-----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, M3X6jhry0jsSnnSCWecs4+b1zcAEiZn8hvfLB0F7ef1+EyB9XVbTncPnNmMnRu2R m0+qDKCImOSnaBofGqJMVg== 0001054508-02-000013.txt : 20021118 0001054508-02-000013.hdr.sgml : 20021118 20021115102549 ACCESSION NUMBER: 0001054508-02-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENSECO FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0001054508 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232939222 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23777 FILM NUMBER: 02828644 BUSINESS ADDRESS: STREET 1: 150 N WASHINGTON AVENUE CITY: SCRANTON STATE: PA ZIP: 18503 BUSINESS PHONE: 7173467741X314 MAIL ADDRESS: STREET 1: 150 N WASHINGTON AVE CITY: SCRANTON STATE: PA ZIP: 18503 10-Q 1 text10q0902.txt PFNS 10-Q- 09/30/2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q ------------------ |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------ Commission file number 000-23777 PENSECO FINANCIAL SERVICES CORPORATION Incorporated pursuant to the Laws of Pennsylvania ------------------ Internal Revenue Service -- Employer Identification No. 23-2939222 150 North Washington Avenue, Scranton, Pennsylvania 18503-1848 (570) 346-7741 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| _____ No _____ The total number of shares of the registrant's Common Stock, $0.01 par value, outstanding on October 25, 2002 was 2,148,000. ================================================================================ PENSECO FINANCIAL SERVICES CORPORATION Page ---- Part I -- FINANCIAL INFORMATION Item 1. Financial Statements - Consolidated Balance Sheets: September 30, 2002.....................................3 December 31, 2001......................................3 Statements of Income: Three Months Ended September 30, 2002..................4 Three Months Ended September 30, 2001..................4 Nine Months Ended September 30, 2002...................5 Nine Months Ended September 30, 2001...................5 Statements of Cash Flows: Nine Months Ended September 30, 2002...................6 Nine Months Ended September 30, 2001...................6 Notes to Financial Statements.............................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......19 Item 4. Disclosure Controls and Procedures...............................20 Part II -- OTHER INFORMATION Item 1. Legal Proceedings................................................20 Item 2. Changes in Securities and Use of Proceeds........................20 Item 3. Defaults Upon Senior Securities..................................20 Item 4. Submission of Matters to a Vote of Security Holders..............20 Item 5. Other Information................................................20 Item 6. Exhibits and Reports on Form 8-K.................................20 Signatures...............................................................21 Certifications...........................................................22 PART I. FINANCIAL INFORMATION, Item 1-- Financial Statements PENSECO FINANCIAL SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands of dollars)
September 30, December 31, 2002 2001 -------------- -------------- ASSETS Cash and due from banks $ 17,513 $ 13,026 Interest bearing balances with banks 11,022 4,270 Federal funds sold 13,575 - -------------- -------------- Cash and Cash Equivalents 42,110 17,296 Investment securities: Available-for-sale, at fair value 108,675 96,505 Held-to-maturity (fair value of $33,807 and $32,617, respectively) 31,312 32,118 -------------- -------------- Total Investment Securities 139,987 128,623 Loans, net of unearned income 309,879 323,808 Less: Allowance for loan losses 3,347 3,600 -------------- -------------- Loans, Net 306,532 320,208 Bank premises and equipment 10,147 10,783 Other real estate owned 85 143 Accrued interest receivable 3,431 3,599 Other assets 3,333 1,899 -------------- -------------- Total Assets $ 505,625 $ 482,551 ============== ============== LIABILITIES Deposits: Non-interest bearing $ 76,897 $ 70,812 Interest bearing 340,951 335,719 -------------- -------------- Total Deposits 417,848 406,531 Other borrowed funds: Repurchase agreements 23,609 18,140 Short-term borrowings 889 17 Accrued interest payable 1,325 1,577 Other liabilities 2,761 1,638 -------------- -------------- Total Liabilities 446,432 427,903 -------------- -------------- STOCKHOLDERS' EQUITY Common stock ($ .01 par value, 15,000,000 shares authorized, 2,148,000 shares issued and outstanding) 21 21 Surplus 10,819 10,819 Retained earnings 44,368 41,206 Accumulated other comprehensive income 3,985 2,602 -------------- -------------- Total Stockholders' Equity 59,193 54,648 -------------- -------------- Total Liabilities and Stockholders' Equity $ 505,625 $ 482,551 ============== ==============
PENSECO FINANCIAL SERVICES CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands of dollars)
Three Months Ended Three Months Ended September 30, 2002 September 30, 2001 ------------------- ------------------ INTEREST INCOME Interest and fees on loans $ 5,107 $ 6,184 Interest and dividends on investments: U.S. Treasury securities and U.S. Agency obligations 1,256 1,412 States & political subdivisions 503 443 Other securities 18 35 Interest on Federal funds sold 64 1 Interest on balances with banks 33 21 ------------------- ------------------ Total Interest Income 6,981 8,096 ------------------- ------------------ INTEREST EXPENSE Interest on time deposits of $100,000 or more 346 415 Interest on other deposits 1,634 2,376 Interest on other borrowed funds 74 181 ------------------- ------------------ Total Interest Expense 2,054 2,972 ------------------- ------------------ Net Interest Income 4,927 5,124 Provision for loan losses 152 284 ------------------- ------------------ Net Interest Income After Provision for Loan Losses 4,775 4,840 ------------------- ------------------ OTHER INCOME Trust department income 333 282 Service charges on deposit accounts 287 300 Merchant transaction income 1,820 1,651 Other fee income 262 236 Other operating income 231 149 Realized gains (losses) on securities, net 359 6 ------------------- ------------------ Total Other Income 3,292 2,624 ------------------- ------------------ OTHER EXPENSES Salaries and employee benefits 2,271 1,958 Expense of premises and fixed assets 650 628 Merchant transaction expenses 1,526 1,409 Other operating expenses 1,149 1,059 ------------------- ------------------ Total Other Expenses 5,596 5,054 ------------------- ------------------ Income before income taxes 2,471 2,410 Applicable income taxes 632 610 ------------------- ------------------ Net Income 1,839 1,800 Other comprehensive income, net of taxes: Unrealized securities gains (losses) 1,080 1,770 ------------------- ------------------ Comprehensive Income $ 2,919 $ 3,570 =================== ================== Earnings per Common Share (Based on 2,148,000 shares outstanding) $ 0.85 $ 0.84 Cash Dividends Declared Per Common Share $ 0.30 $ 0.25
PENSECO FINANCIAL SERVICES CORPORATION CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands of dollars)
Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 ------------------- ------------------ INTEREST INCOME Interest and fees on loans $ 15,921 $ 18,874 Interest and dividends on investments: U.S. Treasury securities and U.S. Agency obligations 3,803 4,215 States & political subdivisions 1,530 1,153 Other securities 61 98 Interest on Federal funds sold 94 6 Interest on balances with banks 70 30 ------------------- ------------------ Total Interest Income 21,479 24,376 ------------------- ------------------ INTEREST EXPENSE Interest on time deposits of $100,000 or more 1,109 1,357 Interest on other deposits 4,944 7,614 Interest on other borrowed funds 226 1,025 ------------------- ------------------ Total Interest Expense 6,279 9,996 ------------------- ------------------ Net Interest Income 15,200 14,380 Provision for loan losses 571 725 ------------------- ------------------ Net Interest Income After Provision for Loan Losses 14,629 13,655 ------------------- ------------------ OTHER INCOME Trust department income 979 964 Service charges on deposit accounts 839 824 Merchant transaction income 4,430 4,433 Other fee income 719 672 Other operating income 628 381 Realized gains (losses) on securities, net 359 (26) ------------------- ------------------ Total Other Income 7,954 7,248 ------------------- ------------------ OTHER EXPENSES Salaries and employee benefits 6,611 5,944 Expense of premises and fixed assets 1,945 2,030 Merchant transaction expenses 3,785 3,874 Other operating expenses 3,480 3,466 ------------------- ------------------ Total Other Expenses 15,821 15,314 ------------------- ------------------ Income before income taxes 6,762 5,589 Applicable income taxes 1,667 1,305 ------------------- ------------------ Net Income 5,095 4,284 Other comprehensive income, net of taxes: Unrealized securities gains (losses) 1,383 2,353 ------------------- ------------------ Comprehensive Income $ 6,478 $ 6,637 =================== ================== Earnings per Common Share (Based on 2,148,000 shares outstanding) $ 2.37 $ 1.99 Cash Dividends Declared Per Common Share $ 0.90 $ 0.75
PENSECO FINANCIAL SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands of dollars)
Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ OPERATING ACTIVITIES Net Income $ 5,095 $ 4,284 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 928 977 Provision for loan losses 571 725 Deferred income tax (benefit) provision (57) 1 Amortization of securities, (net of accretion) 149 13 Net realized (gains) losses on securities (359) 26 Loss (gain) on other real estate - 21 Decrease (increase) in interest receivable 168 (404) (Increase) decrease in other assets (1,434) (332) (Decrease) increase in income taxes payable (107) 172 (Decrease) increase in interest payable (252) (354) Increase (decrease) in other liabilities 575 (156) ------------------ ------------------ Net cash provided by operating activities 5,277 4,973 ------------------ ------------------ INVESTING ACTIVITIES Purchase of investment securities available-for-sale (25,396) (36,010) Proceeds from investment securities available-for-sale 15,570 47,568 Purchase of investment securities to be held-to-maturity - (13,407) Proceeds from repayments of investment securities to be held-to-maturity 767 1,144 Net loans repaid (originated) 12,880 (21,991) Proceeds from other real estate 283 215 Investment in premises and equipment (292) (192) ------------------ ------------------ Net cash (used) provided by investing activities 3,812 (22,673) ------------------ ------------------ FINANCING ACTIVITIES Net increase (decrease) in demand and savings deposits 17,243 5,212 Net (payments) proceeds on time deposits (5,926) 4,495 Increase (decrease) in federal funds purchased - - Increase (decrease) in repurchase agreements 5,469 4,554 Net increase (decrease) in short-term borrowings 872 (3,790) Cash dividends paid (1,933) (1,611) ------------------ ------------------ Net cash provided (used) by financing activities 15,725 8,860 ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 24,814 (8,840) Cash and cash equivalents at January 1 17,296 19,133 ------------------ ------------------ Cash and cash equivalents at September 30 $ 42,110 $ 10,293 ================== ==================
The Company paid interest and income taxes of $6,531 and $1,532 and $10,350 and $987, for the nine month periods ended September 30, 2002 and 2001, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Quarter Ended September 30, 2002 (unaudited) These Notes to Financial Statements reflect events subsequent to December 31, 2001, the date of the most recent Report of Independent Auditors, through the date of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. These Notes to Financial Statements should be read in conjunction with Financial Information and Other Information required to be furnished as part of this Report, in particular, (1) Management's Discussion and Analysis of Financial Condition and Results of Operations for the three months ended September 30, 2002 and September 30, 2001 and for the nine months ended September 30, 2002 and September 30, 2001, with respect to the Company's capital requirements and liquidity, (2) Part II, Item 6, Reports on Form 8-K and (3) the Company's Annual Report - Form 10-K for the year ended December 31, 2001, incorporated herein by reference. NOTE 1 -- Principles of Consolidation Penseco Financial Services Corporation (Company) is a financial holding company, incorporated under the laws of Pennsylvania. It is the parent company of Penn Security Bank and Trust Company (Bank), a state chartered bank. Intercompany transactions have been eliminated in preparing the consolidated financial statements. The accounting policies of the Company conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. NOTE 2 -- Basis of Presentation The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments that are of a normal recurring nature and are considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full year. For further information, refer to the consolidated financial statements and accompanying notes included in the Company's Annual Report - Form 10-K for the year ended December 31, 2001. NOTE 3 -- Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. NOTE 4 -- Investment Securities Investments in securities are classified in two categories and accounted for as follows: Securities Held-to-Maturity. Bonds, notes, debentures and mortgage-backed securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the straight-line basis, which approximates the interest method, over the remaining period to maturity. Securities Available-for-Sale. Bonds, notes, debentures, and certain equity securities not classified as securities to be held-to-maturity are carried at fair value with unrealized holding gains and losses, net of tax, reported as a net amount in a separate component of stockholders' equity until realized. Realized gains and losses on the sale of securities available-for-sale are determined using the specific identification method and are reported as a separate component of other income in the Statements of Income. Unrealized gains and losses are included as a separate item in computing comprehensive income. The amortized cost and fair value of investment securities at September 30, 2002 and December 31, 2001 are as follows: Available-for-Sale Gross Gross Amortized Unrealized Unrealized Fair September 30, 2002 Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 35,123 $ 1,482 $ - $ 36,605 U.S. Agency securities 55,307 3,889 - 59,196 States & political subdivisions 9,933 529 - 10,462 - -------------------------------------------------------------------------------- Total Debt Securities 100,363 5,900 - 106,263 Equity securities 2,275 137 - 2,412 - -------------------------------------------------------------------------------- Total Available-for-Sale $ 102,638 $ 6,037 $ - $ 108,675 - -------------------------------------------------------------------------------- Available-for-Sale Gross Gross Amortized Unrealized Unrealized Fair December 31, 2001 Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 35,014 $ 1,086 $ 31 $ 36,069 U.S. Agency securities 55,368 2,775 - 58,143 States & political subdivisions - - - - - -------------------------------------------------------------------------------- Total Debt Securities 90,382 3,861 31 94,212 Equity securities 2,180 113 - 2,293 - -------------------------------------------------------------------------------- Total Available-for-Sale $ 92,562 $ 3,974 $ 31 $ 96,505 - -------------------------------------------------------------------------------- Held-to-Maturity Gross Gross Amortized Unrealized Unrealized Fair September 30, 2002 Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Agency Obligations: Mortgage-backed securities $ 1,614 $ 7 $ 24 $ 1,597 States & political subdivisions 29,698 2,512 - 32,210 - -------------------------------------------------------------------------------- Total Held-to-Maturity $ 31,312 $ 2,519 $ 24 $ 33,807 - -------------------------------------------------------------------------------- Held-to-Maturity Gross Gross Amortized Unrealized Unrealized Fair December 31, 2001 Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Agency Obligations: Mortgage-backed securities $ 2,377 $ - $ 45 $ 2,332 States & political subdivisions 29,741 799 255 30,285 - -------------------------------------------------------------------------------- Total Held-to-Maturity $ 32,118 $ 799 $ 300 $ 32,617 - -------------------------------------------------------------------------------- The amortized cost and fair value of debt securities at September 30, 2002 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
September 30, 2002 Available-for-Sale Held-to-Maturity - --------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - --------------------------------------------------------------------------------------- Due in one year or less: U.S. Treasury securities $ 10,016 $ 10,133 $ - $ - U.S. Agency securities 6,990 7,254 - - After one year through five years: U.S. Treasury securities 25,107 26,472 - - U.S. Agency securities 48,317 51,942 - - After ten years: States & political subdivisions 9,933 10,462 29,698 32,210 - --------------------------------------------------------------------------------------- Subtotal 100,363 106,263 29,698 32,210 Mortgage-backed securities - - 1,614 1,597 - --------------------------------------------------------------------------------------- Total Debt Securities $ 100,363 $ 106,263 $ 31,312 $ 33,807 - ---------------------------------------------------------------------------------------
NOTE 5 -- Regulatory Matters The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company and the Bank's Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the Capital Adequacy table on the following page) of Tier I and Total Capital to risk-weighted assets and of Tier I Capital to average assets (Leverage ratio). The table also presents the Company's actual capital amounts and ratios. The Bank's actual capital amounts and ratios are substantially identical to the Company's. Management believes, as of September 30, 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of September 30, 2002, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Company as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Company must maintain minimum Tier I Capital, Total Capital and Leverage ratios as set forth in the Capital Adequacy table. There are no conditions or events since that notification that management believes have changed the Company's categorization by the FDIC. The Company and Bank are also subject to minimum capital levels, which could limit the payment of dividends, although the Company and Bank currently have capital levels, which are in excess of minimum capital level ratios required. The Pennsylvania Banking Code restricts capital funds available for payment of dividends to the Retained Earnings of the Bank. Accordingly, at September 30, 2002, the balances in the Capital Stock and Surplus accounts totalling $10,840 are unavailable for dividends. In addition, the Bank is subject to restrictions imposed by Federal law on certain transactions with the Company's affiliates. These transactions include extensions of credit, purchases of or investments in stock issued by the affiliate, purchases of assets subject to certain exceptions, acceptance of securities issued by an affiliate as collateral for loans, and the issuance of guarantees, acceptances, and letters of credit on behalf of affiliates. These restrictions prevent the Company's affiliates from borrowing from the Bank unless the loans are secured by obligations of designated amounts. Further, the aggregate of such transactions by the Bank with a single affiliate is limited in amount to 10 percent of the Bank's Capital Stock and Surplus, and the aggregate of such transactions with all affiliates is limited to 20 percent of the Bank's Capital Stock and Surplus. The Federal Reserve System has interpreted "Capital Stock and Surplus" to include undivided profits.
Actual Regulatory Requirements - ------------------------------------------------ ---------------------------------------------- For Capital To Be Adequacy Purposes "Well Capitalized" As of September 30, 2002 Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 58,496 18.19% > $ 25,725 > 8.0% > $ 32,157 > 10.0% - - - - Tier 1 Capital (to Risk Weighted Assets) $ 55,149 17.15% > $ 12,863 > 4.0% > $ 19,294 > 6.0% - - - - Tier 1 Capital (to Average Assets) $ 55,149 11.17% > $ * > * > $ 24,694 > 5.0% - - - -
*3.0% ($14,816), 4.0% ($19,755) or 5.0% ($24,694) depending on the bank's CAMELS Rating and other regulatory risk factors.
As of December 31, 2001 - --------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 55,646 18.22% > $ 24,428 > 8.0% > $ 30,535 > 10.0% - - - - Tier 1 Capital (to Risk Weighted Assets) $ 52,046 17.04% > $ 12,214 > 4.0% > $ 18,321 > 6.0% - - - - Tier 1 Capital (to Average Assets) $ 52,046 10.95% > $ * > * > $ 23,759 > 5.0% - - - -
*3.0% ($14,255), 4.0% ($19,007) or 5.0% ($23,759) depending on the bank's CAMELS Rating and other regulatory risk factors. PART 1. FINANCIAL INFORMATION, Item 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary provides an overview of the financial condition and significant changes in the results of operations of Penseco Financial Services Corporation and it's subsidiary ("Penn Security Bank and Trust Company") for the three months ended September 30, 2002 and September 30, 2001 and for the nine months ended September 30, 2002 and September 30, 2001. Throughout this review the subsidiary of Penseco Financial Services Corporation, Penn Security Bank and Trust Company, is referred to as the "Company". All intercompany accounts and transactions have been eliminated in preparing the consolidated financial statements. All information is presented in thousands of dollars, except as indicated. Overview of Financial Condition Penseco Financial Services Corporation reported an increase in net income of $39 or 2.2% to $1,839 for the three months ended September 30, 2002 from $1,800 reported for the three months ended September 30, 2001. This is attributed to an increase in other income, along with a gain from the sale of a U.S. Government Agency security. The Company also reported an increase in net income of $811 or 18.9% to $5,095 for the nine months ended September 30, 2002 from $4,284 reported for the first nine months of 2001, largely due to increases in the net interest margin. There was an increase in other income of $706 or 9.7%, mainly from increases in brokerage services, as well as, the sale of non-portfolio mortgages and a gain on the sale of a short-term U.S. Government Agency security. Net Interest Income and Net Interest Margin Net interest income, the largest contributor to the Company's earnings, is defined as the difference between income on assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investments while deposits and short-term borrowings, in the form of securities sold under agreements to repurchase, represent interest-bearing liabilities. Variations in the volume and mix of these assets and liabilities, as well as changes in the yields earned and rates paid, are determinants of changes in net interest income. Three Month Period Net interest income after provision for loan losses decreased $65 or 1.3% from $4,840 for the three month period ended September 30, 2001 to $4,775 for the same period in 2002. In addition, earning assets repriced downward 136 basis points due to the precipitous drop in interest rates following the September 11th, 2001 terrorist attacks on the United States, offset by interest bearing liabilities repricing downward 115 basis points, as shown on the following schedule. The net interest margin represents the Company's net yield on its earning assets and is calculated as net interest income divided by average earning assets. In the three months ended September 30, 2002, the net interest margin was 4.07%, decreasing 44 basis points from 4.51% in the same period of 2001. Total average earning assets and average interest bearing funds increased for the three months ended September 30, 2002 as compared to 2001. For the same period, average earning assets increased $30.4 million or 6.7%, from $453.9 million in 2001 to $484.3 million in 2002 and average interest bearing funds increased $18.5 million, or 5.2%, from $354.0 million to $372.5 million. As a percentage of average assets, earning assets increased to 95.8% for the three months ended September 30, 2002 from 95.5% for the same year ago period. Interest bearing liabilities decreased to 73.7% from 74.4%, as a percentage of total liabilities and stockholders' equity, compared to the year ago period. Changes in the mix of both earning assets and funding sources also impacted net interest income for the three months ended September 30, 2002 and 2001. Average loans as a percentage of average earning assets decreased from 71.7% in 2001 to 65.8% in 2002; average investments increased from 27.8% to 29.3%. Short-term investments, federal funds sold and interest bearing balances with banks increased $20.8 million to $23.4 from $2.6 and also increased as a percentage of earning assets from .6% in 2001 to 4.8% in 2002. Time deposits increased $4.6 million from 42.1% in 2001 to 41.3% in 2002. However, short-term borrowings and repurchase agreements decreased $.4 from 6.4% in 2001 to 6.2% in 2002, as a percentage of funding sources. Shifts in the interest rate environment and competitive factors affected the rates paid for funds, as well as the yields earned on assets. The investment securities tax equivalent yield decreased 99 basis points from 6.72% in the three months ended September 30, 2001 to 5.73% for 2002. Average loan yields decreased 120 basis points, from 7.60% in 2001 to 6.40% in 2002. The average time deposit costs decreased 124 basis points from 4.86% in 2001 to 3.62% in 2002, along with money market accounts decreasing 142 basis points from 2.92% in 2001 to 1.50% in 2002. These are the primary causes of the decrease in the total cost of funds rate from 3.36% in 2001 to 2.21% in 2002. Distribution of Assets, Liabilities and Stockholders' Equity / Interest Rates and Interest Differential The table below presents average balances, interest income on a fully taxable equivalent basis and interest expense, as well as average rates earned and paid on the Company's major asset and liability items for the three months ended September 30, 2002 and September 30, 2001.
- -------------------------------------------------------------------------------------------------------- September 30, 2002 September 30, 2001 ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate - -------------------------------------------------------------------------------------------------------- Investment Securities Available-for-sale: U.S. Treasury securities $ 36,230 $ 377 4.16% $ 36,503 $ 528 5.79% U.S. Agency obligations 62,139 866 5.57% 55,230 841 6.09% States & political subdivisions 9,902 118 7.22% 2,126 23 6.56% Federal Home Loan Bank stock 2,006 16 3.19% 1,911 33 6.91% Other 403 2 1.99% 335 2 2.39% Held-to-maturity: U.S. Agency obligations 1,731 13 3.00% 2,971 43 5.79% States & political subdivisions 29,698 385 7.86% 26,929 420 9.45% Loans, net of unearned income: Real estate mortgages 246,308 4,086 6.64% 251,722 4,825 7.67% Commercial 32,701 454 5.55% 27,813 566 8.14% Consumer and other 39,703 567 5.71% 45,756 793 6.94% Federal funds sold 16,010 64 1.60% 92 1 4.35% Interest on balances with banks 7,428 33 1.78% 2,509 21 3.35% - -------------------------------------------------------------------------------------------------------- Total Earning Assets/ Total Interest Income 484,259 $ 6,981 5.77% 453,897 $ 8,096 7.13% - -------------------------------------------------------------------------------------------------------- Cash and due from banks 8,488 7,759 Bank premises and equipment 10,293 11,077 Accrued interest receivable 3,544 3,880 Other assets 3,088 2,065 Less: Allowance for loan losses 3,954 3,148 - -------------------------------------------------------------------------------------------------------- Total Assets $ 505,718 $ 475,530 - -------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand-Interest bearing $ 25,774 $ 38 0.59% $ 25,729 $ 68 1.06% Savings 72,576 182 1.00% 65,204 244 1.50% Money markets 97,278 365 1.50% 91,095 665 2.92% Time - Over $100 35,848 346 3.86% 32,856 415 5.06% Time - Other 117,948 1,049 3.56% 116,361 1,399 4.81% Federal funds purchased - - - - - - Repurchase agreements 22,608 72 1.27% 18,480 141 3.05% Short-term borrowings 463 2 1.73% 4,245 40 3.77% - -------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities/ Total Interest Expense 372,495 $ 2,054 2.21% 353,970 $ 2,972 3.36% - -------------------------------------------------------------------------------------------------------- Demand - Non-interest bearing 72,605 65,278 All other liabilities 2,837 3,016 Stockholders' equity 57,781 53,266 - -------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 505,718 $ 475,530 - -------------------------------------------------------------------------------------------------------- Interest Spread 3.56% 3.77% - -------------------------------------------------------------------------------------------------------- Net Interest Income $ 4,927 $ 5,124 - -------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Net interest margin 4.07% 4.51% Return on average assets 1.45% 1.51% Return on average equity 12.73% 13.52% Average equity to average assets 11.43% 11.20% Dividend payout ratio 35.29% 29.76% - --------------------------------------------------------------------------------------------------------
Nine Month Period Net interest income after provision for loan losses increased $974 or 7.1% from $13,655 for the first nine months of 2001 to $14,629 in 2002. In addition, earning assets repriced downward 116 basis points due to the precipitous drop in interest rates following the September 11th, 2001 terrorist attacks on the United States, offset by interest bearing liabilities repricing downward 146 basis points, as shown on the following schedule. In the first nine months of 2002, the net interest margin was 4.29%, increasing 3 basis points from 4.26% in the same period of 2001. Total average earning assets and average interest bearing funds increased in the first nine months of 2002 as compared to 2001. Average earning assets increased $22.5 million or 5.0%, from $450.3 million in 2001 to $472.8 million in 2002 and average interest bearing funds increased $10.7 million, or 3.0%, from $355.2 million to $365.9 million for the same periods. As a percentage of average assets, earning assets increased to 95.7% for the first nine months of 2002 from 95.2% for the year ago period. Interest bearing liabilities increased $10.7 or 3.0% of total liabilities and stockholders' equity, compared to the year ago period. Changes in the mix of both earning assets and funding sources also impacted net interest income in the first nine months of both 2002 and 2001. Average loans as a percentage of average earning assets decreased from 72.2% in 2001 to 68.3% in 2002; average investments increased from 27.6% to 28.9%. Short-term investments, federal funds sold and interest bearing balances with banks increased $12.3 million to $13.4 from $1.1 and also increased as a percentage of earning assets from .2% in 2001 to 2.8% in 2002. Time deposits increased $10.1 million from 41.4% in 2001 to 42.9% in 2002. However, short-term borrowings and repurchase agreements decreased $12.5 from 9.2% in 2001 to 5.5% in 2002, as a percentage of funding sources. Shifts in the interest rate environment and competitive factors affected the rates paid for funds as well as the yields earned on assets. The investment securities tax equivalent yield decreased 46 basis points from 6.50% in the first nine months of 2001 to 6.04% for 2002. Also, average loan yields decreased 117 basis points, from 7.74% in the first nine months of 2001 to 6.57% in 2002. The average time deposit costs decreased 163 basis points from 5.31% in 2001 to 3.68% in 2002, along with money market accounts decreasing 187 basis points from 3.40% in 2001 to 1.53% in 2002. These are the primary causes of the decrease in the total cost of funds rate from 3.75% in 2001 to 2.29% in 2002. (The remainder of this page is intentionally left blank.) Distribution of Assets, Liabilities and Stockholders' Equity / Interest Rates and Interest Differential The table below presents average balances, interest income on a fully taxable equivalent basis and interest expense, as well as average rates earned and paid on the Company's major asset and liability items for the nine months ended September 30, 2002 and September 30, 2001.
- -------------------------------------------------------------------------------------------------------- September 30, 2002 September 30, 2001 ASSETS Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate - -------------------------------------------------------------------------------------------------------- Investment Securities Available-for-sale: U.S. Treasury securities $ 36,535 $ 1,202 4.39% $ 40,866 $ 1,786 5.83% U.S. Agency obligations 59,242 2,553 5.75% 49,334 2,277 6.15% States & political subdivisions 6,707 252 7.59% 9,648 267 5.59% Federal Home Loan Bank stock 1,972 54 3.65% 1,871 94 6.70% Other 389 7 2.40% 198 4 2.69% Held-to-maturity: U.S. Agency obligations 1,972 48 3.24% 3,396 152 5.97% States & political subdivisions 29,720 1,278 8.69% 18,865 886 9.49% Loans, net of unearned income: Real estate mortgages 249,508 12,681 6.78% 248,767 14,523 7.78% Commercial 32,865 1,365 5.54% 27,371 1,703 8.30% Consumer and other 40,481 1,875 6.18% 48,839 2,648 7.23% Federal funds sold 7,917 94 1.58% 154 6 5.19% Interest on balances with banks 5,469 70 1.71% 995 30 4.02% - -------------------------------------------------------------------------------------------------------- Total Earning Assets/ Total Interest Income 472,777 $ 21,479 6.06% 450,304 $ 24,376 7.22% - -------------------------------------------------------------------------------------------------------- Cash and due from banks 8,142 8,362 Bank premises and equipment 10,525 11,320 Accrued interest receivable 3,489 3,775 Other assets 2,709 2,401 Less: Allowance for loan losses 3,770 3,114 - -------------------------------------------------------------------------------------------------------- Total Assets $ 493,872 $ 473,048 - -------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand-Interest bearing $ 26,157 $ 120 0.61% $ 25,119 $ 201 1.07% Savings 70,833 541 1.02% 64,025 713 1.48% Money markets 91,836 1,054 1.53% 86,460 2,203 3.40% Time - Over $100 38,462 1,109 3.84% 31,876 1,357 5.68% Time - Other 118,498 3,229 3.63% 114,996 4,497 5.21% Federal funds purchased - - - - - - Repurchase agreements 19,569 218 1.48% 17,220 546 4.23% Short-term borrowings 582 8 1.83% 15,503 479 4.12% - -------------------------------------------------------------------------------------------------------- Total Interest Bearing Liabilities/ Total Interest Expense 365,937 $ 6,279 2.29% 355,199 $ 9,996 3.75% - -------------------------------------------------------------------------------------------------------- Demand - Non-interest bearing 68,705 62,759 All other liabilities 2,883 2,853 Stockholders' equity 56,347 52,236 - -------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 493,872 $ 473,047 - -------------------------------------------------------------------------------------------------------- Interest Spread 3.77% 3.47% - -------------------------------------------------------------------------------------------------------- Net Interest Income $ 15,200 $ 14,380 - -------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Net interest margin 4.29% 4.26% Return on average assets 1.38% 1.21% Return on average equity 12.06% 10.94% Average equity to average assets 11.41% 11.04% Dividend payout ratio 37.97% 37.74% - --------------------------------------------------------------------------------------------------------
Provision for Loan Losses The provision for loan losses represents management's determination of the amount necessary to bring the allowance for loan losses to a level that management considers adequate to reflect the risk of future losses inherent in the Company's loan portfolio. The process of determining the adequacy of the allowance is necessarily judgmental and subject to changes in external conditions. The allowance for loan losses reflects management's judgment as to the level considered appropriate to absorb such losses based upon a review of many factors, including historical loss experience, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), economic conditions and trends, loan portfolio volume and mix, loan performance trends, the value and adequacy of collateral, and the Company's internal credit review process. Accordingly, there can be no assurance that existing levels of the allowance will ultimately prove adequate to cover actual loan losses. The quarterly provision for loan losses charged to operating expense is that amount which is sufficient to bring the balance of the allowance for possible loan losses to an adequate level to absorb anticipated losses. Based on this ongoing evaluation, management determines the provision necessary to maintain an appropriate allowance. In the three months ended September 30, 2002, the provision for loan losses was $152, a decrease from $284 in the three months ended September 30, 2001. Loans charged-off totaled $769 and recoveries were $14 for the three months ended September 30, 2002. In the same period of 2001, loans charged off were $40, offset by recoveries of $6. In the first nine months of 2002, the provision for loan losses was $571, a decrease from $725 in the first nine months of 2001. Loans charged-off totaled $858 and recoveries were $34 for the nine months ended September 30, 2002. In the same period of 2001, loans charged off were $454, offset by recoveries of $29. Other Income The following table sets forth information by category of other income for the Company for three months ended September 30, 2002 and September 30, 2001, respectively: September 30, September 30, Three Months Ended: 2002 2001 - ---------------------------------------------------------------------------- Trust department income $ 333 $ 282 Service charges on deposit accounts 287 300 Merchant transaction income 1,820 1,651 Other fee income 262 236 Other operating income 231 149 Realized gains (losses) on securities, net 359 6 - ---------------------------------------------------------------------------- Total Other Income $ 3,292 $ 2,624 - ---------------------------------------------------------------------------- Other income increased $668 or 25.5% to $3,292 from $2,624 for the three months ended September 30, 2002. Contributing to the growth in other income were increases of $51 or 18.1% in trust department income due to additional business. In addition, there was increased merchant transaction income of $169 or 10.2% to $1,820 from $1,651 and increased other fee income of $26 or 11.0% mainly from increased cardholder discounts. Also an increase of $82 or 55.0% to $231 from $149 in other operating income, due mainly to increased revenue from the sale of non-portfolio mortgages. Realized gains on the sale of securities were $359 due to the sale of a three year U.S Agency security. The proceeds will be re-invested into higher yielding longer term municipal securities. The following table sets forth information by category of other income for the Company for nine months ended September 30, 2002 and September 30, 2001, respectively: September 30, September 30, Nine Months Ended: 2002 2001 - ---------------------------------------------------------------------------- Trust department income $ 979 $ 964 Service charges on deposit accounts 839 824 Merchant transaction income 4,430 4,433 Other fee income 719 672 Other operating income 628 381 Realized gains (losses) on securities, net 359 (26) - ---------------------------------------------------------------------------- Total Other Income $ 7,954 $ 7,248 - ---------------------------------------------------------------------------- Other income increased $706 or 9.7% to $7,954 from $7,248 during the first nine months of 2002. Contributing to the growth in other income were increased other fee income of $47 or 7.0% to $719 from $672 and other operating income of $247 or 64.8% to $628 from $381, due mostly to brokerage division income of $163, along with gains on the sale of non-portfolio mortgages of $130, a reaction to consumers refinancing with interest rates at forty-year lows. Realized gains on the sale of securities were $359 due to the sale of a three year U.S Agency security. The proceeds will be re-invested into higher yielding longer term municipal securities. Other Expenses The following table sets forth information by category of other expenses for the Company for the three months ended September 30, 2002 and September 30, 2001, respectively: September 30, September 30, Three Months Ended: 2002 2001 - ---------------------------------------------------------------------------- Salaries and employee benefits $ 2,271 $ 1,958 Expense of premises and fixed assets 650 628 Merchant transaction expenses 1,526 1,409 Other operating expenses 1,149 1,059 - ---------------------------------------------------------------------------- Total Other Expenses $ 5,596 $ 5,054 - ---------------------------------------------------------------------------- Other expenses increased $542 or 10.7% to $5,596 from $5,054 for the three months ended September 30, 2002 mainly due to an increase of $313 or 16.0% to $2,271 from $1,958 in salaries and employee benefits due to staff additions and replacements, merit increases and higher pension costs, while expense of merchant transactions increased $117 or 8.3% to $1,526 from $1,409 due to increased business. Other operating expense increased $90 or 8.5%, largely due to increases in stationary and supplies and bank shares tax expense. The following table sets forth information by category of other expenses for the Company for the nine months ended September 30, 2002 and September 30, 2001, respectively: September 30, September 30, Nine Months Ended: 2002 2001 - ---------------------------------------------------------------------------- Salaries and employee benefits $ 6,611 $ 5,944 Expense of premises and fixed assets 1,945 2,030 Merchant transaction expenses 3,785 3,874 Other operating expenses 3,480 3,466 - ---------------------------------------------------------------------------- Total Other Expenses $ 15,821 $ 15,314 - ---------------------------------------------------------------------------- Other expenses increased $507 or 3.3% to $15,821 from $15,314 during the first nine months of 2002, largely due to an increase in salaries and employee benefits of $667 or 11.2% to $6,611 from $5,944 attributable to staff additions and replacements, merit increases and higher pension costs. Applicable income tax expense increased $362 or 27.7% to $1,667 from $1,305 due to a higher taxable operating income. Loan Portfolio Details regarding the Company's loan portfolio: September 30, December 31, As Of: 2002 2001 - ------------------------------------------------------------------------------ Real estate - construction and land development $ 5,991 $ 9,124 Real estate mortgages 236,204 246,486 Commercial 31,665 30,001 Credit card and related plans 2,201 2,377 Installment 27,905 30,142 Obligations of states & political subdivisions 5,913 5,678 - ------------------------------------------------------------------------------ Loans, net of unearned income 309,879 323,808 Less: Allowance for loan losses 3,347 3,600 - ------------------------------------------------------------------------------ Loans, net $ 306,532 $ 320,208 - ------------------------------------------------------------------------------ Loan Quality The comprehensive lending policy established by the Board of Directors guides the lending activities of the Company. Loans must meet criteria, which include consideration of the character, capacity and capital of the borrower, collateral provided for the loan, and prevailing economic conditions. Regardless of credit standards, there is risk of loss inherent in every loan portfolio. The allowance for loan losses is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of the loans. The evaluations take into consideration such factors as change in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, industry experience, collateral value and current economic conditions that may affect the borrower's ability to pay. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. The allowance for loan losses is increased by periodic charges against earnings as a provision for loan losses, and decreased periodically by charge-offs of loans (or parts of loans) management has determined to be uncollectible, net of actual recoveries on loans previously charged-off. Non-Performing Assets Non-performing assets consist of non-accrual loans, loans past due 90 days or more and still accruing interest and other real estate owned. The following table sets forth information regarding non-performing assets as of the dates indicated:
September 30, December 31, September 30, As Of: 2002 2001 2001 - ----------------------------------------------------------------------------------------------- Non-accrual loans $ 2,217 $ 1,917 $ 1,123 Loans past due 90 days or more and accruing: Guaranteed student loans 300 304 379 Credit card and home equity loans 14 22 21 - ----------------------------------------------------------------------------------------------- Total non-performing loans 2,531 2,243 1,523 Other real estate owned 85 143 87 - ----------------------------------------------------------------------------------------------- Total non-performing assets $ 2,616 $ 2,386 $ 1,610 - -----------------------------------------------------------------------------------------------
Loans are generally placed on a non-accrual status when principal or interest is past due 90 days or when payment in full is not anticipated. When a loan is placed on non-accrual status, all interest previously accrued but not collected is charged against current income. Loans are returned to accrual status when past due interest is collected and the collection of principal is probable. Loans on which the accrual of interest has been discontinued or reduced amounted to $2,217 and $1,123 at September 30, 2002 and September 30, 2001, respectively. If interest on those loans had been accrued, such income would have been $204 and $125 for the nine months ended September 30, 2002 and September 30, 2001, respectively. Interest income on those loans, which is recorded only when received, amounted to $70 and $23 for September 30, 2002 and September 30, 2001, respectively. There are no commitments to lend additional funds to borrowers whose loans are in non-accrual status. The management process for evaluating the adequacy of the allowance for loan losses includes reviewing each month's loan committee reports, which list all loans that do not meet certain internally developed criteria as to collateral adequacy, payment performance, economic conditions and overall credit risk. These reports also address the current status and actions in process on each listed loan. From this information, adjustments are made to the allowance for loan losses. Such adjustments include both specific loss allocation amounts and general provisions by loan category based on present and past collection experience, nature and volume of the loan portfolio, overall quality, and current economic conditions that may affect the borrower's ability to pay. As of September 30, 2002 there are no significant loans as to which management has serious doubt about their collectibility other than what is included above. At September 30, 2002 and December 31, 2001, the Company did not have any loans specifically classified as impaired. Most of the Company's lending activity is with customers located in the Company's geographic market area and repayment thereof is affected by economic conditions in this market area. Loan Loss Experience The following tables present the Company's loan loss experience during the periods indicated: September 30, September 30, Three Months Ended: 2002 2001 - ------------------------------------------------------------------------------- Balance at beginning of period $ 3,950 $ 3,150 Charge-offs: Real estate mortgages 12 26 Commercial and all others 740 - Credit card and related plans 5 11 Installment loans 12 3 - ------------------------------------------------------------------------------- Total charge-offs 769 40 - ------------------------------------------------------------------------------- Recoveries: Real estate mortgages 12 5 Commercial and all others - - Credit card and related plans 1 - Installment loans 1 1 - ------------------------------------------------------------------------------- Total recoveries 14 6 - ------------------------------------------------------------------------------- Net charge-offs (recoveries) 755 34 - ------------------------------------------------------------------------------- Provision charged to operations 152 284 - ------------------------------------------------------------------------------- Balance at End of Period $ 3,347 $ 3,400 - ------------------------------------------------------------------------------- Ratio of net charge-offs (recoveries) to average loans outstanding 0.237% 0.010% - ------------------------------------------------------------------------------- Due to the continuing economic uncertainties, and as an act of prudence, management had been increasing the allowance for loan losses since late last year. One significant credit related to the trucking industry, for which the reserve had been increased, was charged-off during the three months ended September 30, 2002. Even with this charge-off, the allowance for loan losses, as a percentage of total loans, increased to 1.08% at September 30, 2002 from 1.03% at September 30, 2001. September 30, September 30, Nine Months Ended: 2002 2001 - ------------------------------------------------------------------------------- Balance at beginning of year $ 3,600 $ 3,100 Charge-offs: Real estate mortgages 66 26 Commercial and all others 763 388 Credit card and related plans 16 23 Installment loans 13 17 - ------------------------------------------------------------------------------- Total charge-offs 858 454 - ------------------------------------------------------------------------------- Recoveries: Real estate mortgages 31 20 Commercial and all others - - Credit card and related plans 1 - Installment loans 2 9 - ------------------------------------------------------------------------------- Total recoveries 34 29 - ------------------------------------------------------------------------------- Net charge-offs (recoveries) 824 425 - ------------------------------------------------------------------------------- Provision charged to operations 571 725 - ------------------------------------------------------------------------------- Balance at End of Period $ 3,347 $ 3,400 - ------------------------------------------------------------------------------- Ratio of net charge-offs (recoveries) to average loans outstanding 0.255% 0.131% - ------------------------------------------------------------------------------- The allowance for loan losses is allocated as follows:
As Of: September 30, 2002 December 31, 2001 September 30, 2001 - ----------------------------------------------------------------------------------------------- Amount %* Amount %* Amount %* - ----------------------------------------------------------------------------------------------- Real estate mortgages $ 1,600 78% $ 1,700 79% $ 1,600 77% Commercial and all others 1,222 12% 1,375 11% 1,300 13% Credit card and related plans 175 1% 175 1% 150 1% Personal installment loans 350 9% 350 9% 350 9% - ----------------------------------------------------------------------------------------------- Total $ 3,347 100% $ 3,600 100% $ 3,400 100% - -----------------------------------------------------------------------------------------------
* Percent of loans in each category to total loans Liquidity The objective of liquidity management is to maintain a balance between sources and uses of funds in such a way that the cash requirements of customers for loans and deposit withdrawals are met in the most economical manner. Management monitors its liquidity position continuously in relation to trends of loans and deposits for short-term as well as long-term requirements. Liquid assets are monitored on a daily basis to assure maximum utilization. Management also manages its liquidity requirements by maintaining an adequate level of readily marketable assets and access to short-term funding sources. The Company remains in a highly liquid condition both in the short and long term. Sources of liquidity include the Company's substantial U.S. Treasury and U.S. Agency bond portfolio, additional deposits, earnings, overnight loans to and from other companies (Federal funds), lines of credit at the Federal Reserve Bank and lines of credit at the Federal Home Loan Bank. The designation of securities as "Held-To-Maturity" lessens the ability of banks to sell securities so classified, except in regard to certain changes in circumstances or other events that are isolated, nonrecurring and unusual. Related Parties The Company does not have any material transactions involving related persons or entities, other than traditional banking transactions, which are made on the same terms and conditions as those prevailing at the time for comparable transactions with unrelated parties. Capital Resources A strong capital position is important to the continued profitability of the Company and promotes depositor and investor confidence. The Company's capital provides a basis for future growth and expansion and also provides additional protection against unexpected losses. Additional sources of capital would come from retained earnings from the operations of the Company and from the sale of additional common stock. Management has no plans to offer additional common stock at this time. The Company's total risk-based capital ratio was 18.19% at September 30, 2002. The Company's risk-based capital ratio is more than the 10.00% ratio that Federal regulators use as the "well capitalized" threshold. This is the current criterion, which the FDIC uses in determining the lowest insurance rate for deposit insurance. The Company's risk-based capital ratio is more than double the 8.00% limit, which determines whether a company is "adequately capitalized". Under these rules, the Company could significantly increase its assets and still comply with these capital requirements without the necessity of increasing its equity capital. PART 1. FINANCIAL INFORMATION, Item 3-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks, such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk and the risk that could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks such as foreign currency exchange risk and commodity price risk do not arise in the normal course of community banking activities. Achieving consistent growth in net interest income is the primary goal of the Company's asset/liability function. The Company attempts to control the mix and maturities of assets and liabilities to achieve consistent growth in net interest income despite changes in market interest rates. The Company seeks to accomplish this goal while maintaining adequate liquidity and capital. A continuation of historically low interest rates will most likely affect negatively the Company's net interest income. The Company continues to evaluate its mix of assets and liabilities in response to the changing economy. PART 1. FINANCIAL INFORMATION, Item 4-- DISCLOSURE CONTROLS AND PROCEDURES Based on the Company's principal executive officer, Otto P. Robinson, Jr., President and the Company's principal financial officer, Patrick Scanlon, Controller, evaluations of the Company's Disclosure Controls and Procedures as of October 17, 2002 (evaluation date), they have concluded that the Company's disclosure controls are effective, reasonably ensure that material information relating to the Company and its consolidated subsidiaries is made known to them by others within those entities, particularly during the period in which this report is being prepared, and identify significant deficiencies or material weaknesses in internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data. Based on information available to them, they are not aware of significant deficiencies or material weaknesses in the Company's internal control system. Based on information available to them, they are not aware of any significant changes made in internal controls or in other factors that could significantly affect those controls subsequent to October 17, 2002 (evaluation date) and prior to the date of their certifications. Based on information available to them, they are not aware of any fraud that involves management or other employees of the Company. PART II. OTHER INFORMATION Item 1 -- Legal Proceedings None. Item 2 -- Changes in Securities and Use of Proceeds None. Item 3 -- Defaults Upon Senior Securities None. Item 4 -- Submission of Matters to a Vote of Security Holders None. Item 5 -- Other Information None. Item 6 -- Exhibits and Reports on Form 8-K a. Exhibits No exhibits are filed with this form 10-Q in the quarter ended September 30, 2002. b. Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended September 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENSECO FINANCIAL SERVICES CORPORATION By /s/ RICHARD E. GRIMM ------------------------------ Richard E. Grimm Executive Vice-President Dated: November 13, 2002 By /s/ PATRICK SCANLON ------------------------------ Patrick Scanlon Controller Dated: November 13, 2002 CERTIFICATIONS I, Otto P. Robinson, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Penseco Financial Services Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ OTTO P. ROBINSON JR. ------------------------- Otto P. Robinson, Jr. President I, Patrick Scanlon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Penseco Financial Services Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ PATRICK SCANLON ------------------------- Patrick Scanlon Controller -----END PRIVACY-ENHANCED MESSAGE-----