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 Peoples Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to Peoples.

Regulatory Capital Changes

In July 2013, the Company.federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations begins January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:

In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.

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Under the proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule.

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.

The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules.

Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight.

Under the new rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

Peoples is in the process of assessing the impact of these changes on the regulatory ratios of Peoples and Peoples Bank on the capital, operations, liquidity and earnings of Peoples and Peoples Bank.

Interest Rate Risk

Regulatory agencies include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s IRRinterest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s IRRinterest rate risk management includes a measurement of Boardboard of Directorsdirectors 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. Peoples Bank utilizesWe utilize internal IRRinterest rate risk models to measure and monitor IRR.interest rate risk. In addition, Peoples Bank employswe employ an independent consultant to provide a quarterly assessment of its IRR.our interest rate risk. Finally, regulatory agencies, as part of the scope of their periodic examinations, evaluate Peoples Bank’s IRR management.   For these reasons, the Company does not expect the IRR evaluation in the agencies’ capital guidelines to result in significant changes in its capital requirements.

The Community Reinvestment Act of 1977 (“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. The CRA regulations were completely revised as of July 1, 1995, to establish performance-based standards for use in examining for compliance. ThePeoples Bank had its last CRA compliance examination in 20082013 and received a “satisfactory” rating.

The Patriot Act contains anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act becamewas signed into law. The Dodd-Frank Actis intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank created the Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators authority to take control of and liquidate financial firms. Dodd-Frank additionally created an independent federal regulator to administer federal consumer protection laws. Dodd-Frank has hadand is expected to continue to have a broadsignificant impact on the financial services industry, including significant regulatoryour business operations as its provisions take effect. It is expected that, as various implementing rules and regulations are released, they will increase our operating and compliance changes.

Holding Company Capital Requirements

Dodd-Frank Act makes permanentrequires the $250 thousandFRB to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion, consistent with safety and soundness.

Deposit Insurance

Dodd-Frank permanently increases the maximum deposit insurance limitamount for insured deposits. Amendmentsbanks, savings institutions and credit unions to $250,000 per depositor. Dodd-Frank also broadens the FDICIA also revisebase for FDIC insurance assessments. Assessments are now based on the assessment base against which an insured depository institution’s deposit insurance premiums paid to the FDIC’s Deposit Insurance Fund (“DIF”) will be calculated. Under the amendments, the FDIC assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average equity. Thetangible equity capital of a financial institution. Dodd-Frank Act also changesrequires the minimum designatedFDIC to increase the reserve ratio of the DIF, increasing the minimumDeposit Insurance Fund from 1.15% to 1.35% of the estimated amount of total insured deposits by 2020 and eliminatingeliminates the requirement that the FDIC pay dividends to insured depository institutions to ensure thatwhen the DIF will reach 1.35% by September 30, 2020. Severalreserve ratio exceeds certain thresholds. Further, Dodd-Frank eliminated the federal statutory prohibition against the payment of these provisions may increase the FDIC deposit insurance premiums Peoples Bank pays.

Corporate Governance

Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly tradedrequires publicly-traded companies including the Company. The Dodd-Frank Act: grants shareholders of U.S. publicly traded companies an advisoryto give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and requiresa non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by stockholders. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies listedwith assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions

Dodd-Frank prohibits a depository institution from converting from a state to a federal charter, or vice versa, while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of

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understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator, which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

Interstate Branching

Dodd-Frank authorizes national securities exchangesand state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are able to enter new markets more freely.

Limits on Interstate Acquisitions and Mergers

Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition–the acquisition of a bank outside its home state–unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.

Limits on Interchange Fees

Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve issued its final rule, Regulation II, effective October 1, 2011. Consistent with Dodd-Frank, issuers with less than $10 billion in assets are exempt from debit card interchange fee standards.

Consumer Financial Protection Bureau

Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt clawback policiesconsumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

Ability to Repay and Qualified Mortgage Rule

Pursuant to the Dodd Frank Act, the Consumer Financial Protection Bureau issued a final rule on January 10, 2013, which became effective January 10, 2014, amending Regulation Z as implemented by the Truth in Lending

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Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for incentive-based compensation plans applicablea mortgage loan has a reasonable ability to executive officers.repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision:

Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the requirements the Dodd-Frank Act authorizedtotal loan amount. Loans which meet these criteria will be implemented over time. The Company continues to assessconsidered qualified mortgages, and as a result generally protect lenders from fines or litigation in the impactevent of the changes. Given the uncertainty associatedforeclosure. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with the timing and the manner in which the requirements will be implemented, the full extentability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of impactcompliance. The final rule, as issued, is unclear.  These changes may require the Companynot expected to invest significant management attention and resources to make any necessary changes to comply with the requirements.  While the Company cannot predict the final impact, its present assessment of the changes indicates that it will not have a material effect.

Employees

As of December 31, 2013, we had 354 full-time-equivalent employees. We are not parties to any collective bargaining agreements and we consider our employee relations to be good.

Availability of Securities Filings

We file annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Exchange Act. The Company’s incomepublic may read and cash flows andcopy any materials that we file with the value of assets depend to a great extentSEC at the SEC’s Public Reference Room at Station Place, 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the difference betweenoperation of the interest rates earned on interest-earning assets, such as loansPublic Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings.  These rates are highly sensitive to many factors which are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the FRB.  Changes in monetary policy, including changes in interest rates, will influence not only the interest received on loans and investment securities and the amount of interest paid on deposits and borrowings, but will also affect the Company’s ability to originate loans and obtain deposits and the value of its investment portfolio.  If the rate of interest paid on depositsinformation statements, and other borrowings increases more thaninformation regarding issuers, including us, that file electronically with the rateSEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

In addition, we maintain an Internet website at www.peoplesnatbank.com. We make available free of interest earnedcharge through the “Investor Relations” link on loansour Internet website, our annual report on Form 10-K, quarterly reports

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on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

In addition to the other investments, net interest income,information set forth in this report, one should carefully consider the factors discussed below, which could materially affect our business, financial condition or future results. The risks described below are not the only risks that we face. Additional risks and therefore  earnings, coulduncertainties not currently known to us or that we currently deem to be adversely affected. The Company’s earningsinsignificant also could be adversely affected if the rates on its loans and other investments fall more quickly than those on its deposits and other borrowings.

Risks Relating to Peoples and Its Business

We are subject to credit risk in local, regional, national or global economic conditions could cause the Company to experience a reduction in depositsconnection with our lending activities, and new loans, an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, all of which could adversely affect performance and financial condition.  Unlike larger banks that are more geographically diversified, the Company provides banking and financial services locally.  Therefore, it is particularly vulnerable to adverse local economic conditions.

In addition ifto our internal processes for determining loss allowances, bank regulatory agencies periodically review our allowance for loan and lease losses and may require us to increase the provision for loan and lease losses, to recognize further loan charge-offs, or to take other actions, based on judgments that differ from those of our management. If loan charge-offs in future periods exceed the allowance for loan losses; the Companyand lease losses, we will need additional increases in itsto increase our allowance for loan lease losses. AnyFurthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan and lease losses. Any increases in our allowance for loan and lease losses will result in a decrease in net income and capital, and may materially affect thehave a material adverse effect on our financial condition, results of operations and cash flows.

Changes in interest rates could adversely impact our financial condition and results of operations.

Our ability to generate net income substantially depends upon our net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. Certain assets and liabilities react differently to changes in market interest rates. Further, interest rates on some types of assets and liabilities

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may fluctuate prior to changes in broader market interest rates, while rates on other types of assets may lag behind. Additionally, some assets such as adjustable-rate mortgages have features, and rate caps, which restrict changes in their interest rates.

Factors such as inflation, recession, unemployment, money supply, global disorder, terrorist activity, instability in domestic and foreign financial markets, and other factors beyond our control, may affect interest rates. Changes in market interest rates will also affect the level of voluntary prepayments on loans and the receipt of payments on mortgage-backed securities, resulting in the periodreceipt of proceeds that may have to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. Although we pursue an asset-liability management strategy designed to manage our risk from changes in market interest rates, changes in interest rates can still have a material adverse effect on our profitability.

Changes in interest rates could affect our investment values and impact comprehensive income and stockholders’ equity.

At December 31, 2013, we had approximately $299.7 million of securities available-for-sale. These securities are carried at fair value on our consolidated balance sheets. Unrealized gains or losses on these securities, that is, the difference between the fair value and the amortized cost of these securities, are reflected in stockholders’ equity, net of deferred taxes. As of December 31, 2013, our available-for-sale securities had an unrealized gain, net of taxes, of $1.8 million. The fair value of our available-for-sale securities is subject to interest rate change, which would not affect recorded earnings, but would increase or decrease comprehensive income and stockholders’ equity.

Our results of operations may be materially and adversely affected by other-than-temporary impairment charges relating to our investment portfolio.

Numerous factors, including the allowancelack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. Investments are evaluated periodically to determine whether a decline in their value is increased.other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment.

Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. If an impairment charge is significant enough, it could affect our ability to pay dividends, which could materially adversely affect us and our ability to pay dividends to shareholders. Significant impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized” for regulatory purposes.

The requirement to record certain assets and liabilities at fair value may adversely affect our financial results.

We report certain assets, including available-for-sale investment securities, at fair value. Generally, for assets that are reported at fair value we use quoted market prices or valuation models that utilize market data inputs to estimate fair value. Because we record these assets at their estimated fair value, we may incur losses even if the asset in question presents minimal credit risk. The level of interest rates can impact the estimated fair value of investment securities. Disruptions in the capital markets may require us to recognize other-than-temporary impairments in future periods with respect to investment securities in our portfolio. The amount and timing of any impairment recognized will depend on the severity and duration of the decline in fair value of our investment securities and our estimation of the anticipated recovery period.

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Changes in the value of goodwill and intangible assets could reduce our earnings.

We account for goodwill and other intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it be tested for impairment at least annually at the reporting unit level using the two step approach. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of December 31, 2013, the fair value of our shares exceeded the recorded book value. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date.

Our results of operations, financial condition or liquidity may be adversely impacted by issues arising from certain industry deficiencies in foreclosure practices, including delays and challenges in the foreclosure process.

Over the past few years, foreclosure time lines have increased due to, among other reasons, delays associated with the significant increase in the number of foreclosure cases as a result of the economic downturn, federal and state legal and regulatory actions, including additional consumer protection initiatives related to the foreclosure process and voluntary and, in some cases, mandatory programs intended to permit or require lenders to consider loan modifications or other alternatives to foreclosure. Further increases in the foreclosure time-line may have an adverse effect on collateral values and our ability to minimize our losses.

Difficult market conditions have adversely affected our industry.

We are operating in a challenging economic environment, including generally uncertain national and local conditions. Additional concerns from some of the countries in the European Union and elsewhere have also strained the financial markets both abroad and domestically. Although there has been some improvement in the overall global macroeconomic conditions in 2013, financial institutions continue to be affected by conditions in the real estate market and the constrained financial markets. In recent years, declines in the housing market, increases in unemployment and under-employment have negatively impacted the credit performance of loans and resulted in significant write-downs of asset values by financial institutions. Reflecting concern over economic conditions, many lenders and institutional investors have reduced or ceased providing funding to borrowers. A worsening of economic conditions may impact our results of operations and financial condition. In particular, we may face the following risks in connection with these events:

Our operations are concentrated in northeastern Pennsylvania and southern New York. As a result of this geographic concentration, our financial results may correlate to the economic conditions in these areas. Deterioration in economic conditions in this market area, particularly in the industries on which this geographic area depend, or a general decline in economic conditions may adversely affect the quality of our loan portfolio

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(including the level of non-performing assets, charge offs and provision expense) and demand for our products and services, and, accordingly, our results of operations.

Strong competition within our market area may limit our growth and profitability.

Competition may decrease growth or profits.

A major portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. Our interest-earning assets include outstanding loans extended to our customers and securities held in our investment portfolio. We fund assets using deposits and other borrowings. Our goal has been to maintain noninterest-bearing deposits in the range of 15.0% to 30.0% of total deposits and, as of December 31, 2013, approximately 20.3% of our deposits were noninterest bearing.

On July 14, 2011, the Federal Reserve issued final rules to repeal Regulation Q, which had prohibited the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. The final rules implement Section 627 of the Dodd-Frank Act, which repealed Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. As a result, banks and thrifts are now permitted to offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden under Regulation Q. The repeal of Regulation Q may cause increased competition from other financial institutions for these deposits. If we decide to pay interest on demand accounts, we would expect our interest expense to increase.

Increased needs for disbursement of funds on loans and deposits can affect our liquidity.

We manage our liquidity with an objective of maintaining a balance between sources and uses of funds in such a way that the cash requirements of customers for loans and deposit withdrawals are met in the most economical manner. If we do not properly manage our liquidity, our business, financial condition, results of operations and cash flows may be materially and adversely affected.

Our future pension plan costs and contributions could be unfavorably impacted by the factors that are used in the actuarial calculations.

As part of the Penseco merger, we assumed Penseco’s legacy non-contributory defined benefit pension plan, which was frozen by Penseco in 2008. The costs for this legacy pension plan are dependent upon a number of factors, such as the rates of return on plan assets, discount rates, the level of interest rates used to measure the required minimum funding levels of the plans, future government regulation and required or voluntary contributions made to the plans. Without sustained growth in the pension investments over time to increase the value of our plan assets and depending upon the other factors impacting our costs as listed above, we could be required to fund the plan with higher amounts of cash than are anticipated by our actuaries. Such increased funding obligations could have a material impact on our liquidity by reducing our cash flows.

Our holding company is dependent for liquidity on payments from Peoples Bank, which payments are subject to restrictions.

We depend on dividends, distributions and other payments from Peoples Bank to fund dividend payments to our shareholders, if any, and to fund all payments on obligations of our holding company. Peoples Bank is subject to

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laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from Peoples Bank to us. Restrictions or regulatory actions of that kind could impede our access to funds that we may need to make payments on our obligations or dividend payments, if any. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Holders of our common stock are entitled to receive dividends if and when declared from time to time by our board of directors in its sole discretion out of funds legally available for that purpose.

We need to continually attract and retain qualified personnel for our operations.

Our ability to provide high-quality customer service and to operate efficiently and profitably is dependent on our ability to attract and retain qualified individuals for key positions within the organization. We rely heavily on our executive officers and employees. The loss of certain executive officers or employees could have an adverse effect on us because, as a community bank, the executive officers and employees typically have more responsibility than would be typical at a larger financial institution with more employees. In addition, due to our size as a community bank, we have fewer management-level and other personnel who are in position to succeed to and assume the responsibilities of certain existing executive officers and employees. If we expand geographically or expand to provide non-banking services, current management may not have the necessary experience for successful operation in these new areas. There is very strong competition amongno guarantee that management would be able to meet these new challenges or that we would be able to retain new directors or personnel with the appropriate background and expertise.

Our financial performance may suffer if our information technology is unable to keep pace with growth or industry developments.

Effective and competitive delivery of our products and services providersis increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors. In addition to better serving customers, the effective use of technology increases efficiency and enables us to reduce costs. Our future success will depend, in part, upon our ability to address the Company’s principal service area.  Competitors mayneeds of our customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in our operations. Many of our competitors have greater resources higher lending limits or larger branch systems than doesto invest in technological improvements. Additionally, as technology in the Company.  Accordingly, they mayfinancial services industry changes and evolves, keeping pace becomes increasingly complex and expensive for us. There can be no assurance that we will be able to offer a broader range ofeffectively implement new technology-driven products and services, as well as better pricing for those products and services than the Company can.  In addition, some of the financial services organizations with which the Company competes are not subject to the same degree of regulation as is imposed on federally insured financial institutions.  As a result, those non-bank competitors may be able to access funding and provide various services more easily or at less cost than the Company, adversely affecting itscould reduce our ability to compete effectively.

A failure in or a breach of our information systems or infrastructure, including as a result of cyber-attacks, could disrupt our business, damage our reputation, and consumers, not shareholders.  Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase the Company’s cost of doing business or otherwise adversely affect it and create competitive advantages for others.  Regulations affecting banks and financial services companies undergo continuous change, and the Company cannot predict the ultimate effect of these changes, which could have a material adverse effect on its profitability orour business, financial condition.

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systems. Our technologies, systems, networks and our customers’ devices have been subject to, and are likely to continue to be dependent upon the servicestarget of, its management team.  The unexpectedcyber-attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the unauthorized use, loss or destruction of our or our customers’ confidential information, or otherwise disrupt our or our customers’ or other third parties’ business operations. We believe that it is more likely than not that such attempted attacks may continue.

Although we use a variety of physical, procedural and technological safeguards to protect confidential information from mishandling, misuse or loss, these safeguards cannot provide assurance that mishandling, misuse or loss of servicesthe information will not occur, and that if mishandling, misuse or loss of any key management personnelthe information did occur, those events will be promptly detected and addressed. A failure in or breach of our operational or information security system, or those of a third-party service provider, as a result of cyber-attacks or information security breaches could have a material adverse effect on our business, damage our reputation, increase our costs and/or cause significant losses. As information security risks and cyber threats continue to evolve, we may be required to expend substantial resources to further enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

If information security is breached, despite the controls we and our third-party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings. In addition, our reputation could be damaged which could result in loss of customers, greater difficulty in attracting new customers, or an adverse effect on its businessthe value of our common stock.

Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.

We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in the rules and forms of the Securities and Exchange Commission. We also maintain a system of internal control over financial reporting. These controls may not achieve their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis. If our controls are not effective, it could have a material adverse effect on our financial condition, becauseresults of their skills, knowledgeoperations, and market for our common stock, and could subject us to regulatory scrutiny.

We are exposed to environmental liabilities with respect to real estate.

We currently operate twenty-six branch offices, and own additional real estate. In addition, a significant portion of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

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The soundness of other financial services institutions may require itadversely affect our credit risk.

We rely on other financial services institutions through trading, clearing, counterparty, and other relationships. We maintain limits and monitor concentration levels of our counterparties as specified in our internal policies. Our reliance on other financial services institutions exposes us to incur substantial expenses and may materially limit use of properties the Company acquires through foreclosure, reduce their value or limit its ability to sell themcredit risk in the event of default by these institutions or counterparties. These losses could adversely affect our results of operations and financial condition.

Risks Related to Our Common Stock

Our ability to pay dividends or repurchase shares is subject to limitations.

The Penseco merger agreement contemplates that, unless 80 percent of our board of directors determines otherwise, we will pay a defaultquarterly cash dividend in an amount no less than $0.31 per share through 2018, provided that sufficient funds are legally available, and that Peoples and Peoples Bank remain “well-capitalized” in accordance with applicable regulatory guidelines.

Our ability to pay dividends on our stock depends upon our receipt of dividends from Peoples Bank and its subsidiaries. As a state-chartered bank, Peoples Bank is subject to regulatory restrictions on the loans they secure.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase its exposure to environmental liability.

Further, Peoples Bank’s ability to compete successfully inpay dividends is also subject to its markets may depend on the extent to which itprofitability, financial condition, capital expenditures and other cash flow requirements. There is able to exploit such technological changes.  However, the Company can provide no assurance that itPeoples Bank will be able to properlypay the dividends contemplated by the Penseco merger agreement or timely anticipate or implement such technologies or properly train its staff to use such technologies.  Anyother dividends. Our failure to adapt to new technologies could adversely affect its business, financial condition or operating results.

We operate 26 full-service community banking offices. The Companyoffices located within the Lackawanna, Luzerne, Monroe, Susquehanna, Wayne and Wyoming Counties of Northeastern Pennsylvania and Broome County of New York. Two offices are leased and the balance are owned by Peoples Bank or its subsidiary, Penseco Realty, Inc., with the exception of the Mount Pocono Office, which is owned by Peoples Bank but is located on land occupied under a long-term lease. We have received regulatory approval for a new office in Kingston, Pennsylvania, which is expected to be operational during 2014. We also ownsown an office building located at 241 Main Street, Hallstead, Susquehanna County, Pennsylvania, which serves as itsour Bank Secrecy Act facility. The Company considers itsfacility, and property in the Borough of Dalton, Lackawanna County, which may be used for potential future expansion. We lease an office building located in Scranton, Lackawanna County, Pennsylvania, which serves as a loan production office.

We lease several remote ATM locations throughout Northeastern Pennsylvania and Southern New York. All branches and ATM locations are equipped with closed circuit television monitoring.

We consider our properties to be suitable and adequate for itsour current and immediate future purposes.

There are not parties to anyno material pending legal proceedings, that could haveother than ordinary routine litigation incidental to our business, as to which we are a material effect on the financial conditionparty or operating results of the Company. In addition, the Company, Peoples Bank and their subsidiaries are not parties towhich any legal proceedings under federal and state environmental laws.

Not Applicable

Peoples has paid cash dividends since its incorporation in 1986. The Penseco merger agreement states that, unless 80 percent of our board of directors determines otherwise, we will pay a quarterly cash dividend in an amount no less than $0.31 per share through 2018, provided that sufficient funds are legally available, and that Peoples and Peoples Bank remain “well-capitalized” in accordance with applicable regulatory guidelines. The payment of future dividends must necessarily depend upon earnings, financial position, appropriate restrictions under applicable laws and other factors relevant at the time the Boardour board of Directorsdirectors considers any declaration of dividends. For information on dividend restrictions on the Company and Peoples Bank, refer to the consolidated financial statements and notes to these statements filed at Item 8 to this report and incorporated in their entirety by reference under this Item 5.

The following table presents information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b-18(a)(3), of the Company’s common stock during each of the three months ended December 31, 2011:

During 2013, prior to October 10, 2013, we were not subject to the Boardreporting requirements of Directors authorizedsection 13 or 15(d) of the purchaseSecurities and Exchange Act of 158,9311934. Between January 29, 2013 and September 11, 2013, we sold 3,150 shares of our common stock upon exercise of outstanding options for aggregate consideration of $89,580. The shares were sold to certain employees and directors who had received options under our 1998 Stock Option Plan in reliance upon the Company’s common stock.  Asexemption from registration set forth in Rule 701 under the Securities Act of December 31, 2011, there were 35,451 shares available for repurchase under this Program.  The 2001 Stock Repurchases Program has no expiration date.

The following line graph compares the cumulative total stockholder return on the Company’s common stock, based on the market price change and assumes reinvestment of dividends, with the cumulative total return of the index for The NASDAQ Bank Stocks and the index for the Standards and Poor 500Russell 2000 Stocks during the five-year period ended December 31, 2011.2013. The stockholder return shown on the graph and table below is not necessarily indicative of future performance.

(Dollars in thousands, except per share data)

Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis 2012 versus 2011 contained in this Annual Report.

Forward-Looking Discussion:

In addition to the documents into which it may be incorporated by referencehistorical information contained in this document, the discussion presented may contain and, from time to time, may make, certain statements that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. These statements are not historical facts, but instead represent the current expectations, plans or forecasts of Peoples Financial Services Corp. and its subsidiaries regarding its future operating results, financial position, asset quality, credit reserves, credit losses, capital levels, dividends, liquidity, service charges, cost savings, effective tax rate, impact of changes in fair value of financial assets and liabilities, impact of new accounting and regulatory guidance, legal proceedings and other matters relating to us and the securities that we may offer from time to time. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict, change over time and are often beyond our control. Actual outcomes and results may differ materially from those expressed in, or implied by, forward-looking statements.

You should not place undue reliance on any forward-looking statement and should consider the uncertainties and risks discussed in the “Risk Factors” in Part I, Item 1A entitled “Risk Factors,” inof this Annual Report,annual report, among others, and in any of our subsequent Securities and Exchange Commission (“SEC”) filings. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts have been reclassified to conform with the current year’s presentation.

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during those reporting periods.

For a discussion of the recent Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) refer to Note 1 entitled “Summary of significant accounting policies — Recent accounting standards,” in the Notes to Consolidated Financial Statements toincluded in Part II, Item 8 of this Annual Report.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the consolidated financial statements if a different amount within a range of estimates were used or if estimates changed from period to period. Readers of this report should understand that estimates are made considering facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. Significant estimates that are particularly susceptible to material change within the near term relate to the determination of allowance for loan losses, the determination of

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Management’s Discussion and Analysis 2013 versus 2012

(Dollars in thousands, except per share data)

other-than-temporary impairment, the fair value of financial instruments, the valuations of real estate acquired in connection with foreclosures or satisfaction of loans, acquired assets and liabilities assumed in business combinations and the valuation of loans deferred tax assets and liabilities. Actual amounts could differ from those estimates.

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions.

The allowance for loan losses account consists of an allocated element and an unallocated element. The allocated element consists of a specific portion for the impairment of loans individually evaluated and a formula portion for loss contingencies on those loans collectively evaluated. The unallocated element, if any, is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using our impairment evaluation methodology due to limitations in the process.

We monitor the adequacy of the allocated portion of the allowance quarterly and adjustsadjust the allowance for any deficienciesas necessary through normal operations. This ongoing evaluation reduces potential differences between estimates and actual observed losses. The determination of the level of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accordingly, management cannot ensure that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required, resulting in an adverse impact on operating results.

In determining the requirement to record an other-than-temporary impairment on securities owned by us, four main characteristics are considered including: (i) the length of time and the extent to which the fair value has been less than amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) whether the market decline was affected by macroeconomic conditions and (iv) whether the entityCompany has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on information available to us at a point in time.

Fair values of financial instruments, in cases where quoted market prices are not available, are based on estimates using present value or other valuation techniques which are subject to change.

Real estate acquired in connection with foreclosures or in satisfaction of loans is adjusted to fair value based upon current estimates derived through independent appraisals less cost to sell. However, proceeds realized from sales may ultimately be higher or lower than those estimates.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences by applying enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

The acquired assets and liabilities assumed in business combinations are measured at fair value as of the acquisition date. In many cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest, which required the utilization of significant estimates and judgment in accounting for the acquisition.

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Management’s Discussion and Analysis 2013 versus 2012

(Dollars in thousands, except per share data)

For a further discussion of our critical accounting policies, refer to Note 1 entitled, “Summary of significant accounting policies,” in the Notes to Consolidated Financial Statements to this Annual Report. This note lists the significant accounting policies used by us in the development and presentation of the consolidated financial statements. This MD&A, the Notes to Consolidated Financial Statements and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for the understanding and evaluation of our financial position, results of operations and cash flows.

The United States economy continued to expand moderately in 2011,2013, as the gross domestic product (“GDP”), the value of all goods and services produced in the Nation, increased at an annual rate of 1.9 percent, compared to 2.8 percent in the fourth quarter of 2011, compared to 1.8 percent in the third quarter of 2011. The fourth quarter increase reflected positive contributions from private inventory investment, personal consumption expenditures (“PCE”), exports, and residential and nonresidential fixed investment which were partially offset by negative impacts from federal, state and local government spending, and an increase in imported goods.

Inflationary concerns continue to be relatively tame, as the consumer price index (“CPI”) at 1.3 percent for 2013 continued to be below the FOMC’s benchmark of 2.0 percent. The committee directed that the program of quantitative easing, which began in September 2011, be continued. The Federal Reserve will purchase an additional $400 billion in Treasury securities with remaining maturities of approximately 6 to 30 years and in turn sell $400 billion in Treasuries with remaining maturities of 3 years or less by the end of June 2012. This action should contribute to a flatter yield curve and keep long-term rates low, with the intention of spurring business investment.

Employment conditions improved moderately in 2011.2013. The civilian labor force increased 274decreased 548 thousand, while the number of people employed increased 1.61.4 million for the same period.in 2013. As a result, the annual unemployment rate for the Nation fell to 8.57.4 percent in December 20112013 from 9.48.1 percent in December 2010.2012. All sectors of employment, with the exception of the government sector, reported employment gains from the end of 2010.

National, Pennsylvania, New York and our market area’s seasonally-adjustednon-seasonally-adjusted annual unemployment rates at December 31, 2011in 2013 and 2010,2012, are summarized as follows:

Employment conditions improvedin 2013 were relatively unchanged at 8.0 percent for the Commonwealth of Pennsylvania, as the unemployment rate fell to 7.2 percent by year-end 2011 from 8.1 percent at the end of 2010.Pennsylvania. The unemployment rate for New York State remained at 8.0dropped to 8.3 percent at year-end 2011 and 2010.in 2013, from 8.5 percent in 2012. With respect to the markets we serve, the unemployment rate decreased forin all four countiesof the seven counties. Lackawanna County experienced the most significant improvement declining from 9.0 percent in northeastern Pennsylvania and Broome County in the southern tier of New York. Jobs related2012 to natural gas drilling and exploration in Susquehanna and Wyoming counties in Pennsylvania have contributed to the turnaround in the employment situation in those counties, as well as to the improving employment situation in the neighboring counties of Lackawanna, Pennsylvania and Broome, New York.

7.9 percent in 2013. The lowest unemployment rate in 2013, for all of counties we serve, was a strong year forSusquehanna County at 7.0 percent. The marked improvements in unemployment rates could impact the commercialrate of economic growth and may cause interest rates to rise in the near term.

With respect to the banking industry, characterized by operatingnet income increases and balance sheet growth. Earnings for all Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks in 2013 totaled $154.7 billion, an increase of $13.6 billion or 9.6 percent over 2012. This is the fourth consecutive year that earnings have risen. Approximately 54.2 percent of all institutions reported higher net income in 2013, while only 7.8 percent reported net losses. This is the lowest annual proportion of unprofitable institutions for the industry since 2005. Loan loss provisions of $32.1 billion in 2013 were $25.7 billion or 44.4 percent less than banks set aside in 2012. This is the fourth year in a row that loan loss provisions have been lower, and the total allocation for 2013 was the smallest amount since 2006. Net interest income declined for a third consecutive year, falling by $3.7 billion or 0.9 percent, as interest income fell more rapidly than interest expense. Noninterest income was $3.2 billion or 1.3 percent above the level of 2012, as trading revenue increased 48.3by $4.3 billion or 23.7 percent, in 2011.  With respect to bank balance sheets, totaland servicing fee income rose by $3.9 billion or 27.5 percent. Realized gains on securities were $5.2 billion or 53.7 percent lower than a year ago. Total noninterest expense declined $4.5 billion or 1.1 percent comparing 2013 and 2012. The average return on average assets for all FDIC-insured commercial banks grew 4.82013 was 1.07 percent, in 2011. The increase,the highest annual average for the most part, resulted from an improvement in loan demand, as total loans and leases increased 2.4 percent from December 31, 2010. Specifically, commercial and industrial loans increased 13.8 percent while residential mortgages decreased 1.6 percent and consumer loans decreased 1.2 percent from year-end 2010. FDIC-insured commercial banks also experienced strong demand for their deposit products. Total deposits for all FDIC-insured commercial banks grew 8.7 percent in 2011. Interest-bearing deposits rose 2.3 percent, while noninterest-bearing deposits increased 34.0 percent.

The United States economy is expected to continuegrow at a slow recoveryfaster pace in 2012. Moderate economic growth is expected with GDP advancing between 2.2 percent and 2.7 percent according2014 as compared to the latest FOMC minutes. Labor markets are expected to continue improving, with a slight decrease in the National unemploymentpast few years. This rate of between 8.5 percent and 8.2 percent.  Inflation is expected to remain subdued based on PCE estimates of 1.4 percent to 1.8 percent. Given the very slow pace of recovery and sustained weakness in certain areas, the FOMC has indicated that they will keepgrowth could change interest rates low forwhich may adversely impact bank earnings as net interest margins compress from the inability of management to further reduce fund costs. Continuous expense control, sound balance sheet management and lower loan loss provisions could offset some time. Our 2012 earnings, along with those of all financial institutions, could be adversely impacted should the pace of the recovery be slower than anticipated.

Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, and offer traditional bank products and services, including loans, deposits and wealth managementprovides a full range of financial services through our primaryits wholly-owned subsidiary, Peoples Neighborhood Bank. Our other subsidiary,Security Bank and Trust Company (“Peoples Bank”), including its subsidiaries, Peoples Advisors, LLC and Penseco Realty, Inc. (collectively, the “Company” or “Peoples”). On November 30, 2013, Penseco Financial Services Corporation, a financial holding company incorporated under the laws of Pennsylvania (“Penseco”), merged with and into Peoples Financial Capital Corporation maintainsServices Corp., with Peoples Financial Services Corp. being the surviving corporation (the “Merger”), pursuant to an Agreement and managesPlan of Merger dated June 28, 2013 (the “Merger Agreement”). In connection with the collectionMerger, on December 1, 2013, Penseco’s former banking subsidiary, Penn Security Bank and distribution of income from certain investments of the consolidated companies.Trust Company, merged with and into Peoples Neighborhood Bank operates eleven(the “Bank Merger”), and the resulting institution adopted the name, “Peoples Security Bank and Trust Company.” The Company services its retail and commercial customers through twenty-six full-service community banking offices located within the contiguous four-county market areaLackawanna, Luzerne, Monroe, Susquehanna, Wayne and Wyoming Counties of Lackawanna, Wyoming and Susquehanna Counties inNortheastern Pennsylvania and Broome County inof New York. Each office, interdependent with

Peoples Bank is a state-chartered bank and trust company under the community, offers a comprehensive arrayjurisdiction of financial productsthe Pennsylvania Department of Banking and servicesSecurities and the Federal Deposit Insurance Corporation. Peoples Bank’s primary product is loans to individuals, small- and medium-sized businessesbusinesses. Other lending products include one-to-four family residential mortgages and government entities.consumer loans. Peoples Neighborhood Bank has three subsidiaries, primarily funds its loans by offering open time deposits to commercial enterprises and individuals. Other deposit product offerings include certificates of deposits and various demand deposit accounts.

Peoples Advisors, LLC, Peoples Financial Leasing LLC and Peoples Investment Holdings LLC. Peoples Wealth Management, a division of Peoples Advisors LLC, engages in selling insurance products andmember-managed limited liability company, provides investment advisory services through a third party to the general public. Peoples Financial Leasing LLC provides employee leasing services to Peoples Neighborhood Bank. Peoples Investment Holdings LLC maintainsindividuals and small businesses. Penseco Realty, Inc. holds and manages the collection and distributionreal estate assets on behalf of income from certain investments of the consolidated companies.

Peoples Advisors, LLC and Penseco Realty, Inc. did not meet the quantitative thresholds for required segment disclosure in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Peoples Bank’s twenty-six community banking offices, all similar with respect to economic characteristics, share a majority of the following aggregation criteria: (i) products and services; (ii) operating processes; (iii) customer bases; (iv) delivery systems; and (v) regulatory oversight. Accordingly, they were aggregated into a single operating segment.

The Company faces competition primarily from commercial banks, thrift institutions and credit unions within the Northeastern Pennsylvania market, many of which are substantially larger in terms of assets and capital. In addition, mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance companies compete for various types of loans and leases. Principal methods of competing for banking and permitted nonbanking services include price, nature of product, quality of service and convenience of location.

The Company and Peoples Bank are subject to regulations of certain federal and state regulatory agencies and undergo periodic examinations.

The aforementioned merger between the Company and Penseco was considered a “merger of equals” and is accounted for as a reverse merger using the acquisition method of accounting. As a result of the reverse merger, Peoples is the legal acquirer and Penseco is the accounting acquirer. In a reverse merger the historical consolidated financial statements are those of the accounting acquirer, Penseco and, consequently, comparisons may not be particularly meaningful. The results for the year ended December 31, 2013, include the operating results of Penseco for the entire year and the operating results of Peoples since November 30, 2013. The merger with Penseco had a significant impact on the results of operations for the year ended December 31, 2013.

Readers of this Management Discussion and Analysis are encouraged to refer to the favorablenote entitled “Merger accounting,” in the Notes to the Consolidated Financial Statements to more fully understand the impact caused bythat the lossmerger had on the Company’s financial position and results of a major competitor in our market area, oneoperations.

Total assets, loans and deposits were $1.7 billion, $1.2 billion and $1.4 billion, respectively, at December 31, 2013. Although loans, net and deposits increased 6.7 percent and 2.7 percent, respectively, considering only historical Penseco information, the majority of the other major influences causingtotal 2013 increases over the strength of deposit gathering in 2011 was2012 year-end balances were the effect of natural gas drilling. Many customers who own land in rural sections of Northeastern Pennsylvania were offered significant sums of money, including a flat land lease fee per acre and royalties for any gas extracted, by natural gas companies for drilling rights to their properties. In order to respond to the needs of these customers, we began offering investment products and services specifically tailored to meet these needs through our retail community offices and wealth management division. The favorable deposit growth was also a functionresult of the increase in commercial deposits as wemerger. In accordance with the acquisition accounting for the merger, the historical assets and liabilities of Peoples have been recorded at their respective estimated fair values on the date of the merger. The estimated fair values are subject to change for up to one year after the date of the merger if information unknown relative to closing date fair values becomes available.

Total investment securities were successful in acquiring accounts of local school districts and municipalities.

Stockholders’ equity equaled $59.6$238.8 million or $19.11$31.62 per share at December 31, 2011,2013, and $50.5$132.5 million or $16.07$29.65 per share at December 31, 2010. Our Leverage2012. Dividends declared for the 2013 amounted to $1.23 per share, as adjusted for the merger exchange ratio improved to 9.42of 1.3636.

Nonperforming assets equaled $16.8 million or 1.42 percent at the end of 2011, compared to 9.19 percentloans, net and foreclosed assets at December 31, 2010.2013. The Leverage ratio, as well as allallowance for loan losses equaled $8.7 million or 0.74 percent of our capital ratios, exceeded regulatory standards for well capitalized institutions. Accumulated other comprehensive income (loss) increased $4.5loans, net, at December 31, 2013, compared to $7.0 million fromor 1.11 percent at year-end 2010, which resulted directly from an increase2012. The decrease in the ratio of the allowance for loan losses as a percentage of loans, net, is primarily a function of acquisition accounting, whereby the historical loan

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Management’s Discussion and Analysis 2013 versus 2012

(Dollars in thousands, except per share data)

portfolio of Peoples was recorded at its estimated fair value, including a discount to reflect credit risk, and the Peoples historical allowance for loan losses was eliminated. Loans charged-off, net of investment securities available-for-sale.

Primarily, our investment portfolio provides a source of liquidity needed to meet expected loan demand and generates a reasonable return in order to increase our profitability. Additionally, we utilize the investment portfolio to meet pledging requirements and reduce income taxes. At December 31, 2011,2013, our portfolio consisted primarily of short-term U.S. Government agency and mortgage-backed securities, which provide a source of liquidity and intermediate-term, tax-exempt state and municipal obligations, which mitigate our tax burden.

Our investment portfolio is subject to various risk elements that may negatively impact our liquidity and profitability. The greatest risk element affecting our portfolio is market risk or interest rate risk (“IRR”). Understanding IRR, along with other inherent risks and their potential effects, is essential in effectively managing the investment portfolio.

Market risk or IRR relates to the inverse relationship between bond prices and market yields. It is defined as the risk that increases in general market interest rates will result in market value depreciation. A marked reduction in the value of the investment portfolio could subject us to liquidity strains and reduced earnings if we are unable or unwilling to sell these investments at a loss. Moreover, the inability to liquidate these assets could require us to seek alternative funding, which may further reduce profitability and expose us to greater risk in the future. In addition, since the majority of our entire investment portfolio is designated as available-for-sale and carried at estimated fair value, with net unrealized gains and losses reported as a separate component of stockholders’ equity, market value depreciation could negatively impact our capital position.

During 2013, the FOMC indicated that economic conditions warrant maintaining exceptionally low levels for the federal funds rate for an extended period. Yields on short-term U.S. Treasury securities hovered around the target range for the federal funds rate of 0 to 25 basis points in 2011,2013, as economic data suggested weak employment conditions and relatively low inflation. Although many indicators pointed to an improving economy, albeit at moderate to slow rates, investors sought the relative safety offered by the U.S. Treasury which caused intermediate-and long-term rates to decline throughout 2011. Our investment portfolio consists primarily of fixed-rate bonds. As a result, changes in general market interest rates have a significant influence on the fair value of our portfolio. Specifically, the parts of the yield curve most closely related to our investments include the 2-year and 10-year U.S. Treasury securities. The yield on the 2-year U.S. Treasury note affects the values of our U.S. Government agency and mortgage-backed securities, whereas the 10-year U.S. Treasury note influences the value of tax-exempt state and municipal obligations. The yield on the 2-year U.S. Treasury which began 2011increased from 0.25 percent at 0.59year-end 2012 to 0.28 percent declined 34 basis points to close the year at 0.25 percent. In addition,year-end 2013. Similarly, the yield on the 10-year U.S. Treasury experienced a more drastic change declining 140increased 126 basis points from 3.291.78 percent at December 31, 2010,2012, to 1.893.04 percent at December 31, 2011.2013. Since bond prices move inversely to yields, we experienced an increasea decrease in the aggregate fair value of our investment portfolio.

The carrying values of the major classifications of available-for-saleinvestment securities as they relate to theand their respective percentages of total investment portfoliosecurities for the past three years are summarized as follows: