and 1,668 shares opposed. In addition, no
shareholder elected to exercise any dissenting shareholder rights. The Bank
received approval from the Federal Deposit Insurance Corporation, the
Pennsylvania Department of Banking and the Federal Reserve Board prior to
year-end and the conversion to the holding company structure was effective
December 31, 1997. As a consequence of the holding company conversion, our
Bank's annual report is more detailed and lengthy in the Management Discussion
and Analysis section than before.
During the year, we opened our new Central City office drive-thru
and expanded customer parking. This aided greatly when the sidewalk entrances to
the Bank were closed due to the replacement of the sidewalks. The Central City
renovations are nearly complete with refurbishing of the older parking area, as
well as some corrections to the work already accomplished, still remaining.
During the year, the Bank began construction of the replacement
for our Green Ridge office. The new structure will include ample customer
parking, three drive-up lanes including a drive-up ATM, and full lobby services.
We expect completion of this new office in June of 1998.
We are also ready to break ground for our new Eagle Valley Corners
office in East Stroudsburg, after a long struggle with the Pennsylvania
Department of Transportation over road access. The traffic count at that
location is one of the highest in the entire Pocono Mountain Region and we are
very excited about this new location.
At the end of the year, the Bank purchased software for teller
terminals, utilizing a small PC networked to the Bank's mainframe for each
teller and receipt printer. The Bank's Central City office will be the first to
use this new system, which will, in addition to ordinary teller functions, have
the capability to display signatures, images of checks, and ultimately images of
our customers. This new teller system will cost less than a quarter of what a
far less functional and inefficient teller system would have cost
(The remainder of this page left intentionally blank.)
just three years ago.
At the end of the year, the Bank also took delivery on the first
of a series of new item processing machines. These machines are very versatile
and capture images of the documents, as well as the information encoded on them.
They are capable of reading a number of fonts using both Optical Character
Recognition (OCR) and Magnetic Ink Character Recognition (MICR) technology.
These machines should be in service by the second quarter of 1998. They will
give us the capability of doing lock box services for companies utilizing OCR
documents. The document copies will be available on-line to both Bank employees
and customers alike.
The Bank's new ATM system is functioning well and the Bank intends
this year to replace all of its older IBM 3624 machines with the new NCR
machines.
At the end of the year, the bank was notified that it was selected
to partner with Kutztown University to incorporate banking services into its
Campus ID card. We have been pursuing such a relationship for some time and are
anticipating that its successful implementation will lead to rapid expansion of
our college and university relationships.
As part of the Kutztown University program, we intend to sell U.S.
postage stamps at ATM's, transfer funds between banks initiated through ATMs and
move our home/office banking system to the Internet.
As the new millennium approaches, most businesses are faced with
the problem commonly referred to as the "Y2K" problem. This problem arises from
the need, when computers were first introduced, to conserve space in their
memories. To do so two digit years were used which will cause problems,
particularly when one subtracts dates. The year "00" (meaning 2000) would appear
to be earlier than year "99" (meaning 1999).
We have analyzed this as it impacts Penseco Financial Services
Corporation. Most of our computer systems have been written after 1980 and use
four digit years. Those systems which we suspect of having problems either have
been or are in the process of being fixed. We anticipate extensive testing of
all of our systems beginning in July of this year with completion of testing by
the end of 1998. We do not anticipate any significant additional costs as the
work will be accomplished by our normal computer systems and programming staff.
This year, Christe A. Casciano was named Business Development
Officer, Kristen A. McGoff, was named Branch Operations Officer & Assistant
Cashier, Sharon Rosar was named Human Resources Officer, Robert J. Saslo was
named Director of P.C. Systems and Linda Wolf was named Teller Training Officer.
These people are to be congratulated on their achievements. It is
basically our people who give our Company its strength and we are indeed
fortunate to have such a capable and hard working staff.
Now that our holding company is in place, we have been discussing
with various entities our entry into the securities, mutual funds and insurance
markets. Possibilities range from leasing space to dual employees, joint
ventures or outright purchase of these entities. We will be reaching a decision
in this area shortly and by the time the century changes, a consumer or a
business person should be able to take care of all of his or her financial needs
through Penseco Financial Services Corporation.
In looking to the future, we see our Bank's strong capital
position, good earnings, technological resources, our positioning in the
marketplace with regard to niche national markets, as well as our traditional
geographic market, all providing excellent foundation for continued success. In
this endeavor, you can help us by recommending us to your family, friends and
business acquaintances. This is your institution - let it serve you.
Sincerely yours,
/s/ Otto P. Robinson Jr.
Otto P. Robinson, Jr.
President
(The remainder of this page left intentionally blank.)
This page of the 1997 Annual Report to Shareholders contains two pictures. The
captions and a description of each picture follows:
(1) "Board of Directors": Pictured in the Board of Directors are seated left to
right: Russell C. Hazelton, P. Frank Kozik, Secretary; Attorney Otto. P.
Robinson, Jr., President; Richard E. Grimm, Executive Vice-President and
Treasurer; and Edwin J. Butler. Standing left to right: Sandra C. Phillips,
James G. Keisling, Robert W. Naismith, Ph.D., James B. Nicholas, D. William
Hume, Senior Vice-President; and Emily S. Perry.
(2) "Events 1997": Each year, the Company fields a team for the annual Susan B.
Komen Foundation "Race for the Cure", which is held to support the
Foundation in its fight against breast cancer. Pictured here are some
members of the Company team for this year's race.
(The remainder of this page left intentionally blank.)
This page of the 1997 Annual Report to Shareholders contains three pictures. The
captions and a description of each picture follows:
"Events of 1997": As the year ended, there was a great deal of progress to be
seen at our newly remolded Central City in downtown Scranton. These photos show
a view of the new teller area in the Bank's lobby and the new drive-up facility,
which includes an ATM, on the North Washington Avenue side of the building. The
remodeling effort continues in other areas of our Central City Office.
(The remainder of this page left intentionally blank.)
This page of the 1997 Annual Report to Shareholders contains four pictures. The
captions and a description of each picture follows:
"Events of 1997"
(1) The Company took a leadership position in bringing to the attention of the
public, some of the details of the new Taxpayer Relief Act of 1997. We
offered two evening seminars in the fourth quarter of the year, which were
open to the public, to explain some of the changes pertaining to Individual
Retirement Accounts, and arranged for speakers on the subject from Penn
Security as well as from the legal and accounting professions. In this
photo, Robert T. Kelly, Jr., Esq., CPA, a partner in the law firm of Myers,
Brier & Kelly, LLP, made a point in his presentation during the Scranton
IRA Seminar. Other speakers looking on were from left to right: Robert F.
Duguay, Senior Vice-President and Trust Officer; Francis J. Merkel, CPA a
partner in the local accounting firm of McGrail, Merkel, Quinn and
Associates; and the Company's President, Attorney Otto P. Robinson, Jr.
(2) This photo shows a part of the audience during the Scranton IRA seminar
which was held at the Radisson at Lackawanna Station Hotel in downtown
Scranton.
(3) The Pocono IRA Seminar was held at Pocono Manor Resort and Golf Club, and
was an evening seminar that was open to the public. The speakers at this
seminar in this photo were, from left to right: Robert F. Duguay, Senior
Vice-President and Trust Officer; Kirby G. Upright, Esq., a partner in the
Stroudsburg law firm of Hanna, Young, Upright & Catina, LLP; Gary J. Hazen,
CPA, a partner in the Stroudsburg accounting firm of John J. Riley, Inc; D.
William Hume, Senior Vice-President; and the Company's President, Attorney
Otto P. Robinson, Jr.
(4) This photo shows a part of the audience during the Pocono IRA Seminar which
was held at Pocono Manor Resort and Golf Club near Mount Pocono.
(The remainder of this page left intentionally blank.)
This page of the 1997 Annual Report to Shareholders contains three pictures. The
captions and a description of each picture follows:
"Events of 1997"
(1) As a service to financial and estate planning professionals, the Company
played host to the noted estate planning and tax attorney, Roy M. Adams, a
partner in the law firm of Kirkland & Ellis in New York City, who spoke on
the topic "Cutting Edge Tax Techniques" at the Country Club of Scranton.
Invited guests included judges, attorneys, accountants, and estate planning
professionals.
(2) A group of professionals listen attentively to Attorney Adams as he speaks
to the over one hundred professionals who were at the meeting.
(3) Pictured here are, from left to right, Robert F. Duguay, Senior
Vice-President and Trust Officer, Attorney Adams, and the Company's
President, Attorney Otto P. Robinson, Jr.
(The remainder of this page left intentionally blank.)
This page of the 1997 Annual Report to Shareholders contains three pictures. The
captions and a description of each picture follows:
"Events of 1997"
(1) Molly Walsh from our Charge Card Department organized a fund raising effort
among employees to help children from John Adams School in Scranton have an
extra special Merry Christmas. Each child received a pair of gloves, a
gift, and a lollipop. Charge Card Department employees, pictured here with
some of the children from the John Adams School, are from left to right in
the second row, Eileen Yanchak, Jennifer Wohlgemuth and Molly Walsh.
(2) Jennifer Wohlgemuth from our Charge Card Department is shown standing among
some of the children from the John Adams School during the Company
sponsored Christmas Party.
(3) Who likes donuts? This young lady from the John Adams School, that's who!
(The remainder of this page left intentionally blank.)
This page of the 1997 Annual Report to Shareholders contains five pictures. The
captions and a description of each picture follows, starting at the top, from
left to right:
"Promotions & Appointments"
(1) Christe A. Casciano: Business Development Officer
(2) Kristen A. McGoff: Branch Operations Officer & Assistant Cashier
(3) Sharon Rosar: Human Resources Officer
(4) Robert J. Saslo: Director of P.C. Systems
(5) Linda A. Wolf: Teller Training Officer
(The remainder of this page left intentionally blank.)
SELECTED FINANCIAL DATA
(in thousands, except per share data)
RESULTS OF OPERATIONS:
1997 1996 1995
- ------------------------------------------------------------------------
Interest Income $ 30,099 $ 27,893 $ 27,474
Interest Expense 12,385 11,201 11,218
- ------------------------------------------------------------------------
Net Interest Income 17,714 16,692 16,256
Provision for Loan Losses 316 334 321
- ------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 17,398 16,358 15,935
Other Income 6,285 5,952 6,202
Other Expense 16,884 15,733 15,672
Income Tax 2,074 1,975 2,009
- ------------------------------------------------------------------------
Net Income $ 4,725 $ 4,602 $ 4,456
- ------------------------------------------------------------------------
BALANCE SHEET DATA:
Assets $ 427,577 $ 398,035 $ 378,968
Investment Securities $ 125,048 $ 125,263 $ 146,246
Net Loans $ 269,446 $ 237,915 $ 207,708
Deposits $ 374,488 $ 352,026 $ 336,386
Stockholders' Equity $ 42,924 $ 40,585 $ 39,239
PER SHARE DATA: *
Earnings per Share $ 2.20 $ 2.14 $ 2.07
Dividends per Share $ 1.05 $ 1.00 $ 0.937
Book Value per Share $ 19.98 $ 18.89 $ 18.27
Common Shares Outstanding 2,148,000 2,148,000 2,148,000
FINANCIAL RATIOS:
Net Interest Margin 4.51% 4.51% 4.57%
Return on Average Assets 1.14% 1.17% 1.19%
Return on Average Equity 11.22% 11.54% 11.86%
Average Equity to Average Assets 10.16% 10.14% 10.01%
Dividend Payout Ratio 47.73% 46.67% 45.18%
1994 1993
- ------------------------------------------------------------
Interest Income $ 23,907 $ 23,479
Interest Expense 8,832 8,290
- ------------------------------------------------------------
Net Interest Income 15,075 15,189
Provision for Loan Losses 337 118
- ------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 14,738 15,071
Other Income 6,249 5,908
Other Expense 15,935 15,135
Income Tax 1,414 1,883
- ------------------------------------------------------------
Net Income $ 3,638 $ 3,961
- ------------------------------------------------------------
BALANCE SHEET DATA:
Assets $ 363,317 $ 345,981
Investment Securities $ 160,585 $ 138,948
Net Loans $ 178,605 $ 183,385
Deposits $ 326,482 $ 310,509
Stockholders' Equity $ 32,927 $ 33,244
PER SHARE DATA: *
Earnings per Share $ 1.69 $ 1.84
Dividends per Share $ 0.812 $ 0.812
Book Value per Share $ 15.33 $ 15.48
Common Shares Outstanding 2,148,000 2,148,000
FINANCIAL RATIOS:
Net Interest Margin 4.51% 4.58%
Return on Average Assets 1.02% 1.13%
Return on Average Equity 10.76% 12.31%
Average Equity to Average Assets 9.47% 9.14%
Dividend Payout Ratio 48.01% 44.04%
* Per share data is based on 2,148,000 shares outstanding, giving effect to
the common stock reorganization on December 31, 1997.
Business of the Company
A detailed listing of the services offered by the Company is as follows:
DEPOSIT ACCOUNTS OTHER SERVICES
All Purpose Clubs ATM Services
Certificates of Deposit Bank Money Orders
Christmas Clubs Cashier's Checks
Demand Accounts College Campus Card Interface
Individual Retirement Accounts Credit Card Merchant Draft Capture
Money Market Accounts Data Processing Services
NOW Accounts Direct Deposit of Recurring Payments
Savings Accounts EDI-ACH Service
Time Open Accounts Food Stamps
Vacation Clubs Foreign Remittance
Home Banking and Videotex Services
LENDING Lockbox Services
Night Depository
Appliance Loans Repurchase Agreements
Automobile Loans Safe Deposit Boxes
Business Loans Travelers Checks
Collateral Loans Trust Department Services
Construction Loans (a) Executor
Credit Lines (b) Administrator
Educational Loans (c) Trustee
Home Equity Loans (d) Guardian
Home Repair and Remodeling Loans (e) Agent
Installment Loans (f) Custodian and Trustee for
Mastercard and VISA (Cosmic Card) Pension Plans
Mortgage Loans (Residential (g) Trustee for Public Bond Issues
and Commercial) (h) Securities Depository Service
Personal Loans U.S. Savings Bonds
Management Discussion and Analysis
INTRODUCTION
Penseco Financial Services Corporation (Company), a bank holding company formed
in 1997, is the parent company of Penn Security Bank and Trust Company (Bank).
The Company is subject to supervision by the Federal Reserve Board. The Bank, as
a state chartered financial institution, is subject to supervision by the
Federal Deposit Insurance Corporation and the Pennsylvania Department of
Banking.
The Company through its principal office located at 150 North Washington Avenue,
Scranton, Pennsylvania, containing trust, marketing, audit, credit card, human
resources, executive, data processing and central bookkeeping offices and seven
additional offices located in the South Scranton, East Scranton and Green Ridge
sections of Scranton, the Borough of Moscow, the Town of Gouldsboro, its
Abington Office located in South Abington Township, servicing the Clarks
Summit-Abington area and its Mount Pocono Office located in the Borough of Mount
Pocono, servicing the Pocono Mountain area, provides a full range of banking and
trust services to the Lackawanna, Wayne, Monroe, Pike and Wyoming County areas.
All offices are owned by the Bank or through a wholly owned subsidiary of the
Bank, Penseco Realty, Inc., with the exception of the Mount Pocono Office which
is owned by the Bank but is located on land occupied under a long-term lease.
The Bank is the largest independent bank and trust company headquartered in
Lackawanna County, holding approximately 10% of the banking assets, and
processes its data, as well as some of its customers' data, through its own
processing facility.
Through its banking subsidiary, the Company generates interest
income from its outstanding loans receivable and investment portfolio. Other
income is generated primarily from merchant transaction fees, trust fees and
service charges on deposit accounts. The Company's primary costs are interest
paid on deposits and general operating expenses.
Management Discussion and Analysis
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes and trends related to the
financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. All information is
presented in thousands of dollars, except as indicated.
SUMMARY
Net earnings for 1997 totalled $4.7 million, an increase of 2.7% from the $4.6
million earned in 1996, which in turn was an increase of 3.3% from the $4.5
million earned in 1995. Net earnings per share were $2.20 in 1997, compared with
$2.14 in 1996 and $2.07 in 1995. Net earnings for 1997 were improved over 1996
results primarily due to an increase in net interest income from greater yields
on earning assets and higher levels of average earnings assets. Net earnings for
1996 were improved over 1995 results primarily due to a higher average earning
asset base and a lower cost of funds.
NET INCOME (in millions) YEAR
- ---------------------------------------------
$ 4.725 1997
4.602 1996
4.456 1995
3.638 1994
3.961 1993
The Company's return on average assets was 1.14% in 1997 compared to 1.17% in
1996 and 1.19% in 1995. Return on equity was 11.22%, 11.54% and 11.86% in 1997,
1996 and 1995, respectively.
RETURN ON AVERAGE ASSETS YEAR
- ---------------------------------------
1.14% 1997
1.17% 1996
1.19% 1995
1.02% 1994
1.13% 1993
RETURN ON AVERAGE EQUITY YEAR
- ---------------------------------------
11.22% 1997
11.54% 1996
11.86% 1995
10.76% 1994
12.31% 1993
(The remainder of this page left intentionally blank.)
Management Discussion and Analysis
RESULTS OF OPERATIONS
NET INTEREST INCOME
The principal component of the Company's earnings is net interest income, which
is the difference between interest and fees earned on interest-earning assets
and interest paid on deposits and other borrowings.
Net interest income was $17.7 million in 1997, compared with $16.7 million in
1996, an increase of 6.0%. The improvement in net interest income in 1997
resulted from an increase in the loan portfolio of the Company.
Net interest income was $16.7 million in 1996, compared with $16.3 million in
1995, an increase of 2.7%. The increase in net interest income in 1996 resulted
from an increase in higher average earning assets.
Net interest income, when expressed as a percentage of average interest-earning
assets, is referred to as net interest margin. The Company's net interest margin
for the year ended December 31, 1997 was 4.51% compared with 4.51% for the year
ended December 31, 1996, and 4.57% for the year ended December 31, 1995.
NET INTEREST INCOME (in millions) YEAR
- ------------------------------------------------
$ 17,714 1997
16,692 1996
16,256 1995
15,075 1994
15,189 1993
Interest income in 1997 totalled $30.1 million, compared to $27.9 million in
1996 an increase of $2.2 million or 7.9%. This increase resulted primarily from
increased loan volume. The yield on average interest-earning assets was 7.66% in
1997, compared to 7.54% in 1996. Average interest-earning assets increased in
1997 to $392.8 million from $370.0 million in 1996. Average loans, which are the
Company's highest yielding earning assets, increased $29.1 million in 1997,
while investment securities and other earning assets decreased on average by
$6.3 million. Average loans represented 66.3% of 1997 average interest-earning
assets, compared to 62.5% in 1996.
Interest expense also increased in 1997 to $12.4 million from $11.2 million in
1996, an increase of $1.2 million or 10.6%. This increase resulted from higher
time deposit volume and rate increases. The average rate paid on
interest-bearing liabilities during 1997 was 3.86% compared to 3.72% in 1996.
Interest income in 1996 totalled $27.9 million, compared to $27.5 million in
1995. This improvement resulted from a higher level of average interest-earning
assets. The increase resulted primarily from an improvement in the average loans
outstanding of $39.6 million, off-set by a decrease in the average securities
portfolio of $20.3 million. The yield on average interest-earning assets was
$7.54% in 1996, compared to 7.72% in 1995. Average interest-earning assets
increased in 1996 to $370.0 million from $356.0 million in 1995. Average loans
represented 62.5% of 1996 average interest-earning assets, compared to 53.8% in
1995.
Interest expense decreased in 1996 to $11.201 million from $11.218 million in
1995. The average rate paid on interest-bearing liabilities during 1996 was
3.72%, compared to 3.88% in 1995.
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.
Management Discussion and Analysis
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 years 1997, 1996 and
1995.
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Securities
U.S. Treasury securities $113,559 $ 7,092 6.25% $125,114 $ 7,880 6.30% $121,029 $ 7,894 6.52%
Other 20 1 5.00% 20 1 5.00% 20 - -
U.S. Agency obligations 11,342 712 6.28% 8,401 548 6.52% 32,744 2,061 6.29%
Loans, net of unearned income:
Real estate mortgages 181,812 13,967 7.68% 161,699 12,531 7.75% 137,788 11,447 8.31%
Commercial 22,199 1,915 8.63% 19,252 1,743 9.05% 14,836 1,491 10.05%
Consumer and other 56,364 6,002 10.65% 50,320 4,886 9.71% 39,001 4,051 10.39%
Federal funds sold 7,535 410 5.44% 5,191 304 5.86% 10,579 530 5.01%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 392,831 $ 30,099 7.66% 369,997 $ 27,893 7.54% 355,997 $ 27,474 7.72%
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 9,629 7,985 7,644
Bank premises and equipment 7,950 6,275 6,420
Accrued interest receivable 3,573 3,603 3,560
Other assets 2,988 7,728 3,824
Less: Allowance for loan losses 2,439 2,230 2,088
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $414,532 $393,358 $375,357
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 23,057 $ 349 1.51% $ 22,312 $ 366 1.64% $ 21,676 $ 424 1.96%
Savings 72,815 1,447 1.99% 76,898 1,724 2.24% 77,131 1,952 2.53%
Money markets 68,437 2,039 2.98% 73,626 2,347 3.19% 77,577 2,786 3.59%
Time - Over $100 30,697 1,616 5.26% 19,695 975 4.95% 13,825 687 4.97%
Time - Other 121,201 6,729 5.55% 107,019 5,736 5.36% 98,035 5,339 5.45%
Federal funds purchased 278 14 5.04% 559 23 4.11% 16 1 5.65%
Repurchase agreements 3,971 161 4.05% 100 4 4.00%
- - -
Short-term borrowings 558 30 5.38% 497 26 5.23% 546 29 5.31%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities/
Total Interest Expense 321,014 $ 12,385 3.86% 300,706 $ 11,201 3.72% 288,806 $ 11,218 3.88%
- -----------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 48,241 46,885 44,358
All other liabilities 3,154 5,882 4,604
Stockholders' equity 42,123 39,885 37,589
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $414,532 $393,358 $375,357
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Spread 3.80% 3.82% 3.84%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 17,714 $ 16,692 $ 16,256
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.51% 4.51% 4.57%
Return on average assets 1.14% 1.17% 1.19%
Return on average equity 11.22% 11.54% 11.86%
Average equity to average 10.16% 10.14% 10.01%
assets
Dividend payout ratio 47.73% 46.67% 45.18%
- -----------------------------------------------------------------------------------------------------------------------------------
Management Discussion and Analysis
DOLLAR AMOUNT OF CHANGE IN
INTEREST INCOME AND INTEREST EXPENSE
Dollar Change
Amount Change in Change in in Rate-
1997 compared to 1996 of Change Volume Rate Volume
------------------------------------------------------------------------
Investment Securities:
ASSETS U.S. Treasury securities $ (788) $ (728) $ (75) $ 15
Other - - - -
U.S. Agency obligations 164 192 (20) (8)
Loans, net of unearned income:
Real estate mortgages 1,436 1,559 (113) (10)
Commercial 172 267 (81) (14)
Consumer and other 1,116 587 473 56
Federal funds sold 106 137 (22) (9)
------------------------------------------------------------------------
Total Interest Income $ 2,206 $ 2,014 $ 162 $ 30
------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand-Interest bearing $ (17) $ 12 $ (29) $ -
LIABILITIES Savings (277) (91) (192) 6
Money markets (308) (166) (155) 13
Time - Over $100 641 545 63 33
Time - Other 993 760 203 30
Federal funds purchased (9) (12) 5 (2)
Repurchase agreements 157 160 - (3)
Short-term borrowings 4 4 - -
------------------------------------------------------------------------
Total Interest Expense $ 1,184 $ 1,212 $ (105) $ 77
------------------------------------------------------------------------
Net Interest Income $ 1,022 $ 802 $ 267 $ (47)
------------------------------------------------------------------------
Dollar Change
Amount Change in Change in in Rate-
1996 compared to 1995 of Change Volume Rate Volume
-------------------------------------------------------------------------
EARNING Investment Securities:
ASSETS U.S. Treasury securities $ (13) $ (94) $ 85 $ (4)
Other - - - -
U.S. Agency obligations 1,513) (1,519) 26 (20)
Loans, net of unearned income:
Real estate mortgages 1,084 2,622 (1,254) (284)
Commercial 252 516 (196) (68)
Consumer and other 835 1,499 (484) (180)
Federal funds sold (226) (234) 16 (8)
-------------------------------------------------------------------------
Total Interest Income $ 419 $ 2,790 $ (1,807) $ (564)
-------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand-Interest bearing $ (58) $ 20 $ (76) $ (2)
LIABILITIES Savings (228) (32) (201) 5
Money markets (439) (156) (302) 19
Time - Over $100 288 439 (93) (58)
Time - Other 397 727 (296) (34)
Federal funds purchased 22 26 - (4)
Repurchase agreements 4 - - 4
Short-term borrowings (3) (2) (1) -
-------------------------------------------------------------------------
Total Interest Expense $ (17) $ 1,022 $ (969) $ (70)
-------------------------------------------------------------------------
Net Interest Income $ 436 $ 1,768 $ (838) $ (494)
-------------------------------------------------------------------------
Management Discussion and Analysis
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. Accordingly, there can be no assurance that existing levels of the
allowance will ultimately prove adequate to cover actual loan losses.
OTHER INCOME
The following table sets forth information by category of other income for the
Company for the past three years:
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Trust department income $ 858 $ 730 $ 722
Service charges on deposit accounts 648 664 682
Merchant transaction income 4,083 4,043 4,070
Other fee income 204 209 219
Other operating income 492 306 357
Realized gains on securities, net - - 152
- -------------------------------------------------------------------------------
Total Other Income $ 6,285 $ 5,952 $ 6,202
- -------------------------------------------------------------------------------
Total other income increased $333 during 1997. Most of the increase came from
new trust business which was up $128 from 1996, a 17.5% increase. Also, there
was a slight improvement in our merchant transaction income of $40 due to an
increase in our customer base and increased business with our existing
customers.
Total other income decreased $250 in 1996 from 1995, a 4% decrease, largely due
to smaller margins in our merchant draft capture business in 1996 and due to
OREO income and gains on securities transactions realized in 1995.
OTHER EXPENSES
The following table sets forth information by category of other expenses for the
Company for the past three years:
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Salaries and employee benefits $ 7,578 $ 6,860 $ 6,577
Occupancy expenses, net 1,278 1,221 1,146
Furniture and equipment expenses 850 806 752
FDIC assessments 44 2 378
Merchant transaction expenses 3,365 3,412 3,439
Other operating expenses 3,769 3,432 3,380
- -------------------------------------------------------------------------------
Total Other Expenses $ 16,884 $ 15,733 $ 15,672
- -------------------------------------------------------------------------------
Salaries and employee benefits increased by $718 or 10.4% in 1997 from 1996 and
$283 or 4.3% in 1996 from 1995. The Company employed 202 people on a full-time
equivalent basis at December 31, 1997, compared with 197 at December 31, 1996
and 195 at December 31, 1995. The salary and benefits expense increase was due
to significantly higher health care coverage provided by the Company to its
employees, merit increases, and staff additions.
Occupancy expenses, furniture and equipment, and merchant transaction expenses
were not significantly different during the years 1997, 1996 and 1995. Other
operating expenses increased primarily due to costs associated with foreclosed
properties. However, the Company has benefited from a lower FDIC assessment in
1997 and 1996 than in 1995.
INCOME TAXES
Federal income tax expense amounted to $2,074 in 1997 compared to $1,975
recorded in 1996. The $99 increase in the Company's tax provision was due to the
$222 increase in pre-tax income. The Company's effective income tax rate for
1997 was 30.5% compared to 30.0% for 1996. In 1996, income tax expense decreased
$34 from $2,009 in 1995 due to an increase in non-taxable interest income. The
effective income tax rate for 1996 was 30.0% compared to 31.0% for 1995.
FINANCIAL CONDITION
Total assets increased $29.6 million of 7.4% during 1997 and amounted to $427.6
million at December 31, 1997 compared to $398.0 million at December 31, 1996.
Also, for the year ended December 31, 1996 total assets increased $19.0 million
to $398.0 million or a 5.0% increase over $379.0 million at December 31, 1995.
ASSETS (in millions) YEAR
- ---------------------------------------
$ 427,577 1997
398,035 1996
378,968 1995
363,317 1994
345,981 1993
INVESTMENT PORTFOLIO
The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.
The following table presents the book value by security type for the Company's
investment portfolio.
December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
U.S. Treasury securities $ 114,922 $ 112,904 $ 137,271
Other securities 20 20 20
U.S. Agency obligations 10,106 12,339 8,955
- -------------------------------------------------------------------------------
Total Investment Securities $ 125,048 $ 125,263 $ 146,246
- -------------------------------------------------------------------------------
(The remainder of this page left intentionally blank.)
Management Discussion and Analysis
Details regarding the Company's loan portfolio for the past five years are as
follows:
LOAN PORTFOLIO
As of December 31, 1997 1996 1995
- ----------------------------------------------------------------------
Real estate - construction
and land development $ 3,731 $ 3,770 $ 4,042
Real estate mortgages 190,658 167,291 146,600
Commercial 26,841 19,966 16,246
Credit card and related plans 2,293 2,298 2,404
Installment 39,613 37,463 30,804
Obligations of states
and political subdivisions 8,910 9,427 9,712
- ----------------------------------------------------------------------
Loans, net of unearned income 272,046 240,215 209,808
Less: Allowance for loan losses 2,600 2,300 2,100
- ----------------------------------------------------------------------
Loans, net $ 269,446 $ 237,915 $ 207,708
- ----------------------------------------------------------------------
As of December 31, 1994 1993
- ---------------------------------------------------------
Real estate - construction
and land development $ 4,174 $ 3,219
Real estate mortgages 128,467 133,470
Commercial 12,643 15,344
Credit card and related plans 2,520 2,840
Installment 24,769 21,465
Obligations of states
and political subdivisions 8,132 9,147
- ---------------------------------------------------------
Loans, net of unearned income 180,705 185,485
Less: Allowance for loan losses 2,100 2,100
- ---------------------------------------------------------
Loans, net $ 178,605 $ 183,385
- ---------------------------------------------------------
LOANS
Total net loans increased $31.5 million to $269.4 million at December 31, 1997
from $237.9 million at December 31, 1996, an increase of 13.2%.
Total net loans increased $30.2 million to $237.9 million at December 31, 1996
from $207.7 million at December 31, 1995, an increase of 14.5%.
The increase in both years is due to continued growth in the Company's real
estate, commercial and installment loan portfolios.
NET LOANS (in millions) YEAR
- ---------------------------------------------
$ 269,446 1997
237,915 1996
207,708 1995
178,605 1994
183,385 1993
LOAN QUALITY
The lending activities of the Company are guided by the basic 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 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 judgement 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 charged-off of
loans (or parts of loans) management has determined to be uncollectible, net of
actual recoveries on loans previously charges-off.
Management Discussion and Analysis
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and other real estate owned. The following
table sets forth information regarding non-performing assets as of the dates
indicated:
December 31, 1997 1996 1995
- --------------------------------------------------------------------------
Non-accrual loans $ 1,031 $ 866 $ 940
Loans past due 90 days or more and accruing:
Guaranteed student loans 343 342 166
Credit card and home equity loans 98 93 133
- --------------------------------------------------------------------------
Total non-performing loans 1,472 1,301 1,239
Other real estate owned 339 610 306
- --------------------------------------------------------------------------
Total non-performing assets $ 1,811 $ 1,911 $ 1,545
- --------------------------------------------------------------------------
December 31, 1994 1993
- -----------------------------------------------------------------
Non-accrual loans $ 1,435 $ 1,924
Loans past due 90 days or more and accruing:
Guaranteed student loans 187 118
Credit card and home equity loans 101 140
- -----------------------------------------------------------------
Total non-performing loans 1,723 2,182
Other real estate owned 496 618
- -----------------------------------------------------------------
Total non-performing assets $ 2,219 $ 2,800
- -----------------------------------------------------------------
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 nonaccrual status, all previously accrued but not collected is charged
against current income. Loans are returned to accrual status when past due
interest is collected and the collection of principal is probable.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,031, $866 and $940 at December 31, 1997, 1996 and 1995, respectively. If
interest on those loans had been accrued, such income would have been $89, $66
and $69 for 1997, 1996 and 1995, respectively. Interest income on those loans,
which is recorded only when received, amounted to $35, $45 and $56 for 1997,
1996 and 1995, respectively. There are no commitments to lend additional funds
to individuals whose loans are 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 quality, and
current economic conditions that may affect the borrower's ability to pay. As of
December 31, 1997 there are no significant loans as to which management has
serious doubt about their ability to continue to perform in accordance with
their contractual terms.
At December 31, 1997, 1996 and 1995, 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 repayment thereof is affected by economic
conditions in this market area.
LOAN LOSS EXPERIENCE
The following tables present the Company's loan loss experience during the
periods indicated:
Years Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Balance at beginning of year $ 2,300 $ 2,100 $ 2,100 $ 2,100 $ 2,100
Charge-offs:
Real estate mortgages 38 87 300 341 79
Commercial (time and demand)
and all others - - 11 - 14
Credit card and related plans 52 64 67 55 77
Installment loans 32 32 3 12 20
- --------------------------------------------------------------------------------
Total charge-offs 122 183 381 408 190
- --------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 79 22 2 3 -
Commercial (time and demand)
and all others 1 2 1 25 6
Credit card and related plans 17 16 11 18 19
Installment loans 9 9 46 25 47
- --------------------------------------------------------------------------------
Total recoveries 106 49 60 71 72
- --------------------------------------------------------------------------------
Net charge-offs 16 134 321 337 118
- --------------------------------------------------------------------------------
Provision charged to operations 316 334 321 337 118
- --------------------------------------------------------------------------------
Balance at End of Year $ 2,600 $ 2,300 $ 2,100 $ 2,100 $ 2,100
- --------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans outstanding 0.001% 0.06% 0.17% 0.19% 0.06%
- --------------------------------------------------------------------------------
(The remainder of this page left intentionally blank.)
Management Discussion and Analysis
The allowance for loan losses is allocated as follows:
As of December 31,
--------------------------------------------------
1997 1996 1995
--------------------------------------------------
Amount %* Amount %* Amount %*
Real estate mortgages $ 1,350 71% $ 1,125 71% $ 1,100 72%
Commercial (time and demand)
and all others 850 19% 875 22% 750 23%
Credit card and related plans 150 1% 150 1% 150 1%
Personal installment loans 250 9% 150 6% 100 4%
--------------------------------------------------
Total $ 2,600 100% $ 2,300 100% $ 2,100 100%
--------------------------------------------------
------------------------------------
1994 1993
-------------------------------------
Amount %* Amount %*
Real estate mortgages $ 1,100 74% $ 1,200 74%
Commercial (time and demand)
and all others 700 22% 600 21%
Credit card and related plans 200 2% 200 2%
Personal installment loans 100 2% 100 3%
-------------------------------------
Total $ 2,100 100% $ 2,100 100%
-------------------------------------
* Percent of loans in each category to total loans
DEPOSITS
The primary source of funds to support the Company's growth is its deposit base.
Company deposits increased $22.5 million to $374.5 million at December 31, 1997
from $352.0 million at December 31, 1996, an increase of 6.4%. Company deposits
increased $15.6 million to $352.0 million at December 31, 1996 from $336.4
million at December 31, 1995, an increase of 4.6%. This growth occurred despite
the trend of customers finding alternate repositories for their funds,
principally the equity market via mutual funds. Management is responding to the
competition for these funds by offering competitively priced or alternative
banking products.
DEPOSITS (in millions) YEAR
- ----------------------------------------
$ 374,488 1997
352,026 1996
336,386 1995
326,482 1994
310,509 1993
The maturities of time deposits of $100,000 or more
are as follows:
Three months or less $ 8,128
Over three months through six months 14,261
Over six months through twelve months 5,728
Over twelve months 10,035
----------
Total $ 38,152
ASSET/LIABILITY MANAGEMENT
The Company's policy is to match its level of rate-sensitive assets and
rate-sensitive liabilities within a limited range, thereby reducing its exposure
to interest rate fluctuations. While no single measure can completely identify
the impact of changes in interest rates on net interest income, one gauge of
interest rate-sensitivity is to measure, over a variety of time periods, the
differences in the amounts of the Company's rate-sensitive assets and
rate-sensitive liabilities. These differences, or "gaps", provide an indication
of the extent to which net interest income may be affected by future changes in
interest rates. A positive gap exists when rate-sensitive assets exceed
rate-sensitive liabilities and indicates that a greater volume of assets than
liabilities will reprice during a given period. This mismatch may enhance
earnings in a rising interest rate environment and may inhibit earnings when
interest rates decline. Conversely, when rate-sensitive liabilities exceed
rate-sensitive assets, referred to as a negative gap, it indicates that a
greater volume of liabilities than assets may reprice during the period. In this
case, a rising interest rate environment may inhibit earnings and declining
interest rates may enhance earnings. However, because interest rates for
different asset and liability products offered by financial institutions respond
differently, the gap is only a general indicator of interest rate sensitivity.
Management Discussion and Analysis
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 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 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 instruments 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 a recently instituted interest rate shock simulation
report. The Company has no market risk sensitive instruments held for trading
purposes. It appears the Company's market risk is reasonable at this time.
The following table provides information about the Company's market rate
sensitive instruments used for purposes other than trading that are sensitive to
changes in interest rates. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (e.g., DDA, interest checking, savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates based on
the Company's historical experience, management's judgement, and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.
(The remainder of this page left intentionally blank.)
Management Discussion and Analysis
MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 1997
Non-Rate Fair
1998 1999 2000 2001 2002 Thereafter Sensitive Total Value
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment Securities:
Fixed interest rate securities
U.S. Treasury securities $ 56,057 $ 44,600 $ 14,265 $ - $ - $ - $ - $ 114,922 $114,922
Yield 5.95% 6.55% 6.63% - - - - 6.27%
Variable interest rate securities
U.S. Agency obligations 2,400 2,400 2,400 2,400 506 - - 10,106 10,102
Yield 7.00% 7.00% 7.00% 7.00% 7.00% - - 7.00%
Other - - - - - 20 - 20 20
Yield - - - - - 5.00% - 5.00%
Loans, net of unearned income:
Fixed interest rate loans
Real estate mortgages 8,400 8,170 8,159 8,269 7,414 61,499 - 101,911 102,279
Yield 8.10% 7.97% 7.80% 7.86% 7.82% 7.83% - 7.87%
Consumer and other 4,483 4,593 4,759 3,387 5,011 960 - 23,193 23,029
Yield 8.59% 8.54% 8.46% 8.47% 8.51% 8.32% - 8.51%
Variable interest rate loans
Real estate mortgages 7,091 7,697 10,417 9,595 8,761 48,917 - 92,478 92,478
Yield 8.58% 8.58% 8.78% 8.68% 8.48% 8.37% - 8.50%
Commercial 26,841 - - - - - - 26,841 26,841
Yield 8.82% - - - - - - 8.82%
Consumer and other 11,585 3,528 1,480 1,456 978 8,596 - 27,623 27,623
Yield 8.76% 8.16% 8.81% 8.92% 9.12% 9.14% - 8.33%
Less: Allowance for loan losses 558 229 237 217 212 1,147 - 2,600
Federal funds sold 7,650 - - - - - - 7,650 7,650
Yield 5.44% - - - - - - 5.44%
Cash and due from banks - - - - - - 10,928 10,928 10,928
Other assets - - - - - - 14,505 14,505
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $123,949 $ 70,759 $ 41,243 $ 24,890 $ 22,458 $ 118,845 $ 25,433 $ 427,577 $415,872
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Variable interest rate deposits
Demand - Interest bearing $ - $ 23,826 $ - $ - $ - $ - $ - $ 23,826 $ 23,826
Yield - 1.51% - - - - - 1.51%
Savings - 71,722 - - - - - 71,722 71,722
Yield - 1.99% - - - - - 1.99%
Money markets 63,055 - - - - - - 63,055 63,055
Yield 2.98% - - - - - - 2.98%
Time - Other 13,095 - - - - - - 13,095 13,095
Yield 5.77% - - - - - - 5.77%
Fixed interest rate deposits
Time - Over $100,000 28,117 7,329 1,579 927 200 - - 38,152 38,207
Yield 5.82% 6.14% 6.21% 6.50% 5.99% - - 5.89%
Time - Other 92,796 20,769 2,453 927 1,554 12 - 118,511 118,717
Yield 5.56% 6.11% 6.26% 5.83% 5.93% 5.57% - 5.68%
Demand - Non-interest bearing - - - - - - 46,127 46,127 46,127
Repurchase agreements 5,922 - - - - - - 5,922 5,922
Yield 5.00% - - - - - 5.00%
Short-term borrowings 893 - - - - - - 893 893
Yield 5.25% - - - - - - 5.25%
Other liabilities - - - - - - 3,350 3,350
Stockholders' equity - - - - - - 42,924 42,924
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $203,878 $ 123,646 $ 4,032 $ 1,854 $ 1,754 $ 12 $ 92,401 $ 427,577 $381,564
- ------------------------------------------------------------------------------------------------------------------------------------
Excess of (liabilities) assets
subject to interest rate change $(79,929) $(52,887) $ 37,211 $ 23,036 $ 20,704 $ 118,833 $(66,968) $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Management Discussion and Analysis
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.
The Company remains in a highly liquid condition both in the short and long
term. Sources of liquidity include the Company's substantial U.S. Treasury bond
portfolio, additional deposits, earnings, overnight loans to and from other
companies (Federal Funds) and lines of credit at the Federal Reserve Bank. The
designation of securities as "Held-To-Maturity" lessens the ability of banks to
sell securities so classified, except in regard to certain changes in
circumstances or other events that are isolated, non-recurring and unusual.
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 23.55% at December 31, 1997.
The Company's risk based capital ratio is more than double 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 nearly triple 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.
The Company has purchased land in the East Stroudsburg area and is completing
site work to build a branch office at an approximate cost of $1,200,000. The
Company is also constructing a new branch facility in the Green Ridge section of
Scranton, replacing its existing facility, at a cost of approximately
$1,500,000.
DIVIDEND POLICY
Payment of future dividends will be subject to the discretion of the Board of
Directors and will depend upon the earnings of the Company, its financial
condition, its capital requirements, its need for funds and other matters as the
Board deems appropriate.
Dividends on the Company common stock, if approved by the Board of Directors,
are customarily paid on or about March 15, June 15, September 15 and December
15.
At December 31, 1997, there were 1,019 shareholders of record of the common
stock.
STOCKHOLDERS' EQUITY (in millions) YEAR
- ----------------------------------------------------
$ 42,924 1997
40,585 1996
39,239 1995
32,927 1994
33,244 1993
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs having been written
using a two-digit field as opposed to a four-digit field, to define the
applicable year. Programs that are time sensitive may recognize a date using
"00" as the year 1900 rather than the year 2000. Computer system failure or
significant miscalculations could result from this problem, if not corrected.
The Company licenses a minor portion of its software, used in conducting its
business, from third party software vendors, while most of the Company's
software has been internally developed. The Company has developed a
comprehensive list of all software and all hardware in use within the
organization. Every vendor has been contacted regarding the Year 2000 issue, and
the Company is closely tracking the progress each vendor is making in resolving
the problems associated with the issue. Software is upgraded as the vendors
resolve Year 2000 problems.
Internally developed software is undergoing modifications and many systems have
already been modified. Testing procedures are being formulated for comprehensive
testing of this software beginning in July, 1998, with completion of testing by
the end of 1998. Additionally, the Company has begun the process of contacting
its borrowers to determine the level of progress they have made in addressing
the impact that the Year 2000 issue will have on their respective businesses.
The Company does not anticipate any significant additional costs, over and above
normal operating costs, as the work will be largely accomplished by the
Company's computer systems and programming staff.
(The remainder of this page left intentionally blank.)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, 1997 1996
-----------------------------------------------------------------
ASSETS Cash and due from banks $ 10,928 $ 12,677
Federal funds sold 7,650 10,150
-----------------------------------------------------------------
Cash and Cash Equivalents 18,578 22,827
Investment securities:
Available-for-sale, at fair value 114,942 112,924
Held-to-maturity (fair value of $10,102
and $12,277, respectively) 10,106 12,339
-----------------------------------------------------------------
Total Investment Securities 125,048 125,263
Loans, net of unearned income 272,046 240,215
Less: Allowance for loan losses 2,600 2,300
-----------------------------------------------------------------
Loans, Net 269,446 237,915
Bank premises and equipment 8,646 6,422
Other real estate owned 339 610
Accrued interest receivable 3,895 3,508
Other assets 1,625 1,490
-----------------------------------------------------------------
Total Assets $427,577 $398,035
-----------------------------------------------------------------
LIABILITIES Deposits:
Non-interest bearing $ 46,127 $ 44,657
Interest bearing 328,361 307,369
-----------------------------------------------------------------
Total Deposits 374,488 352,026
Other borrowed funds:
Repurchase agreements 5,922 1,997
Short-term borrowings 893 471
Accrued interest payable 2,524 2,000
Other liabilities 826 956
-----------------------------------------------------------------
Total Liabilities 384,653 357,450
-----------------------------------------------------------------
STOCKHOLDERS' Common stock, $.01 par value, 15,000,000
EQUITY shares authorized, 2,148,000
shares issued and outstanding 21 21
Surplus 10,819 10,819
Retained earnings 31,662 29,193
Unrealized securities gains, net of deferred
tax effect of $217 and $284, respectively 422 552
-----------------------------------------------------------------
Total Stockholders' Equity 42,924 40,585
-----------------------------------------------------------------
Total Liabilities and Stockholders' Equity $427,577 $398,035
-----------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended December 31, 1997 1996 1995
---------------------------------------------------------------------
INTEREST Interest and fees on loans $ 21,884 $ 19,160 $ 16,989
INCOME Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 7,804 8,428 9,955
Other securities 1 1 -
Interest on Federal funds sold 410 304 530
---------------------------------------------------------------------
Total Interest Income 30,099 27,893 27,474
---------------------------------------------------------------------
INTEREST Interest on time deposits of $100,000
EXPENSE or more 1,616 975 687
Interest on other deposits 10,564 10,173 10,501
Interest on other borrowed funds 205 53 30
---------------------------------------------------------------------
Total Interest Expense 12,385 11,201 11,218
---------------------------------------------------------------------
Net Interest Income 17,714 16,692 16,256
Provision for loan losses 316 334 321
---------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 17,398 16,358 15,935
---------------------------------------------------------------------
OTHER Trust department income 858 730 722
INCOME Service charges on deposit accounts 648 664 682
Merchant transaction income 4,083 4,043 4,070
Other fee income 204 209 219
Other operating income 492 306 357
Realized gains on securities, net - - 152
---------------------------------------------------------------------
Total Other Income 6,285 5,952 6,202
---------------------------------------------------------------------
OTHER Salaries and employee benefits 7,578 6,860 6,577
EXPENSES Occupancy expenses, net 1,278 1,221 1,146
Furniture and equipment expenses 850 806 752
FDIC assessments 44 2 378
Merchant transaction expenses 3,365 3,412 3,439
Other operating expenses 3,769 3,432 3,380
---------------------------------------------------------------------
Total Other Expenses 16,884 15,733 15,672
---------------------------------------------------------------------
NET INCOME Income before income taxes 6,799 6,577 6,465
Applicable income taxes 2,074 1,975 2,009
---------------------------------------------------------------------
Net Income $ 4,725 $ 4,602 $ 4,456
---------------------------------------------------------------------
PER SHARE Earnings per Share $ 2.20 $ 2.14 $ 2.07
---------------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Unrealized
Securities Total
Common Retained Gains (Losses), Stockholders'
(in thousands except per share data) Stock Surplus Earnings Net of Taxes Equity
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 21 $ 10,819 $ 24,297 $ (2,210) $ 32,927
Net income, 1995 - - 4,456 - 4,456
Cash dividends declared
($.937 per share) - - (2,014) - (2,014)
Unrealized securities gains,
net of taxes of $1,934 - - - 3,870 3,870
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1995 21 10,819 26,739 1,660 39,239
Net income, 1996 - - 4,602 - 4,602
Cash dividends declared
($1.00 per share) - - (2,148) - (2,148)
Unrealized securities losses,
net of taxes of $571 - - - (1,108) (1,108)
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1996 21 10,819 29,193 552 40,585
Net income, 1997 - - 4,725 - 4,725
Cash dividends declared
($1.05 per share) - - (2,256) - (2,256)
Unrealized securities losses,
net of taxes of $67 - - - (130) (130)
- ----------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 21 $ 10,819 $ 31,662 $ 422 $ 42,924
- ----------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Years Ended December 31, 1997 1996 1995
---------------------------------------------------------------------------------------------------
OPERATING Net Income $ 4,725 $ 4,602 $ 4,456
ACTIVITIES Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 972 929 916
Provision for loan losses 316 334 321
Deferred income tax (benefit) provision (8) 17 66
Amortization of securities (net of accretion) 296 510 538
Net realized gain on securities - - (152)
Loss on other real estate 176 52 27
(Increase) decrease in interest receivable (387) 885 (556)
(Increase) decrease in other assets (136) 98 430
Increase in income tax payable 51 65 99
Increase in interest payable 523 105 515
(Decrease) increase in other liabilities (105) 172 (42)
---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,423 7,769 6,618
INVESTING Purchase of investment securities available-for-sale (48,472) (14,793) (43,886)
ACTIVITIES Proceeds from sales and maturities of investment securities
available-for-sale 46,000 37,000 36,042
Purchase of investment securities to be held-to-maturity - (5,002) -
Proceeds from repayments of investment securities
held-to-maturity 2,194 1,590 27,661
Net loans originated (32,274) (31,040) (29,951)
Proceeds from other real estate 523 143 689
Investment in premises and equipment (3,196) (1,163) (566)
---------------------------------------------------------------------------------------------------
Net cash used by investment activities (35,225) (13,265) (10,011)
FINANCING Net decrease in demand and savings deposits (12,393) (647) (5,038)
ACTIVITIES Net proceeds on time deposits 34,855 16,287 14,943
Decrease in federal funds purchased - - (1,700)
Increase in repurchase agreements 3,925 1,997 -
Net increase (decrease) in short-term borrowings 422 295 (201)
Cash dividends paid (2,256) (2,148) (2,014)
---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 24,553 15,784 5,990
---------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,249) 10,288 2,597
---------------------------------------------------------------------------------------------------
Cash and cash equivalents at January 1 22,827 12,539 9,942
---------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 18,578 $ 2,827 $ 12,539
---------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
General Notes To Financial Statements
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Penseco Financial Services Corporation (Company) is a bank holding company,
incorporated under the laws of Pennsylvania. It is the parent company of Penn
Security Bank and Trust Company (Bank), a state chartered bank.
The Company operates from eight banking offices under a state bank charter and
provides full banking services, including trust services, to individual and
corporate customers primarily in Northeastern Pennsylvania. The Company's
primary deposit products are savings and demand deposit accounts and
certificates of deposit. Its primary lending products are real estate and
consumer loans.
The accounting policies of the Company conform with generally accepted
accounting principles and with general practices within the banking industry.
BASIS OF PRESENTATION
The Financial Statements of the Company have been consolidated with those of its
wholly owned subsidiary, Penn Security Bank and Trust Company, eliminating all
intercompany items and transactions.
On December 31, 1997, the Bank was reorganized into a holding company structure.
Each outstanding share of the Bank's common stock, par value of $10.00 per
share, was exchanged for four shares of Penseco Financial Services Corporation
common stock, par value of $.01 per share. As a result of the reorganization,
the Bank became a wholly-owned subsidiary of the Company.
This reorganization among entities under common control has been accounted for
at historical cost in a similar manner to a pooling of interests. The financial
statements have been restated as if the transaction had occurred on January 1,
1995.
The Statements are presented on the accrual basis of accounting except for Trust
Department income which is recorded when payment is received.
All information is presented in thousands of dollars, except per share data.
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.
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 over the period to
maturity.
Securities Available-for-Sale. Bonds, notes, debentures, 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.
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.
The Company has no derivative financial instruments required to be disclosed
under SFAS No. 119.
LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES
Loans are stated at the principal amount outstanding, net of any unearned
income, deferred loan fees and the allowance for loan losses. Interest on
discounted loans is generally recognized as income based on methods that
approximate the interest method. For all other loans, interest is accrued daily
on the outstanding balances.
Loans are generally placed on a nonaccrual status when principal or interest is
past due 90 days or when payment in full is not anticipated. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is charged against current income. Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.
The provision for loan losses is based on past loan loss experience,
management's evaluation of the potential loss in the current loan portfolio
under current economic conditions and such other factors as, in management's
best judgement, deserve current recognition in estimating loan losses. The
annual provision for loan losses charged to operating expense is that amount
which is sufficient to bring the balance of the allowance for possible loan
losses to an adequate level to absorb anticipated losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Provision for depreciation and amortization, computed principally on the
straight-line method, is charged to operating expenses over the estimated useful
lives of the assets. Maintenance and repairs are charged to current expense as
incurred.
PENSION EXPENSE
Pension expense has been determined in accordance with Statement of Financial
Accounting Standards No. 87, "Employers Accounting for Pensions" (SFAS 87).
POSTRETIREMENT BENEFITS EXPENSE
Postretirement benefits expense has been determined in accordance with Statement
of Financial Accounting Standards No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106).
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) as well as deferred taxes on temporary differences,
between the amount of taxable income and pretax financial income and between the
tax bases of assets and liabilities and their reported amounts in the Financial
Statements. Deferred tax assets and liabilities are included in the Financial
Statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). As changes in tax laws or rates are
enacted deferred tax assets are adjusted through the provision for income taxes.
CASH FLOWS
For purposes of the Statement of Cash Flows, cash and cash equivalents include
cash on hand, due from banks, interest bearing balances with banks and Federal
funds sold for a one-day period.
The Company paid interest and income taxes during the years ended December 31,
1997, 1996 and 1995 as follows:
1997 1996 1995
- --------------------------------------------------------
Income taxes paid $ 1,985 $ 1,935 $ 1,835
Interest paid $ 11,861 $ 11,097 $ 10,704
Non-cash transactions during the years ended December 31, 1997, 1996 and 1995,
comprised entirely of the net acquisition of real estate in the settlement of
loans, amounted to $427, $498, and $527, respectively.
TRUST ASSETS AND INCOME
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the Financial Statements since such items are not assets of
the Company. Trust income is reported on the cash basis and is not materially
different than if it were reported on the accrual basis.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (SFAS 128). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
The adoption of SFAS 128 had no effect on the calculation of the Company's basis
earnings per share. Diluted earnings per share is inapplicable to the Company.
Earnings per share amounts for all periods have been presented in conformity
with SFAS 128.
Basic earnings per share is computed by dividing net income for the year by the
weighted average number of shares outstanding during each year (2,148,000).
RECENT ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income: In June 1997, the Financial Accounting Standards
Board issued Statement No. 130, "Reporting Comprehensive Income". This Statement
will require an entity to include a statement of comprehensive income in their
full set of general purpose financial statements. Comprehensive income consists
of the net income or loss of the entity, plus or minus the change in equity of
the entity during the period from transactions, other events, and circumstances
resulting from non-owner sources. Statement No. 130 is effective for years
beginning after December 15, 1997, and will require financial statements of
earlier periods that are presented for comparative purposes to be reclassified.
Disclosures about Segments of an Enterprise and Related Information: In June
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131. "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 establishes standards for the manner
for which public business enterprises report certain information about operating
segments of their business in both their annual and interim financial reports
provided to shareholders. SFAS 131 is effective for financial statement periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated, unless
impracticable. In addition, the provisions of SFAS 131 need not be applied to
interim financial statements issued in the initial year of application.
Management believes that the adoption of SFAS 130 and 131 will not have a
material impact on the Consolidated Financial Statements.
2 CASH AND DUE FROM BANKS
Cash and due from banks are summarized as follows:
December 31, 1997 1996
- ----------------------------------------------------------
Cash items in process of collection $ 1,796 $ 1,234
Non-interest bearing deposits 4,131 7,150
Cash on hand 5,001 4,293
- ----------------------------------------------------------
Total $ 10,928 $ 12,677
- ----------------------------------------------------------
3 INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at December 31, 1997
and 1996 are as follows:
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- ----------------------------------------------------------------------------
U.S. Treasury securities $ 114,283 $ 639 $ - $ 114,922
Equity securities 20 - - 20
- ----------------------------------------------------------------------------
Total Available-for-Sale $ 114,303 $ 639 $ - $ 114,942
- ----------------------------------------------------------------------------
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
3 INVESTMENT SECURITIES (continued)
The amortized cost and fair value of investment securities at December 31, 1997
and 1996 are as follows:
Available-for-Sale
Gross Gross
Amortized Unrealize Unrealized Fair
1996 Cost Gains Losses Value
- ----------------------------------------------------------------------------
U.S. Treasury securities $ 112,068 $ 889 $ 53 $ 112,904
Equity securities 20 - - 20
- ----------------------------------------------------------------------------
Total Available-for-Sale $ 112,088 $ 889 $ 53 $ 112,924
- ----------------------------------------------------------------------------
A summary of transactions involving available-for-sale debt securities in 1997,
1996 and 1995 is as follows:
December 31, 1997 1996 1995
- ---------------------------------------------------------
Proceeds from sales $ - $ - $ 13,042
Gross realized gains - - 152
Gross realized losses - - -
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
- ----------------------------------------------------------------------------
Obligations of U.S. Agencies:
Mortgage-backed securities $ 10,106 $ 3 $ 7 $ 10,102
- ----------------------------------------------------------------------------
Total Held-to-Maturity $ 10,106 $ 3 $ 7 $ 10,102
- ----------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
- ----------------------------------------------------------------------------
Obligations of U.S. Agencies:
Mortgage-backed securities $ 12,339 $ - $ 62 $ 12,277
- ----------------------------------------------------------------------------
Total Held-to-Maturity $ 12,339 $ - $ 62 $ 12,277
- ----------------------------------------------------------------------------
Investment securities with amortized costs and fair values of $56,026 and
$56,381 at December 31, 1997 and $44,070 and $44,366 at December 31, 1996, were
pledged to secure trust funds, public deposits and for other purposes as
required by law.
The amortized cost and fair value of debt securities at December 31, 1997 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.
Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 55,910 $ 56,057 $ - $ -
After one year through five years:
U.S. Treasury securities 58,373 58,865 - -
- --------------------------------------------------------------------------------
Subtotal 114,283 114,922 - -
Mortgage-backed securities - - 10,106 10,102
- --------------------------------------------------------------------------------
Total Debt Securities $ 114,283 $114,922 $ 10,106 $ 10,102
- --------------------------------------------------------------------------------
4 LOANS
December 31, 1997 1996
- --------------------------------------------------------------------------------
Loans secured by real estate:
Construction and land development $ 3,731 $ 3,770
Secured by farmland 7 18
Secured by 1-4 family residential properties:
Revolving, open-end loans 9,932 11,001
Secured by first liens 131,112 115,035
Secured by junior liens 18,497 10,692
Secured by multi-family properties 561 442
Secured by non-farm, non-residential properties 30,549 30,103
Commercial and industrial loans to U.S. addresses 26,841 19,966
Loans to individuals for household, family and other
personal expenditures:
Credit card and related plans 2,293 2,298
Other (installment and student loans, etc.) 38,648 36,739
Obligations of states and political
subdivisions 8,910 9,427
All other loans 987 903
- --------------------------------------------------------------------------------
Gross Loans 272,068 240,394
Less: Unearned income on loans 22 179
- --------------------------------------------------------------------------------
Loans, Net of Unearned Income $ 272,046 $ 240,215
- --------------------------------------------------------------------------------
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,031, $866 and $940 at December 31, 1997, 1996 and 1995, respectively. If
interest on those loans had been accrued, such income would have been $89, $66
and $69 for 1997, 1996 and 1995, respectively. Interest income on those loans,
which is recorded only when received, amounted to $35, $45 and $56 for 1997,
1996 and 1995, respectively. Also, at December 31, 1997 and 1996, the Bank had
loans totalling $441 and $435, respectively, which were past due 90 days or more
and still accruing interest (credit card, home equity and guaranteed student
loans). Unearned income includes net unamortized loan fees of $0 and $104 at
December 31, 1997 and 1996 respectively.
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
5 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Balance at beginning of year $ 2,300 $ 2,100 $ 2,100
Provision charged to operations 316 334 321
Recoveries credited to allowance 106 48 60
- ------------------------------------------------------------------------------
2,722 2,482 2,481
Losses charged to allowance (122) (182) (381)
- ------------------------------------------------------------------------------
Balance at End of Year $ 2,600 $ 2,300 $ 2,100
- ------------------------------------------------------------------------------
A comparison of the provision for loan losses for Financial Statement purposes
with the allowable bad debt deduction for tax purposes is as follows:
Years Ended December 31, Book Provision Tax Deduction
1997 $ 316 $ 166
1996 $ 334 $ 134
1995 $ 321 $ 321
The balance of the allowance for loan losses as reported for Federal income tax
purposes was $948 for the years ended December 31, 1997, 1996 and 1995,
respectively.
6 PREMISES AND EQUIPMENT
December 31, 1997 1996
- -------------------------------------------------------------------------------
Land $ 2,764 $ 1,982
Buildings and improvements 10,853 9,078
Furniture and equipment 8,134 7,495
- -------------------------------------------------------------------------------
21,751 18,555
Less: Accumulated depreciation 13,105 12,133
- -------------------------------------------------------------------------------
Net Bank Premises and Equipment $ 8,646 $ 6,422
- -------------------------------------------------------------------------------
Buildings and improvements are being depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods. Depreciation expense amounted to $972 in
1997, $929 in 1996 and $916 in 1995.
Occupancy expenses were reduced by rental income received in the amount of $58,
$60 and $137 in the years ended December 31, 1997, 1996 and 1995, respectively.
7 OTHER REAL ESTATE OWNED
Real Estate acquired through foreclosure is recorded at the lower of cost or
market at the time of acquisition. Any subsequent write-downs are charged
against operating expenses. The other real estate owned as of December 31, 1997
and 1996 was $339 and $610, respectively, supported by appraisals of the real
estate involved.
8 INVESTMENT IN AND LOAN TO, INCOME FROM DIVIDENDS AND EQUITY IN EARNINGS OR
LOSSES OF SUBSIDIARY
Penseco Realty, Inc. is a wholly owned subsidiary of the Bank which owns certain
banking premises. Selected financial information is
presented below:
Equity in
underlying Bank's
Percent Total net assets Amount proportionate
of voting investment at balance of part of loss
stock owned and loan sheet date dividends for the period
- -------------------------------------------------------------------------
1997 100% $ 3,950 $ 3,936 None $ -
1996 100% $ 2,055 $ 2,041 None $ -
1995 100% $ 2,055 $ 2,041 None $ -
- -------------------------------------------------------------------------
9 DEPOSITS
December 31, 1997 1996
- ----------------------------------------------------------
Demand - Non-interest bearing $ 46,127 $ 44,657
Demand - Interest bearing 23,826 25,291
Savings 71,722 75,095
Money markets 63,055 73,145
Time - Over $100,000 38,152 22,738
Time - Other 131,606 111,100
- ----------------------------------------------------------
Total $ 374,488 $ 352,026
- ----------------------------------------------------------
Scheduled maturities of time deposits
are as follows:
1998 $134,008
1999 28,098
2000 4,032
2001 1,854
2002 1,754
2003 and thereafter 12
- ------------------------------------
Total $169,758
- ------------------------------------
10 OTHER BORROWED FUNDS
At December 31, 1997 and 1996, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase Agreements.
Short-term borrowings generally have original maturity dates of thirty days or
less.
Investment securities with amortized costs of $7,987 and $5,964 and fair values
of $8,023 and $5,990 were pledged to secure repurchase agreements at December
31, 1997 and 1996.
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
10 OTHER BORROWED FUNDS
Years Ended December 31, 1997 1996
- ---------------------------------------------------------------------------
Amount outstanding at year end $ 6,815 $ 2,468
Average interest rate at year end 4.57% 4.70%
Maximum amount outstanding at any month end $ 6,815 $ 4,667
Average amount outstanding $ 4,807 $ 1,156
Weighted average interest rate during the year:
Federal funds purchased 5.04% 4.11%
Repurchase agreements 4.05% 4.00%
Demand notes to U.S. Treasury 5.38% 5.23%
The Company has an available credit facility with the Federal Reserve Bank in
the amount of $10,000 (secured by pledged securities with amortized costs and
fair values of $9,971 and $9,919 at December 31 1997 and $9,998 and $9,962 at
December 31, 1996 with an interest rate of 5.00% at each year end. There is no
stated expiration date for the credit facility as long as the Company maintains
the pledged securities at the Federal Reserve Bank. There was no outstanding
balance as of December 31, 1997 and 1996.
11 RETIREMENT BENEFIT PLANS
The Company provides an Employee Stock Ownership Plan (ESOP), a Retirement
Profit Sharing Plan and an employee's Pension Plan, all non-contributory,
covering all eligible employees.
The amounts contributed for the last three years are as follows:
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
Employee Stock Ownership Plan $ 140 $ 140 $ 140
Retirement Profit Sharing Plan $ - $ - $ -
Employees' Pension Plan $ 241 $ 232 $ 256
Under the Employee Stock Ownership Plan (ESOP), amounts voted by the Board of
Directors are paid into the ESOP and each employee is credited with a share in
proportion to their annual compensation. All contributions to the ESOP are
invested in or will be invested primarily in Company stock. Distribution of a
participant's ESOP account occurs upon retirement, death or termination in
accordance with the plan provisions.
At December 31, 1997 and 1996, the ESOP held 92,448 and 84,800 shares,
respectively of the Company's stock, all of which were acquired as described
above and allocated to specific participant accounts. These shares are treated
the same for dividend purposes and earnings per share calculations as are any
other outstanding shares of the Company's stock.
Under the Retirement Profit Sharing Plan, amounts voted by the Board of
Directors are paid into a fund and each employee is credited with a share in
proportion to their annual compensation. Upon retirement, death or termination,
each employee is paid the total amount of their credits in the fund in one of a
number of optional ways in accordance with the plan provisions.
Under the Pension Plan, amounts computed on an actuarial basis are paid by the
Company into a trust fund. Provision is made for fixed benefits payable for life
upon retirement at the age of 65, based on length of service and compensation
levels as defined in the plan. Plan assets of the trust fund are invested and
administered by the Trust Department of Penn Security Bank and Trust Company.
For 1997, 1996 and 1995, the minimum required contribution to the pension fund
was $0, $0 and $35, respectively and the maximum contribution allowed was $241,
$232 and $256, respectively.
The determination of net periodic pension cost and prepaid pension cost was made
in accordance with SFAS 87 as follows:
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------
Service cost $ 259 $ 242 $ 188
Interest cost 404 353 318
Actual return on plan assets (850) (540) (774)
Net amortization and deferral 285 40 322
- -------------------------------------------------------------------
Net Periodic Pension Cost $ 98 $ 95 $ 54
- -------------------------------------------------------------------
In determining the projected benefit obligation, the following assumptions were
made:
Years Ended December 31, 1997 1996
- ---------------------------------------------------------------
Assumed discount rate 6.75% 7.00%
Rate of increase in compensation levels 4.50% 4.50%
Long-term rate of return on assets 9.00% 9.00%
A reconciliation of the funded status of the plan with amounts reported on the
Balance Sheets is as Follows:
December 31, 1997 1996
- ------------------------------------------------------------------
Projected benefit obligation $(6,610) $(5,513)
(Accumulated benefit obligation-
$5,051 and $4,443, respectively)
(Vested benefit obligation-$5,007
and $4,397, respectively)
Fair value of plan assets 6,872 5,967
- ------------------------------------------------------------------
Funded Status 262 454
Unrecognized net (asset) or obligation
existing at year-end (265) (331)
Unrecognized prior service cost (85) (93)
Unrecognized net (gain) or loss 1,121 863
Adjustment to recognize additional
minimum liability - -
- ------------------------------------------------------------------
Prepaid Pension Cost $ 1,033 $ 893
- ------------------------------------------------------------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company also maintains an unfunded plan, established in 1994, that provides
certain officers with supplemental retirement benefits to replace benefits lost
due to limits imposed on qualified plans by Federal tax law.
The determination of net periodic pension cost and accrued pension cost was made
in accordance with SFAS 87 as follows:
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
Service cost $ 7 $ 7 $ 6
Interest cost 10 8 8
Amortization of prior service cost (gain) 8 8 8
Amortization of unrecognized loss - - -
- ----------------------------------------------------------------------------
Net Periodic Pension Cost $ 25 $ 23 $ 22
- ----------------------------------------------------------------------------
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
11 RETIREMENT BENEFIT PLANS (continued)
In determining the projected benefit obligation, the following assumptions were
made:
Years Ended December 31, 1997 1996
- --------------------------------------------------------------
Assumed discount rate 6.75% 7.00%
Rate of increase in compensation 4.50% 4.50%
levels
A reconciliation of the funded status of the plan with amounts reported on the
Balance Sheets is as follows:
December 31, 1997 1996
- ------------------------------------------------------------------
Projected benefit obligation $ 154 $ 129
Fair value of plan assets - -
- ------------------------------------------------------------------
Funded Status 154 129
Unrecognized net (asset) or obligation
existing at year-end - -
Unrecognized prior service cost (42) (50)
Unrecognized net (gain) or loss (3) 5
Adjustment to recognize additional
minimum liability - -
- ------------------------------------------------------------------
Accrued Pension Cost $ 109 $ 84
- ------------------------------------------------------------------
12 POSTRETIREMENT BENEFIT PLAN
The Company sponsors an unfunded, non-vesting defined benefit postretirement
life insurance plan covering substantially all of its employees. The plan is
non-contributory and provides for a reducing level of term life insurance
coverage following retirement.
The Company contributed $1, $1 and $5 to the plan during the years ended
December 31, 1997, 1996 and 1995, respectively.
A reconciliation of the funded status of the plan with amounts reported on the
Balance Sheets is as follows:
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees $ 7 $ 7 $ 4
Fully eligible active plan participants 23 21 23
Other active plan participants 18 14 15
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 48 42 42
Fair Value of plan assets - - -
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 48 42 42
Unrecognized transition (asset) or obligation - - -
Unrecognized prior service cost (6) (7) (8)
Unrecognized net gain or (loss) 131 143 149
- --------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost $ 173 $ 178 $ 183
- --------------------------------------------------------------------------------
Net periodic postretirement benefit costs included the following components:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 2 $ 2 $ 2
Interest cost 3 3 3
Actual return on plan assets - - -
Amortization of unrecognized net (gain) or loss (9) (8) (13)
- --------------------------------------------------------------------------------
Net Periodic Postretirement Benefit Cost $ (4) $ (3) $ (8)
- --------------------------------------------------------------------------------
Weighted average discount rates of 6.75%, 7.25% and 6.50% were used to determine
the accumulated benefit obligation for the years ended December 31, 1997, 1996
and 1995, respectively.
13 INCOME TAXES
The total income taxes in the Statements of Income are as follows:
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
Currently payable $ 2,082 $ 1,958 $ 1,943
Deferred (benefit) provision (8) 17 66
- ----------------------------------------------------------------------------
Total $ 2,074 $ 1,975 $ 2,009
- ----------------------------------------------------------------------------
A reconciliation of income taxes at statutory rates to applicable income taxes
reported in the Statements of Income is as follows:
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
Tax at statutory rate $ 2,312 $ 2,236 $ 2,198
Reduction for non-taxable interest (299) (256) (186)
Other reductions 61 (5) (3)
- ----------------------------------------------------------------------------
Applicable Income Taxes $ 2,074 $ 1,975 $ 2,009
- ----------------------------------------------------------------------------
The components of the deferred income tax (benefit) provision, which result from
temporary differences, are as follows:
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------
Accretion of discount on bonds $ 73 $ 47 $ 23
Accelerated depreciation (54) (61) (65)
Supplemental benefit plan (8) - -
Allowance for loan losses (102) (68) -
Prepaid pension cost 48 47 69
Loan fees/costs 35 52 39
- --------------------------------------------------------------------
Total $ (8) $ 17 $ 66
- --------------------------------------------------------------------
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
13 INCOME TAXES (continued)
The significant components of deferred tax assets and liabilities are as
follows:
December 31, 1997 1996
- -------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 562 $ 460
Unamortized loan fees - 35
Depreciation 99 45
Supplemental Benefit Plan 8 -
- -------------------------------------------------------------
Total Deferred Tax Assets $ 669 $ 540
- -------------------------------------------------------------
December 31, 1997 1996
- -------------------------------------------------------------
Deferred tax liabilities:
Unrealized securities gains $ 217 $ 284
Prepaid pension costs 372 323
Depreciation - -
Accretion 212 140
- -------------------------------------------------------------
Total Deferred Tax Liabilities 801 747
- -------------------------------------------------------------
Net Deferred Tax liability $ (132) $ (207)
- -------------------------------------------------------------
In management's opinion, the deferred tax assets are realizable in as much as
there is a history of strong earnings and a carry-back potential greater than
the deferred tax assets. Management is not aware of any evidence that would
preclude the realization of the benefit in the future and, accordingly, has not
established a valuation allowance against the deferred tax assets.
14 COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities, created under prevailing terms and collateral
requirements such as commitments to extend credit, financial guarantees and
letters of credit, which are not reflected in the accompanying Financial
Statements. The Company does not anticipate any losses as a result of these
transactions. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Balance Sheets.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
Financial instruments whose contract amounts represent credit risk at December
31, 1997 and 1996 are as follows:
1997 1996
- -------------------------------------------------------
Commitments to extend credit:
Fixed rate $ 12,604 $ 14,963
Variable rate $ 30,340 $ 33,886
Standby letters of credit $ 849 $ 328
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. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
Various actions and proceedings are presently pending to which the Company is a
party. Management is of the opinion that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
financial position of the Company.
The Company may, from time to time, maintain bank balances with other financial
institutions in excess of $100,000 each. Management is not aware of any evidence
that would indicate that such deposits are at risk.
The Company has purchased land in the East Stroudsburg area and is completing
site work to build a branch office at an approximate cost of $1,200,000. The
Company is also constructing a new branch facility in the Green Ridge section of
Scranton, replacing its existing facility, at a cost of approximately
$1,500,000.
15 FAIR VALUE DISCLOSURE
GENERAL
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires the disclosure of the
estimated fair value of on and off - balance sheet financial instruments.
VALUATION METHODS AND ASSUMPTIONS
Estimated fair values have been determined using the best available data, an
estimation methodology suitable for each category of financial instruments. For
those loans and deposits with floating interest rates it is presumed that
estimated fair value generally approximate the carrying amount balances.
Financial instruments actively traded in a secondary market have been valued
using quoted available market prices. Those with stated maturities have been
valued using a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities. Those
liabilities with no stated maturities have an estimated fair value equal to both
the amount payable on demand and the carrying amount balance. The net loan
portfolio has been valued using a present value discounted cash flow. The
discount rate used in these calculations is the current loan rate adjusted for
non-interest operating costs, credit loss and
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
15 FAIR VALUE DISCLOSURE (continued)
assumed prepayment risk. Off balance sheet carrying amounts and fair value
letters of credit represent the deferred income fees arising from those
unrecognized financial instruments.
Changes in assumptions or estimation methodology may have a material effect on
these estimated fair values.
All assets and liabilities which are not considered financial instruments have
not been valued differently than has been customary with historical cost
accounting.
Management is concerned that reasonable comparability between companies may not
be likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
also introduces a greater degree of subjectivity to these estimated fair values.
December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 10,928 $ 10,928 $ 12,677 $ 12,677
Federal funds sold 7,650 7,650 10,150 10,150
- --------------------------------------- --------------------------------------------------
Cash and cash equivalents 18,578 18,578 22,827 22,827
Investment Securities:
Available-for-sale:
U.S. Treasury securities 114,922 114,922 112,904 112,904
Other securities 20 20 20 20
Held-to-maturity:
U.S. Agency obligations 10,106 10,102 12,339 12,277
- -----------------------------------------------------------------------------------------
Total investment securities 125,048 125,044 125,263 125,201
Loans, net of unearned income:
Real estate mortgages 194,389 194,757 171,061 171,118
Commercial 26,841 26,841 19,966 19,966
Consumer and other 50,816 50,652 49,188 48,972
Less: Allowance for loan losses 2,600 2,300
- -----------------------------------------------------------------------------------------
Loans, net 269,446 272,250 237,915 240,056
- -----------------------------------------------------------------------------------------
Total Financial Assets 413,072 $ 415,872 386,005 $ 388,084
========= =========
Other assets 14,505 12,030
- -----------------------------------------------------------------------------------------
Total Assets $ 427,577 $ 398,035
- -----------------------------------------------------------------------------------------
Financial Liabilities
Demand - Non-interest bearing $ 46,127 $ 46,127 $ 44,657 $ 44,657
Demand - Interest bearing 23,826 23,826 25,291 25,291
Savings 71,722 71,722 75,095 75,095
Money markets 63,055 63,055 73,145 73,145
Time 169,758 170,019 133,838 133,944
- -----------------------------------------------------------------------------------------
Total Deposits 374,488 374,749 352,026 352,132
Repurchase agreements 5,922 5,922 1,997 1,997
Short-term borrowings 893 893 471 471
- -----------------------------------------------------------------------------------------
Total Financial Liabilities 381,303 $ 381,564 354,494 $ 354,600
========= =========
Other Liabilities 3,350 2,956
Stockholders' Equity 42,924 40,585
- -----------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 427,577 $ 398,035
- -----------------------------------------------------------------------------------------
Unrecognized Financial Instruments:
Standby Letters of Credit $ (8) $ (8) $ (3) $ (3)
General Notes To Financial Statements
16 OPERATING LEASES
The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at the Red Barn Village in Newton Township which is being used
as a remote banking facility. Rental expense was $67 in 1997, $66 in 1996 and
$64 in 1995. All leases contain renewal options. The Mount Pocono and the Meadow
Avenue leases contain the right of first refusal for the purchase of the
properties and provisions for annual rent adjustments based upon the Consumer
Price Index.
Future minimum rental commitments under these leases at December 31, 1997 are as
follows:
Mount Meadow Newton
Pocono Avenue Township Total
- --------------------------------------------------------------------------------
1998 $ 44 $ 18 $ 3 $ 65
1999 44 18 3 65
2000 44 18 - 62
2001 44 12 - 56
2002 44 - - 44
2003 to 2011 374 - - 374
- --------------------------------------------------------------------------------
Total minimum payments required $ 594 $ 66 $ 6 $ 666
- --------------------------------------------------------------------------------
17 LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. A summary of loans to directors,
principal officers and related parties is as follows:
Years Ended December 31, 1997 1996
- --------------------------------------------------------------
Beginning Balance $ 4,550 $ 4,243
Additions 3,383 3,985
Collections (3,275) (3,678)
- --------------------------------------------------------------
Ending Balance $ 4,658 $ 4,550
- --------------------------------------------------------------
18 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's and the Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the Capital Adequacy table below) of Tier 1 and Total Capital to
risk-weighted assets and of Tier 1 Capital to average assets (Leverage ratio).
The table also presents the Company's actual capital amounts and ratios. The
Bank's actual capital amounts and ratios are substantially identical to the
Company's. Management believes, as of December 31, 1997, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation 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 1 Capital, Total Capital
and Leverage ratios as set forth in the Capital Adequacy table. There are no
conditions or events since that notification that management believes have
changed the Company's categorization by the FDIC.
The Company and Bank are also subject to minimum capital levels which could
limit the payment of dividends, although the Company and Bank currently have
capital levels which are in excess of minimum capital level ratios required.
The Pennsylvania Banking Code restricts capital funds available for payment of
dividends to the Retained Earnings of the Bank. Accordingly, at December 31,
1997, 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.
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
18 REGULATORY MATTERS (continued)
Actual Regulatory Requirements
- ------------------------------------------ ----------------------------------
For Capital To Be "Well
Adequacy Purposes Capitalized"
As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
- -------------------------------------------- ----------------------------------
Total Capital
(to Risk Weighted Assets) $44,888 23.55% >$15,251 >8.0% >$19,064 >10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $42,502 22.29% >$7,626 >4.0% >$11,438 >6.0%
- - - -
Tier 1 Capital
(to Average Assets) $42,502 10.25% >$ * > * >$20,727 >5.0%
- - - -
*3.0% ($12,436), 4.0% ($16,581) or 5.0% (20,727) depending on the bank's CAMEL
Rating and other regulatory risk factors.
As of December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
- --------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $42,333 22.43% >$15,099 >8.0% $18,873 >10.0%
- - -
Tier 1 Capital
(to Risk Weighted Assets) $40,033 21.21% >$7,549 >4.0% $11,324 > 6.0%
- - -
Tier 1 Capital
(to Average Assets) $40,033 10.18% >$ * > * >$19,668 > 5.0%
- - - -
*3.0% ($11,801), 4.0% ($15,734) or 5.0% (19,668) depending on the bank's CAMEL
Rating and other regulatory risk factors.
- --------------------------------------------------------------------------------
(The remainder of this page left intentionally blank.)
General Notes To Financial Statements
19 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)
On December 31, 1997, the Bank was reorganized into a holding company structure.
Each outstanding share of the Bank's common stock, par value of $10.00 per
share, was exchanged for four shares of Penseco Financial Services Corporation
common stock, par value of $.01 per share. As a result of the reorganization,
the Bank became a wholly-owned subsidiary of the Company.
This reorganization among entities under common control has been accounted for
at historical cost in a manner similar to a pooling of interests. The financial
statements have been restated as if the transaction had occurred on January 1,
1995.
The condensed Company-only information follows:
BALANCE SHEETS
December 31, 1997 1996
- -------------------------------------------------------
Investment in subsidiary $ 42,924 $ 40,585
- -------------------------------------------------------
Total Assets $ 42,924 $ 40,585
- -------------------------------------------------------
Total Stockholders' Equity $ 42,924 $ 40,585
- -------------------------------------------------------
STATEMENTS OF INCOME
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------
Earnings of subsidiary
Dividends received $ 2,256 $ 2,148 $ 2,014
Undistributed net income of
subsidiary 2,469 2,454 2,442
- ---------------------------------------------------------------------------
Net Income $ 4,725 $ 4,602 $ 4,456
- ---------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Operating Activities:
Net Income $ 4,725 $ 4,602 $ 4,456
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiary (2,469) (2,454) (2,442)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 2,256 2,148 2,014
- --------------------------------------------------------------------------------
Investing Activities:
Investment in Interim Bank subsidiary (465) - -
Special dividend from subsidiary 465 - -
- --------------------------------------------------------------------------------
Net cash provided by investing activities - - -
- --------------------------------------------------------------------------------
Financing Activities:
Proceeds from short-term debt 470 - -
Payment of short-term debt (470) - -
Proceeds from sale of stock 5 - -
Purchase of stock (5) - -
Cash dividends paid (2,256) (2,148) (2,014)
- --------------------------------------------------------------------------------
Net cash used by financing activities (2,256) (2,148) (2,014)
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents - - -
- --------------------------------------------------------------------------------
Cash and cash equivalents at January 1 - - -
- --------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ - $ - $ -
- --------------------------------------------------------------------------------
February 24, 1998
To the Board of Directors and Stockholders
Penseco Financial Services Corporation
Scranton, Pennsylvania
Independent Auditor's Report
We have audited the accompanying consolidated balance sheets of Penseco
Financial Services Corporation and its wholly owned subsidiary, Penn Security
Bank and Trust Company as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Penseco
Financial Services Corporation and subsidiary as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the years in the three year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ McGrail, Merkel, Quinn & Associates
Scranton, Pennsylvania
.
(The remainder of this page left intentionally blank.)
Company Officers
PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY
EXECUTIVE OFFICERS
Otto P. Robinson, Jr.
President and General Counsel
Richard E. Grimm
Executive Vice-President and Treasurer
Robert F. Duguay
Senior Vice-President and Trust Officer
D. William Hume
Senior Vice-President and Assistant Secretary
Thomas E. Clewell
Vice-President and Assistant Trust Officer
Andrew A. Kettel, Jr.
Vice-President
Michael Kosh
Vice-President and Assistant Trust Officer
Audrey F. Markowski
Vice-President
Lois Maurer
Vice-President and Assistant Secretary
Richard P. Rossi
Vice-President, Director of Human Resources
James Tobin
Vice-President, Charge Card Department Manager
Otto P. Trostel
Vice-President, Marketing
John H. Warnken
Vice-President, Operations
P. Frank Kozik
Secretary
Patrick Scanlon
Controller
Robert P. Heim
Director of Internal Audit
Gerard P. Vasil
Manager, Data Processing
Henry V. Janoski
Chief Investment Officer, Trust Department
PENN SECURITY BANK AND TRUST COMPANY OFFICERS
ASSISTANT VICE-PRESIDENTS
Carl M. Baruffaldi
Nancy Burns
Denise M. Cebular
Carol R. Curtis
Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
J. Patrick Dietz
Geraldine Hughes
Ann M. Kennedy
Eleanor Kruk
OFFICERS (continued)
Donald F. LaTorre
Caroline Mickelson
Deborah A. Wright
ASSISTANT CASHIERS
Pamela Edwards
Karyn Gaus
Susan T. Holweg
Jacqueline Lucke
Kristen A. McGoff
and Branch Operations Officer
Candace F. Quick
Aleta Sebastianelli
and Assistant Secretary
Sharon Thauer
Eileen Walsh
ACCOUNTING OFFICER
Luree M. Waltz
ASSISTANT CONTROLLER
Susan M. Bray
ASSISTANT DIRECTOR OF INTERNAL AUDIT
Anne M. Cottone
ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua
BRANCH OPERATIONS OFFICER
Lauren L. Lankford
BUSINESS DEVELOPMENT OFFICER
Christie A. Casciano
CHARGE CARD OPERATIONS OFFICER
Eileen Yanchak
COMPUTER OPERATIONS OFFICER
Charles Penn
CREDIT REVIEW OFFICER
Mark M. Bennett
and Assistant Secretary
DIRECTOR OF CAMPUS BANKING
Douglas R. Duguay
DIRECTOR OF P.C. SYSTEMS
Robert J. Saslo
HUMAN RESOURCE OFFICER
Sharon Rosar
LOAN OFFICERS
Denise Belton
Frank Gardner
Barbara Garofoli
Jeffery Solimine
OPERATIONS OFFICER
Patricia Pliske
TELLER TRAINING OFFICER
Linda A. Wolf
TRUST ACCOUNTING OFFICER
Joseph Woytovich
TRUST OPERATIONS OFFICER
Carol Trezzi
Company Officers
PENSECO FINANCIAL SERIVES CORPORATION AND
PENN SECURITY BANK AND TRUST COMPANY
BOARD OF DIRECTORS
Edwin J. Butler
Retired Bank Officer
Richard E. Grimm
Executive Vice-President and Treasurer
Russell C. Hazelton
Captain, Trans World Airlines
D. William Hume
Senior Vice-President and Assistant Secretary
James G. Keisling
Partner, Compression Polymers Group, Manufacturer of Plastic Sheet Products
P. Frank Kozik President, Scranton Craftsmen, Inc., Manufacturer of Ornamental
Iron and Precast Concrete Products
Robert W. Naismith, Ph.D.
President and CEO, William Naismith & Associates, Business Consultant
James B. Nicholas
President, D.G. Nicholas Co., Wholesale Auto Parts Company
Emily S. Perry
Account Executive, Murray Insurance Company
Sandra C. Phillips
Penn State Master Gardner Community Volunteer
Otto P. Robinson, Jr.
Attorney-at-Law, President
PENN SECURITY BANK AND TRUST COMPANY
ADVISORY BOARDS
ABINGTON OFFICE
James L. Burne, DDS
Nancy Burns
Keith Eckel
Richard C. Florey
C. Lee Havey, Jr.
Atty. Patrick J. Lavelle
Sandra C. Phillips
East Scranton Office
Marie W. Allen
Carl M. Baruffaldi
J. Conrad Bosley
Judge Carmen Minora
Mark R. Sarno
Green Ridge Office
Joseph N. Connor
Frances E. Kavulich
Atty. Patrick J. Mellody
Caroline Mickelson
Howard J. Snowdon
Mount Pocono Office
Bruce Berry
Francis Cappelloni
J. Patrick Dietz
Robert C. Hay
Ronald J. Storey
Atty. Kirby Upright
North Pocono Office
Denise M. Cebular
George F. Edwards
Atty. David Z. Smith
South Side Office
Atty. Zygmunt R. Bialkowski, Jr.
Michael P. Brown
Lois Ferrari
Donald F. LaTorre
Jeffrey J. Leventhal
Dr. Ted M. Stampien