-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UmlNzmKeontsQmynxHiLuGhfVkGV1e33QwZwpJFWJDCaQqoWeStaaDK9AOeP8JVX jpl5AUGdPYcohvrFcEixyg== 0001054508-01-000004.txt : 20010323 0001054508-01-000004.hdr.sgml : 20010323 ACCESSION NUMBER: 0001054508-01-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENSECO FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0001054508 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23777 FILM NUMBER: 1576241 BUSINESS ADDRESS: STREET 1: 150 N WASHINGTON AVENUE CITY: SCRANTON STATE: PA ZIP: 18503 BUSINESS PHONE: 7173467741 10-K 1 0001.txt PENSECO FINANCIAL SERVICES CORPORATION (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 Construction Loans Credit Lines Educational Loans Home Equity Loans Home Repair and Remodeling Loans Installment Loans MasterCard and VISA (Cosmic Card) Mortgage Loans (Residential and Commercial) Personal Loans OTHER SERVICES ATM Services Bank Money Orders Cashier's Checks College Campus Card Interface Credit Card Merchant Draft Capture Data Processing Services Direct Deposit of Recurring Payments EDI-ACH Service Foreign Remittance Home Banking and Videotex Services Investor Services (a) Brokerage (b) Insurance Lockbox Services Night Depository 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 (570) 587-4898 East Scranton Prescott Avenue & Ash Street Scranton, PA (570) 342-9101 East Stroudsburg Route 209 & Route 447 East Stroudsburg, PA (570) 420-0432 Gouldsboro Main & Second Streets Gouldsboro, PA (570) 842-6473 Green Ridge 1901 Sanderson Avenue Scranton, PA (570) 346-4695 Central City 150 North Washington Avenue Scranton, PA (570) 346-7741 Mount Pocono Route 611 & Route 940 Mount Pocono, PA (570) 839-8732 North Pocono Main & Academy Streets Moscow, PA (570) 842-7626 South Scranton 526 Cedar Avenue Scranton, PA (570) 343-1151 Other ATM locations Acorn Market Route 209 Marshall's Creek, PA Acorn Market Route 611 Swiftwater, PA Convenient Food Mart Wyoming & Mulberry Streets Scranton, PA Meadow Ave. & Hemlock St. Scranton, PA Metropolitan Life Insurance Company Morgan Highway Clarks Summit, PA Red Barn Village Newton Ransom Blvd Newton, PA On the Cover The cover for our 2000 Annual Report portrays the flow of information and the movement of funds electronically by means of the Internet. Technology-sophisticated banks, such as Penn Security, are not restricted by the physical location of their offices; nor are they limited in their service offerings to "traditional" banking products. This year's cover symbolizes that we at Penn Security, with a wide array of leading edge products and services, along with electronic connectivity to our customers nationwide, via our new website, are well positioned to expand our horizons. Financial Highlights In thousands, except per share data 2000 1999 1998 - -------------------------------------------------------------- Earnings per share $ 2.21 $ 2.17 $ 1.99 Dividends per share $ 1.15 $ 1.10 $ 1.05 Total Capital $ 50,067 $ 45,743 $ 44,961 Total Deposits $ 387,439 $ 367,332 $ 377,526 Total Assets $ 467,230 $ 428,614 $ 436,099 Contents Customer Services ........................................... Inside Front Cover President's Letter ........................................................... 2 Board of Directors ........................................................... 3 Promotions and Appointments .................................................. 4 Community Events ............................................................. 5 Investment Services .......................................................... 6 Form 10-K Part 1, Item 1 Business ..................................................... 8 Item 2 Properties ................................................... 9 Item 3 Legal Proceedings ............................................ 9 Item 4 Submission of Matters to a Vote of Security Holders .......... 9 Part 2, Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ....................................... 10 Item 6 Selected Financial Data 11 Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations ................................. 12 Item 7A Quantitative and Qualitative Disclosures About Market Risk .. 20 Item 8 Financial Statements and Supplementary Data ......................... 22 Consolidated Balance Sheets ......................................... 22 Consolidated Statements of Income ................................... 23 Consolidated Statements of Changes in Stockholders' Equity .......... 24 Consolidated Statements of Cash Flows ............................... 25 General Notes to Financial Statements ............................... 26 Independent Auditor's Report ........................................ 35 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 36 Part 3, Item 10 Directors and Executive Officers of the Registrant .......... 36 Item 11 Executive Compensation ...................................... 36 Item 12 Security Ownership of Certain Beneficial Owners and Management............................................. 36 Item 13 Certain Relationships and Related Transactions .............. 36 Part 4, Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................ 37 Signatures .................................................................. 38 Index to Exhibits ........................................................... 39 Company Officers ............................................................ 40 Company Board Members ........................................ Inside Back Cover Penseco Financial Services Corporation / 2000 Annual Report 1 President's Letter Dear Shareholder I am pleased to report to you that 2000 was another successful year for Penseco Financial Services Corporation. Earnings increased to $2.21 per share for 2000 from $2.17 per share for 1999. Dividends increased to $1.15 per share for 2000 from $1.10 per share for 1999. Total Assets increased to $467 million at year end 2000 from $429 million at year end 1999. Total Deposits increased to $387 million at year end 2000 from $367 million at year end 1999. Capital increased to $50.1 million at year end 2000 from $45.7 million at year end 1999. Net income for the year 2000 was negatively affected by our sale of shorter term, low rate securities and reinvestment in longer term, high rate securities as the rates were peaking last year, resulting in after-tax securities losses of $.11 per share. During the year 2000, the Federal Reserve (FED) concentrated on reigning in the overheating economy. Of particular concern to the FED was the national election where additional spending and tax cut promises presaged a shift to a more stimulative Federal fiscal policy. Apparently, from recent economic statistical reports, as I write this letter, the FED has succeeded in slowing the economy which has and should continue to lead to lower interest rates this year, leaving some room for the tax cuts and spending increases promised during the election. Thus, the modest repositioning of our investment portfolio last year should serve us well this year. Our declaration to become a Financial Holding Company was approved by the Federal Reserve Board in March, 2000. This designation carries with it broader powers than we would have if we were just an ordinary bank holding company. Only bank holding companies who are well capitalized and well managed and have achieved at least a satisfactory rating for community reinvestment can so qualify. The list of activities which financial holding companies are permitted to engage in grows monthly - faster than one can ever take advantage of - nevertheless, one never knows what opportunity will beckon at any particular time, so it is good to be positioned to take advantage of opportunity when it presents itself. With the Y2K issue behind us, and the redirection of our technology forces, a number of new products were instituted. In January, we introduced a low cost, entirely electronic account called EBT for those customers receiving electronic entitlement benefits. We also introduced a new tiered money market account with three different interest rate tiers. Although there has been little demand for the EBT accounts, the tiered money market accounts have proven to be very popular. Also proving popular, have been callable certificates of deposits which were introduced late in 1999. These certificates generally pay a higher interest rate than non-callable certificates of deposit but provide for the Bank an optional date, on or after which, they can be called. This type of certificate of deposit aids the Bank in controlling its interest rate sensitivity. In April, we opened our new Investment Services, through an agreement with Fiserv Investor Services, Inc., a fully licensed broker dealer established by Fiserv, Inc., a large company processing data for thousands of banks nationwide. Dual employees of the Bank and the broker dealer provide for sales and purchases of investments including stocks, bonds, mutual funds and annuities. Mr. Louis J. Rizzo and Mr. Mark J. Zakoski joined the Bank as our first two fully licensed investment representatives. Mr. Rizzo and Mr. Zakoski each bring in excess of eight years experience in the sale of financial and investment products, each having served with a major financial services organization prior to joining our Investment Services. Also joining our investment team was Linda B. Gable who is licensed to accept and place investment orders for our customers. Responsibility for the investment services is vested in Peter F. Moylan, Executive Vice-President and head of our non-deposit services. In the future, we plan to establish a fully licensed broker dealer subsidiary of our holding company. In May, Penn Security went live with its web site - www.pennsecurity.com. This site is both informational and transactional making available through the Internet all of the services which our home/office banking system offers. In addition, the site links to a joint Penn Security/Fiserv Investor Services, Inc.'s web site, permitting our customers access to on-line brokerage services at very low transaction costs. Through the investment services site, customers can view their investment account, buy and sell stocks, bonds and mutual funds, review transaction histories and keep track of the cost bases of their various investments. In making our home/office banking system available on the Internet, we also enhanced the system to make it more user-friendly. In addition, in August we enabled customers, through the on-line banking system, to transfer funds between their brokerage accounts and bank accounts at Penn Security, thus giving our customers complete control of their liquid assets. In addition, transaction files may be downloaded for those customers using Quicken and Microsoft Money to automatically reconcile their bank statement or for other uses of the data contained therein. In September, the Bank replaced its aging IBM document processing machines with new document processing machines which utilize electronic images of the documents rather than microfilm for archival and retrieval functions. We hope to be able to make these images available to our customers through the Internet shortly. In the fourth quarter, the Bank upgraded its network with state of the art equipment and increased line speeds to our branches. Unfortunately, the process took longer than anticipated because of the Verizon employee strike and the reorganization of Verizon divisions pursuant to its merger with GTE. Although a few glitches remain, on the whole, the network is operating very well with excellent response time for users and greater effectiveness and control than before. Through this network, check images and deposit items can be directly accessed and printed at our branches. We are also working on imaging all of our computer reports for retrieval purposes, which will also be available bank-wide through this network. Data privacy, data integrity, data security and data retrieval are foremost on our mind as well as the minds of our customers. Most of our data is processed in-house on one of the world's most secure computers, an IBM AS400. Data is also stored off-site in a secure location and yearly we perform a disaster recovery test to ensure that we can recover all of our customers' data. We maintain sophisticated firewalls to protect our data from external attack. We have been operating our home/office banking system for over 18 years and have never had a security problem. We 2 Penseco Financial Services Corporation / 2000 Annual Report recently mailed privacy policy notices to all of our customers (all financial institutions must do so by July 1, 2001). Judging from the responses, data privacy is a "hot button". We do not share any customer data with any third party, unless we have a joint product which we market with them or where they market our products for us or where a third party processes data for us. In all instances, any third party with whom we have this kind of relationship is contractually bound to protect the data and they may use it only for the stated purposes and may not disclose it to other third parties. In April, William J. Calpin, Jr., joined the Bank as Senior Vice-President, Trust Services. Mr. Calpin is well known in Northeastern Pennsylvania for his expertise in trust services and his many years of experience in the trust services division at a major financial institution in our market area. He replaces our former head of the trust department, Robert F. Duguay, who retired in May of this year after many years of dedicated service. In May, Nancy Burns, our Abington Branch Manager for many years, retired. Mr. Carl M. Baruffaldi was named Abington Branch Manager to replace her, Jeffrey Solimine was named Green Ridge Branch Manager to replace Carl and Karyn Gaus Vashlishan was named Mount Pocono Branch Manager. In October, Lynn M. Peters Thiel joined the Bank as Vice-President and Compliance Officer. Mrs. Thiel was formerly a compliance officer at another local financial institution. The compliance function at the Bank continues to increase in importance and workload as the Bank moves into new products and services, such as investment services and insurance. At the end of the year the following promotions were made: Christe A. Casciano, Vice-President and Director of Marketing; Jennifer S. Wohlgemuth, Assistant Vice-President; Lisa A. Kearney, Assistant Vice-President; Lori A. Dzwieleski, Assistant Branch Manager of the Gouldsboro Office; Barbara Garofoli, Assistant Branch Manager of the East Scranton Office; Susan A. Kopp, Assistant Branch Manager of the Mount Pocono Office; and Stephen A. Hoffman, Branch Operations Officer. We congratulate these fine employees on their many achievements. We are indeed fortunate to have such a dedicated and hardworking staff. This year, three local banks were merged or are in the process of merging with bigger organizations headquartered out of state. As this process continues, we believe it strengthens our franchise as a locally owned and controlled financial services organization. We have indicated before that we are interested in providing a wide range of insurance products to our customers and we continue to pursue that goal. 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 portion of this page of the 2000 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 / 2000 Annual Report 3 This page of the 2000 Annual Report to Shareholders contains nine pictures. A description of each picture follows, starting at the top, from left to right: Promotions & Appointments William J. Calpin, Jr. Senior Vice-President, Trust Services Christe A. Casciano Vice-President, Director of Marketing Lynn M. Peters Thiel Vice-President and Compliance Officer Carl M. Baruffaldi Assistant Vice-President Branch Manager - Abington Office Jeffrey Solimine Assistant Vice-President Branch Manager - Green Ridge Office Karyn Gaus Vashlishan Assistant Vice-President Branch Manager - Mount Pocono Office Lisa A. Kearney Assistant Vice-President Jennifer S. Wohlgemuth Assistant Vice-President Lori A. Dzwieleski Assistant Cashier 4 Penseco Financial Services Corporation / 2000 Annual Report This top portion of this page of the 2000 Annual Report to Shareholders contains three pictures. A description of each picture follows, starting at the top, from left to right: Promotions & Appointments Barbara Garofoli Assistant Cashier Susan A. Kopp Assistant Cashier Stephen A. Hoffman Branch Operations Officer Community Events As a community bank, Penn Security employees not only have a thorough knowledge of the banking industry, but a concern and a commitment for the community as well. Below is a sampling of the community events during 2000 in which Penn Security and their employees participated. This bottom portion of this page of the 2000 Annual Report to Shareholders contains three pictures. A description of each picture follows, starting clockwise at the top left: Part of the crowd of business professionals who participated in the Chamber of Commerce Business Card Exchange sponsored by Penn Security Bank and Trust Company during the holiday season. This past summer, our East Stroudsburg Office participated in the annual Balloon Festival at Shawnee on the Delaware. In the photo above, Douglas R. Duguay (left), Mary Carol Cicco (center) and Peter F. Moylan (right) are shown during one of the many nationwide bookstore shows in which Penn Security Bank participated. Penseco Financial Services Corporation / 2000 Annual Report 5 This page of the 2000 Annual Report to Shareholders contains six pictures. A description of each picture follows, starting at the top, from left to right: INVESTMENT SERVICES Pictured above are the employees of our joint venture with Fiserv Investor Services, Inc. They are from left to right as follows: Linda B. Gable, Otto P. Robinson, Jr., Peter F. Moylan, Mark J. Zakoski and Louis J. Rizzo. Investment Services Pictured above are the employees of our joint venture with Fiserv Investor Services, Inc. They are from left to right as follows: Linda B. Gable, Otto P. Robinson, Jr., Peter F. Moylan, Mark J. Zakoski and Louis J. Rizzo. Louis J. Rizzo Registered Representative Mark J. Zakoski Registered Representative Linda B. Gable Assistant Representative Order Processing 6 Penseco Financial Services Corporation / 2000 Annual Report 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, 2000 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 March 1, 2001, based on the average of the closing bid and asked prices of such stock on that date equals Approximately $49,404,000. The number of shares of common stock outstanding as of March 1, 2001 equals 2,148,000. Documents Incorporated by Reference Portions of the Corporation's 2000 Annual Report to Stockholders are incorporated by reference in Parts I and II. Portions of the Corporation's definitive proxy statement relating to the 2001 Annual Meeting of Stockholders are incorporated by reference in Part III. Penseco Financial Services Corporation / 2000 Annual Report 7 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 other areas such as convenience of location, types of services, service costs and banking hours. EMPLOYEES As of March 1, 2001, the Company employed 199 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. 8 Penseco Financial Services Corporation / 2000 Annual Report 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. Penseco Financial Services Corporation / 2000 Annual Report 9 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 Management of the Company is aware of the following securities dealers who make a market in the Company stock: Baird, Patrick & Company, Inc. Legg Mason Wood Walker, Inc. Ferris, Baker, Watts, Inc. Monroe Securities, Inc. F.J. Morrissey & Company, Inc. Ryan, Beck & Company, Inc. Hopper Soliday & Company, Inc. Sandler, O'Neill & Partners, LP Janney Montgomery Scott, Inc. 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 2000 High Low Per Share - ---------------------------------------------- First Quarter $ 26 $ 21 $ .22 Second Quarter 24 22 .22 Third Quarter 24 20 .22 Fourth Quarter 21 20 .49 ------ $ 1.15 ====== Dividends Paid 1999 High Low Per Share - ---------------------------------------------- First Quarter $ 43 $ 40 $ .21 Second Quarter 41 34 .21 Third Quarter 36 28 .21 Fourth Quarter 30 26 .47 ------ $ 1.10 ====== DIVIDENDS PAID (in millions) YEAR - ------------------------------------------- $ 2,470 2000 2,363 1999 2,255 1998 2,256 1997 2,148 1996 As of March 1 , 2001 there were approximately 1,026 stockholders of the Company based on the number of recordholders. Reference should be made to the information about the Company's dividend policy and regulatory guidelines on pages 20 and 33. TRANSFER AGENT Penseco Financial Services Corporation, 150 North Washington Avenue, Scranton, Pennsylvania 18503-1848. Stockholders' questions should be directed to the Company's corporate headquarters at 570-346-7741. QUARTERLY FINANCIAL DATA (unaudited) (in thousands, except per share amounts) First Second Third Fourth 2000 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------ Net Interest Income $ 4,158 $ 4,323 $ 4,467 $ 4,397 Provision for Loan Losses 40 32 148 13 Other Income 2,308 1,180 2,724 2,021 Other Expenses 5,046 4,337 5,241 4,682 Net Income 1,069 929 1,429 1,316 Earnings Per Share $ .50 $ .43 $ .67 $ .61 First Second Third Fourth 1999 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------ Net Interest Income $ 4,226 $ 4,170 $ 4,391 $ 4,320 Provision for Loan Losses 56 - 14 19 Other Income 2,114 1,407 2,397 1,828 Other Expenses 4,807 4,216 4,821 4,468 Net Income 1,076 1,003 1,407 1,185 Earnings Per Share $ .50 $ .47 $ .65 $ .55 10 Penseco Financial Services Corporation / 2000 Annual Report ITEM 6 Selected Financial Data (in thousands, except per share data) RESULTS OF OPERATIONS:
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------ Interest Income $ 31,043 $ 28,320 $ 29,975 $ 30,099 $ 27,893 Interest Expense 13,698 11,213 13,179 12,385 11,201 - ------------------------------------------------------------------------------------------------ Net Interest Income 17,345 17,107 16,796 17,714 16,692 Provision for Loan Losses 233 89 595 316 334 - ------------------------------------------------------------------------------------------------ Net Interest Income after Provision for Loan Losses 17,112 17,018 16,201 17,398 16,358 Other Income 8,233 7,746 6,838 6,285 5,952 Other Expenses 19,306 18,312 16,986 16,884 15,733 Income Tax 1,296 1,781 1,772 2,074 1,975 - ------------------------------------------------------------------------------------------------ Net Income $ 4,743 $ 4,671 $ 4,281 $ 4,725 $ 4,602 ================================================================================================ BALANCE SHEET DATA: Assets $ 467,230 $ 428,614 $ 436,099 $ 427,577 $ 398,035 Investment Securities $ 125,808 $ 106,511 $ 118,762 $ 125,048 $ 125,263 Net Loans $ 304,641 $ 278,577 $ 280,389 $ 269,446 $ 237,915 Deposits $ 387,439 $ 367,332 $ 377,526 $ 374,488 $ 352,026 Stockholders' Equity $ 50,067 $ 45,743 $ 44,961 $ 42,924 $ 40,585 PER SHARE DATA: (1) Earnings per Share $ 2.21 $ 2.17 $ 1.99 $ 2.20 $ 2.14 Dividends per Share $ 1.15 $ 1.10 $ 1.05 $ 1.05 $ 1.00 Book Value per Share $ 23.31 $ 21.30 $ 20.93 $ 19.98 $ 18.89 Common Shares Outstanding 2,148,000 2,148,000 2,148,000 2,148,000 2,148,000 FINANCIAL RATIOS: Net Interest Margin 4.08% 4.22% 4.12% 4.51% 4.51% Return on Average Assets 1.06% 1.08% .99% 1.14% 1.17% Return on Average Equity 9.96% 10.12% 9.54% 11.22% 11.54% Average Equity to Average Assets 10.60% 10.70% 10.38% 10.16% 10.14% Dividend Payout Ratio 52.04% 50.69% 52.76% 47.73% 46.67%
(1) Per share data is based on 2,148,000 shares outstanding, giving effect to the common stock reorganization on December 31, 1997. Penseco Financial Services Corporation / 2000 Annual Report 11 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 2000 totalled $4,743 million, an increase of 1.5% from the $4,671 million earned in 1999, which in turn was an increase of 9.1% from the $4,281 million earned in 1998. Net earnings per share were $2.21 in 2000, compared with $2.17 in 1999 and $1.99 in 1998. Net earnings for 2000 increased from 1999 results due to an increase in the net interest margin. Also, fee income increased, offset by increases in operating costs. Net earnings for 1999 increased from 1998 results due to an increase in the net interest margin, coupled with a lower provision for loan losses. Also, fee income increased, offset by increases in operating costs. NET INCOME (in millions) YEAR - ------------------------------------------- $ 4,743 2000 4,671 1999 4,281 1998 4.725 1997 4.602 1996 The Company's return on average assets was 1.06% in 2000 compared to 1.08% in 1999 and .99% in 1998. Return on average equity was 9.96%, 10.12% and 9.54% in 2000, 1999 and 1998, respectively. RETURN ON AVERAGE ASSETS YEAR - ------------------------------------------- 1.06% 2000 1.08% 1999 .99% 1998 1.14% 1997 1.17% 1996 RETURN ON AVERAGE EQUITY YEAR - ------------------------------------------- 9.96% 2000 10.12% 1999 9.54% 1998 11.22% 1997 11.54% 1996 12 Penseco Financial Services Corporation / 2000 Annual Report RESULTS OF OPERATIONS Net Interest Income The principal component of the Company's earnings is net interest income, which is the difference between interest and fees earned on interest-earning assets and interest paid on deposits and other borrowings. Net interest income was $17.3 million in 2000, compared with $17.1 million in 1999, an increase of 1.2%. The increase in net interest income in 2000 resulted from increases in loan income, along with increases in securities income, offset by higher money market, time deposit and short-term borrowing costs. Net interest income was $17.1 million in 1999, compared with $16.8 million in 1998, an increase of 1.8%. The increase in net interest income in 1999 resulted from the Company concentrating on maintaining core deposits along with increasing non-interest-bearing deposits which helped in reducing the cost of funds. 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, 2000 was 4.1% compared with 4.2% for the year ended December 31, 1999, and 4.1% for the year ended December 31, 1998. NET INTEREST INCOME (in millions) YEAR - --------------------------------------------- $ 17,345 2000 17,107 1999 16,796 1998 17,714 1997 16,692 1996 Interest income in 2000 totalled $31.0 million, compared to $28.3 million in 1999, increasing 9.5% from the prior year. The yield on average interest-earning assets was 7.3% in 2000, compared to 7.0% in 1999. Average interest-earning assets increased in 2000 to $424.9 million from $405.0 million in 1999. Average loans, which are the Company's highest yielding earning assets, increased $14.3 million in 2000, while investment securities and other earning assets increased on average by $5.7 million. Average loans represented 70.0% of 2000 average interest-earning assets, compared to 69.9% in 1999. Interest expense also increased in 2000 to $13.7 million from $11.2 million in 1999, an increase of $2.5 million or 22.3%. This increase resulted from higher money market, time deposit and short-term borrowing costs. The average rate paid on interest-bearing liabilities during 2000 was 4.0%, compared to 3.4% an increase of 17.6% in 1999. Interest income in 1999 totalled $28.3 million, compared to $30.0 million in 1998, decreasing 5.7% from the prior year. The yield on average interest-earning assets was 7.0% in 1999, compared to 7.4% in 1998. Average interest-earning assets decreased in 1999 to $405.0 million from $407.8 million in 1998. Average loans decreased $1.0 million in 1999, while investment securities and other earning assets decreased on average by $1.9 million. Average loans represented 69.9% of 1999 average interest-earning assets, compared to 69.7% in 1998. Interest expense decreased in 1999 to $11.2 million from $13.2 million in 1998, a decrease of $2 million or 15.2%. This decrease resulted from lower time deposit volume and rate reductions on other deposit products. The average rate paid on interest-bearing liabilities during 1999 was 3.4%, compared to 4.0% in 1998. 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. Penseco Financial Services Corporation / 2000 Annual Report 13 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 2000, 1999 and 1998.
2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- 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 $ 60,684 $ 3,465 5.71% $ 75,346 $ 4,329 5.75% $ 99,405 $ 6,024 6.06% U.S. Agency obligations 20,011 1,338 6.69 5,000 286 5.72 1,250 71 5.68 States & political subdivisions 15,522 572 5.58 23,434 836 5.41 2,683 89 5.03 Federal Home Loan Bank stock 1,798 127 7.06 1,796 119 6.63 619 43 6.95 Other 20 1 5.00 20 1 5.00 20 1 5.00 Held-to-maturity: U.S. Agency obligations 4,407 259 5.88 4,647 279 6.00 8,228 505 6.14 States & political subdivisions 13,122 735 8.49 640 34 8.05 - - - Loans, net of unearned income: Real estate mortgages 227,819 18,249 8.01 221,001 17,236 7.80 221,601 17,642 7.96 Commercial 19,613 1,845 9.41 21,164 1,818 8.59 18,508 1,562 8.44 Consumer and other 49,930 3,717 7.44 40,923 2,819 6.89 43,931 3,405 7.75 Federal funds sold 6,729 414 6.15 7,035 369 5.25 9,994 521 5.21 Interest on balances with banks 5,253 321 6.11 3,977 194 4.88 1,565 112 7.16 - -------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets/ Total Interest Income 424,908 $ 31,043 7.31% 404,983 $ 28,320 6.99% 407,804 $ 29,975 7.35% - -------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks 11,514 11,188 10,642 Bank premises and equipment 12,104 12,588 10,532 Accrued interest receivable 2,628 2,992 3,544 Other assets 1,125 2,186 2,398 Less: Allowance for loan losses 3,004 2,894 2,711 - -------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 449,275 $ 431,043 $ 432,209 ================================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand-Interest bearing $ 23,380 $ 250 1.07% $ 23,643 $ 252 1.07% $ 23,371 $ 347 1.48% Savings 65,927 983 1.49 71,084 1,061 1.49 71,001 1,409 1.98 Money markets 75,959 2,927 3.85 59,066 1,585 2.68 63,489 1,818 2.86 Time - Over $100 38,407 2,262 5.89 43,397 2,172 5.00 39,769 2,165 5.44 Time - Other 115,345 6,236 5.41 115,764 5,633 4.87 126,737 7,035 5.55 Federal funds purchased 22 1 4.55 78 4 5.13 265 11 4.15 Repurchase agreements 15,101 786 5.20 12,169 482 3.96 8,051 364 4.52 Short-term borrowings 4,522 253 5.59 481 24 4.99 638 30 4.70 - -------------------------------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities/ Total Interest Expense 338,663 $ 13,698 4.04% 325,682 $ 11,213 3.44% 333,321 $ 13,179 3.95% - -------------------------------------------------------------------------------------------------------------------------------- Demand - Non-interest bearing 61,162 57,339 51,159 All other liabilities 1,813 1,888 2,868 Stockholders' equity 47,637 46,134 44,861 - -------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 449,275 $ 431,043 $ 432,209 ================================================================================================================================ Interest Spread 3.27% 3.55% 3.40% - -------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 17,345 $ 17,107 $ 16,796 ================================================================================================================================ Financial Ratios Net interest margin 4.08% 4.22% 4.12% Return on average assets 1.06% 1.08% .99% Return on average equity 9.96% 10.12% 9.54% Average equity to average assets 10.60% 10.70% 10.38% Dividend payout ratio 52.04% 50.69% 52.76%
14 Penseco Financial Services Corporation / 2000 Annual Report DOLLAR AMOUNT OF CHANGE IN INTEREST INCOME AND INTEREST EXPENSE
Dollar Change Amount Change in Change in in Rate- 2000 compared to 1999 of Change Volume Rate Volume ---------------------------------------------------------------------------------- EARNING Investment securities: ASSETS Available-for-sale: U.S. Treasury securities $ (864) $ (843) $ (30) $ 9 U.S. Agency obligations 1,052 859 48 145 States & political subdivisions (264) (282) 26 (8) Federal Home Loan Bank stock 8 - 8 - Held-to-maturity: U.S. Agency obligations (20) (14) (6) - States & political subdivisions 701 663 2 36 Loans, net of unearned income: Real estate mortgages 1,013 532 464 17 Commercial 27 (133) 174 (14) Consumer and other 898 621 225 52 Federal funds sold 45 (16) 63 (2) Interest bearing balances with banks 127 62 49 16 ---------------------------------------------------------------------------------- Total Interest Income 2,723 1,449 1,023 251 ---------------------------------------------------------------------------------- INTEREST Deposits: BEARING Demand - Interest bearing (2) (2) - - LIABILITIES Savings (78) (78) - - Money markets 1,342 453 691 198 Time - Over $100 90 (249) 386 (47) Time - Other 603 (20) 625 (2) Federal funds purchased (3) (3) - - Repurchase agreements 304 116 151 37 Short-term borrowings 229 202 3 24 ---------------------------------------------------------------------------------- Total Interest Expense 2,485 419 1,856 210 ---------------------------------------------------------------------------------- Net Interest Income $ 238 $ 1,030 $ (833) $ 41 ================================================================================== - ------------------------------------------------------------------------------------------------ 1999 compared to 1998 ---------------------------------------------------------------------------------- EARNING Investment securities: ASSETS Available-for-sale: U.S. Treasury securities $ (1,695) $ (1,458) $ (308) $ 71 U.S. Agency obligations 215 213 - 2 States & political subdivisions 747 689 7 51 Federal Home Loan Bank stock 76 82 (2) (4) Held-to-maturity: U.S. Agency obligations (226) (220) (11) 5 States & political subdivisions 34 - - 34 Loans, net of unearned income: Real estate mortgages (406) (48) (355) (3) Commercial 256 224 28 4 Consumer and other (586) (233) (378) 25 Federal funds sold (152) (154) 4 (2) Interest bearing balances with banks 82 172 (35) (55) ---------------------------------------------------------------------------------- Total Interest Income (1,655) (733) (1,050) 128 ---------------------------------------------------------------------------------- INTEREST Deposits: BEARING Demand - Interest bearing (95) 4 (96) (3) LIABILITIES Savings (348) 1 (348) (1) Money markets (233) (126) (114) 7 Time - Over $100 7 197 (175) (15) Time - Other (1,402) (609) (862) 69 Federal funds purchased (7) (7) (2) 2 Repurchase agreements 118 186 (45) (23) Short-term borrowings (6) (7) 2 (1) ---------------------------------------------------------------------------------- Total Interest Expense (1,966) (361) (1,640) 35 ---------------------------------------------------------------------------------- Net Interest Income $ 311 $ (372) $ 590 $ 93 ==================================================================================
Penseco Financial Services Corporation / 2000 Annual Report 15 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, 2000 1999 1998 - --------------------------------------------------------------------- Trust department income $ 1,329 $ 1,047 $ 1,001 Service charges on deposit accounts 718 695 657 Merchant transaction income 5,354 5,166 4,500 Other fee income 975 704 539 Other operating income 211 134 141 Realized losses on securities, net (354) - - - --------------------------------------------------------------------- Total Other Income $ 8,233 $ 7,746 $ 6,838 ===================================================================== Total other income increased $487 or 6.3% during 2000 to $8,233 from $7,746 for 1999. Contributing increases came from trust fee income of $282 or 26.9%, of which $107 is attributable to a one-time change from a quarterly charging of fees to a monthly charging of fees for many of our trust customers during the third quarter. Also, merchant transaction income increased $188 or 3.6% to $5,354 from $5,166, along with increases in other fee income of $271 or 38.5%, of which $173 is due to our brokerage division, which continues to exceed our expectations. The loss on the sales of securities occurred mainly in the second quarter of 2000, which included a $333 loss on the sale of ten million dollars of short-term municipal securities. The sale and subsequent re-investment into longer term, higher yielding municipal securities benefits current and future periods. Total other income increased $908 or 13.3% during 1999 to $7,746 from $6,838 for 1998. There was a significant increase in our merchant transaction income of $666 or 14.8% due to an increase in our customer base and increased business with our existing customers. Other fee income increased $165 or 30.6%. 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, 2000 1999 1998 - --------------------------------------------------------------------- Salaries and employee benefits $ 7,951 $ 7,528 $ 7,331 Occupancy expenses, net 1,387 1,334 1,274 Furniture and equipment expenses 1,189 1,227 908 Merchant transaction expenses 4,784 4,471 3,764 Other operating expenses 3,995 3,752 3,709 - --------------------------------------------------------------------- Total Other Expenses $ 19,306 $ 18,312 $ 16,986 ===================================================================== Other expenses increased $994 or 5.4% for 2000 to $19,306 from $18,312 for 1999. Salaries and benefits increased $423 or 5.6% to $7,951 for 2000, from $7,528 for 1999 due to higher health care coverage provided by the company its employees and further staff additions for our brokerage division, which commenced operations in April of 2000. Merchant transaction expenses increased $313 or 7.0%, due to authorization interchange expenses passed on by MasterCard and Visa International. Also, other operating expenses increased $243 or 6.5% to $3,995 from $3,752 due to increases in advertising costs associated with our loan growth, insurance costs and outside consulting services which are non-recurring. Occupancy expenses and furniture and equipment expenses increased significantly during the year of 1999 due to a new branch office in East Stroudsburg, along with the replacement of our former office in the Green Ridge section of Scranton. The Company incurred additional expense in its merchant transaction business of $707 or 18.8% in 1999, due to additional growth. INCOME TAXES Federal income tax expense amounted to $1,296 in 2000 compared to $1,781 recorded in 1999. Largely this decrease resulted from increases in tax free income recorded during 2000. The Company's effective income tax rate for 2000 was 21.5% compared to 27.6% for 1999. In 1999, income tax expense increased $9 from $1,772 in 1998. The effective income tax rate for 1999 was 27.6% compared to 29.3% for 1998. For further discussion pertaining to Federal income taxes, see Note 12 to the Consolidated Financial Statements. FINANCIAL CONDITION Total assets increased $38.6 million or 9.0% during 2000 and amounted to $467.2 million at December 31, 2000 compared to $428.6 million at December 31, 1999. For the year ended December 31, 1999 total assets decreased $7.5 million to $428.6 million or a 1.7% decrease over $436.1 million at December 31, 1998. ASSETS (in millions) YEAR - ------------------------------------- $ 467,230 2000 428,614 1999 436,099 1998 427,577 1997 398,035 1996 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, 2000 1999 1998 - ------------------------------------------------------------------------- U.S.Treasury securities $ 54,662 $ 66,459 $ 81,916 U.S. Agency obligations 39,654 9,643 11,402 States & political subdivisions 29,624 28,591 23,634 Other securities 1,868 1,818 1,810 - ------------------------------------------------------------------------- Total Investment Securities $ 125,808 $ 106,511 $ 118,762 ========================================================================= 16 Penseco Financial Services Corporation / 2000 Annual Report LOAN PORTFOLIO Details regarding the Company's loan portfolio for the past five years are as follows:
December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------- Real estate - construction and land development $ 9,321 $ 3,241 $ 4,152 $ 3,731 $ 3,770 Real estate mortgages 234,212 216,574 221,879 213,128 184,577 Commercial 21,566 18,995 18,169 17,173 13,476 Credit card and related plans 2,267 2,203 2,286 2,293 2,298 Installment 30,290 28,693 28,538 26,811 26,667 Obligations of states & political subdivisions 10,085 11,821 8,195 8,910 9,427 - ------------------------------------------------------------------------------------------- Loans, net of unearned income 307,741 281,527 283,219 272,046 240,215 Less: Allowance for loan losses 3,100 2,950 2,830 2,600 2,300 - ------------------------------------------------------------------------------------------- Loans, net $ 304,641 $ 278,577 $ 280,389 $ 269,446 $ 237,915 ===========================================================================================
LOANS Total net loans increased $26.0 million to $304.6 million at December 31, 2000 from $278.6 million at December 31, 1999, an increase of 9.3%. The increase is due to growth in the Company's real estate, commercial and installment loan portfolios. Total net loans decreased $1.8 million to $278.6 million at December 31, 1999 from $280.4 million at December 31, 1998, a decrease of .6%. NET LOANS (in millions) YEAR - ------------------------------------------- $ 304,641 2000 278,577 1999 280,389 1998 269,446 1997 237,915 1996 LOAN QUALITY The lending activities of the Company are guided by the basic lending policy established by the Board of Directors. Loans must meet criteria which include consideration of the character, capacity and capital of the borrower, collateral provided for the loan, and prevailing economic conditions. Regardless of credit standards, there is risk of loss inherent in every loan portfolio. The allowance 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. Penseco Financial Services Corporation / 2000 Annual Report 17 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, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Non-accrual loans $ 1,210 $ 836 $ 929 $ 1,031 $ 866 Loans past due 90 days or more and accruing: Guaranteed student loans 313 476 348 343 342 Credit card and home equity loans 23 - 27 98 93 - ------------------------------------------------------------------------------------------------- Total non-performing loans 1,546 1,312 1,304 1,472 1,301 Other real estate owned 201 33 111 339 610 - ------------------------------------------------------------------------------------------------- Total non-performing assets $ 1,747 $ 1,345 $ 1,415 $ 1,811 $ 1,911 =================================================================================================
Loans are generally placed on a nonaccrual status when principal or interest is past due 90 days or when payment in full is not anticipated. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is charged against current income. Loans are returned to accrual status when past due interest is collected and the collection of principal is probable. Loans on which the accrual of interest has been discontinued or reduced amounted to $1,210, $836 and $929 at December 31, 2000, 1999 and 1998, respectively. If interest on those loans had been accrued, such income would have been $138, $140 and $108 for 2000, 1999 and 1998, respectively. Interest income on those loans, which is recorded only when received, amounted to $86, $22 and $30 for 2000, 1999 and 1998, 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, 2000, there are no significant loans as to which management has serious doubt about their collectibility. At December 31, 2000, 1999 and 1998, 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, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------- Balance at beginning of year $ 2,950 $ 2,830 $ 2,600 $ 2,300 $ 2,100 Charge-offs: Real estate mortgages 37 82 69 38 87 Commercial and all others 51 13 252 - - Credit card and related plans 27 65 37 52 64 Installment loans 24 26 25 32 32 - ------------------------------------------------------------------------------------------- Total charge-offs 139 186 383 122 183 - ------------------------------------------------------------------------------------------- Recoveries: Real estate mortgages 30 - 1 79 22 Commercial and all others - 195 - 1 2 Credit card and related plans 9 10 9 17 16 Installment loans 17 12 8 9 9 - ------------------------------------------------------------------------------------------- Total recoveries 56 217 18 106 49 - ------------------------------------------------------------------------------------------- Net charge-offs (recoveries) 83 (31) 365 16 134 - ------------------------------------------------------------------------------------------- Provision charged to operations 233 89 595 316 334 - ------------------------------------------------------------------------------------------- Balance at End of Year $ 3,100 $ 2,950 $ 2,830 $ 2,600 $ 2,300 =========================================================================================== Ratio of net charge-offs (recoveries) to average loans outstanding 0.03% (0.01)% 0.13% 0.01% 0.06% ===========================================================================================
18 Penseco Financial Services Corporation / 2000 Annual Report The allowance for loan losses is allocated as follows:
December 31, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Amount %1 Amount %1 Amount %1 Amount %1 Amount %1 - ----------------------------------------------------------------------------------------------------------------- Real estate mortgages $ 1,500 79% $ 1,500 78% $ 1,550 80% $ 1,350 71% $ 1,125 71% Commercial and all others 1,100 10 950 10 830 9 850 19 875 22 Credit card and related plans 150 1 150 1 150 1 150 1 150 1 Personal installment loans 350 10 350 11 300 10 250 9 150 6 - ----------------------------------------------------------------------------------------------------------------- Total $ 3,100 100% $ 2,950 100% $ 2,830 100% $ 2,600 100% $ 2,300 100% =================================================================================================================
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 $20.1 million to $387.4 million at December 31, 2000 from $367.3 million at December 31, 1999, an increase of 5.5%. Company deposits decreased $10.2 million to $367.3 million at December 31, 1999 from $377.5 million at December 31, 1998, a decrease of 2.7%. The increase in deposits in 2000 is the result of the Company introducing new deposit products along with increasing its non-interest bearing deposits. The decline in deposits in 1999 is the result of the Company concentrating on maintaining core deposits, along with increasing its non-interest bearing deposits, which helped to reduce the cost of funds. The maturities of time deposits of $100,000 or more are as follows: Three months or less $ 12,559 Over three months through six months 6,938 Over six months through twelve months 6,653 Over twelve months 7,178 -------- Total $ 33,328 ======== DEPOSITS (in millions) YEAR - -------------------------------------- $ 387,439 2000 367,332 1999 377,526 1998 374,488 1997 352,026 1996 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. The Company remains in a highly liquid condition both in the short and long term. Sources of liquidity include the Company's substantial U.S. Treasury bond portfolio, additional deposits, earnings, overnight loans to and from other companies (Federal Funds) and lines of credit at the Federal Reserve Bank and the Federal Home Loan Bank. The designation of securities as "Held-To-Maturity" lessens the ability of banks to sell securities so classified, except in regard to certain changes in circumstances or other events that are isolated, nonrecurring and unusual. Penseco Financial Services Corporation / 2000 Annual Report 19 CAPITAL RESOURCES A strong capital position is important to the continued profitability of the Company and promotes depositor and investor confidence. The Company's capital provides a basis for future growth and expansion and also provides additional protection against unexpected losses. Additional sources of capital would come from retained earnings from the operations of the Company and from the sale of additional common stock. Management has no plans to offer additional common stock at this time. The Company's total risk-based capital ratio was 18.32% at December 31, 2000. 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 - ---------------------------------------------- $ 50,067 2000 45,743 1999 44,961 1998 42,924 1997 40,585 1996 - -------------------------------------------------------------------------------- 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. 20 Penseco Financial Services Corporation / 2000 Annual Report MATURITIES AND SENSITIVITY OF MARKET RISK AS OF DECEMBER 31, 2000
Non-Rate Fair 2001 2002 2003 2004 2005 Thereafter Sensitive Total Value - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Fixed interest rate securities: U.S. Treasury securities $ 23,992 $ 15,167 $ 5,039 $ 5,141 $ 5,323 $ - $ - $ 54,662 $ 54,662 Yield 5.59% 6.10% 4.65% 6.01% 6.79% - - 5.80% U.S. Agency obligations - - 15,152 4,941 15,656 - - 35,749 35,749 Yield - - 6.56% 7.07% 6.78% - - 6.73% States & political subdivisions - - 4,164 7,199 404 17,857 - 29,624 30,353 Yield - - 5.44% 5.53% 5.60% 8.04% - 7.03% Variable interest rate securities: U.S. Agency obligations 960 960 960 960 65 - - 3,905 3,780 Yield 5.88% 5.88% 5.88% 5.88% 5.88% - - 5.88% Federal Home Loan Bank stock - - - - - 1,798 - 1,798 1,798 Yield - - - - - 7.06% - 7.06% Other - - - - - 70 - 70 70 Yield - - - - - 5.00% - 5.00% Fixed interest rate loans: Real estate mortgages 12,497 11,898 12,335 12,750 12,062 111,138 - 172,680 166,813 Yield 7.73% 7.72% 7.69% 7.64% 7.69% 7.66% - 7.67% Consumer and other 3,656 4,009 1,409 1,284 1,215 2,527 - 14,100 13,597 Yield 6.59% 5.84% 7.58% 7.47% 7.34% 6.72% - 6.64% Variable interest rate loans: Real estate mortgages 17,292 6,294 5,761 5,683 6,286 29,537 - 70,853 70,851 Yield 9.50% 9.64% 9.72% 9.74% 9.87% 9.45% - 9.56% Commercial 21,566 - - - - - - 21,566 21,566 Yield 9.41% - - - - - - 9.41% Consumer and other 6,980 4,855 4,566 4,308 4,596 3,237 - 28,542 28,694 Yield 8.59% 8.11% 7.78% 7.31% 7.29% 7.10% - 7.81% Less: Allowance for loan losses 624 273 243 242 243 1,475 - 3,100 Interest bearing deposits with banks 358 - - - - - - 358 358 Yield 6.11% - - - - - - 6.11% Federal funds sold - - - - - - - - Yield - - - - - - - - Cash and due from banks - - - - - 18,775 18,775 18,775 Other assets - - - - - - 17,648 17,648 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $ 86,677 $ 42,910 $ 49,143 $ 42,024 $ 45,364 $ 164,689 $ 36,423 $ 467,230 $ 447,066 ==================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Variable interest rate deposits: Demand - Interest bearing $ - $ 24,075 $ - $ - $ - $ - $ - $ 24,075 $ 24,075 Yield - 1.07% - - - - - 1.07% Savings - 63,552 - - - - - 63,552 63,552 Yield - 1.49% - - - - - 1.49% Money markets 87,670 - - - - - - 87,670 87,670 Yield 3.85% - - - - - - 3.85% Time - Other 14,397 - - - - - - 14,397 14,397 Yield 6.10% - - - - - - 6.10% Fixed interest rate deposits: Time - Over $100,000 26,150 4,933 1,320 145 205 575 - 33,328 33,739 Yield 6.25% 6.61% 6.87% 6.61% 7.15% 7.02% - 6.35% Time - Other 73,583 19,077 3,775 1,096 1,286 1,416 - 100,233 100,382 Yield 5.63% 6.32% 6.64% 5.63% 6.58% 6.91% - 5.83% Demand - Non-interest bearing - - - - - - 64,184 64,184 64,184 Repurchase agreements 15,086 - - - - - - 15,086 15,086 Yield 5.20% - - - - - - 5.20% Short-term borrowings 11,503 - - - - - - 11,503 11,503 Yield 5.59% - - - - - - 5.59% Other liabilities - - - - - - 3,135 3,135 Stockholders' equity - - - - - - 50,067 50,067 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $ 228,389 $ 111,637 $ 5,095 $ 1,241 $ 1,491 $ 1,991 $ 117,386 $ 467,230 $ 414,588 ==================================================================================================================================== Excess of (liabilities) assets subject to interest rate change $ (141,712) $ (68,727) $ 44,048 $ 40,783 $ 43,873 $ 162,698 $ (80,963) $ - ====================================================================================================================================
Penseco Financial Services Corporation / 2000 Annual Report 21 ITEM 8 Financial Statements and Supplementary Data Consolidated Balance Sheets (in thousands, except per share data) December 31, 2000 1999 ----------------------------------------------------------------- ASSETS Cash and due from banks $ 18,775 $ 10,275 Interest bearing balances with banks 358 3,961 Federal funds sold - 10,875 ----------------------------------------------------------------- Cash and Cash Equivalents 19,133 25,111 Investment securities: Available-for-sale, at fair value 105,572 96,029 Held-to-maturity (fair value of $20,840 and $10,178, respectively) 20,236 10,482 ----------------------------------------------------------------- Total Investment Securities 125,808 106,511 Loans, net of unearned income 307,741 281,527 Less: Allowance for loan losses 3,100 2,950 ----------------------------------------------------------------- Loans, Net 304,641 278,577 Bank premises and equipment 11,707 12,296 Other real estate owned 201 33 Accrued interest receivable 3,990 2,927 Other assets 1,750 3,159 ----------------------------------------------------------------- Total Assets $ 467,230 $ 428,614 ================================================================= LIABILITIES Deposits: Non-interest bearing $ 64,184 $ 58,230 Interest bearing 323,255 309,102 ----------------------------------------------------------------- Total Deposits 387,439 367,332 Other borrowed funds: Repurchase agreements 15,086 11,981 Short-term borrowings 11,503 887 Accrued interest payable 2,268 1,860 Other liabilities 867 811 ----------------------------------------------------------------- Total Liabilities 417,163 382,871 ----------------------------------------------------------------- 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 38,269 35,996 Accumulated other comprehensive income 958 (1,093) ----------------------------------------------------------------- Total Stockholders' Equity 50,067 45,743 ----------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 467,230 $ 428,614 ================================================================= The accompanying Notes are an integral part of these Consolidated Financial Statements. 22 Penseco Financial Services Corporation / 2000 Annual Report Consolidated Statements of Income (in thousands, except per share data)
Years Ended December 31, 2000 1999 1998 ----------------------------------------------------------------------- INTEREST Interest and fees on loans $ 23,811 $ 21,873 $ 22,609 INCOME Interest and dividends on investments: U.S. Treasury securities and U.S. Agency obligations 5,062 4,894 6,600 States & political subdivisions 1,307 870 89 Other securities 128 120 44 Interest on Federal funds sold 414 369 521 Interest on balances with banks 321 194 112 ----------------------------------------------------------------------- Total Interest Income 31,043 28,320 29,975 ----------------------------------------------------------------------- INTEREST Interest on time deposits EXPENSE of $100,000 or more 2,262 2,172 2,165 Interest on other deposits 10,396 8,531 10,609 Interest on other borrowed funds 1,040 510 405 ----------------------------------------------------------------------- Total Interest Expense 13,698 11,213 13,179 ----------------------------------------------------------------------- Net Interest Income 17,345 17,107 16,796 Provision for loan losses 233 89 595 ----------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 17,112 17,018 16,201 ----------------------------------------------------------------------- OTHER Trust department income 1,329 1,047 1,001 INCOME Service charges on deposit accounts 718 695 657 Merchant transaction income 5,354 5,166 4,500 Other fee income 975 704 539 Other operating income 211 134 141 Realized losses on securities, net (354) - - ----------------------------------------------------------------------- Total Other Income 8,233 7,746 6,838 ----------------------------------------------------------------------- OTHER Salaries and employee benefits 7,951 7,528 7,331 EXPENSES Occupancy expenses, net 1,387 1,334 1,274 Furniture and equipment expenses 1,189 1,227 908 Merchant transaction expenses 4,784 4,471 3,764 Other operating expenses 3,995 3,752 3,709 ----------------------------------------------------------------------- Total Other Expenses 19,306 18,312 16,986 ----------------------------------------------------------------------- Income before income taxes 6,039 6,452 6,053 Applicable income taxes 1,296 1,781 1,772 ----------------------------------------------------------------------- NET INCOME Net Income $ 4,743 $ 4,671 $ 4,281 ======================================================================= PER SHARE Earnings Per Share $ 2.21 $ 2.17 $ 1.99 =======================================================================
The accompanying Notes are an integral part of these Consolidated Financial Statements. Penseco Financial Services Corporation / 2000 Annual Report 23 Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998
Accumulated Other Total Common Retained Comprehensive Stockholders' (in thousands, except per share data) Stock Surplus Earnings Income Equity - -------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 21 $ 10,819 $ 31,662 $ 422 $ 42,924 Comprehensive income: Net income, 1998 - - 4,281 - 4,281 Unrealized gains on securities, net of taxes of $6 - - - 11 11 Comprehensive income 4,292 Cash dividends declared ($1.05 per share) - - (2,255) - (2,255) - -------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 21 10,819 33,688 433 44,961 Comprehensive income: Net income, 1999 - - 4,671 - 4,671 Unrealized losses on securities, net of taxes of $786 - - - (1,526) (1,526) Comprehensive income 3,145 Cash dividends declared ($1.10 per share) - - (2,363) - (2,363) - -------------------------------------------------------------------------------------------------------- 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 ========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial Statements. 24 Penseco Financial Services Corporation / 2000 Annual Report Consolidated Statements of Cash Flows (in thousands)
Years Ended December 31, 2000 1999 1998 --------------------------------------------------------------------------------- OPERATING Net Income $ 4,743 $ 4,671 $ 4,281 ACTIVITIES Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,243 1,176 1,005 Provision for loan losses 233 89 595 Deferred income tax benefit (109) (165) (284) Amortization of securities (net of accretion) 55 336 232 Net realized losses on securities 354 - - (Gain) loss on other real estate (22) 28 41 Loss on disposition of fixed assets 8 - - (Increase) decrease in interest receivable (1,063) 307 661 Decrease (increase) in other assets 463 37 (475) Increase (decrease) in income taxes payable 26 253 (182) Increase (decrease) in interest payable 408 (179) (485) Increase (decrease) in other liabilities 30 (56) 102 --------------------------------------------------------------------------------- Net cash provided by operating activities 6,369 6,497 5,491 --------------------------------------------------------------------------------- INVESTING Purchase of investment securities ACTIVITIES available-for-sale (44,610) (48,307) (53,579) Proceeds from sales and maturities of investment securities available-for-sale 37,801 62,015 56,000 Purchase of investment securities to be held-to-maturity (10,689) (5,639) - Proceeds from repayments of investment securities to be held-to-maturity 898 1,535 3,650 Net loans (originated) repaid (26,569) 1,612 (11,664) Proceeds from other real estate 126 161 313 Proceeds from sale of fixed assets 4 - - Investment in premises and equipment (666) (841) (4,990) --------------------------------------------------------------------------------- Net cash (used) provided by investing activities (43,705) 10,536 (10,270) --------------------------------------------------------------------------------- FINANCING Net increase in demand and savings deposits 28,375 851 6,236 ACTIVITIES Net payments on time deposits (8,268) (11,045) (3,198) Increase in repurchase agreements 3,105 1,022 5,037 Net increase (decrease) in short-term borrowings 10,616 887 (893) Cash dividends paid (2,470) (2,363) (2,255) --------------------------------------------------------------------------------- Net cash provided (used) by financing activities 31,358 (10,648) 4,927 --------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (5,978) 6,385 148 --------------------------------------------------------------------------------- Cash and cash equivalents at January 1 25,111 18,726 18,578 --------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 19,133 $ 25,111 $ 18,726 =================================================================================
The accompanying Notes are an integral part of these Consolidated Financial Statements. Penseco Financial Services Corporation / 2000 Annual Report 25 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 generally accepted accounting principles and with general practices within the banking industry. BASIS OF PRESENTATION The Financial Statements of the Company have been consolidated with those of its wholly-owned subsidiary, Penn Security Bank and Trust Company, eliminating all intercompany items and transactions. The Statements are presented on the accrual basis of accounting, except for Trust Department income which is recorded when payment is received. All information is presented in thousands of dollars, except per share data. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. EMERGING ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is required to be adopted in years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective January 1, 2001. Management does not anticipate that the adoption of the new Statement 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 over the period to maturity, which approximates the interest method. Securities Available-for-Sale. Bonds, notes, debentures and certain equity securities not classified as securities to be held to maturity are carried at fair value with unrealized holding gains and losses, net of tax, reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of securities available-for-sale are determined using the specific identification method and are reported as a separate component of other income in the Statements of Income. The Company has no derivative financial instruments required to be disclosed under Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" (SFAS 119). LOANS AND PROVISION (ALLOWANCE) FOR POSSIBLE LOAN LOSSES Loans are stated at the principal amount outstanding, net of any unearned income, deferred loan fees and the allowance for loan losses. Interest on discounted loans is generally recognized as income based on methods that approximate the interest method. For all other loans, interest is accrued daily on the outstanding balances. Loans are generally placed on a nonaccrual status when principal or interest is past due 90 days or when payment in full is not anticipated. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is charged against current income. Loans are returned to accrual status when past due interest is collected and the collection of principal is probable. The provision for loan losses is based on past loan loss experience, management's evaluation of the potential loss in the current loan portfolio under current economic conditions and such other factors as, in management's best judgement, deserve current recognition in estimating loan losses. The annual provision for loan losses charged to operating expense is that amount which is sufficient to bring the balance of the allowance for possible loan losses to an adequate level to absorb anticipated losses. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Provision for depreciation and amortization, computed principally on the straight-line method, is charged to operating expenses over the estimated useful lives of the assets. Maintenance and repairs are charged to current expense as incurred. 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). PENSION EXPENSE Pension expense has been determined in accordance with Statement of Financial Accounting Standards No. 87, "Employers Accounting for Pensions" (SFAS 87). 26 Penseco Financial Services Corporation / 2000 Annual Report 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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, 2000, 1999 and 1998, amounted to $466, $387 and $442, 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, 2000, 1999 and 1998 as follows: 2000 1999 1998 - ------------------------------------------------- Income taxes paid $ 1,379 $ 1,694 $ 2,238 Interest paid $ 13,290 $ 11,392 $ 13,664 Non-cash transactions during the years ended December 31, 2000, 1999 and 1998, comprised entirely of the net acquisition of real estate in the settlement of loans, amounted to $272, $111 and $126, respectively. TRUST ASSETS AND INCOME Assets held by the Company in a fiduciary or agency capacity for its customers are not included in the Financial Statements since such items are not assets of the Company. Trust income is reported on the cash basis and is not materially different than if it were reported on the accrual basis. EARNINGS PER SHARE 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 2000 presentation. 2 CASH AND DUE FROM BANKS Cash and due from banks are summarized as follows: December 31, 2000 1999 - -------------------------------------------------------- Cash items in process of collection $ 37 $ 5 Non-interest bearing balances 13,263 4,961 Cash on hand 5,475 5,309 - -------------------------------------------------------- Total $ 18,775 $ 10,275 ======================================================== 3 INVESTMENT SECURITIES The amortized cost and fair value of investment securities at December 31, 2000 and 1999 are as follows: Available-for-Sale Gross Gross Amortized Unrealized Unrealized Fair 2000 Cost Gains Losses Value - -------------------------------------------------------------------- U.S. Treasury securities $ 54,133 $ 614 $ 85 $ 54,662 U.S. Agency securities 34,666 1,120 37 35,749 States & political subdivisions 13,455 - 162 13,293 - -------------------------------------------------------------------- Total Debt Securities 102,254 1,734 284 103,704 Equity securities 1,868 - - 1,868 - -------------------------------------------------------------------- Total Available - for-Sale $ 104,122 $ 1,734 $ 284 $ 105,572 ==================================================================== Gross Gross Amortized Unrealized Unrealized Fair 1999 Cost Gains Losses Value - -------------------------------------------------------------------- U.S. Treasury securities $ 67,237 $ 9 $ 787 $ 66,459 U.S. Agency securities 5,000 - 200 4,800 States & political subdivisions 23,629 - 677 22,952 - -------------------------------------------------------------------- Total Debt Securities 95,866 9 1,664 94,211 Equity securities 1,818 - - 1,818 - -------------------------------------------------------------------- Total Available - for-Sale $ 97,684 $ 9 $ 1,664 $ 96,029 ==================================================================== Equity securities at December 31, 2000 and 1999, 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. A summary of transactions involving available-for-sale debt securities in 2000, 1999 and 1998 are as follows: December 31, 2000 1999 1998 - ----------------------------------------------------- Proceeds from sales $ 18,952 $ - $ - Gross realized gains 2 - - Gross realized losses 356 - - Penseco Financial Services Corporation / 2000 Annual Report 27 3 INVESTMENT SECURITIES(continued) Held-to-Maturity Gross Gross Amortized Unrealized Unrealized Fair 2000 Cost Gains Losses Value - -------------------------------------------------------------------- U.S. Agency Obligations: Mortgage-backed securities $ 3,905 $ - $ 125 $ 3,780 States & political subdivisions 16,331 729 - 17,060 - -------------------------------------------------------------------- Total Held-to- Maturity $ 20,236 $ 729 $ 125 $ 20,840 ==================================================================== Gross Gross Amortized Unrealized Unrealized Fair 1999 Cost Gains Losses Value - -------------------------------------------------------------------- U.S. Agency Obligations: Mortgage-backed securities $ 4,843 $ - $ 152 $ 4,691 States & political subdivisions 5,639 - 152 5,487 - -------------------------------------------------------------------- Total Held-to- Maturity $ 10,482 $ - $ 304 $ 10,178 ==================================================================== Investment securities with amortized costs and fair values of $74,820 and $77,872 at December 31, 2000 and $50,446 and $49,130 at December 31, 1999, 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, 2000 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 $ 24,007 $ 23,992 $ - $ - States & political subdivisions - - - - After one year through five years: U.S. Treasury securities 30,126 30,670 - - U.S. Agency securities 34,666 35,749 - - States & political subdivisions 11,914 11,767 - - After five years through ten years: States & political subdivisions 1,257 1,246 - - After ten years: States & political subdivisions 284 280 16,331 17,060 - ------------------------------------------------------------------------- Subtotal 102,254 103,704 16,331 17,060 Mortgage-backed securities - - 3,905 3,780 - ------------------------------------------------------------------------ Total Debt Securities $ 102,254 $ 103,704 $ 20,236 $ 20,840 ======================================================================== 4 LOANS Major classifications of loans are as follows: December 31, 2000 1999 - ------------------------------------------------------------------- Loans secured by real estate: Construction and land development $ 9,321 $ 3,241 Secured by farmland 508 526 Secured by 1-4 family residential properties: Revolving, open-end loans 6,146 7,312 Secured by first liens 146,422 123,955 Secured by junior liens 33,791 32,347 Secured by multi-family properties 843 896 Secured by non-farm, non-residential properties 46,502 51,538 Commercial and industrial loans to U.S. addressees 21,566 18,995 Loans to individuals for household, family and other personal expenditures: Credit card and related plans 2,267 2,203 Other (installment and student loans, etc.) 29,725 28,615 Obligations of states & political subdivisions 10,085 11,821 All other loans 565 78 - ------------------------------------------------------------------- Gross Loans 307,741 281,527 Less: Unearned income on loans - - - ------------------------------------------------------------------- Loans, Net of Unearned Income $ 307,741 $ 281,527 =================================================================== Loans on which the accrual of interest has been discontinued or reduced amounted to $1,210, $836 and $929 at December 31, 2000, 1999 and 1998, respectively. If interest on those loans had been accrued, such income would have been $138, $140 and $108 for 2000, 1999 and 1998, respectively. Interest income on those loans, which is recorded only when received, amounted to $86, $22 and $30 for 2000, 1999 and 1998, respectively. Also, at December 31, 2000 and 1999, the Bank had loans totalling $336 and $476, 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, 2000 1999 1998 - --------------------------------------------------------------------------- Balance at beginning of year $ 2,950 $ 2,830 $ 2,600 Provision charged to operations 233 89 595 Recoveries credited to allowance 56 217 18 - --------------------------------------------------------------------------- 3,239 3,136 3,213 Losses charged to allowance (139) (186) (383) - --------------------------------------------------------------------------- Balance at End of Year $ 3,100 $ 2,950 $ 2,830 =========================================================================== 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 - ------------------------ -------------- ------------- 2000 $ 233 $ 52 1999 $ 89 $ 0 1998 $ 595 $ 365 The balance of the Reserve for Bad Debts as reported for Federal income tax purposes was $948, $979 and $948 at December 31, 2000, 1999 and 1998, respectively. 28 Penseco Financial Services Corporation / 2000 Annual Report 6 BANK PREMISES AND EQUIPMENT December 31, 2000 1999 - ------------------------------------------------------ Land $ 2,919 $ 2,929 Buildings and improvements 14,379 14,371 Furniture and equipment 10,938 10,282 - ------------------------------------------------------ 28,236 27,582 Less: Accumulated depreciation 16,529 15,286 - ------------------------------------------------------ Net Bank Premises and Equipment $ 11,707 $ 12,296 ====================================================== Buildings and improvements are being depreciated over 10 to 50 year periods and equipment over 3 to 10 year periods. Depreciation expense amounted to $1,243 in 2000, $1,176 in 1999 and $1,005 in 1998. Occupancy expenses were reduced by rental income received in the amount of $60, $59 and $58 in the years ended December 31, 2000, 1999 and 1998, 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, 2000 and 1999 was $201 and $33, respectively, supported by appraisals of the real estate involved. 8 INVESTMENT IN AND LOAN TO, INCOME FROM DIVIDENDS AND EQUITY IN EARNINGS OR LOSSES OF SUBSIDIARY Penseco Realty, Inc. is a wholly-owned subsidiary of the Bank which owns certain banking premises. Selected financial information is presented below: Equity in Equity in Percent underlying Bank's of voting Total net assets at Amount proportionate stock investment balance of part of loss for owned and loan sheet date dividends the period - ----------------------------------------------------------------------- 2000 100% $ 3,750 $ 3,735 None $ - 1999 100% $ 3,850 $ 3,835 None $ - 1998 100% $ 3,950 $ 3,936 None $ - 9 DEPOSITS December 31, 2000 1999 - ------------------------------------------------------- Demand - Non-interest bearing $ 64,184 $ 58,230 Demand - Interest bearing 24,075 23,558 Savings 63,552 68,824 Money markets 87,670 60,494 Time - Over $100,000 33,328 44,297 Time - Other 114,630 111,929 - ------------------------------------------------------- Total $ 387,439 $ 367,332 ======================================================= 9 DEPOSITS (continued) Scheduled maturities of time deposits are as follows: 2001 $ 114,130 2002 24,010 2003 5,095 2004 1,241 2005 1,491 2006 and thereafter 1,991 - ------------------------------------------------------- Total $ 147,958 ======================================================= 10 OTHER BORROWED FUNDS At December 31, 2000 and 1999, 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 $22,038 and $22,498 at December 31, 2000 and $12,097 and $11,816 at December 31, 1999, were pledged to secure repurchase agreements. Years Ended December 31, 2000 1999 - -------------------------------------------------------- Amount outstanding at year end $ 26,589 $ 12,868 Average interest rate at year end 6.03% 4.39% Maximum amount outstanding at any month end $ 30,280 $ 14,509 Average amount outstanding $ 19,490 $ 12,728 Weighted average interest rate during the year: Federal funds purchased 4.55% 5.13% Repurchase agreements 5.20% 3.96% Demand notes to U.S. Treasury 5.59% 4.99% 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 $10,092 and $10,039 at December 31, 2000 and $10,130 and $9,833 at December 31, 1999, with an interest rate of 6.0% and 5.0% at December 31, 2000 and December 31, 1999, 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, 2000 and 1999, 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, 2000 and 1999, respectively. The Company maintains a collateralized maximum borrowing capacity of $176,555 with the Federal Home Loan Bank of Pittsburgh (FHLB). There was no balance outstanding or assets pledged as of December 31, 2000. Penseco Financial Services Corporation / 2000 Annual Report 29 11 EMPLOYEE BENEFIT PLANS The Company provides an Employee Stock Ownership Plan (ESOP), a Retirement Profit Sharing Plan, an Employees' Pension Plan and a Postretirement Life Insurance Plan, all non-contributory, covering all eligible employees. The Company also maintains an unfunded supplemental executive pension plan, that provides certain officers with additional retirement benefits to replace benefits lost due to limits imposed on qualified plans by Federal tax law. 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, 2000 and 1999, the ESOP held 87,369 and 86,511 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 $110, $90 and $0 to the plan during the years ended December 31, 2000, 1999 and 1998, 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 contributed $0, $0 and $20 to the plan during the years ended December 31, 2000, 1999 and 1998, 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 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. In determining the benefit obligation the following assumptions were made: Pension Benefits Other Benefits ---------------------------------------- December 31, 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Weighted - average assumptions: Discount rate 7.00% 6.50% 7.00% 6.50% Expected return on plan assets 9.00% 9.00% - - Rate of compensation increase 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, 2000 1999 2000 1999 - --------------------------------------------------------------------- Change in benefit obligation: Benefit obligation, beginning $ 7,387 $ 7,488 $ 140 $ 52 Service cost 295 310 - 4 Interest cost 509 475 - 9 Actuarial gain (loss) 8 (653) - 78 Benefits paid (279) (233) - (3) - --------------------------------------------------------------------- Benefit obligation, ending 7,920 7,387 140 140 - --------------------------------------------------------------------- Change in plan assets: Fair value of plan assets, beginning 7,955 7,627 - - Actual return on plan assets 570 560 - - Employer contribution - 1 - 14 Benefits paid (278) (233) - (14) - --------------------------------------------------------------------- Fair value of plan assets, ending 8,247 7,955 - - - --------------------------------------------------------------------- Funded status 327 568 (140) (140) Unrecognized net transition asset (66) (132) - - Unrecognized net actuarial loss (gain) 614 459 - (126) Unrecognized prior service cost (46) (45) - 86 - --------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 829 $ 850 $ (140) $ (180) ===================================================================== A reconciliation of net periodic pension and other benefit costs is as follows: Pension Benefits ---------------- Years Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------ Components of net periodic pension cost: Service cost $ 295 $ 310 $ 295 Interest cost 509 475 444 Expected return on plan assets (705) (676) (615) Amortization of transition asset (66) (66) (66) Amortization of unrecognized net (gain) loss (12) 12 26 - ------------------------------------------------------------------ Net periodic pension cost $ 21 $ 55 $ 84 ================================================================== Other Benefits -------------- Years Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------ Components of net periodic other benefit cost: Service cost $ 5 $ 5 $ 2 Interest cost 11 9 3 Amortization of prior service cost 8 7 1 Amortization of unrecognized net loss (7) (7) (9) - ------------------------------------------------------------------ Net periodic other benefit cost $ 17 $ 14 $ (3) ================================================================== 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 $140, $130 and $0, respectively at December 31, 2000 and $145, $111 and $0, respectively at December 31, 1999. 30 Penseco Financial Services Corporation / 2000 Annual Report 12 INCOME TAXES The total income taxes in the Statements of Income are as follows: Years Ended December 31, 2000 1999 1999 - --------------------------------------------------------------- Currently payable $ 1,405 $ 1,946 $ 2,056 Deferred benefit (109) (165) (284) - --------------------------------------------------------------- Total $ 1,296 $ 1,781 $ 1,772 =============================================================== 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, 2000 1999 1998 - --------------------------------------------------------------- Tax at statutory rate $ 2,053 $ 2,194 $ 2,058 Reduction for non-taxable interest (748) (471) (269) Other (reductions) additions (9) 58 (17) - --------------------------------------------------------------- Applicable Income Taxes $ 1,296 $ 1,781 $ 1,772 =============================================================== The components of the deferred income tax benefit, which result from temporary differences, are as follows: Years Ended December 31, 2000 1999 1998 - --------------------------------------------------------------- Accretion of discount on bonds $ 34 $ (57) $ (147) Accelerated depreciation (85) (59) (32) Supplemental benefit plan (4) (7) (7) Allowance for loan losses (51) (30) (78) Prepaid pension cost (3) (12) (20) - --------------------------------------------------------------- Total $ (109) $ (165) $ (284) =============================================================== The significant components of deferred tax assets and liabilities are as follows: December 31, 2000 1999 - -------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 721 $ 670 Depreciation 274 189 Supplemental Benefit Plan 26 22 Unrealized securities losses - 563 - -------------------------------------------------------------- Total Deferred Tax Assets 1,021 1,444 - -------------------------------------------------------------- Deferred tax liabilities: Unrealized securities gains 493 - Prepaid pension costs 336 340 Accretion 42 8 - -------------------------------------------------------------- Total Deferred Tax Liabilities 871 348 - -------------------------------------------------------------- Net Deferred Tax Asset $ 150 $ 1,096 ============================================================== 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. 13 ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income of $958, ($1,093) and $433 at December 31, 2000, 1999 and 1998, respectively consisted entirely of unrealized gains or losses on available-for-sale securities, net of tax. A reconciliation of other comprehensive income for the year ended December 31, 2000 is as follows: Tax Before-Tax (Expense) Net-of-Tax Amount Benefit Amount - -------------------------------------------------------------------------------- Unrealized gains on available-for-sale securities: Unrealized gains arising during the year $ 2,753 $ (936) $ 1,817 Less: Reclassification adjustment for losses realized in income (354) 120 (234) - -------------------------------------------------------------------------------- Net unrealized gains 3,107 (1,056) 2,051 - -------------------------------------------------------------------------------- Other comprehensive income $ 3,107 $ (1,056) $ 2,051 ================================================================================ 14 COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding commitments and contingent liabilities, created under prevailing terms and collateral requirements such as commitments to extend credit, financial guarantees and letters of credit, which are not reflected in the accompanying Financial Statements. The Company does not anticipate any losses as a result of these transactions. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. Financial instruments whose contract amounts represent credit risk at December 31, 2000 and 1999 are as follows: 2000 1999 - ---------------------------------------------------------------- Commitments to extend credit: Fixed rate $ 19,100 $ 16,703 Variable rate $ 37,075 $ 37,261 Standby letters of credit $ 2,077 $ 1,130 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Various actions and proceedings are presently pending to which the Company is a party. Management is of the opinion that the aggregate liabilities, if any, arising from such actions would not have a material adverse effect on the financial position of the Company. The Company may, from time to time, maintain bank balances with other financial institutions in excess of $100,000 each. Management is not aware of any evidence that would indicate that such deposits are at risk. Penseco Financial Services Corporation / 2000 Annual Report 31 15 FAIR VALUE DISCLOSURE GENERAL Statement of Financial Accounting Standards No.107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of the estimated fair value of on and off - balance sheet financial instruments. VALUATION METHODS AND ASSUMPTIONS Estimated fair values have been determined using the best available data, an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates it is presumed that estimated fair 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, 2000 December 31, 1999 - --------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - --------------------------------------------------------------------------------------- Financial Assets: Cash and due from banks $ 18,775 $ 18,775 $ 10,275 $ 10,275 Interest bearing balances with banks 358 358 3,961 3,961 Federal funds sold - - 10,875 10,875 - --------------------------------------------------------------------------------------- Cash and cash equivalents 19,133 19,133 25,111 25,111 Investment Securities: Available-for-sale: U.S. Treasury securities 54,662 54,662 66,459 66,459 U.S. Agency obligations 35,749 35,749 4,800 4,800 States & political subdivisions 13,293 13,293 22,952 22,952 Federal Home Loan Bank stock 1,798 1,798 1,798 1,798 Other securities 70 70 20 20 Held-to-maturity: U.S. Agency obligations 3,905 3,780 4,843 4,691 States & political subdivisions 16,331 17,060 5,639 5,487 - --------------------------------------------------------------------------------------- Total investment securities 125,808 126,412 106,511 106,207 Loans, net of unearned income: Real estate mortgages 243,533 237,664 219,815 213,273 Commercial 21,566 21,566 18,995 18,995 Consumer and other 42,642 42,291 42,717 42,656 Less: Allowance for loan losses 3,100 2,950 - --------------------------------------------------------------------------------------- Loans, net 304,641 301,521 278,577 274,924 - --------------------------------------------------------------------------------------- Total Financial Assets 449,582 $ 447,066 410,199 $ 406,242 Other assets 17,648 18,415 - --------------------------------------------------------------------------------------- Total Assets $ 467,230 $ 428,614 ======================================================================================= Financial Liabilities: Demand - Non-interest bearing $ 64,184 $ 64,184 $ 58,230 $ 58,230 Demand - Interest bearing 24,075 24,075 23,558 23,558 Savings 63,552 63,552 68,824 68,824 Money markets 87,670 87,670 60,494 60,494 Time 147,958 148,518 156,226 156,691 - --------------------------------------------------------------------------------------- Total Deposits 387,439 387,999 367,332 367,797 Repurchase agreements 15,086 15,086 11,981 11,981 Short-term borrowings 11,503 11,503 887 887 - --------------------------------------------------------------------------------------- Total Financial Liabilities 414,028 $ 414,588 380,200 $ 380,665 Other Liabilities 3,135 2,671 Stockholders' Equity 50,067 45,743 - --------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 467,230 $ 428,614 ======================================================================================= Standby Letters of Credit $ (21) $ (21) $ (11) $ (11)
32 Penseco Financial Services Corporation / 2000 Annual Report 16 OPERATING LEASES The Company leases the land upon which the Mount Pocono Office was built and the land upon which a drive-up ATM was built on Meadow Avenue, Scranton. The Company also leases space at several locations which are being used as remote banking facilities. Rental expense was $81 in 2000, $80 in 1999 and $71 in 1998. 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, 2000 are as follows: Mount Meadow ATM Pocono Avenue Sites Total - ----------------------------------------------------- 2001 $ 47 $ 12 $ 12 $ 71 2002 47 - 6 53 2003 47 - - 47 2004 47 - - 47 2005 47 - - 47 2006 to 2012 250 - - 250 - ----------------------------------------------------- Total minimum payments required $ 485 $ 12 $ 18 $ 515 ===================================================== 17 LOANS TO DIRECTORS, PRINCIPAL OFFICERS AND RELATED PARTIES The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. A summary of loans to directors, principal officers and related parties is as follows: Years Ended December 31, 2000 1999 - --------------------------------------------- Beginning Balance $ 4,921 $ 4,008 Additions 2,914 3,892 Collections (1,876) (2,979) - --------------------------------------------- Ending Balance $ 5,959 $ 4,921 ============================================= 18 REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company 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, 2000, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2000, 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, 2000, 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 / 2000 Annual Report 33 18 REGULATORY MATTERS (continued)
Actual Regulatory Requirements - ---------------------------------------------- --------------------------------------- For Capital To Be Adequacy Purposes "Well Capitalized" December 31, 2000 Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 52,209 18.32% > $ 22,796 > 8.0% > $ 28,494 > 10.0% Tier I Capital (to Risk Weighted Assets) $ 49,109 17.23% > $ 11,398 > 4.0% > $ 17,096 > 6.0% Tier I Capital (to Average Assets) $ 49,109 10.93% > * > * > $ 22,464 > 5.0% * 3.0% ($13,478), 4.0% ($17,971) or 5.0% ($22,464) depending on the bank's CAMELS Rating and other regulatory risk factors. December 31, 1999 Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 49,786 18.96% > $ 21,006 > 8.0% > $ 26,259 > 10.0% Tier I Capital (to Risk Weighted Assets) $ 46,836 17.84% > $ 10,503 > 4.0% > $ 15,755 > 6.0% Tier I Capital (to Average Assets) $ 46,836 10.87% > * > * > $ 21,553 > 5.0% * 3.0% ($12,931), 4.0% ($17,242) or 5.0% ($21,553) depending on the bank's CAMELS Rating and other regulatory risk factors.
19 PENSECO FINANCIAL SERVICES CORPORATION (PARENT CORPORATION) The condensed Company-only information follows: BALANCE SHEETS December 31, 2000 1999 - ------------------------------------------------ Investment in subsidiary $ 50,017 $ 45,743 Equity Investments 50 - - ------------------------------------------------ Total Assets $ 50,067 $ 45,743 ================================================ Total Stockholders' Equity $ 50,067 $ 45,743 ================================================ STATEMENTS OF INCOME Years Ended December 31, 2000 1999 1998 - ---------------------------------------------------------- Earnings of subsidiary: Dividends received $ 2,520 $ 2,363 $ 2,255 Undistributed net income of subsidiary 2,223 2,308 2,026 - ---------------------------------------------------------- Net Income $ 4,743 $ 4,671 $ 4,281 ========================================================== STATEMENTS OF CASH FLOWS Years Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------- Operating Activities: Net Income $ 4,743 $ 4,671 $ 4,281 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (2,223) (2,308) (2,026) - -------------------------------------------------------------------------- Net cash provided by operating activities 2,520 2,363 2,255 - -------------------------------------------------------------------------- Investing Activities: Purchase of equity investment (50) - - - -------------------------------------------------------------------------- Net cash (used) provided by investing activities (50) - - - -------------------------------------------------------------------------- Financing Activities: Cash dividends paid (2,470) (2,363) (2,255) - -------------------------------------------------------------------------- Net cash used by financing activities (2,470) (2,363) (2,255) - -------------------------------------------------------------------------- Net increase in cash and cash equivalents - - - Cash and cash equivalents at January 1 - - - - -------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ - $ - $ - ========================================================================== 34 Penseco Financial Services Corporation / 2000 Annual Report McGrail Merkel Quinn & Associates Certified Public Accountants & Consultants February 21, 2001 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, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2000. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Penseco Financial Services Corporation and subsidiary as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000, in conformity with generally accepted accounting principles. /s/ McGrail, Merkel, Quinn & Associates Scranton, Pennsylvania Penseco Financial Services Corporation / 2000 Annual Report 35 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 2000. 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 1, 2001, 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 1, 2001, 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 1, 2001, 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 1, 2001, is incorporated herein by reference thereto. ITEM 13 Certain Relationships and Related Transactions The information contained in Note 17 under Item 8 on page 33 under the heading "General Notes to Financial Statements" in the Company's 2000 Annual Report to Shareholders is incorporated herein by reference thereto. 36 Penseco Financial Services Corporation / 2000 Annual Report PART IV ITEM 14 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 Changes in 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.) 27 Financial Data Schedule (b) No current report on Form 8-K was filed for the fourth quarter of 2000 of the fiscal year ended December 31, 2000. (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. Penseco Financial Services Corporation / 2000 Annual Report 37 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 March 7, 2001. 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 March 7, 2001. 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 38 Penseco Financial Services Corporation / 2000 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, None arrangement, 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 None security holders, including indentures 9 Voting trust agreement None 10 Material contracts - Supplemental Incorporated herein by reference Benefit Plan Agreement to Exhibit 10 of Registrant's report on Form 10-Q filed with the SEC on May 10, 1999. 11 Statement re: Computation of per None share earnings 12 Statements re: Computation of ratios None 13 Annual report to security holders, Included herein by reference on Form 10-Q or quarterly report to pages 1-40, including the cover. security holders 16 Letter re: Change in certifying None accountant 18 Letter re: Change in accounting None principles 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 None submitted to vote of security holders 23 Consents of experts and counsel None 24 Power of attorney None 27 Financial Data Schedule None 99 Additional Exhibits None
Penseco Financial Services Corporation / 2000 Annual Report 39 Company Officers PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY 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 Thomas E. Clewell Vice-President and Assistant Trust Officer Audrey F. Markowski Vice-President Richard P. Rossi Vice-President, Director of Human Resources Lynn M. 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 Henry V. Janoski Chief Investment Officer, Trust Services Patrick Scanlon Controller Susan M. Bray Assistant Controller and Assistant Treasurer Gerard P. Vasil Manager, Data Processing P. Frank Kozik Secretary Mark M. Bennett Credit Review Officer and Assistant Secretary PENN SECURITY BANK AND TRUST COMPANY OFFICERS ASSISTANT VICE-PRESIDENTS Carl M. Baruffaldi Denise M. Cebular Carol Curtis McMullen Assistant Trust Officer and Assistant Secretary Paula M. DePeters J. Patrick Dietz Karyn Gaus Vashlishan Lisa A. Kearney Ann M. Kennedy Eleanor Kruk Caroline Mickelson Aleta Sebastianelli and Assistant Secretary ASSISTANT VICE-PRESIDENTS (continued) Jeffrey Solimine Jennifer S. Wohlgemuth Linda Wolf and Training Officer Beth S. Wolff Deborah A. Wright ASSISTANT CASHIERS Lori A. Dzwieleski Pamela Edwards 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 CHARGE CARD MANAGER Eileen Yanchak ASSISTANT DIRECTOR OF Internal Audit Paula A. Ralston Nenish ASSISTANT STUDENT LOAN OFFICER Jo Ann M. Bevilaqua BRANCH OPERATIONS OFFICER Stephen A. Hoffman COMPUTER OPERATIONS OFFICER Charles Penn DIRECTOR OF CAMPUS BANKING Douglas R. Duguay DIRECTOR OF P.C. SYSTEMS Robert J. Saslo FINANCIAL REPORTING OFFICER John R. Anderson III HUMAN RESOURCES OFFICER Sharon Rosar LOAN ADMINISTRATION OFFICER Susan D. Blascak LOAN OFFICERS Denise Belton Frank Gardner OPERATIONS OFFICER Patricia Pliske TAX OFFICER Robert W. McDonald TRUST OPERATIONS OFFICER Carol Trezzi 40 Penseco Financial Services Corporation / 2000 Annual Report BACK COVER Company Board Members PENSECO FINANCIAL SERVICES CORPORATION AND PENN SECURITY BANK AND TRUST COMPANY BOARD OF DIRECTORS Edwin J. Butler Retired Bank Officer Richard E. Grimm Executive Vice-President and Treasurer Russell C. Hazelton 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 Mary Citro Robert J. Dillman, Ph.D. Attorney Kirby Upright Jeffrey Weichel GREEN RIDGE OFFICE Joseph N. Connor Everett Jones Attorney Patrick J. Mellody George Noone Howard J. Snowdon Jeffrey Solimine MOUNT POCONO OFFICE Bruce Berry Francis Cappelloni Attorney Brian Golden 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 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
9 1,000 U.S. DOLLARS 12-Mos DEC-31-2000 JAN-01-2000 DEC-31-2000 1.000 18,775 358 0 0 105,572 20,236 20,840 307,741 3,100 467,230 387,439 26,589 3,135 0 0 0 21 50,046 467,230 23,811 6,497 735 31,043 12,658 13,698 17,345 233 (354) 19,306 6,039 6,039 0 0 4,743 2.21 2.21 7.31 1,210 336 0 0 2,950 139 56 3,100 3,100 0 0
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