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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
Incorporated pursuant to the Laws of Pennsylvania
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Internal Revenue Service -- Employer Identification No. 23-2939222
150 North Washington Avenue, Scranton, Pennsylvania 18503-1848
(570) 346-7741
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| _____ No _____
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding on October 25, 2002 was 2,148,000.
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PENSECO FINANCIAL SERVICES CORPORATION
Page
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Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements - Consolidated
Balance Sheets:
September 30, 2002.....................................3
December 31, 2001......................................3
Statements of Income:
Three Months Ended September 30, 2002..................4
Three Months Ended September 30, 2001..................4
Nine Months Ended September 30, 2002...................5
Nine Months Ended September 30, 2001...................5
Statements of Cash Flows:
Nine Months Ended September 30, 2002...................6
Nine Months Ended September 30, 2001...................6
Notes to Financial Statements.............................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......19
Item 4. Disclosure Controls and Procedures...............................20
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................20
Item 2. Changes in Securities and Use of Proceeds........................20
Item 3. Defaults Upon Senior Securities..................................20
Item 4. Submission of Matters to a Vote of Security Holders..............20
Item 5. Other Information................................................20
Item 6. Exhibits and Reports on Form 8-K.................................20
Signatures...............................................................21
Certifications...........................................................22
PART I. FINANCIAL INFORMATION, Item 1-- Financial Statements
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands of dollars)
September 30, December 31,
2002 2001
-------------- --------------
ASSETS
Cash and due from banks $ 17,513 $ 13,026
Interest bearing balances with banks 11,022 4,270
Federal funds sold 13,575 -
-------------- --------------
Cash and Cash Equivalents 42,110 17,296
Investment securities:
Available-for-sale, at fair value 108,675 96,505
Held-to-maturity (fair value of $33,807
and $32,617, respectively) 31,312 32,118
-------------- --------------
Total Investment Securities 139,987 128,623
Loans, net of unearned income 309,879 323,808
Less: Allowance for loan losses 3,347 3,600
-------------- --------------
Loans, Net 306,532 320,208
Bank premises and equipment 10,147 10,783
Other real estate owned 85 143
Accrued interest receivable 3,431 3,599
Other assets 3,333 1,899
-------------- --------------
Total Assets $ 505,625 $ 482,551
============== ==============
LIABILITIES
Deposits:
Non-interest bearing $ 76,897 $ 70,812
Interest bearing 340,951 335,719
-------------- --------------
Total Deposits 417,848 406,531
Other borrowed funds:
Repurchase agreements 23,609 18,140
Short-term borrowings 889 17
Accrued interest payable 1,325 1,577
Other liabilities 2,761 1,638
-------------- --------------
Total Liabilities 446,432 427,903
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock ($ .01 par value, 15,000,000 shares
authorized, 2,148,000 shares issued and outstanding) 21 21
Surplus 10,819 10,819
Retained earnings 44,368 41,206
Accumulated other comprehensive income 3,985 2,602
-------------- --------------
Total Stockholders' Equity 59,193 54,648
-------------- --------------
Total Liabilities and Stockholders' Equity $ 505,625 $ 482,551
============== ==============
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
------------------- ------------------
INTEREST INCOME
Interest and fees on loans $ 5,107 $ 6,184
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 1,256 1,412
States & political subdivisions 503 443
Other securities 18 35
Interest on Federal funds sold 64 1
Interest on balances with banks 33 21
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Total Interest Income 6,981 8,096
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INTEREST EXPENSE
Interest on time deposits of $100,000 or more 346 415
Interest on other deposits 1,634 2,376
Interest on other borrowed funds 74 181
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Total Interest Expense 2,054 2,972
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Net Interest Income 4,927 5,124
Provision for loan losses 152 284
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Net Interest Income After Provision for Loan Losses 4,775 4,840
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OTHER INCOME
Trust department income 333 282
Service charges on deposit accounts 287 300
Merchant transaction income 1,820 1,651
Other fee income 262 236
Other operating income 231 149
Realized gains (losses) on securities, net 359 6
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Total Other Income 3,292 2,624
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OTHER EXPENSES
Salaries and employee benefits 2,271 1,958
Expense of premises and fixed assets 650 628
Merchant transaction expenses 1,526 1,409
Other operating expenses 1,149 1,059
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Total Other Expenses 5,596 5,054
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Income before income taxes 2,471 2,410
Applicable income taxes 632 610
------------------- ------------------
Net Income 1,839 1,800
Other comprehensive income, net of taxes:
Unrealized securities gains (losses) 1,080 1,770
------------------- ------------------
Comprehensive Income $ 2,919 $ 3,570
=================== ==================
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 0.85 $ 0.84
Cash Dividends Declared Per Common Share $ 0.30 $ 0.25
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands of dollars)
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------- ------------------
INTEREST INCOME
Interest and fees on loans $ 15,921 $ 18,874
Interest and dividends on investments:
U.S. Treasury securities and U.S. Agency obligations 3,803 4,215
States & political subdivisions 1,530 1,153
Other securities 61 98
Interest on Federal funds sold 94 6
Interest on balances with banks 70 30
------------------- ------------------
Total Interest Income 21,479 24,376
------------------- ------------------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 1,109 1,357
Interest on other deposits 4,944 7,614
Interest on other borrowed funds 226 1,025
------------------- ------------------
Total Interest Expense 6,279 9,996
------------------- ------------------
Net Interest Income 15,200 14,380
Provision for loan losses 571 725
------------------- ------------------
Net Interest Income After Provision for Loan Losses 14,629 13,655
------------------- ------------------
OTHER INCOME
Trust department income 979 964
Service charges on deposit accounts 839 824
Merchant transaction income 4,430 4,433
Other fee income 719 672
Other operating income 628 381
Realized gains (losses) on securities, net 359 (26)
------------------- ------------------
Total Other Income 7,954 7,248
------------------- ------------------
OTHER EXPENSES
Salaries and employee benefits 6,611 5,944
Expense of premises and fixed assets 1,945 2,030
Merchant transaction expenses 3,785 3,874
Other operating expenses 3,480 3,466
------------------- ------------------
Total Other Expenses 15,821 15,314
------------------- ------------------
Income before income taxes 6,762 5,589
Applicable income taxes 1,667 1,305
------------------- ------------------
Net Income 5,095 4,284
Other comprehensive income, net of taxes:
Unrealized securities gains (losses) 1,383 2,353
------------------- ------------------
Comprehensive Income $ 6,478 $ 6,637
=================== ==================
Earnings per Common Share
(Based on 2,148,000 shares outstanding) $ 2.37 $ 1.99
Cash Dividends Declared Per Common Share $ 0.90 $ 0.75
PENSECO FINANCIAL SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of dollars)
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
------------------ ------------------
OPERATING ACTIVITIES
Net Income $ 5,095 $ 4,284
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 928 977
Provision for loan losses 571 725
Deferred income tax (benefit) provision (57) 1
Amortization of securities, (net of accretion) 149 13
Net realized (gains) losses on securities (359) 26
Loss (gain) on other real estate - 21
Decrease (increase) in interest receivable 168 (404)
(Increase) decrease in other assets (1,434) (332)
(Decrease) increase in income taxes payable (107) 172
(Decrease) increase in interest payable (252) (354)
Increase (decrease) in other liabilities 575 (156)
------------------ ------------------
Net cash provided by operating activities 5,277 4,973
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INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (25,396) (36,010)
Proceeds from investment securities available-for-sale 15,570 47,568
Purchase of investment securities to be held-to-maturity - (13,407)
Proceeds from repayments of investment securities to be held-to-maturity 767 1,144
Net loans repaid (originated) 12,880 (21,991)
Proceeds from other real estate 283 215
Investment in premises and equipment (292) (192)
------------------ ------------------
Net cash (used) provided by investing activities 3,812 (22,673)
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FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 17,243 5,212
Net (payments) proceeds on time deposits (5,926) 4,495
Increase (decrease) in federal funds purchased - -
Increase (decrease) in repurchase agreements 5,469 4,554
Net increase (decrease) in short-term borrowings 872 (3,790)
Cash dividends paid (1,933) (1,611)
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Net cash provided (used) by financing activities 15,725 8,860
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Net increase (decrease) in cash and cash equivalents 24,814 (8,840)
Cash and cash equivalents at January 1 17,296 19,133
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Cash and cash equivalents at September 30 $ 42,110 $ 10,293
================== ==================
The Company paid interest and income taxes of $6,531 and $1,532 and $10,350 and
$987, for the nine month periods ended September 30, 2002 and 2001,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended September 30, 2002
(unaudited)
These Notes to Financial Statements reflect events subsequent to December 31,
2001, the date of the most recent Report of Independent Auditors, through the
date of this Quarterly Report on Form 10-Q for the quarter ended September 30,
2002. These Notes to Financial Statements should be read in conjunction with
Financial Information and Other Information required to be furnished as part of
this Report, in particular, (1) Management's Discussion and Analysis of
Financial Condition and Results of Operations for the three months ended
September 30, 2002 and September 30, 2001 and for the nine months ended
September 30, 2002 and September 30, 2001, with respect to the Company's capital
requirements and liquidity, (2) Part II, Item 6, Reports on Form 8-K and (3) the
Company's Annual Report - Form 10-K for the year ended December 31, 2001,
incorporated herein by reference.
NOTE 1 -- Principles of Consolidation
Penseco Financial Services Corporation (Company) is a financial holding company,
incorporated under the laws of Pennsylvania. It is the parent company of Penn
Security Bank and Trust Company (Bank), a state chartered bank.
Intercompany transactions have been eliminated in preparing the consolidated
financial statements.
The accounting policies of the Company conform with accounting principles
generally accepted in the United States of America and with general practices
within the banking industry.
NOTE 2 -- Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments that are of a normal recurring
nature and are considered necessary for a fair presentation have been included.
They are not, however, necessarily indicative of the results of consolidated
operations for a full year.
For further information, refer to the consolidated financial statements and
accompanying notes included in the Company's Annual Report - Form 10-K for the
year ended December 31, 2001.
NOTE 3 -- Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
NOTE 4 -- Investment Securities
Investments in securities are classified in two categories and accounted for as
follows:
Securities Held-to-Maturity. Bonds, notes, debentures and mortgage-backed
securities for which the Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts computed on the straight-line basis, which approximates
the interest method, over the remaining period to maturity.
Securities Available-for-Sale. Bonds, notes, debentures, 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.
Realized gains and losses on the sale of securities available-for-sale are
determined using the specific identification method and are reported as a
separate component of other income in the Statements of Income. Unrealized gains
and losses are included as a separate item in computing comprehensive income.
The amortized cost and fair value of investment securities at September 30, 2002
and December 31, 2001 are as follows:
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2002 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 35,123 $ 1,482 $ - $ 36,605
U.S. Agency securities 55,307 3,889 - 59,196
States & political subdivisions 9,933 529 - 10,462
- --------------------------------------------------------------------------------
Total Debt Securities 100,363 5,900 - 106,263
Equity securities 2,275 137 - 2,412
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 102,638 $ 6,037 $ - $ 108,675
- --------------------------------------------------------------------------------
Available-for-Sale
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 35,014 $ 1,086 $ 31 $ 36,069
U.S. Agency securities 55,368 2,775 - 58,143
States & political subdivisions - - - -
- --------------------------------------------------------------------------------
Total Debt Securities 90,382 3,861 31 94,212
Equity securities 2,180 113 - 2,293
- --------------------------------------------------------------------------------
Total Available-for-Sale $ 92,562 $ 3,974 $ 31 $ 96,505
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2002 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Agency Obligations:
Mortgage-backed securities $ 1,614 $ 7 $ 24 $ 1,597
States & political subdivisions 29,698 2,512 - 32,210
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 31,312 $ 2,519 $ 24 $ 33,807
- --------------------------------------------------------------------------------
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Agency Obligations:
Mortgage-backed securities $ 2,377 $ - $ 45 $ 2,332
States & political subdivisions 29,741 799 255 30,285
- --------------------------------------------------------------------------------
Total Held-to-Maturity $ 32,118 $ 799 $ 300 $ 32,617
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities at September 30, 2002 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.
September 30, 2002 Available-for-Sale Held-to-Maturity
- ---------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 10,016 $ 10,133 $ - $ -
U.S. Agency securities 6,990 7,254 - -
After one year through five years:
U.S. Treasury securities 25,107 26,472 - -
U.S. Agency securities 48,317 51,942 - -
After ten years:
States & political subdivisions 9,933 10,462 29,698 32,210
- ---------------------------------------------------------------------------------------
Subtotal 100,363 106,263 29,698 32,210
Mortgage-backed securities - - 1,614 1,597
- ---------------------------------------------------------------------------------------
Total Debt Securities $ 100,363 $ 106,263 $ 31,312 $ 33,807
- ---------------------------------------------------------------------------------------
NOTE 5 -- Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company and the Bank's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and classifications are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the Capital Adequacy table on the following page) of Tier I and Total
Capital to risk-weighted assets and of Tier I Capital to average assets
(Leverage ratio). The table also presents the Company's actual capital amounts
and ratios. The Bank's actual capital amounts and ratios are substantially
identical to the Company's. Management believes, as of September 30, 2002, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of September 30, 2002, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Company as "well capitalized" under
the regulatory framework for prompt corrective action. To be categorized as
"well capitalized", the Company must maintain minimum Tier I Capital, Total
Capital and Leverage ratios as set forth in the Capital Adequacy table. There
are no conditions or events since that notification that management believes
have changed the Company's categorization by the FDIC.
The Company and Bank are also subject to minimum capital levels, which could
limit the payment of dividends, although the Company and Bank currently have
capital levels, which are in excess of minimum capital level ratios required.
The Pennsylvania Banking Code restricts capital funds available for payment of
dividends to the Retained Earnings of the Bank. Accordingly, at September 30,
2002, the balances in the Capital Stock and Surplus accounts totalling $10,840
are unavailable for dividends.
In addition, the Bank is subject to restrictions imposed by Federal law on
certain transactions with the Company's affiliates. These transactions include
extensions of credit, purchases of or investments in stock issued by the
affiliate, purchases of assets subject to certain exceptions, acceptance of
securities issued by an affiliate as collateral for loans, and the issuance of
guarantees, acceptances, and letters of credit on behalf of affiliates. These
restrictions
prevent the Company's affiliates from borrowing from the Bank unless the loans
are secured by obligations of designated amounts. Further, the aggregate of such
transactions by the Bank with a single affiliate is limited in amount to 10
percent of the Bank's Capital Stock and Surplus, and the aggregate of such
transactions with all affiliates is limited to 20 percent of the Bank's Capital
Stock and Surplus. The Federal Reserve System has interpreted "Capital Stock and
Surplus" to include undivided profits.
Actual Regulatory Requirements
- ------------------------------------------------ ----------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
As of September 30, 2002 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $ 58,496 18.19% > $ 25,725 > 8.0% > $ 32,157 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $ 55,149 17.15% > $ 12,863 > 4.0% > $ 19,294 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $ 55,149 11.17% > $ * > * > $ 24,694 > 5.0%
- - - -
*3.0% ($14,816), 4.0% ($19,755) or 5.0% ($24,694) depending on the bank's CAMELS
Rating and other regulatory risk factors.
As of December 31, 2001
- ---------------------------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $ 55,646 18.22% > $ 24,428 > 8.0% > $ 30,535 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $ 52,046 17.04% > $ 12,214 > 4.0% > $ 18,321 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $ 52,046 10.95% > $ * > * > $ 23,759 > 5.0%
- - - -
*3.0% ($14,255), 4.0% ($19,007) or 5.0% ($23,759) depending on the bank's CAMELS
Rating and other regulatory risk factors.
PART 1. FINANCIAL INFORMATION, Item 2--
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial condition and
significant changes in the results of operations of Penseco Financial Services
Corporation and it's subsidiary ("Penn Security Bank and Trust Company") for the
three months ended September 30, 2002 and September 30, 2001 and for the nine
months ended September 30, 2002 and September 30, 2001. Throughout this review
the subsidiary of Penseco Financial Services Corporation, Penn Security Bank and
Trust Company, is referred to as the "Company". All intercompany accounts and
transactions have been eliminated in preparing the consolidated financial
statements. All information is presented in thousands of dollars, except as
indicated.
Overview of Financial Condition
Penseco Financial Services Corporation reported an increase in net income of $39
or 2.2% to $1,839 for the three months ended September 30, 2002 from $1,800
reported for the three months ended September 30, 2001. This is attributed to an
increase in other income, along with a gain from the sale of a U.S. Government
Agency security.
The Company also reported an increase in net income of $811 or 18.9% to $5,095
for the nine months ended September 30, 2002 from $4,284 reported for the first
nine months of 2001, largely due to increases in the net interest margin. There
was an increase in other income of $706 or 9.7%, mainly from increases in
brokerage services, as well as, the sale of non-portfolio mortgages and a gain
on the sale of a short-term U.S. Government Agency security.
Net Interest Income and Net Interest Margin
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between income on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and
investments while deposits and short-term borrowings, in the form of securities
sold under agreements to repurchase, represent interest-bearing liabilities.
Variations in the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, are determinants of changes in net
interest income.
Three Month Period
Net interest income after provision for loan losses decreased $65 or 1.3% from
$4,840 for the three month period ended September 30, 2001 to $4,775 for the
same period in 2002. In addition, earning assets repriced downward 136 basis
points due to the precipitous drop in interest rates following the September
11th, 2001 terrorist attacks on the United States, offset by interest bearing
liabilities repricing downward 115 basis points, as shown on the following
schedule.
The net interest margin represents the Company's net yield on its earning assets
and is calculated as net interest income divided by average earning assets. In
the three months ended September 30, 2002, the net interest margin was 4.07%,
decreasing 44 basis points from 4.51% in the same period of 2001.
Total average earning assets and average interest bearing funds increased for
the three months ended September 30, 2002 as compared to 2001. For the same
period, average earning assets increased $30.4 million or 6.7%, from $453.9
million in 2001 to $484.3 million in 2002 and average interest bearing funds
increased $18.5 million, or 5.2%, from $354.0 million to $372.5 million. As a
percentage of average assets, earning assets increased to 95.8% for the three
months ended September 30, 2002 from 95.5% for the same year ago period.
Interest bearing liabilities decreased to 73.7% from 74.4%, as a percentage of
total liabilities and stockholders' equity, compared to the year ago period.
Changes in the mix of both earning assets and funding sources also impacted net
interest income for the three months ended September 30, 2002 and 2001. Average
loans as a percentage of average earning assets decreased from 71.7% in 2001 to
65.8% in 2002; average investments increased from 27.8% to 29.3%. Short-term
investments, federal funds sold and interest bearing balances with banks
increased $20.8 million to $23.4 from $2.6 and also increased as a percentage of
earning assets from .6% in 2001 to 4.8% in 2002. Time deposits increased $4.6
million from 42.1% in 2001 to 41.3% in 2002. However, short-term borrowings and
repurchase agreements decreased $.4 from 6.4% in 2001 to 6.2% in 2002, as a
percentage of funding sources.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds, as well as the yields earned on assets. The investment
securities tax equivalent yield decreased 99 basis points from 6.72% in the
three months ended September 30, 2001 to 5.73% for 2002. Average loan yields
decreased 120 basis points, from 7.60% in 2001 to 6.40% in 2002. The average
time deposit costs decreased 124 basis points from 4.86% in 2001 to 3.62% in
2002, along with money market accounts decreasing 142 basis points from 2.92% in
2001 to 1.50% in 2002. These are the primary causes of the decrease in the total
cost of funds rate from 3.36% in 2001 to 2.21% in 2002.
Distribution of Assets, Liabilities and Stockholders' Equity / Interest Rates
and Interest Differential The table below presents average balances, interest
income on a fully taxable equivalent basis and interest expense, as well as
average rates earned and paid on the Company's major asset and liability items
for the three months ended September 30, 2002 and September 30, 2001.
- --------------------------------------------------------------------------------------------------------
September 30, 2002 September 30, 2001
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------
Investment Securities
Available-for-sale:
U.S. Treasury securities $ 36,230 $ 377 4.16% $ 36,503 $ 528 5.79%
U.S. Agency obligations 62,139 866 5.57% 55,230 841 6.09%
States & political subdivisions 9,902 118 7.22% 2,126 23 6.56%
Federal Home Loan Bank stock 2,006 16 3.19% 1,911 33 6.91%
Other 403 2 1.99% 335 2 2.39%
Held-to-maturity:
U.S. Agency obligations 1,731 13 3.00% 2,971 43 5.79%
States & political subdivisions 29,698 385 7.86% 26,929 420 9.45%
Loans, net of unearned income:
Real estate mortgages 246,308 4,086 6.64% 251,722 4,825 7.67%
Commercial 32,701 454 5.55% 27,813 566 8.14%
Consumer and other 39,703 567 5.71% 45,756 793 6.94%
Federal funds sold 16,010 64 1.60% 92 1 4.35%
Interest on balances with banks 7,428 33 1.78% 2,509 21 3.35%
- --------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 484,259 $ 6,981 5.77% 453,897 $ 8,096 7.13%
- --------------------------------------------------------------------------------------------------------
Cash and due from banks 8,488 7,759
Bank premises and equipment 10,293 11,077
Accrued interest receivable 3,544 3,880
Other assets 3,088 2,065
Less: Allowance for loan losses 3,954 3,148
- --------------------------------------------------------------------------------------------------------
Total Assets $ 505,718 $ 475,530
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 25,774 $ 38 0.59% $ 25,729 $ 68 1.06%
Savings 72,576 182 1.00% 65,204 244 1.50%
Money markets 97,278 365 1.50% 91,095 665 2.92%
Time - Over $100 35,848 346 3.86% 32,856 415 5.06%
Time - Other 117,948 1,049 3.56% 116,361 1,399 4.81%
Federal funds purchased - - - - - -
Repurchase agreements 22,608 72 1.27% 18,480 141 3.05%
Short-term borrowings 463 2 1.73% 4,245 40 3.77%
- --------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 372,495 $ 2,054 2.21% 353,970 $ 2,972 3.36%
- --------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 72,605 65,278
All other liabilities 2,837 3,016
Stockholders' equity 57,781 53,266
- --------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 505,718 $ 475,530
- --------------------------------------------------------------------------------------------------------
Interest Spread 3.56% 3.77%
- --------------------------------------------------------------------------------------------------------
Net Interest Income $ 4,927 $ 5,124
- --------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.07% 4.51%
Return on average assets 1.45% 1.51%
Return on average equity 12.73% 13.52%
Average equity to average assets 11.43% 11.20%
Dividend payout ratio 35.29% 29.76%
- --------------------------------------------------------------------------------------------------------
Nine Month Period
Net interest income after provision for loan losses increased $974 or 7.1% from
$13,655 for the first nine months of 2001 to $14,629 in 2002. In addition,
earning assets repriced downward 116 basis points due to the precipitous drop in
interest rates following the September 11th, 2001 terrorist attacks on the
United States, offset by interest bearing liabilities repricing downward 146
basis points, as shown on the following schedule.
In the first nine months of 2002, the net interest margin was 4.29%, increasing
3 basis points from 4.26% in the same period of 2001.
Total average earning assets and average interest bearing funds increased in the
first nine months of 2002 as compared to 2001. Average earning assets increased
$22.5 million or 5.0%, from $450.3 million in 2001 to $472.8 million in 2002 and
average interest bearing funds increased $10.7 million, or 3.0%, from $355.2
million to $365.9 million for the same periods. As a percentage of average
assets, earning assets increased to 95.7% for the first nine months of 2002 from
95.2% for the year ago period. Interest bearing liabilities increased $10.7 or
3.0% of total liabilities and stockholders' equity, compared to the year ago
period.
Changes in the mix of both earning assets and funding sources also impacted net
interest income in the first nine months of both 2002 and 2001. Average loans as
a percentage of average earning assets decreased from 72.2% in 2001 to 68.3% in
2002; average investments increased from 27.6% to 28.9%. Short-term investments,
federal funds sold and interest bearing balances with banks increased $12.3
million to $13.4 from $1.1 and also increased as a percentage of earning assets
from .2% in 2001 to 2.8% in 2002. Time deposits increased $10.1 million from
41.4% in 2001 to 42.9% in 2002. However, short-term borrowings and repurchase
agreements decreased $12.5 from 9.2% in 2001 to 5.5% in 2002, as a percentage of
funding sources.
Shifts in the interest rate environment and competitive factors affected the
rates paid for funds as well as the yields earned on assets. The investment
securities tax equivalent yield decreased 46 basis points from 6.50% in the
first nine months of 2001 to 6.04% for 2002. Also, average loan yields decreased
117 basis points, from 7.74% in the first nine months of 2001 to 6.57% in 2002.
The average time deposit costs decreased 163 basis points from 5.31% in 2001 to
3.68% in 2002, along with money market accounts decreasing 187 basis points from
3.40% in 2001 to 1.53% in 2002. These are the primary causes of the decrease in
the total cost of funds rate from 3.75% in 2001 to 2.29% in 2002.
(The remainder of this page is intentionally left blank.)
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 nine months ended
September 30, 2002 and September 30, 2001.
- --------------------------------------------------------------------------------------------------------
September 30, 2002 September 30, 2001
ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
- --------------------------------------------------------------------------------------------------------
Investment Securities
Available-for-sale:
U.S. Treasury securities $ 36,535 $ 1,202 4.39% $ 40,866 $ 1,786 5.83%
U.S. Agency obligations 59,242 2,553 5.75% 49,334 2,277 6.15%
States & political subdivisions 6,707 252 7.59% 9,648 267 5.59%
Federal Home Loan Bank stock 1,972 54 3.65% 1,871 94 6.70%
Other 389 7 2.40% 198 4 2.69%
Held-to-maturity:
U.S. Agency obligations 1,972 48 3.24% 3,396 152 5.97%
States & political subdivisions 29,720 1,278 8.69% 18,865 886 9.49%
Loans, net of unearned income:
Real estate mortgages 249,508 12,681 6.78% 248,767 14,523 7.78%
Commercial 32,865 1,365 5.54% 27,371 1,703 8.30%
Consumer and other 40,481 1,875 6.18% 48,839 2,648 7.23%
Federal funds sold 7,917 94 1.58% 154 6 5.19%
Interest on balances with banks 5,469 70 1.71% 995 30 4.02%
- --------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 472,777 $ 21,479 6.06% 450,304 $ 24,376 7.22%
- --------------------------------------------------------------------------------------------------------
Cash and due from banks 8,142 8,362
Bank premises and equipment 10,525 11,320
Accrued interest receivable 3,489 3,775
Other assets 2,709 2,401
Less: Allowance for loan losses 3,770 3,114
- --------------------------------------------------------------------------------------------------------
Total Assets $ 493,872 $ 473,048
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 26,157 $ 120 0.61% $ 25,119 $ 201 1.07%
Savings 70,833 541 1.02% 64,025 713 1.48%
Money markets 91,836 1,054 1.53% 86,460 2,203 3.40%
Time - Over $100 38,462 1,109 3.84% 31,876 1,357 5.68%
Time - Other 118,498 3,229 3.63% 114,996 4,497 5.21%
Federal funds purchased - - - - - -
Repurchase agreements 19,569 218 1.48% 17,220 546 4.23%
Short-term borrowings 582 8 1.83% 15,503 479 4.12%
- --------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 365,937 $ 6,279 2.29% 355,199 $ 9,996 3.75%
- --------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 68,705 62,759
All other liabilities 2,883 2,853
Stockholders' equity 56,347 52,236
- --------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 493,872 $ 473,047
- --------------------------------------------------------------------------------------------------------
Interest Spread 3.77% 3.47%
- --------------------------------------------------------------------------------------------------------
Net Interest Income $ 15,200 $ 14,380
- --------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.29% 4.26%
Return on average assets 1.38% 1.21%
Return on average equity 12.06% 10.94%
Average equity to average assets 11.41% 11.04%
Dividend payout ratio 37.97% 37.74%
- --------------------------------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for loan losses to a level that
management considers adequate to reflect the risk of future losses inherent in
the Company's loan portfolio. The process of determining the adequacy of the
allowance is necessarily judgmental and subject to changes in external
conditions. The allowance for loan losses reflects management's judgment as to
the level considered appropriate to absorb such losses based upon a review of
many factors, including historical loss experience, adverse situations that may
affect the borrower's ability to repay (including the timing of future
payments), economic conditions and trends, loan portfolio volume and mix, loan
performance trends, the value and adequacy of collateral, and the Company's
internal credit review process. Accordingly, there can be no assurance that
existing levels of the allowance will ultimately prove adequate to cover actual
loan losses. The quarterly provision for loan losses charged to operating
expense is that amount which is sufficient to bring the balance of the allowance
for possible loan losses to an adequate level to absorb anticipated losses.
Based on this ongoing evaluation, management determines the provision necessary
to maintain an appropriate allowance.
In the three months ended September 30, 2002, the provision for loan losses was
$152, a decrease from $284 in the three months ended September 30, 2001. Loans
charged-off totaled $769 and recoveries were $14 for the three months ended
September 30, 2002. In the same period of 2001, loans charged off were $40,
offset by recoveries of $6.
In the first nine months of 2002, the provision for loan losses was $571, a
decrease from $725 in the first nine months of 2001. Loans charged-off totaled
$858 and recoveries were $34 for the nine months ended September 30, 2002. In
the same period of 2001, loans charged off were $454, offset by recoveries of
$29.
Other Income
The following table sets forth information by category of other income for the
Company for three months ended September 30, 2002 and September 30, 2001,
respectively:
September 30, September 30,
Three Months Ended: 2002 2001
- ----------------------------------------------------------------------------
Trust department income $ 333 $ 282
Service charges on deposit accounts 287 300
Merchant transaction income 1,820 1,651
Other fee income 262 236
Other operating income 231 149
Realized gains (losses) on securities, net 359 6
- ----------------------------------------------------------------------------
Total Other Income $ 3,292 $ 2,624
- ----------------------------------------------------------------------------
Other income increased $668 or 25.5% to $3,292 from $2,624 for the three months
ended September 30, 2002. Contributing to the growth in other income were
increases of $51 or 18.1% in trust department income due to additional business.
In addition, there was increased merchant transaction income of $169 or 10.2% to
$1,820 from $1,651 and increased other fee income of $26 or 11.0% mainly from
increased cardholder discounts. Also an increase of $82 or 55.0% to $231 from
$149 in other operating income, due mainly to increased revenue from the sale of
non-portfolio mortgages. Realized gains on the sale of securities were $359 due
to the sale of a three year U.S Agency security. The proceeds will be
re-invested into higher yielding longer term municipal securities.
The following table sets forth information by category of other income for the
Company for nine months ended September 30, 2002 and September 30, 2001,
respectively:
September 30, September 30,
Nine Months Ended: 2002 2001
- ----------------------------------------------------------------------------
Trust department income $ 979 $ 964
Service charges on deposit accounts 839 824
Merchant transaction income 4,430 4,433
Other fee income 719 672
Other operating income 628 381
Realized gains (losses) on securities, net 359 (26)
- ----------------------------------------------------------------------------
Total Other Income $ 7,954 $ 7,248
- ----------------------------------------------------------------------------
Other income increased $706 or 9.7% to $7,954 from $7,248 during the first nine
months of 2002. Contributing to the growth in other income were increased other
fee income of $47 or 7.0% to $719 from $672 and other operating income of $247
or 64.8% to $628 from $381, due mostly to brokerage division income of $163,
along with gains on the sale of non-portfolio mortgages of $130, a reaction to
consumers refinancing with interest rates at forty-year lows. Realized gains on
the sale of securities were $359 due to the sale of a three year U.S Agency
security. The proceeds will be re-invested into higher yielding longer term
municipal securities.
Other Expenses
The following table sets forth information by category of other expenses for the
Company for the three months ended September 30, 2002 and September 30, 2001,
respectively:
September 30, September 30,
Three Months Ended: 2002 2001
- ----------------------------------------------------------------------------
Salaries and employee benefits $ 2,271 $ 1,958
Expense of premises and fixed assets 650 628
Merchant transaction expenses 1,526 1,409
Other operating expenses 1,149 1,059
- ----------------------------------------------------------------------------
Total Other Expenses $ 5,596 $ 5,054
- ----------------------------------------------------------------------------
Other expenses increased $542 or 10.7% to $5,596 from $5,054 for the three
months ended September 30, 2002 mainly due to an increase of $313 or 16.0% to
$2,271 from $1,958 in salaries and employee benefits due to staff additions and
replacements, merit increases and higher pension costs, while expense of
merchant transactions increased $117 or 8.3% to $1,526 from $1,409 due to
increased business. Other operating expense increased $90 or 8.5%, largely due
to increases in stationary and supplies and bank shares tax expense.
The following table sets forth information by category of other expenses for the
Company for the nine months ended September 30, 2002 and September 30, 2001,
respectively:
September 30, September 30,
Nine Months Ended: 2002 2001
- ----------------------------------------------------------------------------
Salaries and employee benefits $ 6,611 $ 5,944
Expense of premises and fixed assets 1,945 2,030
Merchant transaction expenses 3,785 3,874
Other operating expenses 3,480 3,466
- ----------------------------------------------------------------------------
Total Other Expenses $ 15,821 $ 15,314
- ----------------------------------------------------------------------------
Other expenses increased $507 or 3.3% to $15,821 from $15,314 during the first
nine months of 2002, largely due to an increase in salaries and employee
benefits of $667 or 11.2% to $6,611 from $5,944 attributable to staff additions
and replacements, merit increases and higher pension costs. Applicable income
tax expense increased $362 or 27.7% to $1,667 from $1,305 due to a higher
taxable operating income.
Loan Portfolio
Details regarding the Company's loan portfolio:
September 30, December 31,
As Of: 2002 2001
- ------------------------------------------------------------------------------
Real estate - construction
and land development $ 5,991 $ 9,124
Real estate mortgages 236,204 246,486
Commercial 31,665 30,001
Credit card and related plans 2,201 2,377
Installment 27,905 30,142
Obligations of states & political subdivisions 5,913 5,678
- ------------------------------------------------------------------------------
Loans, net of unearned income 309,879 323,808
Less: Allowance for loan losses 3,347 3,600
- ------------------------------------------------------------------------------
Loans, net $ 306,532 $ 320,208
- ------------------------------------------------------------------------------
Loan Quality
The comprehensive lending policy established by the Board of Directors guides
the lending activities of the Company. Loans must meet criteria, which include
consideration of the character, capacity and capital of the borrower, collateral
provided for the loan, and prevailing economic conditions.
Regardless of credit standards, there is risk of loss inherent in every loan
portfolio. The allowance for loan losses is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of the loans. The
evaluations take into consideration such factors as change in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, industry experience, collateral value and current economic
conditions that may affect the borrower's ability to pay. Management believes
that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
The allowance for loan losses is increased by periodic charges against earnings
as a provision for loan losses, and decreased periodically by charge-offs of
loans (or parts of loans) management has determined to be uncollectible, net of
actual recoveries on loans previously charged-off.
Non-Performing Assets
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:
September 30, December 31, September 30,
As Of: 2002 2001 2001
- -----------------------------------------------------------------------------------------------
Non-accrual loans $ 2,217 $ 1,917 $ 1,123
Loans past due 90 days or more and accruing:
Guaranteed student loans 300 304 379
Credit card and home equity loans 14 22 21
- -----------------------------------------------------------------------------------------------
Total non-performing loans 2,531 2,243 1,523
Other real estate owned 85 143 87
- -----------------------------------------------------------------------------------------------
Total non-performing assets $ 2,616 $ 2,386 $ 1,610
- -----------------------------------------------------------------------------------------------
Loans are generally placed on a non-accrual status when principal or interest is
past due 90 days or when payment in full is not anticipated. When a loan is
placed on non-accrual status, all interest previously accrued but not collected
is charged against current income. Loans are returned to accrual status when
past due interest is collected and the collection of principal is probable.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $2,217 and $1,123 at September 30, 2002 and September 30, 2001, respectively.
If interest on those loans had been accrued, such income would have been $204
and $125 for the nine months ended September 30, 2002 and September 30, 2001,
respectively. Interest income on those loans, which is recorded only when
received, amounted to $70 and $23 for September 30, 2002 and September 30, 2001,
respectively. There are no commitments to lend additional funds to borrowers
whose loans are in non-accrual status.
The management process for evaluating the adequacy of the allowance for loan
losses includes reviewing each month's loan committee reports, which list all
loans that do not meet certain internally developed criteria as to collateral
adequacy, payment performance, economic conditions and overall credit risk.
These reports also address the current status and actions in process on each
listed loan. From this information, adjustments are made to the allowance for
loan losses. Such adjustments include both specific loss allocation amounts and
general provisions by loan category based on present and past collection
experience, nature and volume of the loan portfolio, overall quality, and
current economic conditions that may affect the borrower's ability to pay. As of
September 30, 2002 there are no significant loans as to which management has
serious doubt about their collectibility other than what is included above.
At September 30, 2002 and December 31, 2001, the Company did not have any loans
specifically classified as impaired.
Most of the Company's lending activity is with customers located in the
Company's geographic market area and
repayment thereof is affected by economic conditions in this market area.
Loan Loss Experience
The following tables present the Company's loan loss experience during the
periods indicated:
September 30, September 30,
Three Months Ended: 2002 2001
- -------------------------------------------------------------------------------
Balance at beginning of period $ 3,950 $ 3,150
Charge-offs:
Real estate mortgages 12 26
Commercial and all others 740 -
Credit card and related plans 5 11
Installment loans 12 3
- -------------------------------------------------------------------------------
Total charge-offs 769 40
- -------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 12 5
Commercial and all others - -
Credit card and related plans 1 -
Installment loans 1 1
- -------------------------------------------------------------------------------
Total recoveries 14 6
- -------------------------------------------------------------------------------
Net charge-offs (recoveries) 755 34
- -------------------------------------------------------------------------------
Provision charged to operations 152 284
- -------------------------------------------------------------------------------
Balance at End of Period $ 3,347 $ 3,400
- -------------------------------------------------------------------------------
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.237% 0.010%
- -------------------------------------------------------------------------------
Due to the continuing economic uncertainties, and as an act of prudence,
management had been increasing the allowance for loan losses since late last
year. One significant credit related to the trucking industry, for which the
reserve had been increased, was charged-off during the three months ended
September 30, 2002. Even with this charge-off, the allowance for loan losses, as
a percentage of total loans, increased to 1.08% at September 30, 2002 from 1.03%
at September 30, 2001.
September 30, September 30,
Nine Months Ended: 2002 2001
- -------------------------------------------------------------------------------
Balance at beginning of year $ 3,600 $ 3,100
Charge-offs:
Real estate mortgages 66 26
Commercial and all others 763 388
Credit card and related plans 16 23
Installment loans 13 17
- -------------------------------------------------------------------------------
Total charge-offs 858 454
- -------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 31 20
Commercial and all others - -
Credit card and related plans 1 -
Installment loans 2 9
- -------------------------------------------------------------------------------
Total recoveries 34 29
- -------------------------------------------------------------------------------
Net charge-offs (recoveries) 824 425
- -------------------------------------------------------------------------------
Provision charged to operations 571 725
- -------------------------------------------------------------------------------
Balance at End of Period $ 3,347 $ 3,400
- -------------------------------------------------------------------------------
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.255% 0.131%
- -------------------------------------------------------------------------------
The allowance for loan losses is allocated as follows:
As Of: September 30, 2002 December 31, 2001 September 30, 2001
- -----------------------------------------------------------------------------------------------
Amount %* Amount %* Amount %*
- -----------------------------------------------------------------------------------------------
Real estate mortgages $ 1,600 78% $ 1,700 79% $ 1,600 77%
Commercial and all others 1,222 12% 1,375 11% 1,300 13%
Credit card and related plans 175 1% 175 1% 150 1%
Personal installment loans 350 9% 350 9% 350 9%
- -----------------------------------------------------------------------------------------------
Total $ 3,347 100% $ 3,600 100% $ 3,400 100%
- -----------------------------------------------------------------------------------------------
* Percent of loans in each category to total loans
Liquidity
The objective of liquidity management is to maintain a balance between sources
and uses of funds in such a way that the cash requirements of customers for
loans and deposit withdrawals are met in the most economical manner. Management
monitors its liquidity position continuously in relation to trends of loans and
deposits for short-term as well as long-term requirements. Liquid assets are
monitored on a daily basis to assure maximum utilization. Management also
manages its liquidity requirements by maintaining an adequate level of readily
marketable assets and access to short-term funding sources.
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 and
U.S. Agency bond portfolio, additional deposits, earnings, overnight loans to
and from other companies (Federal funds), lines of credit at the Federal Reserve
Bank and lines of credit at the Federal Home Loan 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, nonrecurring and unusual.
Related Parties
The Company does not have any material transactions involving related persons or
entities, other than traditional banking transactions, which are made on the
same terms and conditions as those prevailing at the time for comparable
transactions with unrelated parties.
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 18.19% at September 30, 2002.
The Company's risk-based capital ratio is more than the 10.00% ratio that
Federal regulators use as the "well capitalized" threshold. This is the current
criterion, which the FDIC uses in determining the lowest insurance rate for
deposit insurance. The Company's risk-based capital ratio is more than double
the 8.00% limit, which determines whether a company is "adequately capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital requirements without the necessity of increasing its
equity capital.
PART 1. FINANCIAL INFORMATION, Item 3--
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises principally from interest rate risk inherent in
its lending, deposit and borrowing activities. Management actively monitors and
manages its interest rate risk exposure. Although the Company manages other
risks, such as credit quality and liquidity risk in the normal course of
business, management considers interest rate risk to be its most significant
market risk and the risk that could potentially have the largest material effect
on the Company's financial
condition and results of operations. Other types of market risks such as foreign
currency exchange risk and commodity price risk do not arise in the normal
course of community banking activities.
Achieving consistent growth in net interest income is the primary goal of the
Company's asset/liability function. The Company attempts to control the mix and
maturities of assets and liabilities to achieve consistent growth in net
interest income despite changes in market interest rates. The Company seeks to
accomplish this goal while maintaining adequate liquidity and capital. A
continuation of historically low interest rates will most likely affect
negatively the Company's net interest income. The Company continues to evaluate
its mix of assets and liabilities in response to the changing economy.
PART 1. FINANCIAL INFORMATION, Item 4--
DISCLOSURE CONTROLS AND PROCEDURES
Based on the Company's principal executive officer, Otto P. Robinson, Jr.,
President and the Company's principal financial officer, Patrick Scanlon,
Controller, evaluations of the Company's Disclosure Controls and Procedures as
of October 17, 2002 (evaluation date), they have concluded that the Company's
disclosure controls are effective, reasonably ensure that material information
relating to the Company and its consolidated subsidiaries is made known to them
by others within those entities, particularly during the period in which this
report is being prepared, and identify significant deficiencies or material
weaknesses in internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data.
Based on information available to them, they are not aware of significant
deficiencies or material weaknesses in the Company's internal control system.
Based on information available to them, they are not aware of any significant
changes made in internal controls or in other factors that could significantly
affect those controls subsequent to October 17, 2002 (evaluation date) and prior
to the date of their certifications.
Based on information available to them, they are not aware of any fraud that
involves management or other employees of the Company.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
None.
Item 2 -- Changes in Securities and Use of Proceeds
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None.
Item 5 -- Other Information
None.
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
No exhibits are filed with this form 10-Q in the quarter ended September
30, 2002.
b. Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended September 30,
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENSECO FINANCIAL SERVICES CORPORATION
By /s/ RICHARD E. GRIMM
------------------------------
Richard E. Grimm
Executive Vice-President
Dated: November 13, 2002
By /s/ PATRICK SCANLON
------------------------------
Patrick Scanlon
Controller
Dated: November 13, 2002
CERTIFICATIONS
I, Otto P. Robinson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penseco Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ OTTO P. ROBINSON JR.
-------------------------
Otto P. Robinson, Jr.
President
I, Patrick Scanlon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penseco Financial
Services Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ PATRICK SCANLON
-------------------------
Patrick Scanlon
Controller