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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year
ended December 31, 2000
Commission File Number
000-23863
Peoples Financial Services, Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
23-2391852
(IRS Employer Identification Number)
50 Main Street, Hallstead, PA
(Address of principal executive officer)
18822
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of each class)
None
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.00
(Type of class)
2,149,835
(Number of shares outstanding as of December 31, 2000)
TABLE OF CONTENTS
Part I
Item 1 Business.................................................. 3-12
Item 2 Properties................................................ 13
Item 3 Legal Proceedings......................................... 13
Item 4 Submission of Matters to a Vote of Security Holders....... 13
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters............................... 14
Item 6 Selected Financial Data................................... 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation........................15-32
Item 7A Quantitative and Qualitative Disclosure About Market Risk.. 33
Item 8 Financial Statements and Supplementary Data............... 34
Independent Auditor's Report.............................. 34
Consolidated Balance Sheets............................... 35
Consolidated Statements of Income......................... 36
Consolidated Statements of Comprehensive Income........... 37
Consolidated Statements of Stockholders' Equity........... 38
Consolidated Statements of Cash Flows.....................39-40
Notes to Consolidated Financial Statements................41-59
Item 9 Changes and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 60
Part III
Item 10 Directors and Executive Officers.......................... 60
Item 11 Executive Compensation.................................... 60
Item 12 Share Ownership of Management and Directors............... 60
Item 13 Certain Relationships and Related Transactions............ 60
Part IV
Item 14 Exhibits and Reports on Form 8-K.......................... 61
PART 1
ITEM 1 BUSINESS
BRIEF HISTORY
Peoples Financial Services Corp. (the "Company") was incorporated under the
laws of the Commonwealth of Pennsylvania on February 6, 1986, and is a one-bank
holding company headquartered in Hallstead, Pennsylvania.
The Company is engaged primarily in commercial and retail banking services and
in businesses related to banking services through its sole subsidiary, Peoples
National Bank of Susquehanna County ("PNB" or the "Bank"). PNB was chartered in
Hallstead, Pennsylvania in 1905 under the name of The First National Bank of
Hallstead. In 1965, the Hop Bottom National Bank (chartered in 1910) merged with
and into the First National Bank of Hallstead to form PNB. PNB is currently in
its 95th year of operation.
SUPERVISION AND REGULATION
The Company and PNB are extensively regulated under federal and state law.
Generally, these laws and regulations are intended to protect depositors, not
shareholders. The following is a summary description of certain provisions of
certain laws which affect the regulation of bank holding companies and banks.
This discussion is qualified in its entirety by reference to applicable laws and
regulations. Changes in such laws and regulations may have a material effect on
the business and prospects of the Company and PNB.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and as such, it is subject to regulation,
supervision, and examination by the Federal Reserve Bank ("FRB"). The Company is
required to file annual and quarterly reports with the FRB and to provide the
FRB with such additional information as the FRB may require. The FRB also
conducts examinations of the Company.
With certain limited exceptions, the Company is required to obtain prior
approval from the FRB before acquiring direct or indirect ownership or control
of more than 5% of any voting securities or substantially all of the assets of a
bank or bank holding company, or before merging or consolidating with another
bank holding company. Additionally, with certain exceptions, any person or
entity proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of the Company is required to give 60 days
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
The Company's banking subsidiary is a federally-chartered national banking
association regulated by the Office of the Comptroller of the Currency ("OCC").
The OCC may prohibit the institution over which it has supervisory authority
from engaging in activities or investments that the agency believes constitute
unsafe or unsound banking practices. Federal banking regulators have extensive
enforcement authority over the institutions they regulate to prohibit or correct
activities that violate law; regulation or a regulatory agreement or which are
deemed to constitute unsafe or unsound practices.
Enforcement actions may include:
the appointment of a conservator or receiver,
the issuance of a cease and desist order,
the termination of deposit insurance,
the imposition of civil money penalties on the institution, its
directors, officers, employees and institution affiliated parties,
the issuance of directives to increase capital,
the issuance of formal and informal agreements,
the removal of or restrictions on directors, officers, employee and
institution-affiliated parties, and
the enforcement of any such mechanisms through restraining orders or
any other court actions.
PNB is subject to certain restrictions on extensions of credit to executive
officers, directors, principal shareholders or any related interests of such
persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with PNB
and not involving more than the normal risk of repayment. Other laws tie the
maximum amount that may be loaned to any one customer and its related interests
to capital levels of the bank.
Limitations on Dividends and Other Payments
The Company's current ability to pay dividends is largely dependent upon the
receipt of dividends from its banking subsidiary, PNB. Both federal and state
laws impose restrictions on the ability of the Company to pay dividends. The FRB
has issued a policy statement that provides that, as a general matter, insured
banks and bank holding companies may pay dividends only out of prior operating
earnings. Under the National Bank Act, a national bank such as PNB, may pay
dividends only out of the current year's net profits and the net profits of the
last two years. In addition to these specific restrictions, bank regulatory
agencies in general, also have the ability to prohibit proposed dividends by a
financial institution that would otherwise be permitted under applicable
regulations if the regulatory body determines that such distribution would
constitute an unsafe or unsound practice.
Permitted Non-Banking Activities
Generally, a bank holding company may not engage in any activities other than
banking, managing, or controlling its bank and other authorized subsidiaries,
and providing service to those subsidiaries. With prior approval of the FRB, the
Company may acquire more than 5% of the assets or outstanding shares of a
company engaging in non-bank activities determined by the FRB to be closely
related to the business of banking or of managing or controlling banks. The FRB
provides expedited procedures for expansion into approved categories of non-bank
activities.
Subsidiary banks of a bank holding company are subject to certain quantitative
and qualitative restrictions:
on extensions of credit to the bank holding company or its subsidiaries,
on investments in their securities, and
on the use of their securities as collateral for loans to any borrower.
These regulations and restrictions may limit the Company's ability to obtain
funds from PNB for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, PNB may not generally require a
customer to obtain other services from itself or the Company, and may not
require that a customer promise not to obtain other services from a competitor
as a condition to an extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital injections into a
troubled subsidiary bank, and the FRB may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any
losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries
of the Company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross guarantee liabilities generally
are superior in priority to the obligation of the depository institutions to its
stockholders due solely to their status as stockholders and obligations to other
affiliates.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act has made major changes in the way that the financial
services industry has been organized. By eliminating obsolete distinctions
between different types of financial institutions and allowing them to merge,
the bill enables one company to meet all of its consumers' financial needs. It
allows banks and securities firms to own the other. Over the past two decades,
the products offered by banks and securities firms have gradually come to
resemble each other. Both types of firms offer checking accounts in which idle
balances are invested in stocks or bonds and credit cards. The new Act repeals
portions of the 1933 Glass-Steagall Act (P.L. 48-162) that prohibit banks and
securities firms from owning each other. This Act also protects consumer privacy
by allowing customers to know how confidential information will be treated.
Instead of hoping a financial services company will treat their personal data as
confidential, consumers will receive an explicit disclosure of how such
information will be used by the firm. The stated policy must specify how and
under what circumstances confidential information, that is not available from
other public sources, would be disclosed among the firm's affiliates and other
firms. Customers who object to any portion of this policy would be able to take
their business to another firm. This Act also allows consumers to control how
their personal information is shared. Customers have the explicit right to
prohibit financial services companies from sharing their personal confidential
information with other non-affiliated firms. Once a consumer makes that
decision, financial companies would be prohibited from violating their
instructions. Anyone attempting to obtain this information fraudulently by
pretending to be the consumer or any similar action could be sent to a federal
prison for up to five years.
The goal of this Act is to ensure that the interest of consumers are protected,
both by assuring that their personal information is safeguarded and by giving
financial institutions the flexibility to serve their needs.
Pennsylvania Law
As a Pennsylvania bank holding company, the Company is subject to various
restrictions on its activities as set forth in Pennsylvania law. This is in
addition to those restrictions set forth in federal law. Under Pennsylvania law,
a bank holding company that desires to acquire a bank or bank holding company
that has its principal place of business in Pennsylvania must obtain permission
from the Pennsylvania Department of Banking.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. The law provides that, among other
things, substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies were eliminated effective September 29,
1995. The law also permits interstate branching by banks effective as of June 1,
1997, subject to the ability of states to opt-out completely or to set an
earlier effective date.
FIRREA (Financial Institution Reform, Recovery, and Enforcement Act)
FIRREA was enacted into law in order to address the financial condition of the
Federal Savings and Loan Insurance Corporation, to restructure the regulation of
the thrift industry, and to enhance the supervisory and enforcement powers of
the Federal bank and thrift regulatory agencies. As the primary federal
regulator of the bank, the OCC is responsible for the supervision of the bank.
When dealing with capital requirements, the OCC and FDIC have the flexibility to
impose supervisory agreements on institutions that fail to comply with
regulatory requirements. The imposition of a capital plan, termination of
deposit insurance, and removal or temporary suspension of an officer, director
or other institution-affiliated person may cause enforcement actions. There are
three levels of civil penalties under FIRREA.
The first tier provides for civil penalties of up to $5,000 per day for
any violation of law or regulation.
The second tier provides for civil penalties of up to $25,000 per day
if more than a minimal loss or a pattern is involved.
Finally, civil penalties of up to $1 million per day may be assessed for
knowingly or recklessly causing a substantial loss to an institution
or taking action that results in a substantial pecuniary gain or other
benefit.
Criminal penalties are increased to $1 million per violation and may be up to $5
million for continuing violations or for the actual amount of gain or loss.
These penalties may be combined with prison sentences of up to five years.
FDICIA (Federal Deposit Insurance Corporation Improvement Act of 1991)
In December 1991, Congress enacted FDICIA which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things:
publicly available annual financial condition and management reports
for financial institutions, including audits by independent
accountants,
the establishment of uniform accounting standards by federal banking
agencies,
the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with
more scrutiny and restrictions placed on depository institutions with
lower levels of capital,
additional grounds for the appointment of a conservator or
receiver, and
restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements.
FDICIA also provides for increased funding of the FDIC insurance funds and the
implementation of risk based premiums.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories:
"well capitalized,"
"adequately capitalized,"
"under capitalized,"
"significantly undercapitalized," and
"critically undercapitalized."
PNB is currently classified as "well capitalized." An institution may be deemed
by the regulators to be in a capitalization category that is lower than is
indicated by its actual capital position if, among other things, it receives an
unsatisfactory examination rating with respect to asset quality, management,
earnings or liquidity.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. If a
depository fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of other requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and stop accepting deposits
from correspondent banks. Critically undercapitalized institutions are subject
to the appointment of a receiver or conservator, generally within 90 days of the
date such institution is determined to be critically under capitalized.
FDICIA provides the federal banking agencies with significantly expanded powers
to take enforcement action against institutions that fail to comply with capital
or other standards. Such actions may include the termination of deposit
insurance by the FDIC or the appointment of a receiver or conservator for the
institution. FDICIA also limits the circumstances under which the FDIC is
permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Under FDICIA each federal banking agency is required to prescribe, by
regulation, non-capital safety and soundness standards for institutions under
its authority. The federal banking agencies, including the OCC, have adopted
standards covering:
internal controls,
information systems and internal audit systems,
loan documentation,
credit underwriting,
interest rate exposure,
asset growth, and
compensation fees and benefits.
Any institution that fails to meet these standards may be required by the agency
to develop a plan acceptable to the agency, specifying the steps that the
institutions will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. The Company, on
behalf of PNB, believes that it meets substantially all the standards that have
been adopted. FDICIA also imposed new capital standards on insured depository
institutions. Before establishing new branch offices, PNB must meet certain
minimum capital stock and surplus requirements and must obtain OCC approval.
Risk-Based Capital Requirements
The federal banking regulators have adopted certain risk-based capital
guidelines to assist in the assessment of the capital adequacy of a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit, and recourse agreements,
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain US Treasury securities,
to 100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital.
"Tier 1", or core capital, includes common equity, perpetual preferred
stock (excluding auction rate issues) and minority interest in equity
accounts of consolidated subsidiaries, less goodwill and other
intangibles, subject to certain exceptions.
"Tier 2",or supplementary capital, includes, among other things, limited
life preferred stock, hybrid capital instruments, mandatory convertible
securities, qualifying subordinated debt, and the allowance for loan and
lease losses, subject to certain limitations and less restricted
deductions. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking
agencies.
Banks and bank holding companies subject to the risk-based capital guidelines
are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at
least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
The appropriate regulatory authority may set higher capital requirements when
particular circumstances warrant. As of December 31, 2000, PNB's ratio of Tier 1
capital to risk-weighted assets stood at 15.90% and its ratio of total capital
to risk- weighted assets stood at 16.99%. In addition to risk-based capital,
banks and bank holding companies are required to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage capital ratio, of at
least 4%. As of December 31, 2000, The Company's leverage capital ratio was
10.04%.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions including:
limitations on its ability to pay dividends,
the issuance by the applicable regulatory authority of a capital
directive to increase capital, and
in the case of depository institutions, the termination of
deposit insurance by the FDIC, as well as to the measures described
under FDICIA as applicable to under capitalized institutions
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of PNB to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the Company.
Interest Rate Risk
In August 1995 and May 1996, the federal banking agencies adopted final
regulations specifying that the agencies will include, in their evaluations of a
bank's capital adequacy, an assessment of the bank's interest rate risk ("IRR")
exposure. The standards for measuring the adequacy and effectiveness of a
banking organization's IRR management includes a measurement of Board of
Directors and senior management oversight, and a determination of whether a
banking organization's procedures for comprehensive risk management are
appropriate to the circumstances of the specific banking organization. PNB has
internal IRR models that are used to measure and monitor IRR. In addition, an
outside source also assesses IRR using its model on a quarterly basis.
Additionally, the regulatory agencies have been assessing IRR on an informal
basis for several years. For these reasons, the Company does not expect the IRR
evaluation in the agencies' capital guidelines to result in significant changes
in capital requirements for PNB.
FDIC Insurance Assessments
As a FDIC member institution, PNB's deposits are insured to a maximum of
$100,000 per depositor through the Bank Insurance Fund ("BIF")that is
administered by the FDIC and each institution is required to pay semi-annual
deposit insurance premium assessments to the FDIC. The PNB assessment for 2000
was $44,063. These figures can be compared to FDIC assessments in 1999 of
$24,307 and in 1998 of $23,500.
Prior to 1997, only thrift institutions were subject to assessments to raise
funds to pay the Financing Corporate bonds. On September 30, 1996, as part of
the Omnibus Budget Act, Congress enacted the Deposit Insurance Funds Act of
1996, which recapitalized the Savings Association Insurance Fund ("SAIF") and
provided that BIF deposits would be subject to 1/5 of the assessment to which
SAIF deposits are subject for FICO bond payments through 1999. Beginning in
2000, BIF deposits and SAIF deposits were subject to the same assessment for
FICO bonds. The FICO assessment for PNB for 2000 was $.0230 for each $100 of BIF
deposits.
Community Reinvestment Act
The Community Reinvestment Act of 1977, (the CRA) is designed to create a system
for bank regulatory agencies to evaluate a depository institution's record in
meeting the credit needs of its community. Until May 1995, a depository
institution was evaluated for CRA compliance based on twelve assessment factors.
The CRA regulations were completely revised as of July 1, 1995, (the revised CRA
regulation) to establish new performance-based standards for use in examining
for compliance. This revised CRA regulation established new tests for evaluating
both small and large depository institutions. A small bank is defined as one
that has total assets of less than $250 million and is independent or is an
affiliate of a holding company with less than $1 billion in assets.
The Bank had its last CRA compliance examination in 1998 and received a
"satisfactory" rating.
Concentration
Payment risk is a function of the economic climate in which the Bank's lending
activities are conducted. Economic downturns in the economy generally or in a
particular sector could cause cash flow problems for customers and make loan
payments more difficult. The Bank attempts to minimize this risk by avoiding
loan concentrations to a single customer or to a small group of customers whose
loss would have a materially adverse effect on the financial condition of the
Bank.
Monetary Policy
The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the FRB, in connection with the FRB's
regulation of the money supply. Various methods employed by the FRB are:
open market operations in United States Government securities,
changes in the discount rate on member bank borrowings, and
changes in reserve requirements against member bank deposits.
These methods are used in varying combinations to influence overall growth and
distribution of bank loans, investments, and deposits, and their use may also
affect interest rates charged on loans or paid on deposits. The monetary
policies of the FRB have had a significant effect on the operating results of
commercial banks in the past and are expected to do so in the future.
Legislation and Regulatory Changes
From time to time, legislation is enacted that effects the cost of doing
business or limits the activities of a financial institution. No prediction can
be made as to the likelihood of any major changes or the impact of those changes
might have on the Company.
MARKET AREAS
The PNB market areas are in the northeastern part of Pennsylvania with the
primary focus being Susquehanna and Wyoming Counties. Since Susquehanna County
borders the State of New York, the southern portion of Broome County, New York
is also considered part of the market area of PNB. In addition, parts of
Lackawanna, Wayne, and Bradford Counties in Pennsylvania that border Susquehanna
and Wyoming Counties are also considered part of the PNB market area:
The PNB market area is situated between:
the city of Binghamton, Broome County, New York, located to the north
the city of Scranton, Lackawanna County, Pennsylvania, to the south,
and Wilkes Barre, Luzerne County, Pennsylvania, to the southwest.
Susquehanna County could best be described as a bedroom county with a high
percentage of its residents commuting to work in Broome County, New York, or to
the Scranton, Pennsylvania, area. The southern part of Susquehanna County tends
to gravitate south for both employment and shopping while the northern part of
the county goes north to Broome County, New York. The western part of
Susquehanna County gravitates south and west to and through Wyoming County.
Wyoming County is home to a Proctor & Gamble manufacturing facility. This is an
economic stimulus to Wyoming County and the surrounding areas.
Our offices are located in counties that would be considered sparsely populated
as they are made up of many small towns and villages. The latest population
figures show Susquehanna County at approximately 42,000 and Wyoming County at
approximately 30,000 residents. Both counties are experiencing growth, but not
robust growth. Interstate 81 runs north and south through the eastern half of
Susquehanna County and has brought an influx of people from New Jersey and the
Philadelphia area. These people have purchased homes and land to build homes
that are used as vacation/recreation retreats and, quite often, become
retirement homes.
BUSINESS
Lending Activities
PNB provides a full range of retail and commercial banking services designed to
meet the borrowing and depository needs of small and medium sized businesses and
consumers in its market areas. Substantially all of PNB's loans are to customers
located within its service areas. PNB has no foreign loans or highly leveraged
transaction loans, as defined by the FRB. Substantially all of the loans in
PNB's portfolio have been originated by PNB. Policies adopted by the Board of
Directors are the basis by which PNB conducts its lending activities. These loan
policies grant individual lending officers authority to make secured and
unsecured loans in specific dollar amounts. Larger loans must be approved by
senior officers or by the Board of Directors. PNB's management information
systems and loan review policies are designed to monitor lending sufficiently to
ensure adherence to PNB's loan policies.
The commercial loans offered by PNB include:
commercial real estate loans,
working capital,
equipment and other commercial loans,
construction loans,
SBA guaranteed loans,
and agricultural loans.
PNB's commercial real estate loans are used to provide financing for retail
operations, manufacturing operations, farming operations, multi-family housing
units, and churches. Commercial real estate secured loans are generally written
for a term of 15 years or less or amortized over a longer period with balloon
payments at shorter intervals. Personal guarantees are obtained on nearly all
commercial loans. Credit analysis, loan review, and an effective collections
process are also used to minimize any potential losses. PNB employs two
full-time commercial lending officers. These two people are augmented by branch
managers who are authorized to make smaller, less complex, commercial loans.
Risk with respect to PNB's commercial lending activities involves:
payment risk,
interest rate risk,
or collateral risk.
Payment risk is a function of the economic climate in which PNB's lending
activities are conducted; economic downturns in the economy generally or in a
particular sector could cause cash flow problems for customers and make loan
payments more difficult. PNB attempts to minimize this risk by avoiding
concentrations of credit to single borrowers or borrowers in a particular
industry. Interest rate risk would occur if PNB were to make loans at fixed
rates in an environment in which rates were rising thereby preventing PNB from
making loans at the higher prevailing rates. PNB attempts to mitigate this risk
by making adjustable rate commercial loans and, when extending fixed rate
commercial loans, fixing loan maturities at five years or less. Finally,
collateral risk can occur if PNB's position in collateral taken as security for
loan repayment is not adequately secured. PNB attempts to minimize collateral
risk by avoiding loan concentrations to particular borrowers, by perfecting
liens on collateral and by obtaining appraisals on property prior to extending
loans.
Consumer loans offered by PNB include:
residential real estate loans,
automobile loans,
manufactured housing loans,
personal installment loans secured and unsecured for almost any
purpose,
student loans, and
home equity loans (fixed-rate term and open ended revolving lines
of credit).
PNB offers credit cards as an agent bank through another correspondent bank.
Risks applicable to consumer lending are similar to those applicable to
commercial lending. PNB attempts to mitigate payment risk in consumer lending by
limiting consumer lending products to a term of five years or less. To the
extent that PNB extends unsecured consumer loans, there is greater collateral
risk; however, credit checks and borrower history are obtained in all consumer
loan transactions.
Residential mortgage products include adjustable-rate as well as conventional
fixed-rate loans. Terms vary from 1, 5, 7 and 10-year adjustable rate loans to
5, 10, 15, 20, and 30-year fully amortized fixed rate loans. Bi-weekly payment
plans are also available. The longer term fixed rate loans have been
underwritten as conforming and may be sold to the secondary market to reduce
interest rate risk. Personal secured and unsecured revolving lines of credit
with variable interest rates and principal amounts ranging from $1,000 to
$10,000 are offered to credit-worthy customers. The largest segment of PNB's
installment loan portfolio is fixed-rate loans. Most are secured either by
automobiles, motorcycles, snowmobiles, boats, other personal property, or by
liens filed against real estate. These loans are generally available in terms of
up to 15 years with automobile loans having maturities of up to 60 months and
real estate loans having maturities up to 15 years. Loans secured by other
collateral usually require a maturity of less than 60 months. Home equity
products include both fixed-rate term products and also an open-end revolving
line of credit with a maximum loan-to-value ratio of 80% of current appraisal. A
special MGIC program now offered through the Bank, allows for loans of up to
100% of the appreciated value for qualified applicants. Credit checks, credit
scoring, and debt-to-income ratios within preset parameters are used to qualify
borrowers.
Mortgage loans have historically had a longer average life than commercial or
consumer loans. Accordingly, payment and interest rate risks are greater in some
respects with mortgage loans than with commercial or consumer lending. Deposits,
which are used as the primary source to fund mortgage lending, tend to be of
shorter duration than the average maturities on residential mortgage loans and
are more susceptible to interest rate changes. As a result of the relatively
long life of mortgage products, mortgages are written as either conforming or
nonconforming. In an effort to minimize interest rate and payment risk, only
conforming mortgage loans, which can be sold in the secondary mortgage market,
are written for periods of 30 years. Nonconforming mortgages are made with
adjustable rates or fixed rates with maturities shorter than 30 years.
Nonconforming mortgages also historically have higher interest rates. Mortgage
lending is also subject to economic downturns, in that increases in unemployment
could adversely affect the ability of borrowers to repay mortgage loans and
decreases in property values could affect the value of the real estate serving
as collateral for the loan.
The general good economy allowed good growth in loans that ended 2000 up 13.03%
from year-end 1999. Industry standard debt-to-income ratios and credit checks
are used to qualify borrowers on all consumer loans. Managers, assistant
managers, and customer service officers have retail lending authorities at each
of the full-service branch office locations. PNB has centralized loan
administration at its operations/administrative offices where mortgage
underwriting and loan review and analysis take place.
Loan Approval
Individual loan authorities are established by PNB's Board of Directors upon
recommendation by the senior credit officer. In establishing an individual's
loan authority, the experience of the lender is taken into consideration, as
well as the type of lending in which the individual is involved. The President
of PNB has the authority to approve loans up to $500,000 following an analysis
and review by loan administration and a written recommendation by the Chief
Credit Officer. The full Board of Directors reviews on a monthly basis, all
loans approved by individual lenders and the officers loan committee. All loan
requests which are either complex in nature or exceed $500,000 must be analyzed
and reviewed by loan administration and presented with a recommendation to the
full Board of Directors for approval or denial.
PNB generally requires that loans secured by first mortgages or real estate
have loan-to-value ratios within specified limits, ranging from 50% for loans
secured by raw land to 80% for improved property, with the exception of
secondary market programs which allow loan-to-value ratios as high as 95%. In
addition, in some instances for qualified borrowers, private mortgage insurance
is available for purchase that allows loan-to-value ratios to go as high as 95%.
PNB also participates in a guaranteed mortgage insurance program. This allows
PNB to make loans secured by second mortgages on real estate up to 100% of the
value of the property. Adjustable rate mortgage products, as well as
conventional fixed-rate products, are also available at PNB.
Deposit Activities
PNB also offers a full range of deposit and personal banking services insured
by the FDIC, including commercial checking and small business checking products,
cash management services, retirement accounts such as Individual Retirement
Accounts ("IRA"), retail deposit services such as certificates of deposit, money
market accounts, saving accounts, a variety of checking account products,
automated teller machines ("ATM's"), point of sale and other electronic services
such as automated clearing house ("ACH") originations, and other personal
miscellaneous services. These miscellaneous services would include:
safe deposit boxes,
night depository services,
traveler's checks,
merchant credit cards,
direct deposit of payroll and other checks,
U.S. Savings Bonds,
official bank checks, and
money orders.
The principal sources of funds for PNB are core deposits that include demand
deposits, interest bearing transaction accounts, money market accounts, savings
deposits, and certificates of deposit. These deposits are solicited from
individuals, businesses, non-profit entities, and government authorities.
Substantially all of PNB's deposits are from the local market areas surrounding
each of its offices.
Investment Products
In 1999, PNB entered into an agreement with T.H.E. Financial Services to hire a
joint employee to sell investment products. An agent was hired and has an office
located in the Bank's Hallstead Plaza building.
Investment Portfolio and Activities PNB's investment portfolio has several
objectives.
A key objective is to provide a balance in PNB's asset mix of loans and
investments consistent with its liability structure, and to assist in
management of interest rate risk. The investments augment PNB's capital
position in the risk-based capital formula, providing the necessary
liquidity to meet fluctuations in credit demands of the community and
also fluctuations in deposit levels.
In addition, the portfolio provides collateral for pledging against
public funds, and a reasonable allowance for control of tax
liabilities.
Finally, the investment portfolio is designed to provide
income for PNB.
In view of the above objectives, the portfolio is treated conservatively by
management and only securities that pass those criteria are purchased.
Competition
PNB operates in a fairly competitive environment, competing for deposits and
loans with commercial banks, thrifts, credit unions, and finance and mortgage
companies. Some of these competitors possess substantially greater financial
resources than those available to PNB. Also, certain of these institutions have
significantly higher lending limits then PNB and may provide various services
for their customers, such as trust services, that are not presently available at
PNB.
Financial institutions generally compete on the basis of rates and service. PNB
is subject to increasing competition from credit unions, finance companies, and
mortgage companies that may not be subject to the same regulatory restrictions
and taxations as commercial banks.
PNB will seek to remain competitive with interest rates that it charges on its
loans and offers on deposits. It also believes that its success has been, and
will continue to be, due to its emphasis on community involvement, customer
services, and relationships. With consolidation continuing in the financial
industry, and particularly in PNB's markets, smaller profitable banks are
gaining opportunities where larger institutions exit markets that are only
marginally profitable for them.
SEASONALITY
Management does not feel that the deposits or the business of PNB in general are
seasonal in nature. The deposits may, however, vary with local and national
economic conditions but should not have a material effect on planning and policy
making.
ITEM 2 PROPERTIES
PNB has four full-service banking offices in Susquehanna County that are
located in:
Borough of Susquehanna Depot,
Hallstead Plaza, Great Bend Township,
Borough of Hop Bottom,
Montrose office in Bridgewater Township.
PNB's presence in Wyoming County, Pennsylvania had been limited to a de novo
branch in Nicholson which reopened in 1992, until the purchase of the two Mellon
offices in 1997. The Wyoming County locations are:
Borough of Nicholson,
Meshoppen Township,
Tunkhannock Borough
The administrative/operations office of the Company and PNB is located at 50
Main Street, Hallstead, Pennsylvania. The following departments are located at
that office:
commercial, mortgage and consumer lending operations,
executive offices,
marketing department,
human resources office,
deposit account support services,
data processing services
All offices are owned in fee title by PNB with the exception of the Hallstead
Plaza office and the Meshoppen office. The Hallstead Plaza and Meshoppen offices
are subject to ground leases. Each lease is either long-term or includes renewal
options. Current lease payments range from $2,535 to $17,760 annually. Six of
the seven offices provide drive-up banking services and five offices have
24-hour ATM services.
PNB is obligated under non-cancelable lease agreements for certain bank premises
expiring in September 2028. The leases contain a renewal option and provide that
the Bank pay property taxes, insurance, and maintenance costs. See Note 12 of
Notes to Consolidated Financial Statements for further information on this
subject.
ITEM 3 LEGAL PROCEEDINGS
The nature of the Company's business generates a certain amount of litigation
involving matters arising out of the ordinary course of business. In the opinion
of management, there are no legal proceedings that might have a material effect
on the results of operations, liquidity, or the financial position of the
Company at this time.
ITEM 4 Submissions of Matters to a Vote of Security Holders
None
PART 11
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is not listed on an exchange or quoted on the
National Association of Securities Dealers, Inc. Automated Quotation system
(NASDAQ). The Company's Common Stock is traded sporadically in the
over-the-counter market and, accordingly, there is no established public trading
market at this time. The Company's stock is listed on the OTC Bulletin Board
under the symbol PFIS. The cusip number is 711040-10-5. The investment firms of
Tucker Anthony Company Incorporated from Lancaster, Pennsylvania, and Ferris,
Baker Watts, Incorporated from Baltimore, Maryland, make a limited market in the
Company's Common Stock. The Company and previously the Bank has continuously
paid dividends for more than 90 years and it is the intention to pay dividends
in the future. However, future dividends must necessarily depend upon earnings,
financial condition, appropriate legal restrictions, and other factors at the
time that the Board of Directors considers dividend payments. As of December 31,
2000, there were 32,893 outstanding options or warrants to purchase. See Note 9
of the Consolidate Financial Statements for more information. Book value of
common stock at December 31, 2000, was $14.31 and on December 31, 1999, it was
$12.36. As of December 31, 2000, the Company had approximately 774 shareholders
of record. At such date, 2,149,835 shares of Common Stock were outstanding.
The following table reflects high bid and low asked prices for shares of the
Company's Common Stock to the extent such information is available, and the
dividends declared with respect thereto during the preceding two years.
COMPANY STOCK
2000 1999
Price Range Dividends Price Range Dividends
Low High Declared Low High Declared
First Quarter ........ $ 27.00 $ 27.00 $ 0.15 $ 25.50 $ 25.50 $ 0.12
Second Quarter ....... $ 26.50 $ 27.50 $ 0.15 $ 25.50 $ 25.50 $ 0.13
Third Quarter ........ $ 25.50 $ 26.50 $ 0.16 $ 25.50 $ 26.00 $ 0.13
Fourth Quarter ....... $ 23.50 $ 24.00 $ 0.16 $ 26.00 $ 27.00 $ 0.14
ITEM 6 SELECTED FINANCIAL DATA
The following table shows the Consolidated Financial Highlights as seen in the
Quarterly Report for the Fourth Quarter 2000. Amounts are in thousands except
for per share data.
(in thousands)
Consolidated Financial Highlights DEC 31 DEC 31 DIFF
2000 1999 % Inc
Performance
Net Income 3,905 3,787 3.12%
Return of Average Assets 1.42 1.49 (4.70)%
Return on Equity 13.91 14.08 (1.21)%
Shareholders' Value
Net Income per Average Number of Shares 1.813 1.750 3.60%
Dividends 0.620 0.520 19.23%
Book Value 14.31 12.36 15.78%
Market Value 24.00 27.00 (11.11)%
Market Value/Book Value Ratio 167.71% 219.33% (23.54)%
Price Earnings Multiple 13.24 15.46 (14.36)%
Dividend Payout Ratio 35.15% 29.82% 17.87%
Dividend Yield 2.58% 1.93% 33.68%
Safety and Soundness
Stockholders' Equity/Asset Ratio 10.71% 10.26% 4.39%
Allowance for Loan Loss as a Percent of Loans 1.11% 1.15% (3.48)%
Net Charge Offs/Total Loans 0.045% 0.129% (65.116)%
Allowance for Loan Loss/Nonaccrual Loans 464.44% 985.61% (52.88)%
Allowance for Loan Loss/Non-performing Loans 381.43% 654.68% (41.74)%
Balance Sheet Highlights at December 31,2000
Total Assets $ 287,625 $ 261,319 10.07%
Total Investments 99,678 92,066 8.27%
Net Loans 170,262 150,630 13.03%
Allowance for Loan Losses 1,918 1,756 9.23%
Total Deposits 230,739 215,424 7.11%
Stockholders' Equity $ 30,852 $ 26,810 15.08%
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation
This consolidated review and analysis of Peoples Financial Services Corp. (the
Company) is intended to assist the reader in evaluating the Company's
performance for the years ending December 2000 and 1999. The information should
be read in conjunction with the consolidated financial statements and the
accompanying notes to those statements.
Peoples Financial Services Corp. is the one-bank holding company of Peoples
National Bank (the Bank), which is wholly owned by the Company. The Company and
the Bank derive their primary income from the operation of a commercial bank,
including earning interest on loans and investment securities. The Bank incurs
interest expense in relation to deposits and other borrowings. The Bank operates
seven full-service branches in the Hallstead Shopping Plaza, Hop Bottom,
Montrose, Susquehanna, Nicholson, Tunkhannock, and Meshoppen, PA. The Bank has
on-site automated teller machines at all offices except Hop Bottom and
Meshoppen. The administrative offices and operations offices are located in
Hallstead, PA. Principal market areas are Susquehanna and Wyoming Counties in PA
and the bordering areas of those counties. As of December 31, 2000, the Bank
employed 78 full-time employees and 22 part-time employees.
Results of Operations
Net Interest Income
Net interest income is the main source of the Company's income. It is the
difference between interest earned on assets and interest paid on liabilities.
The discussion of net interest income should be read in conjunction with Table
3: "Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate
and Interest Differential", and Table 2: "Rate/Volume Analysis of Changes in Net
Interest Income."
The following table shows the net interest income on a fully tax equivalent
basis for each of the three years ending December 2000, 1999, and 1998.
NET INTEREST INCOME
(In thousands)
2000 1999 1998
Total Interest Income ............................ $19,990 $17,623 $16,584
Tax Equivalent Adjustment ........................ 991 937 766
20,981 18,560 17,350
Total Interest Expense ........................... 10,469 8,480 8,191
Net Interest Income (Fully Tax Equvalent Basis) .. $10,512 $10,080 $ 9,159
Table 2 analyzes the components contributing to the changes in net interest
income in 2000 and indicates the impact in either changes in rate or changes in
volume. Table 3 includes the average balances, interest income and expense, and
the average rates earned and paid for assets and liabilities.
(in thousands)
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential
2000 1999 1998
(in thousands) Average Yield/ Average Yield/ Average Yield/
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
Loans
Real Estate ................... 90,002 7,349 8.17% 82,534 6,680 8.09% 76,516 6,306 8.24%
Installment ................... 18,629 1,769 9.50% 17,739 1,616 9.11% 14,039 1,265 9.01%
Commercial .................... 47,474 4,323 9.11% 37,283 3,366 9.03% 30,162 3,097 10.27%
Tax Exempt .................... 6,398 326 5.10% 7,801 354 4.54% 8,666 402 4.64%
Other Loans ................... 424 53 12.50% 367 41 11.17% 5,309 377 7.10%
Total Loans ................... 162,927 13,820 8.48% 145,724 12,057 8.27% 134,692 11,447 8.50%
Investment Securities (AFS)
Taxable ....................... 64,205 4,397 6.85% 63,737 3,947 6.19% 59,520 3,548 5.96%
Non-Taxable ................... 31,139 1,598 5.13% 28,667 1,464 5.11% 28,937 1,487 5.14%
Total Securities .............. 95,344 5,995 6.29% 92,404 5,411 5.86% 88,457 5,035 5.69%
Time Deposits with Other Banks 1,536 112 7.29% 589 39 6.62% 616 38 6.17%
Fed Funds Sold ................ 976 63 6.45% 2,353 116 4.93% 760 42 5.53%
Total Earning Assets .......... 260,783 19,990 7.67% 241,070 17,623 7.31% 224,525 16,562 7.38%
Less: Allowance for Loan Losses (1,820) (1,716) (1,710)
Cash and Due from Banks ....... 5,102 4,948 1,742
Premises and Equipment, Net ... 3,451 3,521 3,688
Other Assets .................. 7,438 6,580 5,990
Total Assets .................. 274,954 254,403 234,235
2000 1999 1998
(in thousands) Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest Bearing Demand ....... 14,464 396 2.74% 16,066 225 1.40% 15,058 250 1.66%
Regular Savings ............... 44,247 1,600 3.62% 33,416 887 2.65% 31,752 904 2.85%
Money Market Savings ......... 34,022 1,611 4.74% 38,900 1,511 3.88% 38,401 1,565 4.08%
Time .......................... 101,706 5,660 5.57% 102,011 5,364 5.26% 93,890 5,187 5.52%
Total Interest Bearing Deposits 194,439 9,267 4.77% 190,393 7,987 4.20% 179,101 7,906 4.41%
Other Borrowings .............. 20,682 1,201 5.81% 10,135 493 4.86% 6,029 285 4.73%
Total Interest Bearing ........ 215,121 10,468 4.87% 200,528 8,480 4.23% 185,130 8,191 4.42%
Liabilities
Net Interest Spread ........... 9,522 2.80% 9,143 3.08% 8,371 2.95%
Non-Interest Bearing
Demand Deposits ............... 30,448 25,527 22,247
Accrued Expenses and
Other Liabilities ............. 2,034 1,806 1,320
Stockholder's Equity .......... 27,351 26,542 25,538
Total Liabilities and
Stockholder's Equity .......... 274,954 254,403 234,235
Interest Income/Earning Assets 7.67% 7.31% 7.38%
Interest Expense/Earning Assets 4.01% 3.52% 3.65%
Net Interest Margin ........... 3.66% 3.80% 3.74%
Rate/Volume Analysis of Changes in Net Interest Income
2000 to 1999 1999 to 1998
(in thousands) Increase Change Due to Increase Change Due to
(Decrease) Rate Volume (Decrease) Rate Volume
INTEREST INCOME
Real Estate Loans .............. 669 65 604 374 (122) 496
Installment Loans .............. 153 72 81 351 18 333
Commercial Loans ............... 957 37 920 269 (462) 731
Tax Exempt Loans ............... (28) 36 (64) (48) (8) (40)
Other Loans .................... 12 6 6 (336) 15 (351)
Total Loans .................... 1,763 215 1,548 610 (559) 1,169
Investment Securities (AFS)
Taxable ........................ 450 421 29 399 148 251
Non-Taxable .................... 134 8 126 (23) (9) (14)
Total Securities (AFS) ......... 584 429 155 376 138 238
Time Deposits with Other Banks . 73 10 63 1 3 (2)
Fed Funds Sold ................. (53) 15 (68) 74 (14) 88
Total Interest Income .......... 2,367 669 1,698 1,061 (432) 1,493
INTEREST EXPENSE
Interest Bearing Demand Deposits 171 193 (22) (25) (42) 17
Regular Savings Deposits ....... 713 426 287 (17) (64) 47
Money Market Savings Deposits . 100 289 (189) (54) (74) 20
Time Deposits .................. 296 312 (16) 177 (272) 449
Total Interest Bearing Deposits 1,280 1,110 170 81 (417) 498
Other Borrowings ............... 708 195 513 208 14 194
Total Interest Expense ......... 1,988 1,371 617 289 (392) 681
Net Interest Spread ............ 379 (702) 1,081 772 (40) 812
Interest income on loans increased $1,763,000 from 1999 to 2000. This increase
of 14.6% is attributable to growth in the loan portfolio during the Year 2000.
Net loans increased 13%. Although interest rates were higher at the end of the
year than the beginning, competitive pricing pressures kept this increase at
this level. Prime rate increased from 8.5% to 9.5% during the year.
Interest income on taxable investments increased $450,000 from 1999 due to a
combination of higher balances and investing at higher interest rates during the
year. Beginning in June 1999 and ending in May of 2000, the Federal Reserve Bank
increased interest rates 1 3/4%. During most of the Year 2000, interest rates
were inverted, meaning that short-term rates were higher than long-term rates.
Because of this situation and management's desire to shorten maturities on
taxable investments, purchase of taxable securities were limited to those with
maturities of 5 years or less.
Interest on tax exempt securities increased $134,000 as a different plan was
executed in this segment. A conscious effort was made by management to lengthen
the call features on tax exempt securities. When available, longer term issues
were purchased with call features in excess of 5 years. Management's desire is
to have the taxable side of the portfolio provide more of the liquidity with the
tax-exempt side providing more income along with liquidity. This will be
especially evident with the advent of lower interest rates.
Interest income from Federal Funds decreased $53,000 from 1999 to 2000 because
of lesser volume. Even though rates were increasing, the growth in the loan
portfolio did not provide for as much excess funds as previous years.
As previously stated, short-term interest rates increased during the Year 2000.
Since deposit accounts are priced off the short end of the treasury curve, the
Bank experienced an abnormal increase in interest expense of 23.4% or
$1,988,000. Not only did deposits cost more, term borrowings also were more
expensive as that line item went from $493,000 in 1999 to $1,201,099 in 2000.
Funding loan growth through term borrowing was deemed more economically sensible
than through aggressive certificate of deposit rates. Interest on deposits
increased $1,280,000 in 2000 due to the increase in short-term rates.
PROVISION FOR LOAN LOSS
The provision and allowance for loan losses are based on management's ongoing
assessment of the Corporation's credit exposure and consideration of other
relevant factors. The allowance for loan losses is a valuation reserve that is
available to absorb future loan charge offs. The provision for loan losses is
the amount charged to earnings on an annual basis. The factors considered in
management's assessment of the reasonableness of the allowance for loan losses
include prevailing and anticipated economic conditions, assigned risk ratings on
loan exposures, the results of examinations and appraisals of the loan portfolio
conducted by federal regulatory authorities and an independent loan review firm,
the diversification and size of the loan portfolio, the level of and inherent
risk in non-performing assets, and any other factors deemed relevant by
management.
The provision for loan losses remained the same in 2000 as it was in 1999 at
$240,000. Net charge-offs for 2000 were $78,000 compared to $198,000 in 1999, so
the allowance for loan loss increased 9.23%. The ratio of allowance for loan
loss to non-performing loans was 381.43% at year-end 2000 as compared to 654.68%
at year-end 1999. As of December 31, 2000, the allowance for loan loss was 1.11%
of loans and at December 31, 1999, the ratio was 1.15% of loans.
OTHER INCOME
Non-Interest Income
Non-interest income includes items that are not related to interest rates, but
rather, to services rendered and activities conducted in conjunction with the
operation of a commercial bank. Service charges earned on deposit accounts is
the largest single item in this category and represents fees related to deposit
accounts including overdraft fees, minimum balance fees, and transaction fees.
Income in this category increased $228,000 in 2000 or 19.2%, while deposits
increased 7.12%. Increased volume and adjustments in fee schedules account for
the difference. Total other income, which includes gains on securities sales of
$20,000 in 2000, was $1,452,000. Service charges on deposit accounts totaling
$1,415,000 made up most of this figure.
The following table analyzes the increase in total other income by comparing the
years ending 2000 and 1999:
Variance Variance
(In thousands) December 31 2000 1999
2000 1999 1998 Amount Percent Amount Percent
Of Change Of Change Of Change Of Change
Service Charges and Fees $1,415 $1,159 $1,108 $ 256 22.09% $ 51 4.60%
Other Operating Income . 16 63 41 $(47) (74.60)% 22 53.66%
Gains on Security Sales 20 85 47 $(65) (76.47)% 38 80.85%
TOTAL Other Income ..... $1,451 $1,307 $1,196 $ 144 11.02% 111 9.28%
OTHER EXPENSE
Non-Interest Expense
Non-interest expense includes all other expenses associated with the Company.
Salaries and related benefits is the largest expense in this category and it
increased $285,000 or 11.2% over 1999. New employees and annual salary
increases, along with an increase for health insurance, were the reasons for
this change. In comparison, the increase in this category from 1998 to 1999 was
5.8% or $139,000.
Occupancy expense increased 4.6% or $15,000 in 2000 as compared to 1999. This
was considered a normal increase for taxes, utilities, repairs and maintenance,
and depreciation. Furniture and equipment expense also was up a negligible
amount with 2000 at $388,000 and 1999 at $383,000. A new image system and an
update to the computer system were purchased in 2000. Technology has proven to
be expensive and it is the strategic plan of the Company to continue to expand
in areas to make our systems more efficient and also to enhance customer
service. Professional fees, which includes outside service, continues to
increase as management and the Company find it efficient and cost effective to
utilize outside services and consultants to facilitate management and
operations. Professional fees and outside services were $216,000 in 2000 which
compares to $197,000 in 1999.
Computer services and supplies is another component of other expenses and it is
as its name implies. This category covers the expense of data processing for the
Company. Each year dependence grows as does the resultant expense. In 2000 the
expense was $361,000 compared to $306,000 in 1999.
Taxes, other than payroll and income, are another component and in 2000, this
expense was $255,000 vs. $247,000 in 1999, an increase considered to be normal.
Every other non-interest expense is in the category of other operating expense.
In 2000 this expense increased $12,000 and the total for this year was
$1,238,000. The biggest components in this figure were the premiums on the
purchase of the Tunkhannock and Meshoppen branch offices at $258,000; operating
costs other than salaries for our operation center, $150,000; directors' and
associate directors' fees of $124,000; the cost of operating our automated
teller machines, $131,000; FDIC insurance and regulator's fees of $116,000;
stationery printing and supplies, $122,000; and postage at $112,000. All were
deemed to be in line with budget expectations.
The following table is a summary of the other expenses by category for 2000,
19999, and 1998:
Variance Variance
(In thousands except per share) 2000 1999
31-Dec 31-Dec 31-Dec Amount Percent Amount Percent
2000 1999 1998 Of Change Of Change Of Change Of Change
Salaries and Benefits ................. 2,819 2,534 $2,395 $ 285 11.25% $ 139 5.80%
Occupancy Expenses .................... 338 323 319 15 4.64% 4 1.25%
Furniture and Equipment Expense ....... 388 383 436 5 1.31% (53) (12.16)%
FDIC Insurance and Assessments ........ 116 92 88 24 26.09% 4 4.55%
Professional Fees and Outside Services 216 197 191 19 9.64% 6 3.14%
Computer Services and Supplies ........ 361 306 268 55 17.97% 38 14.18%
Taxes, Other Than Payroll and Income .. 255 247 222 8 3.24% 25 11.26%
Other Operating Expenses .............. 1,238 1,226 1,171 12 0.98% 55 4.70%
Total Non-Interest Expense ............ $5,731 $5,308 $5,090 $ 423 7.97%$ 218 4.28%
Income Before Income Taxes ............ 5,002 4,901 4,309
Provision for Income Taxes ............ 1,097 1,115 904
Net Income ............................ $3,905 $3,786 $3,405
Net Income Per Share, Basic and Diluted 1.8 1.74 1.56
Federal Income Taxes
The provision for income taxes in 2000 was $1,096,604 compared to $1,114,538 in
1999. The effective tax rate, which is the ratio of income tax expense to income
before taxes, was 21.9% in 2000, down from 22.7% in 1999. The tax rate for both
periods was substantially less than the federal statutory rate of 34% primarily
due to tax-exempt securities and tax-exempt loan income. Please refer to Note 10
of the Notes to Consolidated Finance Statements included as part of this report
for further analysis of federal income tax expense for 2000.
Quarterly Results
Net income improved each of the first three quarters of 2000 with a slight
dip in the last quarter due to the larger gain in other income peaking during
the third quarter of 2000. Interest expense reached a high of $2,844,000 in the
last quarter and other expenses also reached their peak in the same quarter at
$1,568,000.
(in thousands)
Quarter Ended 2000
31-Mar 30-Jun 30-Sep 31-Dec
Interest Income ................. $ 4,659 $ 4,891 $ 5,105 $ 5,336
Interest Expense ................ 2,334 2,537 2,754 2,844
Net Interest Income ............. 2,325 2,354 2,351 2,492
Provision for Loan Loss ......... (60) (60) (60) (60)
Securities Gains/Losses ......... 2 (2) 12 8
Other Income .................... 345 354 418 375
Other Expense ................... (1,443) (1,411) (1,373) (1,568)
Income Before taxes ............. 1,169 1,235 1,348 1,247
Income Taxes .................... 273 290 311 219
Net Income ...................... 896 945 1,037 1,028
Primary Earnings per common share 0.41 0.44 0.47 0.48
(in thousands)
Quarter Ended 1999
31-Mar 30-Jun 30-Sep 31-Dec
Interest Income ................. $ 4,208 $ 4,275 $ 4,461 $ 4,679
Interest Expense ................ 2,068 2,045 2,122 2,246
Net Interest Income ............. 2,140 2,230 2,339 2,434
Provision for Loan Loss ......... (60) (60) (60) (60)
Securities Gains/Losses ......... 6 57 41 (19)
Other Income .................... 275 287 339 321
Other Expense ................... (1,298) (1,351) (1,218) (1,441)
Income Before taxes ............. 1,063 1,163 1,441 1,234
Income Taxes .................... (212) (266) (377) (260)
Net Income ...................... 851 897 1,064 974
Primary Earnings per common share 0.39 0.42 0.49 0.45
FINANCIAL CONDITION
The Corporation's financial condition can be evaluated in terms of trends in its
sources and uses of funds. The following table illustrates how the Corporation
has managed its sources and uses of funds that are directly affected by outside
economic factors, such as interest rate fluctuations:
(in thousands)
2000 1999 1998
Average Increase(Decrease) Average Increase(Decrease) Average
Funding Uses Balance Amount Percent Balance Amount Percent Balance
Real Estate Loans .......... 90,002 $ 7,468 9.05% 82,534 $ 6,018 7.87% $ 76,516
Consumer Loans ............. 18,629 890 5.02% 17,739 3,700 26.36% 14,039
Commercial Loans ........... 47,474 10,191 27.33% 37,283 7,121 23.61% 30,162
Tax Exempt Loans ........... 6,398 (1,403) (17.98)% 7,801 (865) (9.98)% 8,666
Other Loans ................ 424 57 15.53% 367 (4,942) (93.09)% 5,309
Total Loans ................ 162,927 145,724 134,692
Less Allowance for Loan Loss (1,820) (1,716) (1,710)
Total Loans with Loan Loss . 161,107 17,099 11.87% 144,008 11,026 8.29% 132,982
Taxable Securities ......... 65,741 1,415 2.20% 64,326 4,190 6.97% 60,136
Non-Taxable Securities ..... 31,139 2,472 8.62% 28,667 (270) (0.93)% 28,937
Total Securities ........... 96,880 3,887 4.18% 92,993 3,920 4.40% 89,073
Fed Funds Sold ............. 976 (1,377) (58.52)% 2,353 1,593 209.61% 760
Total Uses ................. $ 258,963 $ 19,609 8.19% $ 239,354 $ 16,539 7.42% $ 222,815
(in thousands)
2000 1999 1998
Average Increase (Decrease) Average Increase (Decrease) Average
Funding Sources Balance Amount Percent Balance Amount Percent Balance
Interest Bearing Demand Deposits 14,464 $(1,602) (9.97)% 16,066 $ 1,008 6.69% $ 15,058
Regular Savings Deposits ........ 44,247 10,831 32.41% 33,416 1,664 5.24% 31,752
Money Market Savings Deposits ... 34,022 (4,878) (12.54)% 38,900 499 1.30% 38,401
Time Deposits ................... 101,706 (305) (0.30)% 102,011 8,121 8.65% 93,890
Total Interest Bearing Deposits . 194,439 4,046 2.13% 190,393 11,292 6.30% 179,101
Other Borrowing ................. 20,682 10,547 104.07% 10,135 4,106 68.10% 6,029
Short Term Funds Borrowed ....... 5,100 4,694 5,399
Long Term Funds Borrowed ........ 15,582 5,441 630
Total Funds Borrowed ............ 20,682 10,135 6,029
Total Deposits and Funds Borrowed 215,121 200,528 185,130
Other Sources, net .............. 43,842 38,826 37,685
Total Sources ................... $ 258,963 $ 239,354 $ 222,815
Total assets increased 10.07%, to $287,625,000 in the year ending December 31,
2000. There were increases in both borrowed funds and deposits on the liability
side which fueled this growth of assets. Loan and investment portfolios on the
asset side reflected growth also.
Investments at year-end 2000 totaled $99,678,000 compared to $92,066,000 on
December 31, 1999. Of this increase of $7,611,000, almost $3 million was due to
less depreciation in the portfolio on December 31, 2000. Due to changing
interest rate scenarios, the structure of the investment portfolio changed as
municipal bonds were added with longer call features to protect higher coupons.
Overall municipal securities increased $1,770,000. The biggest growth was in
corporate bonds which increased $8,513,000. Maturities of 5 years or less with
good quality and higher coupons were added. Government securities were not
replaced as they matured because of declining interest rates; and also for the
same reason, government agencies were not replaced as they prepaid principal
payments or matured.
Average loans receivable, net of loan reserves, increased $17,099,000 or 11.87%
in 2000 compared to an increase of $11,026,000 or 8.29% in 1999.
Loans continued to increase throughout 2000, ending the year at $170,262,000 in
net loans compared to $150,630,000 at year-end 1999, an increase of 13.03%.
Commercial loans and individual mortgages were the biggest gainers. Commercial
loans were up almost 19% to close the year at $50,338,000 compared to
$42,362,000 at year-end 1999.
Mortgages were up 10.52% to $92,074,000 vs. $83,308,000 on December 31, 1999, an
increase of $8,765,000.
Even with interest rates rising during 2000, there continued to be demand for
mortgages. The growth in commercial lending is due, in part, to a concerted
effort on our part to increase our exposure to this segment.
To fund loan growth, borrowings from the Federal Home Loan Bank increased
$5,500,000. Short-term borrowing stood at $7,245,000 at year-end 2000 compared
to $5,851,000 the previous year. As the Year 2000 came to an end, it became
evident that interest rates would decline and the short term borrowing position
would be liquidated with maturing and called investments.
(in thousands)
Dec 2000 Dec 1999 Dec 1998 Dec 1997 Dec 1996
Commercial ............. 58,076 47,771 $ 44,349 $ 14,796 $ 9,787
Real Estate Mortgage ... 94,782 85,528 79,369 96,192 83,484
Real Estate Construction 0 0 0 9 0
Installment ............ 19,456 19,281 17,756 16,035 14,169
Total Loans ................. 172,314 152,580 141,474 127,032 107,440
Deferred Loans .............. (134) (194) (225) (246) (290)
Total Loans, net of Deferred 172,180 152,386 141,249 126,786 107,150
Allowance for Loan Loss ..... (1,918) (1,756) (1,713) (1,676) (1,665)
Net Loans ................... $ 170,262 $ 150,630 $ 139,536 $ 125,110 $ 105,485
Loan Maturities
The Bank has 16.7% of its loans maturing within the next year. Of that 16.7%,
more than half of the maturing loans are commercial loans with the remainder
almost split equally between mortgages and installment loans. In the one to
five year maturity range, the Bank has 28.00% of its portfolio. The over 5 year
maturity group makes up 55.26% of the portfolio which reflects the Bank's
significant investment in mortgages. Mortgages are 54.97% of the total loan
portfolio.
(in thousands)
One Year Over One Year Over Total
Or Less Within Five Years Five Years Loans
Commercial ......................... $ 16,207 $ 18,154 $ 23,715 $ 58,076
Real-Estate Construction ........... 0 0 0 0
Real-Estate Mortgage ............... 6,658 21,067 66,923 94,648
Installment ........................ 5,920 9,024 4,512 19,456
Total .............................. $ 28,785 $ 48,245 $ 95,150 $172,180
Total Loans with Predetermined Rates 18,058 31,997 32,759 82,814
Total Loans with Variable Rates .... 10,727 16,248 62,391 89,366
Total .............................. $ 28,785 $ 48,245 $ 95,150 $172,180
Table 10 reflects the Corporation's non-accrual and past due loans for each of
the past five years. A commercial loan is generally placed on non-accrual when
the contractual payment of principal or interest has become 90 days past due or
when management has serious doubts about further collectibility of principal or
interest even though the loan is currently performing. Consumer loans, including
mortgages, are generally placed on non-accrual at 120 days. A loan may remain on
non-accrual status if it is in the process of collection and is either
guaranteed or well secured.
(In thousands) December 31,
2000 1999 1998 1997 1996
Nonaccrual and Restructured $413 $178 $516 $1,027 $1,544
Loans Past Due 90 or More Days, Accruing Interest 90 90 12 175 137
Total Nonperforming Loans 503 268 528 1,202 1,681
Foreclosed Assets 50 250 351 0 99
Total Nonperforming Assets $553 $518 $879 $1,202 $1,780
Nonperforming Loans to Total Loans at Period-end 0.29% 0.18% 0.38% 0.95% 1.56%
Nonperforming Assets to Period-end Loans and Forclosed Assets 0.32% 0.34% 0.62% 0.95% 1.56%
NONACCURAL & RESTRUCTURED LOANS
(In thousands)
2000 1999 1998 1997 1996
Interest Income That Would Have Been Recorded Under Original Items $ 52 $ 28 $ 63 $ 96 $163
Interest Income Recorded During the Period ....................... 12 3 7 24 31
Commitments To Lend Additional Funds ............................. 0 0 94 0 0
Allowance for Loan Losses
The balance in the allowance for loan losses is based on management's assessment
of the risk in the loan portfolio. Allocations to specific commercial loans are
made in adherence to SFAS 114, Accounting by Creditors for Impairments of a
Loan. These allocations are based upon the present value of expected future cash
flows or the fair value of the underlying collateral. In addition, management
reviews the other components of the loan portfolio through the loan review
function and assigns internal grades to loans based upon the perceived risks
inherent in each loan. In that determination, management reviews a number of
factors including historical analysis of similar credits, delinquency reports,
ratio analysis as compared to peers, concentration of credit risks, local
economic conditions, and regulatory evaluation of the allowance for loan losses.
This evaluation is reviewed monthly by management and by the Board of Directors.
Management believes that on December 31, 2000, the allowance for loan losses was
adequate to absorb potential losses in the loan portfolio. However, this
judgement is subjective and a significant degradation in loan quality could
require a change in the estimates and therefore, a change in net income.
The following is a summary of loans charged off and recoveries to the allowance
for loan losses on December 31, 2000 and 1999.
(in thousands)
Dec 2000 Dec 1999 Dec 1998 Dec 1997 Dec 1996
Average Total Loans ................................. $162,928 $145,724 $134,692 $114,119 $102,525
Balance at Beginning of Period ...................... 1,756 1,713 1,676 1,664 1,488
Charge Offs
Commercial ..................................... 0 46 94 38 20
Residential Real Estate ........................ 4 87 31 50 26
Installment .................................... 115 108 70 61 31
Total charge Offs ................................... 119 241 195 149 77
Recoveries
Commercial ..................................... 0 2 14 4 26
Real Estate .................................... 11 4 4 17 1
Installment .................................... 30 37 24 10 6
Total Recoveries .................................... 41 44 42 31 33
Net Charge-Offs ..................................... 78 198 153 118 44
Provision for Loan Losses ........................... 240 240 190 130 220
Balance at End of Period ............................ $ 1,918 $ 1,756 $ 1,713 $ 1,676 $ 1,644
Allowance for Credit Losses to Period-end Total Loans 1.11% 1.15% 1.22% 1.32% 1.55%
Allowance for Credit Losses to Non-accrual Loans .... 464.44 985.61 331.88 163.24 107.80
Net Charge-Offs to Average Loans .................... 0.05 0.14 0.11 0.09 0.04
Summary of Loan Loss Experience
(in thousands)
Dec 2000 Dec 1999 Dec 1998 Dec 1997 Dec 1996
Commercial ............... $ 359 $ 328 $ 320 $ 321 $ 687
Real Estate Mortgage ..... 384 351 342 343 197
Real Estate Construction . 1 1 1 1 1
Installment .............. 144 133 130 129 118
Unallocated .............. 1,030 943 920 882 661
Total Allowance for Loan Losses $1,918 $1,756 $1,713 $1,676 $1,664
Highly leveraged transactions (HLT's) that result in the borrower's
debt-to-total assets ratio exceeding the 75%, generally include loans and
commitments made in connection with recapitalization, acquisitions, and
leveraged buyouts The Corporation had no loans at December 31, 2000 that
qualified as HLT's.
Securities
The Corporation's securities portfolio is classified, in its entirety, as
"available for sale" as shown in Table 14. Management believes that a portfolio
classification of all available for sale allows complete flexibility in the
investment portfolio. Using this classification, the Corporation intends to hold
these securities for an indefinite amount of time but not necessarily to
maturity. Such securities are carried at fair value with the unrealized holding
gains or losses, net of taxes, reported as a component of the Corporation's
stockholders' equity on the balance sheet. The portfolio is structured to
provide maximum return on investments while providing a consistent source of
liquidity and meeting strict risk standards. Total investment securities of
$101,668,000 include Certificates of Deposits with other banks in the amount of
$1,990,000.
Table 14 shows the book value and average yield of securities by maturity or
call date at December 31, 2000.
(In thousands) 1 Year or Less 1-5 Years 5-10 Years Over 10 Years TOTAL
Book Average Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield Value Yield
Available for Sale
US Government Treasury .......... $ 0 0.00% $ 497 6.85% $ 0 0.00% $ 0 0.00% $ 497 6.85%
US Government Agency ............ 9 10.21% 8,741 6.50% 14,328 6.63% 1,372 6.22% 24,450 6.56%
State/County/Municipal Obligation 495 5.11% 615 5.24% 3,704 5.25% 27,630 5.26% 32,444 5.26%
Mortgage-Baked Securities ....... 69 7.90% 1,923 6.10% 5,912 5.86% 16,398 6.50% 24,302 6.32%
Corporate/Other Securities ...... 3,254 6.73% 10,939 7.45% 3,606 7.05% 2,373 6.59% 20,172 7.16%
TOTAL Available for Sale ........ $ 3,827 6.55% $ 22,715 8.34% $ 27,550 6.33% $ 47,773 5.78% $101,865 6.21%
Table 15 shows the balance of securities for the past three years on December
31. More details on Investments by Market Value can be found in Note 15 of the
Consolidated Financial Statement.
SECURITIES (Market Value)
(In thousands)
2000 1999 1998
Treasury/Agency Obligation .... $ 24,405 $ 26,911 $ 23,008
State/Municipal Obligation .... 31,946 29,097 30,230
Martgage backed Securities .... 24,187 25,698 30,283
Other Securities .............. 21,130 11,845 9,754
Total Investment Securities ... $101,668 $ 93,551 $ 93,275
Available for Sale (Fair Value) $101,668 $ 93,551 $ 93,275
Held to Maturity (Amortized) .. 0 0 0
Total Investment Securities ... $101,668 $ 93,551 $ 93,275
Deposits
Deposits were harder to obtain during 2000 as customers compared rates and took
funds to where they were paid the highest rate. On the other hand, our Bank
weighed the costs of deposits against the costs of borrowing from the Federal
Home Loan Bank. As interest rates escalated, our Bank did not wish to match the
highest certificate rates being paid. As a result, there was no growth in
certificates in the year 2000. For the same reason, there was no growth in
IRA's. Our Bank obtained a 7% growth in deposits because of a new product which
was indexed to the three-month treasury bill rate. The certificate savings
account allows unlimited deposits but restricts withdrawals to one per quarter.
It proved to be very popular because of these features and because throughout
most of the year we were in an inverted yield curve. Although relatively costly
to our bottom line in 2000, we feel this account will be a core deposit in the
future. At year-end, the certificate savings account had almost $22 million in
balances and had grown over $15 million during the course of the year.
Non-interest checking accounts have also grown substantially over the last two
years. The average non interest accounts increased 14.7% in 1999 and another
19.3% in 2000. Management considers these accounts a very important part of our
balance sheet and will continue to seek ways to encourage growth in non-interest
checking accounts.
(In thousands)
2000 1999 1998
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest Bearing Demand Deposits ... $ 14,464 396 2.74% $ 16,066 225 1.40% $ 15,058 250 1.66%
Savings Deposits ................... 44,247 1,600 3.62% 33,416 887 2.65% 31,752 904 2.85%
Money Market Savings ............... 34,022 1,611 4.74% 38,900 1,511 3.88% 38,401 1,565 4.08%
Time Deposits ...................... 101,706 5,660 5.57% 102,011 5,364 5.26% 93,890 5,187 5.52%
Total Interest Bearing Deposits .... 194,439 9,267 4.77% 190,393 7,987 4.20% 179,101 7,906 4.41%
Other Borrowings ................... 20,682 1,201 5.81% 10,135 493 4.86% 6,029 285 4.41%
Total Interest Bearing Liabilities . 215,121 10,468 4.87% 200,528 8,480 4.23% 185,130 8,191 4.42%
Non-Interest Bearing Demand Deposits 30,448 25,527 22,247
Total .............................. $655,129 $616,976 $571,608
MATURITIES OF TIME DEPOSITS
The maturities on the time deposits over $100,000 are spread fairly evenly
throughout the four categories. The largest percentage, 35.79%, is in the last
category of over twelve months.
(in thousands)
Amount Percent
Three Months or Less ................ $ 2,704 16.04
Over Three Monthe through Six Months 3,767 22.35
Over Six Months through Twelve Months 4,352 25.82
Over Twelve Months .................. 6,032 35.79
Total ............................... $16,855 100.00
SHORT AND LONG TERM BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase and
Federal Home Loan Bank advances generally represent overnight or less than
30-day borrowings. U.S. Treasury tax and loan notes for collections made by the
Bank are payable on demand. Short-term borrowings consisted of the following at
December 31, 2000 and 1999:
The Bank has an agreement with Federal Home Loan Bank (FHLB) which allows for
borrowings up to a percentage of qualifying assets. At December 31, 2000 and
1999, the Bank had a maximum borrowing capacity of $109,345,000 and $97,471,000,
respectively. Advances on the flexible line of credit from the FHLB at December
31, 2000 and 1999 were $2,865,000 and $700,000, respectively. All advances from
FHLB are secured by qualifying assets of the Bank.
Securities sold under repurchase agreements were under the Bank's control.
The Bank has a line of credit for the sale of federal funds with Atlantic
Central Bankers Bank of which $-0- were outstanding at December 31, 2000 and
1999, respectively. These borrowings are unsecured.
Long-term borrowings were comprised of three long-term borrowings from Federal
Home Loan Bank (FHLB) as follows:
o A $5,000,000 term fund with a fixed rate of interest at 6.37% which matures in
2010. This note has a convertible option which allows FHLB, after 1 year, to
change the note to an adjustable-rate advance at 3 month LIBOR plus 11 points.
In that event, the Bank has the option to prepay the loan without penalty.
Interest only is payable monthly.
o A $2,500,000 term fund with a fixed rate of interest at 7.03% which matures in
2005. This note has a convertible option which allows FHLB, after 1 year, to
change the note to an adjustable- rate advance at 3 month LIBOR plus 11 points.
In that event, the Bank has the option to prepay the loan without penalty.
Interest only is payable monthly.
o A $5,000,000 term fund with a fixed rate of interest at 6.1% which matures
2010. This note has a convertible option which allows FHLB, after 3 years, to
change the note to an adjustable-rate advance at 3 month LIBOR plus 1 point. In
that event, the Bank has the option to prepay the loan without penalty. Interest
only is payable monthly.
o A $5,000,000 term fund with a rate of 5.93% which matures in 2005. This note
has a convertible option which allows FHLB, after 6 months, to change the note
to an adjustable-rate advance at 3 month LIBOR plus 2 points. In that event, the
Bank has the option to prepay the loan without penalty. Interest only is payable
monthly.
If the Bank prepays any of the above term funds, the prepayment fee applicable
to the advance is equal to the present value of the difference between cash
flows generated at the advance rate from the date of the prepayment until the
original maturity date, and the cash flows that would have resulted from the
interest rate posted by the FHLB on the date of prepayment for an advance of
comparable maturity.
The notes are secured under terms of a blanket collateral agreement by a pledge
of qualifying investment and mortgage backed securities, certain mortgage loans
and a lien on FHLB stock.
Capital Accounts
Total stockholders' equity increased 15.08% or $4,042,000 over year-end 1999.
This growth is primarily attributable to retained earnings. A common ratio used
to determine effective use of capital is the return on average equity. For the
year ending December 31, 2000, this ratio was 13.91% compared to 14.08% at
December 31, 1999. A strong capital position has always been a goal of the
Company, but we also recognize that investors want to see judicious use of
capital. At year-end 2000, the equity-to-assets ratio was 10.71% compared to
10.26% at year-end 1999. It is the goal of management to implement ways to
better leverage our capital. A capital-to-assets ratio closer to 8% is a target
number.
Net Income increased capital by $3,905,000 in 2000 and dividends reduced that
number by $1,341,000. The balance of the increase was created by less
depreciation in our investment portfolio. Since all of our investments are
available for sale, changes in market values adjusted for taxes are reflected in
the equity portion of the balance sheet.
From time to time the Company has purchased PFIS stock in the open market or
from individuals to leverage the capital account and to provide stock for our
dividend reinvestment plan. During the Year 2000, 24,572 shares were purchased
in this manner. Also during the year, 6,589 shares of this treasury stock were
purchased by individuals exercising options and for our dividend reinvestment
plan. The investment banking firms of Tucker Anthony, Inc. and Ferris, Baker
Watts, Incorporated are the market makers.
The following table represents the Company's capital position as it compares to
the regulatory guidelines at December 31, 2000.
December 31 December 31 Regulatory
2000 1999 Requirement
Tier 1 Capital to risk (Weighted) ...... 15.90% 16.99% 4.00%
TOTAL Capital to Risk (Weighted) ....... 16.99% 18.15% 8.00%
Capital Leverage Ratio to Average Assets 10.04% 10.02% 4.00%
Interest Rate Sensitivity
Interest rate sensitivity refers to the relationship between market interest
rates and the earnings volatility of the Company due to the repricing
characteristics of assets and liabilities. The responsibility for monitoring
interest rate sensitivity and policy decisions has been given to the
Asset/Liability Committee (ALCO) of the Bank. The tools used to monitor
sensitivity are the Statement of Interest Sensitivity Gap and the interest rate
shock analysis. The Bank uses a software model to measure and to keep track. In
addition, an outside source does a quarterly analysis to make sure our internal
analysis is current and correct. The Statement of Interest Sensitivity Gap is a
good assessment of current position and is a very useful tool for the ALCO in
performing its job. This report is monitored in an effort to "match" maturities
or repricing opportunities of assets and liabilities in order to attain the
maximum interest within risk tolerance policy guidelines. The statement does,
although, have inherent limitations in that certain assets and liabilities may
react to changes in interest rates in different ways with some categories
reacting in advance of changes and some lagging behind the changes. In addition,
there are estimates used in determining the actual propensity to change of
certain items such as deposits without maturities.
The following is the December 31, 2000, statement:
(In thousands) Maturity or Repricing In:
3 to 6 6 to 12 1 to 5 Over 5
3 Months Months Months Years Years
RATE SENSITIVE ASSETS
Loans ................................................. 16,611 17,750 20,065 68,077 47,759
Securities ............................................ 24,245 4,803 7,015 38,284 27,468
Federal Funds Sold .................................... 0 0 0 0 0
Total Rate Sensitive Assets ........................... 40,856 22,553 27,080 106,361 75,227
Cummulative Rate Sensitive Assets ..................... 40,856 63,409 90,489 196,850 272,077
RATE SENSITIVE LIABILITIES
Interest Bearing Checking ............................. 7,133 0 0 0 12,732
Money Market Deposits ................................. 24,786 1,320 0 0 6,601
Regular Savings ....................................... 24,732 30 208 3 24,911
CDs and IRAs .......................................... 18,147 15,817 25,396 39,469 2,164
Other Borrowings ...................................... 7,245 12,500 0 5,000 0
Total Rate Sensitive Liabilities ...................... 82,043 29,667 25,604 44,472 46,408
Cummulative Rate Sensitive Liabilities ................ $ 82,043 111,710 137,314 181,786 228,194
Period Gap ............................................ $ (41,187) $ (7,114) $ 1,476 $ 61,889 $ 28,819
Cummulative Gap ....................................... (41,187) (48,301) (46,825) 15,064 43,883
Cummulative Rate Sensitive Assets to Liabilities 49.80% 56.76% 65.90% 108.29% 119.23%
Cummulative Gap to Total Assets ....................... (14.32)% (16.79)% (16.28)% 5.24% 15.26%
Statement of Interest Sensitivity Gap
Liquidity
The liquidity of the Company is reflected in its capacity to have sufficient
amounts of cash available to fund the needs of customer withdrawal requests,
accommodate loan demand, and maintain regulatory reserve requirements; that is
to conduct banking business. Additional liquidity is obtained by either
increasing liabilities or by decreasing assets. The primary source for
increasing liabilities is the generation of additional deposit accounts which
are managed through our system of branches. In addition, loan payments on
existing loans, sales of loans held for sale, or investments available for sale
can generate additional liquidity. Other sources include income from operations,
decreases in federal funds sold or interest-bearing deposits in other banks,
securities sold under agreements to repurchase, and borrowings from the Federal
Home Loan Bank. On December 31, 2000, the Bank had a borrowing capacity from the
Federal Home Loan Bank of approximately $109,345,000. During the Year 2000,
maturities and sales of investments, increases in deposits, and short term
borrowings provided the majority of additional cash with operating activities
also contributing to liquidity. The funds were used primarily to grant loans to
customers.
LOAN CONCENTRATION AND OFF BALANCE SHEET RISK
Our Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business in order to meet the financing needs of its customers.
These financial instruments may include and involve commitments to extend
credit, standby letters of credit, elements of credit, and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. The amounts
of these instruments reflect the extent of involvement the Company has in
particular classes of financial instruments. Standby letters of credit commit
the Company to make payments on behalf of customers when certain specified
future events occur. Commitments to extend credit are agreements to lend to the
customer as long as there is no violation of any condition established in the
contract. These commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire in one
year or less without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Our exposure to credit loss is essentially the same for these items as that
involved in extending loans to customers. We use the same credit policies in
making commitments and conditional obligations as we do for on balance sheet
instruments. Collateral is obtained based on management's credit assessment of
the particular customer.
Please refer to Note 13 in the Notes to Consolidated Financial Statements for a
more detailed account.
EFFECTS OF INFLATION
The majority of assets and liabilities of a financial institution are monetary
in nature and, therefore, differ greatly from commercial and industrial
companies that have significant investments in fixed assets or inventories. The
precise impact of inflation upon the Corporation is difficult to measure.
Inflation may affect the borrowing needs of consumers, thereby impacting the
growth rate of the Corporation's assets. Inflation may also affect the general
level of interest rates, which can have a direct bearing on the Corporation.
Management believes that the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain a position that is within
conservative parameters for interest sensitive assets and liabilities in order
to be protected against wide interest rate fluctuation.
FASB AND OTHER DISCLOSURES
The following can be found under Note 1 of the Notes to Consolidated Financial
Statements:
SFAS No. 130, "Reporting Comprehensive Income"
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
SFAS No. 132, "Disclosures about Pension and Other Post-retirement Benefits"
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise"
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities"
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities"
YEAR 2000 COMPLIANCE
The Company adopted a Year 2000 policy to address the "Year 2000" issue
concerning the inability of certain information systems and automated equipment
to properly recognize and process dates containing the Year 2000 and beyond. If
not corrected, these systems and equipment could have produced inaccurate or
unpredictable results. The Company, similar to most financial service providers,
was particularly vulnerable to the potential impact of the Year 2000 issue due
to the nature of financial information.
In order to address the Year 2000 issue, the company developed and implemented a
five-phase compliance plan divided into the following major components:
Awareness
Assessment
Renovation
Validation & Testing
Implementation
Financial institution regulators intensively focused upon Year 2000 exposure,
issuing guidance concerning the responsibilities of senior management and
directors. Year 2000 testing and certification was addressed as a key safety and
soundness issue in conjunction with regulatory exams. The FFIEC highly
prioritized Year 2000 compliance in order to avoid major disruptions to the
operations of financial institutions and the country's financial systems when
the new century begins. The Bank is subject to supervision by the Office of the
Comptroller of the Currency, which regularly conducted reviews of the safety and
soundness of the Banks operations, including Year 2000.
There was no interruption of the company's business due to Year 2000.
Forward Looking Statement
When used in this discussion, the words "believes", "anticipates",
"contemplated", "expects", or similar expressions are intended to identify
forward looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Those risks and uncertainties include changes in interest rates, the
ability to control costs and expenses, and general economic conditions. The
Company undertakes no obligation to publicly release the results of any
revisions to those forward looking statements that may be made to reflect events
or circumstances after this date or to reflect the occurrence of unanticipated
events.
ITEM 7A Quantitative and Qualitative Disclosure About Market Risk
The Company is not a party to any forward contract, interest rate swap, option
interest, or similar derivation instrument. The Company does not deal in foreign
currency. The following table presents average interest rates that relate to
assets and liabilities that are sensitive to changes in interest rates.
Greater than
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 5 Years Total Fair Value
Assets:
Investments ......... $ 22,419 $ 14,866 $ 8,473 $ 8,477 $ 8,650 $ 36,793 $ 99,678 $ 99,678
Average Interest Rate 6.41% 6.34% 6.40% 6.31% 6.32% 6.22% 6.22%
Loans ............... $ 28,784 $ 14,533 $ 12,290 $ 11,278 $ 10,145 $ 93,232 $ 170,262 $170,262
Average Interest Rate 8.48% 8.60% 8.60% 8.59% 8.56% 8.47% 8.47%
Liabilities:
Deposits ............ $ 89,972 $ 30,624 $ 4,259 $ 2,768 $ 1,821 $ 101,295 $ 230,739 $230,348
Average Interest Rate 5.22% 5.46% 5.47% 5.47% 5.47% 4.27% 4.27%
ITEM 8 Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Peoples Financial Services Corp.
and Subsidiary
We have audited the accompanying consolidated balance sheets of Peoples
Financial Services Corp. and Subsidiary as of December 31, 2000 and 1999, and
the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company'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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Peoples
Financial Services Corp. and Subsidiary as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with generally accepted
accounting principles.
February 15, 2001
PROCIAK & ASSOCIATES, L.L.C.
Wilkes-Barre, Pennsylvania
See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
December 31, December 31,
2000 1999
---- ----
C>
ASSETS
Cash and due from banks ........................................................ $ 5,507,116 $ 3,372,554
Interest-bearing deposits in other banks ....................................... 2,090,181 4,095,992
Investment securities available for sale ....................................... 99,677,642 92,066,386
Loans .......................................................................... 172,185,029 152,396,398
Less: Unearned income ...................................................... (5,283) (10,756)
Allowance for loan losses ............................................ (1,918,189) (1,755,629)
------------- -------------
Net loans ................................................................... 170,261,557 150,630,013
Premises and equipment ......................................................... 3,411,110 3,455,270
Accrued interest receivable .................................................... 2,361,879 1,995,981
Other assets ................................................................... 4,315,571 5,703,004
------------- -------------
Total assets ............................................................ $ 287,625,056 $ 261,319,200
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing ...................................................... $ 27,290,399 $ 25,419,318
Interest bearing .......................................................... 203,448,830 190,004,973
------------- -------------
Total deposits .......................................................... 230,739,229 215,424,291
Short-term borrowings ....................................................... 7,245,248 5,850,521
Long-term borrowings ........................................................ 17,500,000 12,000,000
Accrued interest payable .................................................... 853,442 717,941
Other liabilities ........................................................... 435,398 516,573
------------- -------------
Total liabilities ....................................................... 256,773,317 234,509,326
------------- -------------
Stockholders' equity:
Common stock, par value $2 per share, 12,500,000 shares authorized; 2,149,835
and 2,168,218 shares issued and outstanding at December 31, 2000 and
1999, respectively ........................................................ 4,455,000 4,455,000
Surplus ..................................................................... 4,610,969 4,512,333
Retained earnings ........................................................... 23,544,060 20,979,861
Accumulated other comprehensive income (loss) ............................... (129,759) (2,086,929)
Less: treasury stock, at cost (77,665 and 59,282 in 2000 and 1999,
respectively) ........................................................ (1,628,531) (1,050,391)
------------- -------------
Total stockholders' equity ................................................ 30,851,739 26,809,874
------------- -------------
Total liabilities and stockholders' equity ................................ $ 287,625,056 $ 261,319,200
============= =============
See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Interest income:
Interest and fees on loans .............. $13,819,845 $12,056,931 $11,447,692
Interest and dividends on investments:
Taxable ............................... 4,244,518 3,821,456 3,472,481
Tax exempt ............................ 1,597,907 1,464,074 1,486,960
Dividends ............................. 152,590 126,384 89,737
Interest on deposits in other banks ..... 111,835 39,012 45,153
Interest on federal funds sold .......... 63,319 115,740 41,529
Total interest income .................. 19,990,014 17,623,597 16,583,552
----------- ----------- -----------
Interest expense:
Interest on deposits .................... 9,267,686 7,987,930 7,906,294
Interest on short-term borrowings ....... 279,810 213,595 275,041
Interest on long-term borrowings ........ 921,289 279,516 9,667
Total interest expense .................. 10,468,785 8,481,041 8,191,002
----------- ----------- -----------
Net interest income .................... 9,521,229 9,142,556 8,392,550
Provision for loan losses .................. 240,000 240,000 190,000
----------- ----------- -----------
Net interest income after provision for
loan ....................................... 9,281,229 8,902,556 8,202,550
----------- ----------- -----------
losses
Other income:
Service charges and customer service fees 1,415,355 1,187,064 1,108,023
Other income ............................ 16,225 34,448 40,700
Investment securities gains, net ........ 20,481 85,071 47,494
----------- ----------- -----------
Total other income ..................... 1,452,061 1,306,583 1,196,217
----------- ----------- -----------
Other expenses:
Salaries and employee benefits .......... 2,818,849 2,534,316 2,395,055
Occupancy expense, net .................. 338,438 323,250 319,234
Equipment expense ....................... 388,155 382,862 435,631
FDIC insurance and assessments .......... 115,571 91,789 87,683
Professional fees and outside services .. 215,850 196,714 190,676
Computer service and supplies ........... 361,185 306,090 268,294
Taxes, other than payroll and income .... 255,486 247,238 222,267
Other operating expenses ................ 1,237,738 1,225,514 1,170,750
----------- ----------- -----------
Total other expense .................... 5,731,272 5,307,773 5,089,590
----------- ----------- -----------
Income before taxes ........................ 5,002,018 4,901,366 4,309,177
Provision for income tax ................... 1,096,604 1,114,538 903,804
----------- ----------- -----------
Net income ................................. $ 3,905,414 $ 3,786,828 $ 3,405,373
=========== =========== ===========
Earnings per share - basic ................. $ 1.80 $ 1.74 $ 1.56
=========== =========== ===========
Earnings per share - diluted ............... $ 1.80 $ 1.74 $ 1.56
=========== =========== ===========
See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Net income ............................................ $ 3,905,414 $ 3,786,828 $ 3,405,373
----------- ----------- -----------
Other comprehensive income (loss) before tax:
Unrealized holding gains (losses) on securities
available for sale arising during the period .. 2,985,889 (3,927,655) 336,738
Reclassification adjustment ...................... (20,481) (85,071) (47,494)
----------- ----------- -----------
Other comprehensive income (loss) before tax .......... 2,965,408 (4,012,726) 289,244
Federal income tax expense (benefit) ............. 1,008,238 (1,364,327) 98,343
----------- ----------- -----------
Other comprehensive income (loss), net of tax (benefit) 1,957,170 (2,648,399) 190,901
----------- ----------- -----------
Total comprehensive income ............................ $ 5,862,584 $ 1,138,429 $ 3,596,274
=========== =========== ===========
See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
----- ------- -------- ------ ----- -----
Balance, December 31, 1997 ................... $ 4,455,000 $ 4,455,000 $ 15,912,129 $ 370,569 $ (548,775) $ 24,643,923
Net income, 1998 ............................. 3,405,373 3,405,373
Cash dividends paid, 1998 ($.46 per share) ... (995,407) (995,407)
Treasury stock purchase ...................... (199,096) (199,096)
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $98,343 ......... 190,901 190,901
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 ................... 4,455,000 4,455,000 18,322,095 561,470 (747,871) 27,045,694
Net income, 1999 ............................. 3,786,828 3,786,828
Cash dividend paid, 1999 ($.52 per share) .... (1,129,062) (1,129,062)
Shares issued from treasury related to
dividend reinvestment plan
and stock option plan ..................... 57,333 51,835 109,168
Treasury stock purchase ...................... (354,355) (354,355)
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $1,364,327 ... (2,648,399) (2,648,399)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 ................... 4,455,000 4,512,333 20,979,861 (2,086,929) (1,050,391) 26,809,874
Net income, 2000.............................. 3,905,414 3,905,414
Cash dividend paid, 2000 ($.62 per share) .... (1,341,215) (1,341,215)
Shares issued from treasury related to
dividend reinvestment plan
and stock option plan ..................... 98,636 80,368 179,004
Treasury stock purchase ...................... (658,508) (658,508)
Change in unrealized gain (loss) on
securities available for sale, net
of deferred income taxes of $1,008,239 ... 1,957,170 1,957,170
------------ ------------ ------------ ------------ ------------ ------------
$ 4,455,000 $ 4,610,969 $ 23,544,060 $ (129,759) $ (1,628,531) $ 30,851,739
============ ============ ============ ============ ============ ============
See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income .............................................. $ 3,905,414 $ 3,786,828 $ 3,405,373
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ....................... 641,018 642,477 709,422
Provision for loan losses ........................... 240,000 240,000 190,000
(Gain) loss on sale of equipment .................... (4,238) -0- 2,520
(Gain) loss on sale of other real estate ............ (5,079) 6,005 (20,489)
Amortization of securities' premiums and accretion of
discounts ........................................ 79,318 224,731 134,580
Gains on sale of investment securities, net ......... (20,481) (85,071) (47,494)
Deferred income taxes (benefit) ..................... (70,299) (31,870) (36,757)
Increase in accrued interest receivable ............. (365,898) (214,420) (4,653)
Increase in other assets ............................ (17,863) (233,656) (11,249)
Increase in accrued interest payable ................ 135,501 15,052 40,193
Increase (decrease) in other liabilities ............ (81,175) (24,194) (5,678)
------------ ------------ ------------
Net cash provided by operating activities ........ 4,436,218 4,325,882 4,355,768
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities ..... 10,878,642 12,072,318 8,110,848
Proceeds from maturities of available for sale securities 4,158,269 9,016,962 15,044,682
Purchase of available for sale securities ............... (22,813,246) (33,407,774) (34,234,619)
Principal payments on mortgage-backed securities ........ 3,071,651 9,274,789 6,255,232
Net increase in loans ................................... (19,857,227) (11,450,925) (14,961,260)
Proceeds from sale of premises and equipment ............ 4,238 -0- 2,026
Purchase of premises and equipment ...................... (338,499) (316,334) (222,360)
Proceeds from sale of other real estate ................. 199,760 157,400 58,000
------------ ------------ ------------
Net cash used in investing activities ........... (24,696,412) (14,653,564) (19,947,451)
------------ ------------ ------------
Cash flows from financing activities:
Increase in deposits .................................... 15,314,938 5,543,239 16,289,035
Net increase in long-term borrowings .................... 5,500,000 7,000,000 5,000,000
Net increase (decrease) in short-term borrowings ........ 1,394,726 1,818,545 (5,242,859)
Proceeds from sale of treasury stock .................... 179,004 109,168 -0-
Purchase of treasury stock .............................. (658,508) (354,355) (199,096)
Cash dividends paid ..................................... (1,341,215) (1,129,062) (995,407)
------------ ------------ ------------
Net cash provided by financing activities ....... 20,388,945 12,987,535 14,851,673
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ....... 128,751 2,659,853 (740,010)
Cash and cash equivalents, beginning of year ............... 7,468,546 4,808,693 5,548,703
------------ ------------ ------------
Cash and cash equivalents, end of year ..................... $ 7,597,297 $ 7,468,546 $ 4,808,693
============ ============ ============
See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
Supplemental disclosures of cash paid:
Interest paid ........................................ $10,333,284 $ 8,465,989 $ 8,150,809
=========== =========== ===========
Income taxes paid .................................... $ 1,075,000 $ 1,216,000 $ 864,000
=========== =========== ===========
Non-cash investing and financing activities:
Transfers from loans to real estate acquired through
foreclosure ........................................ $ 52,686 $ 233,152 $ 545,253
=========== =========== ===========
Proceeds from sales of foreclosed real estate financed
through loans ...................................... $ 76,761 $ 116,600 $ 200,000
=========== =========== ===========
Total increase (decrease) in unrealized gain (loss) on
securities available for sale ...................... $ 2,965,408 $(4,012,726) $ 289,244
=========== =========== ===========
See notes to financial statements
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Note 1: Summary of Significant Accounting Policies
The accounting and reporting policies of Peoples Financial
Services Corp. and Subsidiary, (the "Company") follow generally
accepted accounting principles and have been applied on a consistent
basis. The more significant accounting policies are summarized below:
Basis of Presentation
The consolidated financial statements include the accounts of Peoples
Financial Services Corp. and its wholly owned subsidiary, Peoples
National Bank of Susquehanna County. All intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations
The Company provides a variety of financial services, through the
bank, to individuals, small businesses and municipalities through its
seven Pennsylvania offices located in Hallstead, Hop Bottom,
Susquehanna, Montrose, Nicholson, Meshoppen and Tunkhannock,
which are small communities in a rural setting. The Bank's primary
deposit products are checking accounts, savings accounts, and
certificates of deposit. Its primary lending products are
single-family residential loans and loans to small businesses.
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.
Investment Securities
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
requires investments to be classified and accounted for as either held
to maturity, available for sale, or trading account securities based
on management's intent at the time of acquisition. Management is
required to reassess the appropriateness of such classifications at
each reporting date.
The Company classifies debt securities as held to maturity when
management has the positive intent and ability to hold such securities
to maturity. Held to maturity securities are stated at cost, adjusted
for amortization of premium and accretion of discount.
Securities classified as available for sale are those debt securities
that the Company intends to hold for an indefinite period of time, but
not necessarily to maturity. Any decision to sell a security
classified as
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 1: (Cont'd)
Investment Securities (Cont'd)
available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of
the Company's assets and liabilities, liquidity needs, regulatory
capital considerations, and other similar factors. Securities available
for sale are carried at fair value.
Unrealized gains or losses are reported as increases or decreases in
stockholders' equity, net of the related tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities
sold, are included in earnings. Management determines the appropriate
classification of securities at the time of purchase and re-evaluates
the designations as of each balance sheet date. Equity securities
include restricted investments, primarily Federal Home Loan Bank stock
which is carried at cost and evaluated for impairment.
Loans
Loans are stated at their outstanding unpaid principal balances net of
an allowance for loan losses and any deferred fees or costs. Interest
income is accrued on the unpaid principal balance. Loan origination
fees, net of certain direct origination costs, are deferred and
recognized over the contractual life of the related loan as an
adjustment to the yield.
A loan is generally considered impaired when it is probable the Company
will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. The
accrual of interest is discontinued when the contractual payment of
principal and interest has become 90 days past due or management has
serious doubts about further collectibility of principal or interest,
even though the loan is currently performing. A loan may remain on
accrual status if it is in the process of collection and is either
guaranteed or well secured. When a loan is placed on non-accrual
status, unpaid interest credited to income in the current year is
reversed and unpaid interest accrued in prior years is charged against
the allowance for loan losses. Certain non-accrual loans may continue
to perform, that is, payments are still being received. Generally, the
payments are applied to principal. These loans remain under constant
scrutiny and if performance continues, interest income may be recorded
on a cash basis based on management's judgment as to collectibility of
principal.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for
loan losses which is charged to operations. Loans, determined to be
uncollectible are charged against the allowance account and subsequent
recoveries, if any, are credited to the account.
The allowance for loan losses related to impaired loans, that are
identified for evaluation, is based on discounted cash flows using the
loans' initial effective interest rate or the fair value, less selling
costs, of the collateral for certain collateral dependent loans. By the
time a loan becomes probable of foreclosure, it has been charged down
to fair value, less estimated costs to sell.
The allowance is maintained at a level believed by management to be
sufficient to absorb estimated potential credit losses. Management's
determination of the adequacy of the allowance is based on periodic
evaluations of the credit portfolio, the overall risk characteristics
of the various portfolio segments, past experience with losses, the
impact of economic conditions on borrowers, and other relevant factors.
This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of expected future cash
flows on impaired loans, which may be susceptible to significant change
in the near term.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 1: (Cont'd)
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight line and
various accelerated methods based on estimated useful lives.
Maintenance, repairs and minor replacements are expensed when incurred.
Gains and losses on routine dispositions are reflected in current
operations.
Intangible Assets
Intangible assets are included in other assets and are being amortized
over a period of fifteen years using the straight-line method.
Amortization was $258,360 for 2000, 1999 and 1998.
Foreclosed Assets Held for Sale
Foreclosed assets held for sale is comprised of property acquired
through a foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure and loans classified as in-substance foreclosure. The
Company includes such properties in other assets. A loan is classified
as in-substance foreclosure when the Company has taken possession of
the collateral regardless of whether formal foreclosure proceedings
take place. Any excess of the loan balance over the recorded value is
charged to the allowance for loan losses. Subsequent declines in the
recorded value of the property prior to its disposal and costs to
maintain the assets are included in other expense. In addition, any
gain or loss realized upon disposal is included in other income or
expense.
Income Taxes
The provision for income taxes is based on the current and deferred tax
consequences of all transactions that have been recognized in the
financial statements using the provisions of the enacted tax laws.
Deferred income taxes are provided using the liability method whereby
deferred tax assets are recognized for deductible temporary differences
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amount of assets and liabilities and their tax bases.
Advertising Costs
The Company follows the policy of charging marketing and advertising
costs to expense as incurred.
Common Stock
Holders of Company Common Stock are entitled to one vote for each share
on all matters voted on by shareholders. Holders of Company Common
Stock do not have cumulative voting rights in the election of
directors.
Holders of Company Common Stock do not have preemptive rights, or any
subscription, redemption or conversion privileges. Holders of Company
Common Stock are entitled to participate ratably in dividends on the
Company Common Stock as declared by the Board of Directors, and are
entitled to share ratably in all assets available for distribution to
shareholders in the event of liquidation or dissolution of the Company.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 1: (Cont'd)
Earnings per Common Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share (SFAS
128)." SFAS 128 eliminates primary and fully diluted earnings per share
and requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share exclude dilution and
is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised and converted into common stock. Prior periods' earnings per
share calculations have been restated to reflect the adoption of SFAS
No. 128.
On September 15, 1998, the Company effected a 5-for-2 stock split to
shareholders of record on August 15, 1998. In connection with the stock
split, the Corporation amended it's articles of incorporation to
authorize 12,500,000 shares of $2 par value common stock. Earnings per
share amounts and weighted average shares outstanding have been
restated to give effect to the stock split.
The following data shows the amounts used in computing earnings per
share for 2000, 1999 and 1998:
Common
Income Shares
Numerator Denominator EPS
2000
Basic EPS ................................ $3,905,414 2,161,476 $ 1.80
=========
Dilutive effect of potential common stock:
Stock options ............................ 2,817
---------
Diluted EPS .............................. $3,905,414 2,164,293 $ 1.80
========== ========== =========
1999
Basic EPS ................................ $3,786,828 2,170,849 $ 1.74
=========
Dilutive effect of potential common stock:
Stock options ............................ 2,981
---------
Diluted EPS .............................. $3,786,828 2,173,830 $ 1.74
========== ========== =========
1998
Basic EPS ................................ $3,405,373 2,182,804 $ 1.56
=========
Dilutive effect of potential common stock:
Stock options ............................ 1,797
---------
Diluted EPS .............................. $3,405,373 2,184,601 $ 1.56
========== ========== =========
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 1: (Cont'd)
Accounting for Stock Options
The Company accounts for stock-based compensation in accordance with
the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." This method calculates compensation expense
using the intrinsic value method which recognizes as expense the
difference between the market value of the stock and the exercise price
at grant date. The Company has not recognized any compensation expense
under this method. The Company adopted the reporting disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires the Company to disclose the pro forma
effects of accounting for stock-based compensation using the fair value
method as described in the accounting requirements of SFAS No. 123. As
permitted by SFAS No. 123, the Company continues to account for
stock-based compensation under APB opinion No. 25.
Accounting for Transfers and Servicing of Financial Assets
In September, 2000, SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125, was issued. It revises the
standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but
it carries over most of Statement 125's provisions without
reconsideration. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. Disclosures about securitization and
collateral accepted need not be reported for periods ending on or
before December 15, 2000, for which financial statements are presented
for comparative purposes. The effect of adopting SFAS No. 140 was not
material to the Company's financial position or results of operations.
Reporting Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" requires entities
presenting a complete set of financial statements to include details of
comprehensive income. Comprehensive income consists of net income or
loss for the current period and income, expenses, gains and losses that
bypass the income statement and are reported directly in a separate
component of equity. The effect of adopting SFAS No. 130 was not
material to the Company's financial position or results of operations.
Segment Reporting
During 1998, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". This Statement
establishes standards for the way public companies report information
about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures
regarding products and services, geographic areas and major customers.
The adoption of this Statement had no impact on the Company's financial
position or results of operations.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 1: (Cont'd)
Disclosures about Pension and Other Post-retirement Benefits
During 1998, the Company adopted SFAS No. 132. This Statement: (1)
revises employers' disclosures about pension and other post-retirement
benefit plans; (2) standardizes the disclosure requirements for
benefits of such plans; (3) requires additional information on changes
in the benefit obligations and fair value of plan assets that will
facilitate financial analysis; and (4) eliminates certain disclosures
that are no longer useful. Most of the changes in the disclosure
provisions of this Statement address defined benefit plans. The
Company's adoption of SFAS No. 132 had no effect on the Company's
financial position or results of operations.
Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise
During 1999, the Company adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". The
Statement amends SFAS 65, "Accounting for Certain Mortgage Banking
Activities." Statement 65, as amended, requires that after the
securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
security as a trading security. This Statement further amends SFAS 65
to require that after the securitization of mortgage loans held for
sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interest based
on its ability and intent to sell or hold those investments. This
Statement conforms the subsequent accounting for securities retained
after securitization of mortgage loans by a mortgage banking entity
with the subsequent accounting for securities retained after the
securitization of other types of assets by nonmortgage banking
enterprises. This means that such securities can be classified as
held-to-maturity if they conform to the requirements of SFAS 115. The
adoption of this statement had no impact on the Company's financial
position or results of operations.
Accounting for Derivative Instruments and Hedging Activities
In June 1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the effective date of SFAS No. 133"
was issued. This statement defers the effective date of SFAS No. 133 to
all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. The accounting for changes in the fair value
of a derivative depends on the intended use of the derivative and the
resulting designation. The adoption of SFAS No. 133 is not expected to
have a material effect on the Company's financial position or results
of operations.
Cash Flows
For the purpose of cash flows, cash and cash equivalents include cash
and due from banks, interest-bearing deposits in other banks and
federal funds sold.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to
extend credit and standby letters of credit. Such financial instruments
are recorded in the financial statements when they become payable.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 1: (Cont'd)
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year's classifications.
Note 2: Restrictions on Cash and Due from Banks
The Bank is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The required
reserve balance at December 31, 2000 and 1999 was $1,534,000 and
$1,095,000, respectively.
Note 3: Investment Securities
At December 31, 2000 and 1999, the amortized cost and fair values of
securities available for sale are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
December 31, 2000
U.S. Treasury securities ......... $ 496,663 $ 7,257 $ -0- $ 503,920
U.S. Government corporate and
agency obligations ............. 33,396,674 -0- 557,680 32,838,994
Obligations of state and political
subdivisions ................... 31,446,299 499,140 -0- 31,945,439
Corporate debt securities ........ 15,898,806 135,904 126,257 15,908,453
Mortgage backed securities ....... 15,853,655 2,206 157,617 15,698,244
Equity securities ................ 2,782,150 442 -0- 2,782,592
----------- ----------- ---------- -----------
$99,874,247 $ 644,949 $ 841,554 $99,677,642
=========== =========== ========= ===========
December 31, 1999
U.S. Treasury securities ......... $ 4,488,848 $ 14,590 $ -0- $ 4,503,438
U.S. Government corporate and
agency obligations ............. 23,241,125 -0- 833,264 22,407,861
Obligations of state and political
subdivisions ................... 30,099,492 -0- 1,002,061 29,097,431
Corporate debt securities ........ 7,221,929 -0- 306,826 6,915,103
Mortgage backed securities ....... 28,412,905 1,369 1,035,821 27,378,453
Equity securities ................ 1,764,100 -0- -0- 1,764,100
----------- ----------- ----------- -----------
$95,228,399 $ 15,959 $ 3,177,972 $92,066,386
=========== =========== =========== ===========
The amortized cost and fair value of securities as of December 31, 2000
by contractual maturity or call date, are shown below. Expected
maturities will differ from contractual maturities or call dates
because borrowers may have the right to prepay obligations with or
without call or prepayment penalties. Maturities of mortgage-backed
securities have been estimated based on the contractual maturity.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 3: (Cont'd)
Amortized Fair
Cost Value
Due in one year or less .............. $ 4,098,433 $ 4,094,312
Due after one year through five years 22,715,825 22,902,821
Due after five years through ten years 14,295,407 14,039,614
Due after ten years .................. 55,982,432 55,858,303
Equity securities .................... 2,782,150 2,782,592
----------- -----------
$99,874,247 $99,677,642
=========== ===========
Proceeds from sale of available for sale securities during 2000, 1999,
and 1998 were $10,878,642, $12,072,318 and $8,110,848, respectively.
Gross gains realized on these sales were $34,820, $112,657, and
$63,459, respectively. Gross losses on these sales were $14,339,
$27,586, and $15,965, respectively. Net unrealized gains (losses) on
securities available for sale included in accumulated other
comprehensive income net of tax was $(129,759) and $(2,086,929) in 2000
and 1999, respectively.
Securities with a carrying value of $31,261,000 and $26,823,000 at
December 31, 2000 and 1999, respectively, were pledged to secure public
deposits and repurchase agreements as required or permitted by law.
Note 4: Loans
Loans are summarized as follows:
2000 1999
---- ----
Commercial ........... $ 22,370,358 $ 16,604,167
Real estate .......... 129,562,917 116,363,918
Consumer ............. 20,251,754 19,428,313
------------ ------------
Total loans $172,185,029 $152,396,398
============ ============
A summary of the transactions in the allowance for loan losses is as
follows:
2000 1999 1998
Balance at beginning of year .......... $ 1,755,629 $ 1,712,657 $ 1,675,887
Provision charged to operating expenses 240,000 240,000 190,000
Recoveries ............................ 41,466 44,139 41,868
Loan charge-offs ...................... (118,906) (241,167) (195,098)
----------- ----------- -----------
Balance at end of year ................ $ 1,918,189 $ 1,755,629 $ 1,712,657
=========== =========== ===========
Information with respect to impaired loans as of and for the years
ended December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Loans receivable for which there is a related
allowance for loan losses .................... $253,200 $260,700
======== ========
Related allowance for loan losses .............. $ 74,000 $ 62,000
======== ========
Average recorded balance on these impaired loans $256,000 $263,000
======== ========
Interest income on these impaired loans ........ $ 17,600 $ 14,300
======== ========
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 4: (Cont'd)
In addition, the Bank had other non-accrual loans of approximately
$322,000 and $83,000 at December 31, 2000 and 1999, respectively, for
which impairment had not been recognized. Interest income on these
loans, which is recorded when received, amounted to $12,400 and $2,800
for the years ended December 31, 2000 and 1999, respectively.
Interest income that would have been recorded under the original terms
of the loan agreements amounted to $52,000 and $27,500 for the years
ended December 31, 2000 and 1999, respectively.
The Bank has no commitments to loan additional funds to borrowers with
impaired or non-accrual loans.
Loans outstanding to directors, executive officers, principal
stockholders or to their affiliates totaled $615,149 at December 31,
2000 and $591,571 at December 31, 1999. Advances and repayments during
2000 totaled $142,975 and $119,397, respectively. These loans are made
during the ordinary course of business at the Company's normal credit
terms. There were no related party loans that were classified as
non-accrual, past due, restructured or considered a potential credit
risk at December 31, 2000 and 1999.
Note 5: Premises and Equipment
Premises and equipment at December 31, 2000 and 1999 are comprised of:
2000 1999
---- ----
Land ............................ $ 348,280 $ 348,280
Building and improvements ....... 3,580,672 3,551,492
Furniture, fixtures and equipment 3,368,457 3,084,455
----------- -----------
Total .................... 7,297,409 6,984,227
Accumulated depreciation . (3,886,299) (3,528,957)
----------- -----------
Net ...................... $ 3,411,110 $ 3,455,270
=========== ===========
Note 6: Deposits
The carrying amounts of deposits at December 31, 2000 and 1999
consisted of the following:
2000 1999
---- ----
Demand - non-interest bearing $ 27,290,399 $ 25,418,319
Demand - interest bearing ... 52,572,754 51,909,234
Savings ..................... 49,615,123 36,018,082
Time - $100,000 and over .... 16,855,028 14,159,389
Time - less than $100,000 ... 84,405,925 87,919,267
------------ ------------
$230,739,229 $215,424,291
============ ============
At December 31, 2000 the time remaining to maturity of time
certificates of deposit of $100,000 or more was as follows:
2000
Within 3 months .. $ 2,700,000
3 to 12 months ... 8,119,000
One to three years 5,134,000
Over three years . 902,028
-----------
Total ....... $16,855,028
===========
Interest expense related to time deposits of $100,000 or more was
$776,588 in 2000, $697,248 in 1999 and $659,044 in 1998.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 7: Short-term Borrowings
Federal funds purchased, securities sold under agreements to repurchase
and Federal Home Loan Bank advances generally represent overnight or
less than 30-day borrowings. U.S. Treasury tax and loan notes for
collections made by the Bank are payable on demand. Short-term
borrowings consisted of the following at December 31, 2000 and 1999:
2000 1999
Maximum Maximum
Ending Average Month End Average Ending Average Month End Average
Balance Balance Balance Rate Balance Balance Balance Rate
------- ------- ------- ---- ------- ------- ------- ----
Federal funds
purchased and
securities sold
under agreements to
repurchase ........ $ 3,898,562 $ 4,169,915 $ 3,946,030 5.32% $ 4,403,328 $ 3,639,276 $ 6,319,172 4.45%
Federal Home Loan
Bank .............. 2,865,000 471,817 5,570,000 6.21% 700,000 587,363 5,000,000 5.25%
U.S. Treasury tax and 481,686 457,268 1,011,339 6.26% 747,193 464,921 1,070,527 4.48%
----------- ----------- ----------- ---- ----------- ----------- ----------- ----
Total ............... $ 7,245,248 $ 5,099,000 $10,527,369 5.49% $ 5,850,521 $ 4,691,560 $12,389,699 4.55%
=========== =========== =========== ==== =========== =========== =========== ====
The Bank has an agreement with Federal Home Loan Bank (FHLB) which
allows for borrowings up to a percentage of qualifying assets. At
December 31, 2000 and 1999, the Bank had a maximum borrowing capacity
of $109,345,000 and $97,471,000, respectively. Advances on the flexible
line of credit from the FHLB at December 31, 2000 and 1999 were
$2,865,000 and $700,000, respectively. All advances from FHLB are
secured by qualifying assets of the Bank.
Securities sold under repurchase agreements were under the Bank's
control.
The Bank has a line of credit for the sale of federal funds with
Atlantic Central Bankers Bank of which $-0- were outstanding at
December 31, 2000 and 1999, respectively. These borrowings are
unsecured.
Note 8: Long-term Borrowings
Long-term borrowings were comprised of three long-term borrowings from
Federal Home Loan Bank (FHLB) as follows:
o A $5,000,000 term fund with a fixed rate of interest at
6.37% which matures in 2010. This note has a convertible
option which allows FHLB, after 1 year, to change the note
to an adjustable-rate advance at 3 month LIBOR plus 11
points. In that event, the Bank has the option to prepay
the loan without penalty. Interest only is payable
monthly.
o A $2,500,000 term fund with a fixed rate of interest at
7.03% which matures in 2005. This note has a convertible
option which allows FHLB, after 1 year, to change the note
to an adjustable- rate advance at 3 month LIBOR plus 11
points. In that event, the Bank has the option to prepay
the loan without penalty. Interest only is payable
monthly.
o A $5,000,000 term fund with a fixed rate of interest at
6.1% which matures 2010. This note has a convertible
option which allows FHLB, after 3 years, to change the
note to an adjustable-rate advance at 3 month LIBOR plus 1
point. In that event, the Bank has the option to prepay
the loan without penalty. Interest only is payable
monthly.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 8: (Cont'd)
o A $5,000,000 term fund with a rate of 5.93% which matures
in 2005. This note has a convertible option which allows
FHLB, after 6 months, to change the note to an
adjustable-rate advance at 3 month LIBOR plus 2 points. In
that event, the Bank has the option to prepay the loan
without penalty. Interest only is payable monthly.
If the Bank prepays any of the above term funds, the prepayment fee
applicable to the advance is equal to the present value of the
difference between cash flows generated at the advance rate from the
date of the prepayment until the original maturity date, and the cash
flows that would have resulted from the interest rate posted by the
FHLB on the date of prepayment for an advance of comparable maturity.
The notes are secured under terms of a blanket collateral agreement by
a pledge of qualifying investment and mortgage backed securities,
certain mortgage loans and a lien on FHLB stock.
Note 9: Stock Purchase Plans
A stock option plan covering non-employee directors and a stock
incentive plan for all officers and key employees was approved by the
shareholders at the annual meeting held on April 25, 1998. The plan
will be administered by a committee of the Board of Directors. Under
the plan, 125,000 shares of common stock (adjusted for the 5-for-2
stock split on September 15, 1998) are reserved for possible issuance,
subject to future adjustment in the event of specified changes in the
Company's capital structure. Under the plan, the exercise price cannot
be less than 100% of the fair market value on the date of grant.
Options granted during 2000, 1999 and 1998 expire in ten years.
A summary of transactions under this plan were as follows:
2000 1999 1998
Weighted Weighted Weighted
average average average
Options price Options price Options price
------- ----- ------- ----- ------- -----
Outstanding,
beginning of year 27,913 $ 23.24 21,060 $ 22.20 -0- $ -0-
Granted ............ 8,750 27.50 9,050 25.50 8,934 55.50
Stock split ........ -0- -0 -0- -0- 13,401 22.20
Exercised .......... (2,495) 22.86 (1,750) 22.67 -0- -0-
Forfeited .......... (1,275) 23.48 (447) 22.20 (1,275) 22.20
------ ------- ------ ------- ---------- -----
Outstanding,
end of year ..... 32,893 $ 24.38 27,913 $ 23.24 21,060 $ 22.20
====== ======= ====== ======= ========== =====
The following summarizes information about all stock options
outstanding at December 31, 2000:
Weighted-Average
Remaining Options
Exercise Price Number Contractual Life Exercisable
$ 22.20 16,343 7.4 years 17,324
$ 25.50 7,800 8.4 years 7,800
$ 27.50 8,750 9.4 years 8,750
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 9: (Cont'd)
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for the Option Plan. Accordingly,
no compensation expense has been recognized for the Option Plan. Had
compensation cost for the Option Plan been determined based on the fair
values at the grant dates for awards consistent with the method of SFAS
No. 123, the Company's net income and earnings per share would have
been adjusted to the pro forma amounts indicated below for the year
ended December 31, 2000:
As Reported Pro Forma
Net income: ....... $ 3,905,414 $ 3,860,542
=========== =============
Earnings per share:
Basic ........ $ 1.80 $ 1.78
=========== =============
Fully diluted $ 1.80 $ 1.78
=========== =============
For the purposes of the pro forma calculations, the fair value of each
option grant is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for grants issued in
2000:
Dividend yield ........ 2.49%
Expected volatility ... 24%
Risk-free interest rate 6.51%
Expected lives ........ 6 years
During 1999, the Company implemented a Dividend Reinvestment and Stock
Purchase plan. Under the plan, the Company registered with the
Securities and Exchange Commission 100,000 shares of the common stock
to be sold pursuant to the plan. Participation is available to all
common stockholders. The Plan provides each participant with a simple
and convenient method of purchasing additional common shares without
payment of any brokerage commission or other service fees. A
participant in the Plan may elect to reinvest dividends on all or part
of their shares to acquire additional common stock. A participant may
withdraw from the Plan at any time. Stockholders purchased 11,880 and
2,527 shares in 2000 and 1999, respectively, through the Plan.
Note 10: Income Taxes
The components of the provision for income tax are as follows:
2000 1999 1998
---- ---- ----
Federal
Currently payable ................ $ 1,166,903 $ 1,146,408 $ 940,561
Deferred tax (benefit) ........... (70,299) (31,870) (36,757)
----------- ----------- -----------
Total provision for income tax $ 1,096,604 $ 1,114,538 $ 903,804
=========== =========== ===========
The deferred tax assets and liabilities resulting from temporary timing
differences have been netted to reflect a net deferred tax asset
included in other assets in these consolidated financial statements.
The components of the net deferred tax assets at December 31, 2000 and
1999 are as follows:
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 10: (Cont'd)
2000 1999
---- ----
Deferred tax asset:
Allowance for loan losses ...................... $ 523,981 $ 468,711
Deferred loan fees ............................. 25,251 38,601
Deferred compensation .......................... 77,474 77,474
Unrealized loss on available for sale securities 66,846 1,075,085
Other .......................................... 27,497 -0-
721,049 1,659,871
----------- -----------
Deferred tax liability:
Other, net ..................................... -0- (882)
----------- -----------
Total ....................................... -0- (882)
----------- -----------
Net deferred tax asset ............................ $ 721,049 $ 1,658,989
=========== ===========
A reconciliation of the provision for income taxes and the amount that
would have been provided at statutory rates for the years ended
December 31, are as follows:
2000 1999 1998
---- ---- ----
Provision at statutory rate ....... $ 1,700,686 $ 1,666,464 $ 1,465,120
Tax exempt interest ............... (654,034) (618,210) (642,312)
Non-deductible interest ........... 97,440 82,639 88,540
Other, net ........................ (47,488) (16,355) (7,544)
----------- ----------- -----------
Net provision for income taxes $ 1,096,604 $ 1,114,538 $ 903,804
=========== =========== ===========
Note 11: Pension Plan and Other Employee Benefit Plans
The Bank has an employee stock ownership plan covering substantially
all employees. Contributions to the plan are at the discretion of the
Board of Directors. Employer contributions are allocated to participant
accounts based on their percentage of total compensation for the plan
year. Shares of Bank stock owned by the plan are included in the
earnings per share calculation and dividends on these shares are
deducted from undivided profits. During 2000, 1999, and 1998,
contributions to the plan charged to operations were $76,667, $72,442
and $67,931, respectively.
The Bank also maintains a profit sharing plan under the provisions of
Section 401 (k) of the Internal Revenue Code. The plan covers
substantially all employees who have completed one year of service.
Contributions to the plan by the Bank equal 50% of the employee
contribution up to a maximum of 6% of annual salary. During 2000, 1999
and 1998, employer contributions to the plan charged to operations were
$44,409, $39,071 and $37,499, respectively.
The Bank has an agreement with its chief executive officer to establish
an excess benefit retirement plan. The plan is a non-qualified Deferred
Compensation Plan in which the Bank is not required to establish a
reserve. The Bank has obtained life insurance (designating the Bank as
the beneficiary) on the life of the chief executive officer in an
amount which is intended to cover the Bank's obligations under the
Deferred Compensation Plan, based upon certain actuarial assumptions
upon the death of the officer. The cost charged to operations was $-0-,
$22,581 and $23,304, for the years ended December 31, 2000, 1999 and
1998, respectively.
In June, 2000, the Bank terminated a noncontributory pension plan
covering eligible employees. The plan assets in excess of the projected
benefit obligation were allocated to the plan's eligible participants
and the prepaid pension cost of $37,490 was charged to expense.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 12: Commitments and Contingencies
Commitments
The Bank is obligated under non-cancelable lease agreements for certain
bank premises expiring in September 2028. The leases contain a renewal
option and provide that the Bank pay property taxes, insurance and
maintenance costs.
The following is a schedule by years of future minimum lease payments
required under this non-cancelable lease:
Years ended December 31
2001 $ 17,760
2002 17,760
2003 18,720
2004 21,600
2005 21,600
2006 through 2008 59,400
------
$156,840
Total rent expense was $17,760, $17,760 and $13,440 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Contingencies:
-------------
The Company is a defendant in various lawsuits wherein various amounts
are claimed. In the opinion of the Company's management, these suits
are without merit and should not result in judgments, which in the
aggregate, would have a material adverse effect on the Company's
consolidated financial statements.
Note 13: Financial Instruments with Off-Balance Sheet Risk and Concentration
of Credit Risk
The Bank is a 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 and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments. Standby letters of credit commit the Bank to make payments
on behalf of customers when certain specified future events occur.
Commitments to extend credit are agreements to lend to the 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. Since many of the commitments are expected to
expire in one year or less without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
The Bank's exposure to credit loss is essentially the same for these
items as that involved in extending loans to customers. The Bank uses
the same credit policies in making commitments and conditional
obligations as it does for on balance sheet instruments. Collateral is
obtained based on management's credit assessment of the particular
customer.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 13: (Cont'd)
The contract or notional amounts at December 31, 2000 and 1999 were as
follows:
2000 1999
---- ----
Commitments to extend credit $12,098,523 $ 9,878,407
Standby letters of credit .. 540,410 446,910
----------- -----------
$12,638,933 $10,325,317
The Bank grants commercial, consumer and residential loans to customers
primarily in the Susque- hanna/Wyoming County, PA and Broome County, NY
areas. Of the total loan portfolio, 75% is for real estate loans,
principally residential. It is the opinion of management that this high
concentration does not pose any adverse credit risk. Further, it is
management's opinion that the remainder of the loan portfolio is
balanced and diversified to the extent necessary to avoid any
significant concentration of credit.
Note14: Regulatory Matters
The Company is subject to the dividend restrictions set forth by the
Comptroller of the Currency. Under such restrictions, the Company may
not, without the prior approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the current year's earnings
(as defined) plus the retained earnings (as defined) from the prior two
years. Under this restriction, the Bank, without prior regulatory
approval, can declare dividends to the Company totaling $5,020,000,
plus an additional amount equal to the net profit for 2001, up to the
date any such dividend is declared.
Under Federal Reserve regulations, the Bank is limited as to the amount
it may lend to its affiliates, including the Company, unless such loans
are collateralized by specified obligations. At December 31, 2000, the
maximum amount available for transfer from the Bank to the Company in
the form of loans approximated 20% of capital stock and surplus.
The Company is 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's 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
its assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the maintenance of minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1
capital to average assets (as defined). Management believes, as of
December 31, 2000, that the Company and Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2000, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. There are no conditions or events
since that notification that management believes have changed the
Bank's category.
The Company and Bank's actual capital ratios as of December 31, 2000
and 1999, and the minimum ratios required for capital adequacy purposes
and to be well capitalized under the prompt corrective action
provisions are as follows:
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 14: (Cont'd)
To Be Well
For Capital Capitalized Under Prompt
Actual Adequacy Purposes Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000:
Total capital (to risk weighted assets):
Consolidated ....................... $30,015,000 16.99% $14,133,000 8.00% $17,666,000 10.00%
Peoples National Bank .............. $29,567,000 16.75% $14,123,000 8.00% $17,654,000 10.00%
Tier 1 capital (to risk weighted assets):
Consolidated ....................... $28,097,000 15.90% $ 7,067,000 4.00% $10,600,000 6.00%
Peoples National Bank .............. $27,649,000 15.66% $ 7,062,000 4.00% $10,593,000 6.00%
Tier 1 capital (to average assets):
Consolidated ....................... $28,097,000 10.04% $11,193,000 4.00% $13,991,000 5.00%
Peoples National Bank .............. $27,649,000 9.88% $11,193,000 4.00% $13,991,000 5.00%
As of December 31, 1999:
Total capital (to risk weighted assets):
Consolidated ....................... $27,509,000 18.15% $12,127,000 8.00% $15,159,000 10.00%
Peoples National Bank .............. $26,989,000 17.62% $12,252,000 8.00% $15,315,000 10.00%
Tier 1 capital (to risk weighted assets):
Consolidated ....................... $25,753,000 16.99% $ 6,064,000 4.00% $ 9,095,000 6.00%
Peoples National Bank .............. $25,233,000 16.48% $ 6,126,000 4.00% $ 9,189,000 6.00%
Tier 1 capital (to average assets):
Consolidated ....................... $25,753,000 10.02% $10,280,000 4.00% $12,849,000 5.00%
Peoples National Bank .............. $25,233,000 9.82% $10,280,000 4.00% $12,849,000 5.00%
Note 15: Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in
the statement of financial condition for cash and cash
equivalents approximate those assets fair values.
Investment securities (including trading account securities
and mortgage-backed securities): Fair values for investment
securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are
based on carrying amounts. The fair values for other loans are
estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value
estimates include judgments regarding future expected loss
experience and risk characteristics. The carrying amount of
accrued interest receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The fair
values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits. The
carrying amount of accrued interest payable approximates fair
value.
Short-term borrowings: The carrying amounts of short-term
borrowings approximate their fair values.
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 15: (Cont'd)
Long-term borrowings: The fair values of the Bank's long-term
debt are estimated using discounted cash flow analyses based
on the Bank's current incremental borrowing rates for similar
types of borrowing arrangements.
Commitments to extend credit and standby letters of credit:
These financial instruments are generally not subject to sale,
and estimated fair values are not readily available. The
carrying value, represented by the net deferred fee arising
from the unrecognized commitment or letter of credit, and the
fair value, determined by discounting the remaining
contractual fee over the term of the commitment using fees
currently charged to enter into similar agreements with
similar risk, are not considered material for disclosure. The
contractual amounts of unfunded commitments and letters of
credit are presented in Note 13.
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 2000 December 31, 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and due from banks .... $ 5,507,116 $ 5,507,116 $ 3,372,554 $ 3,372,554
Interest-bearing deposits in
other banks .............. 2,090,181 2,090,181 4,095,992 4,095,992
Investment securities ...... 99,677,642 99,677,642 92,066,386 92,066,386
Loans, net ................. 170,261,557 170,371,809 150,630,013 150,068,867
Accrued interest receivable 2,361,879 2,361,879 1,995,981 1,995,981
December 31, 2000 December 31, 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial liabilities:
Deposits ............... $230,739,229 $230,347,908 $215,424,291 $215,392,353
Short-term borrowings .. 7,245,248 7,245,248 5,850,521 5,850,521
Accrued interest payable 853,442 853,442 717,941 717,941
Long-term borrowings ... 17,500,000 17,558,939 12,000,000 11,949,679
The carrying amounts in the preceding table are included in the balance
sheet under the applicable captions.
Note 16: Parent Company
The following is financial information for Peoples Financial Services
Corp. (Parent Company only):
Balance Sheets
December 31, December 31,
2000 1999
---- ----
Assets:
Cash .................................... $ 27,438 $ 106,941
Investment in bank subsidiary .......... 30,404,247 26,289,255
Investment securities available for sale 500,000 500,000
Accrued interest receivable ............ 22,500 21,000
----------- -----------
Total assets ...................... $30,954,185 $26,917,196
=========== ===========
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 16: (Cont'd)
December 31, December 31,
2000 1999
Liabilities:
Due to subsidiary ............................. 100,846 105,722
Other liabilities
1,600 1,600
------------ ------------
Total liabilities ........................ 102,446 107,322
------------ ------------
Stockholders' equity:
Common stock .................................. 4,455,000 4,455,000
Surplus ....................................... 4,610,969 4,512,333
Retained earnings ............................. 23,544,060 20,979,861
Accumulated other comprehensive income (loss) . (129,759) (2,086,929)
Less: Treasury stock ......................... (1,628,531) (1,050,391)
------------ ------------
Total stockholders' equity ............... 30,851,739 26,809,874
------------ ------------
Total liabilities and stockholders' equity $ 30,954,185 $ 26,917,196
============ ============
Statements of Income
2000 1999 1998
---- ---- ----
Dividends from bank subsidiary ............. $ 1,741,216 $ 1,479,062 $ 1,595,407
Other income ............................... 46,500 45,000 21,000
Other expenses ............................. 36,841 46,213 51,174
----------- ----------- -----------
Income before taxes and equity in
undistributed income of subsidiary 1,750,875 1,477,849 1,565,233
Provision for income tax (benefit) ......... 3,284 (412) (10,259)
----------- ----------- -----------
Income before equity in undistributed
income of subsidiary ............. 1,747,591 1,478,261 1,575,492
Equity in undistributed income of
subsidiary .............................. 2,157,823 2,308,567 1,829,881
----------- ----------- -----------
Net income ..................... $ 3,905,414 $ 3,786,828 $ 3,405,373
=========== =========== ===========
Statements of Cash Flows
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income .................................. $ 3,905,414 $ 3,786,828 $ 3,405,373
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of subsidiary ... (2,157,823) (2,308,567) (1,829,881)
Increase (decrease) in due to subsidiary (4,875) (800) 40,915
Increase in accrued interest
receivable .......................... (1,500) -0- (21,000)
Increase in other liabilities .......... -0- 1,600 -0-
----------- ----------- -----------
Net cash provided by operating
activities .............................. 1,741,216 1,479,061 1,595,407
----------- ----------- -----------
PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
DECEMBER 31, 2000, 1999 AND 1998
Note 16: (Cont'd)
Statements of Cash Flows (Cont'd)
2000 1999 1998
---- ---- ----
Purchase of available for sale
securities .......................... -0- -0- (500,000)
----------- ----------- -----------
Cash flows from financing activities:
Cash dividends paid ................... (1,341,215) (1,129,062) (995,407)
Proceeds from sale of treasury stock .. 179,004 109,168 -0-
Purchase of treasury stock ............ (658,508) (354,355) (199,096)
----------- ----------- -----------
Net cash used by financing activities (1,820,719) (1,374,249) (1,194,503)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents .............................. (79,503) 104,812 (99,096)
Cash and cash equivalents, beginning
of year ................................. 106,941 2,129 101,225
----------- ----------- -----------
Cash and cash equivalents, end of year ..... $ 27,438 $ 106,941 $ 2,129
=========== =========== ===========
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On February 28, 2001, the Board of Directors of the Company approved the
engagement of the accounting firm of Beard Miller Company LLP as their
independent accountants to replace Prociak & Associates, LLC. Information
pertaining to this change can be found in the previously submitted 8-K dated
March 7, 2001, and the 8-K/A dated March 12, 2001 and March 16, 2001.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS
This item is incorporated by reference under the previously
submitted document DEF 14A filed with the SEC on March 7,
2001.
ITEM 11 EXECUTIVE COMPENSATION
This item is incorporated by reference under the previously
submitted document DEF 14A filed with the SEC on March 7,
2001.
ITEM 12 SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS
This item is incorporated by reference under the previously
submitted document DEF 14A filed with the SEC on March 7,
2001.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference under the previously
submitted document DEF 14A filed with the SEC on March 7,
2001.
PART IV
ITEM 14 EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statement Schedules can be found under Item 8 of this report.
(b) Exhibits required by Item 601 of Regulation S-K that have
previously been filed are as follows:
(3.1) Articles of Incorporation of Peoples Financial
Services Corp.
(3.2) By laws of Peoples Financial Service Corp. as
amended in the 10-Q filed August 16, 1999
(10.1) Agreement dated January 14, 1997, between John
W. Ord and Peoples Financial Services Corp.
(10.2) Excess Benefit Plan dated January 14, 1992, for
John W. Ord.
(10.4) Termination Agreement dated January 1, 1997,
between Debra E. Dissinger and Peoples Financial
Services Corp.
(21) Subsidiaries of Peoples Financial Services
Corp.
(23) Consent of Independent Auditors
(c) Other events and reports on Form 8-K or 8-K/A that have been previously
filed are as follows: Amended submission of 8-K dated March 7, 2001,
regarding change in accountants , resubmitted on March 16, 2001 Amended
submission of 8-K dated March 7, 2001, regarding change in accountants
, resubmitted on March 12, 2001 Letter of Peoples Financial Services
Corp. regarding change in accountants dated March 7, 2001, previously
submitted as
Exhibit 16
Peoples Financial Services Corp. amended by-laws dated February 9, 2001,
previously submitted as Exhibit 99.006
Press Release of Peoples Financial Services Corp. dated January 2, 2001,
previously submitted as Exhibit 99.005
Press Release of Peoples Financial Services Corp.dated November 6, 2000,
previously submitted as Exhibit 99.004
Press Release of Peoples Financial Services Corp. dated July 18, 2000,
previously submitted as Exhibit 99.003
Press Release of Peoples Financial Services Corp. dated May 5, 2000,
previously submitted as Exhibit 99.002
Press Release of Peoples Financial Services Corp.dated January 27, 2000,
previously submitted as Exhibit 99.001
Press Release of Peoples Financial Services Corp dated October 27, 1999,
previously submitted as Exhibit 99.4
Press Release of Peoples Financial Services Corp. dated July 22, 1999,
previously submitted as Exhibit 99.3
Press Release of Peoples Financial Services Corp. dated May 5, 1999,
previously submitted as Exhibit 99.2
Press Release of Peoples Financial Services Corp. dated April 15, 1999,
previously submitted as Exhibit 99.1
Press Release of Peoples Financial Services
Corp. dated February 9, 1999, previously submitted as Exhibit 99.1
Press Release of Peoples Financial Services Corp. dated August 28,
1998, previously submitted as Exhibit 99.1
The Corporation filed a Form S-3 on July 30, 1999.
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.
PEOPLES FINANCIAL SERVICES CORP
By/s/ John W. Ord
John W. Ord, President and Chief Executive Officer
Debra E. Dissinger
Debra E. Dissinger, Executive Vice President
Frederick J. Malloy
Frederick J. Malloy, Accounting Officer
Carl F. Pease
Carl F. Pease Chairman, Board of Directors
Jack M. Norris
Jack M. Norris, Member, Board of Directors
Gerald R. Pennay
Gerald R. Pennay, Member, Board of Directors
George H. Stover, Jr.
George H. Stover, Jr., Member, Board of Directors
Thomas F. Chamberlain
Thomas F. Chamberlain, Member, Board of Directors
Russell Shurtleff
Russell Shurtleff, Member, Board of Directors