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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 31,1997
Commission File Number 000-23777
PENSECO FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization
23-2939222
(I.R.S. Employer Identification Number)
150 North Washington Avenue Scranton, Pennsylvania
(Address of principal executive office)
18503-1848
(Zip Code)
(717)346-7741
(Registrant's telephone number, including area code)
N/A
(Former address if changed since last report)
Common Stock, Par Value $ .01 per share
(Title of Class)
Name of each Exchange on which registered: N/A
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
on March 13, 1998, based on the average of the closing bid and asked prices of
such stock on that date: Approximately $74,106,000
Common Stock $0.01 Par Value Outstanding at March 13, 1998
- ----------------------------- -----------------------------
(class) 2,148,000
Documents Incorporated by Reference
Portions of the Corporation's 1997 Annual Report to Shareholders included as
Exhibit 13are incorporated by reference in Parts II and III to the extent
provided in Items 6, 7, 8, 7A and 13 hereof.
Portions of the Corporation's definitive proxy statement relating to the 1998
annual meeting of stockholders are incorporated by reference in Part III to the
extent provided in Items 10, 11 and 12 hereof.
PART I
ITEM 1. Business
GENERAL
PENSECO FINANCIAL SERVICES CORPORATION, (the "Company" or "PFNS"), 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
bank holding company. The Company became a bank 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. At
December 31, 1997 the Company had, on a consolidated basis, Total Assets,
Deposits and Stockholders' Equity of approximately $428 million, $374 million,
and $43 million, respectively.
The Company operates from eight banking offices under a state bank charter and
provides full banking services, including trust services, to individual and
corporate customers primarily in Northeastern Pennsylvania. The Company through
its principal office located at 150 North Washington Avenue, Scranton,
Pennsylvania, containing trust, marketing, audit, credit card, human resources,
executive, data processing and central bookkeeping offices and seven additional
offices are located in South Scranton, East Scranton and Green Ridge sections of
Scranton, the Borough of Moscow, the Town of Gouldsboro, its Abington Office is
located in South Abington Township, servicing the Clarks Summit-Abington area
and its Mount Pocono Office located in the Borough of Mount Pocono, servicing
the Pocono Mountain area, provides a full range of banking and trust services to
the Lackawanna, Wayne, Monroe, Pike and Wyoming County areas. All offices are
owned directly by the Bank or through a wholly owned subsidiary of the Bank,
Penseco Realty, Inc., with the exception of the Mount Pocono Office which is
owned by the Bank but is located on land occupied under a long-term lease. The
Bank is the largest independent bank and trust company headquartered in
Lackawanna County, holding approximately 10% of the banking assets, and
processes its data, as well as some of its customers' data, through its own
processing facility.
Through its banking subsidiary, the Company generates interest income from its
outstanding loan receivables and investment portfolio. Other income is generated
primarily from merchant transaction fees, trust fees and service charges on
deposit accounts. The Company's primary costs are interest paid on deposits and
general operating expenses. The Bank provides a variety of general 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 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 Company's primary
deposit products are savings and demand deposit accounts and certificates of
deposit.
The Company is not dependent upon a single customer, or a few customers, the
loss of one or more of which would have a material adverse effect on its
operations. The operations and earnings of the Corporation are not materially
affected by seasonal changes or by Federal, state or a local environmental laws
or regulations.
The accounting policies of the Company conform with generally accepted
accounting principles and with general practices within the banking industry.
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
subsidiaries 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 this region, and include commercial
banks, savings and loan associations, credit unions and other lending
institutions.
The principal competitive factors among the Company'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 other areas such as convenience of location,
types of services, service costs and banking hours.
ITEM 1. Business (continued)
EMPLOYEES
As of March 13, 1998, 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
satisfactory.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs having been written
using a two-digit field as opposed to a four-digit field, to define the
applicable year. Programs that are time sensitive may recognize a date using
"00" as the year 1900 rather than the year 2000. Computer system failure or
significant miscalculations could result from this problem, if not corrected.
The Company licenses a minor portion of its software, used in conducting its
business, from third party software vendors, while most of the Company's
software has been internally developed. The Company has developed a
comprehensive list of all software and all hardware in use within the
organization. Every vendor has been contacted regarding the Year 2000 issue, and
the Company is closely tracking the progress each vendor is making in resolving
the problems associated with the issue. Software is upgraded as the vendors
resolve Year 2000 problems.
Internally developed software is undergoing modifications and many systems have
already been modified. Testing procedures are being formulated for comprehensive
testing of this software beginning in July, 1998, with completion of testing by
the end of 1998. Additionally, the Company has begun the process of contacting
its borrowers to determine the level of progress they have made in addressing
the impact that the Year 2000 issue will have on their respective businesses.
The Company does not anticipate any significant additional costs, over and above
normal operating costs, as the work will be largely accomplished by the
Company's computer systems and programming staff.
SUPERVISION AND REGULATION
OVERVIEW
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.
The Bank, as a Pennsylvania state-chartered non-member financial institution, is
subject primarily 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.
BANK HOLDING COMPANY REGULATIONS
As a bank holding company, the Company can engage in banking-related activities
as permitted by the Federal Reserve Board, directly or through newly-formed
subsidiaries or by acquiring companies already established in such activities
subject to the FRB regulations relating to those activities. However, except for
activities related to its operation as the holding company of the Bank, the
Company does not anticipate engaging in any other banking-related activity in
the foreseeable future.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
Regulations implementing the prompt corrective action provision of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became
effective on December 19, 1992. FDICIA required the regulators to stratify
institutions into five quality tiers based upon their respective capital
strengths and to increase progressively the degree of regulation over the weaker
ones, limited the pass-through deposit insurance treatment of certain types of
accounts, adopted a "Truth in Savings" program, called for the adoption of
risk-based premiums on deposit insurance and required banks to observe insider
credit underwriting procedures no less strict than those applied to comparable
non-insider transactions.
Under the guidelines of FDICIA, a financial institution is considered "well
capitalized" if it has a total risk-based capital ratio of at least 10%, a Tier
1 risk-based capital ratio of at least 6%, and a leverage ratio of 5% or
greater, and it is not subject to any written agreement, order or directive.
ITEM 1. Business (continued)
CAPITAL ADEQUACY & REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company and the Bank's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the Capital Adequacy table below) of Tier 1 and Total Capital to
risk-weighted assets and of Tier 1 Capital to average assets (Leverage ratio).
The table also presents the Company's actual capital amounts and ratios. The
Bank's actual capital amounts and ratios are substantially identical to the
Company's. Management believes, as of December 31, 1997, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized", the Company must maintain minimum Tier 1 Capital, Total Capital
and Leverage ratios as set forth in the Capital Adequacy table. There are no
conditions or events since that notification that management believes have
changed the Company's categorization by the FDIC.
Actual Regulatory Requirements
- ------------------------------------------ ----------------------------------
For Capital To Be "Well
Adequacy Purposes Capitalized"
As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
- -------------------------------------------- ----------------------------------
Total Capital
(to Risk Weighted Assets) $44,888 23.55% >$15,251 >8.0% >$19,064 >10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $42,502 22.29% >$ 7,626 >4.0% >$11,438 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $42,502 10.25% >$ * > * >$20,727 > 5.0%
- - - -
*3.0% ($12,436), 4.0% ($16,581) or 5.0% (20,727) depending on the bank's CAMEL
Rating and other regulatory risk factors.
As of December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
- --------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) $42,333 22.43% >$15,099 >8.0% $18,873 >10.0%
- - -
Tier 1 Capital
(to Risk Weighted Assets) $40,033 21.21% >$ 7,549 >4.0% $11,324 > 6.0%
- -
Tier 1 Capital
(to Average Assets) $40,033 10.18% >$ * > * >$19,668 > 5.0%
- - -
*3.0% ($11,801), 4.0% ($15,734) or 5.0% (19,668) depending on the bank's CAMEL
Rating and other regulatory risk factors.
- --------------------------------------------------------------------------------
STATISTICAL INFORMATION
The following tables present statistical information required by
Guide 3 for Bank Holding Companies relating to Penseco Financial Services
Corporation and its subsidiaries on a consolidated basis.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY / INTEREST RATES
AND INTEREST DIFFERENTIAL
ITEM 1. Business (continued)
The table below presents average balances, interest income on a fully taxable
equivalent basis and interest expense, as well as average rates earned and paid
on the Company's major asset and liability items for the years 1997, 1996 and
1995.
- -------------------------------------------------------------------
1997 1997 1997
ASSETS Average Revenue/ Yield/
Balance Expense Rate
- -------------------------------------------------------------------
Investment Securities
U.S. Treasury securities $113,559 $ 7,092 6.25%
Other 20 1 5.00%
U.S. Agency obligations 11,342 712 6.28%
Loans, net of unearned income:
Real estate mortgages 181,812 13,967 7.68%
Commercial 22,199 1,915 8.63%
Consumer and other 56,364 6,002 10.65%
Federal funds sold 7,535 410 5.44%
- -------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 392,831 $30,099 7.66%
- -------------------------------------------------------------------
Cash and due from banks 9,629
Bank premises and equipment 7,950
Accrued interest receivable 3,573
Other assets 2,988
Less: Allowance for loan losses 2,439
- -------------------------------------------------------------------
Total Assets $414,532
- -------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 23,057 $ 349 1.51%
Savings 72,815 1,447 1.99%
Money markets 68,437 2,039 2.98%
Time - Over $100 30,697 1,616 5.26%
Time - Other 121,201 6,729 5.55%
Federal funds purchased 278 14 5.04%
Repurchase agreements 3,971 161 4.05%
Short-term borrowings 558 30 5.38%
- -------------------------------------------------------------------
Total Interest Bearing
Liabilities/
Total Interest Expense 321,014 $12,385 3.86%
- -------------------------------------------------------------------
Demand - Non-interest bearing 48,241
All other liabilities 3,154
Stockholders' equity 42,123
- -------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $414,532
- -------------------------------------------------------------------
Interest Spread 3.80%
- -------------------------------------------------------------------
Net Interest Income $17,714
- -------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.51%
Return on average assets 1.14%
Return on average equity 11.22%
Average equity to average 10.16%
assets
Dividend payout ratio 47.73%
- -------------------------------------------------------------------
- -------------------------------------------------------------------
1996 1996 1996
ASSETS Average Revenue/ Yield/
Balance Expense Rate
- -------------------------------------------------------------------
Investment Securities
U.S. Treasury securities $125,114 $ 7,880 6.30%
Other 20 1 5.00%
U.S. Agency obligations 8,401 548 6.52%
Loans, net of unearned income:
Real estate mortgages 161,699 12,531 7.75%
Commercial 19,252 1,743 9.05%
Consumer and other 50,320 4,886 9.71%
Federal funds sold 5,191 304 5.86%
- -------------------------------------------------------------------
Total Earning Assets/
Total Interest Income 369,997 $ 27,893 7.54%
- -------------------------------------------------------------------
Cash and due from banks 7,985
Bank premises and equipment 6,275
Accrued interest receivable 3,603
Other assets 7,728
Less: Allowance for loan losses 2,230
- -------------------------------------------------------------------
Total Assets $393,358
- -------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 22,312 $ 366 1.64%
Savings 76,898 1,724 2.24%
Money markets 73,626 2,347 3.19%
Time - Over $100 19,695 975 4.95%
Time - Other 107,019 5,736 5.36%
Federal funds purchased 559 23 4.11%
Repurchase agreements 100 4 4.00%
Short-term borrowings 497 26 5.23%
- -------------------------------------------------------------------
Total Interest Bearing
Liabilities/
Total Interest Expense 300,706 $ 11,201 3.72%
- -------------------------------------------------------------------
Demand - Non-interest bearing 46,885
All other liabilities 5,882
Stockholders' equity 39,885
- -------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $393,358
- -------------------------------------------------------------------
Interest Spread 3.82%
- -------------------------------------------------------------------
Net Interest Income $ 16,692
- -------------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.51%
Return on average assets 1.17%
Return on average equity 11.54%
Average equity to average 10.14%
assets
Dividend payout ratio 46.67%
- -------------------------------------------------------------------
- -----------------------------------------------------------------
1995 1995 1995
ASSETS Average Revenue/ Yield/
Balance Expense Rate
- -----------------------------------------------------------------
Investment Securities
U.S. Treasury securities $121,029 $ 7,894 6.52%
Other 20 - -
U.S. Agency obligations 32,744 2,061 6.29%
Loans, net of unearned income:
Real estate mortgages 137,788 11,447 8.31%
Commercial 14,836 1,491 10.05%
Consumer and other 39,001 4,051 10.39%
Federal funds sold 10,579 530 5.01%
- -----------------------------------------------------------------
Total Earning Assets/
Total Interest Income 355,997 $ 27,474 7.72%
- -----------------------------------------------------------------
Cash and due from banks 7,644
Bank premises and equipment 6,420
Accrued interest receivable 3,560
Other assets 3,824
Less: Allowance for loan losses 2,088
- -----------------------------------------------------------------
Total Assets $375,357
- -----------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Demand-Interest bearing $ 21,676 $ 424 1.96%
Savings 77,131 1,952 2.53%
Money markets 77,577 2,786 3.59%
Time - Over $100 13,825 687 4.97%
Time - Other 98,035 5,339 5.45%
Federal funds purchased 16 1 5.65%
Repurchase agreements
- - -
Short-term borrowings 546 29 5.31%
- -----------------------------------------------------------------
Total Interest Bearing
Liabilities/
Total Interest Expense 288,806 $ 11,218 3.88%
- -----------------------------------------------------------------
Demand - Non-interest bearing 44,358
All other liabilities 4,604
Stockholders' equity 37,589
- -----------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $375,357
- -----------------------------------------------------------------
Interest Spread 3.84%
- -----------------------------------------------------------------
Net Interest Income $ 16,256
- -----------------------------------------------------------------
FINANCIAL RATIOS
Net interest margin 4.57%
Return on average assets 1.19%
Return on average equity 11.86%
Average equity to average 10.01%
assets
Dividend payout ratio 45.18%
- -----------------------------------------------------------------
The following table presents the dollar amount of change in interest income and
expense and the corresponding amounts attributable to changes in rate and
changes in volume:
ITEM 1. Business (continued)
DOLLAR AMOUNT OF CHANGE IN
INTEREST INCOME AND INTEREST EXPENSE
Dollar Change
Amount Change Change in
of in in Rate-
1997 compared to 1996 Change Volume Rate Volume
--------------------------------------------------------------------
EARNING Investment Securities:
ASSETS U.S. Treasury securities $ (788) $ (728) $ (75)$ 15
Other - - - -
U.S. Agency obligations 164 192 (20) (8)
Loans, net of unearned income: 1,436 1,559 (113) (10)
Real estate mortgages
Commercial 172 267 (81) (14)
Consumer and other 1,116 587 473 56
Federal funds sold 106 137 (22) (9)
--------------------------------------------------------------------
Total Interest Income $ 2,206 $ 2,014 $ 162 $ 30
--------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand-Interest bearing $ (17) $ 12 $ (29)$ -
LIABILITIES Savings (277) (91) (192) 6
Money markets (308) (166) (155) 13
Time - Over $100 641 545 63 33
Time - Other 993 760 203 30
Federal funds purchased (9) (12) 5 (2)
Repurchase agreements 157 160 - (3)
Short-term borrowings 4 4 - -
--------------------------------------------------------------------
Total Interest Expense $ 1,184 $ 1,212 $ (105) $ 77
--------------------------------------------------------------------
Net Interest Income $ 1,022 $ 802 $ 267 $ (47)
--------------------------------------------------------------------
Dollar Change
Amount Change Change in
of in in Rate-
1997 compared to 1996 Change Volume Rate Volume
-------------------------------------------------------------------
EARNING Investment Securities:
ASSETS U.S. Treasury securities $ (13) $ (94) $ 85 $ (4)
Other - - - -
U.S. Agency obligations (1,513) (1,519) 26 (20)
Loans, net of unearned income:
Real estate mortgages 1,084 2,622 (1,254) (284)
Commercial 252 516 (196) (68)
Consumer and other 835 1,499 (484) 180)
Federal funds sold (226) (234) 16 (8)
--------------------------------------------------------------------
Total Interest Income $ 419 $ 2,790 $ (1,807)$ (564)
--------------------------------------------------------------------
INTEREST Deposits:
BEARING Demand-Interest bearing $ (58) $ 20 $ (76)$ (2)
LIABILITIES Savings (228) (32) (201) 5
Money markets (439) (156) (302) 19
Time - Over $100 288 439 (93) (58)
Time - Other 397 727 (296) (34)
Federal funds purchased 22 26 - (4)
Repurchase agreements 4 - - 4
Short-term borrowings (3) (2) (1) -
--------------------------------------------------------------------
Total Interest Expense $ (17) $ 1,022 $ (969)$ (70)
--------------------------------------------------------------------
Net Interest Income $ 436 $ 1,768 $ (838)$ 494)
--------------------------------------------------------------------
ITEM 1. Business (continued)
II. INVESTMENT PORTFOLIO
The Company maintains a portfolio of investment securities to provide income and
serve as a source of liquidity for its ongoing operations.
The following table presents the book value by security type for the Company's
investment portfolio.
December 31, 1997 1996 1995
- -------------------------------------------------------------------------------
U.S. Treasury securities $ 114,922 $ 112,904 $ 137,271
Other securities 20 20 20
U.S. Agency obligations
10,106 12,339 8,955
- -------------------------------------------------------------------------------
Total Investment Securities $ 125,048 $ 125,263 $ 146,246
- -------------------------------------------------------------------------------
See General Note 3 to the Financial Statements for a breakdown by classification
as to available for sale and held to maturity.
The amortized cost and fair value of debt securities at December 31, 1997 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
Due in one year or less:
U.S. Treasury securities $ 55,910 $56,057 $ - $ -
After one year through five years:
U.S. Treasury securities 58,373 58,865 - -
- --------------------------------------------------------------------------------
Subtotal 114,283 114,922 - -
Mortgage-backed securities - - 10,106 10,102
- --------------------------------------------------------------------------------
Total Debt Securities $ 114,283 $14,922 $ 10,106 $10,102
- --------------------------------------------------------------------------------
III. LOAN PORTFOLIO
LOAN Details regarding the Company's loan portfolio for the past
PORTFOLIO five years are as follows:
As of December 31, 1997 1996 1995
- ------------------------------------------------------------------
Real estate - construction
and land development $ 3,731 $ 3,770 $ 4,042
Real estate mortgages
Commercial 190,658 167,291 146,600
Credit card and related plans 26,841 19,966 16,246
Installment 2,293 2,298 2,404
Obligations of states 39,613 37,463 30,804
and political subdivisions 8,910 9,427 9,712
- ------------------------------------------------------------------
Loans, net of unearned income 272,046 240,215 209,808
Less: Allowance for loan losses 2,600 2,300 2,100
- ------------------------------------------------------------------
Loans, net $269,446 $237,915 $207,708
- ------------------------------------------------------------------
As of December 31, 1994 1993
- ----------------------------------------------------
Real estate - construction
and land development $ 4,174 $ 3,219
Real estate mortgages
Commercial 128,467 133,470
Credit card and related plans 12,643 15,344
Installment 2,520 2,840
Obligations of states 24,769 21,465
and political subdivisions 8,132 9,147
- ----------------------------------------------------
Loans, net of unearned income 180,705 185,485
Less: Allowance for loan losses 2,100 2,100
- ----------------------------------------------------
Loans, net $178,605 $183,385
- ----------------------------------------------------
Nonperforming Assets
Loans are generally placed on a non-accrual status when principal or interest is
past due 90 days or when payment in full is not anticipated. When a loan is
placed on nonaccrual status, all previously accrued but not collected is charged
against current income. Loans are returned to accrual status when past due
interest is collected and the collection of principal is probable.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,031, $866 and $940 at December 31, 1997, 1996 and 1995, respectively. If
interest on those loans had been accrued, such income would have been $89, $66
and $69 for 1997, 1996 and
ITEM 1. Business (continued)
1995, respectively. Interest income on those loans, which is recorded only when
received, amounted to $35, $45 and $56 for 1997, 1996 and 1995, respectively.
There are no commitments to lend additional funds to individuals whose loans are
non-accrual status.
The management process for evaluating the adequacy of the allowance for loan
losses includes reviewing each month's loan committee reports which list all
loans that do not meet certain internally developed criteria as to collateral
adequacy, payment performance, economic conditions and overall credit risk.
These reports also address the current status and actions in process on each
listed loan. From this information, adjustments are made to the allowance for
loan losses. Such adjustments include both specific loss allocation amounts and
general provisions by loan category based on present and past collection
experience, nature and volume of the loan portfolio, overall quality, and
current economic conditions that may affect the borrower's ability to pay. As of
December 31, 1997 there are no significant loans as to which management has
serious doubt about their ability to continue to perform in accordance with
their contractual terms.
At December 31, 1997, 1996 and 1995, the Company did not have any loans
specifically classified as impaired.
Most of the Company's lending activity is with customers located in the
Company's geographic market area repayment thereof is affected by economic
conditions in this market area.
December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
Non-accrual loans $1,031 $ 866 $ 940 $1,435 $1,924
Loans past due 90 days or more
and accruing:
Guaranteed student loans 343 342 166 187 118
Credit card and home equity loans 98 93 133 101 140
- -------------------------------------------------------------------------------
Total non-performing loans 1,472 1,301 1,239 1,723 2,182
Other real estate owned 339 610 306 496 618
- -------------------------------------------------------------------------------
Total non-performing assets $1,811 $1,911 $1,545 $2,219 $2,800
- -------------------------------------------------------------------------------
Real Estate acquired through foreclosure is recorded at the lower of cost or
market at the time of acquisition. Any subsequent write-downs are charged
against operating expenses. The other real estate owned as of December 31, 1997
and 1996 was $339 and $610, respectively, supported by appraisals of the real
estate involved.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
Loans are stated at the principal amount outstanding, net of any unearned
income, deferred loan fees and the allowance for loan losses. Interest on
discounted loans is generally recognized as income based on methods that
approximate the interest method. For all other loans, interest is accrued daily
on the outstanding balances.
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
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. 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.
ITEM 1. Business (continued)
The following tables present the Company's loan loss experience during the
periods indicated:
Years Ended December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Balance at beginning of year $2,300 $2,100 $2,100 $2,100 $2,100
Charge-offs:
Real estate mortgages 38 87 300 341 79
Commercial (time and demand)
and all others - - 11 - 14
Credit card and related plans 52 64 67 55 77
Installment loans 32 32 3 12 20
- --------------------------------------------------------------------------------
Total charge-offs 122 183 381 408 190
- --------------------------------------------------------------------------------
Recoveries:
Real estate mortgages 79 22 2 3 -
Commercial (time and demand)
and all others 1 2 1 25 6
Credit card and related plans 17 16 11 18 19
Installment loans 9 9 46 25 47
- --------------------------------------------------------------------------------
Total recoveries 106 49 60 71 72
- --------------------------------------------------------------------------------
Net charge-offs 16 134 321 337 118
- --------------------------------------------------------------------------------
Provision charged to operations 316 334 321 337 118
- --------------------------------------------------------------------------------
Balance at End of Year $2,600 $2,300 $2,100 $2,100 $2,100
- --------------------------------------------------------------------------------
Ratio of net charge-offs
to average loans outstanding 0.001% 0.06% 0.17% 0.19% 0.06%
- --------------------------------------------------------------------------------
The allowance for loan losses is allocated as
follows:
As of December 31,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
Amount %* Amount %* Amount %*
Real estate mortgages $ 1,350 71% $ 1,125 71% $ 1,100 72%
Commercial (time and demand)
and all others 850 19% 875 22% 750 23%
Credit card and related plans 150 1% 150 1% 150 1%
Personal installment loans 250 9% 150 6% 100 4%
---------------------------------------------------
Total $ 2,600 100% $ 2,300 100% $ 2,100 100%
---------------------------------------------------
As of December 31,
---------------------------------------
1994 1993
---------------------------------------
Amount %* Amount %*
Real estate mortgages $ 1,100 74% $ 1,200 74%
Commercial (time and demand)
and all others 700 22% 600 21%
Credit card and related plans 200 2% 200 2%
Personal installment loans 100 2% 100 3%
---------------------------------------
Total $ 2,100 100% $ 2,100 100%
---------------------------------------
* Percent of loans in each category to total
loans
V. DEPOSITS
The primary source of funds to support the Company's growth is its deposit base.
Company deposits increased $22.5 million to $374.5 million at December 31, 1997
from $352.0 million at December 31, 1996, an increase of 6.4%. Company deposits
increased $15.6 million to $352.0 million at December 31, 1996 from $336.4
million at December 31, 1995, an increase of 4.6%. This growth occurred despite
the trend of customers finding alternate repositories for their funds,
principally the equity market via mutual funds. Management is responding to the
competition for these funds by offering competitively priced or alternative
banking products.
DEPOSITS (in millions) YEAR
- -------------------------------------
$374,488 1997
352,026 1996
336,386 1995
326,482 1994
310,509 1993
The maturities of time deposits of $100,000 or more
are as follows:
Three months or less $ 8,128
Over three months through six months 14,261
Over six months through twelve months 5,728
Over twelve months 10,035
----------
Total $ 38,152
ITEM 1. Business (continued)
December 31, 1997 1996
- ----------------------------------------------------------
Demand - Non-interest bearing $ 46,127 $ 44,657
Demand - Interest bearing 23,826 25,291
Savings 71,722 75,095
Money markets 63,055 73,145
Time - Over $100,000 38,152 22,738
Time - Other 131,606 111,100
- ----------------------------------------------------------
Total $ 374,488 $ 352,026
- ----------------------------------------------------------
Scheduled maturities of time deposits
are as follows:
1998 $134,008
1999 28,098
2000 4,032
2001 1,854
2002 1,754
2003 and thereafter 12
- ------------------------------------
Total $169,758
- ------------------------------------
VI. RETURN OF EQUITY AND ASSETS
FINANCIAL RATIOS: 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Return on Average Assets 1.14% 1.17% 1.19% 1.02% 1.13%
Return on Average Equity 11.22% 11.54% 11.86% 10.76% 12.31%
Dividend Payout Ratio 47.73% 46.67% 45.18% 48.01% 44.04%
Average Equity to Average Assets 10.16% 10.14% 10.01% 9.47% 9.14%
VII. SHORT TERM BORROWINGS
At December 31, 1997 and 1996, other borrowed funds consisted of demand notes to
the U.S. Treasury and Repurchase Agreements.
Short-term borrowings generally have original maturity dates of thirty days or
less.
Investment securities with amortized costs of $7,987 and $5,964 and fair values
of $8,023 and $5,990 were pledged to secure repurchase agreements at December
31, 1997 and 1996.
Years Ended December 31, 1997 1996
- ---------------------------------------------------------------------------
Amount outstanding at year end $ 6,815 $ 2,468
Average interest rate at year end 4.57% 4.70%
Maximum amount outstanding at any month end $ 6,815 $ 4,667
Average amount outstanding $ 4,807 $ 1,156
Weighted average interest rate during the year:
Federal funds purchased 5.04% 4.11%
Repurchase agreements 4.05% 4.00%
Demand notes to U.S. Treasury 5.38% 5.23%
The Company has an available credit facility with the Federal Reserve Bank in
the amount of $10,000 (secured by pledged securities with amortized costs and
fair values of $9,971 and $9,919 at December 31 1997 and $9,998 and $9,962 at
December 31, 1996 with an interest rate of 5.00% at each year end. There is no
stated expiration date for the credit facility as long as the Company maintains
the pledged securities at the Federal Reserve Bank. There was no outstanding
balance as of December 31, 1997 and 1996.
ITEM 2. Properties
The Bank owns all of its offices either directly or through its wholly owned
subsidiary, Penseco Realty, Inc., with the exception of the Mount Pocono Office
which is owned by the Bank but is located on land leased by the Bank over a long
term. The principal office is located in the "Central City" section of Scranton
in its business district. The Central City Office, located at the corner of
North Washington Avenue and Spruce Street in Scranton, utilizes nine (9) stories
and the basement of a ten (10) story - 50,000 sq. ft. office building, the Penn
Security Bank Building, formerly the Mears Building, and houses the operations,
trust, marketing, credit card and audit departments as well as the Bank's
executive offices. The balance of the building is leased to other tenants. Title
to the Penn Security Bank Building is held by Penseco Realty, Inc., a wholly
owned subsidiary of Penn Security Bank and Trust Company. Parking is provided
for approximately 40 customers and it has two (2) ATM's, one drive up and one
covered walk-up. The South Scranton Office is located in the "South Side"
section of Scranton in a business district. It has 13,583 sq. ft. of floor space
all of which is presently being used in the business of the Bank. Parking
facilities are provided for approximately 70 automobiles. The East Scranton
Office is located in that section of Scranton at the corner of Prescott Avenue
and Ash Street. It has 2,290 sq. ft. of floor space all of which is presently
ITEM 2. Properties (continued)
being used in the business of banking. Parking facilities are provided for 15
automobiles and it has a drive-up ATM. The Green Ridge Office is located in that
section of Scranton in a business district at the corner of Boulevard Avenue and
East Market Street. It contains 5,601 sq. ft. of floor space about 3/4 of which
is used for banking purposes and the rest (located on the second floor) is
presently unoccupied. Parking for 50 automobiles is provided and it has a
drive-up ATM. The Moscow Office located at the corner of Main and Academy
Streets in Moscow, has 4,000 sq. ft. of floor space, parking for 50 automobiles,
drive-in windows and a drive-up ATM. The Gouldsboro Office, located at the
corner of Second and Main Streets in Gouldsboro, has 480 sq. ft. of floor space,
parking for 15 automobiles, drive-up windows and an ATM. The Abington Office,
located in South Abington Township, has 2,914 sq. ft. of floor space, parking
for 32 automobiles, drive-in windows and an ATM. The Mount Pocono Office is
located at the junction of Routes 611 and 940 in Mount Pocono, has 2,143 sq. ft.
of floor space, parking for 20 automobiles, drive-up windows and two ATM's. Two
remote ATM locations are leased by the Bank located on Meadow Avenue in Scranton
and the Red Barn Village in Newton Township. All offices have closed circuit
television monitored drive-ups and ATM's.
ITEM 3. Legal Proceedings
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the business of the Company to which
the Company or subsidiary is a party or of which any of their property is the
subject.
ITEM 4. Submission of Matters to a Vote of Security Holders
The formation of the holding company was over-whelmingly approved by the
stockholders at the special meeting held December 16, 1997, the vote being
485,312 shares approving and 1,668 shares opposed, of the 537,000 shares
eligible to vote. In addition, no stockholder elected to exercise any dissenting
stockholder rights. The Bank received approval from the Federal Deposit
Insurance Corporation, the Pennsylvania Department of Banking and the Federal
Reserve Board prior to year-end and the conversion to the holding company
structure was effective December 31, 1997.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's capital stock is traded "Over-the-Counter" BULLETIN
BOARD under the symbol "PFNS". The following table sets forth the price range
together with dividends paid for each of the past two years. These quotations do
not necessarily reflect the value of actual transactions.
Dividends
Paid
1997 High Low Per share
- -----------------------------------------------------
First Quarter $ 23 $ 22 $ 0.20
Second Quarter 23 23 0.20
Third Quarter 25 23 0.20
Fourth Quarter 29 25 0.45
--------
$ 1.05
========
Dividends
Paid
1996 High Low Per share
- -----------------------------------------------------
First Quarter $ 22 $ 22 $ 0.187
Second Quarter 22 22 0.187
Third Quarter 22 22 0.187
Fourth Quarter 22 22 0.439
---------
$ 1.000
=========
As of March 13, 1998 there were approximately 1,019 stockholders of the Company
based on the number of recordholders.
The information on the Dividend Restrictions of the Bank are listed within
Exhibit 13 and incorporated herein by reference thereto.
ITEM 6. Selected Financial Data
The information contained under the heading "Selected Financial Data" is listed
within Exhibit 13 and incorporated herein by reference thereto.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained under the heading "Management's Discussion and
Analysis" is listed within Exhibit 13 and incorporated herein by reference
thereto.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained under the heading "Quantitative and Qualitative
Disclosures About Market Risk" is listed within Exhibit 13 and incorporated
herein by reference thereto.
ITEM 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements are listed within Exhibit 13 and
incorporated herein by reference thereto.
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 1997.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information on Directors of the Bank listed on pages 4 and 5 of the
Company's definitive proxy statement relating to the Company's 1998 meeting of
stockholders is incorporated herein by reference thereto.
The information on Executive Officers listed on pages 6 and 7 of the Company's
definitive proxy statement relating to the Company's 1998 meeting of
stockholders is incorporated herein by reference thereto.
ITEM 11. Executive Compensation
The information contained under the heading "Executive Compensation" on page 6
in the Company's definitive proxy statement relating to the Company's 1998
meeting of stockholders 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, 3 and 4 in the Company's definitive proxy statement
relating to the Company's 1998 meeting of stockholders is incorporated herein by
reference thereto.
ITEM 13. Certain Relationships and Related Transactions
The information contained in Note 17 under the heading "General Notes to
Financial Statements" in the Company's 1997 Annual Report to Stockholders is
incorporated herein by reference thereto.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
As listed in the Index to Financial Statements on page 16 hereof.
2. Financial Statement Schedules
3. Exhibits
As listed in the Index to Exhibits on pages 16 and 17 hereof.
(b) Report on Form 8-K was filed for the fourth quarter of 1997 on the date of
February 11, 1998.
(c) See item 14. (a) 3. above
(d) See item 14. (a) 2. above
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.
By: /s/ Otto P. Robinson, Jr.
Otto P. Robinson, Jr.
President
Date: March 27, 1998
By: /s/ Richard E. Grimm
Richard E. Grimm
Executive Vice-President
Date: March 27, 1998
By: /s/ Patrick Scanlon
Patrick Scanlon
Controller
Date: March 27, 1998
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 and on the dates indicated.
By: /s/ Edwin J. Butler
Edwin J. Butler
Director
Date: March 27, 1998
By: /s/ Richard E. Grimm
Richard E. Grimm
Director
Date: March 27, 1998
By: /s/ Russell C. Hazelton
Russell C. Hazelton
Director
Date: March 27, 1998
By: /s/ D. William Hume
D. William Hume
Director
Date: March 27, 1998
By: /s/ James G. Keisling
James G. Keisling
Director
Date: March 27, 1998
By: /s/ P. Frank Kozik
P. Frank Kozik
Director
Date: March 27, 1998
By: /s/ Robert W. Naismith, Ph.D.
Robert W. Naismith, Ph.D.
Director
Date: March 27, 1998
By: /s/ James B. Nicholas
James B. Nicholas
Director
Date: March 27, 1998
By: /s/ Emily S. Perry
Emily S. Perry
Director
Date: March 27, 1998
By: /s/ Sandra C. Phillips
Sandra C. Phillips
Director
Date: March 27, 1998
By: /s/ Otto P. Robinson, Jr.
Otto P. Robinson, Jr.
Director
Date: March 27, 1998
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report on the 1997 Consolidated Financial Statements *
Consolidated Balance Sheets at December 31, 1997 and 1996 *
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996
and 1995 *
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 *
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 *
General Notes to Consolidated Financial Statements *
* Incorporated by reference to the Company's 1997 Annual Report to
Shareholders. See Item 8 of this report on Form 10-K.
(The remainder of this page left intentionally blank.)
INDEX TO EXHIBITS
Exhibit Number Prior Filing or
Referred to Item 601 Exhibit Page
of Regulation S-K DESCRIPTION OF EXHIBIT Number Herein
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
3 i) Articles of Incorporation Page 16
ii) By-Laws Page 18
4 Instruments defining the rights of
security holders, including indentures None
9 Voting trust agreement None
10 Material contracts - Supplemental Page 8 of the
Benefit Plan Agreement Definitive Proxy
Statement relating
to the Company's
1998 Meeting of
Stockholders is
holders incorp-
orated herein by
reference thereto.
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 quarterly report to
security holders Page 24
16 Letter re change in certifying
accountant None
18 Letter re change in accounting
principles None
21 Subsidiaries of the registrant Page 78
22 Published report regarding matters The Definitive
submitted to vote of security holders Proxy Statement
relating to the
Company's Special
Meeting of Stock-
holders held on
December 16, 1997,
filed on October
24, 1997 is
incorporated
herein by
reference thereto.
23 Consents of experts and counsel None
24 Power of attorney None
27 Financial Data Schedule None
99 Additional Exhibits None