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 September 30, 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 September 30, 2001
COMMON STOCK ($2 Par Value) 2,108,119
- --------------------------- --------------------------
(Title of Class) (Outstanding Shares)
PEOPLES FINANCIAL SERVICES CORP.
FORM 10-Q
For the Quarter Ended September 30, 2001
Contents
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of September 30, 2001 (Unaudited)
and December 31, 2000 (Audited) 3
Consolidated Statements of Income
(Unaudited) for the Nine Months and Three Months
Ended September 30, 2001 and 2000 4
Consolidated Statements of Comprehensive
Income (Unaudited) for the Nine Months
Ended September 30, 2001 and 2000 5
Consolidated Statements of Shareholders'
Equity (Unaudited) for the Nine Months
Ended September 30, 2001 and 2000 6
Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months
Ended September 30, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 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 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2001 (UNAUDITED) and December 31, 2000
(In thousands, except per share data)
ASSETS: SEPT 2001 DEC 2000
Cash and Due from Banks ..................... $ 4,949 $ 5,507
Interest Bearing Deposits with Other Banks .. 3,086 2,090
Federal Funds Sold .......................... 0 0
Securities Available for Sale ............... 103,134 99,678
Loans ....................................... 186,795 172,185
Less: Unearned Income ...................... (2) (6)
Allowance for Loan Loss ............ (1,892) (1,918)
Loans, Net .................................. 184,901 170,261
Bank Premises and Equipment, Net ............ 3,358 3,411
Accrued Interest Receivable ................. 2,301 2,362
Other Assets ................................ 7,657 4,315
TOTAL Assets ................................ $ 309,386 $ 287,624
LIABILITIES
Deposits, Non-Interest Bearing .............. $ 32,693 $ 7,290
Deposits, Interest Bearing .................. 213,797 203,449
Total Deposits .............................. 246,490 230,739
Accrued Interest Payable .................... 832 853
Short-term Borrowings ....................... 10,249 7,245
Long-term Borrowings ........................ 17,500 17,500
Other Liabilities ........................... 686 435
TOTAL Liabilities ........................... 275,757 256,772
SHAREHOLDERS' EQUITY
Common Stock * .............................. 4,455 4,455
Surplus ..................................... 4,611 4,611
Treasury Stock at Cost ...................... (2,642) (1,628)
Undivided Profit ............................ 25,964 23,544
Accumulated Other Comprehensive Income (Loss) 1,241 (130)
TOTAL Shareholders' Equity .................. 33,629 30,852
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .. $ 309,386 $ 287,624
<FN>
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*Common Stock, par value $2 per share,12,500,000 shares authorized: 2,108,119
and 2,149,835 shares issued and outstanding at September 30, 2001 and December
31, 2000, respectively
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
9 Months Ended 3 Months Ended
30-Sep 30-Sep 30-Sep 30-Sep
INTEREST INCOME: 2001 2000 2001 2000
Interest and Fees on Loans ........................ $11,090 $10,105 $ 3,757 $ 3,543
Interest Investments, Taxable ..................... 3,198 3,295 1,094 1,199
Tax Exempt ............................. 1,143 1,107 366 318
Dividends .............................. 64 66 22 23
Interest on Federal Funds Sold .................... 35 44 3 24
Interest on Deposits of Other Banks ............... 145 73 45 33
TOTAL Interest Income ............................. 15,675 14,690 5,287 5,140
Interest on Deposits .............................. 6,720 6,903 2,179 2,562
Interest on Borrowed Funds ........................ 989 722 324 192
TOTAL Interest Expense ............................ 7,709 7,625 2,503 2,754
Net Interest Income ............................... 7,966 7,065 2,784 2,386
Provision for Loan Losses ......................... 20 180 0 60
Net Interest Income, after Loan Loss Provision..... 7,946 6,885 2,784 2,326
OTHER INCOME:
Service Charges and Fees .......................... 831 883 284 295
Gains on Security Sales ........................... 45 12 16 12
Other Operating Income ............................ 397 152 172 67
TOTAL Other Income ................................ 1,273 1,047 472 374
OTHER EXPENSES:
Salaries and Benefits ............................. 2,233 2,049 745 641
Occupancy Expenses ................................ 217 251 75 84
Furniture and Equipment Expense ................... 289 273 92 93
FDIC Insurance and Assessments .................... 89 86 30 29
Professional Fees and Outside Services ............ 166 150 57 54
Computer Services and Supplies .................... 294 264 111 100
Taxes, Other Than Payroll and Income .............. 216 192 75 63
Other Operating Expenses .......................... 988 918 335 291
Total Non-Interest Expense ........................ 4,492 4,183 1,520 1,355
Income Before Income Taxes ........................ 4,727 3,749 1,736 1,345
Provision for Income Taxes ........................ 1,178 871 446 308
Net Income ........................................ $ 3,549 $ 2,878 $ 1,290 $ 1,037
Net Income Per Share, Basic ....................... $ 1.67 $ 1.33 $ 0.61 $ 0.48
Net Income Per Share, Diluted ..................... $ 1.67 $ 1.33 $ 0.61 $ 0.48
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended
(In thousands) Sep 30 Sep 30
2001 2000
Net Income ...................................... $ 3,549 $ 2,878
Other Comp Income (loss):
Unrealized Holding Gains/Losses on Securities.... 2,122 1,007
Less: Reclassification Adjustment ............... 45 12
Other Comp Income (loss) before tax ............. 2,077 995
Federal Income Tax Expense (benefit) ............ (706) (338)
Other Comp Income (loss) ........................ 1,371 657
TOTAL Comp Income ............................... $ 4,920 $ 3,535
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
Accumulated
(In thousands) 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 2,878 0 0 2,878
Cash Dividends Paid, 2000 ($0.46 per share) .............. 0 0 (997) 0 0 (997)
Treasury Stock Purchase .................................. 0 0 0 0 (494) (494)
Treasury Stock Issued for DRIP and Stock Option Plan ..... 0 58 0 0 48 106
Change in unrealized gain/loss on securities available for
sale, net of deferred income taxes ...................... 0 0 0 657 0 657
Balance, September 30, 2000 ............................. $ 4,455 $ 4,570 $ 22,861 ($ 1,430) ($ 1,496) $ 28,960
Balance, December 31, 2000 .............................. $ 4,455 $ 4,611 $ 23,544 ($ 130) ($ 1,628) $ 30,852
Net Income ............................................... 0 0 3,549 0 0 3,549
Cash Dividends Paid, 2001($0.53 per share) ............... 0 0 (1,129) 0 0 (1,129)
Treasury Stock Purchase .................................. 0 0 0 0 (1,014) (1,014)
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 1,371 1,371
Balance, September 30, 2001 ............................. $ 4,455 $ 4,611 $ 25,964 $ 1,241 ($ 2,642) $ 33,629
See Notes to Consolidated Financial Statements
PEOPLES FINANCIAL SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) Nine Months Ended
Sep 30 Sep 30
2001 2000
Cash Flows from Operating Activities
Net Income ............................................................................... $ 3,549 $ 2,878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ............................................................ 287 454
Provision for Loan Losses ................................................................ 20 180
Gain/Loss on sale of equipment ........................................................... 0 (4)
Gain/loss on sale of other real estate ................................................... 16 0
Amortization of securities' premiums and accretion of discounts .......................... 52 66
Gains on sales of investment securities, net ............................................. (45) (12)
Increase in accrued interest receivable .................................................. 61 (162)
Increase/Decrease in other assets ........................................................ (42) (714)
Increase/Decrease in accrued interest payable ............................................ (21) 39
Increase/Decrease in other liabilities ................................................... 251 8
Net cash provided by operating activities ................................................ 4,128 2,733
Cash Flows from investing activities
Proceeds from sale of available for sale securities ...................................... 6,574 7,845
Proceeds from maturities of and principal repayments on available for sale securities..... 19,737 5,510
Purchase of available for sale securities ................................................ (27,697) (18,197)
Purchase of Fed Funds sold ............................................................... 0 945
Net increase in loans .................................................................... (14,866) (15,482)
Purchase of Bank-owned Life Insurance .................................................... (4,000) 0
Proceeds from sale of premises and equipment ............................................. 0 4
Purchase of premises and equipment ....................................................... (234) (161)
Proceeds from sale of other real estate .................................................. 184 8
Purchase of investment in life insurance ................................................. 0 0
Net cash used in investing activities .................................................... (20,302) (19,528)
Cash flows from financing activities
Cash dividends paid ...................................................................... (1,129) (996)
Increase in deposits ..................................................................... 15,751 13,978
Net Increase/Decrease in short-term borrowing ............................................ 3,004 (1,220)
Net Increase/Decrease in long-term borrowing ............................................. 0 5,000
Purchase of treasury stock ............................................................... (1,014) (467)
Net cash provided by financing activities ................................................ 16,612 16,295
Net Increase/Decrease in cash/cash equivalents ........................................... 438 (500)
Cash and cash equivalents, beginning of year ............................................. 7,597 7,469
Cash and cash equivalents,end of year .................................................... $ 8,035 $ 6,969
Supplemental disclosures of cash paid
Interest Paid ............................................................................ $ 7,709 $ 7,625
Income Taxes Paid ........................................................................ $ 1,176 $ 874
Non-cash investing and financing activities
Transfers from loans to real estate through foreclosure .................................. $ 206 $ 44
Proceeds from sales of foreclosed real estate ............................................ 184 8
Total increase/decrease in unrealized gain/loss on securities available for sale ......... 2,077 995
See Notes to Consolidated Financial Statements
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 nine-month period ended September 30, 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
nine-month period ended September 30, 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:
Nine Months Ended Three Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2001 2000 2001 2000
Net income applicable to common stock ......... $3,549,000 $2,878,000 $1,290,000 $1,037,000
Weighted average common shares outstanding .... 2,125,229 2,163,552 2,114,583 2,156,808
Effect of dilutive securities, stock options... 0 0 0 0
Weighted average common shares outstanding
used to calculate diluted earnings per share... 2,125,229 2,163,552 2,114,583 2,156,808
Basic earnings per share ...................... $ 1.67 $ 1.33 $ 0.61 $ 0.48
Diluted earnings per share .................... $ 1.67 $ 1.33 $ 0.61 $ 0.48
3. NEW ACCOUNTING PRONOUNCEMENTS
In June of 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations", and Statement No. 142, "Goodwill and Other
Intangible Assets".
Statement No. 141 requires all business combinations to be accounted for using
the purchase method of accounting as use of the pooling-of-interests method is
prohibited. In addition, this Statement requires that negative goodwill that
exists after the basis of certain acquired assets is reduced to zero should be
recognized as an extraordinary gain. The provisions of this Statement apply to
all business combinations initiated after June 30, 2001.
Statement No. 142 prescribes that goodwill associated with a business
combination and intangible assets with an indefinite useful life should not be
amortized but should be tested for impairment at least annually. The Statement
requires intangibles that are separable from goodwill and that have a
determinable useful life to be amortized over their determinable useful life.
The provisions of this Statement will become effective for the Company in
January of 2002. Upon adoption of this statement, goodwill and other intangible
assets arising from acquisitions completed before July 1, 2001 should be
accounted for in accordance with the provisions of this statement. This
transition provision could require a reclassification of a previously separately
recognized intangible to goodwill and vice versa if the intangibles in question
do not meet the new criteria for classification as a separately recognizable
intangible.
At September 30, 2001, the Company had core deposit acquisition premiums with a
net book value of $2,691,000 which will continue to be amortized under the new
rules. Amortization expense related to these assets was $194,000 for each of the
nine-month periods ended September 30, 2001 and 2000.
In June of 2001, the Financial Accounting Standards Board issued Statement No.
143, "Accounting for Asset Retirement Obligations", which addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
cost. This Statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
This Statement will become effective for the Bank on January 1, 2003, but is not
expected to have a significant impact on the financial condition or results of
operations.
In August of 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment of or Disposal of Long-Lived Assets". This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business , and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the Disposal of a Segment of a Business". This Statement also
amends ARB No. 51, "Consolidated Financial Statements". The provisions of this
Statement will be effective for the Bank on January 1, 2002, but are not
expected to have a significant impact on the financial condition or results of
operations.
4. SUBSEQUENT EVENT
On October 23, 2001, the Securities and Exchange Commission filed suit against
Robert L. Bentley, d/b/a Entrust Group, and Bentley Financial Services, Inc.
for suspected securities fraud. The Commission alleges that the defendants are
representing to investors that they are selling federally insured certificates
of deposit when, in fact they are selling uninsured securities issued by the
defendants. The Commission also alleges that the defendants are violating
certain broker-dealer registration and antifraud provisions of the federal
securities laws. The Commission's action seeks permanent injunctions prohibiting
future violations of these provisions and others, disgorgement of the
defendants/ ill-gotten gains and prejudgment interest, and civil penalties
against each defendant. In addition, the Commission's action seeks emergency
injunctive and equitable relief consisting principally of a temporary
restraining order, an order freezing each defendant's assets and an order
appointing a receiver. The court granted the Commission's request on October 24,
2001, for a temporary restraining order and appointed David H. Marion, Esquire,
of Montgomery, McCraken, Walker and Rhoads, LLP as receiver for Entrust Group
and Bentley Financial Services.
The Bank invested through Entrust Group and Bentley Financial Services, Inc. As
of September 30, 2001, the Bank has $1,980,000 in certificates of deposit
outstanding with Entrust Group. Entrust Group was contractually obligated to
hold the certificates of deposit as custodian for the Bank. The $1,980,000 is
included in "Interest Bearing Deposits with Other Banks" on the Company's
consolidated balance sheet. Effective October 30, 2001, the Bank stopped
accruing interest on these assets and moved the funds to "Other Assets". Based
on information available to the Bank at this time, it is uncertain if there will
be any loss (including accrued interest) to the Bank in connection with this
matter.
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
(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. In June 2001, the
Bank changed its name from Peoples National Bank of Susquehanna County to
Peoples National Bank. Current performance does not guarantee and may not be
indicative of, similar performance in the future.
FINANCIAL CONDITION
Cash and Cash Equivalents:
At September 30, 2001, cash, federal funds sold, and deposits with other banks
totaled
$8.035 million as compared to $7.597 million on December 31, 2000. The increase
over the nine months of 2001 has been largely in Interest Bearing Deposits with
Other Banks that had a balance of $2.090 million at the end of 2000 and now has
a balance of $3.086 million.
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 continuous decline recently in
interest rates continues to increase liquidity. The current sources of funds
will enable the Company to meet all its cash obligations as they come due.
Included in Interest Bearing Deposits with Other Banks at September 30, 2001 is
$1,980,000 of funds invested through Entrust Group and Bentley Financial
Services, Inc. for certificates of deposit. On October 23, 2001, the Securities
and Exchange Commission filed suit against Robert L. Bentley, his d/b/a Entrust
Group and Bentley Financial Services, Inc. alleging fraud in the sales of
securities to financial institutions. Please refer to Note 4 in the Notes to the
Consolidated Financial Statements for further discussion of this matter.
Based on information available to the Bank at this time, it is uncertain if
there will be any loss (including accrued interest) to the Bank due to the above
suit. Effective, October 30, 2001, the Bank has stopped accruing interest on
these assets.
Investments:
Investments totaled $103.134 million on September 30, 2001, increasing by $3.456
over the December 31,2000, total of $99.678. This shows the strong flow of
increased liquidity that is out running loan demand.
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 separate component of
shareholders' equity. The carrying value of investments as of September 30,
2001, included an unrealized gain of $1,880,000 reflected as accumulated other
comprehensive income of $1,241,000 in shareholders' equity net of deferred
income taxes of $639,000. 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 liquidity of
the investment portfolio on a monthly basis through the Asset/Liability
Committee ("ALCO"). 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 borrowings at September 30, 2001, were $10.249 million as
compared to $7.245 million on December 31, 2000, showing an increase of $3.004
million. Long term borrowings on September 30, 2001, and December 31, 2000, were
at $17.5 million. The Bank has not taken any additional long term borrowings in
the nine months ended September 30, 2001. The last term agreement was taken on
November 17, 2000, for $5 million to renew an expiring agreement.
Loans:
The Bank's loan volume has continued to grow during the nine months of 2001. The
September 30, 2001, total was $184.901 million compared to the December 31,
2000, total of $170.261. This shows a growth of $14.640 million in the last
nine-month period.
Increasing the loan to deposit ratio is a goal of the Bank, but loan quality is
always considered in this effort. Management has continued its efforts to create
good underwriting standards for both commercial and consumer credit. The Bank's
lending continues to consist primarily of retail lending which includes single
family residential mortgages and other consumer lending. Most commercial lending
is done primarily with locally owned small businesses.
Other Assets:
Other Assets increased from $4.315 million on December 31, 2000 to $7.657
million on September 30, 2001. A large part of the increase is attributable to
the acquisition of insurance policies on certain employees with cash surrender
values totaling $4 million. The insurance is owned by the Bank and was purchased
to finance the cost of employee benefit plans.
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, certificate of deposits, and IRAs. During the
nine-month period ended September 30, 2001, total deposits increased by $15.751
million to $246.490 million. In the three-month period ended September 30, 2001,
deposits increased $7.095 million.
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 September 30, 2001, regulatory capital to total assets was 9.71% 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 nine months ended
September 30, 2001, the Company purchased 41,716 shares for a total cost of $
1,013,623.
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 the 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 asset ratio was 14.86% and the total
capital ratio to total risk weighted assets ratio was 15.64% at September 30,
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.
Core deposits, including non-interest bearing DDA, NOW accounts, money market
deposit accounts and savings accounts reflect a 100-month decay factor within
the rate sensitivity reports. This change in methodology was adopted based on
the results of an independent evaluation of the Bank's asset/liability modeling
system in the second quarter of 2001. 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.
INTEREST RATE SENSITIVITY ANALYSIS
SEPTEMBER 30, 2001
(In thousands)
Maturity or Repricing In:
3 Months 3-6 Months 6-12 Months 1-5 Years Over 5 Years
RATE SENSITIVE ASSETS
Loans .................................... 22,039 8,830 28,835 73,990 51,153
Securities/Investment in Life Insurance... 9,396 8,190 4,825 39,951 47,982
Federal Funds Sold ....................... 0 0 0 0 0
Total Rate Sensitive Assets .............. 31,489 17,020 33,660 113,941 99,135
Cummulative Rate Sensitive Assets ........ 31,489 48,509 82,169 196,110 295,245
RATE SENSITIVE LIABILITIES
Interest Bearing Checking ................ 704 704 1,409 11,272 9,393
Money Market Deposits .................... 930 930 1,859 14,873 12,394
Regular Savings .......................... 2,398 1,526 3,047 24,355 20,294
CDs and IRAs ............................. 26,653 18,487 31,470 28,282 2,816
Short-term Borrowings .................... 10,249 0 0 0 0
Long-term Borrowings ..................... 0 0 0 7,500 10,000
Total Rate Sensitive Liabilities ......... 40,934 21,647 37,785 86,282 54,897
Cummulative Rate Sensitive Liabilities ... 40,934 62,581 100,366 186,648 241,545
Period Gap ............................... (9,445) (4,627) (4,125) 27,659 44,238
Cummulative Gap .......................... (9,445) (14,072) (18,197) 9,462 53,700
Cummulative RSA to RSL ................... 76.93% 77.51% 81.87% 105.07% 122.23%
Cummulative Gap to Total Assets .......... (3.05%) (4.55%) (5.88%) 3.06% 17.36%
RESULTS OF OPERATIONS
Net Interest Income:
The increase in the net interest income after loan loss provision for the three
and nine month periods ended September 30, 2001, when compared to the same
periods in 2000 can be attributed to the down turn in interest rates affecting
us on the liability side and the increase in volume in loans on the asset side.
Total net interest income for the first nine months of 2001 was $7.946 million
compared to $6.885 million for the first nine months of 2000. This was an
increase of $1.061 million.
Total interest income was $5.287 million for the three-month period ended
September 30, 2001, compared to $ 5.140 for the comparable period in 2000. For
the nine-month period ended September 30, 2001, total interest income was
$15.675 million compared to $14.690 million for the comparable period in 2000.
The $985 thousand dollar increase in 2001 over 2000 was due to the $18.789
million growth in the mortgage and loan portfolio.
Total interest expense was $2.503 million for the three month period ended
September 30, 2001, compared to $2.754 million for the comparable three month
period in 2000, a reduction of $251 thousand between the compared quarters. For
the nine-month period ended September 30, 2001, total interest expenses
increased to $7.709 million from $7.625 million for the comparable nine-month
period in 2000, an increase of $84,000. These slight year to date increases
occurred as a result of an increase in the larger number of interest-bearing
liabilities in 2001 and a significant reduction in the costs of those funds.
Provision for Loan Loss:
The provision for loan loss for the nine-month period ending September 30, 2001,
showed a decrease of $160 thousand from the comparable period in 2000. During
2001, the provision total was $20 thousand as compared to $180 thousand in 2000.
This was due to a greater emphasis put on asset quality over the past few years
and the reduction in the past due ratios. 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 strong 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.
In the nine-month period of 2001 charge-offs totaled $85,067 while net
charge-offs totaled $46,679 as compared to $ 98,999 and $64,932 respectively for
the same nine-month period in 2000. In the current year, charge-offs have been
less and recoveries have increased.
Monthly, senior management utilizes a detailed analysis of the loan portfolio 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 on a monthly basis by the board of directors. The Bank has not had nor
presently has any foreign loans. Based upon this analysis, senior management has
concluded that the allowance of loan loss is adequate.
Other Income:
Total other income increased $226 when comparing the first nine months of 2001
to the first nine months of 2000. Service Charge Fee income has actually gone
done $52 thousand when comparing 2001 to 2000. This was due to many accounts
receiving free checking with direct deposit which has been highly promoted in
the Bank. Gains on sales on securities were up $33 thousand over last year. The
largest increase has been in Other Operating Income, an increase of $245
thousand comparing the first nine months of 2001 to the first nine months of
2000. This increase was due to the commission income from the investment and
Private Business products, the income from the Bank Owned Life Insurance, and
the increase in income from the debit card program.
Other Operating Expenses
Non-interest expense went up by $309 thousand dollars when comparing the first
nine months of 2001 with the first nine months of 2000. The largest share of
this increase, $184 thousand, was in the Salaries and Benefits category due to
an employee profit sharing discretionary expense accrual that is being provided
for in 2001. Computer Services and supplies were also up $30 thousand as of
September 2001 compared to the same period in 2000. Taxes increased $24 thousand
and Furniture and Equipment expenses increased $16 thousand.
Income Tax Provision
The income tax provision was $ 1.178 million for the first nine months of 2001
as compared to $871 thousand in the same period for 2000. The $307 thousand
increase was a reflection of the additional $671 thousand in the September 30th
year to date income in 2001 compared to the same period in 2000.
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 Risk
While the Fed Funds rate and National Prime fell 350 basis points between
December 31,2000, and September 30, 2001, the Bank's net interest margin has
increased from 3.735% for the month of December 2000 compared to 3.838% over the
year-to-date 2001. Because of the extent to which rates have declined this year,
the Bank has become more sensitive to future rate declines and expects future
compression of the net interest margin. Currently, the Bank has 24.3% of its
deposits in NOW and savings accounts, which it considers core deposits and which
normally carry lower rates relative to other types of deposits. Because of this,
these accounts have historically contributed significantly to the net interest
margin. However, there is an ultimate floor to which the rates on these accounts
can fall. Under current conditions, the inability to further decrease these
deposit rates while loan and other earning asset rates continue to drop and
reprice at lower rates will result in compression of the net interest margin.
The added risk in this market is that as the rates on the core deposits bottom
out, investors could migrate to other types of accounts paying higher rates. The
last financial simulation performed as of September 30, 2001, showed a possible
decline in net interest income of 6.564% or $886,000, in a -200 basis point rate
shock over a one year period. An increase of 1.41% or $190,000 is shown in the
model at a +200 basis point rate shock. The net interest income risk position of
the Bank remains within the guidelines established by the Bank's asset/liability
policy. The Bank continues to monitor its rate sensitivity during these unusual
times.
Equity value at risk is monitored regularly and is also within established
policy limits. Please refer to the annual report to shareholders on Form 10-K
filed with the Securities and Exchange Commission for December 31, 2000 for
further discussion of this matter.
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
Reports on Form 8-K that have been previously filed are as follows:
Press Release of Peoples Financial Services Corp. dated October 23, previously
submitted as Exhibit 99.012
Press Release of Peoples Financial Services Corp. dated August 1, previously
submitted as Exhibit 99.011
Press Release of Peoples Financial Services Corp. dated July 24, previously
submitted as Exhibit 99.010
Press Release of Peoples Financial Services Corp. dated July 23, previously
submitted as Exhibit 99.009
Name change of Peoples National Bank dated June 22, 2001, previously submitted
as Exhibit 99.008
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