5 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001 or ( ) Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from No. 0-23863 (Commission File Number) PEOPLES FINANCIAL SERVICES CORP. (Exact Name of Registrant as Specified in its Charter) Pennsylvania 23-2931852 (State of Incorporation) (IRS Employer ID Number) 50 Main Street Hallstead, PA 18822 (Address of Principal Executive Offices) (Zip Code) (570) 879-2175 (Registrant's Telephone Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes X NO____ Number of shares outstanding as of March 31, 2001 COMMON STOCK ($2 Par Value) 2,133,021 - --------------------------- -------------------------- (Title of Class) (Outstanding Shares) PEOPLES FINANCIAL SERVICES CORP. FORM 10-Q For the Quarter Ended March 31, 2001 Contents PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements Consolidated Statements of Financial Condition as of March 31, 2001 (Unaudited) and December 31, 2000 3 Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2001 and 2000 5 Consolidated Statements of Shareholders' Equity (Unaudited) for the Three Months Ended March 31, 2001 and 2000 6 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2001 and 2000 8 Notes to Consolidated Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure About Market Risks 19 PART II. OTHER INFORMATION 19 Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults in Senior Securities 19 Item 4. Submission of Matters for Security Holder Vote 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION March 31, 2001 and December 31, 2000 (UNAUDITED) (In thousands, except per share data) ASSETS: MAR 2001 DEC 2000 Cash and Due from Banks .......................... $ 5,040 $ 5,507 Interest Bearing Deposits with Other Banks ....... 3,083 2,090 Federal Funds Sold ............................... 2,420 0 Securities Available for Sale .................... 94,858 99,678 Loans ............................................ 173,317 172,185 Less: Unearned Income ........................... (4) (6) Allowance for Loan Loss ................. (1,928) (1,918) Loans, Net ....................................... 171,385 170,261 Bank Premises and Equipment, Net ................. 3,343 3,411 Accrued Interest Receivable ...................... 2,205 2,362 Other Assets ..................................... 4,167 4,315 TOTAL Assets ..................................... $ 286,501 $ 287,624 LIABILITIES Deposits, Non-Interest Bearing ................... $ 27,281 $ 27,290 Deposits, Interest Bearing ....................... 204,298 203,449 Total Deposits ................................... 231,579 230,739 Accrued Interest Payable ......................... 818 853 Short-term Borrowings ............................ 3,799 7,245 Long-term Borrowings ............................. 17,500 17,500 Other Liabilities ................................ 678 435 TOTAL Liabilities ................................ 254,374 256,772 SHAREHOLDERS' EQUITY Common Stock * ................................... 4,455 4,455 Surplus .......................................... 4,611 4,611 Treasury Stock at Cost ........................... (2,030) (1,628) Undivided Profit ................................. 24,319 23,544 Accumulated Other Comprehensive Income ........... 772 (130) TOTAL Shareholders' Equity ....................... 32,127 30,852 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 286,501 $ 287,624 *Common Stock, par value $2 per share,12,500,000 shares authorized: 2,133,021 and 2,172,029 shares issued and outstanding at March 31, 2001 and March 31, 2000, respectively PEOPLES FINANCIAL SERVICES CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data) Three Months Ended March 31, March 31, INTEREST INCOME: 2001 2000 ---- ---- Interest and Fees on Loans ............................. $3,650 $3,201 Interest Investments, Taxable .......................... 1,063 1,033 Tax Exempt .................................. 391 378 Dividends ................................... 23 21 Interest on Federal Funds Sold ......................... 1 2 Interest on Deposits of Other Banks .................... 50 23 TOTAL Interest Income .................................. 5,178 4,658 Interest on Deposits ................................... 2,320 2,103 Interest on Borrowed Funds ............................. 354 231 TOTAL Interest Expense ................................. 2,674 2,334 Net Interest Income .................................... 2,504 2,324 Provision for Loan Losses .............................. 20 60 Net Interest Income, after Loan Loss Provision ......... 2,484 2,264 OTHER INCOME: Service Charges and Fees ............................... 249 260 Gains on Security Sales ................................ 29 2 Other Operating Income ................................. 79 70 TOTAL Other Income ..................................... 357 332 OTHER EXPENSES: Salaries and Benefits .................................. 610 724 Occupancy Expenses ..................................... 74 87 Furniture and Equipment Expense ........................ 99 92 FDIC Insurance and Assessments ......................... 30 29 Professional Fees and Outside Services ................. 49 41 Computer Services and Supplies ......................... 74 82 Taxes, Other Than Payroll and Income ................... 67 65 Other Operating Expenses ............................... 327 307 Total Non-Interest Expense ............................. 1,330 1,427 Income Before Income Taxes ............................. 1,511 1,169 Provision for Income Taxes ............................. 370 273 Net Income ............................................. $1,141 $ 896 Net Income Per Share, Basic ............................ $ 0.53 $ 0.41 Net Income Per Share, Diluted .......................... $ 0.53 $ 0.41 PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended (In thousands) March 31, March 31, 2001 2000 Net Income ............................................. $1,141 $ 896 Other Comp Income (loss): Unrealized Holding Gains/Losses on Securities .......... 1,396 114 Less: Reclassification Adjustment ...................... 29 2 Other Comp Income (loss) before tax .................... 1,367 112 Federal Income Tax Expense (benefit) ................... 465 38 Other Comp Income (loss) ............................... 902 74 TOTAL Comp Income ...................................... $2,043 $ 970 PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (In thousands) Accumulated Other Common Surplus Undivided Comprehensive Treasury Total Stock Profit Income Stock Balance, December 31, 1999 .............................. $ 4,455 $ 4,512 $ 20,980 $ (2,087) $ (1,050) $ 26,810 Net Income ............................................... 0 0 896 0 0 896 Cash Dividends Paid, 2000 ($0.15 per share) .............. 0 0 (325) 0 0 (325) Treasury Stock Purchase .................................. 0 0 0 0 0 0 Treasury Stock Issued for DRIP and Stock Option Plan ..... 0 14 0 0 14 28 Change in unrealized gain/loss on securities available for sale, net of deferred income taxes ....................... 0 0 0 74 0 74 Balance, March 31, 2000 ................................. $ 4,455 $ 4,526 $ 21,551 $ (2,013) $ (1,036) $ 27,483 Balance, December 31, 2000 .............................. $ 4,455 $ 4,611 $ 23,544 $ (130) $ (1,628) $ 30,852 Net Income ............................................... 0 0 1,141 0 0 1,141 Cash Dividends Paid, 2001($0.17 per share) ............... 0 0 (366) 0 0 (366) Treasury Stock Purchase .................................. 0 0 0 0 (402) (402) Treasury Stock Issued for DRIP and Stock Option Plan ..... 0 0 0 0 0 0 Change in unrealized gain/loss on securities available for sale, net of deferred income taxes ....................... 0 0 0 902 0 902 Balance, March 31, 2001 ................................. $ 4,455 $ 4,611 $ 24,319 $ 772 $ (2,030) $ 32,127 PEOPLES FINANCIAL SERVICES CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three Months Ended March 31, March 31, 2001 2000 Cash Flows from Operating Activities Net Income .................................................................... $ 1,141 $ 896 Adjustments: Depreciation and amortization ................................... 96 150 Provision for Loan Losses ................................... 20 60 Gain/Loss on sale of equipment ............................... 0 2 Gain/loss on sale of other real estate ....................... 0 0 Amortization of securities' premiums and accretion of discounts ............... 16 28 Gains on sales of investment securities, net .................................. (29) (2) Increase in accrued interest receivable ....................................... 157 199 Increase/Decrease in other assets ............................................. (287) (267) Increase/Decrease in accrued interest payable ................................. (35) (28) Increase/Decrease in other liabilities ........................................ 243 243 Net cash provided by operating activities ..................................... 1,322 1,281 Cash Flows from investing activities Proceeds from sale of available for sale securities ........................... 4,001 945 Proceeds from maturities of available for sale securities ..................... 4,461 295 Purchase of available for sale securities ..................................... (3,022) (3,330) Principal payments on mortgage-backed securities .............................. 760 742 Net increase in loans ......................................................... (1,198 (5,228) Proceeds from sale of premises and equipment .................................. 0 2 Purchase of premises and equipment ............................................ (28) (93) Proceeds from sale of other real estate ....................................... 24 0 Purchase of intangible assets ................................................. 0 0 Net cash used in investing activities ......................................... 4,998 (6,667) Cash flows from financing activities Cash dividends paid ........................................................... (366) (325) Increase in deposits .......................................................... 840 4,562 Net Increase/Decrease in short-term borrowing ................................. (3,446) 72 Purchase of treasury stock .................................................... (402) 28 Net cash provided by financing activities ..................................... (3,374) 4,337 Net Increase/Decrease in cash/cash equivalents ................................ 2,946 (1,049) Cash and cash equivalents, beginning of year .................................. 7,597 7,469 Cash and cash equivalents,end of year ......................................... 10,543 9,420 Supplemental disclosures of cash paid Interest Paid ................................................................. 2,709 2,334 Income Taxes Paid ............................................................. 377 0 Non-cash investing and financing activities Transfers from loans to real estate through foreclosure ....................... 54 8 Increase/Decrease in unrealized gain/loss on securities avail for sale ........ $ 1,367 $ 112 PEOPLES FINANCIAL SERVICES CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (SEC) and in compliance with generally accepted accounting principles. Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The registrant believes that the disclosures made are adequate to make the information presented a fair representation of the Corporation's financial status. In the opinion of management, the accompanying consolidated financial statements for the three-month period ended March 31, 2001 and 2000 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the period. The financial performance reported for the Corporation for the three-month period ended March 31, 2001, is not necessarily the result to be expected for the full year. For further information refer to the financial statements and footnotes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2000. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended March 31, March 31, 2001 2000 Net income applicable to common stock ............ $1,141,000 $ 896,000 Weighted average common shares outstanding ....... 2,137,640 2,170,655 Effect of dilutive securities, stock options ..... 0 0 Weighted average common shares outstanding used to calculated diluted earnings per share .... 2,137,640 2,170,655 Basic earnings per share ......................... $ 0.53 $ 0.41 Diluted earnings per share ....................... $ 0.53 $ 0.41 3. RECENT ACCOUNTING PRONOUNCEMENTS Accounting for Derivative Instruments and Hedging Activities SFAS No. 133 In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (as amended by Statement Nos. 137 and 138), "Accounting for Derivative Instruments and Hedging Activities". This statement and its amendments establish accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and require that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. This statement requires that changes in the fair value of derivatives be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company adopted the statement on January 1, 2001. The adoption of the statement did not have a significant impact on the financial condition or results of operations of the Company. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities SFAS No. 140 In September 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement replaces SFAS No. 125 of the same name. It revises the standards of securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125 without reconsideration. 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. This statement is to be applied prospectively with certain exceptions. Other than these exceptions, earlier or retroactive application of its accounting provisions is not permitted. The adoption of this statement will not have a significant impact on the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management's assessment of financial results. The Corporation's only subsidiary, Peoples National Bank of Susquehanna County (the "Bank") provides financial services to individuals and businesses within the Bank's market area made up of Susquehanna, Wyoming and northern Lackawanna counties in Pennsylvania, and southern Broome County in New York. The Bank is a member of the Federal Reserve System and subject to regulation, supervision and examination by the Office of the Comptroller of the Currency. FINANCIAL CONDITION Cash and Cash Equivalents: At March 31, 2001, cash, federal funds sold, and deposits with other banks totaled $10.543 million; an increase of $2.946 million compared to $7.597 million at December 31, 2000. Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, and the portion of the investment and loan portfolios that matures within one year. The recent decline in interest rates has improved liquidity. The current sources of funds will enable the Corporation to meet cash obligations as they come due. Investments: Investments totaled $94.858 million on March 31, 2001, decreasing $4.820 million as compared to the December 31, 2000, total of $93.495 million. The decline in investment in the first quarter was offset with an increase in Fed funds of $2.420 million, an increase in deposits with other banks of $1 million, and an increase in loans of $1.1 million. The total investment portfolio is held as available for sale. This strategy was implemented in 1995 to provide more flexibility in using the investment portfolio for liquidity purposes as well as providing more flexibility in selling when market opportunities occur. Investments available for sale are accounted for at fair value with unrealized gains or losses, net of deferred income taxes, reported as a separate component of shareholders' equity. The carrying value of investments at March 31, 2001, includes an unrealized gain of $1,170,000 reflected as accumulated other comprehensive income of $772,000 in shareholders' equity, net of deferred income taxes of $398,000. This compares to an unrealized loss of $197,000 at December 31, 2000, reflected as accumulated other comprehensive loss of $130,000, net of deferred income taxes of $67,000. Management monitors the earnings performance and effectiveness of the liquidity of the investment portfolio on a monthly basis through the Asset/Liability Committee ("ALCO") meetings. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the investment securities portfolio, the Corporation maintains sufficient liquidity to satisfy depositor requirements and various credit needs of its customers. Borrowings: The Bank utilizes borrowings as a source of funds for its asset/liability management. Advances are available from the FHLB provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB. Total short-term and long-term borrowings at March 31, 2001, were $21.299 million as compared to $24.745 million on December 31, 2000, showing a decrease of $3.446 million. Long-term borrowings of $17,500 million at March 31, 2001, and December 31, 2000, are term funds from the FHLB under various notes. The Bank has not taken any additional long term borrowings in the first quarter of 2001. The last term agreement was taken on November 17, 2000, for $5,000,000 to renew an expiring agreement. Loans: The Bank's loan volume has continued to be steady through the first quarter of 2001. Increasing the loan to deposit ratio is a goal of the Bank, but loan quality is a requisite in this effort. Management has continued its efforts to create tighter underwriting standards for both commercial and consumer credit. The Bank's lending consists primarily of retail lending which includes single family residential mortgage and other consumer lending, and also commercial lending primarily to locally owned small businesses. On March 31, 2001, net loans totaled $171.385 million as compared to $170.261 million on December 31, 2000. The loan to deposit ratio was 74.00% on March 31, 2001, as compared to 73.79% on December 31, 2000. During the first quarter of 2001 net loans grew $1.124 million as compared to $5.225 million in the same quarter of 2000. Deposits: Deposits are attracted from within the Bank's primary market area through the offering of various deposit instruments including NOW accounts, money market accounts, savings accounts, certificates of deposit and IRAs. Total deposits at March 31, 2001, were $231.579 million as compared to $230.739 million at December 31, 2000. Although in the past year we are not the highest payer for deposits in our market area, our deposit growth has remained steady. Deposits for the first quarter 2001 increased $840 thousand. Capital: The adequacy of the Corporation's capital is reviewed on an ongoing basis with reference to the size, composition and quality of the Corporation's resources and regulatory guidelines. Management seeks to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets and preserve high quality credit ratings. As of March 31, 2001, regulatory capital to total assets was 9.96% as compared to 9.77% on December 31, 2000. The Company purchases PFIS stock in the open market or from individuals as warranted to leverage the capital account and to provide stock for our dividend reinvestment plan. In the first quarter of 2001 the Company purchased 16,814 shares at a total of $402,000. The Corporation has complied with the standards of capital adequacy mandated by the banking regulators. The bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of either 0% (lowest risk asset), 20%, 50% or 100% (highest risk assets) is assigned to each asset on the balance sheet. Capital is being maintained in compliance with risk-based capital guidelines. The Company's Tier 1 capital to total risk weighted assets ratio is 15.96% and the total capital ratio to total risk weighted assets ratio is 16.88% at March 31, 2001. The Corporation is deemed to be well-capitalized under regulatory standards. Liquidity and Interest Rate Sensitivity: Liquidity measures an organization's ability to meet cash obligations as they come due. The consolidated statement of cash flows presented in the accompanying financial statements included in Part I of this Form 10-Q provide analysis of the Corporation's cash and cash equivalents. Additionally, management considers that portion of the loan and investment portfolio that matures within one year as part of the Corporation's liquid assets. The ALCO addresses the liquidity needs of the Bank to see that sufficient funds are available to meet credit demands and deposit withdrawals as well as to the placement of available funds in the investment portfolio. In assessing liquidity requirements, equal consideration is given to the current position as well as the future outlook. The following assumptions have been made in the foregoing model. Non-interest bearing categories are shown to reprice 10% of balances in the "within 3 months" period (all repricing within the first month) and the remaining balances in the last period. NOW accounts and regular Savings accounts also reprice 10% of balances in the "within 3 months" and the remaining balances in the last period. Management can change these rates, but such changes are infrequent and incrementally small. History has shown a strong core deposit relationship in these accounts and little or no run-off if rates change in these products. Repayment for principal on mortgage backed securities are projected by expected cash flows as evidenced by recent history. Repayment of principal for loan categories is projected at expected maturity (amortization) for fixed rate products and the next repricing date for variable rate products. (In thousands) Maturity or Repricing In: 3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years RATE SENSITIVE ASSETS Loans ................................ 25,415 10,578 19,341 67,466 50,513 Securities ........................... 19,266 9,865 8,493 34,031 26,312 Federal Funds Sold ................... 2,424 0 0 0 0 Total Rate Sensitive Assets .......... 47,101 20,443 27,834 101,497 76,825 Cummulative Rate Sensitive Assets .... 47,101 67,544 95,378 196,875 273,700 RATE SENSITIVE LIABILITIES Interest Bearing Checking ............ 6,794 0 0 0 12,501 Money Market Deposits ................ 23,931 1,249 0 0 6,244 Regular Savings ...................... 25,043 29 393 5 25,672 CDs and IRAs ......................... 18,063 21,745 27,338 32,488 2,803 Short-term Borrowings ................ 3,799 0 0 0 0 Long-term Borrowings ................. 12,500 0 0 5,000 0 Total Rate Sensitive Liabilities ..... 90,130 23,023 27,731 37,493 47,220 Cummulative Rate Sensitive Liabilities 90,130 113,153 140,884 178,377 225,597 Period Gap ........................... (43,029) (2,580) 103 64,004 29,605 Cummulative Gap ...................... (43,029) (45,609) (45,506) 18,498 48,103 Cummulative RSA to RSL ............... 52.26% 59.69% 67.70% 110.37% 121.32% Cummulative Gap to Total Assets ...... (15.00)% (15.90)% (15.86)% 6.45% 16.77% RESULTS OF OPERATIONS Net Interest Income: Net interest income after loan loss provision increased by $220 thousand or 9.72% for the three months ended March 31, 2001, as compared to the same period in 2000. Earning assets decreased $275 thousand or 0.1% for March 31, 2001, as compared to December 31, 2000 and increased $18.830 million from March 2000 to March 2001, a 7.39% increase. During the quarter declining interest rates caused deposit costs and borrowing costs to decrease and loan investment income has not decreased as quickly. The result is a better margin for this quarter. The earning assets of the Bank create income in two categories: |X| Interest and fees on loans |X| Interest on investments Interest and fees on loans for the three-months ended March 31, 2001, totaled $3.650 million, reflecting increases of $449 thousand or 14.03% over the comparable period in 2000. The loan portfolio grew $15.66 million from a total of $157.657 million in March 2000 to $173.317 million in March 2001 which is an increase of 9.9%. Interest on investments for the three-months ended March 31, 2001, totaled $1.528 million which reflects increases of $71 thousand or 4.87% over the comparable period in 2000. The investment assets have increased by $3.170 million over the March 2000 total of $97.191 million which is an increase of 3.26%. The higher income percentage growth over the portfolio growth is a by-product of still maintaining some advantage from the 2000 higher interest rate environment. The other side of the net interest margin is our interest costs. Interest expense for the three-months ended March 31, 2001, totaled $2.674 million compared to $2.334 million in 2000, reflecting an increase of $340 thousand or 14.57% over the comparable period in 2000. The deposit and borrowing base of this cost grew $14.320 million or 6.7% from $211.277 million on March 31, 2000 to $225.597 million on March 31, 2001. Provision for Loan Loss: The provision for loan loss for the first quarter ending March 31, 2001 showed a decrease of $40 thousand from the corresponding period in 2000. In 2001 only $20 thousand has been set aside for loan provision compared to $60 thousand in 2000. First quarter 2001 charge-offs totaled $15,361 while net charge-offs totaled $9,703 as compared to $3,984 and $1,498 respectively for the same period in 2000. Senior management utilizes detailed analysis of the loan portfolio monthly to determine loan loss reserve adequacy. The process considers all "problem loans" including classified, criticized and monitored loans. Prior loan loss history and current market trends, both nationally and locally, are taken into consideration. A watch list of potential problem loans is maintained and monitored monthly. This list is reviewed on a monthly basis by the Board of Directors. The Bank has not had nor presently has any foreign loans. In addition, the Bank does not have any concentrations of credit. Based upon this analysis, senior management has concluded that the allowance of loan loss is adequate. The Bank's loan volume continues to be strong. One of the Bank's main goals is to increase the loan to deposit ratio without jeopardizing loan quality. To reach its goal, management has continued its efforts to create tighter underwriting standards for both commercial and consumer credit. The Bank's lending consists primarily of retail lending which includes single family residential mortgages and other consumer lending and commercial lending primarily to locally owned small businesses. Other Income: Total other income increased $25 thousand when comparing the first three months of 2001 to the first three months of 2000. Service Charge Fee Income is down $11 thousand for the first three months. Gains and losses on security sales are $27 thousand more this year when comparing first quarter 2000 to 2001. Other operating income is up $9 thousand over the first three months of 2000. T.H.E. commissions on investment and Private Business products are contributing to other income. Other Operating Expenses: Non-interest expense went down by $97 thousand during the first three months of 2001 as compared to the first three months of 2000. Furniture and equipment expenses are slightly higher comparing $92 thousand in 2000 to $99 thousand in 2001. Professional and legal fees also are slightly more with a total of $49 thousand for the first quarter of 2001 compared to $41 thousand in 2000. Employee salaries, the largest component of non-interest, decreased $114 thousand for the first quarter of 2001 compared to the first quarter of 2000. The decrease is due to an employee profit sharing discretionary expense accrual in 2000 that was not provided in 2001. Income Tax Provision: The income tax provision was $370 thousand and $273 thousand for the three-month periods ended March 31, 2001 and March 31, 2000 respectively. PRIVACY The Board of Directors adopted a Privacy Policy on March 28, 2001, to establish a formal and documented standard to serve as a specific guide for management and staff to use to ensure controls for the protection of consumer data as required under the law. ANNUAL MEETING The 2001 Annual Shareholders' Meeting was held on April 21, 2001, at the Montrose Bible Conference. Carl Pease welcomed everyone and introduced Russ Shurtleff, Chairman of the meeting. Chairman Shurtleff appointed Debra Dissinger to serve as secretary of the meeting and he called the 2001 meeting of shareholders to order. He announced that proof of due notice of this meeting, along with a certified list of shareholders, had been given by the Company's Transfer Agent. He then appointed Wendi Gordon to act as Judge of Election, Jenny Neira as the Proxy and declared an existence of a quorum for the meeting. A motion was made by Frank O'Connor to dispense with the reading of the minutes of the last annual meeting. The secretary then read the "Notice of the Annual Meeting." Chairman Shurtleff then introduced the members of the Board of Directors and the Associate Board Members. Chairman Shurtleff followed with the announcement of the business for this meeting: election of two Class III Directors - Gerald R. Pennay and Thomas F. Chamberlain; and ratification of appointment by the Board of Beard Miller Company LLP, Certified Public Accountants and Consultants, as independent auditors for the year-ending December 31, 2001. Chairman Shurtleff entertained a motion by Francis O'Connor to nominate the above slate of directors for election at the 2001 Annual Meeting. The floor was then open for questions concerning these items. There were no questions. The floor was then open for any shareholder who had not previously delivered a proxy to do so then. The tabulations by the Judge of Election and the proxy began. Chairman Shurtleff introduced Joe Ferretti, Chief Credit Officer who spoke of the loan function at Peoples, he then introduced Wayne Whipple, Chief Sales Officer who spoke about the Bank's sales strategy and future plans. Wayne introduced Debbie Dissinger, Chief Operations Officer, who spoke about her areas of responsibility with emphasis on Human Resources. She then introduced Jack Ord, President & CEO. Jack spoke about the great year that our Bank had, current stock information, and the changes that have occurred over the years. Chairman Shurtleff reported that the Judge of Election and Proxy had completed the voting tabulations. The Secretary of the Meeting gave the results of the voting. On the basis of that report, Chairman Shurtleff declared that Gerald R. Pennay and Thomas F. Chamberlain were elected for a three-year term and Beard Miller Company LLP, had been ratified as the independent auditors for the year-ending December 31, 2001. CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION Except for historical information, this Report may be deemed to contain "forward looking" information. Examples of forward looking information may include, but are not limited to (a) projections of or statements regarding future earnings, interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure and other financial terms, (b) statements of plans and objectives of management or the Board of Directors, (c) statements of future economic performance, and (d) statements of assumptions, such as economic conditions in the market areas served by the Corporation and the Bank, underlying other statements and statements about the Corporation and the Bank or their respective businesses. Such forward looking information can be identified by the use of forward looking terminology such as "believes," "expects," "may," "intends," "will," "should," "anticipates," or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy. No assurance can be given that the future results covered by the forward looking information will be achieved. Such statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed or implied by such forward looking information. Important factors that could impact operating results include, but are not limited to, (i) the effects of changing economic conditions in both the market areas served by the Corporation and the Bank and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could affect operations, (v) funding costs, and (vi) other external developments which could materially affect business and operations. Item 3. Quantitative and Qualitative Disclosure About Market Risks The information set forth under the caption "Liquidity and Interest Sensitivity" under Item 2, Part I is incorporated herein by reference. PART II ITEM 1. 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 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS IN SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS FOR SECURITY HOLDER VOTE None. ITEM 5. OTHER INFORMATION On February 28, 2001, the Board of Directors approved the engagement of Beard Miller Company LLP as accountants for the Bank and the Company for fiscal year 2001. At a special meeting of Peoples Financial Services Corp and the regular meeting of Peoples National Bank on February 28, 2001, the Board of Directors adopted a resolution to change the name of the Bank from "Peoples National Bank of Susquehanna County" to "Peoples National Bank". This request was forwarded to legal counsel, David Schwartz, Esquire of Stevens & Lee. ITEM 6. EXHIBITS AND REPORTS ON FORM 8K Reports on Form 8-K 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 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/ Debra E. Dissinger Debra E. Dissinger, Executive Vice president/COO