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(INSIDE COVER)
Customer Services
A detailed listing of the services offered by the Company is as follows:
DEPOSIT ACCOUNTS
All Purpose Clubs
Certificates of Deposit
Christmas Clubs
Demand Accounts
Individual Retirement Accounts
Money Market Accounts
NOW Accounts
Savings Accounts
Time Open Accounts
Vacation Clubs
LENDING
Appliance Loans
Automobile Loans
Business Loans
Collateral Loans
Commercial Equipment Leasing
Construction Loans
Cosmic Card (Debit Card, Check Card)
Credit Lines
Educational Loans
Home Equity Loans
Home Repair and Remodeling Loans
Installment Loans
MasterCard and VISA (Credit Card)
Mortgage Loans (Residential and Commercial)
Personal Loans
OTHER SERVICES
ATM Services
Bank Money Orders
Cash Management
Cashier's Checks
College Campus Card Interface
Data Processing Services
Direct Deposit of Recurring Payments
EDI-ACH Service
Foreign Remittance
Home Banking Services
Internet Banking
Investor Services
(a) Brokerage
(b) Insurance
Lockbox Services
Night Depository
Point-of-Sale Banking
Repurchase Agreements
Safe Deposit Boxes
Travelers Checks
Trust Department Services
(a) Administrator
(b) Agent
(c) Custodian and Trustee for Pension Plans
(d) Executor
(e) Guardian
(f) Securities Depository Service
(g) Trustee
(h) Trustee for Public Bond Issues
U.S. Savings Bonds
BRANCH LOCATIONS (with ATMs)
Abington
1100 Northern Boulevard
Clarks Summit, PA
Carl M. Baruffaldi, Manager
(570) 587-4898
East Scranton
Prescott Avenue & Ash Street
Scranton, PA
Beth S. Wolff, Manager
(570) 342-9101
East Stroudsburg
Route 209 & Route 447
East Stroudsburg, PA
Denise M. Cebular, Manager
(570) 420-0432
Gouldsboro
Main & Second Streets
Gouldsboro, PA
Lori A. Dzwieleski, Manager
(570) 842-6473
Green Ridge
1901 Sanderson Avenue
Scranton, PA
Jeffrey Solimine, Manager
(570) 346-4695
Central City
150 North Washington Avenue
Scranton, PA
Andrew A. Kettel, Jr., Manager
(570) 346-7741
Mount Pocono
Route 611 & Route 940
Mount Pocono, PA
Karyn Gaus Vashlishan, Manager
(570) 839-8732
North Pocono
Main & Academy Streets
Moscow, PA
Deborah A. Wright, Manager
(570) 842-7626
South Scranton
526 Cedar Avenue
Scranton, PA
J. Patrick Dietz, Manager
(570) 343-1151
Other ATM locations
Acorn Market
Route 611
Swiftwater, PA
Convenient Food Mart
Wyoming & Mulberry Streets
Scranton, PA
Marshall's Creek Food Market, Inc.
Milford Road
East Stroudsburg, PA
Meadow Ave. & Hemlock St.
Scranton, PA
Metropolitan Life Insurance Company
Morgan Highway
Clarks Summit, PA
Red Barn Village
Newton Ransom Blvd
Newton, PA
Skytop Lodge
One Skytop
Skytop, PA
www.pennsecurity.com
Financial Highlights
--------------------
In thousands, except
per share data 2002 2001 2000
- ---------------------------------------------------------
Earnings per share $ 3.14 $ 2.62 $ 2.21
Dividends per share $ 1.35 $ 1.25 $ 1.15
Total Capital $ 58,975 $ 54,648 $ 50,067
Total Deposits $ 414,664 $ 406,531 $ 387,439
Total Assets $ 496,956 $ 482,551 $ 467,230
Contents
--------
Customer Services.............................................Inside Front Cover
President's Letter.............................................................2
Board of Directors.............................................................3
Promotions and Appointments....................................................4
Community Events...............................................................7
Form 10-K
Part I, Item 1 Business...................................................9
Item 2 Properties................................................10
Item 3 Legal Proceedings.........................................10
Item 4 Submission of Matters to a Vote of Security Holders.......10
Part II, Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters.............................11
Item 6 Selected Financial Data...................................12
Item 7 Management Discussion and Analysis of Financial Condition
and Results of Operations...............................13
Item 7A Quantitative and Qualitative Disclosures
About Market Risk.......................................22
Item 8 Financial Statements and Supplementary Data...............24
Consolidated Balance Sheets...............................24
Consolidated Statements of Income.........................25
Consolidated Statements of Stockholders' Equity...........26
Consolidated Statements of Cash Flows.....................27
General Notes to Financial Statements.....................28
Independent Auditor's Report..............................38
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.....................39
Part III, Item 10 Directors and Executive Officers of the Registrant........39
Item 11 Executive Compensation....................................39
Item 12 Security Ownership of Certain Beneficial Owners
and Management..........................................39
Item 13 Certain Relationships and Related Transactions............39
Item 14 Controls and Procedures...................................39
Part IV, Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.....................................40
Signatures..................................................................41
Certifications..............................................................42
Index to Exhibits...........................................................43
Company Officers..............................................................44
Company Board Members..........................................Inside Back Cover
Penseco Financial Services Corporation / 2002 Annual Report 1
President's Letter
------------------
Dear Shareholder
I am, once again, pleased to report to you that 2002 was a record year for
Penseco Financial Services Corporation. Earnings per share increased to $3.14
per share for 2002 from $2.62 per share for 2001. Dividends increased to $1.35
per share for 2002 from $1.25 per share for 2001. Total Assets increased to $497
million at year end 2002 from $483 million at year end 2001. Total Deposits
increased to $415 million at year end 2002 from $407 million at year end 2001.
Capital increased to $59 million at year end 2002 from $55 million at year end
2001. These record results came as we celebrated the 100th year of Penn Security
Bank's service to our community.
A number of special events marked our recognition of this centennial year.
Beginning on New Year's Eve 2001, we were the major sponsor of the First Night
Celebration in Scranton. Literally, thousands of people were entertained in our
Central City office lobby as clowns, face painting and storytellers amused
children. Then opera arias and popular songs entertained classical music
enthusiasts and finally "The Magics", a "doo wop" band, entertained until 11:30
PM, followed by a gigantic fireworks display at midnight. Adding to the
excitement was the commencement of the external illumination of our Central City
office.
In March, the Bank entered a float in the St. Patrick's Day parade in
Scranton, displaying our one hundred years of service to the thousands of people
lining the parade route. In May, coinciding with the 100th Anniversary of the
filing of the application to form a bank with the Pennsylvania Department of
Banking, we held a "Customers' Week" in our branches, offering coffee, doughnuts
and other refreshments. In August, the week in which, 100 years prior, the Bank
received its charter to operate, we had another Customers' Week with prizes from
drawings and special treats at the branches.
October 1, exactly 100 years from the first day of business of the Bank, we
hosted a dinner for major shareholders, depositors, directors, executive
officers, borrowers and dignitaries. Silver anniversary commemorative coins and
a 100th Anniversary booklet, detailing the history of the Bank, were given out.
Finally, the year ended with another First Night Celebration on New Year's
Eve 2002 with "The Magics" and "The Irish Balladeers" entertaining in our
Central City office lobby.
While we celebrated our anniversary, we were mindful of what was happening
in the economy and indeed, the world.
The Federal Reserve, having lowered short-term rates eleven times in 2001,
lowered them again in 2002. Prime Rate, at the end of 2002 stood at 4.25%, down
from 9.50% at the beginning of 2001. Long term rates also have declined
dramatically, with 15 year and 30 year home mortgage rates at 5 3/8% and 6%,
respectively. The economy and equity markets are still in a state of shock from
the dramatic decline in equity prices caused by the confluence of the ending of
a market bubble, economic recession, terrorist acts, possible war and certain
tax law changes creating federal deficits and proving to be ineffective in
stimulating the economy. As a result, we have experienced a flood of present and
new customers refinancing loans to take advantage of lower rates. As we
anticipate that current rates, now at 40 year lows, will begin to rise when the
economy begins to accelerate, we have been selling all low-yield, fixed-rate
residential mortgage loans into the secondary market, although we have been
retaining the servicing on these loans. Although providing revenue in the form
of gains on the sale of these loans, it has resulted in a decline in the amount
of loans outstanding in our loan portfolio, which has proved difficult to
replace with shorter term or variable rate loans. We have been working on
several types of new loan products to help fill the gap. In addition, we
continue to evaluate the addition of new fee generating services in the Bank.
In July of 2002, the Federal Government enacted the Sarbanes-Oxley Act as a
result of a number of high profile accounting irregularities and unethical
practices at a number of large corporations. The purpose of this Act was to
restore the confidence of investors that information in quarterly and annual
reports was accurate. This Act, as it applies to our Corporation, will require,
among other things:
- - Certifications by our Chief Executive Officer and Chief Financial Officer
of our financial statements.
- - Reporting of insider trades within two business days of transaction.
- - The Audit Committee is to be made up of "independent" directors.
- - A disclosure whether the Audit Committee has a "financial expert" on it,
and if not, why it does not.
- - Establishment of a "whistleblower" procedure whereby employees can report
irregularities to the Audit Committee, anonymously.
- - The Audit Committee must have the ability to hire separate legal counsel.
- - The Audit firm may not be hired to do non-audit work, other than certain
specific items.
- - Severe penalties for false certifications.
- - A disclosure of whether there is a Company policy regarding ethics and
conflicts of interest, applicable to corporate officers.
The audit program at our organization has always been strong. We have our
own, full-time, internal auditor reporting to the Audit Committee who has a
staff of four full-time assistants. In addition, a firm of Certified Public
Accountants is hired by the Audit Committee to perform an external audit and
certify our financial statements. In addition to that, since we are a banking
company, we are examined every year on an alternate basis by either the
Pennsylvania Department of Banking or the Federal Deposit Insurance Corporation.
Our four member Audit Committee includes
2 Penseco Financial Services Corporation / 2002 Annual Report
three members with substantial education and experience in accounting and
financial management, of which, one is a Chief Executive Officer of a company,
one is a Chief Financial Officer of a company and one is a former Executive
Vice-President of our organization. The Audit Committee, as well as the entire
Board of Directors, are ethical people who will "stand up and blow the whistle"
if anything is wrong. We are not sure whether any of them fit the definition of
"audit committee financial expert", but we think that they have the expertise to
assure that our financial statements are fairly presented.
The Company has had for many years a Code of Ethics applicable to all
employees including the Company's principal Executive Officer and principal
Financial Officer (Controller). The purpose of the Code is to promote honest and
ethical conduct, full and fair disclosures of financial information, compliance
with laws and regulations and accountability for actions.
During the year, the following appointments and promotions were made: Linda
Wolf, Assistant Director of Human Resources, Louis J. Rizzo, Assistant
Vice-President, Brokerage, Mark J. Zakoski, Assistant Vice-President, Brokerage,
John R. Anderson III, Assistant Vice-President, Loan Administration, Carol J.
Grunza, Loan Administration Officer and Robin L. Jenkins, Assistant Branch
Operations Officer. These people are to be congratulated on their achievements.
Also during the year, Gerard P. Vasil, who had been Manager of our Data
Processing Department, retired after 25 years of dedicated service to the Bank.
This year we also lost the valued service of two of our Advisory Board
members due to the deaths of Attorney Patrick Mellody, from our Green Ridge
office, and Mary Citro, from our East Stroudsburg office.
We think that our strong capital position, good earnings, advanced
technology and solid customer base, both in our traditional geographic market
and niche national markets, provide an excellent foundation for our continued
success. In this endeavor you can help us by recommending us to your family,
friends, and business organizations. This is your institution - let it serve
you.
Sincerely yours,
Otto P. Robinson, Jr., President
================================================================================
The bottom of this page of the 2002 Annual Report to Shareholders contains one
picture. A description of the picture follows:
Board of Directors
------------------
Seated left to right:
Edwin J. Butler, Emily S. Perry, Attorney Otto P. Robinson, Jr., President;
Sandra C. Phillips and Russell C. Hazelton
Standing left to right:
P. Frank Kozik, Secretary; Steven L. Weinberger, Robert W. Naismith, Ph.D.,
James B. Nicholas, James G. Keisling, D. William Hume, and Richard E. Grimm,
Executive Vice-President and Treasurer
Penseco Financial Services Corporation / 2002 Annual Report 3
This page of the 2002 Annual Report to Shareholders contains six pictures. A
description of each picture follows, starting at the top, from left to right:
Promotions & Appointments
-------------------------
Linda Wolf
Assistant Director of Human Resources
Louis J. Rizzo
Assistant Vice-President, Brokerage
Mark J. Zakoski
Assistant Vice-President, Brokerage
John R. Anderson III
Assistant Vice-President, Loan Administration
Carol J. Grunza
Loan Administration Officer
Robin L. Jenkins
Assistant Branch Operations Officer
4 Penseco Financial Services Corporation / 2002 Annual Report
This page of the 2002 Annual Report to Shareholders contains one picture.
A Century of Service
--------------------
100 years ago, a new bank was opened in South Scranton known as the South Side
Bank. Today that Bank, now Penn Security Bank & Trust Company, has evolved into
an institution with 9 offices, 19 ATM's and one-half billion dollars in assets.
Our employees throughout our branch offices are privileged to serve the
Scranton, Abington and Pocono communities. As we begin our second century of
service, we remain dedicated to providing outstanding financial services to our
customers and the communities in which they live in.
We remain Strong, Independent, Innovative, Caring and Enduring.
Penseco Financial Services Corporation / 2002 Annual Report 5
Centennial Celebration
----------------------
On October 1, 2002, exactly 100 years from the first day of business of the
Bank, we hosted a dinner for major shareholders, depositors, directors,
executive officers, borrowers and dignitaries.
The remainder of this page of the 2002 Annual Report to Shareholders contains
five pictures from the Centennial dinner.
6 Penseco Financial Services Corporation / 2002 Annual Report
Community Events
----------------
The top of this page of the 2002 Annual Report to Shareholders contains two
pictures.
These above pictures are from the 2002 Annual St. Patrick's Day parade. The
float was created by the employees of Penn Security Bank.
The bottom of this page of the 2002 Annual Report to Shareholders contains one
pictures.
Debbie Wright, Branch Manager of our Moscow Office greets a customer during
Customer Appreciation Week.
Penseco Financial Services Corporation / 2002 Annual Report 7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
Commission File Number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
Scranton, Pennsylvania
Commonwealth of Pennsylvania
I.R.S. Employer Identification Number 23-2939222
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
Telephone number 570-346-7741
Securities Registered Under
Section 12(g) of the Act
Common Stock, Par Value $ .01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
THE AGGREGATE MARKET VALUE OF THE COMPANY'S VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT ON FEBRUARY 14, 2003, BASED ON THE AVERAGE OF THE CLOSING BID
AND ASKED PRICES OF SUCH STOCK ON THAT DATE EQUALS APPROXIMATELY $78,939,000.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF FEBRUARY 14, 2003 EQUALS
2,148,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation's 2002 Annual Report to Stockholders are
incorporated by reference in Parts I and II.
Portions of the Corporation's definitive proxy statement relating to the 2003
Annual Meeting of Stockholders are incorporated by reference in Part III.
8 Penseco Financial Services Corporation / 2002 Annual Report
PENSECO FINANCIAL SERVICES CORPORATION
PART I
------
ITEM 1 Business
GENERAL
PENSECO FINANCIAL SERVICES CORPORATION, (the "Company"), which is headquartered
in Scranton, Pennsylvania, was formed under the general corporation laws of the
State of Pennsylvania in 1997 and is registered as a financial holding company.
The Company became a holding company upon the acquisition of all of the
outstanding shares of Penn Security Bank and Trust Company (the "Bank"), a state
chartered bank, on December 31, 1997. The Company is subject to supervision by
the Federal Reserve Board. The Bank, as a state chartered financial institution,
is subject to supervision by the Federal Deposit Insurance Corporation and the
Pennsylvania Department of Banking.
The Company's principal banking office is located at 150 North Washington
Avenue, Scranton, Pennsylvania, containing trust, investor services, marketing,
audit, credit card, human resources, executive, data processing and central
bookkeeping offices. There are eight additional offices.
Through it's banking subsidiary, the Company generates interest income from
it's outstanding loans receivable and it's 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. The Bank provides a variety of
commercial and retail banking services to business and professional customers,
as well as retail customers, on a personalized basis. The Bank's primary lending
products are real estate, commercial and consumer loans. The Bank also offers
ATM access, credit cards, active investment accounts, trust department services
and other various lending, depository and related financial services. The Bank's
primary deposit products are savings and demand deposit accounts and
certificates of deposit.
The Bank has a third party marketing agreement with Fiserv Investor
Services, Inc. that allows the bank to offer a full range of securities,
brokerage and annuity sales to it's customers. The investor services division is
located in the headquarters building and the services are offered throughout the
entire branch system.
The Company is not dependent upon a single customer, or a few customers,
the loss of one or more of which would have a material adverse effect on it's
operations. The operations and earnings of the Corporation are not materially
affected by seasonal changes or by Federal, state or local environmental laws or
regulations.
COMPETITION
The Bank operates in a competitive environment in which it must share its market
with many local independent banks as well as several banks which are affiliates
or branches of very large regional holding companies. The Bank encounters
competition from diversified financial institutions, ranging in size from small
banks to the nationwide banks operating in it's region, and include commercial
banks, savings and loan associations, credit unions and other lending
institutions.
The principal competitive factors among the Bank's competitors can be
grouped into two categories: pricing and services. In the Bank's primary service
area, interest rates on deposits, especially time deposits, and interest rates
and fees charged to customers on loans are very competitive. From a service
perspective, the Bank competes in areas such as convenience of location, types
of services, service costs and banking hours.
EMPLOYEES
As of February 14, 2003, the Company employed 202 full-time equivalent
employees. The employees of the Company are not represented by any collective
bargaining group. Management of the Company considers relations with its
employees to be good.
SUPERVISION AND REGULATION
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended, and, as such, is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board" or "FRB"). The Company is required to file quarterly reports of
its operations with the FRB.
Penseco Financial Services Corporation / 2002 Annual Report 9
As a financial holding company, the Company is permitted to engage in
banking-related activities as authorized by the Federal Reserve Board, directly
or through subsidiaries or by acquiring companies already established in such
activities subject to the FRB regulations relating to those activities.
The Bank, as a Pennsylvania state-chartered financial institution, is
subject to supervision, regulation and examination by the Commonwealth of
Pennsylvania Department of Banking and by the Federal Deposit Insurance
Corporation (the "FDIC"), which insures the Bank's deposits to the maximum
extent permitted by law.
FORWARD LOOKING INFORMATION
This Form 10-K contains forward-looking informational statements, in addition to
the historical financial information required by the Securities and Exchange
Commission. There are certain risks and uncertainties associated with these
forward-looking statements which could cause actual results to differ materially
from those stated herein. Such differences are discussed in the section entitled
"Management Discussion and Analysis of Financial Condition and Results of
Operations". These forward-looking statements reflect management's analysis as
of this point in time. Readers should review the other documents the Company
periodically files with the Securities and Exchange Commission in order to keep
apprised of any material changes.
ITEM 2 Properties
There are nine offices positioned throughout the greater Northeastern
Pennsylvania region. They are located in the South Scranton, East Scranton,
Green Ridge, and Central City sections of Scranton, the Borough of Moscow, the
Town of Gouldsboro, South Abington Township, the Borough of Mount Pocono and the
Borough of East Stroudsburg at Eagle Valley Corners. Through these offices, the
Company provides a full range of banking and trust services primarily to
Lackawanna, Wayne, Monroe and the surrounding counties. All offices are owned by
the Bank or through a wholly owned subsidiary of the Bank, Penseco Realty, Inc.,
with the exception of the Mount Pocono Office, which is owned by the Bank but is
located on land occupied under a long-term lease.
The principal office, located at the corner of North Washington Avenue and
Spruce Street in the "Central City" of Scranton's business district, houses the
operations, trust, investor services, marketing, credit card and audit
departments as well as the Company's executive offices. Several remote ATM
locations are leased by the Bank, which are located throughout Northeastern
Pennsylvania. All branches and ATM locations are equipped with closed circuit
television monitoring.
ITEM 3 Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of the Company, as to which the Company or
subsidiary is a party or of which any of their property is subject.
ITEM 4 Submission of Matters to a Vote of Security Holders
No matter was submitted by the Company to its shareholders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
10 Penseco Financial Services Corporation / 2002 Annual Report
PART II
-------
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters
This Annual Report is the Company's annual disclosure statement as required
under Section 13 or 15(d) of the Securities Exchange Act of 1934. Questions may
be directed to any branch location of the Company or by contacting the
Controller's office at:
Patrick Scanlon, Controller
Penseco Financial Services Corporation
150 North Washington Avenue
Scranton, Pennsylvania 18503-1848
1-800-327-0394
The Company has had for many years a Code of Ethics applicable to all employees
including the Company's principal Executive Officer and principal Financial
Officer (Controller). The purpose of the Code is to promote honest and ethical
conduct, full and fair disclosures of financial information, compliance with
laws and regulations and accountability for actions. Copies of the Code may be
obtained, at no charge, by contacting the above.
Management of the Company is aware of the following securities dealers who make
a market in the Company stock:
Baird, Patrick & Company, Inc. Knight Securities, LP
Ferris, Baker, Watts, Inc. Monroe Securities, Inc.
F.J. Morrissey & Company E.E. Powell & Company
Boenning & Scattergood, Inc. Ryan, Beck & Company, Inc.
Hill Thompson Magid, LP Schwab Capital Markets, LP
The Company's capital stock is traded on the "Over-the-Counter" BULLETIN BOARD
under the symbol "PFNS". The following table sets forth the price range together
with dividends paid for each of the past two years. These quotations do not
necessarily reflect the value of actual transactions.
Dividends Paid
2002 High Low Per Share
- ---------------------------------------------
First Quarter $ 30 $ 27 $ .30
Second Quarter 34 29 .30
Third Quarter 33 31 .30
Fourth Quarter 35 31 .45
------
$ 1.35
======
Dividends Paid
2001 High Low Per Share
- ---------------------------------------------
First Quarter $ 25 $ 20 $ .25
Second Quarter 25 22 .25
Third Quarter 30 23 .25
Fourth Quarter 32 27 .50
------
$ 1.25
======
DIVIDENDS PAID (in millions) YEAR
- -------------------------------------------
$ 2,899 2002
2,685 2001
2,470 2000
2,363 1999
2,255 1998
As of February 14 , 2003 there were approximately 988 stockholders of the
Company based on the number of holders of record.
Reference should be made to the information about the Company's dividend policy
and regulatory guidelines on pages 21 and 35.
TRANSFER AGENT
Penn Security Bank and Trust Company, Trust Department, 150 North Washington
Avenue, Scranton, Pennsylvania 18503-1848. Stockholders' questions should be
directed to the Bank's Trust Department at 570-346-7741.
QUARTERLY FINANCIAL DATA (unaudited)
(in thousands, except per share amounts)
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------
Net Interest Income $ 5,173 $ 5,100 $ 4,927 $ 4,688
Provision for Loan Losses 179 240 152 242
Other Income 2,684 1,978 3,292 3,078
Other Expenses 5,413 4,812 5,596 5,277
Net Income 1,689 1,567 1,839 1,658
Earnings Per Share $ .79 $ .73 $ .85 $ .77
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------
Net Interest Income $ 4,461 $ 4,795 $ 5,124 $ 4,956
Provision for Loan Losses 150 291 284 229
Other Income 2,680 1,944 2,624 1,938
Other Expenses 5,629 4,631 5,054 4,763
Net Income 1,088 1,396 1,800 1,338
Earnings Per Share $ .51 $ .65 $ .84 $ .62
Penseco Financial Services Corporation / 2002 Annual Report 11
ITEM 6 Selected Financial Data
(in thousands, except per share data)
RESULTS OF OPERATIONS:
2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Interest Income $ 27,899 $ 31,860 $ 31,043 $ 28,320 $ 29,975
Interest Expense 8,011 12,524 13,698 11,213 13,179
- -----------------------------------------------------------------------------------------------
Net Interest Income 19,888 19,336 17,345 17,107 16,796
Provision for Loan Losses 813 954 233 89 595
- -----------------------------------------------------------------------------------------------
Net Interest Income
after Provision for
Loan Losses 19,075 18,382 17,112 17,018 16,201
Other Income 11,032 9,186 8,233 7,746 6,838
Other Expenses 21,098 20,077 19,306 18,312 16,986
Income Taxes 2,256 1,869 1,296 1,781 1,772
- -----------------------------------------------------------------------------------------------
Net Income $ 6,753 $ 5,622 $ 4,743 $ 4,671 $ 4,281
===============================================================================================
BALANCE SHEET DATA:
Assets $ 496,956 $ 482,551 $ 467,230 $ 428,614 $ 436,099
Investment Securities $ 139,132 $ 128,623 $ 125,808 $ 106,511 $ 118,762
Net Loans $ 285,509 $ 320,208 $ 304,641 $ 278,577 $ 280,389
Deposits $ 414,664 $ 406,531 $ 387,439 $ 367,332 $ 377,526
Stockholders' Equity $ 58,975 $ 54,648 $ 50,067 $ 45,743 $ 44,961
PER SHARE DATA:
Earnings per Share $ 3.14 $ 2.62 $ 2.21 $ 2.17 $ 1.99
Dividends per Share $ 1.35 $ 1.25 $ 1.15 $ 1.10 $ 1.05
Book Value per Share $ 27.46 $ 25.44 $ 23.31 $ 21.30 $ 20.93
Common Shares Outstanding 2,148,000 2,148,000 2,148,000 2,148,000 2,148,000
FINANCIAL RATIOS:
Net Interest Margin 4.21% 4.30% 4.08% 4.22% 4.12%
Return on Average Assets 1.37% 1.18% 1.06% 1.08% .99%
Return on Average Equity 11.79% 10.57% 9.96% 10.12% 9.54%
Average Equity to Average Assets 11.58% 11.19% 10.60% 10.70% 10.38%
Dividend Payout Ratio 42.99% 47.71% 52.04% 50.69% 52.76%
12 Penseco Financial Services Corporation / 2002 Annual Report
ITEM 7 Management Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes and trends related to the
financial condition of the Company and the results of its operations. This
discussion and analysis should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. All information is
presented in thousands of dollars, except as indicated.
SUMMARY
Net earnings for 2002 totalled $6,753, an increase of 20.1% from the $5,622
earned in 2001, which in turn was an increase of 18.5% from the $4,743 earned in
2000. Net earnings per share were $3.14 in 2002, compared with $2.62 in 2001 and
$2.21 in 2000. Net earnings for 2002 increased from 2001 results due to an
increase in the net interest income, fee income, mainly from the sale of
non-portfolio mortgages and the sale of U.S. Agency securities, offset by an
increase in operating costs, primarily salaries and employee benefits and
applicable income tax expense. Net earnings for 2001 increased from 2000 results
due to an increase in the net interest margin. Also, fee income increased,
offset by increases in operating costs and applicable income tax expense.
NET INCOME (in millions) YEAR
- -------------------------------------------
$ 6,753 2002
5,622 2001
4,743 2000
4,671 1999
4,281 1998
The Company's return on average assets was 1.37% in 2002 compared to 1.18% in
2001 and 1.06% in 2000. Return on average equity was 11.79%, 10.57% and 9.96% in
2002, 2001 and 2000, respectively.
RETURN ON AVERAGE ASSETS YEAR
- -------------------------------------------
1.37% 2002
1.18% 2001
1.06% 2000
1.08% 1999
.99% 1998
RETURN ON AVERAGE EQUITY YEAR
- -------------------------------------------
11.79% 2002
10.57% 2001
9.96% 2000
10.12% 1999
9.54% 1998
Penseco Financial Services Corporation / 2002 Annual Report 13
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 $19.9 million in 2002, compared with $19.3 million
in 2001, an increase of 3.1%. The increase in net interest income in 2002
resulted from an increase in interest-earning assets. Also, the Company had
increases in its deposit transaction accounts, which have the lowest carrying
costs.
Net interest income was $19.3 million in 2001, compared with $17.3 million
in 2000, an increase of 11.6%. The increase in net interest income in 2001
resulted from increases in loan income, increases in securities income, along
with lower funding costs mainly due to the Federal Reserve Bank reducing short
term interest rates eleven times during the year.
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, 2002 was 4.2% compared with
4.3% for the year ended December 31, 2001, and 4.1% for the year ended December
31, 2000.
Interest income in 2002 totalled $27.9 million, compared to $31.9 million
in 2001, decreasing 12.5% from the prior year. The yield on average
interest-earning assets was 5.9% in 2002, compared to 7.1% in 2001. Average
interest-earning assets increased in 2002 to $472.8 million from $450.0 million
in 2001. Average loans, which are the Company's highest yielding earning assets,
decreased $9.3 million in 2002, while investment securities increased on average
by $13.7 million. Average loans represented 67.0% of 2002 average
interest-earning assets, compared to 72.4% in 2001.
Interest expense also decreased in 2002 to $8.0 million from $12.5 million
in 2001, a decrease of $4.5 million or 36.0%. This decrease resulted from the
Federal Reserve cutting short term interest rates in late 2001 due to the
economy showing anemic growth. The average rate paid on interest-bearing
liabilities during 2002 was 2.2%, compared to 3.5% a decrease of 37.1% from
2001.
Interest income in 2001 totalled $31.9 million, compared to $31.0 million
in 2000, increasing 2.9% from the prior year.
The yield on average interest-earning assets was 7.1% in 2001, compared to
7.3% in 2000. Average interest-earning assets increased in 2001 to $450.0
million from $424.9 million in 2000. Average loans, which are the Company's
highest yielding earning assets, increased $28.5 million in 2001, while
investment securities increased on average by $7.7 million. Average loans
represented 72.4% of 2001 average interest-earning assets, compared to 70.0% in
2000.
Interest expense also decreased in 2001 to $12.5 million from $13.7 million
in 2000, a decrease of $1.2 million or 8.8%. This decrease resulted from the
Federal Reserve cutting short term interest rates due to the economy slipping
into a recession. The average rate paid on interest-bearing liabilities during
2001 was 3.5%, compared to 4.0% a decrease of 12.5% from 2000.
The most significant impact on net interest income between periods is
derived from the interaction of changes in the volume of and rates earned or
paid on interest-earning assets and interest-bearing liabilities. The volume of
earning dollars in loans and investments, compared to the volume of
interest-bearing liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
NET INTEREST INCOME (in millions) YEAR
- ---------------------------------------------
$ 19,888 2002
19,336 2001
17,345 2000
17,107 1999
16,796 1998
14 Penseco Financial Services Corporation / 2002 Annual Report
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 2002, 2001 and
2000.
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities:
Available-for-sale:
U.S. Treasury securities $ 36,550 $ 1,575 4.31% $ 40,596 $ 2,262 5.57% $ 60,684 $ 3,465 5.71%
U.S. Agency obligations 57,544 3,267 5.68 47,802 3,130 6.55 20,011 1,338 6.69
States & political subdivisions 8,962 439 7.42 6,725 245 5.52 15,522 572 5.58
Federal Home Loan Bank stock 1,960 69 3.52 1,881 122 6.49 1,798 127 7.06
Other 391 10 2.56 211 6 2.84 20 1 5.00
Held-to-maturity:
U.S. Agency obligations 1,862 58 3.11 3,192 185 5.80 4,407 259 5.88
States & political subdivisions 29,715 1,641 8.37 22,852 1,189 7.88 13,122 735 8.49
Loans, net of unearned income:
Real estate mortgages 245,016 16,412 6.70 250,000 19,148 7.66 227,819 18,249 8.01
Commercial 32,168 1,751 5.44 27,885 2,117 7.59 19,613 1,845 9.41
Consumer and other 39,405 2,390 6.07 47,961 3,418 7.13 49,930 3,717 7.44
Federal funds sold 12,995 189 1.45 181 6 3.31 6,729 414 6.15
Interest on balances with banks 6,277 98 1.56 651 32 4.92 5,253 321 6.11
- ------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 472,845 $ 27,899 5.90% 449,937 $ 31,860 7.08% 424,908 $ 31,043 7.31%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 8,234 8,310 11,514
Bank premises and equipment 10,411 11,218 12,104
Accrued interest receivable 3,432 3,831 2,628
Other assets 3,083 5,063 1,125
Less: Allowance for loan losses 3,662 3,185 3,004
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 494,343 $ 475,174 $ 449,275
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 26,204 $ 159 .61% $ 25,033 $ 240 .96% $ 23,380 $ 250 1.07%
Savings 71,470 700 .98 64,513 965 1.50 65,927 983 1.49
Money markets 91,561 1,329 1.45 86,154 2,616 3.04 75,959 2,927 3.85
Time - Over $100 37,741 1,398 3.70 32,998 1,779 5.39 38,407 2,262 5.89
Time - Other 116,659 4,139 3.55 114,943 5,784 5.03 115,345 6,236 5.41
Federal funds purchased - - - 3 - - 22 1 4.55
Repurchase agreements 20,278 276 1.36 17,366 570 3.28 15,101 786 5.20
Short-term borrowings 562 10 1.78 15,520 570 3.67 4,522 253 5.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities/
Total Interest Expense 364,475 $ 8,011 2.20% 356,530 $ 12,524 3.51% 338,663 $ 13,698 4.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Demand - Non-interest bearing 69,482 61,823 61,162
All other liabilities 3,124 3,656 1,813
Stockholders' equity 57,262 53,165 47,637
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 494,343 $ 475,174 $ 449,275
====================================================================================================================================
Interest Spread 3.70% 3.57% 3.27%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 19,888 $ 19,336 $ 17,345
====================================================================================================================================
Financial Ratios
Net interest margin 4.21% 4.30% 4.08%
Return on average assets 1.37% 1.18% 1.06%
Return on average equity 11.79% 10.57% 9.96%
Average equity to average assets 11.58% 11.19% 10.60%
Dividend payout ratio 42.99% 47.71% 52.04%
Penseco Financial Services Corporation / 2002 Annual Report 15
DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE
Dollar Change
Amount Change in Change in in Rate-
2002 compared to 2001 of Change Volume Rate Volume
----------------------------------------------------------------------------------
EARNING Investment securities:
ASSETS Available-for-sale:
U.S. Treasury securities $ (687) $ (225) $ (512) $ 50
U.S. Agency obligations 137 638 (416) (85)
States & political subdivisions 194 81 85 28
Equity securities (49) 10 (57) (2)
Held-to-maturity:
U.S. Agency obligations (127) (77) (86) 36
States & political subdivisions 452 357 69 26
Loans, net of unearned income:
Real estate mortgages (2,736) (382) (2,400) 46
Commercial (366) 325 (599) (92)
Consumer and other (1,028) (610) (508) 90
Federal funds sold 183 424 (3) (238)
Interest bearing balances with banks 66 277 (22) (189)
----------------------------------------------------------------------------------
Total Interest Income (3,961) 818 (4,449) (330)
----------------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand - Interest bearing (81) 11 (88) (4)
LIABILITIES Savings (265) 104 (335) (34)
Money markets (1,287) 163 (1,353) (97)
Time - Over $100 (381) 256 (558) (79)
Time - Other (1,645) 86 (1,701) (30)
Federal funds purchased - - - -
Repurchase agreements (294) 96 (332) (58)
Short-term borrowings (560) (549) (293) 282
----------------------------------------------------------------------------------
Total Interest Expense (4,513) 167 (4,660) (20)
----------------------------------------------------------------------------------
Net Interest Income $ 552 $ 651 $ 211 $ (310)
==================================================================================
Dollar Change
Amount Change in Change in in Rate-
2001 compared to 2000 of Change Volume Rate Volume
----------------------------------------------------------------------------------
EARNING Investment securities:
ASSETS Available-for-sale:
U.S. Treasury securities $ (1,203) $ (1,147) $ (84) $ 28
U.S. Agency obligations 1,792 1,859 (28) (39)
States & political subdivisions (327) (324) (6) 3
Equity securities - 19 (17) (2)
Held-to-maturity:
U.S. Agency obligations (74) (71) (4) 1
States & political subdivisions 454 545 (52) 39)
Loans, net of unearned income:
Real estate mortgages 899 1,775 (798) (78)
Commercial 272 778 (356) (150)
Consumer and other (299) (146) (154) 1
Federal funds sold (408) (403) (191) 186
Interest bearing balances with banks (289) (281) (63) 55
----------------------------------------------------------------------------------
Total Interest Income 817 2,604 (1,753) (34)
----------------------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand - Interest bearing (10) 18 (26) (2)
LIABILITIES Savings (18) (21) 3 -
Money markets (311) 393 (615) (89)
Time - Over $100 (483) (318) (192) 27
Time - Other (452) (22) (438) 8
Federal funds purchased (1) (1) - -
Repurchase agreements (216) 118 (290) (44)
Short-term borrowings 317 615 (87) (211)
----------------------------------------------------------------------------------
Total Interest Expense (1,174) 782 (1,645) (311)
----------------------------------------------------------------------------------
Net Interest Income $ 1,991 $ 1,822 $ (108) $ 277
==================================================================================
16 Penseco Financial Services Corporation / 2002 Annual Report
PROVISION FOR LOAN LOSSES
The provision for loan losses represents management's determination of the
amount necessary to bring the allowance for loan losses to a level that
management considers adequate to reflect the risk of future losses inherent in
the Company's loan portfolio. The 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, 2002 2001 2000
- ----------------------------------------------------------------
Trust department income $ 1,266 $ 1,233 $ 1,329
Service charges on
deposit accounts 1,123 1,126 718
Merchant transaction income 5,519 5,331 5,354
Other fee income 1,562 1,291 975
Other operating income 553 231 211
Realized gains (losses) on
securities, net 1,009 (26) (354)
- ----------------------------------------------------------------
Total Other Income $ 11,032 $ 9,186 $ 8,233
================================================================
Total other income increased $1,846 or 20.1% during 2002 to $11,032 from $9,186
for 2001. Components of this increase include $1,009 from the gain on the sale
of U.S. Agency securities, merchant transaction income of $188 along with an
increase in fee income of $158 due to our brokerage division and a gain on the
sale of low-yield, fixed-rate non-portfolio mortgage loans of $444.
Total other income increased $953 or 11.6% during 2001 to $9,186 from
$8,233 for 2000. Components of this increase include service charges on deposit
accounts of $408 or 56.8% mainly due to the ongoing implementation of the
recommendations of a cost/revenue study held in the first quarter of 2001, an
increase in other fee income of $316 or 32.4% from the same period last year, of
which $199 was due to our brokerage division. The loss on the sale of securities
in 2001 was $26 compared to a $354 loss in 2000.
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, 2002 2001 2000
- ----------------------------------------------------------------
Salaries and employee
benefits $ 9,048 $ 8,180 $ 7,951
Occupancy expenses, net 1,384 1,416 1,387
Furniture and equipment
expenses 1,208 1,245 1,189
Merchant transaction
expenses 4,731 4,636 4,784
Other operating expenses 4,727 4,600 3,995
- ----------------------------------------------------------------
Total Other Expenses $ 21,098 $ 20,077 $ 19,306
================================================================
Other expenses increased $1,021 or 5.1% for 2002 to $21,098 from $20,077 for
2001. Salaries and employee benefits increased $868 or 10.6% to $9,048 for 2002
from $8,180 for 2001 partly due to staff additions, replacements, merit
increases and pension costs. Merchant transaction expenses increased $95, the
result of additional volume. Also, other operating expenses increased $127 or
2.8%, mainly due to increased expenses in advertising and other centennial year
expenses.
Other expenses increased $771 or 4.0% for 2001 to $20,077 from $19,306 for
2000. Salaries and employee benefits increased $229 or 2.9% to $8,180 for 2001
from $7,951 for 2000. Also, other operating expenses increased $605 or 15.1% to
$4,600 from $3,995 due to increases in advertising costs associated with our
loan growth and non-recurring insurance costs of $117 and $180 in outside
consulting services.
INCOME TAXES
Federal income tax expense increased $387 or 20.7% to $2,256 in 2002 compared to
$1,869 in 2001, due to increased operating income.
Federal income tax expense increased $573 or 44.2% to $1,869 in 2001
compared to $1,296 in 2000. This was largely the result of increased net income
from normal business operations
The Company's effective income tax rate for 2002 was 25.0%, the same as
2001.
The effective income tax rate for 2001 was 25.0% compared to 21.5% for
2000. This increase resulted from larger tax free income recorded during 2000.
For further discussion pertaining to Federal income taxes, see Note 13 to
the Consolidated Financial Statements.
FINANCIAL CONDITION
Total assets increased $14.4 million or 3.0% during 2002 to $497.0 million at
December 31, 2002 compared to $482.6 million at December 31, 2001. For the year
ended December 31, 2001 total assets increased $15.4 million to $482.6 million
or a 3.3% increase over $467.2 million at December 31, 2000.
ASSETS (in millions) YEAR
- -------------------------------------
$ 496,956 2002
482,551 2001
467,230 2000
428,614 1999
436,099 1998
INVESTMENT PORTFOLIO
The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.
The following table presents the carrying value, by security type, for the
Company's investment portfolio.
December 31, 2002 2001 2000
- -----------------------------------------------------------------
U.S.Treasury securities $ 36,456 $ 36,069 $ 54,662
U.S. Agency obligations 52,026 60,520 39,654
States & political subdivisions 49,294 29,741 29,624
Equity securities 1,356 2,293 1,868
- -----------------------------------------------------------------
Total Investment Securities $ 139,132 $ 128,623 $ 125,808
=================================================================
Penseco Financial Services Corporation / 2002 Annual Report 17
LOAN PORTFOLIO
Details regarding the Company's loan portfolio for the past five years are as
follows:
December 31, 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------
Real estate - construction
and land development $ 5,031 $ 9,124 $ 9,321 $ 3,241 $ 4,152
Real estate mortgages 217,883 246,486 234,212 216,574 221,879
Commercial 30,077 30,001 21,566 18,995 18,169
Credit card and related plans 2,320 2,377 2,267 2,203 2,286
Installment 27,306 30,142 30,290 28,693 28,538
Obligations of states &
political subdivisions 6,239 5,678 10,085 11,821 8,195
- --------------------------------------------------------------------------------------------
Loans, net of unearned income 288,856 323,808 307,741 281,527 283,219
Less: Allowance for loan losses 3,347 3,600 3,100 2,950 2,830
- --------------------------------------------------------------------------------------------
Loans, net $ 285,509 $ 320,208 $ 304,641 $ 278,577 $ 280,389
============================================================================================
LOANS
Total net loans decreased $34.7 million to $285.5 million at December 31, 2002
from $320.2 million at December 31, 2001, a decrease of 10.8%. The decrease is
due to management's reluctance to carry low-yield, fixed-rate mortgages, while
concentrating on increasing variable rate loans.
Total net loans increased $15.6 million to $320.2 million at December 31,
2001 from $304.6 million at December 31, 2000, an increase of 5.1%. The increase
was due to growth in the Company's real estate and commercial loan portfolios.
NET LOANS (in millions) YEAR
- -------------------------------------------
$ 285,509 2002
320,208 2001
304,641 2000
278,577 1999
280,389 1998
LOAN QUALITY
The lending activities of the Company are guided by the comprehensive lending
policy established by the Board of Directors. Loans must meet criteria which
include consideration of the character, capacity and capital of the borrower,
collateral provided for the loan, and prevailing economic conditions.
Regardless of credit standards, there is risk of loss inherent in every
loan portfolio. The allowance for loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of the loans.
The evaluations take into consideration such factors as change in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, industry experience, collateral value and current economic
conditions that may affect the borrower's ability to pay. Management believes
that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgment of information available to them at the time of their examination.
The allowance for loan losses is increased by periodic charges against
earnings as a provision for loan losses, and decreased periodically by
charge-offs of loans (or parts of loans) management has determined to be
uncollectible, net of actual recoveries on loans previously charged-off.
18 Penseco Financial Services Corporation / 2002 Annual Report
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans past due 90 days or
more and still accruing interest and other real estate owned. The following
table sets forth information regarding non-performing assets as of the dates
indicated:
December 31, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Non-accrual loans $ 2,245 $ 1,917 $ 1,210 $ 836 $ 929
Loans past due 90 days or more and accruing:
Guaranteed student loans 394 304 313 476 348
Credit card and home equity loans - 22 23 - 27
- ---------------------------------------------------------------------------------------------
Total non-performing loans 2,639 2,243 1,546 1,312 1,304
Other real estate owned 59 143 201 33 111
- ---------------------------------------------------------------------------------------------
Total non-performing assets $ 2,698 $ 2,386 $ 1,747 $ 1,345 $ 1,415
=============================================================================================
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 $2,245, $1,917 and $1,210 at December 31, 2002, 2001 and 2000,
respectively. If interest on those loans had been accrued, such income would
have been $171, $152 and $138 for 2002, 2001 and 2000, respectively. Interest
income on those loans, which is recorded only when received, amounted to $77,
$86 and $86 for 2002, 2001 and 2000, respectively. There are no commitments to
lend additional funds to individuals whose loans are on non-accrual status.
The management process for evaluating the adequacy of the allowance for
loan losses includes reviewing each month's loan committee reports which list
all loans that do not meet certain internally developed criteria as to
collateral adequacy, payment performance, economic conditions and overall credit
risk. These reports also address the current status and actions in process on
each listed loan. From this information, adjustments are made to the allowance
for loan losses. Such adjustments include both specific loss allocation amounts
and general provisions by loan category based on present and past collection
experience, nature and volume of the loan portfolio, overall portfolio quality,
and current economic conditions that may affect the borrower's ability to pay.
As of December 31, 2002, there are no significant loans as to which management
has serious doubt about their collectibility.
At December 31, 2002, 2001 and 2000, the Company did not have any loans
specifically classified as impaired.
Most of the Company's lending activity is with customers located in the
Company's geographic market area and repayment thereof is affected by economic
conditions in this market area.
LOAN LOSS EXPERIENCE
The following tables present the Company's loan loss experience during the
periods indicated:
Years Ended December 31, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------
Balance at beginning of year $ 3,600 3,100 $ 2,950 $ 2,830 $ 2,600
Charge-offs:
Real estate mortgages 91 38 37 82 69
Commercial and all others 944 389 51 13 252
Credit card and related plans 44 37 27 65 37
Installment loans 22 19 24 26 25
- ---------------------------------------------------------------------------------------
Total charge-offs 1,101 483 139 186 383
- ---------------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 31 20 30 - 1
Commercial and all others - - - 195 -
Credit card and related plans 1 1 9 10 9
Installment loans 3 8 17 12 8
- ---------------------------------------------------------------------------------------
Total recoveries 35 29 56 217 18
- ---------------------------------------------------------------------------------------
Net charge-offs (recoveries) 1,066 454 83 (31) 365
- ---------------------------------------------------------------------------------------
Provision charged to operations 813 954 233 89 595
- ---------------------------------------------------------------------------------------
Balance at End of Year $ 3,347 $ 3,600 $ 3,100 $ 2,950 $ 2,830
=======================================================================================
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.34% 0.14% 0.03% (0.01)% 0.13%
=======================================================================================
Penseco Financial Services Corporation / 2002 Annual Report 19
The allowance for loan losses is allocated as follows:
December 31, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Amount %1 Amount %1 Amount %1 Amount %1 Amount %1
- ---------------------------------------------------------------------------------------------------------------
Real estate mortgages $ 1,600 77% $ 1,700 79% $ 1,500 79% $ 1,500 78% $ 1,550 80%
Commercial
and all others 1,222 13 1,375 11 1,100 10 950 10 830 9
Credit card and
related plans 175 1 175 1 150 1 150 1 150 1
Personal installment loans 350 9 350 9 350 10 350 11 300 10
- ---------------------------------------------------------------------------------------------------------------
Total $ 3,347 100% 3,600 100% $ 3,100 100% $ 2,950 100% $ 2,830 100%
===============================================================================================================
Note: 1 - Percent of loans in each category to total loans
DEPOSITS
The primary source of funds to support the Company's operations is its deposit
base. Company deposits increased $8.2 million to $414.7 million at December 31,
2002 from $406.5 million at December 31, 2001, an increase of 2.0% due to
increases in DDA and savings deposits. Company deposits increased $19.1 million
to $406.5 million at December 31, 2001 from $387.4 million at December 31, 2000,
an increase of 4.9% due to increases in DDA, savings and time deposits.
The maturities of time deposits of $100,000 or more are as follows:
Three months or less $ 12,226
Over three months through six months 5,495
Over six months through twelve months 5,672
Over twelve months 10,293
---------
Total $ 33,686
=========
DEPOSITS (in millions) YEAR
- --------------------------------------
$ 414,664 2002
406,531 2001
387,439 2000
367,332 1999
377,526 1998
ASSET/LIABILITY MANAGEMENT
The Company's policy is to match its level of rate-sensitive assets and
rate-sensitive liabilities within a limited range, thereby reducing its exposure
to interest rate fluctuations. While no single measure can completely identify
the impact of changes in interest rates on net interest income, one gauge of
interest rate-sensitivity is to measure, over a variety of time periods, the
differences in the amounts of the Company's rate-sensitive assets and
rate-sensitive liabilities. These differences, or "gaps", provide an indication
of the extent to which net interest income may be affected by future changes in
interest rates. A positive gap exists when rate-sensitive assets exceed
rate-sensitive liabilities and indicates that a greater volume of assets than
liabilities will reprice during a given period. This mismatch may enhance
earnings in a rising interest rate environment and may inhibit earnings when
interest rates decline. Conversely, when rate-sensitive liabilities exceed
rate-sensitive assets, referred to as a negative gap, it indicates that a
greater volume of liabilities than assets may reprice during the period. In this
case, a rising interest rate environment may inhibit earnings and declining
interest rates may enhance earnings. However, because interest rates for
different asset and liability products offered by financial institutions respond
differently, the gap is only a general indicator of interest rate sensitivity.
LIQUIDITY
The objective of liquidity management is to maintain a balance between sources
and uses of funds in such a way that the cash requirements of customers for
loans and deposit withdrawals are met in the most economical manner. Management
monitors its liquidity position continuously in relation to trends of loans and
deposits for short-term as well as long-term requirements. Liquid assets are
monitored on a daily basis to assure maximum utilization. Management also
manages its liquidity requirements by maintaining an adequate level of readily
marketable assets and access to short-term funding sources. Management does not
foresee any adverse trends in liquidity.
20 Penseco Financial Services Corporation / 2002 Annual Report
LIQUIDITY (continued)
The Company remains in a highly liquid condition both in the short and long
term. Sources of liquidity include the Company's U.S. Treasury and U.S. Agency
bond portfolios, additional deposits, earnings, overnight loans to and from
other companies (Federal Funds) and lines of credit at the Federal Reserve Bank
and the Federal Home Loan Bank. The Company is not a party to any commitments,
guarantees or obligations that could materially affect its liquidity.
Subsequent to the Balance Sheet Date, the Bank purchased a FHLMC (Freddie
Mac) pool of new twenty year residential mortgages, with a 5 1/2% coupon and a
face value of $100,000. The Bank financed the purchase by borrowing $100,000
from the Federal Home Loan Bank with maturities ranging from 5 to 20 years.
Calculations indicate a 100 basis point spread in the 1st year declining to 81
basis points after the 10th year and every year thereafter. These calculated
spreads may vary depending on various interest rate scenarios which affect
prepayment speeds.
The investment resulted in increases in Total Assets and Total Liabilities
of approximately 20.7% and 22.8% from December 31, 2002, respectively.
The Bank has estimated that the transaction will result in an increase in
net interest income of approximately $800 for the current fiscal year.
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, 2002 and 2001 are as follows:
2002 2001
- ---------------------------------------------------
Commitments to extend credit:
Fixed rate $ 12,273 $ 17,490
Variable rate $ 66,257 $ 45,033
Standby letters of credit $ 10,586 $ 3,311
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
RELATED PARTIES
The Company does not have any material transactions involving related persons or
entities, other than traditional banking transactions, which are made on the
same terms and conditions as those prevailing at the time for comparable
transactions with unrelated parties. During 2002, the Bank issued a standby
letter of credit for the account of a related party in the amount of $6,353.
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 17.99% at December 31,
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
criteria which the FDIC uses in determining the lowest insurance rate for
deposit insurance. The Company's risk-based capital ratio is more than double
the 8.00% limit which determines whether a company is "adequately capitalized".
Under these rules, the Company could significantly increase its assets and still
comply with these capital requirements without the necessity of increasing its
equity capital.
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.
STOCKHOLDERS' EQUITY (in millions) YEAR
- ----------------------------------------------
$ 58,975 2002
54,648 2001
50,067 2000
45,743 1999
44,961 1998
Penseco Financial Services Corporation / 2002 Annual Report 21
ITEM 7A 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 instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the inherent risk while at the same time
maximizing income. Management realizes certain risks are inherent and that the
goal is to identify and minimize the risks. Tools used by management include the
standard GAP report and an interest rate shock simulation report. The Company
has no market risk sensitive instruments held for trading purposes. It appears
the Company's market risk is reasonable at this time.
The following table provides information about the Company's market rate
sensitive instruments used for purposes other than trading that are sensitive to
changes in interest rates. For loans, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of residential and home equity loans and mortgage-backed
securities. For core deposits (e.g., DDA, interest checking, savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates based on
the Company's historical experience, management's judgment, and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.
22 Penseco Financial Services Corporation / 2002 Annual Report
MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2001
Non-Rate
2003 2004 2005 2006 2007 Thereafter Sensitive Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed interest rate securities:
U.S. Treasury securities $ 15,223 $ 15,659 $ 5,574 $ - $ - $ - $ - $ 36,456 $ 36,456
Yield 3.64% 4.00% 6.79% - - - - 4.28%
U.S. Agency obligations 10,266 23,708 16,632 - - - - 50,606 50,606
Yield 6.98% 5.04% 6.78% - - - - 6.01%
States & political subdivisions - - - - - 49,294 - 49,294 51,243
Yield - - - - - 7.55% - 7.55%
Variable interest rate securities:
U.S. Agency obligations 660 660 100 - - - - 1,420 1,408
Yield 3.11% 3.11% 3.11% - - - - 3.11%
Federal Home Loan Bank stock - - - - - 946 - 946 946
Yield - - - - - 3.25% - 3.25%
Other - - - - - 410 - 410 410
Yield - - - - - 4.02% - 4.02%
Fixed interest rate loans:
Real estate mortgages 6,669 6,846 6,672 7,114 6,855 61,673 - 95,829 97,069
Yield 7.35% 7.38% 7.41% 7.24% 7.40% 7.22% - 7.27%
Consumer and other 1,592 1,405 1,271 1,136 988 1,115 - 7,507 7,514
Yield 6.95% 6.75% 6.42% 6.03% 5.64% 8.23% - 6.70%
Variable interest rate loans:
Real estate mortgages 19,635 14,192 12,666 10,892 10,804 58,896 - 127,085 128,069
Yield 4.64% 4.79% 4.96% 4.89% 4.89% 5.35% - 5.06%
Commercial 30,077 - - - - - - 30,077 30,077
Yield 5.44% - - - - - - 5.44%
Consumer and other 11,252 4,601 4,246 3,849 3,982 428 - 28,358 28,593
Yield 5.37% 5.69% 5.06% 4.16% 4.16% 5.74% - 5.05%
Less: Allowance for loan losses 802 313 288 266 262 1,416 - 3,347
Interest bearing deposits with banks 10,424 - - - - - - 10,424 10,424
Yield 1.08% - - - - - - 1.08%
Federal funds sold 33,075 - - - - - - 33,075 33,075
Yield 1.13% - - - - - - 1.13%
Cash and due from banks - - - - - - 11,120 11,120 11,120
Other assets - - - - - - 17,696 17,696
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 138,071 $ 66,758 $ 46,873 $ 22,725 $ 22,367 $ 171,346 $ 28,816 $ 496,956 $ 487,010
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Variable interest rate deposits:
Demand - Interest bearing $ - $ 31,363 $ - $ - $ - $ - $ - $ 31,363 $ 31,363
Yield - .46% - - - - - .46%
Savings - 73,786 - - - - - 73,786 73,786
Yield - .73% - - - - - .73%
Money markets 89,462 - - - - - - 89,462 89,462
Yield 1.06% - - - - - - 1.06%
Time - Other 11,255 - - - - - - 11,255 11,255
Yield 3.13% - - - - - - 3.13%
Fixed interest rate deposits:
Time - Over $100,000 23,393 3,044 1,560 2,355 3,234 100 - 33,686 36,118
Yield 2.65% 3.65% 3.41% 5.78% 4.73% 5.00% - 3.20%
Time - Other 57,128 12,819 5,796 4,458 14,000 2,351 - 96,552 97,608
Yield 2.75% 3.41% 3.74% 4.96% 4.81% 4.96% - 3.35%
Demand - Non-interest bearing - - - - - - 78,560 78,560 78,560
Repurchase agreements 19,419 - - - - - - 19,419 19,419
Yield 1.03% - - - - - - 1.03%
Short-term borrowings 890 - - - - - - 890 890
Yield .94% - - - - - - .94%
Other liabilities - - - - - - 3,008 3,008
Stockholders' equity - - - - - - 58,975 58,975
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 201,547 $ 121,012 $ 7,356 $ 6,813 $ 17,234 $ 2,451 $ 140,543 $ 496,956 $ 438,461
- ------------------------------------------------------------------------------------------------------------------------------------
Excess of (liabilities) assets
subject to interest rate change $ (63,476) $ (54,254) $ 39,517 $ 15,912 $ 5,133 $ 168,895 $(111,727) $ -
====================================================================================================================================
Penseco Financial Services Corporation / 2002 Annual Report 23
ITEM 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets
(in thousands, except per share data)
December 31, 2002 2001
---------------------------------------------------------------
ASSETS Cash and due from banks $ 11,120 $ 13,026
Interest bearing balances with banks 10,424 4,270
Federal funds sold 33,075 -
---------------------------------------------------------------
Cash and Cash Equivalents 54,619 17,296
Investment securities:
Available-for-sale, at fair value 108,083 96,505
Held-to-maturity (fair value of $32,986
and $32,617, respectively) 31,049 32,118
---------------------------------------------------------------
Total Investment Securities 139,132 128,623
Loans, net of unearned income 288,856 323,808
Less: Allowance for loan losses 3,347 3,600
---------------------------------------------------------------
Loans, Net 285,509 320,208
Bank premises and equipment 9,920 10,783
Other real estate owned 59 143
Accrued interest receivable 3,399 3,599
Other assets 4,318 1,899
---------------------------------------------------------------
Total Assets $ 496,956 $ 482,551
===============================================================
LIABILITIES Deposits:
Non-interest bearing $ 78,560 $ 70,812
Interest bearing 336,104 335,719
---------------------------------------------------------------
Total Deposits 414,664 406,531
Other borrowed funds:
Repurchase agreements 19,419 18,140
Short-term borrowings 890 17
Accrued interest payable 1,317 1,577
Other liabilities 1,691 1,638
---------------------------------------------------------------
Total Liabilities 437,981 427,903
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 45,060 41,206
Accumulated other comprehensive income 3,075 2,602
---------------------------------------------------------------
Total Stockholders' Equity 58,975 54,648
---------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 496,956 $ 482,551
===============================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
24 Penseco Financial Services Corporation / 2002 Annual Report
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended December 31, 2002 2001 2000
------------------------------------------------------------------------
INTEREST Interest and fees on loans $ 20,553 $ 24,683 $ 23,811
INCOME Interest and dividends on investments:
U.S. Treasury securities and U.S.
Agency obligations 4,900 5,577 5,062
States & political subdivisions 2,080 1,434 1,307
Other securities 79 128 128
Interest on Federal funds sold 189 6 414
Interest on balances with banks 98 32 321
------------------------------------------------------------------------
Total Interest Income 27,899 31,860 31,043
------------------------------------------------------------------------
INTEREST Interest on time deposits
EXPENSE of $100,000 or more 1,398 1,779 2,262
Interest on other deposits 6,327 9,605 10,396
Interest on other borrowed funds 286 1,140 1,040
------------------------------------------------------------------------
Total Interest Expense 8,011 12,524 13,698
------------------------------------------------------------------------
Net Interest Income 19,888 19,336 17,345
Provision for loan losses 813 954 233
------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 19,075 18,382 17,112
------------------------------------------------------------------------
OTHER Trust department income 1,266 1,233 1,329
INCOME Service charges on deposit accounts 1,123 1,126 718
Merchant transaction income 5,519 5,331 5,354
Other fee income 1,562 1,291 975
Other operating income 553 231 211
Realized gains (losses) on securities, net 1,009 (26) (354)
------------------------------------------------------------------------
Total Other Income 11,032 9,186 8,233
------------------------------------------------------------------------
OTHER Salaries and employee benefits 9,048 8,180 7,951
EXPENSES Occupancy expenses, net 1,384 1,416 1,387
Furniture and equipment expenses 1,208 1,245 1,189
Merchant transaction expenses 4,731 4,636 4,784
Other operating expenses 4,727 4,600 3,995
------------------------------------------------------------------------
Total Other Expenses 21,098 20,077 19,306
------------------------------------------------------------------------
Income before income taxes 9,009 7,491 6,039
Applicable income taxes 2,256 1,869 1,296
------------------------------------------------------------------------
NET INCOME Net Income $ 6,753 $ 5,622 $ 4,743
========================================================================
PER SHARE Earnings Per Share $ 3.14 $ 2.62 $ 2.21
========================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Penseco Financial Services Corporation / 2002 Annual Report 25
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Other Total
Common Retained Comprehensive Stockholders'
(in thousands except per share data) Stock Surplus Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 21 10,819 35,996 (1,093) 45,743
Comprehensive income:
Net income, 2000 - - 4,743 - 4,743
Unrealized gains on securities,
net of reclassification adjustment
and taxes - - - 2,051 2,051
-------
Comprehensive income 6,794
Cash dividends declared ($1.15 per share) - - (2,470) - (2,470)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 21 10,819 38,269 958 50,067
Comprehensive income:
Net income, 2001 - - 5,622 - 5,622
Unrealized gains on securities,
net of reclassification adjustment
and taxes - - - 1,644 1,644
-------
Comprehensive income 7,266
Cash dividends declared ($1.25 per share) - - (2,685) - (2,685)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 21 $ 10,819 $ 41,206 $ 2,602 $ 54,648
Comprehensive income:
Net income, 2002 - - 6,753 - 6,753
Unrealized gains on securities,
net of reclassification adjustment
and taxes - - - 473 473
-------
Comprehensive income 7,226
Cash dividends declared ($1.35 per share) - - (2,899) - (2,899)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 21 $ 10,819 $ 45,060 $ 3,075 $ 58,975
==========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
26 Penseco Financial Services Corporation / 2002 Annual Report
Consolidated Statements of Cash Flows
(in thousands) Years Ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------
OPERATING Net Income $ 6,753 $ 5,622 $ 4,743
ACTIVITIES Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,240 1,288 1,243
Provision for loan losses 813 954 233
Deferred income tax provision (benefit) 95 (213) (109)
Amortization of securities
(net of accretion) 201 38 55
Net realized (gains) losses on securities (1,009) 26 354
Loss (gain) on other real estate 2 (14) (22)
Loss on disposition of fixed assets 7 - 8
Decrease (increase) in interest receivable 200 391 (1,063)
(Increase) decrease in other assets (2,419) (299) 463
(Decrease) increase in income taxes payable (252) 208 26
(Decrease) increase in interest payable (260) (691) 408
(Decrease) increase in other liabilities (34) 78 30
------------------------------------------------------------------------------------------
Net cash provided by
operating activities 5,337 7,388 6,369
------------------------------------------------------------------------------------------
INVESTING Purchase of investment securities
ACTIVITIES available-for-sale (34,798) (41,035) (44,610)
Proceeds from sales and maturities of investment
securities available-for-sale 24,797 52,568 37,801
Purchase of investment securities to be
held-to-maturity - (13,407) (10,689)
Proceeds from repayments of investment
securities to be held-to-maturity 1,017 1,487 898
Net loans repaid (originated) 33,629 (16,786) (26,569)
Proceeds from other real estate 339 337 126
Proceeds from sale of fixed assets 5 - 4
Investment in premises and equipment (389) (364) (666)
------------------------------------------------------------------------------------------
Net cash provided (used) by
investing activities 24,600 (17,200) (43,705)
------------------------------------------------------------------------------------------
FINANCING Net increase in demand and savings deposits 18,906 14,784 28,375
ACTIVITIES Net (payments) proceeds on time deposits (10,773) 4,308 (8,268)
Increase in repurchase agreements 1,279 3,054 3,105
Net increase (decrease) in short-term borrowings 873 (11,486) 10,616
Cash dividends paid (2,899) (2,685) (2,470)
------------------------------------------------------------------------------------------
Net cash provided by
financing activities 7,386 7,975 31,358
------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 37,323 (1,837) (5,978)
Cash and cash equivalents at January 1 17,296 19,133 25,111
------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 54,619 $ 17,296 $ 19,133
==========================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Penseco Financial Services Corporation / 2002 Annual Report 27
General Notes To Financial Statements
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Penseco Financial Services Corporation (Company) is a financial holding company,
incorporated in 1997 under the laws of Pennsylvania. It is the parent company of
Penn Security Bank and Trust Company (Bank), a state chartered bank.
The Company operates from nine banking offices under a state bank charter
and provides full banking services, including trust services, to individual and
corporate customers primarily in Northeastern Pennsylvania. The Company's
primary deposit products are savings and demand deposit accounts and
certificates of deposit. Its primary lending products are real estate,
commercial and consumer loans.
The Company's revenues are attributable to a single reportable segment,
therefore segment information is not presented.
The accounting policies of the Company conform with accounting principles
generally accepted in the United States of America and with general practices
within the banking industry.
BASIS OF PRESENTATION
The Financial Statements of the Company have been consolidated with those of its
wholly-owned subsidiary, Penn Security Bank and Trust Company, eliminating all
intercompany items and transactions.
The Statements are presented on the accrual basis of accounting.
All information is presented in thousands of dollars, except per share
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.
EMERGING ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued various new accounting
standards as of December 31, 2002, which are applicable in future periods.
Management does not anticipate that the adoption of any of the new
standards will have a significant effect on the Company's earnings or financial
position.
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.
Gains and losses on the sale of securities available-for-sale are
determined using the specific identification method and are reported as a
separate component of other income in the Statements of Income.
LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES
Loans are stated at the principal amount outstanding, net of any unearned
income, deferred loan fees and the allowance for loan losses. Interest is
accrued daily on the outstanding balances.
Loans are generally placed on a non-accrual status when principal or
interest is past due 90 days or when payment in full is not anticipated. When a
loan is placed on non-accrual status, all interest previously accrued but not
collected is charged against current income. Loans are returned to accrual
status when past due interest is collected and the collection of principal is
probable.
The provision for loan losses is based on past loan loss experience,
management's evaluation of the potential loss in the current loan portfolio
under current economic conditions and such other factors as, in management's
best judgement, deserve current recognition in estimating loan losses. The
annual provision for loan losses charged to operating expense is that amount
which is sufficient to bring the balance of the allowance for possible loan
losses to an adequate level to absorb anticipated losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Provision for depreciation and amortization, computed principally on the
straight-line method, is charged to operating expenses over the estimated useful
lives of the assets. Maintenance and repairs are charged to current expense as
incurred.
LONG-LIVED ASSETS
The Company reviews the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that carrying amounts of
the assets might not be recoverable, as prescribed in Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).
LOAN SERVICING
The Company generally retains the right to service mortgage loans sold to
others. The cost allocated to the mortgage servicing rights retained has been
recognized as a separate asset and is being amortized in proportion to and over
the period of estimated net servicing income.
Mortgage servicing rights are evaluated for impairment based on the fair
value of those rights. Fair values are estimated using discounted cash flows
based on current market rates of interest and current expected future prepayment
rates. For purposes of measuring impairment, the rights must be stratified by
one or more predominant risk characteristics of the underlying loans. The
Company stratifies its capitalized mortgage servicing rights based on the
product type, interest rate and term of the underlying loans. The amount of
impairment recognized is the amount, if any, by which the amortized cost of the
rights for each stratum exceed the fair value.
28 Penseco Financial Services Corporation / 2002 Annual Report
1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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).
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising expenses for the years
ended December 31, 2002, 2001 and 2000, amounted to $650, $497 and $466,
respectively.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of non-taxable income such as interest on state
and municipal securities) as well as deferred taxes on temporary differences,
between the amount of taxable income and pre-tax financial income and between
the tax bases of assets and liabilities and their reported amounts in the
Financial Statements. Deferred tax assets and liabilities are included in the
Financial Statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
CASH FLOWS
For purposes of the Statements of Cash Flows, cash and cash equivalents include
cash on hand, due from banks, interest bearing balances with banks and Federal
funds sold for a one-day period.
The Company paid interest and income taxes during the years ended December 31,
2002, 2001 and 2000 as follows:
2002 2001 2000
- ---------------------------------------------------------
Income taxes paid $ 2,636 $ 1,909 $ 1,379
Interest paid $ 8,271 $ 13,215 $ 13,290
Non-cash transactions during the years ended December 31, 2002, 2001 and 2000,
comprised entirely of the net acquisition of real estate in the settlement of
loans, amounted to $257, $265 and $272, respectively.
TRUST ASSETS AND INCOME
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the Financial Statements since such items are not assets of
the Company. Trust income is reported on the accrual basis of accounting.
EARNINGS PER SHARE
Basic earnings per share is computed on the weighted average number of common
shares outstanding during each year (2,148,000) as prescribed in Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). A
calculation of diluted earnings per share is not applicable to the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2002
presentation.
2 CASH AND DUE FROM BANKS
Cash and due from banks are summarized as follows:
December 31, 2002 2001
- -----------------------------------------------------------------
Cash items in process of collection $ 127 $ 293
Non-interest bearing balances 8,708 9,672
Cash on hand 2,285 3,061
- -----------------------------------------------------------------
Total $ 11,120 $ 13,026
=================================================================
The Company may, from time to time, maintain bank balances with other
financial institutions in excess of $100,000 each. Management is not aware of
any evidence that would indicate that such deposits are at risk.
3 INVESTMENT SECURITIES
The amortized cost and fair value of investment securities at December 31, 2002
and 2001 are as follows:
AVAILABLE-FOR-SALE
Gross Gross
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
- --------------------------------------------------------------------------
U.S. Treasury securities $ 35,098 $ 1,358 $ - $ 36,456
U.S. Agency securities 47,679 2,927 - 50,606
States & political
subdivisions 19,431 361 127 19,665
- --------------------------------------------------------------------------
Total Debt Securities 102,208 4,646 127 106,727
Equity securities 1,215 141 - 1,356
- --------------------------------------------------------------------------
Total Available -
for-Sale $ 103,423 $ 4,787 $ 127 $108,083
==========================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
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
==========================================================================
Equity securities at December 31, 2002 and 2001, consisted primarily of Federal
Home Loan Bank stock, which is a required investment in order to participate in
an available line of credit program. The stock is stated at par value as there
is no readily determinable fair value.
Penseco Financial Services Corporation / 2002 Annual Report 29
3 INVESTMENT SECURITIES (continued)
A summary of transactions involving available-for-sale debt securities in 2002,
2001 and 2000 are as follows:
December 31, 2002 2001 2000
- ------------------------------------------------------------
Proceeds from sales $ 13,832 $ 28,594 $ 18,952
Gross realized gains 1,009 53 2
Gross realized losses - 79 356
Held-to-Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
- --------------------------------------------------------------------------
U.S. Agency Obligations:
Mortgage-backed
securities $ 1,420 $ 8 $ 20 $ 1,408
States & political
subdivisions 29,629 1,949 - 31,578
- --------------------------------------------------------------------------
Total Held-to-Maturity $ 31,049 $ 1,957 $ 20 $ 32,986
==========================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
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
==========================================================================
Investment securities with amortized costs and fair values of $88,034 and
$92,907 at December 31, 2002 and $76,419 and $79,091 at December 31, 2001, 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, 2002
by contractual maturity, are shown in the following table. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 15,008 $ 15,223 $ - $ -
U.S. Agency securities 9,961 10,266 - -
After one year through
five years:
U.S. Treasury securities 20,090 21,233 - -
U.S. Agency securities 37,718 40,340 - -
After ten years:
States & political
subdivisions 19,431 19,665 29,629 31,578
- --------------------------------------------------------------------------------
Subtotal 102,208 106,727 29,629 31,578
Mortgage-backed securities - - 1,420 1,408
- --------------------------------------------------------------------------------
Total Debt Securities $ 102,208 $ 106,727 $ 31,049 $ 32,986
================================================================================
4 LOANS
Major classifications of loans are as follows:
December 31, 2002 2001
- ------------------------------------------------------------------
Loans secured by real estate:
Construction and land development $ 5,031 $ 9,124
Secured by farmland - 395
Secured by 1-4 family residential
properties:
Revolving, open-end loans 15,818 8,410
Secured by first liens 135,602 159,748
Secured by junior liens 20,921 29,269
Secured by multi-family properties 635 808
Secured by non-farm, non-residential
properties 44,907 47,856
Commercial and industrial loans
to U.S. addressees 30,077 30,001
Loans to individuals for household, family
and other personal expenditures:
Credit card and related plans 2,320 2,377
Other (installment and
student loans, etc.) 26,942 29,169
Obligations of states &
political subdivisions 6,239 5,678
All other loans 364 973
- ------------------------------------------------------------------
Gross Loans 288,856 323,808
Less: Unearned income on loans - -
- ------------------------------------------------------------------
Loans, Net of Unearned Income $ 288,856 $ 323,808
==================================================================
Loans on which the accrual of interest has been discontinued or reduced amounted
to $2,245, $1,917 and $1,210 at December 31, 2002, 2001 and 2000, respectively.
If interest on those loans had been accrued, such income would have been $171,
$152 and $138 for 2002, 2001 and 2000, respectively. Interest income on those
loans, which is recorded only when received, amounted to $77, $86 and $86 for
2002, 2001 and 2000, respectively. Also, at December 31, 2002 and 2001, the Bank
had loans totalling $394 and $326, respectively, which were past due 90 days or
more and still accruing interest (credit card, home equity and guaranteed
student loans).
5 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Years Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------
Balance at beginning of year $ 3,600 $ 3,100 $ 2,950
Provision charged to operations 813 954 233
Recoveries credited to allowance 35 29 56
- ----------------------------------------------------------------------
4,448 4,083 3,239
Losses charged to allowance (1,101) (483) (139)
- ----------------------------------------------------------------------
Balance at End of Year $ 3,347 $ 3,600 $ 3,100
======================================================================
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
- ------------------------ -------------- -------------
2002 $ 813 $ 1,066
2001 $ 954 $ 454
2000 $ 233 $ 52
The balance of the Reserve for Bad Debts as reported for Federal income tax
purposes was $948, $948 and $948 at December 31, 2002, 2001 and 2000,
respectively.
30 Penseco Financial Services Corporation / 2002 Annual Report
6 BANK PREMISES AND EQUIPMENT
December 31, 2002 2001
- -----------------------------------------------------------
Land $ 2,919 $ 2,919
Buildings and improvements 14,519 14,473
Furniture and equipment 11,539 11,208
- -----------------------------------------------------------
28,977 28,600
Less: Accumulated depreciation 19,057 17,817
- -----------------------------------------------------------
Net Bank Premises and Equipment $ 9,920 $ 10,783
===========================================================
Buildings and improvements are being depreciated over 10 to 50 year periods and
equipment over 3 to 10 year periods. Depreciation expense amounted to $1,240 in
2002, $1,288 in 2001 and $1,243 in 2000.
Occupancy expenses were reduced by rental income received in the amount of
$63, $61 and $60 in the years ended December 31, 2002, 2001 and 2000,
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, 2002
and 2001 was $59 and $143, respectively, supported by appraisals of the real
estate involved.
8 LOAN SERVICING
The Company services $27,694 in mortgage loans for Freddie Mac which are not
included in the accompanying Consolidated Balance Sheets.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in deposits, were approximately $299 at December 31,
2002. The balance of the servicing rights was $227 at December 31,2002, net of
amortization.
The Company recognized an asset of $236 for mortgage servicing rights in
2002. Amortization expense of $9 was recorded for the year ended December 31,
2002.
There was no allowance for impairment recorded at December 31, 2002.
9 INVESTMENT IN AND LOAN TO, INCOME FROM DIVIDENDS AND EQUITY IN EARNINGS OR
LOSSES OF SUBSIDIARY
Penseco Realty, Inc. is a wholly-owned subsidiary of the Bank which owns certain
banking premises. Selected financial information is presented below:
Equity in
underlying Bank's
Percent Total net assets Amount proportionate
of voting investment at balance of part of loss
Year stock owned and loan sheet date dividends for the period
- --------------------------------------------------------------------------
2002 100% $ 3,550 $ 3,535 None $ -
2001 100% $ 3,650 $ 3,635 None $ -
2000 100% $ 3,750 $ 3,735 None $ -
10 DEPOSITS
December 31, 2002 2001
- -------------------------------------------------------------
Demand - Non-interest bearing $ 78,560 $ 70,812
Demand - Interest bearing 31,363 27,498
Savings 73,786 67,613
Money markets 89,462 88,342
Time - Over $100,000 33,686 37,606
Time - Other 107,807 114,660
- -------------------------------------------------------------
Total $ 414,664 $ 406,531
=============================================================
Scheduled maturities of time deposits are as follows:
2002 $ 91,776
2003 15,863
2004 7,356
2005 6,813
2006 17,234
2007 and thereafter 2,451
--------------------------------
Total $ 141,493
================================
11 OTHER BORROWED FUNDS
At December 31, 2002 and 2001, other borrowed funds consisted of demand notes to
the U.S. Treasury, Repurchase agreements and Federal funds purchased.
Short-term borrowings generally have original maturity dates of thirty days
or less.
Investment securities with amortized costs and fair values of $27,133 and
$29,008 at December 31, 2002 and $22,056 and $23,367 at December 31, 2001, were
pledged to secure repurchase agreements.
Years Ended December 31, 2002 2001
- ----------------------------------------------------------------
Amount outstanding at year end $ 20,309 $ 18,157
Average interest rate at year end 1.57% 1.81%
Maximum amount outstanding at
any month end $ 24,649 $ 49,313
Average amount outstanding $ 20,792 $ 32,364
Weighted average interest rate
during the year:
Federal funds purchased .53% 2.55%
Repurchase agreements 1.00% 3.28%
Demand notes to U.S. Treasury 1.00% 3.67%
The Company has an available credit facility with the Federal Reserve Bank in
the amount of $10,000, secured by pledged securities with amortized costs and
fair values of $10,010 and $10,150 at December 31, 2002 and $9,998 and $10,095
at December 31, 2001 and with interest rates of .75% and 1.25% at December 31,
2002 and December 31, 2001, respectively. There is no stated expiration date for
the credit facility as long as the Company maintains the pledged securities at
the Federal Reserve Bank. There was no outstanding balance as of December 31,
2002 and 2001, respectively.
The Company has the availability of a $5,000 overnight Federal funds line
of credit with First Union Bank. There was no balance outstanding as of December
31, 2002 and 2001, respectively.
The Company maintains a collateralized maximum borrowing capacity of
$189,060 with the Federal Home Loan Bank of Pittsburgh (FHLB). There was no
balance outstanding or assets pledged as of December 31, 2002 (see note 21).
Penseco Financial Services Corporation / 2002 Annual Report 31
12 EMPLOYEE BENEFIT PLANS
The Company provides an Employee Stock Ownership Plan (ESOP), a Retirement
Profit Sharing Plan, an Employees' Pension Plan, as well as an unfunded
supplemental executive pension plan and a Postretirement Life Insurance Plan,
all non-contributory, covering all eligible employees.
Under the Employee Stock Ownership Plan (ESOP), amounts voted by the Board
of Directors are paid into the ESOP and each employee is credited with a share
in proportion to their annual compensation. All contributions to the ESOP are
invested in or will be invested primarily in Company stock. Distribution of a
participant's ESOP account occurs upon retirement, death or termination in
accordance with the plan provisions.
At December 31, 2002 and 2001, the ESOP held 88,962 and 85,337 shares,
respectively of the Company's stock, all of which were acquired as described
above and allocated to specific participant accounts. These shares are treated
the same for dividend purposes and earnings per share calculations as are any
other outstanding shares of the Company's stock. The Company contributed $140,
$140 and $110 to the plan during the years ended December 31, 2002, 2001 and
2000, respectively.
Under the Retirement Profit Sharing Plan, amounts voted by the Board of
Directors are paid into a fund and each employee is credited with a share in
proportion to their annual compensation. Upon retirement, death or termination,
each employee is paid the total amount of their credits in the fund in one of a
number of optional ways in accordance with the plan provisions. The Company did
not contribute to the plan during the years ended December 31, 2002, 2001 and
2000, respectively.
Under the Pension Plan, amounts computed on an actuarial basis are paid by
the Company into a trust fund. Provision is made for fixed benefits payable for
life upon retirement at the age of 65, based on length of service and
compensation levels as defined in the plan. Plan assets of the trust fund are
invested and administered by the Trust Department of Penn Security Bank and
Trust Company.
The unfunded supplemental executive pension plan provides certain officers
with additional retirement benefits to replace benefits lost due to limits
imposed on qualified plans by Federal tax law.
The postretirement life insurance plan is an unfunded, non-vesting defined
benefit plan. The plan is non-contributory and provides for a reducing level of
term life insurance coverage following retirement.
For the unfunded plans above, amounts calculated on an actuarial basis are
recorded as a liability.
In determining the benefit obligation the following assumptions were made:
Pension Benefits Other Benefits
-------------------- ----------------
December 31, 2002 2001 2002 2001
- ------------------------------------------------------------------
Weighted - average
assumptions:
Discount rate 6.25%-6.50% 6.50% 6.25% 6.50%
Expected return on
plan assets 9.00% 9.00% - -
Rate of compensation
increase 4.50% 4.50% 4.50% 4.50%
A reconciliation of the funded status of the plans with amounts reported on the
Consolidated Balance Sheets is as follows:
Pension Benefits Other Benefits
------------------ -----------------
December 31, 2002 2001 2002 2001
- ------------------------------------------------------------------
Change in benefit
obligation:
Benefit obligation,
beginning $ 9,059 $ 7,940 $ 186 $ 167
Service cost 370 310 5 5
Interest cost 588 540 15 11
Amendments 111 - - -
Actuarial gain (loss) 26 563 51 10
Benefits paid (299) (294) (7) (7)
- ------------------------------------------------------------------
Benefit obligation,
ending 9,855 9,059 250 186
- ------------------------------------------------------------------
Change in plan assets:
Fair value of plan
assets, beginning 8,100 8,247 - -
Actual return on plan
assets (219) 86 - -
Employer contribution 222 61 - -
Benefits paid (299) (294) - -
- ------------------------------------------------------------------
Fair value of plan
assets, ending 7,804 8,100 - -
- ------------------------------------------------------------------
Funded status (2,051) (959) (250) (186)
Unrecognized net transition
asset - - - -
Unrecognized net actuarial
loss (gain) 2,845 1,853 (34) (88)
Unrecognized prior service
cost 56 (55) 64 72
- ------------------------------------------------------------------
Prepaid (accrued) benefit
cost $ 850 $ 839 $ (220) $ (202)
==================================================================
A reconciliation of net periodic pension and other benefit costs is as follows:
Pension Benefits
------------------
Years Ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------
Components of net periodic
pension cost:
Service cost $ 370 $ 310 $ 295
Interest cost 588 540 509
Expected return on plan assets (726) (732) (705)
Amortization of transition asset - (66) (66)
Amortization of prior service cost (104) - -
Amortization of unrecognized
net (gain) loss 82 - (12)
- ---------------------------------------------------------------------
Net periodic pension cost $ 210 $ 52 $ 21
=====================================================================
Other Benefits
------------------
Years Ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------
Components of net periodic
other benefit cost:
Service cost $ 5 $ 5 $ 5
Interest cost 15 11 11
Amortization of prior service cost 7 7 8
Amortization of unrecognized
net loss (1) (5) (7)
- ---------------------------------------------------------------------
Net periodic other benefit cost $ 26 $ 18 $ 17
=====================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $98, $98 and $0, respectively at December 31, 2001
and $185, $174 and $0, respectively at December 31, 2001.
32 Penseco Financial Services Corporation / 2002 Annual Report
13 INCOME TAXES
The total income taxes in the Statements of Income are as follows:
Years Ended December 31, 2002 2001 2000
- ----------------------------------------------------------
Currently payable $ 2,161 $ 2,082 $ 1,405
Deferred provision (benefit) 95 (213) (109)
- ----------------------------------------------------------
Total $ 2,256 $ 1,869 $ 1,296
==========================================================
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, 2002 2001 2000
- -----------------------------------------------------------------
Tax at statutory rate $ 3,063 $ 2,547 $ 2,053
Reduction for non-taxable interest (828) (746) (748)
Other additions (reductions) 21 68 (9)
- -----------------------------------------------------------------
Applicable Income Taxes $ 2,256 $ 1,869 $ 1,296
================================================================
The components of the deferred income tax provision (benefit), which result from
temporary differences, are as follows:
Years Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------
Accretion of discount on bonds $ 53 $ 53 $ 34
Accelerated depreciation (36) (96) (85)
Supplemental benefit plan 4 (9) (4)
Allowance for loan losses 86 (180) (51)
Prepaid pension cost (12) 19 (3)
- -----------------------------------------------------------------
Total $ 95 $ (213) $ (109)
=================================================================
The significant components of deferred tax assets and liabilities are as
follows:
December 31, 2002 2001
- -----------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 815 $ 901
Depreciation 406 370
Supplemental Benefit Plan 31 35
- -----------------------------------------------------------------
Total Deferred Tax Assets 1,252 1,306
=================================================================
Deferred tax liabilities:
Unrealized securities gains 1,584 1,340
Prepaid pension costs 343 355
Accretion 148 95
- -----------------------------------------------------------------
Total Deferred Tax Liabilities 2,075 1,790
- -----------------------------------------------------------------
Net Deferred Tax (Liabilities) Assets $ (823) $ (484)
=================================================================
In management's opinion, the deferred tax assets are realizable in as much as
there is a history of strong earnings and a carryback potential greater than the
deferred tax assets. Management is not aware of any evidence that would preclude
the realization of the benefit in the future and, accordingly, has not
established a valuation allowance against the deferred tax assets.
14 ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income of $3,075, $2,602 and $958 at December
31, 2002, 2001 and 2000, respectively consisted entirely of unrealized gains or
losses on available-for-sale securities, net of tax.
A reconciliation of other comprehensive income for the years ended December
31, 2002 and 2001 is as follows:
Tax
Before-Tax (Expense) Net-of-Tax
2002 Amount Benefit Amount
- ------------------------------------------------------------------------------
Unrealized gains on
available-for-sale securities:
Unrealized gains arising during
the year $ 1,726 $ (587) $ 1,139
Less: Reclassification adjustment
for gains realized in income 1,009 (343) 666
- ------------------------------------------------------------------------------
Net unrealized gains $ 717 $ (244) $ 473
==============================================================================
2001
- ------------------------------------------------------------------------------
Unrealized gains on
available-for-sale securities:
Unrealized gains arising during
the year $ 2,465 $ (838) $ 1,627
Less: Reclassification adjustment
for losses realized in income (26) 9 (17)
- ------------------------------------------------------------------------------
Net unrealized gains $ 2,491 $ (847) $ 1,644
==============================================================================
15 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, 2002 and 2001 are as follows:
2002 2001
- ---------------------------------------------------------
Commitments to extend credit:
Fixed rate $ 12,273 $ 17,490
Variable rate $ 66,257 $ 45,033
Standby letters of credit $ 10,586 $ 3,311
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have expiration dates of one year or less or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
Various actions and proceedings are presently pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
financial position of the Company.
Penseco Financial Services Corporation / 2002 Annual Report 33
16 FAIR VALUE DISCLOSURE
GENERAL
Statement of Financial Accounting Standards No.107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires the disclosure of the
estimated fair value of on and off-balance sheet financial instruments.
VALUATION METHODS AND ASSUMPTIONS
Estimated fair values have been determined using the best available data, an
estimation methodology suitable for each category of financial instruments. For
those loans and deposits with floating interest rates it is presumed that
estimated fair values generally approximate the carrying amount balances.
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices. Those with stated maturities have
been valued using a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities. Those
liabilities with no stated maturities have an estimated fair value equal to both
the amount payable on demand and the carrying amount balance. The net loan
portfolio has been valued using a present value discounted cash flow. The
discount rate used in these calculations is the current loan rate adjusted for
non-interest operating costs, credit loss and assumed prepayment risk. Off
balance sheet carrying amounts and fair value of letters of credit represent the
deferred income fees arising from those unrecognized financial instruments.
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
All assets and liabilities which are not considered financial instruments
have not been valued differently than has been customary with historical cost
accounting.
December 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 11,120 $ 11,120 $ 13,026 $ 13,026
Interest bearing balances with banks 10,424 10,424 4,270 4,270
Federal funds sold 33,075 33,075 - -
- --------------------------------------------------------------------------------------------
Cash and cash equivalents 54,619 54,619 17,296 17,296
Investment Securities:
Available-for-sale:
U.S. Treasury securities 36,456 36,456 36,069 36,069
U.S. Agency obligations 50,606 50,606 58,143 58,143
States & political subdivisions 19,665 19,665 - -
Federal Home Loan Bank stock 946 946 1,911 1,911
Other securities 410 410 382 382
Held-to-maturity:
U.S. Agency obligations 1,420 1,408 2,377 2,332
States & political subdivisions 29,629 31,578 29,741 30,285
- --------------------------------------------------------------------------------------------
Total investment securities 139,132 141,069 128,623 129,122
Loans, net of unearned income:
Real estate mortgages 222,914 225,138 255,610 258,864
Commercial 30,077 30,077 30,001 30,001
Consumer and other 35,865 36,107 38,197 38,551
Less: Allowance for loan losses 3,347 3,600
- --------------------------------------------------------------------------------------------
Loans, net 285,509 291,322 320,208 327,416
- --------------------------------------------------------------------------------------------
Total Financial Assets 479,260 $ 487,010 466,127 $ 473,834
Other assets 17,696 16,424
- --------------------------------------------------------------------------------------------
Total Assets $ 496,956 $ 482,551
============================================================================================
Financial Liabilities:
Demand - Non-interest bearing $ 78,560 $ 78,560 $ 70,812 $ 70,812
Demand - Interest bearing 31,363 31,363 27,498 27,498
Savings 73,786 73,786 67,613 67,613
Money markets 89,462 89,462 88,342 88,342
Time 141,493 144,981 152,266 155,170
- --------------------------------------------------------------------------------------------
Total Deposits 414,664 418,152 406,531 409,435
Repurchase agreements 19,419 19,419 18,140 18,140
Short-term borrowings 890 890 17 17
- --------------------------------------------------------------------------------------------
Total Financial Liabilities 434,973 $ 438,461 424,688 $ 427,592
Other Liabilities 3,008 3,215
Stockholders' Equity 58,975 54,648
- --------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 496,956 $ 482,551
============================================================================================
Standby Letters of Credit $ (106) $ (106) $ (33) $ (33)
34 Penseco Financial Services Corporation / 2002 Annual Report
17 OPERATING LEASES
The Company leases the land upon which the Mount Pocono Office was built and the
land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company
also leases space at several locations which are being used as remote banking
facilities. Rental expense was $80 in 2002, $81 in 2001 and $81 in 2000. 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, 2002
are as follows:
Mount Meadow ATM
Pocono Avenue Sites Total
- -----------------------------------------------------------
2003 $ 48 $ 19 $ 12 $ 79
2004 48 19 4 71
2005 48 19 4 71
2006 48 13 - 61
2007 48 - - 48
2008 to 2011 160 - - 160
- -----------------------------------------------------------
Total minimum
payments required $ 400 $ 70 $ 20 $ 490
===========================================================
18 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, 2002 2001
- -------------------------------------------------
Beginning Balance $ 6,664 $ 5,959
Additions 748 2,997
Collections (2,929) (2,292)
- -------------------------------------------------
Ending Balance $ 4,483 $ 6,664
=================================================
In addition to the loan amounts shown above, during 2002, the Bank issued a
standby letter of credit for the account of a related party in the amount of
$6,353.
19 REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company and the Bank's Consolidated Financial Statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and classifications are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the Capital Adequacy table on the following page) of Tier I and Total
Capital to risk-weighted assets and of Tier I Capital to average assets
(Leverage ratio). The table also presents the Company's actual capital amounts
and ratios. The Bank's actual capital amounts and ratios are substantially
identical to the Company's. Management believes, as of December 31, 2002, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 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 December 31,
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.
Penseco Financial Services Corporation / 2002 Annual Report 35
19 REGULATORY MATTERS (continued)
Actual Regulatory Requirements
- ---------------------------------------------- --------------------------------------------
For Capital To Be
Adequacy Purposes "Well Capitalized"
December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $ 59,020 17.99% > $ 26,250 > 8.0% > $ 32,813 > 10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 55,673 16.97% > $ 13,125 > 4.0% > $ 19,688 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 55,673 11.26% > * > * > $ 24,717 > 5.0%
- - - -
* 3.0% ($14,830), 4.0% ($19,774) or 5.0% ($24,717) depending on the bank's
CAMELS Rating and other regulatory risk factors.
December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $ 55,646 18.22% > $ 24,428 > 8.0% > $ 30,535 > 10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 52,046 17.04% > $ 12,214 > 4.0% > $ 18,321 > 6.0%
- - - -
Tier I 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.
20 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION)
The condensed Company-only information follows:
BALANCE SHEETS
December 31, 2002 2001
- -------------------------------------------------------------------
Cash $ 7 $ 6
Investment in bank subsidiary 58,626 54,319
Equity Investments 390 362
- -------------------------------------------------------------------
Total Assets $ 59,023 $ 54,687
===================================================================
Total Liabilities $ 48 $ 39
Total Stockholders' Equity 58,975 54,648
- -------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 59,023 $ 54,687
===================================================================
STATEMENTS OF INCOME
Years Ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------
Dividends from bank subsidiary $ 2,899 $ 2,892 $ 2,520
Dividends on investment securities 9 5 -
- -------------------------------------------------------------------------
Total Income 2,908 2,897 2,520
Other non-interest expense 8 7 -
- -------------------------------------------------------------------------
Net income before undistributed
earnings of bank subsidiary 2,900 2,890 2,520
Undistributed earnings of bank
subsidiary 3,853 2,732 2,223
- -------------------------------------------------------------------------
Net Income $ 6,753 $ 5,622 $ 4,743
=========================================================================
36 Penseco Financial Services Corporation / 2002 Annual Report
20 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION) (continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------
Operating Activities:
Net Income $ 6,753 $ 5,622 $ 4,743
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net
income of bank subsidiary (3,853) (2,732) (2,223)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 2,900 2,890 2,520
- ------------------------------------------------------------------------------
Investing Activities:
Purchase of equity investment - (199) (50)
- ------------------------------------------------------------------------------
Net cash (used) provided by
investing activities - (199) (50)
- ------------------------------------------------------------------------------
Financing Activities:
Cash dividends paid (2,899) (2,685) (2,470)
- ------------------------------------------------------------------------------
Net cash used by financing activities (2,899) (2,685) (2,470)
- ------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1 6 -
Cash and cash equivalents at January 1 6 - -
- ------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 7 $ 6 $ -
==============================================================================
21 SUBSEQUENT EVENT
Subsequent to the Balance Sheet Date, the Bank purchased a FHLMC (Freddie Mac)
pool of new twenty year residential mortgages, with a 5 1/2% coupon and a face
value of $100,000. The Bank financed the purchase by borrowing $100,000 from the
Federal Home Loan Bank with maturities ranging from 5 to 20 years. Calculations
indicate a 100 basis point spread in the 1st year declining to 81 basis points
after the 10th year and every year thereafter. These calculated spreads may vary
depending on various interest rate scenarios which affect prepayment speeds.
The investment resulted in increases in Total Assets and Total Liabilities
of approximately 20.7% and 22.8% from December 31, 2002, respectively.
The Bank has estimated that the transaction will result in an increase in
net interest income of approximately $800 for the current fiscal year.
Penseco Financial Services Corporation / 2002 Annual Report 37
McGrail Merkel Quinn & Associates
Certified Public Accountants & Consultants
February 5, 2003,
except for Note 21
as to which the date
is February 19, 2003
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, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three year period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the years in the three year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ McGrail, Merkel, Quinn & Associates
38 Penseco Financial Services Corporation / 2002 Annual Report
ITEM 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on matters of
accounting principles or practices or financial statement disclosures in 2002.
PART III
--------
ITEM 10 Directors and Executive Officers of the Registrant
The information on Directors of the Company on pages 4, 5 and 6 in the
definitive proxy statement relating to the Company's Annual Meeting of
stockholders, to be held May 6, 2003, is incorporated herein by reference
thereto.
The information on Executive Officers on pages 6 and 7 in the definitive proxy
statement relating to the Company's Annual Meeting of stockholders, to be held
May 6, 2003, is incorporated herein by reference thereto.
ITEM 11 Executive Compensation
The information contained under the heading "Executive Compensation" on page 6
in the definitive proxy statement relating to the Company's Annual Meeting of
stockholders, to be held May 6, 2003, is incorporated herein by reference
thereto.
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Voting Securities & Principal
Holders Thereof" on pages 2 and 3 in the definitive proxy statement relating to
the Company's Annual Meeting of stockholders, to be held May 6, 2003, is
incorporated herein by reference thereto.
ITEM 13 Certain Relationships and Related Transactions
The information contained in Note 18 under Item 8 on page 35 under the heading
"General Notes to Financial Statements" in the Company's 2002 Annual Report to
Shareholders is incorporated herein by reference thereto.
ITEM 14 Controls and Procedures
Based on the Company's principal executive officer, Otto P. Robinson, Jr.,
President and the Company's principal financial officer, Patrick Scanlon,
Controller, evaluations of the Company's Disclosure Controls and Procedures as
of February 19, 2003 (evaluation date), they have concluded that the Company's
disclosure controls are effective, reasonably ensure that material information
relating to the Company and its consolidated subsidiaries is made known to them
by others within those entities, particularly during the period in which this
report is being prepared, and identify significant deficiencies or material
weaknesses in internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data.
Based on information available to them, they are not aware of significant
deficiencies or material weaknesses in the Company's internal control system.
Based on information available to them, they are not aware of any significant
changes made in internal controls or in other factors that could significantly
affect those controls subsequent to February 19, 2003 (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.
Penseco Financial Services Corporation / 2002 Annual Report 39
PART IV
-------
ITEM 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements - The following financial statements are
incorporated by reference in Part II, Item 8 hereof:
Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
General Notes to Financial Statements
Independent Auditor's Report
(2) Financial Statement Schedules - The Financial Statement Schedules are
incorporated by reference in Part II, Item 8 hereof.
(3) Exhibits
The following exhibits are filed herewith or incorporated by reference
as part of this Annual Report.
3(i) Registrant's Articles of Incorporation (Incorporated herein by
reference to Exhibit 3(i) of Registrant's report on Form 10-K
filed with the SEC on March 30, 1998.)
3(ii)Registrant's By-Laws (Incorporated herein by reference to
Exhibit 3(ii) of Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.)
10 Material contracts - Supplemental Benefit Plan Agreement
(Incorporated herein by reference to Exhibit 10 of Registrant's
report on Form 10-Q filed with the SEC on May 10, 1999.)
13 Annual report to security holders (Included herein by reference
on pages 1-40, including the cover.)
21 Subsidiaries of the registrant (Incorporated herein by reference
to Exhibit 21 of Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.)
(b) No current report on Form 8-K was filed for the fourth quarter of the
fiscal year ended December 31, 2002.
(c) The exhibits required to be filed by this Item are listed under Item
14. (a) 3, above.
(d) There are no financial statement schedules required to be filed under
this item.
40 Penseco Financial Services Corporation / 2002 Annual Report
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on February 25, 2003.
By: /s/ Otto P. Robinson, Jr.
-------------------------
Otto P. Robinson, Jr.
President
By: /s/ Richard E. Grimm
-------------------------
Richard E. Grimm
Executive Vice-President
By: /s/ Patrick Scanlon
-------------------------
Patrick Scanlon
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on February 25, 2003.
By: /s/ Edwin J. Butler By: /s/ Robert W. Naismith, Ph.D.
------------------------- -------------------------
Edwin J. Butler Robert W. Naismith, Ph.D.
Director Director
By: /s/ Richard E. Grimm By: /s/ James B. Nicholas
------------------------- -------------------------
Richard E. Grimm James B. Nicholas
Director Director
By: /s/ Russell C. Hazelton By: /s/ Emily S. Perry
------------------------- -------------------------
Russell C. Hazelton Emily S. Perry
Director Director
By: /s/ D. William Hume By: /s/ Sandra C. Phillips
------------------------- -------------------------
D. William Hume Sandra C. Phillips
Director Director
By: /s/ James G. Keisling By: /s/ Otto P. Robinson, Jr.
------------------------- -------------------------
James G. Keisling Otto P. Robinson, Jr.
Director Director
By: /s/ P. Frank Kozik By: /s/ Steven L. Weinberger
------------------------- -------------------------
P. Frank Kozik Steven L. Weinberger
Director Director
Penseco Financial Services Corporation / 2002 Annual Report 41
CERTIFICATIONS
I, Otto P. Robinson, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Penseco Financial Services
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual report whether 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: February 25, 2003
/s/ OTTO P. ROBINSON JR.
- -------------------------
Otto P. Robinson, Jr.
President
I, Patrick Scanlon, certify that:
1. I have reviewed this annual report on Form 10-K of Penseco Financial Services
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
annual report whether 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: February 25, 2003
/s/ PATRICK SCANLON
- --------------------
Patrick Scanlon
Controller
42 Penseco Financial Services Corporation / 2002 Annual Report
INDEX TO EXHIBITS
Exhibit Number
Referred to
Item 601 of Prior Filing or Exhibit
Regulation S-K DESCRIPTION OF EXHIBIT Page Number Herein
- ----------------------------------------------------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3 (i) Articles of Incorporation Incorporated herein by reference to Exhibit 3 (i) of
Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.
(ii) By-Laws Incorporated herein by reference to Exhibit 3 (ii) of
Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.
4 Instruments defining the rights of security holders, None
including indentures
9 Voting trust agreement None
10 Material contracts - Supplemental Benefit Plan Incorporated herein by reference to Exhibit 10 of
Agreement Registrant's report on Form 10-Q filed with the
SEC on May 10, 1999.
11 Statement re: Computation of per share earnings None
12 Statements re: Computation of ratios None
13 Annual report to security holders, Form 10-Q or Included herein by reference on pages 1-40,
quarterly report to security holders including the cover.
16 Letter re: Change in certifying accountant None
18 Letter re: Change in accounting principles None
21 Subsidiaries of the registrant Incorporated herein by reference to Exhibit 21 of
Registrant's report on Form 10-K filed with the
SEC on March 30, 1998.
22 Published report regarding matters submitted to None
vote of security holders
23 Consents of experts and counsel None
24 Power of attorney None
99 Additional Exhibits None
Penseco Financial Services Corporation / 2002 Annual Report 43
Company Officers
----------------
EXECUTIVE OFFICERS
Otto P. Robinson, Jr.
President and General Counsel
Richard E. Grimm
Executive Vice-President and Treasurer
Peter F. Moylan
Executive Vice-President Non-Deposit Services and Trust Officer
William J. Calpin, Jr.
Senior Vice-President, Trust Services
Andrew A. Kettel, Jr.
Senior Vice-President
Christe A. Casciano
Vice-President, Director of Marketing
Audrey F. Markowski
Vice-President
Michael G. Ostermayer
Vice-President, Chief Investment Officer, Trust Services
Richard P. Rossi
Vice-President, Director of Human Resources
Lynn Peters Thiel
Vice-President and Compliance Officer
James Tobin
Vice-President, Charge Card Manager
John H. Warnken
Vice-President, Operations
Robert P. Heim
Director of Internal Audit
Patrick Scanlon
Controller
P. Frank Kozik
Secretary
ASSISTANT VICE-PRESIDENTS
John R. Anderson III
Carl M. Baruffaldi
Denise M. Cebular
Carol Curtis McMullen
Assistant Trust Officer and Assistant Secretary
Paula M. DePeters
and Assistant Treasurer
J. Patrick Dietz
Karyn Gaus Vashlishan
Lisa A. Kearney
Eleanor Kruk
Caroline Mickelson
Louis J. Rizzo
Aleta Sebastianelli
and Assistant Secretary
Jeffrey Solimine
Jennifer S. Wohlgemuth
Linda Wolf
and Training Officer
Beth S. Wolff
Deborah A. Wright
Mark J. Zakoski
ASSISTANT CASHIERS
Lori A. Dzwieleski
Pamela Edwards
Frank Gardner
Barbara Garofoli
Susan T. Holweg
Susan A. Kopp
Jacqueline Lucke
Kristen A. McGoff
and Branch Operations Officer
Candace F. Quick
Nereida Santiago
Sharon Thauer
ACCOUNTING OFFICER
Luree M. Waltz
ASSISTANT BRANCH OPERATIONS OFFICERS
Carolyn E. Brown
Robin L. Jenkins
ASSISTANT CHARGE CARD MANAGER
Eileen Yanchak
ASSISTANT CONTROLLER
Susan M. Bray
and Assistant Treasurer
ASSISTANT DIRECTOR OF INTERNAL AUDIT
Paula A. Ralston Nenish
ASSISTANT STUDENT LOAN OFFICER
Jo Ann M. Bevilaqua
ASSISTANT TRUST OFFICER
Dominick P. Gianuzzi
and Assistant Secretary
BRANCH OPERATIONS OFFICERS
Patricia A. Bruno
Stephen A. Hoffman
BUSINESS DEVELOPMENT OFFICER
Mary Carol Cicco
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
LOAN ADMINISTRATION OFFICERS
Susan D. Blascak
Carol J. Grunza
LOAN OFFICER
Denise Belton
MERCHANT OFFICER
Jill Ross
OPERATIONS OFFICER
Patricia Pliske
TAX OFFICER
Robert W. McDonald
TRUST OPERATIONS OFFICER
Carol Trezzi
TRUST INVESTMENT OFFICER
Katherine M. Oven
44 Penseco Financial Services Corporation / 2002 Annual Report
(INSIDE BACK COVER)
Company Board Members
---------------------
PENSECO FINANCIAL SERVICES CORPORATION ANDPENN 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
Retired Captain, Trans World Airlines
D. William Hume
Retired Bank Officer
James G. Keisling
Partner & Treasurer, 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.
Chairman & CEO, eMedsecurities, Inc.
James B. Nicholas
President, D. G. Nicholas Co., Wholesale Auto Parts Company
Emily S. Perry
Retired Insurance Account Executive & Community Volunteer
Sandra C. Phillips
Penn State Master Gardener
Community Volunteer
Otto P. Robinson, Jr.
Attorney-at-Law, President
Steven L. Weinberger
Vice-President of G. Weinberger Company, Mechanical
Contractor Specializing in Commercial & Industrial Construction
PENN SECURITY BANK AND TRUST COMPANY
ADVISORY BOARDS
ABINGTON OFFICE
Carl M. Baruffaldi
James L. Burne, DDS
Keith Eckel
Richard C. Florey
C. Lee Havey, Jr.
Attorney Patrick J. Lavelle
Sandra C. Phillips
EAST SCRANTON OFFICE
Marie W. Allen
J. Conrad Bosley
Judge Carmen Minora
Mark R. Sarno
Beth S. Wolff
EAST STROUDSBURG OFFICE
Denise M. Cebular
Robert J. Dillman, Ph.D.
Attorney Kirby Upright
Jeffrey Weichel
GREEN RIDGE OFFICE
Joseph N. Connor
Everett Jones
George Noone
Howard J. Snowdon
Jeffrey Solimine
MOUNT POCONO OFFICE
Bruce Berry
Francis Cappelloni
Robert C. Hay
David Lansdowne
Karyn Gaus Vashlishan
NORTH POCONO OFFICE
Jacqueline A. Carling
Anthony J. Descipio
George F. Edwards
James A. Forti
Attorney David Z. Smith
Deborah A. Wright
SOUTH SIDE OFFICE
Attorney Zygmunt R. Bialkowski, Jr.
Michael P. Brown
J. Patrick Dietz
Lois Ferrari
Jeffrey J. Leventhal
Ted M. Stampien, DDS
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